Report of Independent Auditors and Financial Statements for Arizona State Lottery A Proprietary Fund of the State of Arizona June 30, 2013 CONTENTS PAGE REPORT OF INDEPENDENT AUDITORS 1‐3 MANAGEMENT’S DISCUSSION AND ANALYSIS (UNAUDITED) 4‐8 Statement of net position Statement of revenues, expenses, and changes in net position Statement of cash flows Notes to basic financial statements 9 10 11 12‐18 SUPPLEMENTARY INFORMATION Supplemental schedule of gross profit by game 19‐26 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 27‐28 Schedule of Findings and Responses 29‐31 REPORT OF INDEPENDENT AUDITORS To the Commissioners of Arizona State Lottery Phoenix, Arizona Report on the Financial Statements We have audited the accompanying financial statements of the business‐type activities of the Arizona State Lottery (the “Lottery”) as of and for the years ended June 30, 2013 and the related notes to the financial statements, which collectively comprise the Lottery’s basic financial statements as listed in the table of contents. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in conformity with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in conformity 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 from material misstatement. 1 An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, based on our audit, the financial statements referred to above present fairly, in all material respects, the respective financial position of the Lottery, as of June 30, 2013, and the changes in financial position, and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management’s discussion and analysis on pages 4 through 8 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 conformity 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. 2 Other Supplemental Information Our audit was conducted for the purpose of forming opinions about the financial statements of the Arizona State Lottery. The transmittal letter and supplemental schedule of Gross Profit by Game on pages 19 through 26 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 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 conformity with auditing standards general 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. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we also have issued our report dated December 3, 2013 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 in considering the Lottery’s internal control over financial reporting and compliance. Scottsdale, Arizona December 3, 2013 3 ARIZONA STATE LOTTERY A PROPRIETARY FUND OF THE STATE OF ARIZONA MANAGEMENT’S DISCUSSION AND ANALYSIS (UNAUDITED) This discussion and analysis of the Lottery's financial statements is a required component of financial reporting under Governmental 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, 2013, 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, 2013. The statement of net position; the statement of revenues, expenses, and changes in net position; 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 period. The statement of net position provides information about the assets, deferred outflows of resources, liabilities, deferred inflows of resources and net position 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 position represents 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 period is presented in the statement of revenues, expenses, and changes in net position. 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 transfer’s 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. 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. 4 ARIZONA STATE LOTTERY A PROPRIETARY FUND OF THE STATE OF ARIZONA MANAGEMENT’S DISCUSSION AND ANALYSIS (UNAUDITED) Sales Activities Revenues from the sale of Lottery products for the fiscal year ended June 30, 2013 were higher than Fiscal Year 2012 and also a Lottery record high. As shown in the financial statements, sales increased 7.2% from the prior year, from $646.7 million in Fiscal Year 2012 to $693 million in the current year. Sales of ScratchersSM, Powerball® and Weekly Winnings all showed increases while Mega Millions®, The Pick, Fantasy 5, Cash 4, 2 By 2 sales decreased. The following table compares Lottery product sales between fiscal years. Sales are presented in millions of dollars. Product Sales Scratchers (including economic development) Instant Tabs Powerball Mega Millions The Pick Fantasy 5 Arizona Raffle Pick 3 Cash 4 2 By 2 Weekly Winnings Total FY 2012 $ $ FY 2013 409.8 3.3 104.2 56.1 34.6 18.1 6.0 8.5 2.8 3.3 ‐ $ 646.7 $ 436.6 Differences $ 3.9 151.2 32.4 33.0 15.8 ‐ 8.5 0.6 3.1 7.9 693.0 26.8 0.6 47.0 (23.7) (1.6) (2.3) (6.0) ‐ (2.2) (0.2) 7.9 $ 46.3 Percentage 6.54% 18.18% 45.11% ‐42.25% ‐4.62% ‐12.71% ‐100.00% 0.00% ‐78.57% ‐6.06% 100.00% 7.16% Total Revenues Nonoperating revenues for the year ended June 30, 2013, were $79,161 as compared to $101,923 for the year ended June 30, 2012. Nonoperating revenue is comprised of interest earned on invested cash and periodic recognition of commissions earned by the Lottery. Total revenues were $694.2 million for the year ended June 30, 2013, as compared to $646.8 million for the year ended June 30, 2012. As mentioned above, the increase was due to an increase in sales revenues. 