NEW MEXICO LOTTERY AUTHORITY FINANCIAL STATEMENTS … · Report on the Financial Statements We have audited the accompanying financial statements of the business‐type activities,

NEWMEXICOLOTTERYAUTHORITY

FINANCIALSTATEMENTS

JUNE30,2014and2013

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NewMexicoLotteryAuthority

OFFICIALROSTER

June30,2014

BOARDOFDIRECTORS

Dr.DanSalzwedel Chairman

MarkKoson ViceChairman

JohnKubiak,CPA Secretary/Treasurer

AmyBailey,Esq. Asst.Secretary/Treasurer

ClaudeAustin Member

SalvatoreBaragiola Member

Dr.PaulGuerin Member

OFFICIALSOFTHENEWMEXICOLOTTERYAUTHORITY

DavidM.Barden,Esq. ChiefExecutiveOfficer

SylviaA.Jaramillo,CPA ChiefofStaff/DirectorofAdministration

J.VinceTorrez ExecutiveVicePresidentofSecurity

EvelynMcKnight DirectorofHumanResources

Vacant DirectorofMarketing

DavidRamirez DirectorofMIS

PamPoteat DirectorofSales

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ORGANIZATIONALDIVISIONSOFTHENEWMEXICOLOTTERYAUTHORITY

AspertheNewMexicoLotteryAct,Chapter6,Article24NMSA1978,theNewMexicoLotteryAuthority (the Lottery) is governedby a seven‐memberBoard ofDirectors(BoardorDirectors),whoprovidetheLotterywiththeprivate‐sectorperspectiveofalarge marketing and sales enterprise in order to maximize revenues for theLegislativeLotteryScholarship.TheDirectorsareresidentsofNewMexicoappointedbytheGovernorwiththeadviceandconsentoftheSenate. TheDirectorsareprominentpersonsintheirbusinessesorprofessionsandgeographicallyrepresenttheStateofNewMexico.Nomorethanfour Directors are from any one political party. The Directors receive nocompensationfortheirservices,butarereimbursedforapprovedexpensesincurredin the conduct of the Lottery’s business. EachDirector is subject to a backgroundcheck and investigation to determine his/her fitness for the office. At least oneDirectorhasfiveyearsofexperienceasalawenforcementofficer,oneDirectorisanattorney admitted topractice inNewMexico, andoneDirector is aCertifiedPublicAccountantcertifiedinNewMexico.TheDirectorsserveforafive‐yearterm,butcanbereappointedbytheGovernor. TheBoardselectsaChairman,aVice‐Chairman,aSecretary/Treasurer, and an Assistant‐Secretary/Treasurer each fiscal year. TheChairmanalsoappointsaChairmanandtwoDirectorsforeachofthethreestandingcommittees of the Board, the Finance/Audit Committee, the Security/OperationsCommittee,andthePersonnelCommittee.TheDirectorsappointtheChiefExecutiveOfficer (CEO) and prescribe his qualifications, duties and salary, and with therecommendation and assistance of the CEO, employ an ExecutiveVice President ofSecurityandanInternalAuditor.TheDirectorsmeetatleastonceeachquarter,andmoreoftenasneeded.AttheirmeetingstheDirectors:

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

approve,disapprove,amend,ormodifytheoriginalbudgetforthesucceedingfiscalyearandanyrevisedbudgetduringafiscalyear;

review and discuss current financial information and the Lottery’sperformancetotheapprovedbudgetforthefiscalyear;

approve or disapprove all procurements over seventy‐five thousand dollarsandtheresultingawardofcontracts;

approve the financial audit contract after (or pending) Office of the StateAuditor (State Auditor) approval, hold an audit exit conference with theindependentpublicaccountants(IPA)atanexecutivesessionoftheBoardorintheFinance/AuditCommittee,andatanopenmeetingacceptthefiscalyearauditfollowingreleasebytheStateAuditorandpresentationbytheIPA;

listentoanddiscussLotteryupdatesonsales,games,issues,etc.; review,discuss,andacceptinternalauditreports;and discuss,andwhennecessary,approveordisapproveothermattersthatshould

properlycomebeforetheDirectorsintheirfiduciarydutyfortheefficientandeffectiveoperation,profitability,integrity,andsecurityoftheLottery.

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ORGANIZATIONALDIVISIONSOFTHENEWMEXICOLOTTERYAUTHORITY‐CONTINUED

TheExecutiveDivision, under thedirectionof theChief ExecutiveOfficer, providesleadership for all activities of the Lottery to carry out its objectives and overallstatutory mission to maximize net revenues for the Lottery’s beneficiaries. Thedivisionestablishesanddirectstheorganization’sday‐to‐dayoperatingstrategyandplan. Inaddition, thedivisionperformsasa liaisonamongtheBoard, theGovernor,the Legislature, governmental entities, external providers of goods and services,retailers,thepublic,andLotterydivisionsandemployees.Also,withintheExecutiveDivision isProductDevelopment,whichmanagesandmonitors the instant andon‐lineproducts,includingsuchareasasgamelaunches,gameendings,andperformanceanalysisusingseveralkeyperformancemeasures.Inaddition,withintheExecutiveDivisioniscommunicationsandretailerrecruitment.Communicationsisresponsiblefor all aspects of corporate communications including creating news releases andrespondingtorequestsforinformationbythepublicandthemedia.The Administration Division, under the direction of the Chief of Staff/Director ofAdministration, performs all the activities associated with the financial andaccountingfunctionsoftheLottery, includingthegeneral ledger;cashmanagement;retailer accounts receivable and debt collection; fixed asset accounting; gameaccounting;payroll andbenefit accounting,payment, andreview;and tax reportingand payment. In addition, the division provides financial reporting, disclosure, andcompliance with generally accepted accounting practices and budget compilation,includingthequarterlyandannualfinancialreportingofrevenues,expenses,andnetrevenues to theStateofNewMexico; the financialauditandrelatedcompilationoffinancial statements, related notes, and theManagement’s Discussion and Analysis(MDA)forthefiscalyear;thestatutorilyrequiredannualproposedoperatingbudgetfor the Lottery for the succeeding fiscal year and the final proposed budget bydivisionforBoardofDirectors’approval.Furthermore,thedivisionisresponsiblefortheprocurementofmaterialsandservices;claimscenterpaymentofprizesandsalesof tickets; and accountspayable. Thewarehouse component of theAdministrationDivisionisresponsibleforthepackingandshipmentoftheLottery’sinstantscratcherticketsand for themaintenanceandshippingofLotterypremiumandpointof saleitems.Thedivision isalsoresponsible for themanagementofbuildingandgroundsmaintenanceandvehiclefleetoperationsandmaintenance.The Human Resources Division, under the direction of the Director of HumanResources, oversees the development and implementation of human resourcespolicies, programs and services, including recruitment, selection, retention, legalcompliance, employee benefits, employee insurance reconciliation, employeerelations, employment practices and procedures, employee communications andemployeeevents.TheInternalAuditDepartment,underthedirectionoftheInternalAuditor,conductsandcoordinatescomprehensiveauditsforallaspectsoftheLotteryasspelledoutintheNewMexicoLotteryAct.AuditsarecarriedoutpursuanttoanannualauditplanthatisapprovedbytheBoardofDirectorsandasmayberequestedbytheCEO.

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ORGANIZATIONALDIVISIONSOFTHENEWMEXICOLOTTERYAUTHORITY‐CONTINUED

The Marketing Division, under the direction of the Director of Marketing, isresponsible for implementing,managingandadministering theactivitiesassociatedwith marketing the Lottery and its products, including advertising, televisiondrawings,promotionsandspecialevents.Thisentailscreatingandproducingmulti‐mediaadvertisingcampaigns,in‐storepointofsalematerialsandplayerandretailerpublications; as well as negotiating and overseeing the Lottery’s participation in anumberofstatewidepromotionsandspecialevents.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.

TABLEOFCONTENTS

NEWMEXICOLOTTERYAUTHORITYREPORTOFINDEPENDENTAUDITORS....................................................................1‐3MANAGEMENT’SDISCUSSIONAND ANALYSIS(UNAUDITED).........................................................................................4‐23BASICFINANCIALSTATEMENTS

StatementsofNetPosition.........................................................................................24StatementsofRevenues,Expensesand ChangesinNetPosition...........................................................................................25StatementsofCashFlows....................................................................................26‐27StatementsofFiduciaryNetPosition...................................................................28StatementsofChangesinFiduciaryNetPosition..........................................29NotestoFinancialStatements...........................................................................30‐49

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

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

OTHERINFORMATIONExitConference........................................................................................................................52

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REPORTOFINDEPENDENTAUDITORS

BoardofDirectorsNewMexicoLotteryAuthority

ReportontheFinancialStatementsWehaveaudited theaccompanying financial statementsof thebusiness‐typeactivities, and theaggregateremaining fund informationof theStateofNewMexicoLotteryAuthority(Lottery),acomponentunitoftheStateofNewMexico,asofandfortheyearsendedJune30,2014and2013,andtherelatednotestothefinancialstatements,whichcollectivelycomprisetheLottery’sbasicfinancial statements as listed in the table of contents. We have also audited the budgetarycomparison statements and the schedules of percentage return to the State of New MexicopresentedassupplementaryinformationintheaccompanyingfinancialstatementsasofandfortheyearsendedJune30,2014and2013,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 theUnitedStatesofAmerica.Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonable 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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BoardofDirectorsNewMexicoLotteryAuthorityandMr.HectorH.BalderasNewMexicoStateAuditorAccordingly,weexpressnosuchopinion.Anauditalsoincludesevaluatingtheappropriatenessofaccounting policies used and the reasonableness of significant accounting estimates made bymanagement,aswellasevaluatingtheoverallpresentationofthefinancialstatements.Webelieve that theaudit evidencewehaveobtained is sufficient andappropriate toprovideabasisforourauditopinions.OpinionsInouropinion,thefinancialstatementsreferredtoabovepresentfairly, inallmaterialrespects,therespectivefinancialpositionofthebusiness‐typeactivities,andtheaggregateremainingfundinformationoftheLotteryasofJune30,2014and2013,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 June30,2014and2013 inconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica.OtherMattersRequiredSupplementaryInformationAccounting principles generally accepted in the United States of America require thatmanagement’sdiscussionandanalysis,onpages4 through23,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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BoardofDirectorsNewMexicoLotteryAuthorityandMr.HectorH.BalderasNewMexicoStateAuditorOtherInformationOur auditwas conducted for the purpose of forming opinions on the financial statements thatcollectively comprise the Lottery’s basic financial statements. The budgetary comparisonstatements and schedules of percentage return to the State of New Mexico are presented forpurposesofadditionalanalysisandarenotarequiredpartofthebasicfinancialstatements.The budgetary comparison statements and schedules of percentage return to the State ofNewMexicoaretheresponsibilityofmanagementandwerederivedfromandrelatesdirectlytothe underlying 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,NewMexicoOctober6,2014

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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, 2014 and 2013 withcomparativenumbers for the fiscal yearended June30,2012.Please read it in conjunctionwiththefinancialstatements,whichbeginonpage24.FINANCIALHIGHLIGHTS

Attheendoffiscalyears2014and2013,theLottery’stotalcurrentassetsincreasedby$971,072, 6.8%, and $2,677,330, 23.0%, respectively, in comparison to June30th ofeachpreviousfiscalyear.

Compared to the end of the two preceding fiscal years, the Lottery’s total liabilitiesincreasedby$902,613,6.0%attheendoffiscalyear2014andby$3,001,125,25.2%,attheendoffiscalyear2013.

Infiscalyear2014,totalnetticketsaleswere$136,002,604,adecreaseof$5,755,918,(4.1)%, from the prior fiscal year. In fiscal year 2013, total net sales were$141,758,522, an increase of $7,971,170, 6.0%, compared to total net ticket sales of$133,787,352infiscalyear2012.

Fromthepriorfiscalyears,totalgameexpensesdecreasedby$3,441,051,or(3.7)%infiscal year 2014,while total game expenses increased by $5,668,837, 6.5%, in fiscalyear2013.

