C E RT I F I E D P U B L I C A C C O U N TA N T S ARIZONA STATE LOTTERY A Component Unit of the State of Arizona FINANCIAL STATEMENTS Year Ended June 30, 2012 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 9 Statement of Revenues, Expenses and Changes in Net Assets 10 Statement of Cash Flows 11 Notes to Financial Statements 13 Supplemental Information Supplementary Schedule of Gross Profit by Game 22 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 31 November 28, 2012 Dear Arizona Lottery Commissioners: The Arizona Lottery is pleased to submit its audited financial statements as of and for the year ended June 30, 2012, as prepared by the Lottery Accounting Department and audited by Henry & Horne, LLP. The Lottery is responsible for the accuracy and completeness of all data and disclosures in this report. To the best of our knowledge, the information presented is accurate and complete in all material respects and fairly depicts the financial position of the Arizona Lottery. This report includes a statement of net assets of the Arizona Lottery, the related statement of revenues, expenses, and changes in fund net assets; the statement of cash flows; footnotes related to the financial reports; and the supplemental schedule of gross profit by game. The audit of the Arizona Lottery was performed under the authority of A.R.S. § 5-505 and A.R.S. § 5-524, which require an annual audit of the Lottery. The Arizona Lottery was created in 1980 when Arizona voters approved a ballot initiative adding Title 5, Chapter 5 to the Arizona Revised Statutes. The Lottery began selling instant “scratchoff” tickets in July 1981 and during its 31 years of operation has offered a variety of instant and on-line products. The Lottery operates as an agency of the State of Arizona and is reported as an enterprise fund within the state’s Comprehensive Annual Financial Report. The fund is operated in a manner similar to a private business enterprise. In fiscal year 2012 the Arizona Lottery had revenues of $646.7 million from Lottery ticket sales, 10.8% more than last fiscal year, and an income before transfers of $164.8 million, 13.8% more than last fiscal year. Almost $397 million was paid to our players in prizes and our retail partners received $43.8 million for sales commissions. In its 31 years of operation, the Lottery has produced almost $9.2 billion in Lottery ticket sales. In fiscal year 2012, the Arizona Lottery made transfers to other State Funds of $10.0 million for the Heritage Fund, $11.2 million to Mass Transit, $3.5 million for the Economic Development Fund, $0.3 million for the Department of Gaming, $19.3 million for the Healthy Arizona Fund, $1.0 million for Homeless Shelters, $10.3 million for University Capital Bonds and $106.1 million was transferred to the State General Fund for allocation by the state legislature. In addition, from the Lottery Prize Fund, almost $3 million was transferred to the Court Appointed Special Advocate (CASA). In total, over $164.7 million was transferred to other State Funds for fiscal year 2012. In its 31 years of operation, the Lottery has returned over $2.8 billion to its beneficiaries. Arizona Lottery Commissioners Page 2 Further financial results for fiscal year 2012 are detailed in Management’s Discussion and Analysis, included in this report. Sincerely, Jeff Hatch-Miller Executive Director INDEPENDENT AUDITORS' REPORT To the Commissioners of Arizona State Lottery Phoenix, Arizona We have audited the accompanying financial statements of The Arizona State Lottery (the “Lottery”) of the State of Arizona, as of and for the year ended June 30, 2012 as listed in the table of contents. 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 summarized comparative information has been derived from the Lottery’s 2011 financial statements and, in our report dated November 16, 2011, we expressed an unqualified opinion on those financial 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. