new mexico lottery authority financial statements … · two new board members have been appointed...

NEWMEXICOLOTTERYAUTHORITY

FINANCIALSTATEMENTS

JUNE30,2013and2012

NewMexicoLotteryAuthority

OFFICIALROSTER

June30,2013

BOARDOFDIRECTORS

Vacant* Chairman

CliffordStroud,MBA** ViceChairman

DanSalzwedel Treasurer

AmyBailey Secretary

RetaJones,CPA** AssistantSecretary‐Treasurer

MarkKoson Member

SalvatoreBaragiola Member

*KenHoeksema’stermwastoendonJune30,2013.HeresignedhispositioninMay2013.

**‐ThetermofappointmentforCliffordStroudandRetaJonesendedonJune30,2013.Twonewboardmembershavebeenappointedinfiscalyear2014.TheyareJohnKubiak,CPA,andDr.PaulGuerin.

OFFICIALSOFTHENEWMEXICOLOTTERYAUTHORITY

TomRomero ChiefExecutiveOfficer

J.VinceTorrez ExecutiveVicePresidentofSecurity

SylviaAnnJaramillo,CPA DirectorofFinance

EvelynMcKnight DirectorofHumanResources

AdrianaBinns DirectorofMarketingandCommunications

DavidRamirez DirectorofMIS

PamPoteat DirectorofSales

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ORGANIZATIONALDIVISIONSOFTHENEWMEXICOLOTTERYAUTHORITY

AspertheNewMexicoLotteryAct,Chapter6,Article24NMSA1978,theNewMexicoLottery Authority (the Lottery) is governed by a seven‐member Board of Directors(BoardorDirectors),whoprovide theLotterywith theprivate‐sectorperspectiveofalargemarketingandsalesenterpriseinordertomaximizerevenuesfortheLegislativeLotteryScholarship.TheDirectorsareresidentsofNewMexicoappointedbytheGovernorwiththeadviceandconsentoftheSenate. TheDirectorsareprominentpersonsintheirbusinessesorprofessionsandgeographicallyrepresenttheStateofNewMexico. NomorethanfourDirectorsare fromanyonepoliticalparty. TheDirectorsreceivenocompensationfortheirservices,butarereimbursedforapprovedexpensesincurredintheconductoftheLottery’sbusiness.EachDirectorissubjecttoabackgroundcheckandinvestigationtodeterminehis/herfitnessfortheoffice.AtleastoneDirectorhasfiveyearsexperienceas a law enforcement officer, oneDirector is an attorney admitted to practice inNewMexico,andoneDirectorisaCertifiedPublicAccountantcertifiedinNewMexico.TheDirectorsserveforafive‐yearterm,butcanbereappointedbytheGovernor.TheBoardselects a Chairman, a Vice‐Chairman, a Secretary, a Treasurer, and an Assistant‐Secretary/Treasurereachfiscalyear.TheChairmanalsoappointsaChairmanandtwoDirectors for each of the two standing committees of the Board, the Finance/AuditCommittee and the Security/Operations Committee. The Directors appoint the ChiefExecutiveOfficer(CEO)andprescribehisqualifications,dutiesandsalary,andwiththerecommendation and assistance of the CEO, employ an Executive Vice President ofSecurity and an Internal Auditor. The Directorsmeet at least once each quarter, andmoreoftenasneeded.AttheirmeetingstheDirectors:

adopt, amend, or repeal rules, policies and procedures necessary for theoperationoftheLottery;

approve, disapprove, amend, or modify the original budget for the succeedingfiscalyearandanyrevisedbudgetduringafiscalyear;

reviewanddiscusscurrent financial informationandtheLottery’sperformancetotheapprovedbudgetforthefiscalyear;

approveordisapproveallprocurementsoverseventy‐fivethousanddollarsandtheresultingawardofcontracts;

approvethefinancialauditcontractafter(orpending)OfficeoftheStateAuditor(State Auditor) approval, hold an audit exit conference with the independentpublic accountants (IPA) at an executive session of the Board or in theFinance/Audit Committee, and in an openmeeting accept the fiscal year auditfollowingreleasebytheStateAuditorandpresentationbytheIPA;

listentoanddiscussLotteryupdatesonsales,games,issues,etc.; review,discuss,andacceptinternalauditreports;and discuss, andwhennecessary, approveordisapproveothermatters that should

properly comebefore theDirectors in their fiduciary duty for the efficient andeffectiveoperation,profitability,integrity,andsecurityoftheLottery.

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ORGANIZATIONALDIVISIONSOFTHENEWMEXICOLOTTERYAUTHORITY‐CONTINUED

The Executive Division, under the direction of the Chief Executive Officer, providesleadershipforallactivitiesoftheLotterytocarryoutitsobjectivesandoverallstatutorymission to maximize net revenues for the Lottery’s beneficiaries. The divisionestablishes and directs the organization’s day‐to‐day operating strategy and plan. Inaddition, the division performs as a liaison among the Board, the Governor, theLegislature, governmental entities, external providers of goods and services, retailers,thepublic andLotterydivisions and employees.Also,within theExecutiveDivision isProductDevelopment,whichmanagesandmonitorstheinstantproducts,includingsuchareas as game launches, game endings, and performance analysis using several keyperformancemeasures.The FinanceDivision, under the direction of theDirector of Finance, performs all theactivitiesassociatedwiththefinancialandaccountingfunctionsoftheLottery,includingthegeneral ledger;cashmanagement;retaileraccountsreceivableanddebtcollection;fixedassetaccounting;gameaccounting;payrollandbenefitaccounting,payment,andreview; and tax reporting and payment. In addition, the division provides financialreporting,disclosure,andcompliancewithgenerallyacceptedaccountingpracticesandbudgetcompilation,includingthequarterlyandannualfinancialreportingofrevenues,expenses,andnetrevenuestotheStateofNewMexico;thefinancialauditandrelatedcompilationoffinancialstatements,relatednotes,andtheManagement’sDiscussionandAnalysis (MDA) for the fiscalyear; thestatutorily requiredannualproposedoperatingbudget for theLottery for thesucceeding fiscalyearand the finalproposedbudgetbydivision forBoard of Directors’ approval. Furthermore, the division is responsible fortheprocurementofmaterialsandservices;claimscenterpaymentofprizesandsalesoftickets;andaccountspayable.TheHumanResourcesDivision,underthedirectionoftheDirectorofHumanResources,oversees thedevelopmentand implementationofhumanresourcespolicies,programsand services, including recruitment, selection, retention, legal compliance, employeebenefits,employee insurancereconciliation,employeerelations,employmentpracticesandprocedures,employeecommunicationsandemployeeevents.The Internal Audit Department, under the direction of the Internal Auditor, conductsandcoordinatescomprehensiveauditsforallaspectsoftheLotteryasspelledoutintheNewMexicoLotteryAct.AuditsarecarriedoutpursuanttoanannualauditplanthatisapprovedbytheBoardofDirectorsandasmayberequestedbytheCEO.The Marketing and Communications Division, under the direction of the Director ofMarketing and Communications, is responsible for implementing, managing andadministering the activities associated with marketing the Lottery and its products,including advertising, communications, television drawings, promotions and specialevents.Thisentailscreatingandproducingmulti‐mediaadvertisingcampaigns,in‐store

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ORGANIZATIONALDIVISIONSOFTHENEWMEXICOLOTTERYAUTHORITY‐CONTINUED

pointofsalematerialsandplayerandretailerpublications;aswellasnegotiatingandoverseeing the Lottery’s participation in a number of statewide promotions andspecial events. The division is also responsible for all aspects of corporatecommunicationsincludingcreatingnewsreleasesandannualreportsandrespondingtorequestsforinformationbythepublicandthemedia.The Management Information Systems (MIS) Division, under the direction of theDirector of MIS, performs all the activities associated with the systems and dataprocessing functions of the Lottery, including instant ticket transaction processing,back office functionality, order and distribution systems, financial applications,retailernetworksupport,gamemanagement,monitoringofgameactivitiesanddrawgamevendors,andprovidingdataandanalysistodivisions.The Sales Division, under the direction of the Director of Sales, is responsible fordeveloping and implementing all sales activities and programs for the Lottery,including retailer visits, customer relationshipmanagement, ticket sales, inventorymanagement, pointof salesmaterialdistribution, retailer installations, promotionalandeventparticipationandpreparation,aswellasmaximizingsalesinitiatives.TheSecurityDivision,underthedirectionoftheExecutiveVicePresidentofSecurity,statutorily as a law enforcement agency is responsible for administering, enforcingandensuringcompliancewiththesecurityprovisionsoftheNewMexicoLotteryAct.The division conducts backgrounds of all prospective employees, lottery retailers,lottery vendors and lottery contractors. It also supervises ticket verification andLotterydrawingsandconductsdrawingswhentheprizeamountismorethan$5,000.The division functions as liaison among the Attorney General’s Office, DistrictAttorneyOfficesand lawenforcementagencies ingeneral. It is also responsible forbuildingandemployeesecurityandsafety.ThewarehousecomponentoftheSecurityDivisionisresponsibleforthepackingandshipmentoftheLottery’sinstantscratcherticketsand for themaintenanceandshippingofLotterypremiumandpointof saleitems. The division is responsible for the management of building and groundsmaintenance.

TABLEOFCONTENTS

NEWMEXICOLOTTERYAUTHORITYREPORTOFINDEPENDENTAUDITORS....................................................................1‐3MANAGEMENT’SDISCUSSIONAND ANALYSIS(UNAUDITED).........................................................................................4‐22BASICFINANCIALSTATEMENTS

StatementsofNetPosition.........................................................................................23StatementsofRevenues,Expensesand ChangesinNetPosition...........................................................................................24StatementsofCashFlows....................................................................................25‐26StatementsofFiduciaryNetPosition...................................................................27StatementsofChangesinFiduciaryNetPosition..........................................28NotestoFinancialStatements...........................................................................29‐49

SUPPLEMENTARYINFORMATION BudgetaryComparisonStatements.......................................................................50

SchedulesofPercentageReturntotheStateofNewMexico...................................................................................................51

OTHERINFORMATION ExitConference................................................................................................................52

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REPORTOFINDEPENDENTAUDITORSBoardofDirectorsNewMexicoLotteryAuthorityReportontheFinancialStatementsWehaveaudited theaccompanying financial statementsof thebusiness‐typeactivities, and theaggregateremaining fund informationof theStateofNewMexicoLotteryAuthority(Lottery),acomponentunitoftheStateofNewMexico,asofandfortheyearsendedJune30,2013and2012,which collectively comprise the Lottery’s basic financial statements as listed in the table ofcontents. We have also audited the budgetary comparison statements and the schedules ofpercentage return to the State of NewMexico presented as supplementary information in theaccompanyingfinancialstatementsasofandfortheyearsendedJune30,2013and2012,aslistedinthetableofcontents.Management’sResponsibilityfortheFinancialStatementsManagementisresponsibleforthepreparationandfairpresentationofthesefinancialstatementsinaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica;thisincludes the design, implementation, and maintenance of internal control relevant to thepreparation and fair presentation of financial statements that are free from materialmisstatement,whetherduetofraudorerror.Auditor’sResponsibilityOur responsibility is toexpressopinionson these financial statementsbasedonouraudits.Weconducted our audits in accordance with auditing standards generally accepted in the UnitedStates of America. Those standards require that we plan and perform the audits to obtainreasonable assurance about whether the financial statements are free from materialmisstatement.An audit involves performing procedures to obtain audit evidence about the amounts anddisclosures in the financial statements. The procedures selected depend on the auditor’sjudgment, including the assessment of the risks of material misstatement of the financialstatements, whether due to fraud or error. In making those risk assessments, the auditorconsiders internal control relevant to the entity’s preparation and fair presentation of thefinancial statements in order to design audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on the effectiveness of theLottery’sinternalcontrol.

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BoardofDirectorsNewMexicoLotteryAuthorityAccordingly,weexpressnosuchopinion.Anauditalsoincludesevaluatingtheappropriatenessofaccounting policies used and the reasonableness of significant accounting estimates made bymanagement,aswellasevaluatingtheoverallpresentationofthefinancialstatements.

Webelieve that theaudit evidencewehaveobtained is sufficient andappropriate toprovideabasisforourauditopinions.Opinions

Inouropinion,thefinancialstatementsreferredtoabovepresentfairly, inallmaterialrespects,therespectivefinancialpositionofthebusiness‐typeactivities,andtheaggregateremainingfundinformationoftheLotteryasofJune30,2013and2012,andtherespectivechangesinfinancialpositionand,whereapplicable, cash flows thereof for theyears thenended inaccordancewithaccounting principles generally accepted in the United States of America. In addition, in ouropinion,thefinancialstatementsreferredtopreviouslypresentfairly,inallmaterialrespects,thebudgetarycomparisonstatementsandschedulesofpercentagereturntotheStateofNewMexicofor theyearsended June30,2013and2012 inconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica.OtherMatters

Accounting principles generally accepted in the United States of America require thatmanagement’sdiscussionandanalysis,onpages4 through22,bepresented to supplement thebasicfinancialstatements.Suchinformation,althoughnotapartofthebasicfinancialstatements,isrequiredbytheGovernmentalAccountingStandardsBoardwhoconsidersittobeanessentialpartoffinancialreportingforplacingthebasicfinancialstatementsinanappropriateoperational,economic, or historical context. We have applied certain limited procedures to the requiredsupplementary information in accordance with auditing standards generally accepted in theUnited States of America, which consisted of inquiries of management about the methods ofpreparing the information and comparing the information for consistency with management'sresponses to our inquiries, the basic financial statements, and other knowledge we obtainedduringourauditofthebasicfinancialstatements.Wedonotexpressanopinionorprovideanyassuranceon the informationbecause the limitedproceduresdo notprovideuswith sufficientevidencetoexpressanopinionorprovideanyassurance.

