ARIZONA STATE LOTTERY A Component Unit of the State of Arizona FINANCIAL STATEMENTS Year Ended June 30, 2010 This page intentionally left blank. ARIZONA STATE LOTTERY TABLE OF CONTENTS Page Letter of Transmittal i Independent Auditors' Report 1 Management’s Discussion and Analysis 3 Statement of Net Assets 8 Statement of Revenues, Expenses and Changes in Net Assets 9 Statement of Cash Flows 10 Notes to Financial Statements 11 Supplemental Information Supplementary Schedule of Gross Profit by Game 20 Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards 29 This page intentionally left blank. ii INDEPENDENT AUDITORS' REPORT To the Commissioners of Arizona State Lottery Phoenix, Arizona We have audited the accompanying statement of net assets of Arizona State Lottery (the “Lottery”), a component unit of the state of Arizona, as of June 30, 2010 (with comparative totals as of June 30, 2009), and the related statements of revenues, expenses and changes in net assets and cash flows for the year then ended (with comparative totals for the year ended June 30, 2009). These financial statements are the responsibility of the Lottery’s management. Our responsibility is to express an opinion on these financial statements based on our audit. The prior-year comparative totals information has been derived from the Lottery’s 2009 financial statements, which were audited by other auditors whose report dated January 15, 2010 expressed an unqualified opinion on those statements. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the respective financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Lottery’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Lottery as of June 30, 2010, and the changes in its net assets and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. www.henryandhorne.com To the Commissioners of Arizona State Lottery The accompanying transmittal letter is not part of the required basic financial statements. Such information is the responsibility of the Lottery’s management. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the transmittal letter. However, we did not audit the information and we do not express an opinion on it. The accompanying required supplementary information, management’s discussion and analysis, is presented on pages 3 through 7 and is not a required part of the basic financial statements, but is supplementary accounting information required by the Governmental Accounting Standards Board. This supplementary information is the responsibility of the Lottery’s management. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and we do not express an opinion on it. Our audit was conducted for the purpose of forming an opinion on the Lottery’s basic financial statements. The accompanying supplemental schedule of Gross Profit by Game is presented for purposes of additional analysis and is not a required part of the basic financial statements. This supplemental schedule is the responsibility of the Lottery’s management. Such information has been subjected to the auditing procedures applied by us in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. In accordance with Government Auditing Standards, we have also issued our report dated November 19, 2010, on our consideration of the Lottery’s internal control over financial reporting and our tests of its compliance and other matters. The purpose of that report is to describe the scope of our testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be read in conjunction with this report in considering the results of our audit. Casa Grande, Arizona November 19, 2010 2 ARIZONA STATE LOTTERY, A COMPONENT UNIT OF THE STATE OF ARIZONA PROPRIETARY FUND — ENTERPRISE FUND MANAGEMENT’S DISCUSSION AND ANALYSIS AS OF AND FOR THE YEAR ENDED JUNE 30, 2010 This discussion and analysis of the Lottery’s financial statements is a required component of financial reporting under Government Accounting Standards and was prepared by Arizona Lottery Management. It provides an overview of financial activities as of and for the year ended June 30, 2010, and should be read in conjunction with the Lottery’s financial statements and notes to the financial statements. This annual report consists of three types of financial statements and accompanying notes that provide explanations and details of accounting policies, account balances and activities. Account balances and activities are shown as of and for the year ended June 30, 2010, with comparative totals for June 30, 2009. The statement of net assets; the statement of revenues, expenses, and changes in net assets; and the notes are presented using the accrual method of accounting. Under this method, financial transactions are recorded when earned or incurred regardless of when cash is received or disbursed. The statement of cash flows reflects cash receipts and disbursements during the same 12-month periods. The statement of net assets provides information about the assets and liabilities of the Lottery. Assets consist of cash, substantially all held by the State Treasurer, amounts owed to the Lottery from licensed Lottery retailers and other State agencies, ticket inventory, and property. Liabilities represent amounts owed by the Lottery to vendors, to employees for wages and benefits, to prize winners, and to other State funds. Fund net assets represent the portion of the Lottery’s assets that are not encumbered by liabilities. It serves as an indicator of the net worth of the Lottery. A summary of the financial results of operations for the 12-month periods is presented in the statement of revenues, expenses, and changes in net assets. Operating revenues include sales of Lottery tickets, retailer licensing fees, and commissions earned on the sales of Lottery tickets at Lottery offices, and special events. Direct costs and administrative expenses comprise the operating expenses section of this statement. Direct costs are variable expenses that fluctuate with the level of sales. Marketing and overhead costs are included in the administrative expenses category. Nonoperating revenues consist of interest earned on prize fund cash investments from the State Treasurer, interest credited to the Lottery’s Multistate Lottery Association (MUSL) unreserved account for interest earned on prize reserves at MUSL and income recognized from common stock. The transfers category includes transfers to other state funds as required by Lottery statutes. The statement of cash flows includes cash receipts and disbursements from operating, noncapital financing, and investment earnings. This statement also includes a reconciliation of operating income presented on the accrual basis of accounting to net cash provided by operating activities. 