5 ARIZONA STATE LOTTERY A PROPRIETARY FUND OF THE STATE OF ARIZONA MANAGEMENT’S DISCUSSION AND ANALYSIS (UNAUDITED) Major Expenses $493.4 million of the Lottery's total operating expenses of $493.4 million for the year ended June 30, 2013 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, $459.3 million of the Lottery's total operating expenses of $482.1 million for the year ended June 30, 2012, 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 Prize expense Retailer commissions On‐line system expenses Scratchers system and Distribution expenses Tickets purchased $ Total $ 396.7 43.8 8.6 FY 2013 $ 4.0 6.2 459.3 426.1 47.1 9.3 Differences $ 4.4 6.5 $ 493.4 $ Percentage 29.4 3.3 0.7 ‐ 0.4 0.3 7.4% 7.5% 8.1% 10.0% 4.8% 34.1 7.4% The increase in Game Related Expenses is reflective of the increase in product sales. See the product sales schedule above. Of the $22.8 million in Fiscal Year 2013 in other operating expenses, $14.6 million was used for advertising and promotion and $5.9 million was used to compensate Lottery employees. In comparison, 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. Transfers to Other State Funds Note 3 to the financial statements details the amounts transferred to other State Funds. In Fiscal Year 2013 the Lottery transferred $177.8 million to other State Funds. In comparison, in Fiscal Year 2012 the Lottery transferred $164.7 million to other State Funds. 6 ARIZONA STATE LOTTERY A PROPRIETARY FUND OF THE STATE OF ARIZONA MANAGEMENT’S DISCUSSION AND ANALYSIS (UNAUDITED) Other Financial Information Statement of Net Position Current assets Capital assets Other assets ‐ deposits FY 2012 $ Total assets Current liabilities Net position $ 64.8 3.1 9.4 FY 2013 $ 86.3 3.8 9.3 77.3 99.4 66.7 88.8 10.6 $ 10.6 The Lottery's total assets at June 30, 2013 were $99.4 million. Assets consisted of cash held substantially by the State Treasurer of $76 million, receivables from Lottery retailers for the sale of Lottery products of $37.9 million, Scratchers ticket inventory of $3.7 million, net investment in fixed assets of $3.8 million and a deposit with MUSL of $9.3 million. Comparable figures at June 30, 2012, were $77.3 million in total assets, including $56.3 million in cash held by the State Treasurer, $5.4 million in receivables from retailers, $3.1 million in Scratchers ticket inventory, net investment in capital assets of $3.1 million and a MUSL deposit of $9.4 million. Total liabilities at June 30, 2013, were $88.8 million, consisting of $5.9 million in accounts payable and accrued expenses, prize liabilities of $12.2 million, and amounts due to other State Funds of $70.8 million. All of the Lottery's liabilities were current liabilities. The Lottery’s 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. Total net position at June 30, 2013, was $10.6 million, which is consistent with the amount of total net position reported at June 30, 2012. 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.) 7 ARIZONA STATE LOTTERY A PROPRIETARY FUND OF THE STATE OF ARIZONA MANAGEMENT’S DISCUSSION AND ANALYSIS (UNAUDITED) 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 2013 budget was amended in the regular legislative session of 2012. 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." The Lottery's appropriation was $86.9 million at the beginning of the year and increased to $94.6 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 2013 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. 8 ARIZONA STATE LOTTERY A PROPRIETARY FUND OF THE STATE OF ARIZONA STATEMENT OF NET POSITION ASSETS June 30, 2013 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, 2013 and 2012 Scratch ticket inventory Pull tab inventory $ 76,000,899 6,396,051 3,741,527 205,697 Total current assets 86,344,174 CAPITAL ASSETS Land and land improvements Buildings Furniture, fixtures, and equipment Less accumulated depreciation (4,561,393) Total capital assets 3,785,667 1,268,695 3,923,817 3,154,548 OTHER ASSETS Deposit ‐ MUSL 9,304,016 Total assets $ 99,433,857 LIABILITIES AND NET POSITION CURRENT LIABILITIES Accounts payable Accrued expenses Prize liability Due to other funds Due to other state funds Total current liabilities NET POSITION Net investment in capital assets Unrestricted Total net position 9 $ 5,536,411 289,389 12,236,088 17,855,177 52,898,492 88,815,557 3,785,667 6,832,633 $ 10,618,300 See accompanying notes. ARIZONA STATE LOTTERY A PROPRIETARY FUND OF THE STATE OF ARIZONA STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION Year Ended June 30, 2013 OPERATING REVENUES Ticket sales Scratchers Powerball The Pick Fantasy 5 Pick 3 Mega Millions 2 By 2 Cash 4 Weekly Winnings Instant Tab Total ticket sales Other operating revenues Total operating revenues OTHER EXPENSES Direct costs Prize expense Retailer commissions and incentives Online system expense Scratcher system and distribution expenses Tickets purchased Total direct costs $ 436,599,601 151,219,355 32,998,104 15,762,206 8,547,584 32,370,173 3,094,844 578,346 7,903,108 3,865,494 692,938,815 1,216,059 694,154,874 426,143,442 47,086,481 9,341,528 4,367,836 6,471,398 493,410,685 Advertising and promotion Wages and related expenses Contract services Depreciation Administrative expenses 14,756,557 5,923,481 374,098 190,983 1,771,923 Total operating expenses 516,427,727 OPERATING INCOME NONOPERATING REVENUES ‐ Investment income and other 177,727,147 INCOME BEFORE TRANSFERS TRANSFERS TO OTHER STATE FUNDS 177,806,308 177,806,308 Change in net position NET POSITION ‐ beginning of year NET POSITION ‐ end of year See accompanying notes. 79,161 ‐ 10,618,300 $ 10,618,300 10 ARIZONA STATE LOTTERY A PROPRIETARY FUND OF THE STATE OF ARIZONA STATEMENT OF CASH FLOWS Year Ended June 30, 2013 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 $ 529,554,908 12,663,535 (323,915,100) (36,378,905) (5,920,312) Net cash provided by operating activities 176,004,126 CASH FLOWS USED BY NONCAPITAL FINANCING ACTIVITIES Payments to beneficiaries per Arizona Statutes (156,152,193) CASH FLOWS USED BY CAPITAL FINANCING ACTIVITIES Payments for acquisition of capital assets (224,256) CASH FLOWS FROM INVESTING ACTIVITIES Receipts of interest 70,313 Net increase in cash 19,697,990 CASH AT BEGINNING OF YEAR 56,302,909 CASH AT END OF YEAR $ RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Operating income $ 177,727,147 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 11 76,000,899 190,983 (1,006,630) (821,417) (53,284) 1,092,630 (1,125,303) $ 176,004,126 See accompanying notes. ARIZONA STATE LOTTERY A PROPRIETARY FUND OF THE STATE OF ARIZONA NOTES TO BASIC FINANCIAL STATEMENTS 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 accompanying financial statements present information as to the transactions of the Lottery. For the period July 1, 2012 through June 30, 2013, the Lottery held 63 instant games (games 740, 742, 743, 745‐748, 750, 753, 754, 756‐760, 763‐769, 772‐791, 793‐803, 806, 810, 814, 816, 817, 825‐829). During 2013, the Lottery continued the "Pick 3," "Pick 5," "The Pick," "Powerball," "Mega Millions," "2 By 2" and "Cash 4" online games. As required, the Lottery has deposits with "Powerball," and "Mega Millions," multistate online lottery games, of $9,304,016 at June 30, 2013. 