Totaloperatingexpensesincreasedby3.2%or$160,483infiscalyear2014,whereasoperating expenses decreased by 1.3% or $66,197 in fiscal year 2013, each incomparisontothepreviousfiscalyear.

Non‐operatingincomedecreasedby$14,659,(31.2)%,and$16,917,(26.5)%,infiscalyear2014andfiscalyear2013,respectively,comparedtoeachprecedingfiscalyear.

Net income in fiscal year 2014was $41,208,550, a decrease of $2,476,131, a (5.7)%decrease, compared to the previous fiscal year. Net income in fiscal year 2013was$43,684,681,a$2,355,938or5.7%increaseoverthepreviousfiscalyear’snetincomeof$41,328,743. BeginningJuly1,2007,theLotterywasrequiredbytheNewMexicoLotteryActtotransmitatleasttwenty‐sevenpercentofitsgrossrevenuestotheStateofNewMexicoandthenatleast30%beginninginJanuary2009. Infiscalyear2014,theLotterytransmitted30.09%innetreturntotheState,whileinfiscalyear2013,theLotterytransmitted30.80%innetrevenuestotheState.Ineachofthelasttwofiscalyears,theLotterymetthe30%requiredgrossrevenuereturneachmonth.

IncludingthefinaltransferonJuly31,2014ofJune2014’snetrevenues(netincome);the Lottery has transferred $613,435,077 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 24 and the Statements ofRevenues, Expenses, and Changes in Net Position on page 25 report the Lottery’s assets,liabilities, revenuesandexpenses incomparative format for fiscalyear2014and fiscalyear2013.TheStatementsofCashFlowsonpages26and27reportthesourcesandusesofcashfor fiscal years 2014 and 2013. The Statements of Fiduciary Net Position on page 28 andStatementsofChangesinFiduciaryNetPositiononpage29reportthebalancesandactivityoftheLottery’sRetirementPlanforfiscalyears2014and2013.NotestoFinancialStatements.TheNotestoFinancialStatementsonpages30to49provideadditionalinformationthatisessentialforafullunderstandingofthefinancialstatementsandprovidemoredetaileddata.Budgetary Comparison Statements. The Budgetary Comparison Statements on page 50showthevariancesbetweenthebudgetsandactualLotteryperformance.SchedulesofPercentageReturntotheStateofNewMexico.TheSchedulesofPercentageReturntotheStateofNewMexicoonpage51reportsthepercentagesofgrossrevenuesthatwerereturnedtotheStateofNewMexicoforfiscalyears2014and2013incompliancewiththeNewMexicoLotteryAct.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)–CONTINUEDFINANCIALANALYSISTotalNetPosition

Attheendof fiscalyear2014theLottery’snetpositionwas$267,000,whileattheendoffiscal year 2013 the Lottery’s total assets and total liabilities were equal with total netpositionreducedtozero.TotalAssets

Table1

TotalAssets

2014 2013 2012

Increase(Decrease)$Change2013to2014

Increase(Decrease)%Change2013to2014

Increase$Change2012to2013

Increase%

Change2012to2013

Cashandcash

Equivalents $10,280,672 $9,340,237 $6,885,806 $940,435 10.1% $2,454,431 35.6%

Accountsreceivable,

(netofallowancefor

doubtfulaccounts) 1,326,831 1,371,427 1,225,638 (44,596) (3.3) 145,789 11.9

Reserveson

Deposit 3,431,968 3,405,568 3,396,831 26,400 0.8 8,737 0.3

Inventory 122,891 36,964 33,077 85,927 232.5 3,887 11.8

Prepaidexpenses 108,078 145,172 80,686 (37,094) (25.6) 64,486 79.9

Totalcurrent

Assets 15,270,440 14,299,368 11,622,038 971,072 6.8 2,677,330 23.0

Capitalassets,net 827,886 629,345 305,550 198,541 31.5 323,795 106.0

Totalassets $16,098,326 $14,928,713 $11,927,588 $1,169,613 7.8% $3,001,125 25.2%

Comparedtoeachprior fiscalyear, theLottery’scashandcashequivalents increasedat theendoffiscalyear2014by$940,435or10.1%andinfiscalyear2013by$2,454,431or35.6%,respectively. Thechangesincashandcashequivalentsrelatemainlytochangesinaccountsreceivable,accountspayableandprizespayableattheendofeachfiscalyearcomparedtothepriorfiscalyear.AccountsreceivablefromtheLottery’sretailersarecollectedweeklyeachThursdaythroughelectronicbanktransfers.Receivablesareequaltosalesbyretailersnetofanyprizespaidbythe retailers and any commissions earned, less the allowance for bad debts and plus anymiscellaneousreceivablesfromanyothersource.Accountsreceivabledecreasedby$44,596,(3.3)%,infiscalyear2014,whileaccountsreceivableincreasedby$145,789or11.9%attheendoffiscalyear2013.Thedecreaseinaccountsreceivableattheendoffiscalyear2014is

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MANAGEMENT’SDISCUSSIONANDANALYSIS(UNAUDITED)–CONTINUEDFINANCIALANALYSIS–CONTINUEDTotalAssets‐Continuedpartially due to having highermulti‐draw sales at the end of the fiscal year that were fordrawingsinfiscalyear2015comparedtothemulti‐drawsalesattheendoffiscalyear2013thatwerefordrawingsinfiscalyear2014sales. Thesemulti‐drawsaleswereadjustedintothe fiscal year inwhich the drawingswere held. In fiscal year 2013, this increase can beattributedtohavingeightdaysoftransactionsinaccountsreceivableatyearendcomparedtoonlysevenattheendofthepreviousfiscalyear.TheLotteryhasamountsondepositwith theMulti‐StateLotteryAssociation (MUSL)calledreservesondeposit,asrequiredbythePowerball®(Powerball),HotLotto®(HotLotto),andMega Millions® (Mega Millions) game rules and an unreserved account for payment ofexpensesandtorecordreceiptsofinterestandotherincomeonthedeposits.Thechangesintheseaccountsinbothfiscalyears2014and2013of$26,400and$8,737,respectively,werecaused by the receipts of interest earned and other income on the deposits with MUSL;paymentsofgameexpenses;changestotheMegaMillionsandHotLottoreserveaccounts,asrequired by the Mega Millions and Hot Lotto game rules; and the re‐balancing of 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 theunreservedaccount.Theinventorybalanceattheendofbothfiscalyear2014and2013increasedby$85,927,a232.5% increase, and$3,887, an11.8% increase, respectively. TheLotteryhasagreementssignedinMarch2010,withitsprimaryinstantticketprinter,wherebytheticketsprintedareownedby thevendorwith theLotteryhavinganobligation topay for the ticketswhen thetickets are sold. Therefore, these tickets are not included in the Lottery’s inventory. But,underanagreementsignedwithasecondaryinstantticketprinterinMarch2010,theLotterybeganpurchasing the instant ticketsprintedby thisvendor. TheLotteryhasaccounted forgames printed under this agreement as ticket inventory using the specific identificationmethodat the lowerofcostormarket. At theendofeachof thetwo fiscalyears2014and2013, theLotteryhadremaining inventoryof$65,460and$9,633 forsevengamesandtwogames,respectivelyineachyear,purchasedunderthisagreement. Inaddition,attheendoffiscalyears2014and2013,theLotteryhadinventoryof$2,309and$3,192,respectively,forapromotional instant game purchased. Included in inventory, the Lottery also hadmerchandise prizes at the end of each fiscal year of $55,122 and $24,139, respectively, forsummersecondchancedrawingpromotions.AspartoftheagreementwithINTRALOT,Inc.toprovideanupdatedon‐linegamingsystem,theLotteryinstalledandimplementedanewinternalcontrolsystem(ICS)infiscalyear2009.ThecostoftheICSisincludedinthefixedfeepaidtothevendorasapercentageofnetsales.

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FINANCIALANALYSIS–CONTINUED

TotalAssets–Continued

TheLotteryhasaccountedforthistransactionasacapitalleaseand,therefore,theICScostof$43,600isreflectedincapitalassets.TherelatedliabilityfortheICSisincludedinthecurrentportionofcapitalleaseobligation($6,229atJune30,2014and2013,respectively)andinthenoncurrentportionofcapitalleaseobligation($2,595and$8,823atJune30,2014and2013,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. $7,835 in both fiscal years 2014 and2013, respectively, are included in thecurrentportionofcapitalleaseobligationand$60,724and$68,559forfiscalyears2014and2013,respectively,areincludedinthenoncurrentportionofcapitalleaseobligation.

Thechangesincapitalassetsinfiscalyears2014and2013areattributableto$387,046and$463,188incapitalassetpurchasesand$188,505and$139,393indepreciation,forthetwofiscalyears,respectively.

TotalLiabilitiesTable2

TotalLiabilities

2014 2013 2012



Increase

$Change2012to2013

Increase

%Change2012to2013

Accountspay‐

ableandother

currentliabilities $2,145,418 $1,977,904 $1,955,328 $167,514 8.5% $22,576 1.2%

Currentportion

ofcapitallease

Obligation 14,064 14,064 11,015 ‐ ‐ 3,049 27.7

Prizespayable 10,552,075 9,355,989 6,860,315 1,196,086 12.8 2,495,674 36.4

DuetoLottery

TuitionFund 3,056,450 3,503,374 3,039,205 (446,924) (12.8) 464,169 15.3

Totalcurrent

liabilities 15,768,007 14,851,331 11,865,863 916,676 6.2 2,985,468 25.2

Noncurrentpor‐

tionofcapital

leaseobligation 63,319 77,382 61,725 (14,063) (18.2) 15,657 25.4

Totalliabilities $15,831,326 $14,928,713 $11,927,588 $902,613 6.0% $3,001,125 25.2%

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MANAGEMENT’SDISCUSSIONANDANALYSIS(UNAUDITED)–CONTINUEDFINANCIALANALYSIS–CONTINUEDTotalLiabilities‐ContinuedAccountspayableandothercurrentliabilitiesincreasedby$167,514or8.5%and$22,576or1.2%attheendoffiscalyears2014and2013,respectively.Inbothfiscalyears,thechangescompared to the prior fiscal year were mainly due to amounts owed to five 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 gamedesignsandprizestructuresfordrawgameandinstantgameprizes,therelatedunremittedfederalandstatetaxeswithheldonprizesclaimed,andanyunclaimedprizesintheprizefund.At the end of fiscal years 2014 and 2013, prizes increased by $1,196,086 or 12.8% and$2,495,674or36.4%,respectively. ThesedifferencesrelatetothechangesofprizespayableonindividualLotterygamesbetweenthefiscalyearsasaresultofsalesineachfiscalyearandprizesnotyetclaimed.At the end of fiscal years 2014 and 2013, $3,056,450 and $3,503,274, 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–CONTINUED

NetTicketSalesandPrizeExpenseTable3

NetTicketSalesand

PrizeExpense

2014NetTicketSales

PrizeExpense

GrossMargin

Instanttickets $69,804,813 $39,624,564 $30,180,249

Powerball 34,027,555 16,983,374 17,044,181

MegaMillions 13,410,732 6,704,090 6,706,642

RoadrunnerCash 8,592,684 5,266,316 3,326,368

HotLotto 5,700,311 2,907,024 2,793,287

Pick3 3,828,187 2,208,335 1,619,852

Quicksters 638,322 366,543 271,779

Total $136,002,604 $74,060,246 $61,942,358

2013NetTicketSales

PrizeExpense

GrossMargin

Instanttickets $69,886,435 $40,283,399 $29,603,036

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

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

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

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

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

Quicksters 864,842 475,878 388,964

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

2012NetTicketSales

PrizeExpense

GrossMargin

Instanttickets $68,736,331 $38,273,594 $30,462,737

Powerball 33,767,315 16,897,832 16,869,483

MegaMillions 14,255,730 7,230,117 7,025,613

RoadrunnerCash 7,509,592 4,586,920 2,922,672

HotLotto 5,430,132 2,723,879 2,706,253

Pick3 3,634,804 2,068,225 1,566,579

Quicksters 453,448 246,741 206,707

Total $133,787,352 $72,027,308 $61,760,044$(decrease)fromFY2013toFY2014 $(5,755,918) $(3,008,312) $(2,747,606)

%(decrease)fromFY2013toFY2014 (4.1)% (3.9)% (4.2)%

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

%IncreasefromFY2012toFY2013 6.0% 7.0% 4.7%

Note:Instantticketsalesarenetofticketsprovidedasprizes,stolen,andpromotiontickets;Powerball,MegaMillions,RoadrunnerCash,HotLotto,Pick3andQuickstersalesarenetofspoiledandpromotionaltickets.