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BoardofDirectorsNewMexicoLotteryAuthorityOur auditwas conducted for the purpose of forming opinions on the financial statements thatcollectively comprise theLottery’s financial statements. Thebudgetary comparison statementsand schedules of percentage return to the State of NewMexico are presented for purposes ofadditionalanalysisandarenotarequiredpartofthefinancialstatements.The budgetary comparison statements and schedules of percentage return to the State ofNewMexico is the responsibility of management and was derived from and relates directly to theunderlying accounting and other records used to prepare the financial statements. Suchinformationhas been subjected to the auditingprocedures applied in the audit of the financialstatements and certain additional procedures, including comparing and reconciling suchinformationdirectlytotheunderlyingaccountingandotherrecordsusedtopreparethefinancialstatements or to the financial statements themselves, and other additional procedures inaccordancewith auditing standards generally accepted in the United States of America. In ouropinion,thebudgetarycomparisonstatementsandschedulesofpercentagereturntotheStateofNewMexicoarefairlystatedinallmaterialrespectsinrelationtothebasicfinancialstatementstakenasawhole.

Albuquerque,NewMexicoOctober29,2013

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MANAGEMENT’SDISCUSSIONANDANALYSIS(UNAUDITED)ThisManagement’sDiscussionandAnalysisof theNewMexicoLotteryAuthority (Lottery),offers readersof theLottery’s financial statementsanarrativeoverviewandanalysisof thefinancial activities of the Lottery for the fiscal years ended June 30, 2013 and 2012 withcomparativenumbers for the fiscal yearended June30,2011.Please read it in conjunctionwiththefinancialstatements,whichbeginonpage23.FINANCIALHIGHLIGHTS

Attheendoffiscalyears2013and2012,theLottery’stotalcurrentassetsincreasedby$2,677,330, or 23.0%, and $2,124,932, or 22.4%, respectively, in comparison toJune30thofeachpreviousfiscalyear.

Compared to the end of the two preceding fiscal years, the Lottery’s total liabilitiesincreasedby$3,001,125or25.2%attheendoffiscalyear2013andby$2,262,417or23.4%attheendoffiscalyear2012.

In fiscal year 2013, total net saleswere $141,758,522, an increase of $7,971,170, or6.0%fromthepriorfiscalyear.Infiscalyear2012,totalnetsaleswere$133,787,352,adecreaseof$1,753,682,(1.3)%,comparedtototalnetsalesof$135,541,034infiscalyear2011.

Fromthepriorfiscalyears,totalgameexpensesincreasedby$5,668,837,or6.5%,infiscalyear2013,whiletotalgameexpensesdecreasedby$1,913,734,(2.1)%,infiscalyear2012.

Totaloperatingexpensesdecreasedby1.3%or$66,197 in fiscalyear2013,whereasoperating expenses increased by 3.4% or $171,155 in fiscal year 2012, each incomparisontothepreviousfiscalyear.

Non‐operating incomedecreasedby$16,917or(26.5)%infiscalyear2013,while itincreased by $28,980 or 82.9% in fiscal year 2012, each year compared to theprecedingfiscalyear.

Net income in fiscalyear2013was$43,684,681,a$2,355,938or5.7%increaseoverthepreviousfiscalyear.NetIncomeinfiscalyear2012was$41,328,743,a$21,453or.1% increase compared to the previous fiscal year’s net income of $41,307,290.Beginning July 1, 2007, the Lotterywas required by the NewMexico Lottery Act totransmitatleasttwenty‐sevenpercentofitsgrossrevenuestotheStateofNewMexicoand then at least 30% beginning in January 2009. In fiscal year 2013, the Lotterytransmitted30.80%innetrevenuestotheState,whileinfiscalyear2012,theLotterytransmitted30.88%innetrevenuestotheState.IneachofthelasttwofiscalyearstheLottery surpassed the30% required gross revenue return eachmonth. The Lotteryhascontinued to transfer itsactualnet incomeatyearend, regardlessofwhetherornottheamountofnetincomeexceededthestatutoryrequirement.

IncludingthefinaltransferonJuly31,2013ofJune2013’snetrevenues(netincome);the Lottery has transferred $572,493,527 to the State of New Mexico since thecommencementofsalesinApril1996.

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MANAGEMENT’SDISCUSSIONANDANALYSIS(UNAUDITED)–CONTINUED

OVERVIEWOFTHEFINANCIALSTATEMENTSThe Lotterywas established in 1995 as a public body, politic and corporate, separate andapart from the State of NewMexico and constituting a governmental instrumentality and,therefore,isaccountedforassuch,reportingalloftheLottery’sassetsandliabilitiesusingtheaccrualbasisofaccounting,muchlikeanyprivate‐sectorbusinessentity.SincetheLotteryisacomponentunitoftheState,theLottery’sfinancialstatementsareincorporatedintotheStateofNewMexico’sComprehensiveAnnualFinancialReports.Thisreportconsistsoffourparts—theManagement’sDiscussionandAnalysis(thissection),the basic financial statements, including the notes to the financial statements; requiredsupplementary information, the Budgetary Comparison Statements, and supplementaryinformation,theSchedulesofPercentageReturntotheStateofNewMexico.Financial Statements. The Statements of Net Position on Page 23 and the Statements ofRevenues, Expenses, and Changes in Net Position on page 24 report the Lottery’s assets,liabilities, revenuesandexpenses incomparative format for fiscalyear2013and fiscalyear2012.TheStatementsofCashFlowsonpages25and26reportthesourcesandusesofcashfor fiscal years 2013 and 2012. The Statements of Fiduciary Net Position on page 27 andStatementsofChangesinFiduciaryNetPositiononpage28reportthebalancesandactivityoftheLottery’sRetirementPlanforfiscalyears2013and2012.NotestoFinancialStatements.TheNotestoFinancialStatementsonpages29to49provideadditionalinformationthatisessentialforafullunderstandingofthefinancialstatementsandprovidemoredetaileddata.Budgetary Comparison Statements. The Budgetary Comparison Statements on page 50showthevariancesbetweenthebudgetsandactualLotteryperformance.SchedulesofPercentageReturntotheStateofNewMexico.TheSchedulesofPercentageReturntotheStateofNewMexicoonpage51reportsthepercentagesofgrossrevenuesthatwerereturnedtotheStateofNewMexicoforfiscalyears2013and2012incompliancewiththeNewMexicoLotteryAct.ToassesstheLottery’sfinancialpositionandfinancialhealth,thereaderofthesestatementsshouldpayparticularattention tochanges in thecomponentsofassetsand liabilitiesassetforthintheStatementsofNetPosition;inchangesintotalrevenues,gameexpenses,operatingexpenses,non‐operating incomeandnet incomeasset forth in theStatementsofRevenues,Expenses,andChangesinNetPosition;andinthesourcesandusesofcashassetforthintheStatementsofCashFlows.

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MANAGEMENT’SDISCUSSIONANDANALYSIS(UNAUDITED)–CONTINUEDFINANCIALANALYSISTotalNetPositionAttheendoffiscalyears2013and2012,theLottery’stotalassetsandtotalliabilitieswereequalwith total net position reduced to zero. The Lottery has no reserve balances on itsbooks at fiscal yearend; transferring all its net revenues for the fiscal year to the LotteryTuitionFund.TotalAssets

Table1

TotalAssets

2013 2012 2011

Increase$Change2012to2013

Increase%Change2012to2013

Increase(Decrease)$Change2011to2012

Increase(Decrease)%Change2011to2012

Cashandcash

equivalents $9,340,237 $6,885,806 $5,561,825 $2,454,431 35.6% $1,323,981 23.8%

Accountsreceivable,

(netofallowancefor

doubtfulaccounts) 1,371,427 1,225,638 885,691 145,789 11.9 339,947 38.4

Reserveson

deposit 3,405,568 3,396,831 2,925,251 8,737 0.3 471,580 16.1

Inventory 36,964 33,077 11,334 3,887 11.8 21,743 191.8

Prepaidexpenses 145,172 80,686 113,005 64,486 79.9 (32,319) (28.6)

Totalcurrent

assets 14,299,368 11,622,038 9,497,106 2,677,330 23.0 2,124,932 22.4

Capitalassets,net 629,345 305,550 168,065 323,795 106.0 137,485 81.8

Totalassets $14,928,713 $11,927,588 $9,665,171 $3,001,125 25.2% $2,262,417 23.4%

Comparedtoeachprior fiscalyear, theLottery’scashandcashequivalents increasedat theend of fiscal year 2013 and 2012 by $2,454,431 or 35.6% and by $1,323,981 or 23.8%,respectively. Thechangesincashandcashequivalentsrelatemainlytochangesinaccountsreceivable,accountspayableandprizespayableattheendofeachfiscalyearcomparedtothepriorfiscalyear.AccountsreceivablefromtheLottery’sretailersarecollectedweeklyeachThursdaythroughelectronicbanktransfers.Receivablesareequaltosalesbyretailersnetofanyprizespaidbythe retailers and any commissions earned, less the allowance for bad debts and plus anymiscellaneousreceivablesfromanyothersource.Accountsreceivableincreasedby$145,789or11.9%attheendoffiscalyear2013.Thisincreasecanbeattributedtohavingeightdaysoftransactionsinaccountsreceivableatyearendcomparedtoonlysevenattheendofthe

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MANAGEMENT’SDISCUSSIONANDANALYSIS(UNAUDITED)–CONTINUEDFINANCIALANALYSIS–CONTINUEDTotalAssets‐Continuedpreviousfiscalyear.Accountsreceivableincreasedby$339,947or38.4%infiscalyear2012.Thisincreaseatyear‐endfromthepriorfiscalyearcanbeattributedtohavingsevendaysofsalesinreceivablescomparedtoonlyfivedaysinthepriorfiscalyear.TheLotteryhasamountsondepositwithMUSLcalledreservesondeposit,asrequiredbythePowerball®(Powerball),HotLotto®(HotLotto),andMegaMillions®(MegaMillions)gamerulesandanunreservedaccount forpaymentofexpensesandtorecordreceiptsof interestandotherincomeonthedeposits.Thechangesintheseaccountsinbothfiscalyears2013and2012of$8,737and$471,580,respectively,werecausedbythereceiptsofinterestearnedandother income on the depositswithMUSL; payments of game expenses; changes to theHotLottoreserveaccount,as requiredby theHotLottogamerules;and there‐balancingof thePowerball reserve accounts. In addition, in fiscal year 2013 the payment of the Lottery’sportion of intellectual property purchased for MUSL games was deducted from theunreserved account and in fiscal year 2012 the receipt of the Lottery’s portion of anunclaimed Powerball jackpot was added to the unreserved account. Additionally, in fiscalyear2010,areserveaccountforMegaMillionswasestablishedincompliancewiththeMegaMillionsgamerulesandinfiscalyears2013and2012,thisreserveaccountgrewby$123,669and$149,951,respectively.Theinventorybalanceattheendofbothfiscalyear2013and2012increasedby$3,887,an11.8% increase, and$21,743, a191.8% increase, respectively. TheLotteryhasagreementssigned inMarch2003and2010,with itsprimary instant ticketprinter,wherebytheticketsprintedareownedbythevendorwiththeLotteryhavinganobligationtopayfortheticketswhentheticketsaresold.Therefore,theseticketsarenotincludedintheLottery’sinventory.But, under anagreement signedwitha secondary instant ticket printer inMarch2010, theLottery began purchasing the instant tickets printed by this vendor. The Lottery hasaccounted for games printed under this agreement as ticket inventory using the specificidentificationmethodatthelowerofcostormarket.Attheendofeachofthetwofiscalyears2013and2012, theLotteryhadremaining inventoryof$9,633and$33,077 for2games ineach year purchased under this agreement. In addition at the end of fiscal year 2013, theLottery had inventory of $3,192 for a promotional game purchased and had merchandiseprizesof$24,139forasecondchancedrawingpromotionincludedininventory.Attheendoffiscalyears2012,therewerenomerchandiseprizesforsecondchancedrawingsincludedininventory.AspartoftheagreementwithINTRALOT,Inc.toprovideanupdatedon‐linegamingsystem,theLotteryinstalledandimplementedanewinternalcontrolsystem(ICS)infiscalyear2009.ThecostoftheICSisincludedinthefixedfeepaidtothevendorasapercentageofnetsales.

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MANAGEMENT’SDISCUSSIONANDANALYSIS(UNAUDITED)–CONTINUEDFINANCIALANALYSIS–CONTINUEDTotalAssets–Continued

TheLotteryhasaccountedforthistransactionasacapitalleaseand,therefore,theICScostof$43,600isreflectedincapitalassets.TherelatedliabilityfortheICSisincludedinthecurrentportionofcapitalleaseobligation($6,229and$6,228atJune30,2013and2012,respectively)andinthenoncurrentportionofcapitalleaseobligation($8,823and$15,052atJune30,2013and2012,respectively).

Aspartofthefacilityleaseagreementssignedin2002and2012,thelandlordpaidfor$29,975and$51,858 intenant improvements for theLottery’scorporatefacility in fiscalyears2013and2012,respectively. TheLotteryhascapitalized$72,543astenantimprovementswitharelated deferred liability, while the remaining purchases of tenant improvements totaling$9,290were expensed because the items purchased did notmeet the $5,000 threshold forcapitalization.Infiscalyear2013and2012,$7,835and$4,787,respectively,areincludedinthe current portion of capital lease obligation and $68,559 and $46,673, respectively, areincludedinthenoncurrentportionofcapitalleaseobligation.

Thechangesincapitalassetsinfiscalyears2013and2012areattributableto$463,188and$253,418incapitalassetpurchasesand$139,393and$115,933indepreciation,forthetwofiscalyears,respectively.