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 proprietary fund 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 follows all applicable Governmental Accounting Standards Board pronouncements. The Fund accounts for prize payments, operational expenses (including consulting), promotional, advertising expenses, and transfers of monies to other State funds. Receipts from each type of lottery game are 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, 2012 to June 30, 2013.  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. Cash and investments – 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. 12 ARIZONA STATE LOTTERY A PROPRIETARY FUND OF THE STATE OF ARIZONA NOTES TO BASIC FINANCIAL STATEMENTS Note 1 – Nature of Operations and Summary of Significant Accounting Policies (continued) 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 Lottery defines capital assets as assets with an individual cost of more than $5,000. 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 computed using the straight‐line method. Capital assets are depreciated on the following basis: Buildings Improvements Fixtures and equipment 40 years 40 years 3–10 years Investments and investment income – Investments are reported at fair value on the statement of net position 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 position. 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). 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. The Lottery’s operating revenues result from exchange transactions associated with the principle activity of the fund. Non‐operating revenues result from non‐exchange transactions or from ancillary activities of the fund. 13 ARIZONA STATE LOTTERY A PROPRIETARY FUND OF THE STATE OF ARIZONA NOTES TO BASIC FINANCIAL STATEMENTS Note 1 – Nature of Operations and Summary of Significant Accounting Policies (continued) Prize expense and prize liability – Instant ticket prize expense is estimated and recognized when ticket packs are settled and is based on the design of the game. Game designs include certain guaranteed prizes in each pack of tickets and prizes placed randomly by the gaming vendor. When validations for the game have ended, differences between estimated and actual prizes awarded for the randomly placed tickets are adjusted to prize expense and prize liability. Prize expense for draw games is recognized as drawings are held, based on the estimated or known cost of the prize payments. Prize expense is adjusted as prizes are claimed and the actual cost of the prize is known. Prize liabilities for prizes are recorded when the prize expense is recognized. The prize liability represents a liability for prizes which are unclaimed for games in progress. Prizes unclaimed for 180 days after the drawing date are forfeited by the ticket holder. The prize liability also includes forfeited unclaimed prizes of approximately $5,000,000 at June 30, 2013. The Lottery retains 70% of all forfeited unclaimed prizes, under State statue, for supplemental prizes in subsequent lottery games. State statute also requires that 30% of all forfeited unclaimed prizes be transferred to the Court Appointed Special Advocate Account, a fund within the State's General Fund. 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, 2013, the Fund's accounts payable and accrued expenses balance includes an accrual of vacation pay and related benefits of $289,389. 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 accordance 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. 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., 151 Floor, Phoenix, AZ, 85007‐2812. 14 ARIZONA STATE LOTTERY A PROPRIETARY FUND OF THE STATE OF ARIZONA NOTES TO BASIC FINANCIAL STATEMENTS Note 2 – Cash and Investments Held by the State Treasurer (continued) 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, 2013 the Lottery's deposits with the Treasurer were as follows: Cash Investment ‐ Pool 3 Total cash and investments Held by State Treasurer $ 60,903,204 15,097,695 $ 76,000,899 Note 3 – Transfers and Statutory Requirements As required by ARS Section 5‐505, the Lottery made transfers during the years ended June 30 as follows: General Fund Healthy Arizona Mass Transit (LTAF) University Bond Fund Heritage Fund Commerce Authority Arizona Competes Fund Court‐appointed Special Advocate Fund Economic Security Homeless Services Department of Gaming Total tranfers to other State funds $ 118,150,673 19,615,800 11,224,800 11,041,186 10,000,000 3,500,000 2,973,849 1,000,000 300,000 $ 177,806,308 These transactions met the minimum percentage requirements imposed upon the Lottery by statute. 15 ARIZONA STATE LOTTERY A PROPRIETARY FUND OF THE STATE OF ARIZONA NOTES TO BASIC FINANCIAL STATEMENTS Note 4 – Capital Assets Capital asset activity for the year ended June 30, 2013 is as follows: Beginning Balance Capital assets, not being depreciated: Land Intangible assets Construction in progress $ Capital assets, being depreciated: Land improvements Buildings Furniture, fixtures, and equipment Total capital assets Less accumulated depreciation for: Land improvements Buildings Furniture, fixtures, and equipment Total accumulated depreciation Total capital assets, net $ 937,830 ‐ 59,938 Increases $ ‐ 599,324 ‐ Decreases $ Ending Balance Transfers ‐ ‐ ‐ $ ‐ ‐ (59,938) $ 937,830 599,324 ‐ 330,865 3,648,272 ‐ 275,545 ‐ ‐ ‐ ‐ 330,865 3,923,817 2,532,245 22,979 ‐ ‐ 2,555,224 7,509,150 897,848 ‐ (330,865) (1,879,660) ‐ (86,991) ‐ ‐ ‐ ‐ (330,865) (1,966,651) (2,159,884) (103,993) ‐ ‐ (2,263,877) (4,370,409) (190,984) ‐ ‐ (4,561,393) 3,138,741 $ 706,864 $ ‐ (59,938) $ (59,938) 8,347,060 $ 3,785,667 Note 5 – Pledged Revenues 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, 2013, pledged revenues totaled approximately $174,373,100, of which $37,499,600 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. 