11


MANAGEMENT’SDISCUSSIONANDANALYSIS(UNAUDITED)‐CONTINUED

FINANCIALANALYSIS–CONTINUEDNetTicketSalesandPrizeExpense–ContinuedTable 3 compares net ticket sales, prize expense and grossmargin (net ticket salesminusprizeexpense)foreachlotterygameforfiscalyears2014,2013,and2012.Infiscalyear2014netsales,prizeexpenseandgrossmarginincreasedforMegaMillions,RoadrunnerCashandPick3,whilenet sales,prizeexpenseandgrossmargindecreased forPowerball,HotLotto,and Quicksters. In fiscal year 2014, net instant ticket sales and the related prize expensedecreased, but gross margin increased due to the application of unclaimed prizes tosupplementhigherprizepayouts,inanincreasedefforttobringbacklapsedplayers.Thelastquarter of the year reflects a 4.66% growth in net instant sales due to a comprehensivelyplanned instant ticket sales strategy, including using unclaimed prizes to supplement theprizes in instant ticket games, launching instant games on the first Tuesday of themonth,using plans for retailers to place instant tickets into the dispensers and self‐service lotteryterminalsandincreasingthevisibilityofinstantticketsbyusingon‐counterdispensers.In fiscal year 2013 net sales, prize expense and grossmargin increased for Powerball, HotLotto, andQuicksters,while net sales, prize expense and grossmargin decreased forMegaMillions, Roadrunner Cash, and Pick 3. In fiscal year 2013, net sales and prize expenseincreasedforinstantsales,butthegrossmarginfortheyeardecreasedincomparisontothepriorfiscalyear.Thisdecreaseingrossmarginforinstantsaleswastheduetoanincreaseintheoverallpayoutpercentageforinstantticketsfrom57.97%infiscalyear2012to58.94%infiscal year 2013, primarily to bring players back to purchasing instant games and stop thedeclineofinstantsalesoverthepriorsixyears.NetTicketSalesInbothfiscalyears2014and2013,theLotteryhascontinuedtousethecustomerrelationshipmanagement(CRM)systemforplacinginstantgameticketsatretailerlocations.TheLottery’scustomerservicerepresentativescontinuetoplacecallseachweektoeachretailer location,reviewtheinventoryateachlocationwiththeretailer,andplaceorderscontinuallyasneededbasedontheinventoryturnoverateachlocation.Infiscalyear2014,forty‐ninenewinstantticketgameswerelaunched‐13‐$1,10‐$2,10‐$3,10‐$5,5‐$10and1‐$20—3less$1games,4more$3,1more$5and2more$10game than in fiscalyear2013. In fiscalyear2013,forty‐fivenewinstantticketgameswerelaunched‐16‐$1,10‐$2,6‐$3,9‐$5,3‐$10and1‐$20—1more$1,2less$3,1more$5and3more$10gamethaninfiscalyear2012.Infiscal year 2014, the Lottery launched 17 games with free (prize) tickets and 32 gameswithout prize tickets, while in fiscal year 2013, the Lottery launched 22 games with free(prize) tickets and 23 games without free tickets. Net instant ticket sales for 5 months,including the last threemonthsof the year,werehigher than for the comparablemonth infiscalyear2013. Net instantticketsalesfor7months(includingthe lastfivemonthsofthefiscal year) were higher than the comparablemonth in fiscal year 2012. Since fiscal year2007,whennetinstantticketsaleswerearecord$91.37million,netinstantticketsaleshave

12


MANAGEMENT’SDISCUSSIONANDANALYSIS(UNAUDITED)‐CONTINUEDFINANCIALANALYSIS‐CONTINUEDNetTicketSalesandPrizeExpense‐ContinuedNetTicketSales–Continueddecreasedby$21.57millionor anapproximate23.6%drop to $69.80million in fiscal year2014.InJanuary2012,thePowerballgamewaschangedfroma$1pricepointtoa$2pricepoint.Along with this price change, the jackpot now starts at $40 million, up from the previousstartingjackpotof$20million.Thematrixwaschangedfroma5of59and1of39gametoa5of59and1of35game.Twoprizelevelswerechanged;theMatch5+0prizelevelgoingfroma$200,000cashprizetoa$1millioncashprizeandtheMatch0+1goingfroma$3prizetoa$4 prize. The overall odds and the jackpot odds were improved. The Powerplay optionremainedinthegame,butthemultiplieroptionwasdiscontinuedandinsteadincreasedsetprizelevelsareincludedinthePowerPlayoption.Therolldownoptionwaseliminated.Although,Powerballsalesaregenerallydrivenbytheadvertisedjackpot,infiscalyears2014and2013,thechangeinthepricepointandthematrixalsoaffectedthesalesineachyear.Infiscalyear2014,thehighestjackpotwas$448.4millioninAugust2013withanotherjackpotof$425.3millioninFebruary2014.Otherjackpotsreachedto$399.4,$259.8,$213.4,$148.8,$130.3, and $122.9with three other jackpots thatwere less than $100millionwhenwon.Whilethreejackpotssurpassedorwerenearly$400millionwhenwon,nothavingthe“superjackpots” of nearly six hundredmillion dollars caused sales in fiscal year 2014 to be over$12.7millionlessthaninfiscalyear2013.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 $300 million mark helped Powerball achieve net sales that were 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,Powerballnetsaleshavedecreased. Playerswanting largerand larger jackpotsbeforetheybuyticketshaveaffectedPowerballsaleseachyear.

13


MANAGEMENT’SDISCUSSIONANDANALYSIS(UNAUDITED)‐CONTINUEDFINANCIALANALYSIS‐CONTINUEDNetTicketSalesandPrizeExpense–ContinuedNetTicketSales–ContinuedMegaMillions’ salesarealsodrivenby the jackpotamount. In fiscalyear2014, thehighestjackpotforMegaMillionswas$648millionatthetimeitwaswoninDecember2013followedbya$414millionjackpotinMarch2014. Therewerealsotwojackpotsof$190millionand$150millionand8jackpotsoflessthan$80million.TheDecember2013jackpotbroughtinapproximatelyfourmilliondollarsofincrementalsalesduringthelastfewdrawingswhilethejackpot was growing. Due to the large jackpots, Mega Millions closed the year with $5.3millioninnetsalesoverthepriorfiscalyear;a66%increaseinnetsales.Infiscalyear2013,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 millionwhen they were won. Six jackpots were won at amounts less than $100 million. The$656million jackpot helped to increase sales in March 2012 by over five million dollars.Although, Mega Millions had a higher jackpot in fiscal year 2012 than Powerball,MegaMillions averagemonthly sales,without the $656million run‐up spike, averaged lessthan$800,000permonth,whilePowerball’saveragesales,withoutrun‐upspikes,wereover$2.5millionpermonth.SimilartothePowerballandMegaMillionsgames,RoadrunnerCashsalesaredrivenbythejackpot(top)prizeamount.Infiscalyear2014,RoadrunnerCashhadarecordsettingjackpotof$890,000.Duringthatmonth,RoadrunnerCashsalesgrewbyapproximately$1.5million.Therewasalsoonejackpotthatroseto$385,000andanotherjackpotthatroseto$307,000withtwoother jackpotsgrowingto$265,000and$220,000beforebeingwon; twelveotherjackpotswere$160,000orless.Fiscalyear2014endedwithRoadrunnerCashnetsalesbeing$1.8milliondollarsmorethanthepriorfiscalyear.In fiscal year 2013, the Roadrunner Cash jackpot rose to $320,000 in August 2012 and to$430,000 inDecember2012,plus twoother timesduring theyear to jackpotsgreater than$150,000.Sixteenotherjackpotswerelessthan$150,000beforebeingwonduringthefiscalyear.Infiscalyear2012,thejackpotclimbedseventimestomorethan$150,000climbingto$420,000and$550,000inAugust2011andinMarch2012,respectively.Thesedifferencesinthetopprizesreflectedonthenetsalesinthesetwofiscalyearswithfiscalyear2013’ssalebeinglowerthaninthepreviousfiscalyear—a9.9%declineinnetsales.

14


MANAGEMENT’SDISCUSSIONANDANALYSIS(UNAUDITED)‐CONTINUEDFINANCIALANALYSIS‐CONTINUEDNetTicketSalesandPrizeExpense–ContinuedNetTicketSales–ContinuedTheMUSLgame,HotLotto, isanothersmallernational jackpotgameofferedbytheLottery.Sales for thisgamealso trackwith the jackpot. Fiscalyear2014startedwiththeHotLottojackpotatapproximately$6.9million. The jackpotgrewuntil itwaswonbyaNewMexicoLotteryplayeronAugust3,2013when itwas$7.3million. Following thiswin, the jackpotclimbedtonearly$2millionwhenitwaswoninOctoberandthenbeginclimbingagainatthattime,endingtheyearatjustover$8.1million.Infiscalyear2013,HotLottostartedfiscalyearwithajackpotofjustover$1millionandgrewto$1.4millionbeforebeingwoninJuly2012.Itthenclimbedto$9.4millioninJanuarybeforeitwaswon. Thejackpotthencontinuedtorise from $1million until year end,where it ended the year at nearly $6.9million. Thesechangingjackpotsreflectonnetsalesduringeachfiscalyear.Pick3net sales increased in fiscal year2013by$335,271. In early June2014, theLotteryaddedamid‐daydrawing.Thismid‐daydrawingprovidedsalesofapproximately$4,700foreachmid‐daydrawandprovidednearly$90,000inadditionalsalesinJune2014.Pick3netsalesinfiscalyear2013decreasedby$141,889or3.9%.Pick3remainsacoregamefortheLotterybringinginsteadymonthlyaveragenetsalesofover$300,000eachmonth.Anewgame,Quicksters,wasstartedonMarch25,2012. Quickstersareinstant‐wingames,similar to instant ticket games, but produced by the same lottery sales terminals as drawgameticketsandwithnoscratchingneededtorevealtheprizes.ThefirstgameofferedwasSuper7s.Thisgameprovided$453,448innetsalesforfiscalyear2012.Infiscalyear2013,fivenewQuickstergameswereaddedproducing$864,842innetsalesforthefiscalyear.Infiscalyear2014,Quicksternetsaleswere$638,000.PrizeExpensePrizeexpenseforthedrawgamesofPowerball,MegaMillionsandHotLottoisbasedontheoverall prizepayoutper thegamedesign,whileprize expense forRoadrunnerCash,Pick3andQuicksters isdeterminedbytheprizeswoneachmonthforeachdrawingorgame.Theprizesincludedintheprizestructureforeachinstantgameprinteddetermineprizeexpenseforinstantgames.Ingeneral,prizeexpenseincreasesordecreasesfromyear‐to‐yearrelativetotheincreasesordecreasesinsalesforeachLotteryproductandtheprizestructuresofthegames.

15


MANAGEMENT’SDISCUSSIONANDANALYSIS(UNAUDITED)‐CONTINUEDFINANCIALANALYSIS–CONTINUEDNetTicketSalesandPrizeExpense–ContinuedPrizeExpense‐ContinuedInfiscalyears2014and2013,theprizepayoutincreasedbyapproximately1.09%and.12%,respectively,priortotheapplicationofunclaimedprizes.