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the 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. As discussed in Note 1, the financial statements present only the Lottery and do not purport to, and do not, present fairly the financial position of the State of Arizona, as of June 30, 2012, and the changes in its financial position, or, where applicable, its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Lottery as of June 30, 2012, and the changes in financial position and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Tempe 2055 E. Warner Road Suite 101 Tempe, AZ 85284-3487 (480) 839-4900 Fax (480) 839-1749 Scottsdale 7098 E. Cochise Road Suite 100 Scottsdale, AZ 85253-4517 (480) 483-1170 Fax (480) 483-7126 Casa Grande 1115 E. Cottonwood Lane Suite 100 Casa Grande, AZ 85122-2950 (520) 836-8201 Fax (520) 426-9432 w w w . h e n r y a n d h o r n e . c o m In accordance with Government Auditing Standards, we have also issued our report dated November 28, 2012, on our consideration of the Lottery’s internal control over financial reporting and on 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 describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on 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 considered in assessing the results of our audit. Accounting principles generally accepted in the United States of America require that the management’s discussion and analysis on pages 3 through 7 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Our audit was conducted for the purpose of forming opinions on the financial statements of The Arizona State Lottery. The transmittal letter and supplemental schedule of Gross Profit by Game are presented for purposes of additional analysis and are not a required part of the financial statements. The schedule of Gross Profit by Game is the responsibility of management and was derived from and relate directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole. The transmittal letter has not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we do not express an opinion or provide any assurance on them. Casa Grande, Arizona November 28, 2012 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, 2012 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, 2012, 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, 2012, with comparative totals for June 30, 2011. The statement of net assets; the statement of revenues, expenses, and changes in Fund 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, 2012 were higher than Fiscal Year 2011 and also a Lottery record high. As shown in the financial statements, sales increased 10.8% from the prior year, from $583.5 million in Fiscal Year 2011 to $646.7 million in the current year. Sales of ScratchersSM, Powerball®, The Pick, Pick 3™, Fantasy 5 and Mega Millions ® all showed increases while Cash 4, 2 by 2 and Fast Play™ sales decreased. The following table compares Lottery product sales between fiscal years. Sales are presented in millions of dollars. Product Sales FY 2012 FY 2011 Difference Percentage Scratchers (including economic development) Instant Tabs Powerball Mega Millions The Pick Fantasy 5 Arizona Raffle Pick 3 Cash 4 2 by 2 Fast Play $409.8 3.3 104.2 56.1 34.6 18.1 6.0 8.5 2.8 3.3 0.0 $373.5 1.0 89.1 47.3 34.6 15.6 6.0 8.3 3.0 3.9 1.2 $36.3 2.3 15.1 8.8 0.0 2.5 0.0 .2 -0.2 -0.6 -1.2 9.7% 223.2% 17.0% 18.5% 0.0% 16.0% 0.0% 1.7% -7.0% -13.7% --100.0% Total $646.7 $583.5 $63.2 10.8% Total Revenues Nonoperating revenues for the year ended June 30, 2012, were $101,923 as compared to $143,153 for the year ended June 30, 2011. Nonoperating revenue is comprised of interest earned on invested cash and periodic recognition of commissions earned by the Lottery. Total revenues were $646.8 million for the year ended June 30, 2012, as compared to $583.8 million for the year ended June 30, 2011. As mentioned above, the increase was due to an increase in sales revenues. 4 Major Expenses $459.3 million of the Lottery’s total operating expenses of $482.1 million for the year ended June 30, 2012 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, $416.5 million of the Lottery’s total operating expenses of $439.1 million for the year ended June 30, 2011, were game-related expenses. The following table compares the game-related expenses between fiscal years. All expenses are presented in millions of dollars. Game Related Expenses FY 2012 FY 2011 Difference Percentage Prize Expense Retailer Commissions On-line System Expenses Scratchers System and Distribution Expenses Tickets Purchased $396.7 43.8 8.6 $360.5 39.2 7.8 $36.2 4.6 0.8 10.0% 11.7% 10.3% 4.0 6.2 3.5 5.5 0.5 0.7 14.3% 12.7% Total $459.3 $416.5 $42.8 10.3% The increase in Game Related Expenses is reflective of the increase in product sales. See the product sales schedule above. Of the $22.9 million in Fiscal Year 2012 in other operating expenses, $14.9 million was used for advertising and promotion and $5.9 million was used to compensate Lottery employees. In comparison, of the $22.6 million in Fiscal Year 2011 other operating expenses, $14.9 million was used for advertising and promotion and $5.7 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 2012 the Lottery transferred $164.7 million to other State Funds. In comparison, in Fiscal Year 2011 the Lottery transferred $146.3 million to other State Funds. 