16 ARIZONA STATE LOTTERY A PROPRIETARY FUND OF THE STATE OF ARIZONA NOTES TO BASIC FINANCIAL STATEMENTS Note 6 – 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. 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 in September 2011. Note 7 – Loss 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. The 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. Purchases of annuities transfer liabilities for prizes to the insurance company. However, the Lottery may incur liabilities for prizes in the event of a default of an insurance company. Aggregate future payments to prize winners on existing annuities totaled $48,822,660 at June 30, 2013. Approximately $41,529,261 of the total aggregate future payments at June 30, 2013, relate to annuities purchased from five separate insurance companies, of which $12,964,667 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. 17 ARIZONA STATE LOTTERY A PROPRIETARY FUND OF THE STATE OF ARIZONA NOTES TO BASIC FINANCIAL STATEMENTS Note 8 – 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 10.90%, 10.75%, and 9.85% (rate includes 0.24%, 0.25%, and 0.25%, for long‐term disability) of their compensation for the years ended June 30, 2013, 2012, and 2011, with the contributions made through payroll deduction. Employee contributions vest immediately. Total contributions to the Plan for the years ended June 30, 2013, 2012, and 2011; by the Lottery's covered employees were approximately $463,000 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, 2013, 2012, and 2011, was $4,159,662, $4,050,304, and $3,996,101, 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, 2013. 18 SUPPLEMENTARY INFORMATION ARIZONA STATE LOTTERY A PROPRIETARY FUND OF THE STATE OF ARIZONA SUPPLEMENTAL SCHEDULE OF GROSS PROFIT BY GAME FOR GAMES EXPIRING DURING THE YEAR YEAR ENDED JUNE 30, 2013 I'm in the Money Game 740 Ticket Sales $ Direct Expenses: Commissions Prizes ‐ low tier Prizes ‐ high tier Total prizes Ticket purchases Advertising 11,077,360 100% 720,028 $ $ 100% 5,147,960 100% 6.50% 824,147 6.50% 334,621 6.50% 4,430,944 3,832,800 40.00% 34.60% 5,916,945 2,146,250 46.67% 16.93% 2,316,582 1,314,900 45.00% 25.54% 8,263,744 74.60% 8,063,195 63.60% 3,631,482 70.54% 54,051 0.00% 137,577 1.09% 127,675 2.48% $ Direct Expenses: Commissions Prizes ‐ low tier Prizes ‐ high tier Total prizes Ticket purchases Advertising Total direct expenses Gross profit by game $ ‐ 0.00% 4,093,778 79.52% 1,054,182 20.48% 9,037,823 81.59% 2,039,537 18.41% $ $ Direct Expenses: Commissions Prizes ‐ low tier Prizes ‐ high tier Total prizes Ticket purchases Advertising Total direct expenses Gross profit by game $ 9,024,919 71.18% 3,654,248 28.82% $ Jumbo Bucks Game 746 10,788,760 100% 701,269 $ Cosmic Crossword Game 747 11,174,600 100% 23,264,795 100% 6.50% 726,349 6.50% 1,512,214 6.50% 4,045,785 4,014,050 37.50% 37.21% 4,190,475 4,153,750 37.50% 37.17% 9,305,918 7,072,150 40.00% 30.40% 8,059,835 74.71% 8,344,225 74.67% 16,378,068 70.40% 60,407 0.56% 60,405 0.54% 205,195 0.88% ‐ 0.00% ‐ 0.00% ‐ 0.00% 8,821,511 81.77% 9,130,979 81.71% 18,095,477 77.78% 1,967,249 18.23% 2,043,621 18.29% 5,169,318 22.22% $ Cash Frenzy Game 748 Ticket Sales $ ‐ $100,000 Payout Game 745 Ticket Sales Aces High Game 743 12,679,167 ‐ Total direct expenses Gross profit by game Blue Line Crossword Game 742 $ $ VIP Club Game 750 5,428,385 100% 352,847 $ All the Money Game 753 24,967,680 100% 6.50% 1,622,899 2,442,773 1,319,350 45.00% 24.30% 3,762,123 2,462,590 100% 6.50% 160,068 6.50% 6,829,494 10,105,150 27.35% 40.47% 1,126,637 444,780 45.75% 18.06% 69.30% 16,934,644 67.83% 1,571,417 63.81% 59,393 1.09% 69,553 0.28% 40,516 1.65% ‐ 0.00% ‐ 0.00% ‐ 0.00% 4,174,363 76.90% 18,627,096 74.60% 1,772,001 71.96% 1,254,022 23.10% 6,340,584 25.40% 690,589 28.04% $ $ $ 19 THE ARIZONA STATE LOTTERY A PROPRIETARY FUND OF THE STATE OF ARIZONA SUPPLEMENTAL SCHEDULE OF GROSS PROFIT BY GAME FOR GAMES EXPIRING DURING THE YEAR YEAR ENDED JUNE 30, 2013 Double the Money Game 754 Ticket Sales $ Direct Expenses: Commissions Prizes ‐ low tier Prizes ‐ high tier Total prizes Ticket purchases Advertising Total direct expenses Gross profit by game $ Red Hot 7's Game 756 2,433,494 100% 158,177 $ 10,370,666 100% 1,638,606 100% 6.50% 674,093 6.50% 106,511 6.50% 1,192,412 382,370 49.00% 15.71% 5,703,866 1,018,269 55.00% 9.82% 860,270 122,550 52.50% 7.48% 1,574,782 64.71% 6,722,135 64.82% 982,820 59.98% 46,034 1.89% 122,420 1.18% 30,497 1.86% ‐ 0.00% ‐ 0.00% ‐ 0.00% 1,778,993 73.10% 7,518,648 72.50% 1,119,828 68.34% 654,501 26.90% 2,852,018 27.50% 518,778 31.66% $ Spin 3 Game 758 Ticket Sales $ Direct Expenses: Commissions Prizes ‐ low tier Prizes ‐ high tier Total prizes Ticket purchases Advertising Total direct expenses Gross profit by game $ $ Direct Expenses: Commissions Prizes ‐ low tier Prizes ‐ high tier Total prizes Ticket purchases Advertising Total direct expenses Gross profit by game 20 $ $ $ Sevens and Elevens Game 759 1,341,121 100% 87,174 $ Bingo Game 760 1,436,191 100% 18,911,916 100% 6.50% 93,354 6.50% 1,229,275 6.50% 683,972 120,980 51.00% 9.02% 736,051 125,862 51.25% 8.76% 10,117,875 1,999,350 53.50% 10.57% 804,952 60.02% 861,913 60.01% 12,117,225 64.07% 30,043 2.24% 30,312 2.11% 274,493 1.45% ‐ 0.00% ‐ 0.00% ‐ 0.00% 922,169 68.76% 985,579 68.62% 13,620,993 72.02% 418,952 31.24% 450,612 31.38% 5,290,923 27.98% $ Sky High Crossword Game 763 Ticket Sales Three Queens Game 757 $ $ Ink Game 764 