3 The notes to the financial statements present information on accounting policies, transfers and statutory requirements, commitments, contingencies, and retirement benefits. These notes are an integral part of the financial statements. Sales Activities Revenues from the sale of Lottery products for the fiscal year ended June 30, 2010 were higher than Fiscal Year 2009. As shown in the financial statements, sales increased 13.8% from the prior year, from $484.5 million in Fiscal Year 2009 to $551.5 million in the current year. The increases in ScratchersSM, Powerball®, Pick 5™, Cash 4, and Fast Play™ sales, and the introduction of the Mega Millions ® and 2 by 2® games more than offset the decrease in The Pick, Pick 3™, and Arizona Raffle™ sales. The following table compares Lottery product sales between fiscal years. Sales are presented in millions of dollars. Product Sales FY 2010 FY 2009 Difference Percentage Scratchers (including economic development) Powerball Mega Millions The Pick Pick 5 Arizona Raffle Pick 3 Cash 4 2 by 2 Fast Play $336.9 118.8 6.8 44.4 16.5 5.3 8.6 5.4 6.5 2.3 $278.9 117.3 0.0 45.5 17.0 11.2 9.4 3.0 0.0 2.2 $58.0 1.5 6.8 -1.1 -.5 -5.9 -0.8 2.4 6.5 0.1 20.8% 1.3% -2.4% -2.9% -52.7% -8.5% 80.0% 4.6% Total $551.5 $484.5 $67.0 13.8% Total Revenues Nonoperating revenues for the year ended June 30, 2010, were $1,734,523 as compared to $752,101 for the year ended June 30, 2009. Nonoperating revenue is comprised of interest earned on invested cash, periodic recognition of commissions earned by the Lottery and income from common stock. Total revenues were $551.8 million for the year ended June 30, 2010, as compared to $485.8 million for the year ended June 30, 2009. As mentioned above, most of the increase was due to an increase in sales revenues. Major Expenses $385.6 million of the Lottery’s total operating expenses of $410.1 million for the year ended June 30, 2010 were incurred in direct support of the sales of Lottery games. These expenses include prize expense, retailer commissions and incentives, purchases of Scratchers tickets, compensation to the vendor for Scratchers ticket distribution, and compensation to the vendor who maintains and supports the on-line gaming system. In comparison, $332.1 million of the Lottery’s total operating expenses of $357.8 million for the year ended June 30, 2009, were game-related expenses. 4 The following table compares the game-related expenses between fiscal years. All expenses are presented in millions of dollars. Game Related Expenses FY 2010 FY 2009 Difference Percentage Prize Expense Retailer Commissions On-line System Expenses Scratchers System and Distribution Expenses Tickets Purchased $333.1 37.0 8.0 $282.5 32.5 7.8 $50.6 4.5 .2 17.9% 13.8% 2.6% 2.0 5.5 2.3 7.0 -.3 -1.5 -13.0% -21.4% Total $385.6 $332.1 $53.5 16.1% The increase in prize expense and retailer commissions is reflective of the increase in product sales. See the product sales schedule above. The decrease in tickets purchased is mostly related to the inventory write-off that was included in last year’s results. The pricing in the Lottery’s new contract with an outside vendor for and scratch ticket system expenses resulted in decreased costs of approximately $864 thousand over last fiscal year. Of the $24.5 million in Fiscal Year 2010 in other operating expenses, $14.5 million was used for advertising and promotion and $6.1 million was used to compensate Lottery employees. In comparison, of the $20.0 million in Fiscal Year 2009 other operating expenses, $15.7 million was used for advertising and promotion and $6.1 million was used to compensate Lottery employees. Transfers to Other State Funds Note 2 to the financial statements details the amounts transferred to other State Funds. In Fiscal Year 2010 the Lottery transferred $141.9 million to other State Funds. In comparison, in Fiscal Year 2009 the Lottery transferred $129.1 million to other State Funds. Other Financial Information Statement of Net Assets FY 2010 FY 2009 Current Assets Capital Assets Other Assets — Deposit and Investment $47.2 3.5 9.7 $43.7 3.8 8.3 Total Assets 60.4 55.8 Current Liabilities 48.4 45.4 Net Assets $12.0 $10.4 The Lottery’s total assets at June 30, 2010 were $60.4 million. Assets consisted of cash held substantially by the State Treasurer of $36.2 million, receivables from Lottery retailers for the sale of Lottery products of $7.1 million, Scratchers ticket inventory of $3.9 million, net investment in fixed assets of $3.5 million, a deposit with MUSL of $8.2 million, and an investment in common stock of $1.5 million. 5 Comparable figures at June 30, 2009, were $55.8 million in total assets, including $35.5 million in cash held by the State Treasurer, $5.8 million in receivables from retailers, $2.4 million in Scratchers ticket inventory, net investment in fixed assets of $3.8 million, and a MUSL deposit of $8.3 million. Total liabilities at June 30, 2010, were $48.4 million, consisting of $4.7 million in accounts payable and accrued expenses, prize liabilities of $26.6 million, and amounts due to other State Funds of $17.1 million. All of the Lottery’s liabilities were current liabilities. The Lottery’s total liabilities at June 30, 2009, were $45.4 million, which consisted of $4.8 million of accounts payable and accrued expenses, prize liabilities of $31.9 million, and amounts due to other State Funds of $8.6 million. All liabilities were current liabilities. Total net assets at June 30, 2010, were $12.0 million, which is $1.6 million more than the amount of total net assets at June 30, 2009. $8.5 million of the Lottery’s total net assets are unrestricted. In the sixth special session of the State Legislature in 2010, amendments were made to the Lottery statutes allowing the State to issue Lottery Revenue Bonds. These bonds provide additional working capital to pay appropriated expenditures of the State’s General Fund. The bonds are payable solely from and secured by pledged revenues consisting of, until July 1, 