5 Other Financial Information Statement of Net Assets FY 2012 Current Assets Capital Assets Other Assets — Deposits $64.8 3.1 9.4 $55.9 3.3 9.0 Total Assets 77.3 68.2 Current Liabilities 66.7 57.7 $10.6 $10.5 Net Assets FY 2011 The Lottery’s total assets at June 30, 2012 were $77.3 million. Assets consisted of cash held substantially by the State Treasurer of $56.3 million, receivables from Lottery retailers for the sale of Lottery products of $5.4 million, Scratchers ticket inventory of $3.1 million, net investment in fixed assets of $3.1 million and a deposit with MUSL of $9.4 million. Comparable figures at June 30, 2010, were $60.4 million in total assets, including $36.2 million in cash held by the State Treasurer, $7.1 million in receivables from retailers, $3.9 million in Scratchers ticket inventory, net investment in fixed assets of $3.5 million, a MUSL deposit of $8.2 million and investment in common stock of $1.5 million. Total liabilities at June 30, 2012, were 66.7 million, consisting of $4.6 million in accounts payable and accrued expenses, prize liabilities of $31.2 million, and amounts due to other State Funds of $30.9 million. All of the Lottery’s liabilities were current liabilities. The Lottery’s total liabilities at June 30, 2011, were $57.7 million, which consisted of $3.4 million of accounts payable and accrued expenses, prize liabilities of $29.2 million, and amounts due to other State Funds of $25.1 million. All liabilities were current liabilities. Total net assets at June 30, 2012, were $10.6 million, which is $0.1 million more than the amount of total net assets at June 30, 2011. $7.5 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 2012 and 2013 were set in the regular legislative session of 2011. The Lottery’s Fiscal Year 2012 budget was amended in the regular legislative session of 2011. 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 6 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.” The Lottery’s appropriation was $85.0 million at the beginning of the year and increased to $88.6 million, as actual revenues were more 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 2012 and to demonstrate the Lottery’s accountability for the money it received from the sale of Lottery products. 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 ______________________________________________ Adam O’Kane Director of Accounting and Audit 7 ARIZONA STATE LOTTERY, A COMPONENT UNIT OF THE STATE OF ARIZONA STATEMENT OF NET ASSETS June 30, 2012 (with comparative totals for June 30, 2011) 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, 2012 and 2011 Scratch ticket inventory Pull tab inventory 2012 $ 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 Deposit - MUSL TOTAL ASSETS LIABILITIES CURRENT LIABILITIES Accounts payable Accrued expenses Prize liability Due to other state funds TOTAL CURRENT LIABILITIES NET ASSETS Invested in capital assets Unrestricted TOTAL NET ASSETS See accompanying notes. $ 56,302,909 2011 $ 43,843,094 5,389,421 3,065,267 60,540 8,018,310 3,942,775 131,120 64,818,137 55,935,299 1,268,695 3,648,272 2,532,245 59,938 (4,370,409) 1,268,695 3,648,272 2,361,824 76,348 (4,100,729) 3,138,741 3,254,410 9,357,300 9,048,732 77,314,178 68,238,441 4,148,379 416,396 31,216,564 30,914,539 2,774,277 674,168 29,217,211 25,056,404 66,695,878 57,722,060 3,138,741 7,479,559 3,254,410 7,261,971 10,618,300 $ 10,516,381 9 ARIZONA STATE LOTTERY, A COMPONENT UNIT OF THE STATE OF ARIZONA STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS Year Ended June 30, 2012 (with comparative totals for the year ended June 30, 2011) 2012 OPERATING REVENUES Ticket sales: Scratchers Powerball The Pick Fantasy 5 Pick 3 Mega Millions 2 By 2 Cash 4 Arizona Raffle Economic development Instant tab Fast Play $ TOTAL TICKET SALES 408,849,452 104,210,966 34,630,237 18,087,438 8,485,027 56,069,774 3,324,388 2,820,786 6,000,000 927,285 3,270,120 - 2011 $ 361,097,419 89,101,991 34,623,614 15,597,083 8,343,169 47,317,197 3,849,966 3,031,492 6,000,000 12,354,770 1,011,642 1,209,150 646,675,473 583,537,493 172,969 224,147 646,848,442 583,761,640 396,714,155 43,790,205 8,644,259 3,954,548 6,155,999 360,491,232 39,247,401 7,735,726 3,529,021 5,514,726 459,259,166 416,518,106 14,919,827 5,881,112 294,157 269,681 1,506,486 14,859,476 5,735,458 365,916 307,397 1,282,770 482,130,429 439,069,123 164,718,013 144,692,517 101,923 143,153 INCOME BEFORE TRANSFERS 164,819,936 144,835,670 TRANSFERS TO OTHER STATE FUNDS 164,718,013 146,329,266 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 101,922 NET ASSETS - BEGINNING OF YEAR NET ASSETS - END OF YEAR See accompanying notes. (1,493,596) 