Attheendoftheclaimperiodforeachgame,unclaimedprizesfortheLottery’sinstantgamesanddrawgamesarepaid intothe“PrizeFund,” inaccordancewiththeNewMexicoLotteryAct.TheseunclaimedprizesfromtheLottery’sprizefundhavebeenusedtosupplementtheprizesininstantanddrawgamesandforsecondchancedrawingsand,therefore,reducetheprizeexpenseforLotteryproductsandhelptheLotterytomaximizeitssalesanditsreturntoeducation.PrizeTicketsIn fiscal years2014and2013, ticketsprovided asprizes (prize or free tickets) claimed forinstant games decreased by $383,110 or 15.45% and $411,456 or 14.23%, respectively, incomparisontothepreviousfiscalyears.Prizeticketsareplacedintheprizestructureofthegameinlieuofthebreakevenprizes.Prizeticketsgiveaplayeraprizeofanotherinstantgameticketofthesamepricepointastheinstantticketthathadthewinningprizeticket.Eachfiscalyear, the Lottery has continued to study themarket to determine the optimumquantity ofprizeticketstoplaceinitsinstantticketgamesinordertooptimizeitsinstantticketsales.

16


MANAGEMENT’SDISCUSSIONANDANALYSIS(UNAUDITED)‐CONTINUED

FINANCIALANALYSIS–CONTINUEDGameExpenses

Table4

GameExpenses

2014 2013 2012





Prizeexpense $74,060,246 $77,068,558 $72,027,308 $(3,008,312) (3.9)% $5,041,250 7.0%

Retailer

commissions 8,782,855 9,153,204 8,696,851 (370,349) (4.0) 456,353 5.2

Advertising 2,267,772 2,263,221 2,277,892 4,551 0.2 (14,671) (0.6)

On‐linevendor

fees 2,177,205 2,269,623 2,139,754 (92,418) (4.1) 129,869 6.1

Ticketvendor

fees 1,188,107 1,158,028 1,177,708 30,079 2.6 (19,680) (1.7)

Othergame

expenses 1,132,149 1,136,751 1,061,035 (4,602) (0.4) 75,716 7.1

Totalgame

expenses $89,608,334 $93,049,385 $87,380,548 $(3,441,051) (3.7)% $5,668,837 6.5%

Thechanges inretailercommissions for fiscalyears2014and2013areconsistentwith thechangesingrossticketsalesforthetwoyearsandareequivalentto6.46%and6.45%ofgrossrevenues for the two years, respectively. Retailer commissions are paid to the Lottery’sretailersforsellingLotterytickets,cashingLotteryprizesandforsellingajackpot/grandprizeforPowerball,MegaMillionsorHotLotto, forsellingamatch5prizeforPowerballorMegaMillions,andforsellingajackpotprizeofmorethan$100,000forRoadrunnerCash.SinceNovember21,2008,theon‐linevendorfeehasbeenafixedpercentageofnetsales,plusapplicablegrossreceiptstaxes,withnoadditionalterminalfees.Theon‐linefeeincreasesordecreasesasdrawgameandinstantticketnetsalesincreaseordecrease.Thechangesintheon‐linevendorfeesforthetwofiscalyearsareconsistentwiththechangesindrawgameandinstant ticketnet sales in fiscal years 2014and2013and are equivalent to 1.60%of grossrevenuesforthetwoyears.

17


MANAGEMENT’SDISCUSSIONANDANALYSIS(UNAUDITED)–CONTINUEDFINANCIALANALYSIS–CONTINUEDGameExpenses‐ContinuedAdvertisingmoney is expended tomarket theLotteryand itsproducts to thepublic and toinformthepublicabout thegames thatareavailable, the jackpotandtopprizeamounts forthedrawgames,toprovidesecuritytipsandgamblingawarenessforourplayersandbenefitmessagestoNewMexicostudentsandtheirfamilies,andtokeepthelotteryproductsfreshinthe public’sminds, all in order tomaximize sales. Advertising expensewas approximately1.67%and1.60%ofgrossrevenues,respectively,forfiscalyears2014and2013andstayedwithintheLotteryBoardapprovedbudgetsof$2,300,000foreachfiscalyear.Infiscalyears2010theLotterysignedanewcontractwithitsprimaryticketprintereffectiveinMarchofthatyear. Underthiscontract,theinstantticketsareownedbythevendorwiththeLotteryexpensingthecosttoticketvendorfeesandpayingfortheticketsasapercentageofnetinstantsaleswhentheticketsaresold.Inaddition,inMarch2010,theLotterysignedacontract with a secondary printer, whereby the Lottery would be purchasing the ticketsprinted.Theseticketsareincludedininventorywiththecostoftheticketsbeingrecordedasticketvendorfeesastheticketsareconsignedtoretailers.Infiscalyear2014and2013,thecostforanylicensingfeesorspecialprintingcostsarealsoincludedinticketvendorfees.Theticketvendor fees forboth fiscalyear2014and2013are .87%and .82%ofgrossrevenuesandareconsistentwithnetinstantticketsalesforeachfiscalyear.Included inothergameexpensesareretailerequipment, shippingandpostage,promotions,drawinggame,responsiblegaming,andgamemembershipexpenses.Fiscalyear2014reflectsadecreaseof$4,602or(0.4)%,whilefiscalyear2013reflectsanincreaseof$75,716or7.1%.Infiscalyear2014,thischangeisprimarilyduetoachievingsavingsinthecostofshippingofinstantgamestoretailers;savingsinthecostofresponsiblegaming,gamemembershipanddrawinggameexpensesoffsetbythecosttopurchasemorecosteffectiveelectronic jackpotsigns to replace eight year old signs at retailer locations. The new signs will have nocommunication costs and will replace signs that have cost over $25,000 in annualcommunicationexpense.Infiscalyear2013,theincreasewaspartiallyduetothepurchaseoflottery informationcenters toenable theLottery toreplace theagingequipmentatsomeofthe lottery’s retailers and an increase in shipping and postage due to shipping additionalinstantticketstolotteryretailers,offsetbyadecreaseintheamountsspentformarketingandsalespromotions,forpremiumitemsandforotherretailerequipment.

18



FINANCIALANALYSIS–CONTINUEDOperatingExpenses

Table5

OperatingExpenses

2014 2013 2012





Salaries,wages,

andbenefits $3,726,941 $3,614,032 $3,583,778 $112,909 3.1% $30,254 0.8%

Utilitiesand

maintenance 448,166 439,041 431,189 9,125 2.1 7,852 1.8

Leasesand

Insurance 423,932 514,990 585,629 (91,058) (17.7) (70,639) (12.1)

Otheroperating

Expenses 641,491 511,984 545,648 129,507 25.3 (33,664) (6.2)

Totaloperating

expenses $5,240,530 $5,080,047 $5,146,244 $160,483 3.2% $(66,197) (1.3)%

Operating expenses aremade up of salaries,wages and benefits, utilities andmaintenance,leases and insurance, and other operating expenses, which include depreciation andamortization, professional fees,materials and supplies, travel, and other expenses. In fiscalyear 2014, the Lottery’s operating expenses increased by $160,483 or 3.2%,while in fiscalyear2013,theLotterydecreaseditsoperatingexpensesby$66,197or(1.3)%.

In fiscal year 2014, salaries,wages and benefits increased due to the $165,000 contractualseverance payments for the former CEO, whose contract was terminated and increases inprofessional fees and depreciation for replacement equipment. These costswere offset bycostsavingsonthenewleaseofover$90,000.

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

19



FINANCIALANALYSIS‐CONTINUEDOperatingExpenses–continuedNon‐OperatingIncomeNon‐operatingincomedecreasedinbothfiscalyears2014and2013.Interestratescontinueto be lowduring both fiscal years. No significant other incomewas received in fiscal year2014. For fiscal year 2013, other income decreased compared to fiscal year 2012, whereliquidateddamageshadbeenreceivedonaLotterycontract.NetIncome

TotalOperatingRevenues NetIncome

FiscalYear2014 $136,025,057 $41,208,550

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

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

(Decrease)fromFY2013toFY2014 $(5,742,040) $(2,476,131)

%(Decrease)fromFY2013toFY2014 (4.1)% (5.7)%

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

%IncreasefromFY2012toFY2013 6.0% 5.7%

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 2014 and 2013, the Lottery transmitted its net incomeeach month, totaling $40,941,550 and $43,684,681, respectively. The gross revenuepercentagereturnforfiscalyear2014was30.09%,whileforfiscalyear2013,itwas30.80%.TheLotterywasabletomeetthe30%grossrevenuepercentagereturnseachmonthinbothfiscalyears.Thechangesinnetincomeforfiscalyears2014and2013wererelatedtothechangesinsalesfortheLottery’sgamesduringthetwoyearsnettedagainstsavingsinthecostoftheproductandoperatingexpensesduringthetwofiscalyears.

20



FINANCIALANALYSIS–CONTINUEDNetIncome‐ContinuedInadditiontothechangesthathadbeenmadeinfiscalyear2008ofreducingstaffing,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 togrossrevenuesofover3.1%inbothfiscalyear2014and2013comparedtofiscalyear2008.Inaddition,theLotteryhascontinuedtorealizeasavingsoninstantticketprintingfeesyearoveryearsince2010basedoncontractsthatweresignedwithtwovendorsinthatyear. Inaddition,in2012anewleasewasnegotiatedandsignedwhereoverhalf‐a‐milliondollarswillbesavedoverthetermofthelease.

21



FINANCIALANALYSIS–CONTINUEDBudgetaryComparison

2014

OriginalBudget

FinalBudget Actual

VariancewithFinalBudget

%VariancewithFinalBudget

Totaloperatingrevenues $131,400,000 $135,303,000 $136,025,057 $722,057 0.5%

Totalgameexpenses 86,280,000 89,031,000 89,608,334 577,334 0.6

Totaloperatingexpenses 5,716,000 5,698,000 5,240,530 (457,470) (8.0)

Operatingincome 39,404,000 40,574,000 41,176,193 602,193 1.5

Totalnon‐operatingincome 24,000 25,000 32,357 7,357 29.4

Netincomebefore

transfersto

LotteryTuitionFund $39,428,000 $40,599,000 $41,208,550 $609,550 1.5%

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%

22


MANAGEMENT’SDISCUSSIONANDANALYSIS(UNAUDITED)‐CONTINUEDFINANCIALANALYSIS‐CONTINUEDBudgetaryComparison–Continued

Infiscalyear2014,theoriginalbudgetwasrevisedbecauseMegaMillions,RoadrunnerCashandPick3 saleswereperformingbetter than forecastand thussales for thesegameswereincreased.Instant,HotLotto,andQuickstersaleswerereducedbecauseofpoorperformanceduring the first half of the fiscal year. Powerball was left at the same budget amount inanticipationofa jackpot run‐up in the fewmonthsof the fiscalyear. Thesalesbudgetwasincreasedby$3,903,000,whichwasmadeupofa$4.0million increase forMegaMillions,a$1.6million increase for Roadrunner Cash, and a $300,000 increase for Pick 3 offset by adecrease of $1.5million for instants, a decrease of $500,000 forHot Lotto, and a $400,000decreaseforQuicksters,alongwithadecreaseof$400,000forticketsprovidedforprizes,a$1,000increasetospoiled,stolen,andpromotionaltickets,anda$4,000increaseforretailerfees. Gameexpensesremainedatapproximately65%ofthebudgetandoperatingexpenseswerereducedby$18,000.Withthesechanges,netincomewasincreasedby$1,171,000;stillremainingat30%.Infiscalyear2014,actualnetsalesexceededtherevisedbudgetbymorethan$691,000.Netinstant saleswere$2.0millionmore than the revisedbudgetandMegaMillions saleswere$1.4millionmorethantherevisedbudget.RoadrunnerCash,HotLotto,Pick3andQuicksterssuperseded the revisedbudgetby $202,000, $707,000, $134,000and$40,000, respectively.But,Powerballsaleswerelessthantherevisedbudgetbyover$3.8million.Totaloperatingrevenuesended theyearat100.53%of therevisedbudget;gameexpensesended the fiscalyear at 100.65% of the revised budget, tracking right in line with operating revenues.Operatingexpensesendedtheyearat91.97%oftherevisedbudget,withallbudgetlineitemsfinishing the year at less than the revised budget; in total less than the revised budget by$457,470.NetreturntotheLegislativeLotteryScholarshipfundwas$342,550morethantherevisedbudgetamountat100.84%ofbudget;generatingreturnof30%ofgrossrevenues.In 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.