2012, amounts distributable to the State General Fund from the Lottery pursuant to Lottery law, and from and after July 1, 2012 all Lottery revenues deposited to the Lottery fund net of Lottery operating expenses. (See note 3 to the financial statements.) BUDGETARY HIGHLIGHTS The Lottery’s budget is set by the legislative appropriations process on a biennial basis. The budgets for Fiscal Years 2010 and 2011 were set in the regular legislative session of 2009. The Lottery’s Fiscal Year 2010 budget was amended in the regular legislative session of 2010 and again in special sessions of 2010. The Lottery’s appropriation for sales-related expenditures is based on approved percentages of projected revenues and is allowed to increase for these items without a supplemental appropriations request if actual revenues exceed projected revenues. The appropriation does not include an amount for prizes because Lottery statutes set this amount at “not less than 50% of the total annual revenues accruing from the sale of Lottery tickets or shares.” In the second regular legislative session of 2008 Lottery statutes were amended so that distributions to beneficiaries are no longer derived from specific Lottery products. The legislation also removed the 4% cap for advertising expenditures, limiting total expenditures to not more than 18.5% of revenues. The Lottery’s appropriation was $78.5 million at the beginning of the year and decreased to $75.9 million, as actual revenues were less than budgeted projections. CONTACTING THE LOTTERY’S FINANCIAL MANAGEMENT This management’s discussion and analysis (MD&A) is designed to provide Arizona citizens, Arizona government officials, our players, retailers, and other interested parties with an overview of the Lottery’s financial activity for Fiscal Year 2010 and to demonstrate the Lottery’s accountability for the money it received from the sale of Lottery products. 6 If you have questions about the MD&A or need additional information, contact the Arizona Lottery’s Director of Audit and Accounting, 4740 East University, Phoenix, Arizona 85034. _____________________________________________ Jeff Hatch-Miller Executive Director ______________________________________________ William B. Kahler Director of Accounting and Audit 7 ARIZONA STATE LOTTERY, A COMPONENT UNIT OF THE STATE OF ARIZONA STATEMENT OF NET ASSETS June 30, 2010 (with comparative totals for June 30, 2009) 2010 ASSETS CURRENT ASSETS Cash - substantially all held by the State Treasurer Accounts receivable - net of allowance for doubtful accounts of $145,000 as of June 30, 2010 and 2009 Scratch ticket inventory $ TOTAL CURRENT ASSETS CAPITAL ASSETS Land and land improvements Buildings Furniture, fixtures and equipment Construction in progress Less accumulated depreciation TOTAL CAPITAL ASSETS OTHER ASSETS Investments Deposit - MUSL TOTAL ASSETS LIABILITIES CURRENT LIABILITIES Accounts payable Accrued expenses Prize liability Due to other state funds TOTAL LIABILITIES NET ASSETS Invested in capital assets Unrestricted TOTAL NET ASSETS See accompanying notes. $ 36,193,820 2009 $ 35,537,819 7,090,214 3,927,375 5,783,197 2,367,733 47,211,409 43,688,749 1,268,695 3,648,272 2,271,713 83,580 (3,793,332) 1,268,695 3,648,272 2,466,217 52,680 (3,647,979) 3,478,928 3,787,885 1,528,410 8,203,374 8,329,576 60,422,121 55,806,210 4,363,723 328,970 26,648,369 17,071,082 4,531,282 308,411 31,930,197 8,645,397 48,412,144 45,415,287 3,478,928 8,531,049 3,787,885 6,603,038 12,009,977 $ 10,390,923 8 ARIZONA STATE LOTTERY, A COMPONENT UNIT OF THE STATE OF ARIZONA STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS Year Ended June 30, 2010 (with comparative totals for the year ended June 30, 2009) 2010 OPERATING REVENUES Ticket sales: Scratchers Powerball The Pick Pick 5 Pick 3 Mega Millions 2 By 2 Cash 4 Arizona Raffle Economic development Fast Play $ TOTAL TICKET SALES 313,175,361 118,802,400 44,354,631 16,541,074 8,563,207 6,785,931 6,466,860 5,425,860 5,307,060 23,766,275 2,303,042 2009 $ 262,695,972 117,238,451 45,489,149 16,996,584 9,409,924 3,036,194 11,184,560 16,228,385 2,206,885 551,491,701 484,486,104 321,640 550,905 551,813,341 485,037,009 333,105,221 36,995,955 7,991,552 1,980,925 5,545,973 282,482,645 32,472,390 7,813,813 2,329,018 7,037,109 385,619,626 332,134,975 14,454,016 6,077,733 337,559 352,766 3,228,532 15,687,024 6,107,037 393,838 355,971 3,129,245 410,070,232 357,808,090 141,743,109 127,228,919 1,734,523 752,101 INCOME BEFORE TRANSFERS 143,477,632 127,981,020 TRANSFERS TO OTHER STATE FUNDS 141,858,578 129,080,003 Other operating revenues TOTAL OPERATING REVENUES OPERATING EXPENSES Direct costs: Prize expense Retailer commissions and incentives Online system expense Scratcher system and distribution expenses Tickets purchased TOTAL DIRECT COSTS Advertising and promotion Wages and related expenses Contract services Depreciation Administrative expenses TOTAL OPERATING EXPENSES OPERATING INCOME NONOPERATING REVENUES - Investment income and other CHANGE IN NET ASSETS NET ASSETS - BEGINNING OF YEAR NET ASSETS - END OF YEAR See accompanying notes. $ 1,619,054 (1,098,983) 10,390,923 11,489,906 12,009,977 $ 10,390,923 9 ARIZONA STATE LOTTERY, A COMPONENT UNIT OF THE STATE OF ARIZONA STATEMENT OF CASH FLOWS Year Ended June 30, 2010 (with comparative totals for the year ended June 30, 2009) 2010 CASH FLOWS FROM OPERATING ACTIVITIES Cash received from retailers -net of commissions and incentives $ 263,951,121 Cash received from other sources 10,691,153 Cash payments for prizes and related taxes (99,789,628) Cash payments to suppliers of goods or services (34,831,299) Cash payments to employees (6,024,094) NET CASH PROVIDED BY OPERATING ACTIVITIES 2009 $ 249,897,690 10,541,931 (93,272,517) (34,056,699) (6,128,575) 133,997,253 126,981,830 (133,432,900) (147,314,209) CASH FLOWS USED BY CAPITAL FINANCING ACTIVITIES Payments for acquisition of capital assets (43,809) (142,056) CASH FLOWS FROM INVESTING ACTIVITIES Receipts of interest 135,457 161,811 CASH FLOWS USED BY NONCAPITAL FINANCING ACTIVITIES Payments to beneficiaries per Arizona Statutes NET INCREASE (DECREASE) IN CASH 656,001 CASH AT BEGINNING OF YEAR 35,537,819 CASH AT END OF YEAR RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Operating income Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation (Increase) decrease in: Accounts receivable