TotalLiabilities Table2

TotalLiabilities

2013 2012 2011

Increase$Change

2012to2013

Increase%Change2012to2013

Increase(Decrease)$Change

2011to2012


Accountspay‐

ableandother

currentliabilities $1,977,904 $1,955,328 $1,829,650 $22,576 1.2% $125,678 6.9%

Currentportion

ofcapitallease

obligation 14,064 11,015 6,228 3,049 27.7 4,787 76.9

Prizespayable 9,355,989 6,860,315 4,592,530 2,495,674 36.4 2,267,785 49.4

DuetoLottery

TuitionFund 3,503,374 3,039,205 3,215,482 464,169 15.3 (176,277) (5.5)

Totalcurrent

liabilities 14,851,331 11,865,863 9,643,890 2,985,468 25.2 2,221,973 23.0

Noncurrentpor‐

tionofcapital

leaseobligation 77,382 61,725 21,281 15,657 25.4 40,444 190.0

Totalliabilities $14,928,713 $11,927,588 $9,665,171 $3,001,125 25.2% $2,262,417 23.4%

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MANAGEMENT’SDISCUSSIONANDANALYSIS(UNAUDITED)–CONTINUEDFINANCIALANALYSIS–CONTINUEDTotalLiabilities‐ContinuedAccountspayableandothercurrentliabilitiesincreasedby$22,576or1.2%and$125,678or6.9%attheendoffiscalyears2013and2012,respectively.Inbothfiscalyears,thechangescompared to the prior fiscal year were mainly due to amounts owed to four vendors foradvertising,theon‐linegamingsystem,instantticketprintingfees,andthelottery’sshareofprizes payable to MUSL for Powerball, Hot Lotto, and Mega Millions. Sales amounts andadvertisingplacedduringthelastfewweeksofeachfiscalyearwillgenerallydeterminetheamounts owed at the end of each fiscal year to these vendors andwhether that amount ishigherorlowerthaninthepriorfiscalyear.Prizes payable is essentially comprised of amounts accrued based on the Lottery’s gamedesigns and prize structures for drawing game and instant game prizes, the relatedunremitted federalandstate taxeswithheldonprizesclaimed,andanyunclaimedprizes intheprize fund.At theendof fiscalyears2013and2012,prizes increasedby$2,495,674or36.4%and$2,267,785or49.4%.ThesedifferencesrelatetothechangesofprizespayableonindividualLotterygamesbetweenthefiscalyearsasaresultofsales ineachfiscalyearandprizesnotyetclaimed.At the end of fiscal years 2013 and 2012, $3,503,274 and $3,039,205, respectively, of netrevenues for the month of June were due to the Lottery Tuition Fund. These funds weretransferredtotheNewMexicoStateTreasurerbytheendofJulyofeachyear.

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MANAGEMENT’SDISCUSSIONANDANALYSIS(UNAUDITED)–CONTINUEDFINANCIALANALYSIS–CONTINUEDNetTicketSalesandPrizeExpense

Table3NetTicketSalesand

PrizeExpense

2013NetTicketSales

PrizeExpense

GrossMargin

Instantticket,netofprize,stolen,andpromotionaltickets $69,886,435 $40,283,399 $29,603,036

Powerball,netofspoiledandpromotionaltickets 46,734,439 23,332,651 23,401,788

MegaMillions,netofspoiledandpromotionaltickets 8,078,050 4,027,633 4,050,417

RoadrunnerCash,netofspoiledandpromotionaltickets 6,767,906 4,016,276 2,751,630

HotLotto,netofspoiledandpromotionaltickets 5,933,935 2,959,006 2,974,929

Pick3,netofspoiledandpromotionaltickets 3,492,915 1,973,715 1,519,200

Quicksters,netofspoiledandpromotionaltickets 864,842 475,878 388,964

Totalnetticketsales $141,758,522 $77,068,558 $64,689,964

2012NetTicketSales

PrizeExpense

GrossMargin







Quicksters,netofspoiledandpromotionaltickets 453,448 246,741 206,707


2011NetTicketSales

PrizeExpense

GrossMargin








$IncreasefromFY2012toFY2013 $7,971,170 $5,041,250 $2,929,920

%IncreasefromFY2012toFY2013 6.0% 7.0% 4.7%

$(Decrease)fromFY2011toFY2012 $(1,753,682) $(1,586,029) $(167,653)

%(Decrease)fromFY2011toFY2012 (1.3)% (2.2)% (0.3)%

11


MANAGEMENT’SDISCUSSIONANDANALYSIS(UNAUDITED)‐CONTINUED

FINANCIALANALYSIS–CONTINUEDNetTicketSalesandPrizeExpense–ContinuedTable3comparesnetsales,prizeexpenseandgrossmargin(netsalesminusprizeexpense)foreachlotterygameforfiscalyears2013,2012,and2011.Infiscalyear2013netsales,prizeexpenseandgrossmarginincreasedforPowerball,HotLotto,andQuicksters,whilenetsales,prizeexpenseandgrossmargindecreasedforMegaMillions,RoadrunnerCash,andPick3.Infiscalyear2013,netsalesandprizeexpenseincreasedforinstantsales,butthegrossmarginfortheyeardecreasedincomparisontothepriorfiscalyear. Thisdecreaseingrossmarginforinstantsaleswastheduetoanincreaseintheoverallpayoutpercentageforinstantticketsfrom57.97%infiscalyear2012to58.94%infiscalyear2013,primarilytobringplayersbacktopurchasinginstantgamesandstopthedeclineofinstantsalesoverthelastsixyears.In fiscal year2012,Powerball andMegaMillionsnet sales,prizeexpenseandgrossmarginincreased, but net sales, prize expense, and gross margin decreased for instant tickets,Roadrunner Cash, Hot Lotto, and Pick 3. Quicksters were introduced in March 2012 andcontributed$206,707ingrossmargin.NetTicketSalesInbothfiscalyears2013and2012,theLotteryhascontinuedtousethecustomerrelationshipmanagement(CRM)systemforplacinginstantgameticketsatretailerlocations.TheLottery’scustomerservicerepresentativescontinuetoplacecallseachweektoeachretailer location,reviewtheinventoryateachlocationwiththeretailer,andplaceorderscontinuallyasneededbasedon the inventory turnoverateach location. In fiscalyear2013, forty‐fivenew instantticketgameswerelaunched‐16‐$1,10‐$2,6‐$3,9‐$5,3‐$10and1‐$20—1more$1,2less$3,1more$5and3more$10gamethaninfiscalyear2012.Infiscalyear2012,forty‐twonewinstantticketgameswerelaunched–15‐$1,10‐$2,8‐$3,8‐$5,and1‐$20—5less$1,1more$3,1less$5and1less$10gamethaninfiscalyear2011.Infiscalyear2013,the Lottery launched22 gameswith free (prize) tickets and23 gameswithout free tickets,while in fiscal year 2012, the Lottery launched 22 games with free tickets and 20 gameswithout free tickets. Instant ticketsales for7months(including the last fivemonthsof thefiscalyear)werehigherthanthecomparablemonthinfiscalyear2012. Instantticketsalesforeverymonthof fiscalyear2012were lowerthanthecomparablemonth inthepreviousfiscalyear.Sincefiscalyear2007,whennetinstantticketsaleswerearecord$91.37million,net instant ticket saleshavedecreasedby$21.48millionor anapproximate23.5%drop to$69.89millioninfiscalyear2013.InJanuary2012,thePowerballgamewaschangedfroma$1pricepointtoa$2pricepoint.Along with this price change, the jackpot now starts at $40 million, up from the previousstartingjackpotof$20million.Thematrixwaschangedfroma5of59and1of39gametoa5of59and1of35game.Twoprizelevelswerechanged;theMatch5+0prizelevelgoingfrom

12


MANAGEMENT’SDISCUSSIONANDANALYSIS(UNAUDITED)‐CONTINUEDFINANCIALANALYSIS‐CONTINUEDNetTicketSalesandPrizeExpense‐ContinuedNetTicketSales–Continueda$200,000cashprizetoa$1millioncashprizeandtheMatch0+1goingfroma$3prizetoa$4prize.Theoveralloddsandthejackpotoddswereimproved.ThePowerplayoptionremainedinthegame,butthemultiplieroptionwasdiscontinuedandinsteadincreasedsetprizelevelsareincludedinthePowerPlayoption.Therolldownoptionwaseliminated.Although,Powerballsalesaregenerallydrivenbytheadvertisedjackpot,infiscalyears2013and2012,thechangeinthepricepointandthematrixalsoaffectedthesalesineachyear.Infiscalyear2013,thehighestjackpotfortheyearwas$590.5millionwithanotherjackpotof$587.5million closely following. Therewere alsoother jackpots that each reached$338.3,$337.0, $217.2, $202.1, and$131.5millionand ten jackpots thatwere$70.0millionor lesswhen they were won. Having a $2 price point for a full year and the four jackpots thatsurpassed the $300millionmark helped Powerball achieve net sales thatwere nearly $13millionhigherthaninfiscalyear2012.In fiscal year 2012, the highest jackpot for the year was $336.4 million with three otherjackpotsreaching$254.2,$241.0,and$228.9million,threesmallerjackpotsreaching$172.7,$128.8,and$108.8million,andsix jackpotsbeing$70millionor lesswhentheywerewon.Thechangeinthepricepointandthe levelof the jackpotshelpedto increasePowerballnetsalesbynearly$4.7millionoverthepreviousfiscalyear.Since fiscalyear2006whennetsaleswerearecord$54.1million,Powerballnetsaleshavedecreasedby$7.4million,adecreaseofapproximately13.7%,to$46.7millioninfiscalyear2013.MegaMillions’ salesarealsodrivenby the jackpotamount. In fiscalyear2013, thehighestjackpotwonwas$198.0millionfollowedbyanotherjackpotof$120.0million.Twelveotherjackpotswerewoninfiscalyear2013thatwere$89millionorless. WithPowerballhavingsuchlargejackpotsinfiscalyear2013andMegaMillionsstayingrelativelylow,MegaMillionsnetsalesdroppedbyover$6milliondollarsor43.3%.In fiscal year2012, thehighest jackpot reacheda record$656millionwithanother jackpotclimbing to $206 million and three smaller jackpots hitting $118, $113, and $105 millionwhentheywerewon. Six jackpotswerewonatamounts less than$100million. The$656millionjackpothelpedtoincreasesalesinMarch2012byoverfivemilliondollars.Although,MegaMillionshadahigherjackpotinfiscalyear2012thanPowerball,MegaMillionsaveragemonthlysales,withoutthe$656millionrun‐upspike,averagelessthan$800,000permonth,whilePowerball’saveragesales,withoutrun‐upspikes,areover$2.5millionpermonth.

13


MANAGEMENT’SDISCUSSIONANDANALYSIS(UNAUDITED)‐CONTINUEDFINANCIALANALYSIS‐CONTINUEDNetTicketSalesandPrizeExpense–ContinuedNetTicketSales–ContinuedSimilartothePowerballandMegaMillionsgames,RoadrunnerCashsalesaredrivenbythejackpot(top)prizeamount.Infiscalyear2013,thejackpotroseto$320,000inAugust2012andto$430,000inDecember2012,plustwoothertimesduringtheyeartojackpotsgreaterthan$150,000.Sixteenotherjackpotswerelessthan$150,000beforebeingwonduringthefiscalyear.Infiscalyear2012,thejackpotroseseventimestomorethan$150,000climbingto$420,000and$550,000inAugust2011andinMarch2012,respectively.Thesedifferencesinthetopprizesreflectedonthenetsalesinthesetwofiscalyearswithfiscalyear2013’ssalebeinglowerthaninthepreviousfiscalyear—a9.9%declineinnetsales.TheMUSLgame,HotLotto, isanothersmallernational jackpotgameofferedbytheLottery.HotLottostarted fiscalyearwitha jackpotof justover$1millionandgrew to$1.4millionbeforebeingwoninJuly2012. Itthenclimbedto$9.4millioninJanuary,whenitwaswon.Thejackpotthencontinuedtorisefrom$1millionuntilyearendwhereitendedtheyearatnearly$6.9million.HotLottostartedfiscalyear2012at$1.1millionandcontinuedtoclimbto $7.5million inNovember 2011. It climbed again to $1.2million inNovember, to $2.61millioninJanuary,to$2.99millioninMarch,to$1.54millioninApril,andto$3.4millionthelastweekof June. Thesechanging jackpotsreflectonnetsalesduringeach fiscalyearwithfiscalyear2013showinga9.3%increaseinnetsales.Pick3netsales in fiscalyear2013decreasedby$141,889or3.9%. Pick3netsales in thefiscalyear2012decreasedby$94,132ora2.5%decrease.Pick3hasbecomeacoregamefortheLotterybringinginsteadymonthlynetsalesofnearly$300,000eachmonthwithnomajorsaleschangesfrommonth‐to‐month.Anewgame,Quicksters,wasstartedonMarch25,2012. Quickstersareinstant‐wingames,similartoinstantticketgames,butproducedbythesamelotterysalesterminalsasdrawinggameticketsandwithnoscratchingneededtorevealtheprizes.ThefirstgameofferedwasSuper7s.Thisgameprovided$453,448innetsalesforfiscalyear2012.Infiscalyear2013,fivenewQuickstergameswereaddedproducing$864,842innetsalesforthefiscalyear.PrizeExpensePrizeexpenseforthedrawinggamesofPowerball,MegaMillionsandHotLotto isbasedontheoverallprizepayoutperthegamedesign,whileprizeexpenseforRoadrunnerCash,Pick3andQuicksters isdeterminedbytheprizeswoneachmonthforeachdrawingorgame.Theprizesincludedintheprizestructureforeachinstantgameprinteddetermineprizeexpenseforinstantgames.Ingeneral,prizeexpenseincreasesordecreasesfromyear‐to‐yearrelativetotheincreasesordecreasesinsalesforeachLotteryproductandtheprizestructuresofthegames.