23


MANAGEMENT’SDISCUSSIONANDANALYSIS(UNAUDITED)–CONTINUEDFINANCIALANALYSIS‐CONTINUEDBudgetaryComparison‐ContinuedIn fiscal year2013, actual net sales for Instant tickets,Powerball,MegaMillions,Hot Lotto,Pick 3, and Quicksters all surpassed the projected net sales in the final budget with onlyRoadrunnerCashnotmeetingthebudgetbylessthan$25,000.Actualnetsalesexceededthebudgetbynearly$9.2millionandduetohighersales,relatedgameexpenseswerealsomorethanthebudgetbynearly$5.7million.Therewasanadditionalcostsavingsintheoperatingexpenses of over $250,000 and an additional amount earned in non‐operating income of$23,000 in comparison to the final budget. The Lottery ended the year with net incomesurpassingthefinalbudgetby$3,749,681;endingtheyearat109.39%ofthefinalbudget.RequestsforAdditionalFinancialInformationThisfinancialreportisdesignedtoprovidetheexecutiveandlegislativebranchesoftheStateof NewMexico, the public, the Lottery’s retailers, vendors, creditors, and other interestedpartieswithageneraloverviewofthefinancialpositionoftheLotteryasofJune30,2014and2013,andresultsofitsoperations,cashflows,variancesfrombudgets,andpercentagereturntothestatefortheyearsthenendedandtodemonstratetheLottery’saccountabilityfortherevenues it receives. If you have any questions about this report or need additionalinformation,contacttheDirectorofAdministrationattheNewMexicoLotteryAuthority,P.O.Box93130,Albuquerque,NewMexico87199.

24


STATEMENTSOFNETPOSITION

June30,2014and2013

2014 2013CURRENTASSETSCashandcashequivalents $10,280,672 $9,340,237

Accountsreceivable(netofallowancefordoubtfulaccounts) 1,326,831 1,371,427

Reservesondeposit 3,431,968 3,405,568Inventory 122,891 36,964Prepaidexpenses 108,078 145,172

Totalcurrentassets 15,270,440 14,299,368

CAPITALASSETS,NET 827,886 629,345

Totalassets $16,098,326 $14,928,713

CURRENTLIABILITIESAccountspayableandothercurrentliabilities $2,145,418 $1,977,904Currentportionofcapitalleaseobligation 14,064 14,064Prizespayable 10,552,075 9,355,989DuetoLotteryTuitionFund 3,056,450 3,503,374

Totalcurrentliabilities 15,768,007 14,851,331

LONG‐TERMLIABILITIESNoncurrentportionofcapitalleaseobligation 63,319 77,382

Totalliabilities $15,831,326 $14,928,713

NETPOSITIONNetinvestmentincapitalassets $827,886 $629,345Unrestricted(deficit) (560,886) (629,345)

Totalnetposition $267,000 $‐

Theaccompanyingnotesareanintegralpartofthesefinancialstatements.

25


STATEMENTSOFREVENUES,EXPENSES,ANDCHANGESINNETPOSITION

YearsendedJune30,2014and2013

2014 2013OPERATINGREVENUES

Instantticketsales $69,804,813 $69,886,435Powerballsales 34,027,555 46,734,439MegaMillionssales 13,410,732 8,078,050RoadrunnerCashsales 8,592,684 6,767,906HotLottosales 5,700,311 5,933,935Pick3sales 3,828,187 3,492,915Quickstersales 638,322 864,842

Netticketsales 136,002,604 141,758,522

Retailerfees 22,453 20,575Baddebts ‐ (12,000)

Totaloperatingrevenues 136,025,057 141,767,097

GAMEEXPENSESPrizeexpense 74,060,246 77,068,558Retailercommissions 8,782,855 9,153,204Advertising 2,267,772 2,263,221On‐linevendorfees 2,177,205 2,269,623Ticketvendorfees 1,188,107 1,158,028Retailerequipment 345,786 201,436Shippingandpostage 335,679 428,532Promotions 221,036 236,268Drawinggame 102,880 116,081Responsiblegaming 83,050 87,400Gamemembership 43,718 67,034

Totalgameexpenses 89,608,334 93,049,385

OPERATINGEXPENSESSalaries,wages,andbenefits 3,726,941 3,614,032Utilitiesandmaintenance 448,166 439,041Leasesandinsurance 423,932 514,990Depreciation 188,505 139,393Professionalfees 186,035 112,893Materialsandsupplies 135,260 125,050Other 69,711 71,640Travel 61,980 63,008

Totaloperatingexpenses 5,240,530 5,080,047

OPERATINGINCOME 41,176,193 43,637,665

NON‐OPERATINGINCOMEInterestincome 18,753 21,324Otherincome 13,604 25,692

Totalnon‐operatingincome 32,357 47,016

Netincomebeforetransfers 41,208,550 43,684,681

TransferstoLotteryTuitionFund 40,941,550 43,684,681

Changeinnetposition 267,000 ‐

Netpositionatbeginningofyear ‐ ‐

Netpositionatendofyear $267,000 $‐


26


STATEMENTSOFCASHFLOWS


Increase(Decrease)inCashandCashEquivalents

2014 2013 Cash flows from operating activities

Cash received: From retailers-sales net of commissions, incentives,

and prize, spoiled, and stolen ticket credits $ 127,279,025 $ 132,472,895 From MUSL - Hot Lotto jackpot 10,992,481 -

Cash payments: To prize winners and related taxes (68,225,640) (58,375,753)To MUSL (15,631,001) (16,197,131)To suppliers of goods or services (8,748,786) (9,058,917)To employees for services and related taxes (3,027,629) (2,880,565)

Net cash provided by operating activities 42,638,450 45,960,529

Cash flows from investing activities Receipts of interest 12,319 10,254 Other 682 367

Net cash provided by investing activities 13,001 10,621

Cash flows from noncapital financing activities Transfers to Lottery Tuition Fund (41,388,474) (43,220,512)

Cash flows from capital and related financing activities Purchases of capital assets (308,479) (284,938) Principal payments under capital lease (14,063) (11,269)

Net cash used by capital and related financing (322,542) (296,207) activities

NET INCREASE IN CASH AND CASH EQUIVALENTS 940,435 2,454,431

Cash and cash equivalents at beginning of year 9,340,237 6,885,806

Cash and cash equivalents at end of year $ 10,280,672 $ 9,340,237


27


STATEMENTSOFCASHFLOWS‐CONTINUED


Increase(Decrease)inCashandCashEquivalents

2014 2013 Reconciliation of operating income to net cash

provided by operating activities Operating income $ 41,176,193 $ 43,637,665 Adjustments to reconcile operating income to net

cash provided by operating activities Depreciation 188,505 139,393 Vendor's non-cash transactions (54,357) (119,759) Interest on MUSL unreserved account 2,919 3,088

Net changes in assets and liabilities: Accounts receivable 36,823 (140,998) Reserves on deposit (26,400) (8,737) Inventory (85,927) (3,887) Prepaid expenses 37,094 (64,486) Accounts payable and other liabilities 167,514 22,576 Prizes payable 1,196,086 2,495,674

Net cash provided by operating activities $ 42,638,450 $ 45,960,529


28


STATEMENTSOFFIDUCIARYNETPOSITION

June30,2014and2013

2014 2013ASSETSCashandcashequivalents $669,043 $500,847Marketablesecuritiesandotherinvestments 4,683,748 4,259,724Contributionreceivable 8,423 8,121

Totalassets $5,361,214 $4,768,692

NETPOSITIONPensionplanparticipants'benefits $5,361,214 $4,768,692


29


STATEMENTSOFCHANGESINFIDUCIARYNETPOSITION


2014 2013ADDITIONSInvestmentearnings $885,971 $559,478Employercontributions 344,457 344,578

Totaladditions 1,230,428 904,056

DEDUCTIONSDistributionstoparticipants 637,906 203,727

Totaldeductions 637,906 203,727

Changeinnetposition 592,522 700,329

Netposition‐beginning 4,768,692 4,068,363

Netposition‐ending $5,361,214 $4,768,692


30


NOTESTOFINANCIALSTATEMENTS

June30,2014and2013NOTEA‐SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES1. ReportingEntityThe financial reporting entity as defined by Governmental Accounting Standards Board(GASB) Statement 14 (as amended by GASB Statement 61) consists of the primarygovernment,organizationsforwhichtheprimarygovernmentisfinanciallyaccountable,andother organizations for which the nature and significance of their relationship with theprimary government are such that exclusion would cause the reporting entity’s financialstatementstobemisleading.Thisdefinitionofthereportingentityisbasedprimarilyonthenotionoffinancialaccountabilityasthe“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.The Lottery commenced sales of instant tickets onApril 27, 1996, and sales of draw gameticketsonOctober20,1996.2. 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.

31


NOTESTOFINANCIALSTATEMENTS‐CONTINUED

June30,2014and2013NOTEA‐SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES‐CONTINUED2. BasisofPresentation–ContinuedAFiduciaryFundisusedtoaccountforassetsheldinatrusteecapacityforLotteryemployees.TheLottery’sonlyfiduciaryfundisapensiontrustfund.ThepensiontrustfundperStatementsofFiduciaryNetPositionandStatementsofChangesinFiduciaryNetPositionandNoteDreflectstheactivitiesoftheNewMexicoLotteryAuthorityRetirementPlan(Plan)pursuanttoatrustagreementwithWellsFargobank.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.TheprincipaloperatingrevenuesoftheLotteryaresalesofinstantanddrawgametickets.TheLotteryalsorecognizesretailerfees for connecting new retailers to the system as operating revenues. Operating expensesincludethecostsrelatedtosales,administrativeexpensesrequiredtomanageandoperatetheLottery, and depreciation on capital assets. All revenues and expenses not meeting thisdefinitionarereportedasnon‐operatingrevenuesandexpenses.Whenanexpenseisincurredthatcanbepaidusingeitherrestrictedorunrestrictedresources,the Lottery’s policy is to first apply the expense toward unrestricted resources and thentowardrestrictedresources.Attheendoffiscalyears2014and2013therewerenorestrictedresources.3. BudgetsandBudgetaryAccountingEachyearLotterymanagementpreparesabudgetinconformitywithGAAPforthesucceedingfiscalyear.TheLottery’sbudgetisnotlegallybinding.ThebudgetispresentedbymanagementtotheLottery’sboardofdirectorsforreview,amendment,andapprovalpriortothebeginningofthenextfiscalyear.AnyrevisionstothisbudgetduringthefiscalyearareapprovedbytheLottery’sboardofdirectors.TheLottery’s financial statementsarereviewedateachregularboardofdirectors’meeting.Performanceinrelationtothebudgetispresentedanddiscussedduringthesemeetings.4. CashandCashEquivalentsFor the purposes of the Statements of Cash Flows, the Lottery considers cash and cashequivalentstobecashonhand,demanddeposits,timedepositswithanoriginalmaturityofninetydaysorless,andovernightrepurchaseagreements.