Ticket inventory Deposit - MUSL Increase (decrease) in: Accounts payable and accrued expenses Prizes payable NET CASH PROVIDED BY OPERATING ACTIVITIES See accompanying notes. (20,312,624) $ 36,193,820 55,850,443 $ 35,537,819 $ 141,743,109 $ 127,228,919 352,766 355,971 (1,236,354) (1,559,642) 126,202 (19,917) 1,146,517 (581,847) (147,000) (5,281,828) 1,195,426 (2,343,239) $ 133,997,253 $ 126,981,830 10 ARIZONA STATE LOTTERY, A COMPONENT UNIT OF THE STATE OF ARIZONA NOTES TO FINANCIAL STATEMENTS June 30, 2010 NOTE 1 NATURE OF OPERATIIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Arizona State Lottery (the “Lottery”) was created by enactment of Title 5, Chapter 5 to the Arizona Revised Statutes (ARS), which was an initiative measure approved by the voters of the State of Arizona (the “State”) in 1980. The Lottery commenced operations in 1981. The Lottery is a component unit of the State. The accompanying financial statements present information as to the transactions of the Lottery. The financial statements include prior-year comparative information, but the notes to the financial statements omit prior-year information required for a presentation in conformity with accounting principles generally accepted in the United States of America. Accordingly, such prior-year information should be read in conjunction with the Lottery’s financial statements for the year ended June 30, 2009, from which the information was derived. For the period July 1, 2009 through June 30, 2010, the Lottery held 71 instant games (games 453, 619, 623, 626, 628-629, 634, 636, 638-641, 645, 647-652, 654-665, 667-670, 672-700, 702-703, 710, 718, 728, 731, and 732), three of which were Economic Development games (games 619, 636, and 662). During 2010, the Lottery continued the “Pick 3,” “Pick 5,” “The Pick,” “Powerball,” “Fast Play,” and “Cash 4” online games, continued the “Arizona Raffle” game, which was held two times in the fiscal year, and introduced the “2 By 2” and “Mega Millions” online games. As required, the Lottery has deposits with “Powerball,” and “Mega Millions,” multistate online lottery games, of $8,203,374 at June 30, 2010. The Lottery prepares its financial statements in accordance with accounting principles generally accepted in the United States of America. State Lottery Fund The State Lottery Fund (the “Fund”), which is a component unit of the State, accounts for revenues received from the sale of lottery tickets and the receipt of license fees. The Fund is operated in a manner similar to a private business enterprise where the governing body has decided that periodic determination of revenues earned, expenses incurred, and net income is appropriate for capital maintenance, management control, accountability or other purposes. Activities accounted for in the proprietary fund follow all applicable Governmental Accounting Standards Board pronouncements, as well as applicable Financial Accounting Standards Board pronouncements issued on or before November 30, 1989. The Fund accounts for prize payments, operational expenses, including consulting, promotional, and advertising expenses, and transfers of monies to other State funds. Receipts from each type of lottery game are to be allocated as follows: • Not less than 50% of the total annual revenue from Lottery ticket sales is apportioned for the payment of prizes to the holders of winning tickets for the period July 1, 2009 to June 30, 2010. 11 ARIZONA STATE LOTTERY, A COMPONENT UNIT OF THE STATE OF ARIZONA NOTES TO FINANCIAL STATEMENTS June 30, 2010 NOTE 1 NATURE OF OPERATIIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) State Lottery Fund (Continued) • Not more than 18.5% is apportioned for payment of Lottery operating expenditures. Legislation enacted in 2008 set this limit and also removed a 4% cap on advertising expenditures. In addition, State statute requires that 30% of all unclaimed prizes be transferred to the Court-Appointed Special Advocate Account, a fund within the State’s General Fund. Cash Substantially all the Lottery’s cash is held by the State Treasurer for pooled investment purposes. Statutes require the State Treasurer to invest these pooled funds in obligations of the U.S. government and are recorded at fair value. Accounts Receivable Retailers are billed weekly for tickets sold. Payments from retailers are mainly received through electronic withdrawals from retailer accounts one week after the amounts are billed. Accounts receivable represents amounts that have been billed but not yet collected. An allowance for doubtful accounts is recorded in the amount of any balances that are not paid by retailers, generally one week after amounts are billed. Ticket Inventory Ticket inventory is stated at cost, which represents the amount incurred by the Lottery for purchasing the tickets. Property and Equipment Property and equipment of the Fund, which consists principally of buildings, land, land improvements, and office furniture and equipment are stated at historical cost. The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend assets’ lives are not capitalized. Expenditures for normal repairs and maintenance are charged to operations as incurred, whereas expenditures for major renewals, replacements, and betterments are capitalized and depreciated. Depreciation is provided for as follows: Buildings Land improvements Furniture, fixtures, and computer equipment Method Straight-line Straight-line Straight-line Estimated Useful Life 40 years 20 years 5–7 years 12 ARIZONA STATE LOTTERY, A COMPONENT UNIT OF THE STATE OF ARIZONA NOTES TO FINANCIAL STATEMENTS June 30, 2010 NOTE 1 NATURE OF OPERATIIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Investments and Investment Income Investments are reported at fair value on the Statement of Net Assets as determined by quoted market prices with any realized or unrealized gains and losses reported in the Statement of Revenues, Expenses and Changes in Net Assets. Investment income from all investments is recognized by the Lottery in the period it is earned and gains and losses are recognized as revenue in the period in which they occur. Investment income also includes earnings on invested cash held by the State Treasurer and invested prize reserves held by the Multistate Lottery Association (MUSL). Ticket Sales and Revenue Recognition Revenue is recognized and the related