14,503,250 100% 942,711 $ Bingo Nights Game 765 1,433,653 100% 6.50% 93,190 5,800,825 4,937,100 40.00% 34.04% 10,737,925 14,699,410 100% 6.50% 955,463 6.50% 731,163 130,015 51.00% 9.07% 5,879,764 4,308,295 40.00% 29.31% 74.04% 861,178 60.07% 10,188,059 69.31% 127,533 0.88% 32,056 2.24% 289,065 1.97% ‐ 0.00% ‐ 0.00% ‐ 0.00% 11,808,169 81.42% 986,424 68.80% 11,432,587 77.78% 2,695,081 18.58% 447,229 31.20% 3,266,823 22.22% $ $ $ THE ARIZONA STATE LOTTERY A PROPRIETARY FUND OF THE STATE OF ARIZONA SUPPLEMENTAL SCHEDULE OF GROSS PROFIT BY GAME FOR GAMES EXPIRING DURING THE YEAR YEAR ENDED JUNE 30, 2013 Wild Dice Game 766 Ticket Sales $ Direct Expenses: Commissions Prizes ‐ low tier Prizes ‐ high tier Total prizes Ticket purchases Advertising Total direct expenses Gross profit by game $ Wild 10's Game 767 6,059,725 100% 393,884 $ 19,694,060 100% 2,728,114 100% 6.50% 1,280,114 6.50% 177,327 6.50% 2,651,337 1,530,575 43.75% 25.26% 6,948,056 6,816,700 35.28% 34.61% 1,248,115 520,240 45.75% 19.07% 4,181,912 69.01% 13,764,756 69.89% 1,768,355 64.82% 56,886 0.94% 99,495 0.51% 67,870 2.49% ‐ 0.00% ‐ 0.00% ‐ 0.00% 4,632,682 76.45% 15,144,365 76.90% 2,013,552 73.81% 1,427,043 23.55% 4,549,695 23.10% 714,562 26.19% $ 30th Anniversary Celebration Game 769 Ticket Sales $ Direct Expenses: Commissions Prizes ‐ low tier Prizes ‐ high tier Total prizes Ticket purchases Advertising Total direct expenses Gross profit by game $ 6,237,985 100% 405,469 $ Direct Expenses: Commissions Prizes ‐ low tier Prizes ‐ high tier Total prizes Ticket purchases Advertising Total direct expenses Gross profit by game $ $ $ Blackjack Bonus Game 772 $ Ace in the Hole Game 773 2,350,268 100% 2,414,092 100% 6.50% 152,767 6.50% 156,916 6.50% 2,183,295 2,156,775 35.00% 34.57% 1,151,631 359,360 49.00% 15.29% 1,104,451 446,040 45.75% 18.48% 4,340,070 69.57% 1,510,991 64.29% 1,550,491 64.23% 85,539 1.37% 39,124 1.66% 39,163 1.62% ‐ 0.00% ‐ 0.00% ‐ 0.00% 4,831,078 77.45% 1,702,882 72.45% 1,746,570 72.35% 1,406,907 22.55% 647,386 27.55% 667,522 27.65% $ Super 7s Game 774 Ticket Sales 30th Anniversary Game 768 $ $ Reindeer Money Game 775 1,506,561 100% 97,928 $ Holiday Break Game 776 1,875,284 100% 6.50% 121,895 836,143 68,940 55.50% 4.58% 905,083 2,029,574 100% 6.50% 131,922 6.50% 937,642 176,900 50.00% 9.43% 994,491 313,180 49.00% 15.43% 60.08% 1,114,542 59.43% 1,307,671 64.43% 34,545 2.29% 45,333 2.42% 39,759 1.96% ‐ 0.00% 18,491 0.99% 18,491 0.91% 1,037,556 68.87% 1,300,261 69.34% 1,497,843 73.80% 469,005 31.13% 575,023 30.66% 531,731 26.20% $ $ $ 21 THE ARIZONA STATE LOTTERY A PROPRIETARY FUND OF THE STATE OF ARIZONA SUPPLEMENTAL SCHEDULE OF GROSS PROFIT BY GAME FOR GAMES EXPIRING DURING THE YEAR YEAR ENDED JUNE 30, 2013 Snowflake Crossword Game 777 Ticket Sales $ Direct Expenses: Commissions Prizes ‐ low tier Prizes ‐ high tier Total prizes Ticket purchases Advertising Total direct expenses Gross profit by game $ $50,000 Jingle Jackpot Game 778 2,806,842 100% 182,445 $ 5,091,570 100% 6,042,020 100% 6.50% 330,954 6.50% 392,731 6.50% 1,375,353 430,000 49.00% 15.32% 2,418,671 1,101,650 47.50% 21.64% 2,718,510 1,653,450 44.99% 27.37% 1,805,353 64.32% 3,520,321 69.14% 4,371,960 72.36% 61,149 2.18% 55,510 1.09% 105,519 1.75% 18,491 0.66% 18,491 0.36% 18,491 0.31% 2,067,438 73.66% 3,925,276 77.09% 4,888,701 80.91% 739,404 26.34% 1,166,294 22.91% 1,153,319 19.09% $ Slingo Trio Game 780 Ticket Sales $ Direct Expenses: Commissions Prizes ‐ low tier Prizes ‐ high tier Total prizes Ticket purchases Advertising Total direct expenses Gross profit by game $ $ Direct Expenses: Commissions Prizes ‐ low tier Prizes ‐ high tier Total prizes Ticket purchases Advertising Total direct expenses Gross profit by game 22 $ $ $ Suits Game 781 9,768,315 100% 634,942 $ Joker's Wild Game 782 1,396,941 100% 6,134,790 100% 6.50% 90,803 6.50% 398,763 6.50% 3,418,910 3,370,405 35.00% 34.50% 733,396 96,050 52.50% 6.88% 2,760,656 1,522,500 45.00% 24.82% 6,789,315 69.50% 829,446 59.38% 4,283,156 69.82% 141,590 1.45% 49,973 3.58% 61,802 1.01% ‐ 0.00% ‐ 0.00% ‐ 0.00% 7,565,847 77.45% 970,222 69.45% 4,743,721 77.32% 2,202,468 22.55% 426,719 30.55% 1,391,069 22.68% $ 7‐11‐21 Game 784 Ticket Sales Holiday Riches Game 779 $ $ Triple Luck Game 785 2,690,500 100% 174,883 $ Fat Wallet Game 786 2,629,144 100% 6.50% 170,894 1,230,905 501,140 45.75% 18.63% 1,732,045 5,745,925 100% 6.50% 373,488 0.00% 1,209,406 488,835 46.00% 18.59% 2,442,214 1,576,300 0.00% 0.00% 64.38% 1,698,241 64.59% 4,018,514 0.00% 48,880 1.82% 48,792 1.86% 60,421 0.00% ‐ 0.00% ‐ 0.00% ‐ 1,955,808 72.69% 1,917,927 72.95% 4,452,423 0.00% 734,692 27.31% 711,217 27.05% 1,293,502 0.00% $ $ $ THE ARIZONA STATE LOTTERY A PROPRIETARY FUND OF THE STATE OF ARIZONA SUPPLEMENTAL SCHEDULE OF GROSS PROFIT BY GAME FOR GAMES EXPIRING DURING THE YEAR YEAR ENDED JUNE 30, 2013 9s to Win Game 787 Ticket Sales $ Direct Expenses: Commissions Prizes ‐ low tier Prizes ‐ high tier Total prizes Ticket purchases Advertising Total direct expenses Gross profit by game $ Twenty‐one Blackjack Game 788 1,512,344 100% 98,304 $ 1,626,586 100% 2,132,246 100% 6.50% 105,729 6.50% 138,596 6.50% 839,353 67,820 55.50% 4.48% 853,959 118,200 52.50% 7.27% 980,833 399,550 46.00% 18.74% 907,173 59.98% 972,159 59.77% 1,380,383 64.74% 30,250 2.00% 34,838 2.14% 50,380 2.36% ‐ 0.00% ‐ 0.00% ‐ 0.00% 1,035,727 68.48% 1,112,726 68.41% 1,569,359 73.60% 476,617 31.52% 513,860 31.59% 562,887 26.40% $ Casino Crossword Game 790 Ticket Sales $ Direct Expenses: Commissions Prizes ‐ low tier Prizes ‐ high tier Total prizes Ticket purchases Advertising Total direct expenses Gross profit by game $ $ Direct Expenses: Commissions Prizes ‐ low tier Prizes ‐ high tier Total prizes Ticket purchases Advertising Total direct expenses Gross profit by game $ $ $ Crossword Game 791 10,027,683 100% 651,801 $ Wheel of Fortune Game 793 20,706,302 100% 7,762,945 100% 6.50% 1,345,910 6.50% 504,593 6.50% 4,679,585 1,627,500 46.67% 16.23% 10,353,151 3,034,550 