32



June30,2014and2013NOTEA‐SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES–CONTINUED

5. AccountsReceivable

Accounts receivable represent the unremitted receipts on ticket sales, net of retailercommissionsandprizespaidbytheretailers.ReceiptsaretransferredweeklyfromretailerbankaccountstotheLottery.Creditlossesrelatingtocontractedretailershavebeenwithinmanagementexpectations.Generally, collateral isnot requiredonreceivables.At June30,2014and2013, anallowance fordoubtful accountsof $34,315and$36,165, respectively,hasbeenprovidedtorecognizefutureuncollectiblebillings.Infiscalyears2014and2013,tenretailcustomers(503and477retailerlocations)represented60%and58%ofsalesforeachyear,respectively,and62%and59%ofaccountsreceivableforeachyear,respectively.6. ReservesonDeposit

The Lottery is a member of the Multi‐State Lottery Association (MUSL), which operatesgames on behalf of participating lotteries. MUSL currently operates the POWERBALL®(Powerball), Hot Lotto® (Hot Lotto) andMega Millions® (MegaMillions) games for theLottery.TheLotterysellsPowerball,HotLottoandMegaMillionsgameticketsthroughitsretailersandmakesweeklywiretransferstoMUSLinanamountequivalenttothememberlottery’s shareof theestimatedgrandprize liability foreachgame.Lesserprizesarepaiddirectlytothewinnersbyeachmemberlottery.TheprizepoolsforPowerballandHotLottoare50%ofeachgame’sdrawingperiod’ssalesaftertheprizereserveaccountsarefundedtotheamountssetbytheMUSLproductgroup. Theprizepool forMegaMillions isupto55% of each drawing period’s sales after the prize reserve accounts are funded to theamounts set by the MUSL product group, but may be higher or lower based upon thenumberofwinnersateachprizelevel.

MUSLhasestablishedprizereserveaccountsforthegamesitoperates.TheseprizereserveaccountsarefundedoutoftheprizepoolsforthegamesuntiltheaccountsreachamountssetbytheMUSLproductgroupsforeachgame.Oncetheprizereservefundsexceedthesedesignatedmaximums,theexcessbecomespartofthegrandprizepool.Theprizereservefunds serve as contingency reserves to protect MUSL and the party lotteries fromunforeseenprize liabilities. Themoney in thesereserve funds isusedat thediscretionoftheMUSLBoardofDirectors.TheprizereservefundsarerefundabletoMUSLmembersifMUSL disbands, a member leaves MUSL, or a game is discontinued. In these instances,membersmust wait one year before receiving their remaining share, if any, of the prizereserve funds. Theprize reserve accountsmayalsobe carried forward to a replacementgame’sprizereserveaccount.

AsofOctober1,2014,thePowerballprizereservedeductionissettobeginattwopercent(2%)whentheannuityjackpot,asdeterminedaftersalesareknown,exceeds$120million,and four percent (4%) when the annuity jackpot, as determined after sales are known,exceeds $250 million. Prior to this time, MUSL included 2% of the Lottery’s Powerball

33



June30,2014and2013

NOTEA‐SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES‐CONTINUED6. ReservesonDeposit‐Continueddrawingperiod’ssalesintwoprizereserveaccounts,thePowerballPrizeReserveAccount(PRA)andtheSetPrizeReserveAccount(SPRA),untiltheLottery’sshareinboththePRAandSPRAwere fully funded. Themaximumamountsdesignatedby theMUSLPowerballproduct group for thePRA is $80million and for the SPRA is $40million for allmemberlotteries. At June 30, 2014 and 2013, the Lottery’s share in the Powerball PRA was$1,150,023 and $1,150,604, respectively, and in the SPRA was $500,010 and $554,595,respectively. BothPowerballreservefundswerefullyfundedattheendofJune2014and2013,respectively.

MUSLincludesupto3%oftheLottery’sHotLottodrawingperiod’ssales,dependingontheannuitizedvalueoftheGrandPrize,intoaPrizeReserveAccount(PRA).TheMUSLproductgroup has set the maximum Hot Lotto PRA balance at nine million dollars for all partylotteries.AtJune30,2014and2013,theLottery’sshareintheHotLottoPRAwas$655,418and$735,241,respectively.TheHotLottoPRAwasfullyfundedattheendofJune2014and2013,respectively.

TheLotterycommencedsalesofMegaMillionsticketsonJanuary31,2010.MUSLincludesanadditionalamountupto5%oftheLottery’sMegaMillionsdrawingperiod’ssalesintotheMegaMillionsPrizeReserveAccount(PRA).AsofMarch22,2013,theMUSLproductgroupset themaximumPRAbalanceat$45million forallparty lotteries. At June30,2014and20123 the Lottery’s share in the Mega Millions PRA was $514,756 and $409,688,respectively. TheLottery’sremainingMegaMillionsprizereservewas fully fundedat theendofJune2014;thebuy‐inamountforJune30,2013was$114,165.

TheLotteryalsohasanunreservedfundwithMUSL.InterestearnedontheMUSLfundsandany unclaimed grand prizes may be deposited into the unreserved fund and gamemembershipfeesandotherMUSLcostsmaybepaidfromthis fund.At June30,2014and2013,theLottery’sshareoftheunreservedfundwas$611,761and$555,440,respectively.

AwinnerofaPowerballgrandprizeorMegaMillionsgrandprizemayselectthattheprizebe paid at the cash value of the prize or as an annuity. For both, Powerball and MegaMillions, thegrandprize annuity ispaidout in30graduatedannual installmentsover29years. Government securities at the discounted value of the grand prize annuity arepurchasedtofundallfutureinstallmentsandareheldintrust.Maturitiesarestaggeredinordertoprovideadequatecashflowforeachannual installment.TheseassetsandrelatedliabilitiesarereflectedinMUSL’sfinancialstatementsandthereforearenotreflectedintheLottery’sfinancialstatements.MUSLisresponsiblefortransferringthecashortheannuityinstallmentamountstothememberlotterypriortothepaymenttoanygrandprizewinner.Currently,theLotteryisnotpayinganyprizewinneranyannuityprizepayments.

34



June30,2014and2013NOTEA‐SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES‐CONTINUED6. ReservesonDeposit–ContinuedAsofMay12,2013,theHotLottoadvertisedgrandprizeispaidasawithholdingstaxespaidsingle, cash payment prize where the estimated advertised grand prize is grossed up toincludefederalandstatetaxwithholdingsandtheprizewinnerreceivesthenetprizeaftertaxwithholdings. PriortoMay12,2013,aHotLottograndprizewaspaidoutatthecashvalueoftheprizeorasanannuitypaidoutin25annualinstallments.

7. InventoryIn March 2010, the Lottery entered into an agreement with its primary instant ticketprinter, whereby the printer retains title to the instant ticket inventory until the instantticketsaresold.Under thisagreement, theLotterypays thevendora feebasedona fixedpercentageof thenet instant ticketssold;net instantticketssoldrepresents instant ticketsales less prize, spoiled, stolen, and promotional tickets. In addition, inMarch 2010, theLotterysignedanagreementwitha secondary instant ticketprinter,whereby theLotterypurchasesandowns the ticketsprinted. These ticketsare carriedat the lowerof costormarketusingthespecificidentificationmethod. Attheendoffiscalyears2014and2013,theLotterywasdistributinggamesprintedunderthetwoMarch2010agreements.As of June 30, 2014 and 2013, $67,769 and $12,825, respectively, of instant tickets areincluded in inventory. For each year respectively, $55,122 and $24,139 of merchandiseprizesforsecondchancedrawingsarealsoincludedininventory.8. CapitalAssetsCapitalassets,whichincludedataprocessingsoftwareandhardware,tenantimprovements,vehicles,furnitureandfixtures,intellectualproperty,andequipment,arestatedatcostnetofaccumulateddepreciation.TheLotterycapitalizesallassetsthathaveacostgreaterthan$5,000 and an expected useful life of more than one year. Tenant improvements areamortizedoverfiveyearsortheremainingleaseterm,whicheverisshorter,andintellectualproperty is amortized over the remaining life at the time of acquisition or at the time ofdevelopment. For all other capital assets placed into service on or after July 1, 2013,depreciation and amortization are computed using the straight‐line method over theestimatedusefullivesof4to10years.PriortoJuly1,2013,depreciationandamortizationwere computed using the straight‐line method over the estimated useful lives of 2 to 5years. When assets are retired or otherwise disposed, the cost and related accumulateddepreciationareremovedfromtheaccountsandanyresultinggainorlossisreflectedintheresultsfromoperationsintheperiodofdisposal.

35



June30,2014and2013NOTEA‐SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES‐CONTINUED9. RevenueandAccountsReceivableRecognitionLottery games are sold to the public by contracted retailers and directly by the Lottery.Revenuesandaccountsreceivableforinstantticketsarerecognizedwhenpacksaresettledandretailersarebilledforthetickets.Revenuesandaccountsreceivableforalldrawgamesare recognized when drawings are held, except for Quicksters, where the revenues andaccountsreceivablearerecognizedatthetimetheticketsaresold.Accountsreceivablearestatedattheirnetrealizablevalueandtheirpastduestatusisbaseduponcontractualterms.The following isasummaryof totaloperatingrevenuesthatarecomprisedof instantanddrawgameticketsalesandtherelatedprize,spoiled,stolen,andpromotionaltickets,whicharenettedintotheapplicablegamesalesonthefinancialstatements;plusanyretailerfeesand related bad debts that are shown as a contra revenue account in total operatingrevenues.

2014 2013OPERATINGREVENUESInstantticketsales $71,961,184 $72,397,663Powerballsales 34,065,150 46,767,095MegaMillionssales 13,418,660 8,088,972RoadrunnerCashsales 8,599,410 6,784,566HotLottosales 5,709,957 5,996,195Pick3sales 3,831,547 3,496,279Quickstersales 639,311 867,111Lessticketsprovidedasprizes (2,096,244) (2,479,354)Lessspoiled,stolen,andpromotionaltickets (126,371) (160,005)Netticketsales 136,002,604 141,758,522

Retailerfees 22,453 20,575Baddebts ‐ (12,000)Totaloperatingrevenues $136,025,057 $141,767,097

10. PrizesPrizeexpenseforinstant,Powerball,MegaMillions,andHotLottogamesisrecordedbasedon an estimate of the predetermined prize structure for each game. Prize expense forRoadrunnerCash,Pick3,andQuickstergamesisrecordedbasedontheactualprizeswonforeachgame.

36



June30,2014and2013NOTEA‐SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES‐CONTINUED11. CommissionsRetailersreceiveacommissionof6%ongrossticketsalesanda1%cashingcommissiononwinningticketvalidationsforprizesupto$600.12. AdvertisingCostsAdvertisingcostsareexpensedasincurred.13. IncomeTaxesThe Lottery is exempt from Federal and New Mexico income taxes. Accordingly, noprovisionforincometaxeshasbeenmade.14. CustodialCreditRiskandInterestRateRiskAt June 30, 2014 and 2013, respectively, the Lotterymaintained its cash balances in onefinancialinstitution.ThebalancesfordemanddepositswereinsuredbytheFederalDepositInsuranceCorporationupto$250,000atthisfinancialinstitution.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,custodialcreditriskistheriskthatintheeventofthefailureofthecounterparty,theLotterywillnotbeabletorecoverthevalueof its investments or collateral securities that are in the possession of an outside party.Mutual funds, external investment pools, and securities underlying reverse repurchaseagreements are not exposed to custodial credit risk. The Lottery does not have aninvestmentpolicyforcustodialcreditrisk.TheLottery’s custodial risk for investments is inaccordancewithArticle10,NMSA,1978Compilation. The Lottery’s investments are made in overnight repurchase agreements.InvestmentsaremadethroughalocalfinancialinstitutionandareheldinsafekeepingattheFederalReserveBank.RepurchaseagreementsarecollateralizedbytheGovernment.

37



June30,2014and2013NOTEA‐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, 2014 and 2013, theLottery’s bank balances of $10,372,837 and $9,523,952, respectively, were exposed tocustodialcreditriskasfollows:

2014 2013 Uninsuredanduncollateralized $ ‐ $ ‐

Collateralheldbythepledging bank’strustdepartmentin theBank’sname ‐ ‐

Collateralheldbythepledging bank’strustdepartmentin theLottery’sname 10,372,837 9,523,952 $ 10,372,837 $ 9,523,952InterestRateRisk–Investments.Interestrateriskistheriskthatchangesininterestrateswill adversely affect the fair valueof an investment.TheLotterydoesnothave a specificpolicytolimititsexposuretointerestraterisk.At June 30, 2014 and 2013, the Lottery had overnight yield repurchase agreementswithone‐daymaturities.