14


MANAGEMENT’SDISCUSSIONANDANALYSIS(UNAUDITED)‐CONTINUEDFINANCIALANALYSIS–CONTINUEDNetTicketSalesandPrizeExpense–ContinuedPrizeExpense‐ContinuedInfiscalyears2013theprizepayoutincreasedbyapproximately.01%,whereasinfiscalyear2012theprizepayoutdecreasedbyapproximately.69%respectively,priortotheapplicationofunclaimedprizes.

Attheendoftheclaimperiodforeachgame,unclaimedprizesfortheLottery’sinstantgamesanddrawinggamesarepaidintothe“PrizeFund,”inaccordancewiththeNewMexicoLotteryAct.TheseunclaimedprizesfromtheLottery’sprizefundareusedtosupplementtheprizesininstantanddrawinggamesandforsecondchancedrawingsand,therefore,reducetheprizeexpense for Lottery products and help the Lottery to maximize its sales and its return toeducation.PrizeTicketsIn fiscal years 2013 and 2012, prize (free) tickets claimed for instant games decreased by$411,456or14.23%and$195,471or6.33%,respectively,incomparisontothepreviousfiscalyears. Prize tickets are placed in the prize structure of the game in lieu of the breakevenprizes.Prizeticketsgiveaplayeraprizeofanotherinstantgameticketofthesamepricepointas the instant ticket that had the winning prize ticket. The Lottery continues to study themarket to determine the optimum quantity of prize tickets to place each fiscal year in itsinstantticketgamesinordertooptimizeitsinstantticketsales.

15


MANAGEMENT’SDISCUSSIONANDANALYSIS(UNAUDITED)‐CONTINUED

FINANCIALANALYSIS–CONTINUEDGameExpenses

2013 2012 2011

Increase(Decrease)$ Change

2012 to 2013

Increase(Decrease)% Change

2012 to 2013

Increase(Decrease)$ Change

2011 to 2012

Increase(Decrease)% Change

2011 to 2012

Prize expense 77,068,558$ 72,027,308$ 73,613,337$ 5,041,250$ 7.0% (1,586,029)$ (2.2)%

Retailer

commissions 9,153,204 8,696,851 8,859,206 456,353 5.2 (162,355) (1.8)

On-line vendor

fees 2,269,623 2,139,754 2,170,366 129,869 6.1 (30,612) (1.4)

Advertising 2,263,221 2,277,892 2,286,794 (14,671) (0.6) (8,902) (0.4)

Ticket vendor

fees 1,158,028 1,177,708 1,350,379 (19,680) (1.7) (172,671) (12.8)

Other game

expenses 1,136,751 1,061,035 1,014,200 75,716 7.1 46,835 4.6

Total game

expenses 93,049,385$ 87,380,548$ 89,294,282$ 5,668,837$ 6.5% (1,913,734)$ (2.1)%

Table 4

Game Expenses

Thechangesinretailercommissionsforfiscalyears2013and2012areconsistentwiththechangesingrossticketsalesforthetwoyearsandareequivalentto6.45%and6.50%ofgrossrevenuesforthetwoyears,respectively.RetailercommissionsarepaidtotheLottery’sretailersforsellingLotterytickets,cashingLotteryprizesandforsellingajackpot/grandprizeforPowerball,MegaMillionsorHotLotto,forsellingamatch5prizeforPowerballorMegaMillions,andforsellingajackpotprizeofmorethan$100,000forRoadrunnerCash.SinceNovember21,2008,theon‐linevendorfeehasbeenafixedpercentageofnetsales,plusapplicablegrossreceiptstaxes,withnoadditionalterminalfees.Theon‐linefeeincreasesordecreasesasdrawinggameandinstantticketnetsalesincreaseordecrease.Thechangesinthe on‐line vendor fees for the two fiscal years are consistentwith the changes in drawinggameandinstantticketnetsalesinfiscalyears2013and2012andareequivalentto1.60%ofgrossrevenuesforthetwoyears.AdvertisingisexpendedtomarkettheLotteryanditsproductstothepublicandtoinformthepublicaboutthegamesthatareavailable,thejackpotandtopprizeamountsforthedrawing

16


MANAGEMENT’SDISCUSSIONANDANALYSIS(UNAUDITED)–CONTINUEDFINANCIALANALYSIS–CONTINUEDGameExpenses‐Continuedgames,toprovidesecuritytipsandgamblingawarenessforourplayersandbenefitmessagesto New Mexico students and their families, and to keep the lottery products fresh in thepublic’sminds,allinordertomaximizesales.Advertisingexpensewasapproximately1.60%and1.70%ofgrossrevenues,respectively,forfiscalyears2013and2012andstayedwithintheLotteryBoardapprovedbudgetsof$2,300,000foreachfiscalyear.In fiscal years 2010 and 2003, the Lottery signed contractswith its primary ticket printereffective in March of each respective year. Under these contracts, the instant tickets areownedbythevendorwiththeLotteryexpensingthecosttoticketvendorfeesandpayingfortheticketsasapercentageofsaleswhentheticketsaresold.Thecostfortheticketsunderthe2003contractalsoincludedthecostfortheCRMsystemusedbytheLottery.Inaddition,inMarch 2010, the Lottery signed a contract with a secondary printer, whereby the Lotterywouldbepurchasingtheticketsprinted.Theseticketsareincludedininventorywiththecostoftheticketsbeingrecordedasticketvendorfeesastheticketsareconsignedtoretailers.Infiscal year 2013 and 2012, the cost for any licensing fees or special printing costs are alsoincludedinticketvendorfees.Theticketvendorfeesforbothfiscalyear2013and2012areless due to the instant ticket sales in each year, but also as a result of payment of a lowerpercentageofnetsalestotheprimaryticketprintercomparedtopreviousfiscalyearswherethepercentagewashigherandwaspaidongrosssalesratherthannetsales.Thislowerfeeisreflectedinthelowerpercentagetogrossrevenuesforticketvendorfeesof .82%and.88%,comparedtothepreviousyear’s1.00%ofgrossrevenues.Included in other game expenses are promotions, shipping and postage, drawing game,responsible gaming, and game membership expenses. Fiscal years 2013 and 2012 reflectincreases of $75,716 or 7.1% and $46,835 or 4.6%, respectively. In fiscal year 2013, theincreasewaspartiallyduetothepurchaseoflotteryinformationcenterstoenabletheLotterytoreplacetheagingequipmentatsomeofthelottery’sretailersandanincreaseinshippingandpostageduetoshippingadditionalinstantticketstolotteryretailers,offsetbyadecreasein theamountsspent formarketingandsalespromotions, forpremiumitemsand forotherretailerequipment. In fiscalyear2012, thischangewasprimarilydue toan increase inTVandradiopromotionsandevents,offsetwithasavingsinshippingcoststodistributeinstantticketstotheLottery’sretailers.

17


MANAGEMENT’SDISCUSSIONANDANALYSIS(UNAUDITED)–CONTINUEDFINANCIALANALYSIS–CONTINUEDOperatingExpenses

Table5OperatingExpenses

2013 2012 2011

Increase(Decrease)$Change

2012to2013


Increase(Decrease)$Change2011to2012


Salaries,wages,

andbenefits $3,614,032 $3,583,778 $3,456,748 $30,254 0.8% $127,030 3.7%

Leasesand

insurance 514,990 585,629 593,740 (70,639) (12.1) (8,111) (1.4)

Otheroperating

expenses 951,025 976,837 924,601 (25,812) (2.6) 52,236 5.6

Totaloperating

expenses $5,080,047 $5,146,244 $4,975,089 $(66,197) ‐1.3% $171,155 3.4%

Operating expenses aremade up of salaries,wages and benefits, leases and insurance, andother operating expenses, which include utilities and maintenance, depreciation andamortization,materials and supplies, professional fees, travel, and other expenses. In fiscalyear2013,theLotterydecreaseditsoperatingexpensesby$66,197or(1.3)%,whileinfiscalyear2012,theLotteryincreaseditstotaloperatingexpensesby$171,155or3.4%.

Thechangeinfiscalyear2013ismainlyduetoover$70,000,or12%,insavingsonleasesandinsurancefollowinganextensivetwo‐yearreviewofthefacilityandotheralternatesitesandthe final negotiation and acceptance of a new lease in June 2012; therewere also smallersavingsrealizedinprofessionalfees,materialsandsuppliesandtravel.Thesedecreaseswereoffsetwithanincreaseinsalaries,wages,andbenefitsmainlyduetonothavinganyoneleavetheemployoftheLotteryinthesecondhalfofthefiscalyearandhavingallbuttwopositionsontheLottery’sorganizationchartfilledplusanincreaseindepreciationandamortizationforreplacementequipmentthathasbeenrecentlypurchased.

The change in fiscal year 2012 ismainly due to increases in the cost of salary,wages andbenefits. In fiscal year 2012, the Lotterywas nearly fully staffedmost of the yearwith anaverageof55.5employeesduringtheyear,whileinthepriorfiscalyeartheLotteryemployedfewer employees all year at an average of 53 employeeswhen vacated positionswere notimmediately filled. In fiscal year 2012, the cost of health insurance for the Lottery alsoincreased by approximately twelve percent. In addition, replacement computer equipmentwas purchased and the cost for building and vehicle maintenance, gas, and legal feesincreased. Thesecostswereoffsetwithsavingson leaseand insurancecostsandasmalleramountofdepreciationandamortizationforcapitalizedassets.

18


MANAGEMENT’SDISCUSSIONANDANALYSIS(UNAUDITED)–CONTINUEDFINANCIALANALYSIS–CONTINUEDNon‐OperatingIncome

Non‐operating incomedecreased in fiscal year 2013,while it increased in fiscal year 2012.Interestincomeincreasedslightlyin2013duetoasmallincreaseintheinterestrateearnedandhighercashdeposits,whereasinfiscalyear2012interestincomedecreasedmainlyduetothedecrease in interest rateson theLottery’sdeposits. For fiscal year2013,other incomedecreasedcompared to fiscal year2012,where liquidateddamageshadbeen receivedonaLotterycontract.

NetIncome

TotalOperatingRevenues NetIncome

FiscalYear2013 $141,767,097 $43,684,681

FiscalYear2012 $133,791,602 $41,328,743

FiscalYear2011 $135,541,708 $41,307,290

IncreasefromFY2012toFY2013 $7,975,495 $2,355,938

%IncreasefromFY2012toFY2013 6.0% 5.7%

Increase(Decrease)fromFY2011toFY2012 $(1,750,106) $21,453

%Increase(Decrease)fromFY2011toFY2012 (1.3)% 0.1%

Effective July 1, 2007, the NewMexico Lottery Act, Chapter 6, Article 24 NMSA 1978,waschangedtorequiretheLotterytotransmitatleasttwenty‐sevenpercentofitsgrossrevenuesto the State Treasurer until December 31, 2008 and at least thirty percent of its grossrevenues thereafter. In fiscal years 2012 and 2011, the Lottery transmitted its net income

19



FINANCIALANALYSIS–CONTINUEDNetIncome‐Continuedeach month, totaling $43,684,681 and $41,328,743, respectively. The gross revenuepercentagereturnforfiscalyear2013was30.80%,whileforfiscalyear2012,itwas30.88%.TheLotterywasabletomeetthe30%grossrevenuepercentagereturnseachmonthinbothfiscalyears.Thechangesinnetincomeforfiscalyears2013and2012wererelatedtothechangesinsalesfortheLottery’sgamesduringthetwoyearsnettedagainstsavingsinthecostoftheproductandoperatingexpensesduringthetwofiscalyears.Inadditiontothechangesthathadbeenmadeinfiscalyear2008ofreducingstaffing,retailerand sales staff incentives, advertising costs, and prize expense to meet the statutoryrequirement of 27% through December 2008 and 30% thereafter for gross revenuepercentagereturn;theLotteryalsocommencedanewon‐linesystemagreementinNovember2008, whereby the fee to the on‐line vendor was reduced, and separate terminalcommunicationfeesandvendingmachinefeesthathadpreviouslybeenpaidwereeliminated.This change has continued to provide a percentage reduction of the on‐line vendor fees togrossrevenuesofover3%inbothfiscalyear2013and2012comparedtofiscalyear2008.Inaddition, the Lottery has continued to realize a savings on instant ticket printing fees yearoveryearsince2010basedonthecontractthatwassignedwiththeprimaryvendorinthatyear.