50.00% 14.66% 3,299,253 2,130,660 42.50% 27.45% 6,307,085 62.90% 13,387,701 64.66% 5,429,913 69.95% 137,037 1.37% 299,917 1.45% 617,880 7.96% ‐ 0.00% ‐ 0.00% 4,588 0.06% 7,095,923 70.76% 15,033,528 72.60% 6,556,974 84.47% 2,931,760 29.24% 5,672,774 27.40% 1,205,971 15.53% $ Match & Win Game 794 Ticket Sales Lucky Pairs Game 789 $ $ Four by 4 Game 795 6,004,030 100% 390,264 $ 2 for the Money Game 796 1,593,205 100% 6.50% 103,559 2,401,612 1,702,105 40.00% 28.35% 4,103,717 1,386,556 100% 6.50% 90,128 6.50% 788,638 165,220 49.50% 10.37% 769,541 60,500 55.50% 4.36% 68.35% 953,858 59.87% 830,041 59.86% 96,349 1.60% 34,539 2.17% 37,874 2.73% ‐ 0.00% ‐ 0.00% ‐ 0.00% 4,590,330 76.45% 1,091,956 68.54% 958,043 69.10% 1,413,700 23.55% 501,249 31.46% 428,513 30.90% $ $ $ 23 THE ARIZONA STATE LOTTERY A PROPRIETARY FUND OF THE STATE OF ARIZONA SUPPLEMENTAL SCHEDULE OF GROSS PROFIT BY GAME FOR GAMES EXPIRING DURING THE YEAR YEAR ENDED JUNE 30, 2013 Fun $50s Game 797 Ticket Sales $ Direct Expenses: Commissions Prizes ‐ low tier Prizes ‐ high tier Total prizes Ticket purchases Advertising Total direct expenses Gross profit by game $ $5,000 Jackpot Game 798 996,814 100% 64,795 $ 1,201,115 100% 2,539,328 100% 6.50% 78,076 6.50% 165,056 6.50% 466,014 129,300 46.75% 12.97% 612,569 116,050 51.00% 9.66% 1,231,574 421,400 48.50% 16.59% 595,314 59.72% 728,619 60.66% 1,652,974 65.09% 37,842 3.80% 85,825 7.15% 121,408 4.78% ‐ 0.00% ‐ 0.00% ‐ 0.00% 697,951 70.02% 892,520 74.31% 1,939,438 76.38% 298,863 29.98% 308,595 25.69% 599,890 23.62% $ $50,000 Jackpot Game 800 Ticket Sales $ Direct Expenses: Commissions Prizes ‐ low tier Prizes ‐ high tier Total prizes Ticket purchases Advertising Total direct expenses Gross profit by game $ $ Direct Expenses: Commissions Prizes ‐ low tier Prizes ‐ high tier Total prizes Ticket purchases Advertising Total direct expenses Gross profit by game 24 $ $ $ $100,000 Jackpot Game 801 6,174,085 100% 401,316 $ 30 Years of Fun! Game 802 10,236,740 100% 1,586,878 100% 6.50% 665,388 6.50% 103,149 6.50% 2,623,782 1,626,100 42.50% 26.34% 2,843,766 4,347,600 27.78% 42.47% 761,701 184,600 48.00% 11.63% 4,249,882 68.83% 7,191,366 70.25% 946,301 59.63% 182,727 2.96% 184,968 1.81% 49,832 3.14% ‐ 0.00% ‐ 0.00% ‐ 0.00% 4,833,925 78.29% 8,041,722 78.56% 1,099,282 69.27% 1,340,160 21.71% 2,195,018 21.44% 487,596 30.73% $ Arizona Black Limited Game 803 Ticket Sales $10,000 Jackpot Game 799 $ $ Double Match Game 806 8,723,805 100% 567,048 $ Bonus Slots Game 810 2,459,706 100% 6.50% 159,881 3,925,712 2,154,000 45.00% 24.69% 6,079,712 2,051,604 100% 6.50% 133,354 6.50% 1,168,360 408,460 47.50% 16.61% 984,770 326,450 48.00% 15.91% 69.69% 1,576,820 64.11% 1,311,220 63.91% 95,029 1.09% 48,894 1.99% 48,861 2.38% ‐ 0.00% ‐ 0.00% ‐ 0.00% 6,741,789 77.28% 1,785,595 72.59% 1,493,435 72.79% 1,982,016 22.72% 674,111 27.41% 558,169 27.21% $ $ $ ARIZONA STATE LOTTERY A PROPRIETARY FUND OF THE STATE OF ARIZONA SUPPLEMENTAL SCHEDULE OF GROSS PROFIT BY GAME FOR GAMES EXPIRING DURING THE YEAR YEAR ENDED JUNE 30, 2013 Cash Stampede Game 814 Ticket Sales $ Direct Expenses: Commissions Prizes ‐ low tier Prizes ‐ high tier Total prizes Ticket purchases Advertising Total direct expenses Gross profit by game $ Jumbo Crossword Game 816 1,505,532 100% 97,860 $ 14,968,380 100% 23,326,640 100% 6.50% 972,945 6.50% 1,516,232 6.50% 692,545 293,000 46.00% 19.46% 5,292,838 5,199,450 35.36% 34.74% 6,470,826 9,998,890 27.74% 42.86% 985,545 65.46% 10,492,288 70.10% 16,469,716 70.60% 50,385 3.35% 136,021 0.91% 119,020 0.51% ‐ 0.00% ‐ 0.00% ‐ 0.00% 1,133,790 75.31% 11,601,254 77.51% 18,104,968 77.61% 371,742 24.69% 3,367,126 22.49% 5,221,672 22.39% $ Let It Dough Doubler Game 825 Ticket Sales $ Direct Expenses: Commissions Prizes ‐ low tier Prizes ‐ high tier Total prizes Ticket purchases Advertising Total direct expenses Gross profit by game $ $ Direct Expenses: Commissions Prizes ‐ low tier Prizes ‐ high tier Total prizes Ticket purchases Advertising Total direct expenses Gross profit by game $ $ $ Cashing Thru the Snow Game 826 1,774,621 100% 115,354 $ 2,467,078 100% 6.50% 160,360 887,311 174,060 50.00% 9.81% 1,061,371 Jolly Elf Crossword Game 827 3,444,372 100% 6.50% 223,884 6.50% 1,208,868 371,940 49.00% 15.08% 1,687,742 537,200 49.00% 15.60% 59.81% 1,580,808 64.08% 2,224,942 64.60% 54,840 3.09% 175,940 7.13% 85,300 2.48% 36,035 2.03% 36,035 1.46% 36,035 1.05% 1,267,600 71.43% 1,953,143 79.17% 2,570,161 74.62% 507,021 28.57% 513,935 20.83% 874,211 25.38% $ Sweet Winnings Game 828 Ticket Sales Extreme Green Game 817 $ $ Holiday Treasures Game 829 5,359,620 100% 348,378 $ Centennial Cash (ACA) Game 783 6,695,700 100% 6.50% 435,221 2,545,646 1,227,150 47.50% 22.90% 3,772,796 1,595,103 100% 6.50% 103,683 6.50% 3,012,851 1,727,047 45.00% 25.79% 701,845 243,900 44.00% 15.29% 70.39% 4,739,898 70.79% 945,745 59.29% 140,381 2.62% 117,525 1.76% 43,818 2.75% 36,035 0.67% 36,035 0.54% ‐ 0.00% 4,297,590 80.18% 5,328,679 79.58% 1,093,246 68.54% 1,062,030 19.82% 1,367,021 20.42% 501,857 31.46% $ $ $ 25 ARIZONA STATE LOTTERY A PROPRIETARY FUND OF THE STATE OF ARIZONA SUPPLEMENTAL SCHEDULE OF GROSS PROFIT BY GAME FOR GAMES EXPIRING DURING THE YEAR YEAR ENDED JUNE 30, 2013 Fantasy 5/Fantasy 5 Extra Drawings January 1, 2012 to December 31, 2012 Pick/Pick Extra Drawings January 1, 2012 to December 31, 2012 Ticket Sales $ Direct Expenses: Commissions Total prizes Online system expenses Advertising Total direct expenses Gross profit by game $ 33,382,380 100% 2,169,838 17,011,176 1,235,148 118,805 $ 17,141,442 100% $ 131,781,406 100% 6.50% 50.96% 3.70% 0.36% 1,114,178 8,850,407 634,233 3 6.50% 51.63% 3.70% 0.00% 8,565,785 65,890,703 4,875,912 2,462,542 6.50% 50.00% 3.70% 1.87% 20,534,967 61.51% 10,598,821 61.83% 81,794,942 62.07% 12,847,413 38.49% 6,542,621 38.17% 49,986,464 37.93% $ Pick 3 Drawings January 1, 2012 to December 31, 2012 Ticket Sales $ Direct Expenses: Commissions Total prizes Online system expenses Advertising