direct expenses of ticket sales, including prize expense, are accrued based upon the known relationship of the amount of ticket sales to the amount of prizes for each game. This method of measuring revenue is necessary in order to properly match revenues and expenses. Compensated Absences Vacation leave vests with the employee as it is earned. Employees may carry forward only the amount of vacation benefits equal to the maximum allowable accumulated credits for the preceding calendar year. Accordingly, at June 30, 2010, the Fund’s accounts payable and accrued expenses balance includes an accrual of vacation pay and related benefits of $328,970. Upon termination or retirement, an employee will be compensated for accumulated leave up to a maximum of 240 hours, dependent upon accumulated time and the individual’s benefits associated with their rank as defined by State personnel rule #R2-5-403. Payment will be based on the individual’s rate of pay at termination or retirement. Upon death, the same benefits shall be paid to the employee’s beneficiary. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 13 ARIZONA STATE LOTTERY, A COMPONENT UNIT OF THE STATE OF ARIZONA NOTES TO FINANCIAL STATEMENTS June 30, 2010 NOTE 2 TRANSFERS AND STATUTORY REQUIREMENTS As required by ARS Section 5-505, the Lottery made transfers during the year ended June 30, 2010, as follows: County assistance fund Court-appointed special advocate account Department of gaming Economic development commission fund General fund Healthy Arizona fund Heritage fund Homeless shelters Local transportation assistance fund $ 4,233,400 2,527,678 300,000 5,693,900 75,451,150 18,659,400 16,147,750 1,000,000 17,845,300 Total transfers to other State funds $ 141,858,578 These transactions met the minimum percentage requirements imposed upon the Lottery by statute. NOTE 3 PLEDGED REVENUES (GASB 48) The Lottery has pledged portions of its gross revenues towards the payment of debt service on the State Lottery Revenue Bonds Series 2010A issued by the State. These bonds provide additional working capital to the State to pay appropriated expenditures of the State’s General Fund. The bonds are payable solely from and secured by pledged revenues consisting of, until July 1, 2012, amounts distributable to the State General Fund from the Lottery pursuant to Lottery law, and from and after July 1, 2012, all Lottery revenues deposited to the Lottery Fund net of operating expenses of the Lottery. At June 30, 2010, pledged revenues totaled $64,297,950, of which 3.5% ($2,255,045) was required to be transferred to cover debt service. Future pledged revenues required to be transferred to pay all remaining debt service for the bonds through final maturity of July 1, 2029 is $677,598,181. 14 ARIZONA STATE LOTTERY, A COMPONENT UNIT OF THE STATE OF ARIZONA NOTES TO FINANCIAL STATEMENTS June 30, 2010 NOTE 4 CAPITAL ASSETS Capital asset activity for the year ended June 30, 2010 is as follows: Beginning Balance Capital assets: Land Land improvements Buildings Furniture, fixtures and equipment Construction in progress Total capital assets Less accumulated depreciation for: Land improvements Buildings Furniture, fixtures and equipment Total accumulated depreciation Total capital assets, net NOTE 5 $ 937,830 330,865 3,648,272 Increases Decreases Transfers $ $ $ - - - Ending Balance $ 937,830 330,865 3,648,272 2,466,217 52,680 12,909 30,900 (207,413) - - 2,271,713 83,580 7,435,864 43,809 (207,413) - 7,272,260 (330,865) (1,590,425) (115,268) - (330,865) (1,705,693) (1,726,689) (237,498) 207,413 - (1,756,774) (3,647,979) (352,766) 207,413 - (3,793,332) $ 3,787,885 $ (308,957) - $ - $ - $ 3,478,928 INVESTMENTS During the year ended June 30, 2010, the Lottery was notified that they owned common stock in publicly traded companies with a fair value of $1,528,410. These stocks were issued to the Lottery as incentives for purchasing annuity contracts for prize payouts. The Lottery intends to liquidate these investments subsequent to year end. NOTE 6 PRIZE LIABILITY Prize liability activity for the year ended June 30, 2010, was as follows: Prize liability Beginning Balance Increases Decreases Ending Balance $ 31,930,197 $ 337,041,316 $ (342,323,144) $ 26,648,369 15 ARIZONA STATE LOTTERY, A COMPONENT UNIT OF THE STATE OF ARIZONA NOTES TO FINANCIAL STATEMENTS June 30, 2010 NOTE 7 COMMITMENTS The Lottery enters into various contracts for goods and services during the normal course of its business. All contacts and purchasing activity are subject to the Arizona State Procurement Code and the rules of the Arizona State Procurement Office. All contracts have incorporated into them the “Standard Terms and Conditions” as required by the Arizona State Procurement Office. These terms and conditions in all the contracts allow for cancellation for lack of funding in the current fiscal year or next fiscal year. The contract may also be terminated for the Lottery’s convenience at any time with no penalty when it is in the best interest of the State. Effective September 1, 2006, the Lottery entered into a five-year contract with GTech Services, Inc. for computer processing services at a base contract rate of 3.8012% of online sales. NOTE 8 CONTINGENCIES Annuities are purchased for all prizes over $400,000 for which winners will receive the jackpot in annual installments for The Pick online game. These annuities are purchased from qualifying insurance companies, which have the highest ratings from among A.M. Best Company, Standard & Poor’s, Moody’s, Duff & Phelps or Weiss. The Lottery may incur future liabilities on these annuities. Aggregate future payments to prize winners on existing annuities totaled $65,801,522 at June 30, 2010. Approximately $42,527,700 of the total aggregate future payments at June 30, 2010, relate to annuities purchased from five separate insurance companies, of which $11,731,924 relates to a single insurance company. Tort claims against the Lottery, its agents, officers, and employees who are acting in the scope and course of their employment with the Lottery are covered pursuant to the State Risk Management statute, ARS § 41-621. There is no limit to that coverage. Therefore, as to any claims based on tort, there is no contingent liability to the budget of the Lottery. The Lottery is involved in various legal proceedings, which arose in the