20



FINANCIALANALYSIS–CONTINUED

BudgetaryComparison

2013

OriginalBudget

FinalBudget Actual

VariancewithFinalBudget

%VariancewithFinalBudget

Totaloperatingrevenues $135,000,000 $132,600,000 $141,767,097 $9,167,097 6.9%

Totalgameexpenses 88,742,000 87,350,000 93,049,385 5,699,385 6.5

Totaloperatingexpenses 5,763,000 5,339,000 5,080,047 (258,953) (4.9)

Operatingincome 40,495,000 39,911,000 43,637,665 3,726,665 9.3

Totalnon‐operatingincome 18,000 24,000 47,016 23,016 95.9

Netincomebefore

transfersto

LotteryTuitionFund $40,513,000 $39,935,000 $43,684,681 $3,749,681 9.4%

2012

OriginalBudget

FinalBudget Actual

VariancewithFinalBudget

%VariancewithFinalBudget

Totaloperatingrevenues $136,400,000 $134,143,000 $133,791,602 $(351,398) (0.3)%

Totalgameexpenses 89,964,000 88,173,000 87,380,548 (792,452) (0.9)

Totaloperatingexpenses 5,456,000 5,368,000 5,146,244 (221,756) (4.1)

Operatingincome 40,980,000 40,602,000 41,264,810 662,810 1.6

Totalnon‐operatingincome 80,000 42,000 63,933 21,933 52.2

Netincomebefore

transfersto

LotteryTuitionFund $41,060,000 $40,644,000 $41,328,743 $684,743 1.7%

21


MANAGEMENT’SDISCUSSIONANDANALYSIS(UNAUDITED)‐CONTINUEDFINANCIALANALYSIS‐CONTINUEDBudgetaryComparison–ContinuedIn fiscal year 2013, the original budgetwas revisedbecausePowerball andHot Lotto saleswere performing better than expected, but Instant ticket,MegaMillions, Roadrunner Cash,Pick3andQuicksterswereunderperforming.Thesalesbudgetwasreducedby$3.0million,whichwasmadeupofanincreasetoPowerballof$5.0millionandtoHotLottoof$600,000offsetbyasalesreductiontoInstantticketsof$1.1million,toMegaMillionsof$4.3million,toRoadrunner Cash of $1.2million, to Pick 3 of $300,000, and to Quicksters of $1.7million.Prize ticketswerealso reducedby$500,000andspoiled, stolenandpromotional ticketsby$90,000,whileretailerfeeswereincreasedby$10,000.Withallthesechanges,totalrevenueswerereducedby$2.4million.Non‐operatingincomewasincreasedby$6,000.Intotal,grossrevenueswerereducedby$2,394,000.Relatedgameexpenseswerereducedby$1,392,000,operatingexpensesby$424,000andnetincomeby$578,000,butstillreturningover30%ofgrossrevenues.ActualnetsalesforInstanttickets,Powerball,MegaMillions,HotLotto,Pick3,andQuickstersall surpassed the projected net sales in the final budget with only Roadrunner Cash notmeetingthebudgetbylessthan$25,000.Actualnetsalesexceededthebudgetbynearly$9.2million anddue tohigher sales, related gameexpenseswere alsomore than thebudgetbynearly$5.7million. Therewasanadditionalcostsavings in theoperatingexpensesofover$250,000 and an additional amount earned in non‐operating income of $23,000 incomparisontothefinalbudget. TheLotteryendedtheyearwithnet incomesurpassingthefinalbudgetby$3,749,681;endingtheyearat109.39%ofthefinalbudget.Infiscalyear2012,theoriginalbudgetwasrevisedbecauseinstantticket,RoadrunnerCashandHotLottosaleswereunderperformingandPowerballandMegaMillionswerewellaheadoftheiroriginalbudgetedsalesamounts.Pick3wasalsorevisedupwardbyasmallamount.The new game, Quicksters, had originally been planned to start in late October or earlyNovember,butwasnot launcheduntiltheendofMarch,therefore,theQuickstersaleswerealsorevisedtoalowersalesamount.Thesalesbudgetwasdecreasedby$2.6million,whichwasmadeupofareductionininstantticketsalesof$8million,inRoadrunnerCashsalesof$2.2million, inHotLottosalesof$2.4million,and inQuickstersalesof$1.6millionandanincreaseof$7millionforPowerballsales,$4.5forMegaMillionssalesand$100,000forPick3sales. Prize ticketswerealso reducedby$300,000, spoiled, stolenandpromotional ticketsreduced by $40,000; and retailer fees increased by $3,000. All of these changes decreasedtotaloperatingrevenuesby$2,257,000.Non‐operatingincomewasreducedby$38,000duetocontinuingdecreasesininterestratesinthecurrentyearandlessotherincomeexpected.Intotal,grossrevenuesweredecreasedby$2,295,000.

22



FINANCIALANALYSIS‐CONTINUEDRelated game expenses for prize expense, retailer commissions, on‐line vendor fees, ticketvendorfees,andothergameexpenseswereadjustedinfiscalyear2012inaccordancetothechanges in saleswitha total adjustmentof $1,791,000 to gameexpenses. Each line item inoperatingexpenses,exceptforleasesandinsurancewasreducedforatotalreductionofBudgetaryComparison‐Continued$88,000 and net income was decreased by $416,000, still returning over 30% of grossrevenues.Actualnetsalesforfiscalyear2012didnotmeetthebudget,underperformingby$351,398.Withcostsavingsingameexpensesof$792,452andinoperatingexpensesof$221,756andadditionalnon‐operating incomeof$21,933, theLotterywasable to surpass the fiscal year2012revisedannualbudgetnetincomeby$684,743;endingthefiscalyearat101.68%oftherevisedbudget.RequestsforAdditionalFinancialInformationThisfinancialreportisdesignedtoprovidetheexecutiveandlegislativebranchesoftheStateof NewMexico, the public, the Lottery’s retailers, vendors, creditors, and other interestedpartieswithageneraloverviewofthefinancialpositionoftheLotteryasofJune30,2013and2012,andresultsofitsoperations,cashflows,variancesfrombudgets,andpercentagereturntothestatefortheyearsthenendedandtodemonstratetheLottery’saccountabilityfortherevenues it receives. If you have any questions about this report or need additionalinformation, contact theDirector of Finance at theNewMexico LotteryAuthority, P.O. Box93130,Albuquerque,NewMexico87199.

23


STATEMENTSOFNETPOSITION

June30,2013and2012

2013 2012CURRENTASSETS

Cashandcashequivalents $9,340,237 $6,885,806 Accountsreceivable(netofallowance

fordoubtfulaccounts) 1,371,427 1,225,638Reservesondeposit 3,405,568 3,396,831Inventory 36,964 33,077Prepaidexpenses 145,172 80,686

Totalcurrentassets 14,299,368 11,622,038

CAPITALASSETS,NET 629,345 305,550

Totalassets $14,928,713 $11,927,588

CURRENTLIABILITIESAccountspayableandothercurrentliabilities $1,977,904 $1,955,328Currentportionofcapitalleaseobligation 14,064 11,015Prizespayable 9,355,989 6,860,315DuetoLotteryTuitionFund 3,503,374 3,039,205

Totalcurrentliabilities 14,851,331 11,865,863

LONG‐TERMLIABILITIESNoncurrentportionofcapitalleaseobligation 77,382 61,725

Totalliabilities $14,928,713 $11,927,588

NETPOSITION Netinvestmentincapitalassets $629,345 $305,550Unrestricted(deficit) (629,345) (305,550)

Totalnetposition $‐ $‐

Theaccompanyingnotesareanintegralpartofthesefinancialstatements.

24


STATEMENTSOFREVENUES,EXPENSES,ANDCHANGESINNETPOSITION

YearsendedJune30,2013and20122013 2012

OPERATING REVENUES Instant ticket sales $ 72,397,663 $ 71,632,710 Powerball sales 46,767,095 33,795,664 Mega Millions sales 8,088,972 14,330,230 Roadrunner Cash sales 6,784,566 7,520,021 Hot Lotto sales 5,996,195 5,438,475 Pick 3 sales 3,496,279 3,638,558 Quickster sales 867,111 453,448 Less tickets provided as prizes (2,479,354) (2,890,810) Less spoiled, stolen, and promotional tickets (160,005) (130,944)

Net ticket sales 141,758,522 133,787,352

Retailer fees 20,575 16,250 Bad debts (12,000) (12,000)

Total operating revenues 141,767,097 133,791,602

GAME EXPENSES Prize expense 77,068,558 72,027,308 Retailer commissions 9,153,204 8,696,851 On-line vendor fees 2,269,623 2,139,754 Advertising 2,263,221 2,277,892 Ticket vendor fees 1,158,028 1,177,708 Promotions 437,704 381,179 Shipping and postage 428,532 410,422 Drawing game 116,081 116,532 Responsible gaming 87,400 87,400 Game membership 67,034 65,502

Total game expenses 93,049,385 87,380,548

OPERATING EXPENSES Salaries, wages, and benefits 3,614,032 3,583,778 Leases and insurance 514,990 585,629 Utilities and maintenance 439,041 431,189 Depreciation and amortization 139,393 115,933 Materials and supplies 125,050 153,867 Professional fees 112,893 150,651 Other 71,640 55,727 Travel 63,008 69,470

Total operating expenses 5,080,047 5,146,244

OPERATING INCOME 43,637,665 41,264,810

NON-OPERATING INCOME Other income 25,692 45,464 Interest income 21,324 18,469

Total non-operating income 47,016 63,933

Net income before transfers 43,684,681 41,328,743

Transfers to Lottery Tuition Fund 43,684,681 41,328,743

Change in net position - -

Net position at beginning of year - -

Net position at end of year $ - $ -


25


STATEMENTSOFCASHFLOWS

YearsendedJune30,2013and2012

Increase(Decrease)inCashandCashEquivalents

2013 2012CashflowsfromoperatingactivitiesCashreceived:Fromretailers‐salesnetofcommissions,incentives,andprize,spoiled,andstolenticketcredits $132,472,895 $124,762,104

FromMUSL‐HotLottojackpot ‐ 1,153,023Cashpayments:

Toprizewinnersandrelatedtaxes

(58,375,753)

(57,149,803)

ToMUSL

(16,197,131)

(13,762,743)Tosuppliersofgoodsorservices (9,058,917) (9,200,911)Toemployeesforservicesandrelatedtaxes (2,880,565) (2,838,626)

Netcashprovidedbyoperatingactivities 45,960,529 42,963,044

CashflowsfrominvestingactivitiesReceiptsofinterest 10,254 7,861Other 367 23,971

Netcashprovidedbyinvestingactivities 10,621 31,832

Cashflowsfromnoncapitalfinancingactivities

TransferstoLotteryTuitionFund

(43,220,512)

(41,505,020)

CashflowsfromcapitalandrelatedfinancingactivitiesPurchasesofcapitalassets (284,938) (159,248)Principalpaymentsundercapitallease (11,269) (6,627)

Netcashusedbycapitalandrelatedfinancing (296,207) (165,875)activities

NETINCREASEINCASHANDCASHEQUIVALENTS 2,454,431 1,323,981

Cashandcashequivalentsatbeginningofyear 6,885,806 5,561,825

Cashandcashequivalentsatendofyear $9,340,237 $6,885,806


26


STATEMENTSOFCASHFLOWS‐CONTINUED


Increase(Decrease)inCashandCashEquivalents

2013 2012ReconciliationofoperatingincometonetcashprovidedbyoperatingactivitiesOperatingincome $43,637,665 $41,264,810AdjustmentstoreconcileoperatingincometonetcashprovidedbyoperatingactivitiesDepreciation 139,393 115,933Vendor'snon‐cashtransactions (119,759) (18,678)InterestonMUSLunreservedaccount 3,088 1,167

Netchangesinassetsandliabilities:Accountsreceivable (140,998) (332,647)Reservesondeposit (8,737) (471,580)Inventory (3,887) (21,743)Prepaidexpenses (64,486) 32,319Accountspayableandotherliabilities 22,576 125,678Prizespayable 2,495,674 2,267,785

Netcashprovidedbyoperatingactivities $45,960,529 $42,963,044


27


STATEMENTSOFFIDUCIARYNETPOSITION

June30,2013and2012

2013 2012ASSETSCashandcashequivalents $500,847 $461,989Marketablesecuritiesandotherinvestments 4,259,724 3,599,443Contributionreceivable 8,121 6,931

Totalassets $4,768,692 $4,068,363

NETPOSITION

Pensionplanparticipants'benefits $4,768,692 $4,068,363


28


STATEMENTSOFCHANGESINFIDUCIARYNETPOSITION


2013 2012ADDITIONS

Investmentearnings $559,478 $739,810Employercontributions 344,578 335,375Otheractivity ‐ ‐

Totaladditions 904,056 1,075,185

DEDUCTIONSInvestmentlosses ‐ 776,116Distributionstoparticipants 203,727 341,313

Totaldeductions 203,727 1,117,429

Changeinnetposition 700,329 (42,244)

Netposition‐beginning 4,068,363 4,110,607

Netposition‐ending $4,768,692 $4,068,363


29


NOTESTOFINANCIALSTATEMENTS

June30,2013and2012NOTEA‐SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES1. ReportingEntityThe financial reporting entity as defined by Governmental Accounting Standards Board(GASB) Statement 14 consists of the primary government, organizations for which theprimarygovernmentisfinanciallyaccountable,andotherorganizationsforwhichthenatureand significance of their relationshipwith the primary government are such that exclusionwouldcausethereportingentity’sfinancialstatementstobemisleading.Thisdefinitionofthereporting entity is based primarily on the notion of financial accountability as the“cornerstoneofallfinancialreportingingovernment.”WiththeenactmentoftheNewMexicoLotteryAct(theAct)onJuly1,1995,theNewMexicoLotteryAuthority(theLottery)wascreatedasapublicbody,politicandcorporate,separateandapart fromtheStateofNewMexicoandconstitutingagovernmental instrumentalityofthe state. The Lottery was created and organized for the purpose of establishing andconductingtheLotterytoproviderevenuesforthepublicpurposesdesignatedbytheAct.TheNewMexicoLotterywasorganizedasanindependentbusinessenterpriseseparatefromstategovernment,self‐sustainingandself‐funded,withoutneedforstaterevenuesorresourcesandsubjecttooversight,audit,andaccountabilitybypublicofficialsandagencies.However,sincethereisafinancialbenefittotheState’sinstitutionsofhighereducation,whicharepartoftheState,theLotteryisconsideredacomponentunitoftheStateofNewMexico.TheLotteryhasnocomponentunits.TheLotterycommencedsalesofinstantticketsonApril27,1996,andsalesofdrawinggameticketsonOctober20,1996.2. BasisofPresentationThefinancialstatementsarepreparedontheeconomicresourcesmeasurementfocusandtheaccrualbasisofaccountinginaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica.InaccordancewithGovernmentalAccountingStandardsBoard(GASB)StatementNumber62,Codification ofAccounting and FinancialReportingGuidance Contained inPre‐November 30,1989 FASB and AICPA Pronouncements, the Lottery has elected to follow all GASBpronouncements, and as other accounting literature, post‐November 30, 1989 FASBpronouncementsthatdonotconflictwithorcontradictGASBpronouncements. IninstanceswhereGASBguidanceconflictswithprivatesectorprinciples,theLotteryconformstoGASB.