Total direct expenses Gross profit by game 100% 562,598 4,327,720 320,251 ‐ 6.50% 50.00% 3.70% 0.00% 0.00% 60.20% 0.00% 39.80% 3,444,870 $ $ Cash 4 Drawings January 1, 2012 to December 31, 2012 Ticket Sales $ Direct Expenses: Commissions Total prizes Online system expenses Advertising Total direct expenses Gross profit by game $ $ Arizona Raffle Drawings January 1, 2012 to December 31, 2012 8,655,439 5,210,569 $ Powerball Drawings January 1, 2012 to December 31, 2012 306,020 100% 19,892 154,234 11,323 534,428 Weekly Winnings January 1, 2012 to December 31, 2012 $ 3,533,000 100% 6.50% 50.40% 3.70% 174.64% 229,645 1,766,500 130,721 1,779,883 6.50% 50.00% 3.70% 50.38% 719,877 235.24% 3,906,749 110.58% (413,857) ‐135.24% $ 2 By 2 January 1, 2012 to December 31, 2012 1,955,948 100% 127,137 979,929 72,370 ‐ $ ‐10.58% Mega Millions January 1, 2012 to December 31, 2012 3,142,234 100% 6.50% 50.10% 3.70% 0.00% 204,245 1,627,676 116,263 ‐ 1,179,436 60.30% 776,512 39.70% $ (373,749) $ 52,876,223 100% 6.50% 51.80% 3.70% 0.00% 3,436,942 27,231,256 1,956,420 1,421,339 6.50% 51.50% 3.70% 2.69% 1,948,184 62.00% 34,045,957 64.39% 1,194,050 38.00% 18,830,266 35.61% $ 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, 2013. Economic Development games are denoted with (*) 26 REPORT OF INDEPENDENT AUDITORS 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 To the Commissioners of Arizona State Lottery Phoenix, Arizona We have audited, in conformity with the 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, the financial statements of the business‐type activities of the Arizona State Lottery (the “Lottery”), as of and for the year ended June 30, 2013, and the related notes to the financial statements, which collectively comprise the Lottery’s basic financial statements, and have issued our report thereon dated December 3, 2013. Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the Lottery’s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Lottery’s internal control. Accordingly, we do not express an opinion on the effectiveness of the Lottery’s internal control. 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. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. 27 Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. We did identify certain deficiencies in internal control, described in the accompanying Schedule of Findings and Responses as items 2013‐001, 2013‐002 and 2013‐003 that we consider to be significant deficiencies. 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. The Arizona Lottery’s responses to the findings identified in our audit are described in the accompanying Schedule of Findings and Responses. We did not audit the Arizona Lottery’s responses and accordingly, we express no opinion on it. This report is intended solely for the information and use of management, Commissioners of the Arizona State Lottery, and other within the entity and is not intended to be and should not be used by anyone other than these specified parties. Scottsdale, Arizona December 3, 2013 28 ARIZONA STATE LOTTERY A PROPRIETARY FUND OF THE STATE OF ARIZONA SCHEDULE OF FINDINGS AND RESONSES YEAR ENDED JUNE 30, 2013 2013‐01 – Accounting and Reporting Components of Net Position (Significant Deficiency) Criteria: We believe that paragraph 12.123 of the American Institute of Certified Public Accountants, (AICPA) State and Local Government Audit and Accounting Guide provides the relevant accounting guidance for liabilities for prizes and forfeitures of unclaimed prizes. Forfeitures of unclaimed prizes should be recognized as a gain (net against prize expense) as of the date the claim is forfeited according to the provisions of a State’s stated regulations. Many States have regulations with regard to how forfeited unclaimed prizes must be utilized. For example some States require all forfeited unclaimed prizes to be transferred to another State fund or agency having a different mission. Arizona Revised Statutes 5‐568 states the following: Disposition of unclaimed prize money Unclaimed prize money for the prize on a winning ticket or share shall be retained for the person entitled to the prize for one hundred eighty days after the drawing in which the prize was won in the case of a drawing prize and for one hundred eighty days after the announced end of the game in question in the case of a prize determined in any manner other than by means of a drawing. If a claim is not made for the money within the applicable period, seventy per cent of the prize money shall be held in the state lottery prize fund for use as additional prizes in future games and thirty per cent shall be transferred monthly to the court appointed special advocate fund established by section 8‐524. We believe the State’s statue places a restriction on the use of forfeited prizes. Restricted net position should be reported when constraints placed on net position are either externally imposed by grantors, creditors, contributors or by laws or enabling legislation. The restriction to use unclaimed prizes that are forfeited represents a specific purpose, does not represent a liability in our view, rather it is the underlying transaction exchange transaction resulting from the sale of lottery tickets for games in progress that creates a liability, defined by GASB’s Concept Statement No. 4, Elements of Financial Statements, as the present obligation to sacrifice resources. Condition: The previously balance reported as liabilities for prizes was comprised of several components of the Lottery’s Prize Fund. These components consisted of unclaimed forfeited prizes, accumulated prize fund balance, accumulated investment earnings of the prize fund and flows of the prize fund. Certain of these components do not appear related to a present obligation for prizes. The Arizona Lottery retains and reports unclaimed prizes as a liability. Context: The Lottery previously reported a liability for prizes of approximately $30 million. Management’s estimate of liability attributable to only prizes is approximately $12 million. A portion of this estimate is attributable to forfeited prizes is approximately $5 million. Effect: We believe the liability for prizes has been overstated and that components of net position are understated or other liabilities exist. 