normal course of business. Management of the Lottery does not believe that the ultimate resolution of these matters will have a material effect on the financial position, results of operations, or cash flows of the Lottery. NOTE 9 RETIREMENT AND PENSION PLAN Permanent, full-time employees of the Lottery are covered by the Arizona State Retirement Plan (the “Plan”), a retirement plan administered by the Arizona State Retirement System (ASRS), which is a multiple-employer, cost-sharing pension plan. 16 ARIZONA STATE LOTTERY, A COMPONENT UNIT OF THE STATE OF ARIZONA NOTES TO FINANCIAL STATEMENTS June 30, 2010 NOTE 9 RETIREMENT AND PENSION PLAN (Continued) The Comprehensive Annual Financial Report of the ASRS can be obtained by accessing www.azasrs.gov . The Plan was established by the State to provide benefits for employees of the State and employees of participating political subdivisions and school districts. The Plan became effective on July 1, 1971. By actuarial computation, employee member contributions to the Plan were fixed at 9.0%, 8.95%, and 9.10% of their compensation for the years ended June 30, 2010, 2009, and 2008, with the contributions made through payroll deduction. Employee contributions vest immediately. Total contributions to the Plan for the years ended June 30, 2010, 2009, and 2008; by the Lottery’s covered employees were $381,883, $384,476, and $397,693, respectively. Matching employer member contributions were actuarially determined and fixed at 9.0%, 8.95%, and 9.10% of the compensation of all employee members for the years ended June 30, 2010, 2009, and 2008. Total matching contributions to the Plan for the years ended June 30, 2010, 2009, and 2008 by the Lottery were $381,883, $384,476, and $397,693. In the event the Plan’s actuary determines that additional contributions are needed in order to amortize an unfunded accrued liability, every employer member will be required to contribute the revised contribution percentage that is set by the Plan. All full-time employees of the Lottery are required to become members of the Plan. The Lottery’s total payroll for employees covered by this Plan for the years ended June 30, 2010, 2009, and 2008, was $4,334,699, $4,410,518, and 4,422,107, respectively. Contributions to the Plan by the Lottery for its covered employees become fully vested immediately after membership in the Plan. All required employer contributions were made to the Plan within 30 days after June 30, 2010. 17 This page intentionally left blank. SUPPLEMENTAL INFORMATION ARIZONA STATE LOTTERY, A COMPONENT UNIT OF THE STATE OF ARIZONA SUPPLEMENTAL SCHEDULE OF GROSS PROFIT BY GAME FOR GAMES EXPIRING DURING THE YEAR Year Ended June 30, 2010 King Size Crossword Game 515 TICKET SALES $ 34,507,990 100% DIRECT EXPENSES: Commissions 2,243,021 Prizes - low tier Prizes - high tier Super Slots Game 545 590,269 100% 6.50% 38,368 11,135,732 9,532,770 32.27% 27.62% Total prizes 20,668,502 Ticket purchases Total direct expenses GROSS PROFIT BY GAME $ $ Super Red Hot Dice Game 548 1,376,962 100% 6.50% 89,503 6.50% 289,232 46,500 49.00% 7.88% 647,172 180,140 47.00% 13.08% 59.89% 335,732 56.88% 827,312 60.08% 498,670 1.45% 42,070 7.13% 46,281 3.36% 23,410,193 67.84% 416,170 70.51% 963,096 69.94% 11,097,797 32.16% 174,099 29.49% 413,866 30.06% $ $ Wild Willie Game 559 8,558,870 100% $ 20,459,650 100% 556,327 6.50% 1,329,877 Prizes - low tier Prizes - high tier 4,707,379 415,912 55.00% 4.86% Total prizes 5,123,291 DIRECT EXPENSES: Commissions Ticket purchases Total direct expenses GROSS PROFIT BY GAME $ 906,055 100% 6.50% 58,894 6.50% 7,248,555 5,214,550 35.43% 25.49% 471,149 47,875 52.00% 5.28% 59.86% 12,463,105 60.92% 519,024 57.28% 113,646 1.33% 194,417 0.95% 48,166 5.32% 5,793,264 67.69% 13,987,399 68.37% 626,084 69.10% 2,765,606 32.31% 6,472,251 31.63% 279,971 30.90% Bingo Game 560 TICKET SALES $ $ $ 39,820,078 100% DIRECT EXPENSES: Commissions 1,061,088 6.50% 2,588,305 Prizes - low tier Prizes - high tier 8,815,195 1,172,900 54.00% 7.18% Total prizes 9,988,095 GROSS PROFIT BY GAME $ $ Triple 7's Blackjack Game 563 100% Total direct expenses $ Crossword Game 561 16,324,436 Ticket purchases $ Wild 10's Game 554 Red Hot 7's Game 552 TICKET SALES $ $ 4,813,025 100% 6.50% 312,847 6.50% 19,910,039 4,767,750 50.00% 11.97% 2,045,536 1,045,430 42.50% 21.72% 61.18% 24,677,789 61.97% 3,090,966 64.22% 357,861 2.19% 638,448 1.60% 74,207 1.54% 11,407,044 69.88% 27,904,542 70.08% 3,478,020 72.26% 4,917,392 30.12% $ 11,915,536 29.92% 1,335,005 27.74% $ 20 ARIZONA STATE LOTTERY, A COMPONENT UNIT OF THE STATE OF ARIZONA SUPPLEMENTAL SCHEDULE OF GROSS PROFIT BY GAME FOR GAMES EXPIRING DURING THE YEAR Year Ended June 30, 2010 Just a Buck Game 566 TICKET SALES $ 659,664 100% DIRECT EXPENSES: Commissions 42,879 Prizes - low tier Prizes - high tier Total prizes Ticket purchases Total direct expenses GROSS PROFIT BY GAME $ $ 1,821,078 100% $ 10,205,920 100% 6.50% 118,370 6.50% 663,386 6.50% 290,252 88,770 44.00% 13.46% 846,801 231,490 46.50% 12.71% 3,300,937 2,717,280 32.34% 26.62% 379,022 57.46% 1,078,291 59.21% 6,018,217 58.97% 45,679 6.92% 47,251 2.59% 239,678 2.35% 467,580 70.88% 1,243,912 68.31% 6,921,281 67.82% 192,084 29.12% 577,166 31.69% 3,284,639 32.18% $ $ 8,244,360 100% 535,883 Prizes - low tier Prizes - high tier Sacks of Cash Game 593 1,303,566 100% 6.50% 84,732 2,812,704 1,871,150 34.12% 22.70% Total prizes 4,683,854 Ticket purchases DIRECT EXPENSES: Commissions Total direct expenses GROSS PROFIT BY GAME $ $ 988,244 100% 6.50% 64,237 6.50% 599,640 184,280 46.00% 14.14% 501,536 63,550 50.75% 6.43% 56.81% 783,920 60.14% 565,086 57.18% 112,664 1.37% 43,576 3.34% 37,393 3.78% 5,332,401 64.68% 912,228 69.98% 666,716 67.46% 2,911,959 35.32% 391,338 30.02% 321,528 32.54% $ Doubling Star Crossword Game 594 TICKET SALES $ 12,337,275 100% 801,924 Prizes - low tier Prizes - high tier Total prizes DIRECT EXPENSES: Commissions Ticket purchases Total direct expenses GROSS PROFIT BY GAME $ $ Double Doubler Game 591 Colossal Crossword Game 590 TICKET SALES Blingo Bling Game 583 Wild Cherries Game 577 $ $ Fun $50's Game 595 $ Wild 8s Game 596 1,328,102 100% 6.50% 86,327 5,757,395 1,983,700 46.67% 16.08% 7,741,095 1,252,306 100% 6.50% 81,400 6.50% 557,803 230,900 42.00% 17.39% 588,584 166,372 47.00% 13.29% 62.75% 788,703 59.39% 754,956 60.29% 184,175 1.49% 43,781 3.30% 43,455 3.47% 