10,516,381 $ 10,618,300 12,009,977 $ 10,516,381 10 ARIZONA STATE LOTTERY, A COMPONENT UNIT OF THE STATE OF ARIZONA STATEMENT OF CASH FLOWS Year Ended June 30, 2012 (with comparative totals for the year ended June 30, 2011) 2012 CASH FLOWS FROM OPERATING ACTIVITIES Cash received from retailers-net of commissions and incentives Cash received from other sources Cash payments for prizes and related taxes Cash payments to suppliers of goods or services Cash payments to employees $ NET CASH PROVIDED BY OPERATING ACTIVITIES CASH FLOWS USED BY NONCAPITAL FINANCING ACTIVITIES Payments to beneficiaries per Arizona Statutes CASH FLOWS USED BY CAPITAL FINANCING ACTIVITIES Payments for acquisition of capital assets CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of investments Receipts of interest NET INCREASE IN CASH CASH AT BEGINNING OF YEAR CASH AT END OF YEAR RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Operating income See accompanying notes. $ 273,904,802 62,416,807 (151,598,498) (34,520,303) (5,757,723) 171,388,103 144,445,085 (158,859,878) (138,343,942) (154,012) (50,879) 85,602 1,528,410 70,600 12,459,815 7,649,274 43,843,094 36,193,820 $ 56,302,909 $ 43,843,094 $ 164,718,013 $ 144,692,517 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 312,573,813 19,198,168 (121,297,361) (32,935,553) (6,150,964) 2011 269,681 307,397 2,645,211 948,086 (308,569) (855,542) (146,520) (845,357) 1,116,331 1,999,350 $ 171,388,103 (1,276,252) 2,568,842 $ 144,445,085 11 ARIZONA STATE LOTTERY, A COMPONENT UNIT OF THE STATE OF ARIZONA NOTES TO FINANCIAL STATEMENTS June 30, 2012 NOTE 1 NATURE OF OPERATIONS 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, 2011, from which the information was derived. For the period July 1, 2011 through June 30, 2012, the Lottery held 108 instant games (games 638, 671, 672, 687, 690, 692, 700-702, 705, 706, 709-711, 713, 714, 716-723, 725-744, 746751, 753-782, 784-787, 789-791, 793-803, 810, 813, 816, 817, 820, 821, 823, 831, 752, 783), two of which were Economic Development games (games 707 and 724). During 2012, the Lottery continued the “Pick 3,” “Pick 5,” “The Pick,” “Powerball,” “Mega Millions,” “2 By 2” and “Cash 4” online games, continued the “Arizona Raffle” game, which was held one time in the fiscal year. As required, the Lottery has deposits with “Powerball,” and “Mega Millions,” multistate online lottery games, of $9,357,300 at June 30, 2012. The Lottery also sold instant tab lottery tickets to non-profit organizations. These games are printed and sold by the Lottery, though are administered and paid out by the purchasing non-profit organizations. 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, 2011 to June 30, 2012. 13 ARIZONA STATE LOTTERY, A COMPONENT UNIT OF THE STATE OF ARIZONA NOTES TO FINANCIAL STATEMENTS June 30, 2012 NOTE 1 NATURE OF OPERATIONS 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 CourtAppointed 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. 14 ARIZONA STATE LOTTERY, A COMPONENT UNIT OF THE STATE OF ARIZONA NOTES TO FINANCIAL STATEMENTS June 30, 2012 NOTE 1 NATURE OF OPERATIONS 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, 2012, the Fund’s accounts payable and accrued expenses balance includes an accrual of vacation pay and related benefits of $292,488. 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. 15 ARIZONA STATE LOTTERY, A COMPONENT UNIT OF THE STATE OF ARIZONA NOTES TO FINANCIAL STATEMENTS June 30, 2012 NOTE 2 CASH AND INVESTMENTS HELD BY THE STATE TREASURER All cash is deposited or invested with the Arizona State Treasurer (Treasurer). The Treasurer is part of the State’s financial reporting entity and issues a separately published Annual Financial Report. A copy of the Treasurer’s Annual Financial Report can be obtained from its Web site at www.aztreasury.gov or by contacting the Treasurer’s Office at 1700 West Washington St., 1st Floor, Phoenix, AZ, 85007-2812. A.R.S. requires state agencies’ monies to be deposited with the Treasurer, and further requires those deposits to be invested in various pooled funds. Cash and investments held by the Treasurer represent the Board’s portion of those monies. The Treasurer invests idle monies of the state agencies in an internal investment pool (Pool 3) and distributes interest to the participants. Interest earned from these invested monies is allocated monthly based on the average daily balance. Participant shares in the pool are purchased and sold based on the net asset value of the shares, and a participant’s portion of the pool is not identified with specific investments. Accordingly, the Board’s portion of these deposits and investments approximates