30


NOTESTOFINANCIALSTATEMENTS‐CONTINUED

June30,2013and2012NOTEA‐SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES‐CONTINUED2. BasisofPresentation–ContinuedAFiduciaryFundisusedtoaccountforassetsheldinatrusteecapacityforLotteryemployees.TheLottery’sonlyfiduciaryfundisapensiontrustfund.ThepensiontrustfundperStatementsofFiduciaryNetPositionandStatementsofChangesinFiduciaryNetPositionandNoteDreflectstheactivitiesoftheNewMexicoLotteryAuthorityRetirementPlan(Plan)pursuanttoatrustagreementwithanationalbank.Thebankholds,investsanddistributestheassetsofthePlanforthebenefitofthePlanparticipants,subjecttotheoveralldirectionoftheLotteryinitscapacityasplanadministrator.The Lottery distinguishes operating revenues and expenses from non‐operating items.Operating revenues and expenses generally result from providing goods and services inconnectionwiththeLottery’sprincipalongoingoperations.Theprincipaloperatingrevenuesof the Lottery are sales of instant and drawing game tickets. The Lottery also recognizesretailer fees for connecting new retailers to the system as operating revenues. Operatingexpensesincludethecostsrelatedtosales,administrativeexpensesrequiredtomanageandoperate the Lottery, and depreciation on capital assets. All revenues and expenses notmeetingthisdefinitionarereportedasnon‐operatingrevenuesandexpenses.When an expense is incurred that can be paid using either restricted or unrestrictedresources,theLottery’spolicyistofirstapplytheexpensetowardunrestrictedresourcesandthen toward restricted resources. At the end of fiscal years 2013 and 2012 therewere norestrictedresources.3. BudgetsandBudgetaryAccountingEachyearLotterymanagementpreparesabudgetinconformitywithGAAPforthesucceedingfiscal year. The Lottery’s budget is not legally binding. The budget is presented bymanagementtotheLottery’sboardofdirectorsforreview,amendment,andapprovalpriortothebeginningof thenext fiscalyear.Anyrevisionsto thisbudgetduringthe fiscalyearareapprovedbytheLottery’sboardofdirectors.TheLottery’sfinancialstatementsarereviewedateachregularboardofdirectors’meeting.Performanceinrelationtothebudgetispresentedanddiscussedduringthesemeetings.4. CashandCashEquivalentsFor the purposes of the Statements of Cash Flows, the Lottery considers cash and cashequivalentstobecashonhand,demanddeposits,timedepositswithanoriginalmaturityofninetydaysorless,andovernightrepurchaseagreements.

31



June30,2013and2012NOTEA‐SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES–CONTINUED5. AccountsReceivable

Accounts receivable represent the unremitted receipts on ticket sales, net of retailercommissionsandprizespaidbytheretailers.ReceiptsaretransferredweeklyfromretailerbankaccountstotheLottery.Creditlossesrelatingtocontractedretailershavebeenwithinmanagementexpectations.Generally,collateralisnotrequiredonreceivables.AtJune30,2013and2012,anallowancefordoubtfulaccountsof$36,165and$29,688,respectively,hasbeenprovidedtorecognizefutureuncollectiblebillings.Infiscalyears2013and2012,tenretailcustomers(477and481retailerlocations)represented58%and55%ofsalesforeach year, respectively, and 59% and 52% of accounts receivable for each year,respectively.6. ReservesonDeposit

The Lottery is amember of theMulti‐State Lottery Association (MUSL), which operatesgames on behalf of participating lotteries. MUSL currently operates the POWERBALL®(Powerball), Hot Lotto® (Hot Lotto) andMegaMillions® (MegaMillions) games for theLottery.TheLotterysellsPowerball,HotLottoandMegaMillionsgameticketsthroughitsretailersandmakesweeklywiretransferstoMUSLinanamountequivalenttothememberlottery’sshareoftheestimatedgrandprizeliabilityforeachgame.Lesserprizesarepaiddirectly to thewinnersbyeachmember lottery.Theprizepools for the threegamesare50%ofeachgame’sdrawingperiod’ssalesaftertheprizereserveaccountsarefundedtotheamountssetbytheMUSLproductgroup.

MUSLhasestablishedprizereserveaccountsforthegamesitoperates.TheseprizereserveaccountsarefundedoutoftheprizepoolsforthegamesuntiltheaccountsreachamountssetbytheMUSLproductgroupsforeachgame.Oncetheprizereservefundsexceedthesedesignatedmaximums,theexcessbecomespartofthegrandprizepool.Theprizereservefunds serve as contingency reserves to protect MUSL and the party lotteries fromunforeseenprizeliabilities. ThemoneyinthesereservefundsisusedatthediscretionoftheMUSLBoardofDirectors.TheprizereservefundsarerefundabletoMUSLmembersifMUSL disbands, amember leavesMUSL, or a game is discontinued. In these instances,membersmustwait one year before receiving their remaining share, if any, of the prizereserve funds. Theprizereserveaccountsmayalsobecarriedforwardtoareplacementgame’s prize reserve account. MUSL included 2% of the Lottery’s Powerball drawingperiod’s sales in twoprize reserveaccounts, thePowerballPrizeReserveAccount (PRA)and theSetPrizeReserveAccount (SPRA),until theLottery’s share inboth thePRAandSPRA were fully funded. The maximum amounts designated by the MUSL Powerballproductgroup for thePRA is$80millionand for theSPRA is$40million forallmemberlotteries. At June 30, 2013 and 2012, the Lottery’s share in the Powerball PRA was$1,150,604 and $1,430,961, respectively, and in the SPRA was $554,595 and $440,966,respectively.BothPowerballreservefundsarefullyfunded.

32



June30,2013and2012

NOTEA‐SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES‐CONTINUED6. ReservesonDeposit‐ContinuedMUSLincludesfrom1%to3%oftheLottery’sHotLottodrawingperiod’ssales,dependingontheannuitizedvalueoftheGrandPrize,intoaPrizeReserveAccount(PRA).TheMUSLproductgrouphasset themaximumHotLottoPRAbalanceatninemilliondollars forallparty lotteries. At June30,2013and2012, theLottery’sshare in theHotLottoPRAwas$735,241and$696,149,respectively.TheLottery’sremainingHotLottoprizereservebuy‐inamountwas$0.00and$70,645,respectively,asofJune30,2013and2012.

TheLotterycommencedsalesofMegaMillionsticketsonJanuary31,2010.MUSLincludesanadditionalamountupto5%oftheLottery’sMegaMillionsdrawingperiod’ssalesandincluded 4.9338682%until September 13, 2010 and then 1.5801572%of theMegapliersalesintothePrizeReserveAccount(PRA).AsofMarch22,2013,theMUSLproductgroupsetthemaximumMegaMillionsPRAbalanceat$45millionforallpartylotteries.AtJune30, 2013 and 2012, the Lottery’s share in the Mega Millions PRA was $409,688 and$286,019, respectively. The Lottery’s remaining Mega Millions prize reserve buy‐inamountwas$114,165asofJune30,2013.

TheLotteryalsohasanunreserved fundwithMUSL. Interestearnedon theMUSL fundsand any unclaimed grand prizes may be deposited into the unreserved fund and gamemembershipfeesandotherMUSLcostsmaybepaidfromthisfund.AtJune30,2013and2012,theLottery’sshareoftheunreservedfundwas$555,440and$542,736,respectively.

AwinnerofaPowerballgrandprizeorMegaMillionsgrandprizemayselectthattheprizebepaidatthecashvalueoftheprizeorasanannuity.APowerballgrandprizeannuityispaidout in30annual installmentsover29yearsandaMegaMillionsgrandprize ispaidoutin26annualinstallmentsover25years.Governmentsecuritiesatthediscountedvalueof the grand prize annuity are purchased to fund all future installments and are held intrust. Maturities are staggered in order to provide adequate cash flow for each annualinstallment.TheseassetsandrelatedliabilitiesarereflectedinMUSL’sfinancialstatementsand thereforearenotreflected in theLottery’s financial statements.MUSL is responsiblefortransferringthecashortheannuityinstallmentamountstothememberlotterypriortothe payment to any grand prize winner. Currently, the Lottery is not paying any prizewinneranyannuityprizepayments.

AsofMay12,2013, theHotLottoadvertisedgrandprize ispaidasawithholdings taxespaidsingle,cashpaymentprizewheretheestimatedadvertisedgrandprizeisgrossedupto include federalandstate taxwithholdingsand theprizewinnerreceives thenetprizeaftertaxwithholdings.PriortoMay12,2013,aHotLottograndprizewaspaidoutatthecashvalueoftheprizeorasanannuitypaidoutin25annualinstallments.

33



June30,2013and2012NOTEA‐SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES‐CONTINUED7. InventoryInMarch2003andthenagaininMarch2010,theLotteryenteredintoagreementswithitsprimary instant ticket printers, whereby the printers retain title to the instant ticketinventoryuntiltheinstantticketsaresold.UndertheMarch2003agreement,theLotterypays the vendor a fee based on a fixed percentage of the instant tickets sold. Under theMarch2010agreement, theLotterypaysthevendora feebasedona fixedpercentageofthe net instant tickets sold; net instant tickets representing instant tickets less prize,spoiled,stolen,andpromotionaltickets.Inaddition,inMarch2010,theLotterysignedanagreement with a secondary instant ticket printer, whereby the Lottery purchases andownstheticketsprinted.Theseticketsarecarriedatthelowerofcostormarketusingthespecificidentificationmethod.At theendof fiscalyear2013, theLotterywasdistributinggamesprintedunder the twoMarch2010agreements;whileattheendoffiscalyear2012,theLotterywasdistributinggamesprintedundertheMarch2003agreementandthetwoMarch2010agreements.As of June 30, 2013 and 2012, $12,825 and $33,077, respectively, of instant tickets areincluded in inventory. Foreachyearrespectively,$24,139and$0ofmerchandiseprizesforsecondchancedrawingsarealsoincludedininventory.8. CapitalAssetsCapital assets, which include data processing software and hardware, tenantimprovements, vehicles, furniture and fixtures, intellectual property, and equipment, arestatedatcostnetofaccumulateddepreciation.TheLotterycapitalizesallassetsthathaveacostgreater than$5,000andanexpecteduseful lifeofmore thanoneyear.Depreciationandamortizationare computedusing the straight‐linemethodover theestimatedusefullives of 2 to 5 years, except for tenant improvements, which are amortized over theirexpecteduseful livesor the lease term,whichever is shorter.Whenassets are retiredorotherwisedisposed,thecostandrelatedaccumulateddepreciationareremovedfromtheaccounts and any resulting gainor loss is reflected in the results fromoperations in theperiodofdisposal.

34



June30,2013and2012NOTEA‐SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES‐CONTINUED9. RevenueandAccountsReceivableRecognitionLottery games are sold to the public by contracted retailers and directly by the Lottery.Revenuesandaccountsreceivableforinstantticketsarerecognizedwhenpacksaresettledand retailers arebilled for the tickets.Revenues and accounts receivable for all drawinggamesarerecognizedwhendrawingsareheld,exceptforQuicksters,wheretherevenuesand accounts receivable are recognized at the time the tickets are sold. Accountsreceivablearestatedattheirnetrealizablevalueandtheirpastduestatus isbaseduponcontractualterms.10. PrizesPrizeexpenseforinstant,Powerball,MegaMillions,andHotLottogamesisrecordedbasedon an estimate of the predetermined prize structure for each game. Prize expense forRoadrunnerCash,Pick3,andQuickstergamesisrecordedbasedontheactualprizeswonforeachgame.11. CommissionsRetailersreceiveacommissionof6%ongrossticketsalesanda1%cashingcommissiononwinningticketvalidationsforprizesupto$600.12. AdvertisingCostsAdvertisingcostsareexpensedasincurred.13. IncomeTaxesThe Lottery is exempt from Federal and New Mexico income taxes. Accordingly, noprovisionforincometaxeshasbeenmade.

35



June30,2013and2012NOTEA‐SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES‐CONTINUED14. CustodialCreditRiskandInterestRateRiskAtJune30,2013,theLotterymaintaineditscashbalancesinonefinancialinstitution,whileatJune30,2012,theLotterymaintaineditscashbalancesintwofinancialinstitutions.ThebalancesfordemanddepositswereinsuredbytheFederalDepositInsuranceCorporationupto$250,000atthesefinancialinstitutions.Custodialcreditrisk–Deposits.Inthecaseofdeposits,thisistheriskthatintheeventofabankfailure,theLottery’sdepositsmaynotbereturnedtoit.TheLotterydoesnothaveadepositpolicyforcustodialcreditrisk.TheLotterylimitsitscustodialriskforitscashandrequirescollateralinanamountgreaterthanorequalto50%ofanydepositnotinsuredbyFederal Insuring Agencies. A greater amount of collateral is required when the Lotterydetermines it is prudent. Collateral must meet State of New Mexico “Security of PublicMoney”standardsandbeheldinthethirdpartysafekeeping.Custodialcreditrisk–Investments.Foraninvestment,custodialcreditriskistheriskthatin theeventof the failureof thecounterparty, theLotterywillnotbeable torecoverthevalue of its investments or collateral securities that are in the possession of an outsideparty. Mutual funds, external investment pools, and securities underlying reverserepurchaseagreementsarenotexposedtocustodialcreditrisk.TheLotterydoesnothaveaninvestmentpolicyforcustodialcreditrisk.TheLottery’scustodialriskforinvestmentsis inaccordancewithArticle10,NMSA,1978Compilation. The Lottery’s investments are made in overnight repurchase agreements.Investmentsaremade througha local financial institutionandareheld insafekeepingattheFederalReserveBank.RepurchaseagreementsarecollateralizedbytheGovernment

36



June30,2013and2012NOTEA‐SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES‐CONTINUED14. CustodialCreditRiskandInterestRateRisk‐Continued

Securitieswithamarketvalueofatleast102%oftheprincipalandareusedforovernightinvestment only. Collateral must meet State of New Mexico “Security of Public Money”standards and be held in third party safekeeping. As of June 30, 2013 and 2012, theLottery’s bank balances of $9,523,952 and $7,027,864, respectively, were exposed tocustodialcreditriskasfollows:

2013 2012 Uninsuredanduncollateralized $ ‐ $ ‐

Collateralheldbythepledging bank’strustdepartmentin theBank’sname ‐ ‐ Collateralheldbythepledging bank’strustdepartmentin theLottery’sname 9,523,952 7,027,864 $ 9,523,952 $ 7,027,864InterestRateRisk–Investments.Interestrateriskistheriskthatchangesininterestrateswilladverselyaffect the fairvalueofan investment.TheLotterydoesnothaveaspecificpolicytolimititsexposuretointerestraterisk.At June30,2013and2012, theLotteryhadovernightyield repurchaseagreementswithone‐daymaturities.