8,727,194 70.74% 918,811 69.18% 879,811 70.26% 3,610,081 29.26% 409,291 30.82% 372,495 29.74% $ $ $ 21 ARIZONA STATE LOTTERY, A COMPONENT UNIT OF THE STATE OF ARIZONA SUPPLEMENTAL SCHEDULE OF GROSS PROFIT BY GAME FOR GAMES EXPIRING DURING THE YEAR Year Ended June 30, 2010 Hot Tamales Game 597 TICKET SALES $ Money Maker Game 598 2,000,924 100% DIRECT EXPENSES: Commissions 130,060 Prizes - low tier Prizes - high tier Total prizes Ticket purchases Total direct expenses GROSS PROFIT BY GAME $ $ 3,329,905 100% 2,894,885 100% 6.50% 216,444 6.50% 188,168 6.50% 940,434 354,150 47.00% 17.70% 1,254,710 708,750 37.68% 21.28% 1,230,424 635,900 42.50% 21.97% 1,294,584 64.70% 1,963,460 58.96% 1,866,324 64.47% 100,622 5.03% 70,073 2.10% 65,706 2.27% 1,525,266 76.23% 2,249,977 67.57% 2,120,198 73.24% 475,658 23.77% 1,079,928 32.43% 774,687 26.76% $ 500K Cash Bonanza Blowout Game 600 TICKET SALES $ Money Money Money Game 599 23,156,920 100% DIRECT EXPENSES: Commissions 1,505,200 Prizes - low tier Prizes - high tier Total prizes Cash Zone Game 602 100% 6.50% 58,558 5,582,365 7,420,200 24.11% 32.04% 13,002,565 Ticket purchases Advertising GROSS PROFIT BY GAME $ $ 1,156,840 100% 6.50% 75,197 6.50% 448,193 68,490 49.75% 7.60% 589,988 119,340 51.00% 10.32% 56.15% 516,683 57.35% 709,328 61.32% 213,068 0.92% 38,064 4.23% 57,133 4.94% 214,068 0.92% 14,934,901 64.49% 613,305 68.08% 841,658 72.75% 8,222,019 35.51% 287,584 31.92% 315,182 27.25% $ Big Money Maker Game 603 TICKET SALES $ 4,001,440 100% 260,094 Prizes - low tier Prizes - high tier 6.50% 87,464 1,368,492 1,042,800 34.20% 26.06% Total prizes 2,411,292 Ticket purchases 76,036 $ 2,248,412 100% 6.50% 146,147 6.50% 672,787 96,500 50.00% 7.17% 944,333 405,600 42.00% 18.04% 60.26% 769,287 57.17% 1,349,933 60.04% 1.90% 77,925 5.79% 118,629 5.28% 131,185 9.75% 131,185 5.83% 1,065,861 79.21% 1,745,894 77.65% 279,712 20.79% 502,518 22.35% Advertising GROSS PROFIT BY GAME $ $ Monopoly ($2) Game 605 100% Total direct expenses $ Monopoly ($1) Game 604 1,345,573 DIRECT EXPENSES: Commissions $ Triple Win Game 601 900,889 Total direct expenses $ 2,747,422 68.66% 1,254,018 31.34% $ $ $ 22 ARIZONA STATE LOTTERY, A COMPONENT UNIT OF THE STATE OF ARIZONA SUPPLEMENTAL SCHEDULE OF GROSS PROFIT BY GAME FOR GAMES EXPIRING DURING THE YEAR Year Ended June 30, 2010 Monopoly ($5) Game 606 TICKET SALES $ $500,000 Golden Ticket Game 607 3,827,460 100% $ 13,057,440 100% 248,786 6.50% 848,734 Prizes - low tier Prizes - high tier 1,626,672 846,350 42.50% 22.11% Total prizes 2,473,022 Ticket purchases Advertising DIRECT EXPENSES: Commissions Total direct expenses GROSS PROFIT BY GAME $ 773,145 100% 6.50% 50,255 6.50% 3,554,254 5,743,600 27.22% 43.99% 396,238 47,400 51.25% 6.13% 64.61% 9,297,854 71.21% 443,638 57.38% 184,125 4.81% 144,778 1.11% 38,163 4.94% 131,185 3.43% 15,168 0.12% 3,037,118 79.35% 10,306,534 78.93% 532,056 68.82% 790,342 20.65% 2,750,906 21.07% 241,089 31.18% $ Holiday Bucks Game 610 TICKET SALES $ 100% DIRECT EXPENSES: Commissions 83,483 Prizes - low tier Prizes - high tier Total prizes Advertising Total direct expenses GROSS PROFIT BY GAME $ $ $ 100% 2,245,158 100% 6.50% 84,870 6.50% 145,935 6.50% 629,318 163,940 49.00% 12.76% 639,790 180,260 49.00% 13.81% 1,100,127 368,350 49.00% 16.41% 793,258 61.76% 820,050 62.81% 1,468,477 65.41% 55,621 4.33% 48,568 3.72% 78,477 3.50% 150,773 11.74% 150,773 11.55% 150,773 6.72% 1,083,135 84.34% 1,104,261 84.57% 1,843,662 82.12% 201,187 15.66% 201,433 15.43% 401,496 17.88% $ 100% 212,652 Prizes - low tier Prizes - high tier Total prizes 6.50% 35,115 1,553,982 747,200 47.50% 22.84% 2,301,182 Ticket purchases Advertising $ $ Game 615 100% GROSS PROFIT BY GAME $ Triple Payout 540,220 Total direct expenses $ Fast Money Game 614 3,271,535 DIRECT EXPENSES: Commissions $ Candy Cane Crossword Game 612 1,305,694 Silver Bells Game 613 TICKET SALES $ Happy Holiday Game 611 1,284,322 Ticket purchases King of Cash Game 608 2,182,358 100% 6.50% 141,853 6.50% 270,110 39,100 50.00% 7.24% 894,767 408,610 41.00% 18.72% 70.34% 309,210 57.24% 1,303,377 59.72% 132,341 4.05% 37,482 6.94% 43,681 2.00% 150,773 4.61% 2,796,948 85.49% 381,807 70.68% 1,488,911 68.22% 474,587 14.51% 158,413 29.32% 693,447 31.78% $ $ $ 23 ARIZONA STATE LOTTERY, A COMPONENT UNIT OF THE STATE OF ARIZONA SUPPLEMENTAL SCHEDULE OF GROSS PROFIT BY GAME FOR GAMES EXPIRING DURING THE YEAR Year Ended June 30, 2010 In the Chips Game 616 TICKET SALES $ 1,659,223 100% DIRECT EXPENSES: Commissions 107,852 Prizes - low tier Prizes - high tier Total prizes Ticket purchases Total direct expenses GROSS PROFIT BY GAME $ $ 2,274,172 100% 4,503,010 100% 6.50% 147,821 6.50% 292,697 6.50% 813,019 210,320 49.00% 12.68% 1,040,438 424,350 45.75% 18.66% 1,969,919 1,256,800 43.75% 27.91% 1,023,339 61.68% 1,464,788 64.41% 3,226,719 71.66% 96,452 5.81% 107,944 4.75% 161,081 3.58% 1,227,643 73.99% 1,720,553 75.66% 3,680,497 81.73% 431,580 26.01% 553,619 24.34% 822,513 18.27% $ $ 5,972,705 100% 100% 388,228 6.50% 96,515 Prizes - low tier Prizes - high tier 2,687,717 1,579,750 45.00% 26.45% Total prizes 4,267,467 Ticket purchases Total direct expenses GROSS PROFIT BY GAME $ $ 1,396,152 100% 6.50% 90,751 6.50% 831,514 87,700 56.00% 5.91% 628,268 228,025 45.00% 16.33% 71.45% 919,214 61.91% 856,293 61.33% 216,303 3.62% 37,482 2.52% 40,026 2.87% 4,871,998 81.57% 1,053,211 70.93% 987,070 70.70% 1,100,707 18.43% 431,635 29.07% 409,082 29.30% $ Lucky Symbols Game 624 TICKET SALES $ 100% DIRECT EXPENSES: Commissions 92,631 Prizes - low tier Prizes - high tier Total prizes Total direct expenses GROSS PROFIT BY GAME $ $ $ Lucky Bucks Game 625 1,423,524 Ticket purchases $ Odds & Evens Game 622 1,484,846 DIRECT EXPENSES: Commissions $ Lucky 7's Game 621 Texas Hold 'Em Game 620 TICKET SALES High Roller Game 618 Player's Club Game 617 $ Funky 5's Game 627 1,806,056 100% 6.51% 117,394 704,647 158,920 49.50% 11.16% 863,567 6,178,295 100% 6.50% 401,590 6.50% 844,334 316,820 46.75% 17.54% 3,089,148 1,341,900 50.00% 21.72% 60.66% 1,161,154 64.29% 4,431,048 71.72% 38,208 2.68% 50,037 2.77% 78,736 1.27% 994,406 69.86% 1,328,585 73.56% 4,911,374 79.49% 429,118 30.14% 477,471 26.44% 1,266,921 20.51% $ $ $ 24 ARIZONA STATE LOTTERY, A COMPONENT UNIT OF THE STATE OF ARIZONA SUPPLEMENTAL SCHEDULE OF GROSS PROFIT BY GAME FOR GAMES EXPIRING DURING THE YEAR Year Ended June 30, 2010 Bingo Game 630 TICKET SALES $ Crossword Game 