the Board’s value of pool shares. The Treasurer’s internal investment Pool 3 is not required to be registered (and is not registered) with the Securities and Exchange Commission under the Investment Company Act of 1940. In accordance with A.R.S. §35-311, the State Board of Investments reviews the activities and performance of the pool monthly. At June 30, 2012, the Lottery’s deposits with the Treasurer were as follows: Cash Investment-Pool 3 NOTE 3 $ 43,228,938 13,073,971 $ 56,302,909 TRANSFERS AND STATUTORY REQUIREMENTS As required by ARS Section 5-505, the Lottery made transfers during the year ended June 30, 2012, as follows: Commerce Authority Arizona Competes Fund Court-appointed special advocate fund Department of gaming Economic Security Homeless Services Heritage fund General Fund University Bond Fund $ 3,500,000 2,997,913 300,000 1,000,000 11,000,000 135,621,096 10,299,004 Total transfers to other State funds $ 164,718,013 These transactions met the minimum percentage requirements imposed upon the Lottery by statute. 16 ARIZONA STATE LOTTERY, A COMPONENT UNIT OF THE STATE OF ARIZONA NOTES TO FINANCIAL STATEMENTS June 30, 2012 NOTE 4 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, 2012, pledged revenues totaled approximately $96,200,000, of which $20,709,000 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 approximately $638,000,000. NOTE 5 CAPITAL ASSETS Capital asset activity for the year ended June 30, 2012 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 $ 937,830 330,865 3,648,272 Increases $ - Decreases Transfers $ $ - - Ending Balance $ 937,830 330,865 3,648,272 2,361,824 76,348 170,421 - - (16,410) 2,532,245 59,938 7,355,139 170,421 - (16,410) 7,509,150 (330,865.00) (1,792,677) (86,983) - - (330,865) (1,879,660) (1,977,188) (182,696) - - (2,159,884) (4,100,730) (269,679) - - (4,370,409) 3,254,409 $ (99,258) $ - $ (16,410) $ 3,138,741 17 ARIZONA STATE LOTTERY, A COMPONENT UNIT OF THE STATE OF ARIZONA NOTES TO FINANCIAL STATEMENTS June 30, 2012 NOTE 6 PRIZE LIABILITY Prize liability activity for the year ended June 30, 2012, was as follows: Beginning Balance Prize liability NOTE 7 $ 29,217,211 Increases Decreases $ 396,714,155 $ (394,714,802) Ending Balance $ 31,216,564 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, 2011, the Lottery entered into a five-year contract with G-Tech 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 $57,151,018 at June 30, 2012. Approximately $34,845,756 of the total aggregate future payments at June 30, 2012, relate to annuities purchased from five separate insurance companies, of which $13,567,333 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. 18 ARIZONA STATE LOTTERY, A COMPONENT UNIT OF THE STATE OF ARIZONA NOTES TO FINANCIAL STATEMENTS June 30, 2012 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. 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 10.75%, 9.85%, and 9.4% (rate includes 0.25, 0.25, and 0.40 for longterm disability) of their compensation for the years ended June 30, 2012, 2011, and 2010, with the contributions made through payroll deduction. Employee contributions vest immediately. Total contributions to the Plan for the years ended June 30, 2012, 2011, and 2010, by the Lottery’s covered employees were approximately $380,000, annually. Matching employer member contributions were actuarially determined and fixed at 9.6%, 9.0%, and 8.95% of the compensation of all employee members for the years ended June 30, 2012, 2011, and 2010. Total matching contributions to the Plan for the years ended June 30, 2012, 2011, and 2010 by the Lottery were approximately $380,000, annually. 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, 2012, 2011, and 2010, was $4,050,304, $3,996,101, and $4,334,669, 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, 2012. 19 20 SUPPLEMENTAL INFORMATION 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, 2012 Golden Spin Game 671 $100 Million Cash Spectacular Game 638 TICKET SALES $ 144,431,010 100% $ 1,985,496 Double Dollars Game 672 100% $ 1,932,046 100% DIRECT EXPENSES: Commissions 9,388,016 6.50% 129,057 6.50% 125,583 6.50% Prizes - low tier Prizes - high tier 47,734,449 53,186,711 33.05% 36.82% 953,038 334,650 48.00% 16.85% 946,703 285,360 49.00% 14.77% Total prizes 100,921,159 69.87% 1,287,688 64.85% 1,232,063 63.77% Ticket purchases 794,849 0.55% 46,888 2.36% 43,663 2.26% Advertising 2,431,017 Total direct expenses GROSS PROFIT BY GAME $ - 113,535,041 78.61% 30,895,969 21.39% $ Red Hot 7S Game 687 TICKET SALES $ DIRECT EXPENSES: Commissions Prizes - low tier Prizes - high tier 10,375,716 - 1,463,633 73.72% 521,863 26.28% $ $ 20,229,318 72.53% 530,737 