37



June30,2013and2012NOTEA‐SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES‐CONTINUED15. BankAccountsAtJune30,2013:

BalanceDescription Bank perBankOperatingaccount‐overnightrepurchaseAgreement WellsFargoBank,NA $9,523,952Operatingaccount–checking WellsFargoBank,NA ‐Totalamountdepositedinbank 9,523,952Less:FDICcoverage ‐*Totaluninsuredfunds–depositsandovernightrepurchaseagreement $9,523,952

102%pledgedcollateralrequirementperstatuteforrepurchaseagreement $9,714,431

*Totalpledgedsecurity

(9,714,432)

Amountunder(over)requirementatJune30,2013 $(1)*WellsFargoBank,NA securitiesareheld in safekeepingat theFederalReserveBank inSanFrancisco,CA. Presentedat fairvalue,CUSIPNumber3128MJSN1(fairmarketvalue$9,691,268),maturesMarch 01, 2043. The repurchase agreement is collateralizedwithsecuritiesheldinthenameoftheNewMexicoLotteryAuthority.CashandcashequivalentsperbankatJune30,2013 $9,523,952Lessreconcilingitems‐‐outstandingchecks (191,420)

ReconciledcashinbankatJune30,2013

9,332,532

Cashinvault

7,705

TotalcashandcashequivalentsperStatementsofNetPosition $9,340,237

38



June30,2013and2012NOTEA‐SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES‐CONTINUED15. BankAccounts‐ContinuedAtJune30,2012:

BalanceDescription Bank perBankOperatingaccount–overnightrepurchase Agreement WellsFargoBank,NA $6,864,002Operatingaccount–checking WellsFargoBank,NA ‐Operatingaccount‐overnightrepurchaseAgreement USBank 163,862Operatingaccount–checking USBank ‐Totalamountdepositedinbank 7,027,864Less:FDICcoverage ‐*Totaluninsuredfunds–depositsandovernightrepurchaseagreement $7,027,864

102%pledgedcollateralrequirementperstatuteforrepurchaseagreement $7,168,421*Totalpledgedsecurity (7,168,423)

Amountunder(over)requirementatJune30,2012 $(2)*WellsFargoBank,NASecuritiesareheld in safekeepingat theFederalReserveBank inSanFrancisco,CA.Presentedatfairvalue,CUSIPNumbers31292LE35(fairmarketvalue$7,001,283),maturesMarch 01, 2042. The repurchase agreement is collateralizedwithsecuritiesheldinthenameoftheNewMexicoLotteryAuthority.*USBanksecuritiesareheldinsafekeepingattheFederalReserveBankinCleveland,OH.Presentedatfairvalue,CUSIPNumber3128DFAU2(fairmarketvalue$167,140),maturesOctober 1, 2035. The repurchase agreement is collateralizedwith securities held in thenameoftheNewMexicoLotteryAuthority.

39



June30,2013and2012NOTEA‐SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES–CONTINUED15. BankAccounts‐ContinuedCashandcashequivalentsperbankatJune30,2012 $7,027,864Lessreconcilingitems‐‐outstandingchecks (156,979)

ReconciledcashinbankatJune30,2012 6,870,885

Cashinvault 14,921

TotalcashandcashequivalentsperStatementsofNetPosition $6,885,80616. RiskManagementTheLotteryisexposedtovariousrisksoflossrelatedtotorts;theftof,damageto,andthedestructionof assets; errors andomissions; injuries toemployees; andnaturaldisasters.TheLotterypurchasescommercialinsurancetocovertheserisks.Theamountofcoveragehasnotbeenexceededbyclaimsinthelastthreeyears.17. ShippingandHandlingCostsShipping and handling costs associated with inventory distribution are expensed asincurredandincludedingameexpenses.

40



June30,2013and2012NOTEA‐SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES–CONTINUED18. NetPositionNet position represents the difference between all other elements in a statement offinancial position and should be displayed in the applicable components of netinvestmentincapitalassets,restrictedandunrestricted.Net Investment in Capital Assets – consists of capital assets, net of accumulateddepreciation, reduced by outstanding balances of bonds, mortgages, notes, or otherborrowings that are attributable to the acquisition, constructions, or improvement ofthoseassets.Restricted–consists of restricted assets reduced by liabilities and deferred inflows ofresourcesrelatedtothoseassets.TheLotterydoesnothavearestrictedcomponentofnetposition.Unrestricted – consists of the net amount of assets, deferred outflows of resources,liabilities,anddeferredinflowsofresourcesthatarenotincludedinthedeterminationofnetinvestmentincapitalassetsortherestrictedcomponentofnetposition.19. UnclaimedPrizesThe Act requires that prizes not claimed within the time period established by theLottery are forfeited and shall be paid into the prize fund (unclaimed prize liabilityaccounts).Unclaimedprizesareappliedagainstprizeexpensetosupplementprizes intheLottery’sgames.20. UseofEstimatesinPreparationofFinancialStatementsThe preparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimatesandassumptionsthataffectthereportedamountofassetsandliabilitiesanddisclosureofcontingentassetsandliabilitiesatthedateofthefinancialstatementsandthe reported amounts of revenues and expenses during the reporting period. Actualresultscoulddifferfromthoseestimates.

41



June30,2013and2012NOTEA‐SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES‐CONTINUED21. CompensatedAbsencesPayableAnnualleaveandsickleaveareaccruedatratesspecifiedbytheLottery’sLeavePolicy.Annual leave is awarded based on the employee’s years of service, leave status, andemployment status (full‐time or part‐time) and sick leave is awarded at 3.7 hoursbiweekly for full‐timeemployees.Themaximumnumberofannual leavethat full‐timeemployeesmaycarryoverandretainintheirannualleavebankvariesfrom80hoursforan employeewith less than 5 years of service up to amaximum of 320 hours for anemployee with fifteen or more years of service. The maximum number of sick leavehours that a full‐time employeemay carry over fromyear‐to‐year is 480 hours. Part‐timeemployeesreceiveleaveandcarry‐overandretainleaveintheirleavebanksbasedon their percentage of employment.Upon separation from service, employeeswith atleast one year of service will be compensated for their annual leave balance, not toexceed themaximumannual leave bank based on their years of service. Accrued sickleavehourswillnotbepaid toanemployeeuponseparation fromservice.During theyears ended June 30, 2013 and 2012, the following changes occurred in thecompensatedabsencesliabilities:

BalanceJuly1,2012 Increase Decrease

BalanceJune30,2013

$212,919 $23,898 $(9,108) $227,709


BalanceJune30,2012

$193,831 $30,259 $(11,171) $212,919

ThebalancesofcompensatedabsencespayablearereportedontheStatementsofNetPosition in accounts payable and other current liabilities. The Lottery estimates allcompensatedabsencesareduewithinoneyear.

42



June30,2013and2012NOTEA‐SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES‐CONTINUED22. Long‐termLiabilities‐CapitalLeaseObligationsDuringtheyearsendedJune30,2013and2012,thefollowingchangesoccurredinthecapitalleaseobligations:


BalanceJune30,2013

AmountsDueWithinOneYear

$72,740 $29,975 $(11,269) $91,446 $14,064


BalanceJune30,2012

AmountsDueWithinOneYear

$27,509 $51,858 $(6,627) $72,740 $11,015

23. AccountsPayableandOtherCurrentLiabilitiesAccountspayableandothercurrentliabilitiesarecomprisedofthefollowingatJune30:

2013 2012

Accountspayable $1,478,280 $1,458,049 Accruedliabilities,vendors* 115,042 142,146 Accruedliabilities,retailers* 28,000 30,500 Accruedpayroll,andpayroll taxesandbenefits 128,873 111,714 Compensatedabsences 227,709 212,919 $1,977,904 $1,955,328*TheLotteryhasaccruedanestimatedamountofservicesdeliveredbyitsvendorsanddepositsforitsretailersasofJune30,2013and2012,respectively.

43



June30,2013and2012NOTEB–CAPITALASSETSCapitalassetsatJune30,2013consistedof:

BeginningBalance

Reclass‐ification Increases Decreases

EndingBalance

Dataprocessingsoftware $2,418,935 $(7,407) $‐ $‐ $2,411,528

Dataprocessingequipment 852,857 (23,179) 850 ‐ 830,528

Equipment‐Securityand

disasterrecovery 639,604 (42,374) 38,577 ‐ 635,807

Vehicles 432,500 ‐ 193,006 (132,226) 493,280

Tenantimprovements 374,168 ‐ 51,682 ‐ 425,850

Furnitureandfixtures 233,172 (2,405) ‐ ‐ 230,767

Intellectualproperty ‐ ‐ 179,073 ‐ 179,073

Equipment‐communications 118,635 ‐ ‐ ‐ 118,635

Equipment‐drawing 116,478 ‐ ‐ ‐ 116,478

Equipment‐warehouse 71,174 ‐ ‐ ‐ 71,174

Equipment‐office 49,508 ‐ ‐ ‐ 49,508

Obsoletecapitalassets 901,871 75,365 ‐ (762,452) 214,784

Capitalassets 6,208,902 ‐ 463,188 (894,678) 5,777,412

Dataprocessingsoftware (2,418,935) 7,407 ‐ ‐ (2,411,528)

Dataprocessingequipment (738,476) 23,179 (38,232) ‐ (753,529)


disasterrecovery (541,966) 42,374 (19,635) ‐ (519,227)

Vehicles (395,031) ‐ (54,585) 132,226 (317,390)

Tenantimprovements (325,141) ‐ (12,049) ‐ (337,190)

Furnitureandfixtures (233,172) 2,405 ‐ ‐ (230,767)

Intellectualproperty ‐ ‐ (12,350) ‐ (12,350)

Equipment‐communications (118,635) ‐ ‐ ‐ (118,635)

Equipment‐drawing (115,522) ‐ (956) ‐ (116,478)

Equipment‐warehouse (65,095) ‐ (1,586) ‐ (66,681)

Equipment‐office (49,508) ‐ ‐ ‐ (49,508)

Obsoletecapitalassets (901,871) (75,365) ‐ 762,452 (214,784)

Accumulateddepreciation (5,903,352) ‐ (139,393) 894,678 (5,148,067)

Capitalassets,net $305,550 $‐ $323,795 $‐ $629,345Included indataprocessingsoftware,dataprocessingequipment,andtenant improvementsare$116,143and$86,167inassetsreportedascapitalleasesatJune30,2013and2012,respectively.Foreachfiscalyear,therewere$11,269and$6,627,respectively,inrelatedamortizationontheseassets.

44


NOTESTOFINANCIALSTATEMENTS–CONTINUED

June30,2013and2012NOTEB–CAPITALASSETS‐CONTINUEDCapitalassetsatJune30,2012consistedof:

BeginningBalance

Reclass‐ification Increases Decreases

EndingBalance

Dataprocessingsoftware $2,503,323 $(84,388) $‐ $‐ $2,418,935

Dataprocessingequipment 1,281,648 (530,259) 101,468 ‐ 852,857


disasterrecovery 572,479 (25,908) 94,170 (1,137) 639,604

Vehicles 432,500 ‐ ‐ ‐ 432,500

Tenantimprovements 339,670 (16,939) 51,437 ‐ 374,168

Furnitureandfixtures 233,172 ‐ ‐ ‐ 233,172

Intellectualproperty ‐ ‐ ‐ ‐ ‐

Equipment‐communications 116,260 2,375 ‐ ‐ 118,635

Equipment‐drawing 116,478 ‐ ‐ ‐ 116,478

Equipment‐warehouse 69,831 ‐ 6,343 (5,000) 71,174

Equipment‐office 50,837 (1,329) ‐ ‐ 49,508

Obsoletecapitalassets 780,733 656,448 ‐ (535,310) 901,871

Capitalassets 6,496,931 ‐ 253,418 (541,447) 6,208,902

Dataprocessingsoftware (2,485,425) 84,388 (17,898) ‐ (2,418,935)

Dataprocessingequipment (1,257,806) 530,259 (10,929) ‐ (738,476)


disasterrecovery (566,399) 25,908 (2,612) 1,137 (541,966)

Vehicles (318,944) ‐ (76,087) ‐ (395,031)

Tenantimprovements (339,670) 16,939 (2,410) ‐ (325,141)

Furnitureandfixtures (233,172) ‐ ‐ ‐ (233,172)

Intellectualproperty ‐ ‐ ‐ ‐ ‐

Equipment‐communications (116,260) (2,375) ‐ ‐ (118,635)

Equipment‐drawing (109,789) ‐ (5,733) ‐ (115,522)

Equipment‐warehouse (69,831) ‐ (264) 5,000 (65,095)

Equipment‐office (50,837) 1,329 ‐ ‐ (49,508)

Obsoletecapitalassets (780,733) (656,448) ‐ 535,310 (901,871)

Accumulateddepreciation (6,328,866) ‐ (115,933) 541,447 (5,903,352)

Capitalassets,net $168,065 $‐ $137,485 $‐ $305,550

45



June30,2013and2012

NOTEC‐ALLOCATIONOFNETINCOME/TRANSFERSTOLOTTERYTUITIONFUND

NetIncome

DuetoLotteryTuitionFund

NetPosition

BalanceatJune30,

2012 $3,039,205 $3,039,205 $‐

Currentyearnet

income 43,684,681 43,684,681 ‐

Currentyear

transfers (43,220,512) (43,220,512) ‐

BalanceatJune30,

2013 $3,503,374 $3,503,374 $‐

InaccordancewiththeLotteryAct,nolaterthanthelastbusinessdayofeachmonth,theLotteryshalltransmitatleastthirtypercentofthegrossrevenueofthepreviousmonth,tothe New Mexico State Treasurer, who shall deposit it into state agency number 950,NewMexicoHigherEducationDepartment,theLotteryTuitionFund,SHAREfundnumber63700. As of July 31, 2013 and 2012, the Lottery has transferred $43,684,681 and$41,328,743,respectively,fortheyearsendedJune30,2013and2012totheNewMexicoStateTreasurer.