38



June30,2014and2013NOTEA‐SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES‐CONTINUED15. BankAccountsAtJune30,2014:

BalanceDescription Bank perBankOperatingaccount‐overnightrepurchaseAgreement WellsFargoBank,NA $10,372,772Operatingaccount–checking WellsFargoBank,NA 65Totalamountdepositedinbank 10,372,837Less:FDICcoverage (65)*Totaluninsuredfunds–depositsandovernightrepurchaseagreement $10,372,772

102%pledgedcollateralrequirementperstatuteforrepurchaseagreement 10,580,227

*Totalpledgedsecurity

(10,580,228)

Amountunder(over)requirementatJune30,2014 $(1)*WellsFargoBank,NAsecuritiesareheldinsafekeepingattheFederalReserveBankinSanFrancisco, CA. Presented at fair value, CUSIP Number 36179NTE8 (fair market value$9,839,187),maturesNovember01,2043.TherepurchaseagreementiscollateralizedwithsecuritiesheldinthenameoftheNewMexicoLotteryAuthority.CashandcashequivalentsperbankatJune30,2014 10,372,837Lessreconcilingitems‐‐outstandingchecks (103,865)

ReconciledcashinbankatJune30,2014

10,268,972

Cashinvault

11,700

TotalcashandcashequivalentsperStatementsofNetPosition $10,280,672

39



June30,2014and2013NOTEA‐SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES–CONTINUED15. BankAccounts‐ContinuedAtJune30,2013:

Balance

Description 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,NAsecuritiesareheldinsafekeepingattheFederalReserveBankinSanFrancisco, CA. Presented at fair value, CUSIP Number 3128MJSN1 (fair market value$9,691,268), matures March 01, 2043. The repurchase agreement is collateralized withsecuritiesheldinthenameoftheNewMexicoLotteryAuthority.CashandcashequivalentsperbankatJune30,2013 $9,523,952Lessreconcilingitems‐‐outstandingchecks (191,420)

ReconciledcashinbankatJune30,2013

9,332,532

Cashinvault

7,705

TotalcashandcashequivalentsperStatementsofNetPosition $9,340,237

40



June30,2014and2013NOTEA‐SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES–CONTINUED16. RiskManagementTheLotteryisexposedtovariousrisksoflossrelatedtotorts;theftof,damageto,andthedestruction of assets; errors and omissions; injuries to employees; and natural disasters.TheLotterypurchasescommercialinsurancetocovertheserisks.Theamountofcoveragehasnotbeenexceededbyclaimsinthelastthreeyears.17. ShippingandHandlingCostsShipping and handling costs associated with inventory distribution are expensed asincurredandincludedingameexpenses.18. NetPositionNetpositionrepresentsthedifferencebetweenallotherelementsinastatementoffinancialpositionandshouldbedisplayedintheapplicablecomponentsofnetinvestmentincapitalassets,restrictedandunrestricted.NetInvestmentinCapitalAssets–consistsofcapitalassets,netofaccumulateddepreciation,reducedbyoutstandingbalancesofbonds,mortgages,notes,orotherborrowingsthatareattributabletotheacquisition,constructions,orimprovementofthoseassets.Restricted – consists of restricted assets reduced by liabilities and deferred inflows ofresourcesrelatedtothoseassets.TheLotterydoesnothavearestrictedcomponentofnetposition.Unrestricted–consistsofthenetamountofassets,deferredoutflowsofresources,liabilities,and deferred inflows of resources that are not included in the determination of netinvestmentincapitalassetsortherestrictedcomponentofnetposition. InMay2014,theNew Mexico Lottery Authority Board executed a resolution to establish contingencyreservesfromoperatingexpensesforthesolepurposeofallowingtheNewMexicoLotteryAuthoritytosuccessfullycarryouttheprovisionoftheNewMexicoLotteryAct.19. UnclaimedPrizesTheActrequiresthatprizesnotclaimedwithinthetimeperiodestablishedbytheLotteryare forfeited and shall be paid into the prize fund (unclaimed prize liability accounts).Unclaimedprizes are applied against prize expense to supplement prizes in the Lottery’sgames.

41



June30,2014and2013NOTEA‐SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES–CONTINUED20. 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.21. CompensatedAbsencesPayableAnnualleaveandsickleaveareaccruedatratesspecifiedbytheLottery’sLeavePolicy.Annualleaveisawardedbasedontheemployee’syearsoflotteryservice, leavestatus,andemploymentstatus(full‐timeorpart‐time)andsick leave isawardedat3.7hoursbiweeklyforfull‐timeemployees.Themaximumnumberofannualleavehoursthatfull‐time employeesmay carry over and retain in their annual leave bank varies from80hoursforanemployeewithlessthan5yearsofserviceuptoamaximumof320hoursfor an employeewith fifteen ormore years of service. Themaximumnumber of sickleavehours that a full‐time employeemay carryover fromyear‐to‐year is 480hours.Part‐timeemployeesreceiveleaveandcarry‐overandretainleaveintheirleavebanksbased on their percentage of employment. Upon separation from service, employeeswithatleastoneyearofservicewillbecompensatedfortheirannualleavebalance,nottoexceedthemaximumannualleavebankbasedontheiryearsofservice.Accruedsickleavehourswillnotbepaid toanemployeeuponseparation fromservice.During theyears ended June 30, 2014 and 2013, the following changes occurred in thecompensatedabsencesliabilities:

BalanceJuly1,2013 Increase Decrease

BalanceJune30,2014

$227,709 $22,471 $(42,940) $207,240


BalanceJune30,2013

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

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

42



June30,2014and2013NOTEA‐SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES‐CONTINUED22. Long‐termLiabilities‐CapitalLeaseObligationsDuringtheyearsendedJune30,2013and2014,thefollowingchangesoccurredinthecapitalleaseobligations:


BalanceJune30,2014

AmountsDueWithinOneYear

$91,446 $‐ $(14,063) $77,383 $14,064


BalanceJune30,2013

AmountsDueWithinOneYear

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

23. AccountsPayableandOtherCurrentLiabilitiesAccountspayableandothercurrentliabilitiesarecomprisedofthefollowingatJune30:

2014 2013

Accountspayable $798,344 $1,478,280 Accruedliabilities,vendors* 985,907 115,042 Accruedliabilities,retailers* 24,000 28,000 Accruedpayroll,andpayroll taxesandbenefits 129,927 128,873 Compensatedabsences 207,240 227,709 $2,145,418 $1,977,904*TheLotteryhasaccruedanestimatedamountofservicesdeliveredbyitsvendorsanddepositsforitsretailersasofJune30,2014and2013,respectively.

43



June30,2014and2013NOTEB–CAPITALASSETSCapitalassetsatJune30,2014consistedof:

BeginningBalance

Reclass‐ification Increases Decreases

EndingBalance

Dataprocessingsoftware $2,411,528 $‐ $19,337 $‐ $2,430,865

Dataprocessingequipment 830,528 ‐ 31,454 ‐ 861,982

Equipment‐Securityand

disasterrecovery 635,807 (18,170) 21,200 ‐ 638,837

Vehicles 493,280 ‐ 67,284 (108,280) 452,284

Tenantimprovements 425,850 ‐ ‐ ‐ 425,850

Furnitureandfixtures 230,767 ‐ ‐ ‐ 230,767

Intellectualproperty 179,073 ‐ ‐ ‐ 179,073

Equipment‐communications 118,635 ‐ 147,539 ‐ 266,174

Equipment‐drawing 116,478 ‐ 100,232 (109,910) 106,800

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

Equipment‐office 49,508 ‐ ‐ ‐ 49,508

Obsoletecapitalassets 214,784 18,170 ‐ (67,842) 165,112

Capitalassets 5,777,412 ‐ 387,046 (286,032) 5,878,426

Dataprocessingsoftware (2,411,528) ‐ (1,174) ‐ (2,412,702)

Dataprocessingequipment (753,529) ‐ (36,230) ‐ (789,759)


disasterrecovery (519,227) 18,170 (28,765) ‐ (529,822)

Vehicles (317,390) ‐ (67,074) 108,280 (276,184)

Tenantimprovements (337,190) ‐ (20,624) ‐ (357,814)

Furnitureandfixtures (230,767) ‐ ‐ ‐ (230,767)

Intellectualproperty (12,350) ‐ (24,700) ‐ (37,050)

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

Equipment‐drawing (116,478) ‐ (8,353) 109,910 (14,921)

Equipment‐warehouse (66,681) ‐ (1,585) ‐ (68,266)

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

Obsoletecapitalassets (214,784) (18,170) ‐ 67,842 (165,112)

Accumulateddepreciation (5,148,067) ‐ (188,505) 286,032 (5,050,540)

Capitalassets,net $629,345 $‐ $198,541 $‐ $827,886

Included in data processing software, data processing equipment, and tenant improvements are $116,143 in assets reported as capital

leases at June 30, 2014 and 2013, respectively. For each fiscal year, there were $14,063 and $11,269, respectively, in related

amortization on these assets.

44


NOTESTOFINANCIALSTATEMENTS–CONTINUED

June30,2014and2013NOTEB–CAPITALASSETS‐CONTINUEDCapitalassetsatJune30,2013consistedof:

BeginningBalance

Reclass‐ification Increases Decreases

EndingBalance

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

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


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 $‐ $629,345

45



June30,2014and2013

NOTEC‐ALLOCATIONOFNETINCOME/TRANSFERSTOLOTTERYTUITIONFUND

NetIncome

DuetoLotteryTuitionFund

NetPosition

BalanceatJune30,

2013 $3,503,374 $3,503,374 $‐

Currentyearnet

return 40,941,550 40,941,550 ‐

Currentyear

transfers (41,388,474) (41,388,474) ‐

BalanceatJune30,

2014 $3,056,450 $3,056,450 $‐

In accordancewith the Lottery Act, no later than the last business day of eachmonth, theLotteryshalltransmitatleastthirtypercentofthegrossrevenueofthepreviousmonth,totheNewMexicoStateTreasurer,whoshalldeposititintostateagencynumber950,NewMexicoHigherEducationDepartment, theLotteryTuitionFund,SHARE fundnumber63700. AsofJuly 31, 2014 and 2013, the Lottery has transferred $40,941,550 and $43,684,681,respectively,fortheyearsendedJune30,2014and2013totheNewMexicoStateTreasurer.NOTED‐RETIREMENTPLANPlanDescriptionAlloftheLottery’seligibleemployeesparticipateinaplanprovidedbytheLotterypursuantto the New Mexico Lottery Act (Chapter 6, Article 24 NMSA 1978). The Lottery is theadministratorofthePlan,whichisadefinedcontributionmoneypurchasepensionplan,andWellsFargoBankisthetrusteefortheplan.Employeesbecomeeligibletoparticipateforthepurposes of money purchase pension plan contributions when they have completed sixmonthsofservice.Contributionsstartonthefirstdayofthequartercoincidingwithornextfollowing the date in which the employee satisfied the eligibility requirement. The planprovidestwenty‐eightinvestmentfundsforemployeestoself‐directtheircontributions.TheNew Mexico Lottery Authority Retirement Plan provides for retirement benefits to planmembersand theirbeneficiaries. Sixty‐twoandsixty‐four currentand formeremployeesofthe Lottery were participants in the plan at the end of fiscal years 2014 and 2013,respectively.