27.47% $50,000 Double Play Game 692 Bingo Game 690 100% 1,401,309 100% $ 7,880,500 100% 674,422 6.50% 1,314,906 6.50% 512,234 6.50% 5,706,644 1,027,635 55.00% 9.90% 10,822,685 2,122,330 53.50% 10.49% 3,447,721 2,016,050 43.75% 25.58% Total prizes 6,734,279 64.90% 12,945,015 63.99% 5,463,771 69.33% Ticket purchases 117,728 1.13% 411,443 2.03% 238,723 3.03% 7,526,428 72.54% 14,671,364 72.53% 6,214,728 78.86% 2,849,288 27.46% 5,557,954 27.47% 1,665,772 21.14% Total direct expenses GROSS PROFIT BY GAME $ $ The Price is Right Game 701 Arizona's Millionaire Club Game 700 TICKET SALES $ 45,877,140 100% $ $ 5,291,390 Wild Cherry Crossword Game 702 100% $ 12,010,890 100% DIRECT EXPENSES: Commissions 2,982,014 6.50% 343,942 6.50% 780,710 6.50% Prizes - low tier Prizes - high tier 15,428,482 16,557,478 33.63% 36.09% 2,314,986 1,340,550 43.75% 25.33% 5,605,082 2,056,250 46.67% 17.12% Total prizes 31,985,960 69.72% Ticket purchases 483,472 1.05% Advertising 166,814 628 Total direct expenses GROSS PROFIT BY GAME 3,655,536 $ 69.08% 7,661,332 63.79% 3.15% 131,016 1.09% - 35,452,074 77.28% 10,425,066 22.72% $ - 4,166,292 78.74% 1,125,098 21.26% $ 8,573,058 71.38% 3,437,832 28.62% 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, 2012 9's In a Line Game 705 TICKET SALES $ 1,452,389 Spicy Cash Game 706 100% $ 1,517,852 Cash Explosion Game 707 100% $ 5,837,690 100% DIRECT EXPENSES: Commissions 94,406 6.50% 98,660 6.50% 379,453 6.50% Prizes - low tier Prizes - high tier 813,338 79,750 56.00% 5.49% 698,212 271,380 46.00% 17.88% 2,626,961 1,509,500 45.00% 25.86% Total prizes 893,088 61.49% 969,592 63.88% 4,136,461 70.86% Ticket purchases 37,732 2.60% 46,011 3.03% 60,495 1.04% 1,025,226 70.59% 1,114,263 73.41% 4,576,408 78.39% 427,163 29.41% 403,589 26.59% 1,261,282 21.61% Total direct expenses GROSS PROFIT BY GAME $ $ Lucky 7's Game 708 TICKET SALES $ 1,411,773 $ Cosmic Cash Game 709 100% $ 1,196,708 Bank it Baby! Game 710 100% $ 10,702,430 100% DIRECT EXPENSES: Commissions 91,767 6.50% 77,789 6.50% 695,658 6.50% Prizes - low tier Prizes - high tier 790,593 78,200 56.00% 5.54% 592,374 139,600 49.50% 11.67% 4,280,972 3,592,750 40.00% 33.57% Total prizes 868,793 61.54% 731,974 61.17% 7,873,722 73.57% Ticket purchases 31,193 2.21% 31,155 2.60% 51,012 0.48% 991,752 70.25% 840,918 70.27% 8,620,392 80.55% 420,021 29.75% 355,790 29.73% 2,082,038 19.45% Total direct expenses GROSS PROFIT BY GAME $ $ Secret Santa Game 711 TICKET SALES $ 1,646,474 $ Holiday Magic Game 712 100% $ 1,938,510 Jingle Bell Crossword Game 713 100% $ 2,261,548 100% DIRECT EXPENSES: Commissions 107,022 6.50% 126,003 6.50% 147,001 6.50% Prizes - low tier Prizes - high tier 823,237 162,880 50.00% 9.89% 949,870 321,260 49.00% 16.57% 1,108,159 362,400 49.00% 16.02% Total prizes 986,117 59.89% 1,271,130 65.57% 1,470,559 65.02% Ticket purchases 36,332 2.21% 38,317 1.98% 62,180 2.75% Advertising 13,301 Total direct expenses GROSS PROFIT BY GAME $ 13,301 1,142,772 69.41% 503,702 30.59% $ 13,301 1,448,751 74.74% 489,759 25.26% $ 1,693,040 74.86% 568,508 25.14% 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, 2012 Season's Greetings Game 714 TICKET SALES $ DIRECT EXPENSES: Commissions Prizes - low tier Prizes - high tier 5,191,740 Find the 9's Game 717 Triple It Game 716 100% $ 1,449,851 100% $ 2,847,038 100% 337,465 6.50% 94,241 6.50% 185,057 6.50% 2,466,083 1,119,050 47.50% 21.55% 710,427 168,630 49.00% 11.63% 1,359,462 478,160 47.75% 16.79% Total prizes 3,585,133 69.05% 879,057 60.63% 1,837,622 64.55% Ticket purchases 157,435 3.03% 31,180 2.15% 45,328 1.59% Advertising 13,301 Total direct expenses GROSS PROFIT BY GAME $ - 4,093,334 78.84% 1,098,406 21.16% $ $ DIRECT EXPENSES: Commissions Prizes - low tier Prizes - high tier 9,409,755 1,004,478 69.28% 445,373 30.72% $ Blackjack Bonus Game 719 Slingo Trio Game 718 TICKET SALES - 100% $ 1,465,656 2,068,008 72.64% 779,030 27.36% Ace in the Hole Game 720 100% $ 2,606,288 100% 611,637 6.50% 95,268 6.50% 169,409 6.50% 3,293,414 3,273,065 35.00% 34.78% 751,150 141,000 51.25% 9.62% 1,185,861 480,500 45.50% 18.44% Total prizes 6,566,479 69.78% 892,150 60.87% 1,666,361 63.94% Ticket purchases 137,823 1.46% 36,149 2.47% 46,034 1.77% 7,315,939 77.75% 1,023,567 69.84% 1,881,804 72.20% 2,093,816 22.25% 442,089 30.16% 724,484 27.80% Total direct expenses GROSS PROFIT BY GAME $ $ Lucky Hearts Game 722 Diamond Dollars Game 721 TICKET SALES $ 1,536,744 $ 100% $ 2,608,542 Winning in Spades Game 723 100% $ 5,233,210 100% DIRECT EXPENSES: Commissions 99,891 6.50% 169,555 6.50% 340,161 6.50% Prizes - low tier Prizes - high tier 806,794 121,600 52.50% 7.91% 1,252,100 421,750 48.00% 16.17% 2,224,118 1,449,500 42.50% 27.70% Total