29 ARIZONA STATE LOTTERY A PROPRIETARY FUND OF THE STATE OF ARIZONA SCHEDULE OF FINDINGS AND RESPONSES (CONTINUED) YEAR ENDED JUNE 30, 2013 Cause: We don’t not believe management had fully considered the applicable accounting and financial reporting guidance for prizes or components of net position. Recommendation: We recommend that management review the underlying nature and agreements for each significant reported balance and assess reporting restricted components of net position and review/revise its accounting policies with regard to activities of the Prize Fund. Those policies should reflect the use of resources in conformity with State statue while also considering the financial condition of the Lottery. Views of responsible officials and planned corrective actions: Management will review accounting policies for activities in the Prize Fund. The Lottery has been consistent in its reporting of prize liability since the Lottery’s inception and that reporting is similar to reporting used by other state lotteries. We agreed with the auditor to revise the presentation of prize liability this year and will seek to find an appropriate presentation in future years. The Lottery also believes that forfeited prizes are properly included in prize liability. Some of those forfeited prizes are committed to prize subsidies for Scratchers games that began in FY13 and are continuing into FY14 and the balance of forfeited prizes will be used to subsidize other games before the end of FY14. The Lottery has historically subsidized Scratchers by $6 to $8 million annually. The Lottery also has an ongoing commitment to fund a $1 million jackpot for the Pick game. It is currently taking from twelve to fourteen draws to fully fund jackpot payouts from sales. Any subsidy would come from forfeited prizes. 2013‐02 – Improve cash management practices (Significant Deficiency) Criteria: Cash management controls and procedures should ensure the accuracy of the funds that are disbursed. Condition and Context: Management self‐reported to us on instance that an erroneous payment was issued for $35,000,000 instead of the intended $3,500,000 to another State agency. Effect: A significant amount of funds were disbursed by the Lottery, however were subsequently returned. In addition, the Lottery also missed the opportunity to earn interest for a short period of time between when the funds were disbursed and then returned. Cause: The Lottery’s controls failed to detect a significant error in the cash disbursed. Recommendation: We recommend that management review its controls to ensure the accuracy of cash disbursements. 30 ARIZONA STATE LOTTERY A PROPRIETARY FUND OF THE STATE OF ARIZONA SCHEDULE OF FINDINGS AND RESONSES (CONTINUED) YEAR ENDED JUNE 30, 2013 Views of responsible officials and planned corrective actions: Management has reviewed the controls concerning cash disbursements and determined that controls are proper but that a significant error had been made. Employees involved have been counseled. 2013‐03 – Regularly review third party service reports (Significant Deficiency) Criteria: Service organizations are entities that provide outsourcing activities that are relevant to the control environments at user organizations. A Type II SSAE 16 report is an independent report on the design and operating effectiveness of key controls at a service organization. A Type II SSAE 16 provides assurance to user organizations that the control objectives relating to the services provided by their service organization are suitably designed and operating effectively throughout the examination period. Condition and Context: The Lottery utilizes reports and systems of GTECH, a service organization; however GTECH does not currently provide a Type II SSAE 16 report to the Lottery. Effect: Errors, if any, in the reports provided to the Lottery by GTECH may not be detected in a timely manner. Cause: GTECH does not appear to have a Type II SSAE 16 report available for the Lottery. Recommendation: We recommended that management obtain and review SSAE 16/SAS 70 annually to ensure service providers have sufficient controls in place and are operating effectively given the significance of the information provided by GTECH to the Lottery. Views of responsible officials and planned corrective actions: With the present on‐line contract GTECH was required to provide, within the first year but not before six months, the Arizona Lottery with a SAS 70 report. This report was to study the controls put into place by GTECH Arizona. The Arizona Lottery was able to approve the contractor that GTECH proposed to use for the SAS 70 report. The cost associated with this project was placed on the winner of the on‐line contract. It was a built in expense as it is quite expensive to produce. The Lottery is always attempting to make sure all systems and processes are followed, not only by the rules set forth by the Lottery but, also with the rules set forth under the Multi State Lottery agreement. The Lottery’s internal auditing department verifies all changes made to the GTECH process and programs. These changes are reviewed and tested before they are implemented. The Arizona Security department also observers the process several times a year to ensure compliance with existing rules and processes. To start a SSAE 16/SAS 70 report outside of the contract would place an undue financial burden upon the Lottery as it is not required by contract to be performed by GTECH. If it is indeed necessary this will be made an ongoing requirement placed in the upcoming RFP for the on‐line contract. 31