NOTED‐RETIREMENTPLAN

PlanDescription

All of the Lottery’s eligible employees participate in a plan provided by the LotterypursuanttotheNewMexicoLotteryAct(Chapter6,Article24NMSA1978).TheLotteryisthe administrator of the Plan,which is a defined contributionmoney purchase pensionplan. Employees become eligible to participate for the purposes of money purchasecontributionswhentheyhavecompletedsixmonthsofservice.Contributionsstartonthefirstdayofthequartercoincidingwithornextfollowingthedateinwhichtheemployeesatisfiedtheeligibilityrequirement. TheNewMexicoLotteryAuthorityRetirementPlanprovides for retirement benefits to planmembers and their beneficiaries. The balancesand activity of the Plan as of and for the years ended June 30, 2013 and 2012 arepresented in the Statements of Fiduciary Net Position and Statements of Changes inFiduciaryNetPosition.Thereareno separately issued financial statementsavailable fortheNewMexicoLotteryAuthorityRetirementPlan.

46



June30,2013and2012NOTED‐RETIREMENTPLAN‐CONTINUED

FundingPolicyThe Lottery contributes 13.25% of compensation for eligible employees to the Plan.Lottery contributions are 100% vested when deposited monthly. For the years endedJune30, 2013 and 2012, the Lottery recognized $344,578 and $335,375 of pensionexpenseforthePlanoneligiblecompensationof$2,600,589and$2,531,132,respectively.Therewere no forfeitures of employee balances for the years ended June 30, 2013 and2012, respectively. The entire pension amounts applicable to all compensation paidduringtherespectivefiscalyearshavebeenpaidtothePlanbyJune30,2013and2012,respectively. For the years ended June 30, 2013 and 2012, the Lottery recognized acontribution liability of $8,121 and $6,931, respectively, for contributions due oncompensationearned,butnotpaid,forthelastfewdaysofeachfiscalyear.

NOTEE‐CREDITAGREEMENT

In July 2012, the Lottery entered into an agreement with Wells Fargo Bank effectiveMay15,2012foranautomaticunsecuredoverdraftlineofcreditsweepintheamountof$4,000,000withavariable interestrate,whichwas3.25%asof June30,2013.This linematuredonMay14,2013andwasrenewedforanotheryearunderthesametermsandconditions.InJuly2005,theLotteryhadenteredanagreementwithFirstCommunityBank(USBank)effectiveMay15,2005 foranautomaticunsecuredoverdraft lineof credit sweep in theamountof$1,000,000withafixedinterestrateattheWallStreetJournalinterestrateless.500percentagepoints.ThislinematuredonMay14,2008,May14,2010,andfinallyonMay14,2012,withnofurtherextension.FortheyearsendedJune30,2013and2012,theLotteryhadnooutstandingborrowingsagainsteitherlineofcredit.

47



June30,2013and2012NOTEF‐LEASES

In1996 theLotteryentered intooperating leases for therentalofofficeandwarehousespace fora termof tenyears. InSeptember2002, theLottery renegotiated these leases.TheleaseswereextendeduntilMarch31,2013atthesameleaseamountsthatweretobepaidinthefinalyearoftheoriginalleasewithnofurtheryearlyescalationsofthemonthlyleaseamounts.In June 2012, the Lottery executed a new lease for its corporate office andwarehousespace. The new lease commenced on July 1, 2012 and cancelled the remaining ninemonths of the 2002 lease extension. The new lease is for ten years and ninemonths,endingonMarch31,2023. TheLotteryhas theoption to extend thenew lease for fiveadditionalyearsuntilMarch31,2028.Rentexpensewas$391,495and$465,653 for theyears ended June30,2013and2012,respectively.Futureminimumrentalpaymentsontheseleaseswithoriginaltermsofoneyearormorearescheduledasfollows:

Year

Amount

2014 $280,165 2015 280,165 2016 280,165 2017 280,165 2018 281,664 2019‐2023 1,359,282 $2,761,606

Following is a schedule of the composition of net rental expense for all long‐termoperatingleasesfortheyearsendedJune30:

2013 2012

Minimumrentals $ 368,813 $ 431,087

Less:Subleases ‐ ‐

$ 368,813 $ 431,087

48



June30,2013and2012NOTEF‐LEASES–CONTINUED

As part of the agreementwith INTRALOT, Inc., to provide an updated on‐line gamingsystem, the Lottery installed and implemented a new internal control system (ICS) infiscalyear2009.ThecostfortheICSisincludedinthefixedfeepaidtothevendorasapercentageofnetsales.TheLotteryhasaccountedforthistransactionasacapitallease.TheICScostwasprojectedoverthe initial termofthecontractofsevenyearsandhasbeen capitalized on the books of the Lottery at the present value of this cost, asdeterminedwithadiscountrateof4%.

YearsendingJune30:

2014 $8,2382015 8,2372016 3,432Totalminimumpayments 19,907

Lesstheamountrepresentinginterest (4,855)Presentvalueofnetminimumpayments $15,052

Aspartofthe2002leaseextensionwithNMLB,LLC,theLotteryreceived$50,000in2012tobeusedfortenantimprovementstothefacility.Inaddition,aspartofthe2012lease,the Lottery received $1,858 in 2012 and $29,975 in fiscal year 2013 for tenantimprovements to the facility. The Lottery has recorded the $81,833 as tenantimprovementswitharelateddeferred liability tobeamortizedover the lifeof the leaseusingthestraight‐linemethod.

YearsendingJune30: 2014 $7,835 2015 7,836 2016 7,835 2017 7,835 2018 7,835 2019‐2023 37,218 Totalminimumpayments $76,394

49



June30,2013and2012NOTEG‐COMMITMENT

EffectiveonNovember15,2007,theLotteryenteredintoanagreementwithINTRALOT,Inc.,aGeorgia‐basedcompany,toprovideanupdatedon‐linegamingsystemforatotalofseven years with the option of three additional one year periods or any combinationthereof.Thesystemincludesthesupply,installation,maintenance,service,andoperationofacommunicationnetwork,lotteryterminalsandperipheralequipmentfortheLottery’sexisting and future retailers, ticket scanners to enable players to check their tickets forprizes, self service ticket vending machines that sell both instant and drawing gametickets, a disaster recovery and business continuity facility, and various employees tooperatethesystemandprovidesalesandmarketingsupporttotheLottery.Thetransitiontothisnewon‐linegamingsystemtookplaceonNovember16,2008.SinceNovember21,2008,theon‐linevendorfeehasbeenfixedat1.5%ofnetsales,plustheapplicablegrossreceiptstax.

NOTEH‐OTHEREXPENSES

OtherexpensesatJune30consistedof:

2013 2012

Registrationsandmemberships $30,044 $25,712

Training 20,250 15,982Other 17,404 10,723Publicationsandsubscriptions 3,942 3,310

$71,640 $55,727

50


BUDGETARYCOMPARISONSTATEMENTS

YearsendedJune30,2013and20122013 2012

Original Final Variance with Original Final Variance with

Budget Budget Actual Final Budget Budget Budget Actual Final Budget

Operating revenues

Instant ticket sales $ 71,100,000 $ 70,000,000 $ 72,397,663 $ 2,397,663 $ 80,000,000 $ 72,000,000 $ 71,632,710 $ (367,290)

Powerball sales 36,000,000 41,000,000 46,767,095 5,767,095 27,000,000 34,000,000 33,795,664 (204,336)

Mega Millions sales 12,000,000 7,700,000 8,088,972 388,972 9,500,000 14,000,000 14,330,230 330,230

Roadrunner Cash sales 8,000,000 6,800,000 6,784,566 (15,434) 10,000,000 7,800,000 7,520,021 (279,979)

Hot Lotto sales 5,000,000 5,600,000 5,996,195 396,195 8,000,000 5,600,000 5,438,475 (161,525)

Pick 3 sales 3,700,000 3,400,000 3,496,279 96,279 3,600,000 3,700,000 3,638,558 (61,442)

Quickster sales 2,500,000 800,000 867,111 67,111 1,900,000 300,000 453,448 153,448

Less tickets provided as prizes (3,000,000) (2,500,000) (2,479,354) 20,646 (3,400,000) (3,100,000) (2,890,810) 209,190

Less spoiled, stolen,

and promotional tickets (287,000) (197,000) (160,005) 36,995 (187,000) (147,000) (130,944) 16,056

Net ticket sales 135,013,000 132,603,000 141,758,522 9,155,522 136,413,000 134,153,000 133,787,352 (365,648)

Retailer fees 11,000 21,000 20,575 (425) 11,000 14,000 16,250 2,250

Bad debts (24,000) (24,000) (12,000) 12,000 (24,000) (24,000) (12,000) 12,000

Total operating revenues 135,000,000 132,600,000 141,767,097 9,167,097 136,400,000 134,143,000 133,791,602 (351,398)

Total game expenses 88,742,000 87,350,000 93,049,385 5,699,385 89,964,000 88,173,000 87,380,548 (792,452)

Total operating expenses 5,763,000 5,339,000 5,080,047 (258,953) 5,456,000 5,368,000 5,146,244 (221,756)

Operating income 40,495,000 39,911,000 43,637,665 3,726,665 40,980,000 40,602,000 41,264,810 662,810

Total non-operating income 18,000 24,000 47,016 23,016 80,000 42,000 63,933 21,933

Net income before transfers

to Lottery Tuition Fund $ 40,513,000 $ 39,935,000 $ 43,684,681 $ 3,749,681 $ 41,060,000 $ 40,644,000 $ 41,328,743 $ 684,743

51


SCHEDULESOFPERCENTAGERETURNTOTHESTATEOFNEWMEXICO


2013 2012 OPERATING REVENUES

Instant ticket sales $ 72,397,663 $ 71,632,710 Powerball sales 46,767,095 33,795,664 Mega Millions sales 8,088,972 14,330,230 Roadrunner Cash sales 6,784,566 7,520,021 Hot Lotto sales 5,996,195 5,438,475 Pick 3 sales 3,496,279 3,638,558 Quickster sales 867,111 453,448 Less tickets provided as prizes (2,479,354) (2,890,810) Less spoiled, stolen, and promotional tickets (160,005) (130,944)

Net ticket sales 141,758,522 133,787,352

Retailer fees 20,575 16,250 Bad debts (12,000) (12,000)

Total operating revenues 141,767,097 133,791,602

NON-OPERATING INCOME Other income 25,692 45,464 Interest income 21,324 18,469

Total non-operating income 47,016 63,933

GROSS REVENUES 141,814,113 133,855,535

GAME EXPENSES Prize expense 77,068,558 72,027,308 Retailer commissions 9,153,204 8,696,851 On-line vendor fees 2,269,623 2,139,754 Advertising 2,263,221 2,277,892 Ticket vendor fees 1,158,028 1,177,708 Promotions 437,704 381,179 Shipping and postage 428,532 410,422 Drawing game 116,081 116,532 Responsible gaming 87,400 87,400 Game membership 67,034 65,502

Total game expenses 93,049,385 87,380,548

OPERATING EXPENSES Salaries, wages, and benefits 3,614,032 3,583,778 Leases and insurance 514,990 585,629 Utilities and maintenance 439,041 431,189 Depreciation and amortization 139,393 115,933 Materials and supplies 125,050 153,867 Professional fees 112,893 150,651 Other 71,640 55,727 Travel 63,008 69,470

Total operating expenses 5,080,047 5,146,244

OPERATING INCOME 43,637,665 41,264,810

NET INCOME $ 43,684,681 $ 41,328,743

GROSS REVENUE PERCENTAGE RETURN 30.80% 30.88%

52


EXITCONFERENCE

FortheYearEndedJune30,2013Anexitconferencewasheldat theNewMexicoLotteryAuthorityonOctober14,2013.Thefollowingindividualsparticipated:

Name TitleNewMexicoLotteryAuthorityFinance/AuditCommitteeDanSalzwedelMarkKosonNewMexicoLotteryAuthorityEmployeesTomRomeroSylviaAnnJaramillo,CPADavidRamirezMichaelBoland,CPA

BoardChairBoardVice‐ChairChiefExecutiveOfficerDirectorofFinanceDirectorofMISInternalAuditor

MossAdamsLLPScottEliason,CPACorrineZajac‐ClarksonJaimeRumbaoa

AuditPartnerAuditin‐chargeITSeniorManager

FinancialStatementPreparationTheNewMexicoLotteryAuthority’sfinancialstatements,notes,andmanagement’sdiscussionandanalysishavebeenpreparedbytheNewMexicoLotteryAuthority’saccountants.

new mexico lottery authority financial statements … · two new board members have been appointed...

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