631 Dazzlin' Diamond 7s Game 632 9,957,074 100% $ 10,364,778 100% 647,210 6.50% 673,711 Prizes - low tier Prizes - high tier 5,327,035 1,059,270 53.50% 10.64% Total prizes 6,386,305 DIRECT EXPENSES: Commissions Ticket purchases Total direct expenses GROSS PROFIT BY GAME $ 5,897,970 100% 6.50% 383,371 6.50% 5,182,389 1,541,650 50.00% 14.87% 2,948,985 1,302,450 50.00% 22.08% 64.14% 6,724,039 64.87% 4,251,435 72.08% 210,528 2.11% 221,281 2.13% 73,583 1.25% 7,244,043 72.75% 7,619,031 73.51% 4,708,389 79.83% 2,713,031 27.25% 2,745,747 26.49% 1,189,581 20.17% $ Holiday Treasures Game 633 TICKET SALES $ 3,221,490 100% 209,397 Prizes - low tier Prizes - high tier Total prizes DIRECT EXPENSES: Commissions Ticket purchases Advertising Total direct expenses GROSS PROFIT BY GAME $ $ $ 100% 1,264,558 100% 6.50% 307,769 6.50% 82,196 6.50% 1,293,540 929,400 40.15% 28.85% 1,893,936 1,534,380 40.00% 32.41% 575,374 250,950 45.50% 19.84% 2,222,940 69.00% 3,428,316 72.41% 826,324 65.34% 41,048 1.27% 165,560 3.50% 49,418 3.91% 150,773 4.68% 2,624,158 81.46% 3,901,645 82.40% 957,938 75.75% 597,332 18.54% 833,195 17.60% 306,620 24.25% $ DIRECT EXPENSES: Commissions 35,947 Prizes - low tier Prizes - high tier Total prizes GROSS PROFIT BY GAME $ $ $ Monopoly ($2) Game 643 100% Total direct expenses Beat the Dealer Game 637 4,734,840 552,989 Ticket purchases $ Blackout Bingo Game 635 Monopoly ($1) Game 642 TICKET SALES $ $ Monopoly ($5) Game 644 836,086 100% 6.50% 54,346 295,852 46,750 53.50% 8.45% 342,602 1,347,195 100% 6.50% 87,570 6.50% 353,250 182,350 42.25% 21.81% 555,770 428,550 41.25% 31.81% 61.95% 535,600 64.06% 984,320 73.06% 77,777 14.06% 118,676 14.19% 184,125 13.67% 456,326 82.52% 708,622 84.75% 1,256,015 93.23% 96,663 17.48% 127,464 15.25% 91,180 6.77% $ $ $ 25 ARIZONA STATE LOTTERY, A COMPONENT UNIT OF THE STATE OF ARIZONA SUPPLEMENTAL SCHEDULE OF GROSS PROFIT BY GAME FOR GAMES EXPIRING DURING THE YEAR Year Ended June 30, 2010 Crossword Game 653 TICKET SALES $ 10,201,252 100% 663,081 6.50% Prizes - low tier Prizes - high tier 5,100,626 1,510,800 50.00% 14.81% Total prizes 6,611,426 64.81% 221,737 2.17% 7,496,244 73.48% 2,705,008 26.52% DIRECT EXPENSES: Commissions Ticket purchases Total direct expenses GROSS PROFIT BY GAME $ Blazin' Red Hot Numbers* Game 572 TICKET SALES $ Super 7's* Game 592 9,458,030 100% $ 10,553,000 100% 614,772 6.50% 685,945 6.50% Prizes - low tier Prizes - high tier 2,751,341 2,904,400 29.09% 30.71% 3,429,736 3,396,385 32.50% 32.18% Total prizes 5,655,741 59.80% 6,826,121 64.68% 94,051 0.99% 70,959 0.67% 6,364,564 67.29% 7,583,025 71.86% 3,093,466 32.71% 2,969,975 28.14% DIRECT EXPENSES: Commissions Ticket purchases Total direct expenses GROSS PROFIT BY GAME $ $ 26 ARIZONA STATE LOTTERY, A COMPONENT UNIT OF THE STATE OF ARIZONA SUPPLEMENTAL SCHEDULE OF GROSS PROFIT BY GAME FOR GAMES EXPIRING DURING THE YEAR Year Ended June 30, 2010 Pick/Pick Extra Drawings January 1, 2009 to December 31, 2009 TICKET SALES $ DIRECT EXPENSES: Commissions Total prizes Online system expenses Advertising Total direct expenses GROSS PROFIT BY GAME $ 23,013,241 100.00% 1,495,875 11,758,080 874,779 519,498 Pick 5/Pick 5 Extra Drawings Powerball Drawings January 1, 2009 to December 31, 2009 January 1, 2009 to December 31, 2009 $ 9,392,307 100.00% 6.50% 51.09% 3.80% 2.26% 610,510 4,784,044 357,020 94,181 14,648,232 63.65% 8,365,009 36.35% $ Pick 3 Drawings January 1, 2009 to December 31, 2009 TICKET SALES $ DIRECT EXPENSES: Commissions Total prizes Online system expenses Advertising Total direct expenses GROSS PROFIT BY GAME $ 4,704,152 100.00% 305,775 2,352,076 178,814 - $ 61,360,563 100.00% 6.50% 50.94% 3.80% 1.00% 3,988,443 30,680,282 2,332,438 467,009 6.50% 50.00% 3.80% 0.76% 5,845,755 62.24% 37,468,172 61.06% 3,546,552 37.76% 23,892,391 38.94% $ Arizona Raffle Drawings Fast Play Drawings January 1, 2009 to December 31, 2009 January 1, 2009 to December 31, 2009 6,763,060 100.00% 6.50% 50.00% 3.80% 0.00% 439,599 3,550,607 257,077 1,625,091 2,836,665 60.30% 1,867,487 39.70% $ $ $ 1,232,625 100.00% 6.50% 52.50% 3.80% 24.03% 79,488 717,787 46,855 98,985 6.45% 58.23% 3.80% 8.03% 5,872,374 86.83% 943,115 76.51% 890,686 13.17% 289,510 23.49% $ Cash 4 Drawings January 1, 2009 to December 31, 2009 TICKET SALES $ DIRECT EXPENSES: Commissions Total prizes Online system expenses Advertising Total direct expenses GROSS PROFIT BY GAME $ 3,036,194 100.00% 197,353 1,521,133 115,412 751,355 6.50% 50.10% 3.80% 24.75% 2,585,253 85.15% 450,941 14.85% NOTE: After the announced completion of ticket sales for each game, customers have a 180-day period in which they can redeem their winning tickets. The above gross profit information includes games in which the 180-day grace period expired during the fiscal year ended June 30, 2010. Economic Development games are denoted with (*) 27 This page intentionally left blank. REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS The Commissioners Arizona State Lottery We have audited the financial statements of the Arizona State Lottery (the “Lottery”), as of and for the year ended June 30, 2010, and have issued our report thereon dated November 19, 2010. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Internal Control Over Financial Reporting In planning and performing our audit, we considered the Lottery’s internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Lottery’s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the Lottery’s internal control over financial reporting. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis. Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over financial reporting that might be deficiencies, significant deficiencies, or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above. www.henryandhorne.com The Commissioners Arizona State Lottery Page Two Compliance and Other Matters As part of obtaining reasonable assurance about whether the Lottery’s financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. We noted certain other matters that we reported to management of the Lottery in a separate letter dated November 19, 2010. This report is intended solely for the information and use of the Lottery Commissioners, management, federal awarding agencies and pass-through entities and is not intended to be and should not be used by anyone other than these specified parties. Casa Grande, Arizona November 19, 2010 30