prizes 928,394 60.41% 1,673,850 64.17% 3,673,618 70.20% Ticket purchases 99,531 6.48% 124,206 4.76% 185,061 3.54% 1,127,816 73.39% 1,967,611 75.43% 4,198,840 80.23% 408,928 26.61% 640,931 24.57% 1,034,370 19.77% Total direct expenses GROSS PROFIT BY GAME $ $ $ 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, 2012 Lucky Hearts Game 722 Diamond Dollars Game 721 TICKET SALES $ 1,536,744 100% $ 2,608,542 Winning in Spades Game 723 100% $ 5,233,210 100% DIRECT EXPENSES: Commissions 99,891 6.50% 169,555 6.50% 340,161 6.50% Prizes - low tier Prizes - high tier 806,794 121,600 52.50% 7.91% 1,252,100 421,750 48.00% 16.17% 2,224,118 1,449,500 42.50% 27.70% Total prizes 928,394 60.41% 1,673,850 64.17% 3,673,618 70.20% Ticket purchases 99,531 6.48% 124,206 4.76% 185,061 3.54% 1,127,816 73.39% 1,967,611 75.43% 4,198,840 80.23% 408,928 26.61% 640,931 24.57% 1,034,370 19.77% Total direct expenses GROSS PROFIT BY GAME $ $ $100,000 Clubs Game 724 TICKET SALES $ DIRECT EXPENSES: Commissions Prizes - low tier Prizes - high tier 7,010,160 $ Lucky Symbols Game 725 100% $ 1,607,850 5X the Money Game 726 100% $ 2,879,954 100% 455,660 6.50% 104,512 6.50% 187,197 6.50% 2,278,539 2,920,950 32.50% 41.67% 795,888 166,520 49.50% 10.36% 1,382,378 474,500 48.00% 16.48% Total prizes 5,199,489 74.17% 962,408 59.86% 1,856,878 64.48% Ticket purchases 185,650 2.65% 32,039 1.99% 46,034 1.60% 5,840,799 83.32% 1,098,958 68.35% 2,090,109 72.57% 1,169,361 16.68% 508,892 31.65% 789,845 27.43% Total direct expenses GROSS PROFIT BY GAME $ $ Crown Jewel 7S Game 727 TICKET SALES $ DIRECT EXPENSES: Commissions Prizes - low tier Prizes - high tier 11,928,445 $ Cash on the Spot Game 729 Coffee Break Crossword Game 728 100% $ 25,491,010 100% $ 1,439,322 100% 775,350 6.50% 1,656,917 6.50% 93,557 6.50% 5,367,800 2,907,300 45.00% 24.37% 10,196,404 7,676,970 40.00% 30.12% 712,466 165,160 49.50% 11.47% Total prizes 8,275,100 69.37% 17,873,374 70.12% 877,626 60.97% Ticket purchases 132,485 1.11% 222,357 0.87% 32,099 2.23% 9,182,935 76.98% 19,752,648 77.49% 1,003,282 69.71% 2,745,510 23.02% 5,738,362 22.51% 436,040 30.29% Total direct expenses GROSS PROFIT BY GAME $ $ $ 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, 2012 Diamond Dazzler Bingo Game 730 TICKET SALES $ DIRECT EXPENSES: Commissions Prizes - low tier Prizes - high tier 15,113,930 100% Crossword Game 731 $ 20,890,100 Wild 10's Game 732 100% $ 18,804,920 100% 982,406 6.50% 1,357,857 6.50% 1,222,320 6.50% 6,045,572 4,393,405 40.00% 29.07% 10,445,050 3,058,600 50.00% 14.64% 7,521,968 6,567,600 40.00% 34.92% Total prizes 10,438,977 69.07% 13,503,650 64.64% 14,089,568 74.92% Ticket purchases 296,124 1.96% 301,711 1.44% 99,482 0.53% 11,717,507 77.53% 15,163,218 72.59% 15,411,370 81.95% 3,396,423 22.47% 5,726,883 27.41% 3,393,550 18.05% Total direct expenses GROSS PROFIT BY GAME $ $ Cool 5's Game 733 TICKET SALES $ DIRECT EXPENSES: Commissions Prizes - low tier Prizes - high tier 5,386,400 $ Easy Cash Game 734 100% $ 1,658,569 Doubler Doubler Game 735 100% $ 1,640,589 100% 350,117 6.50% 107,808 6.50% 106,639 6.50% 2,693,200 1,096,750 50.00% 20.36% 820,993 174,200 49.50% 10.50% 803,889 179,440 49.00% 10.94% Total prizes 3,789,950 70.36% 995,193 60.00% 983,329 59.94% Ticket purchases 71,192 1.32% 30,317 1.83% 32,056 1.95% 4,211,259 78.18% 1,133,318 68.33% 1,122,024 68.39% 1,175,141 21.82% 525,251 31.67% 518,565 31.61% Total direct expenses GROSS PROFIT BY GAME $ $ 7-11-21 Game 736 TICKET SALES $ 1,411,206 $ Lucky 3's Game 737 100% $ 1,658,569 Deluxe Crossword Game 738 100% $ 13,951,740 100% DIRECT EXPENSES: Commissions 91,731 6.50% 107,808 6.50% 906,863 6.50% Prizes - low tier Prizes - high tier 705,603 153,880 50.00% 10.90% 820,993 174,200 49.50% 10.50% 5,580,696 4,805,450 40.00% 34.44% Total prizes 859,483 60.90% 995,193 60.00% 10,386,146 74.44% Ticket purchases 32,050 2.27% 30,317 1.83% 122,285 0.88% 983,264 69.68% 1,133,318 68.33% 11,415,294 81.82% 427,942 30.32% 525,251 31.67% 2,536,446 18.18% 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, 2012 World Series of Poker Game 739 TICKET SALES $ DIRECT EXPENSES: Commissions Prizes - low tier Prizes - high tier 3,765,245 100% Bunco! Game 741 $ 2,040,764 Winning Streak Game 744 100% $ 6,035,095 100% 244,745 6.50% 132,650 6.50% 392,283 6.50% 1,694,360 921,550 45.00% 24.48% 979,567 348,500 48.00% 17.08% 2,715,793 1,451,000 45.00% 24.04% Total prizes 2,615,910 69.48% 1,328,067 65.08% 4,166,793 69.04% Ticket purchases 190,494 5.06% 35,761 1.75% 59,370 0.98% 54,034 1.44% - 0.00% - 0.00% 3,105,184 82.47% 1,496,477 73.33% 4,618,446 76.53% 660,061 17.53% 544,287 26.67% 1,416,649 23.47% Advertising Total direct expenses GROSS PROFIT BY GAME $ $ Quick 7's Deluxe Game 749 TICKET SALES $ DIRECT EXPENSES: Commissions Prizes - low tier Prizes - high tier 2,677,246 $ Happy Go Lucky Game 751 100% $ 1,922,112 Cool Bill Game 752 100% $ 1,154,046 100% 174,021 6.50% 124,937 6.50% 75,013 6.50% 1,271,692 448,500 47.50% 16.75% 884,172 360,520 46.00% 18.76% 530,861 220,480 46.00% 19.10% Total prizes 1,720,192 64.25% 1,244,692 64.76% 751,341 65.10% Ticket purchases 35,818 1.34% 42,024 2.19% 40,516 3.51% 1,930,031 72.09% 1,411,653 73.44% 866,870 75.12% 747,215 27.91% 510,459 26.56% 287,176 24.88% Total direct expenses GROSS PROFIT BY GAME $ $ 5X Cash Game 755 TICKET SALES $ DIRECT EXPENSES: Commissions Prizes - low tier Prizes - high tier 5,717,915 $ Crossword Game 761 100% $ 19,839,302 Double Lucky 7's Game 762 100% $ 2,506,638 100% 371,665 6.50% 1,289,555 6.50% 162,931 6.50% 2,573,062 1,387,150 45.00% 24.26% 9,919,651 2,923,200 50.00% 14.73% 1,228,253 396,300 49.00% 15.81% Total prizes 3,960,212 69.26% 12,842,851 64.73% 1,624,553 64.81% Ticket purchases 54,467 0.95% 286,866 1.45% 46,034 1.84% 4,386,344 76.71% 14,419,272 72.68% 1,833,518 73.15% 1,331,571 23.29% 5,420,030 27.32% 673,120 26.85% Total direct expenses GROSS PROFIT BY GAME $ $ $ 27 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, 2012 Tic Tac Toe Game 771 TICKET SALES $ 701,644 100% DIRECT EXPENSES: Commissions 45,609 6.50% Prizes - low tier Prizes - high tier 347,316 67,840 49.50% 9.67% Total prizes 415,156 59.17% Ticket purchases 30,680 4.37% 491,445 70.04% 210,199 29.96% Total direct expenses GROSS PROFIT BY GAME $ 28 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, 2012 Pick/Pick Extra Drawings January 1, 2011 to December 31, 2011 TICKET SALES $ DIRECT EXPENSES: Commissions Total prizes Online system expenses Advertising Total direct expenses GROSS PROFIT BY GAME $ 33,645,442 100.00% 2,186,942 17,138,525 1,244,881 409,084 Fantasy 5/Fantasy 5 Extra Drawings January 1, 2011 to December 31, 2011 $ 16,565,772 100.00% $ 94,610,930 100.00% 6.50% 50.94% 3.70% 1.22% 1,076,765 8,532,846 612,934 85,915 6.50% 51.51% 3.70% 0.52% 6,149,703 47,305,465 3,500,604 2,334,478 6.50% 50.00% 3.70% 2.47% 20,979,432 62.35% 10,308,460 62.23% 59,290,250 62.67% 12,666,010 37.65% 6,257,312 37.77% $ 35,320,680 37.33% $ Pick 3 Drawings January 1, 2011 to December 31, 2011 TICKET SALES $ Powerball Drawings January 1, 2011 to December 31, 2011 8,327,849 100.00% 541,305 4,163,925 308,130 528 Arizona Raffle Drawings January 1, 2011 to December 31, 2011 $ 6,468,640 100.00% 6.50% 50.00% 3.70% 0.01% 420,461 3,260,195 239,340 1,769,536 5,013,888 60.21% 3,313,961 39.79% Fast Play Drawings January 1, 2011 to December 31, 2011 $ 285,800 100.00% 6.50% 50.40% 3.70% 27.36% 18,455 167,139 10,575 - 6.46% 58.48% 3.70% 0.00% 5,689,532 87.96% 196,169 68.64% 779,108 12.04% 89,631 31.36% DIRECT EXPENSES: Commissions Total prizes Online system expenses Advertising Total direct expenses GROSS PROFIT BY GAME $ $ Cash 4 Drawings January 1, 2011 to December 31, 2011 TICKET SALES $ DIRECT EXPENSES: Commissions Total prizes Online system expenses Advertising Total direct expenses GROSS PROFIT BY GAME $ 2,941,544 100.00% 191,200 1,473,712 108,891 - 2 By 2 January 1, 2011 to December 31, 2011 $ $ Mega Millions January 1, 2011 to December 31, 2011 3,552,918 100.00% $ 46,720,786 100.00% 6.50% 50.10% 3.70% 0.00% 230,940 1,840,410 131,458 - 6.50% 51.80% 3.70% 0.00% 3,036,844 24,341,651 1,728,669 1,398,396 6.50% 52.10% 3.70% 2.99% 1,773,803 60.30% 2,202,808 62.00% 30,505,560 65.29% 1,167,741 39.70% 1,350,110 38.00% $ 16,215,226 34.71% $ 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, 2012. Economic Development games are denoted with (*) 29 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, 2012, and have issued our report thereon dated November 28, 2012. 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 Management of the lottery is responsible for establishing and maintaining effective 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 previously. Tempe 2055 E. Warner Road Suite 101 Tempe, AZ 85284-3487 (480) 839-4900 Fax (480) 839-1749 Scottsdale 7098 E. Cochise Road Suite 100 Scottsdale, AZ 85253-4517 (480) 483-1170 Fax (480) 483-7126 Casa Grande 1115 E. Cottonwood Lane Suite 100 Casa Grande, AZ 85122-2950 (520) 836-8201 Fax (520) 426-9432 w w w . h e n r y a n d h o r n e . c o m 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. This report is intended solely for the information and use of the State of Arizona, the Lottery Commissioners, management, and others within the entity, and is not intended to be and should not be used by anyone other than these specified parties. Casa Grande, Arizona November 28, 2012