46



June30,2014and2013NOTED‐RETIREMENTPLAN‐CONTINUEDPlanDescription–ContinuedThebalancesandactivityofthePlanasofandfortheyearsendedJune30,2014and2013arepresentedintheStatementsofFiduciaryNetPositionandStatementsofChangesinFiduciaryNetPosition.TherearenoseparatelyissuedfinancialstatementsavailablefortheNewMexicoLotteryAuthorityRetirementPlan.FundingPolicyTheLotterycontributes13.25%ofcompensation foreligibleemployeesto thePlan.Lotterycontributionsare100%vestedwhendepositedmonthly.FortheyearsendedJune30,2014and2013,theLotteryrecognized$344,457and$344,578ofpensionexpenseforthePlanoneligiblecompensationof$2,599,675and$2,600,589,respectively.Therewerenoforfeituresofemployeebalances for theyearsended June30,2014and2013,respectively. TheentirepensionamountsapplicabletoallcompensationpaidduringtherespectivefiscalyearshavebeenpaidtothePlanbyJune30,2014and2013,respectively.FortheyearsendedJune30,2014 and 2013, the Lottery recognized a contribution liability of $8,423 and $8,121,respectively, for contributionsowedoncompensationearned,butnotpaid, for the last fewdaysofeachfiscalyear.RetirementPlanSubsequentEventAtaLotteryBoardofDirectors’meetingonMay6,2014,theBoardbyanadoptedresolutionremovedWellsFargoBankandappointedVerisightTrustCompany(c/oVerisight,Inc.)asthenewtrusteefortheretirementplan(the“NewMexicoLotteryAuthorityRetirementPlan”)tobe effective as of the date the money purchase pension plan retirement assets weretransferred to or deposited at Verisight Trust Company. The retirement assets wereliquidated by Wells Fargo Bank as of August 15, 2014 and transferred to Verisight TrustCompany. With the appointment ofVerisightTrust Company, the LotteryBoard elected toallownewemployeestoentertheretirementplanontheirdateofhire.InadditionattheMay6,2014meeting,theBoardadoptedaSection457(b)Plan,(the“NewMexico Lottery Authority 457(b) Plan”) that allows both pre‐tax and Roth (after tax)contributions by employees for their retirement to be effective July 1, 2014 or shortlythereafter. Employee contribution commencedwith the payroll ended onAugust 2, 2014.This newplan, like themoney purchase pension plan, now allows employees to self‐directtheir investments intoanyof the41 investment funds. VerisightTrustCompany isalso thetrusteeforthe457(b)plan.

47



June30,2014and2013NOTEE‐CREDITAGREEMENTInJuly2012,theLotteryenteredintoanagreementwithWellsFargoBankeffectiveMay15,2012foranautomaticunsecuredoverdraftlineofcreditsweepintheamountof$4,000,000with a variable interest rate,whichwas 3.25%as of June 30, 2014 and 2013, respectively.This linematured onMay 14, 2014 andMay14, 2013 and was renewed for another yearunderthesametermsandconditionseachyear.For the years ended June 30, 2014 and 2013, the Lottery had no outstanding borrowingsagainstthelineofcredit.NOTEF‐LEASESIn1996,theLotteryenteredintooperatingleasesfortherentalofofficeandwarehousespaceforatermoftenyears.InSeptember2002,theLotteryrenegotiatedtheseleases.TheleaseswereextendeduntilMarch31,2013at thesame leaseamounts thatwere tobepaid in thefinalyearoftheoriginalleasewithnofurtheryearlyescalationsofthemonthlyleaseamounts.InJune2012,theLotteryexecutedanewleaseforitscorporateofficeandwarehousespace.Thenew leasecommencedon July1,2012andcancelled the remainingninemonthsof the2002leaseextension. Thenewleaseisfortenyearsandninemonths,endingonMarch31,2023. The Lottery has the option to extend the new lease for five additional years untilMarch31,2028.Rent expense was $293,530 and $391,495 for the years ended June 30, 2014 and 2013,respectively.Futureminimumrentalpaymentsontheseleaseswithoriginaltermsofoneyearormorearescheduledasfollows:

Year

Amount

2015 $280,165 2016 280,165 2017 280,165 2018 281,664 2019 286,164 2020‐2023 1,073,118 $2,481,441

48



June30,2014and2013NOTEF‐LEASES–CONTINUEDFollowing isascheduleof thecompositionofnetrentalexpense forall long‐termoperatingleasesfortheyearsendedJune30:

2014 2013

Minimumrentals $ 280,165 $ 368,813

Less:Subleases ‐ ‐

$ 280,165 $ 368,813AspartoftheagreementwithINTRALOT,Inc.,toprovideanupdatedon‐linegamingsystem,the Lottery installed and implemented a new internal control system (ICS) in fiscal year2009.ThecostfortheICSisincludedinthefixedfeepaidtothevendorasapercentageofnetsales.TheLotteryhasaccountedforthistransactionasacapitallease.TheICScostwasprojectedovertheinitialtermofthecontractofsevenyearsandhasbeencapitalizedonthebooksoftheLotteryatthepresentvalueofthiscost,asdeterminedwithadiscountrateof4%.

YearsendingJune30:

2015 $8,2372016 3,432Totalminimumpayments 11,669

Lesstheamountrepresentinginterest (2,846)Presentvalueofnetminimumpayments $8,823

Aspartofthe2002leaseextensionwithNMLB,LLC,theLotteryreceived$50,000in2012tobeusedfortenantimprovementstothefacility.Inaddition,aspartofthe2012lease,theLotteryreceived$1,858in2012and$29,975infiscalyear2013fortenantimprovementstothefacility.

49



June30,2014and2013NOTEF‐LEASES–CONTINUEDThe Lottery has recorded the $81,833 as tenant improvements with a related deferredliabilitytobeamortizedoverthelifeoftheleaseusingthestraight‐linemethod. YearsendingJune30: 2015 $7,836 2016 7,835 2017 7,835 2018 7,835 2019 7,836 2020‐2023 29,382 Totalminimumpayments $68,559NOTEG‐COMMITMENT

EffectiveonNovember15,2007,theLotteryenteredintoanagreementwithINTRALOT,Inc.,aGeorgia‐basedcompany, toprovideanupdatedon‐linegamingsystemfora totalofsevenyearswiththeoptionofthreeadditionaloneyearperiodsoranycombinationthereof. Theoption to extend the agreement until November 2018 was exercised during fiscal year2014.Thesystemincludesthesupply,installation,maintenance,service,andoperationofacommunicationnetwork,lotteryterminalsandperipheralequipmentfortheLottery’sexistingand future retailers, ticket scanners to enable players to check their tickets for prizes, self‐service ticket vending machines that sell both instant and draw game tickets, a disasterrecoveryandbusiness continuity facility, andvariousemployees tooperate the systemandprovidesalesandmarketingsupporttotheLottery.Thetransitiontothisnewon‐linegamingsystemtookplaceonNovember16,2008.SinceNovember21,2008,theon‐linevendorfeehasbeenfixedat1.5%ofnetsales,plustheapplicablegrossreceiptstax.

NOTEH‐OTHEREXPENSES

OtherexpensesatJune30consistedof:

2014 2013

Other $ 29,336 $ 17,404 Registrations and memberships 23,912 30,044 Training 12,015 20,250 Publications and subscriptions 4,448 3,942

$ 69,711 $ 71,640

50


SUPPLEMENTARYINFORMATIONBUDGETARYCOMPARISONSTATEMENTS


2014 2013

Original Final Variancewith Original Final VariancewithBudget Budget Actual FinalBudget Budget Budget Actual FinalBudget

OperatingrevenuesInstantticketsales $68,893,000 $67,797,000 $69,804,813 $2,007,813 $67,984,000 $67,434,000 $69,886,435 $2,452,435Powerballsales 37,851,500 37,850,000 34,027,555 (3,822,445) 35,859,200 40,901,000 46,734,439 5,833,439MegaMillionssales 7,989,800 11,989,000 13,410,732 1,421,732 11,988,400 7,688,000 8,078,050 390,050RoadrunnerCashsales 6,791,300 8,391,000 8,592,684 201,684 7,992,200 6,792,000 6,767,906 (24,094)HotLottosales 5,493,000 4,993,000 5,700,311 707,311 4,995,200 5,595,000 5,933,935 338,935Pick3sales 3,395,700 3,694,000 3,828,187 134,187 3,696,400 3,396,000 3,492,915 96,915Quickstersales 998,700 598,000 638,322 40,322 2,497,600 797,000 864,842 67,842

Netticketsales 131,413,000 135,312,000 136,002,604 690,604 135,013,000 132,603,000 141,758,522 9,155,522Retailerfees 11,000 15,000 22,453 7,453 11,000 21,000 20,575 (425)Baddebts (24,000) (24,000) ‐ 24,000 (24,000) (24,000) (12,000) 12,000

Totaloperatingrevenues 131,400,000 135,303,000 136,025,057 722,057 135,000,000 132,600,000 141,767,097 9,167,097

Totalgameexpenses 86,280,000 89,031,000 89,608,334 577,334 88,742,000 87,350,000 93,049,385 5,699,385

Totaloperatingexpenses 5,716,000 5,698,000 5,240,530 (457,470) 5,763,000 5,339,000 5,080,047 (258,953)

Operatingincome 39,404,000 40,574,000 41,176,193 602,193 40,495,000 39,911,000 43,637,665 3,726,665

Totalnon‐operatingincome 24,000 25,000 32,357 7,357 18,000 24,000 47,016 23,016

Netincomebeforetransfers

toLotteryTuitionFund $39,428,000 $40,599,000 $41,208,550 $609,550 $40,513,000 $39,935,000 $43,684,681 $3,749,681

51


SUPPLEMENTARYINFORMATIONSCHEDULESOFPERCENTAGERETURNTOTHESTATEOFNEWMEXICO


2014 2013

OPERATINGREVENUESInstantticketsales $69,804,813 $69,886,435Powerballsales 34,027,555 46,734,439MegaMillionssales 13,410,732 8,078,050RoadrunnerCashsales 8,592,684 6,767,906HotLottosales 5,700,311 5,933,935Pick3sales 3,828,187 3,492,915Quickstersales 638,322 864,842Netticketsales 136,002,604 141,758,522

Retailerfees 22,453 20,575Baddebts ‐ (12,000)Totaloperatingrevenues 136,025,057 141,767,097

NON‐OPERATINGINCOMEInterestincome 18,753 21,324Otherincome 13,604 25,692Totalnon‐operatingincome 32,357 47,016

GROSSREVENUES 136,057,414 141,814,113

GAMEEXPENSESPrizeexpense 74,060,246 77,068,558Retailercommissions 8,782,855 9,153,204Advertising 2,267,772 2,263,221On‐linevendorfees 2,177,205 2,269,623Ticketvendorfees 1,188,107 1,158,028Retailerequipment 345,786 201,436Shippingandpostage 335,679 428,532Promotions 221,036 236,268Drawinggame 102,880 116,081Responsiblegaming 83,050 87,400Gamemembership 43,718 67,034Totalgameexpenses 89,608,334 93,049,385

OPERATINGEXPENSESSalaries,wages,andbenefits 3,726,941 3,614,032Utilitiesandmaintenance 448,166 439,041Leasesandinsurance 423,932 514,990OperationalReserveFundexpense 267,000 ‐ Depreciationandamortization 188,505 139,393Professionalfees 186,035 112,893Materialsandsupplies 135,260 125,050Other 69,711 71,640Travel 61,980 63,008Totaloperatingexpenses 5,507,530 5,080,047

OPERATINGINCOME 40,909,193 43,637,665

NETINCOME $40,941,550 $43,684,681

GROSSREVENUEPERCENTAGERETURN 30.09% 30.80%

52


EXITCONFERENCE

FortheYearEndedJune30,2014An exit conferencewas held at theNewMexico LotteryAuthority onOctober 6, 2014. Thefollowingindividualsparticipated:

Name TitleNewMexicoLotteryAuthorityFinance/AuditCommitteeDr.DanSalzwedelMarkKosonJohnKubiak,CPANewMexicoLotteryAuthorityEmployeesDavidM.BardenSylviaAnnJaramillo,CPADavidRamirezMichaelBoland,CPA

BoardChairBoardVice‐ChairandFinance/AuditCommitteeChairmanBoardSecretary/TreasurerChiefExecutiveOfficerChiefofStaff/DirectorofAdministrationDirectorofMISInternalAuditor

MossAdamsLLPJeffBridgens,CPACorrineZajac‐ClarksonJaimeRumbaoa

AuditManagerAuditorin‐chargeITSeniorManager

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

Documents

NEW MEXICO LOTTERY AUTHORITY FINANCIAL STATEMENTS … · Report on the Financial Statements We have audited the accompanying financial statements of the business‐type activities,