[Annual financial statements]

              OKLAHOMA LOTTERY
COMMISSION
June 30, 2011
OKLAHOMA LOTTERY COMMISSION
June 30, 2011
AUDITED FINANCIAL STATEMENTS
Independent Auditors’ Report ................................................................................................................. 1
Management’s Discussion and Analysis ................................................................................................ 3
Statements of Net Assets ........................................................................................................................... 7
Statements of Revenues, Expenses and Changes in Net Assets .......................................................... 8
Statements of Cash Flows ......................................................................................................................... 9
Notes to Financial Statements ................................................................................................................ 10
REPORT REQUIRED BY GOVERNMENT AUDITING STANDARDS
Independent Auditors’ Report on Compliance and Other Matters and on
Internal Control Over Financial Reporting Based on an Audit of
Financial Statements Performed in Accordance With Government Auditing Standards............... 21
1
Independent Auditors’ Report
The Board of Trustees
Oklahoma Lottery Commission
We have audited the accompanying statements of net assets of the Oklahoma Lottery Commission
(the “OLC”), a component unit of the State of Oklahoma, as of June 30, 2011 and 2010, and the
related statements of revenues, expenses and changes in net assets and cash flows for the years
then ended. These financial statements are the responsibility of the management of the OLC. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United
States of America and the standards applicable to financial audits contained in Government
Auditing Standards, issued by the Comptroller General of the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining
on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects,
the financial position of the OLC as of June 30, 2011 and 2010, and the changes in its net assets and
cash flows for the years then ended, in conformity with accounting principles generally accepted
in the United States of America.
Management’s Discussion and Analysis is not a required part of the basic financial statements but
is supplementary information required by the Governmental Accounting Standards Board. We
have applied certain limited procedures, which consisted principally of inquiries of management
regarding the methods of measurement and presentation of the required supplementary
information. However we did not audit the information and express no opinion on it.
2
In accordance with Government Auditing Standards, we have also issued our report dated
September 8, 2011 on our consideration of the OLC’s internal control over financial reporting and
our tests of its compliance with certain provisions of laws, regulations, contracts, grant
agreements and other matters. The purpose of that report is to describe the scope of our testing of
internal control over financial reporting and compliance, and the results of that testing, and not to
provide an opinion on the internal control over financial reporting and compliance. That report is
an integral part of an audit performed in accordance with Government Auditing Standards and
should be considered in assessing the results of our audit.
Oklahoma City, Oklahoma
September 8, 2011
OKLAHOMA LOTTERY COMMISSION
MANAGEMENT’S DISCUSSION AND ANALYSIS
3
Management of the Oklahoma Lottery Commission (the “OLC”) provides this Management’s
Discussion and Analysis of their financial performance for the readers of the OLC’s financial
statements. This narrative provides an overview of the OLC’s financial activity for the fiscal
years ended June 30, 2011 and 2010. This analysis is to be considered in conjunction with the
financial statements to provide an objective analysis of the OLC’s financial activities based on
facts, decisions and conditions currently facing management.
UNDERSTANDING THE LOTTERY’S FINANCIAL STATEMENTS
The OLC, an instrumentality of the State of Oklahoma, is accounted for as an enterprise fund
that reports all assets and liabilities using the accrual basis of accounting, much like a private
business entity. In accordance with accounting principles generally accepted in the United
States of America, this report consists of a series of financial statements, along with explanatory
notes to the financial statements. The financial statements immediately follow this
Management’s Discussion and Analysis and are designed to highlight the OLC’s net assets and
changes to those assets resulting from the OLC’s operations.
The most important relationship demonstrated within the OLC’s financial statements is the
requirement that the OLC transfer all net proceeds, “as defined”, to the State Treasurer for the
Oklahoma Education Lottery Trust Fund (“OELTF”). Accordingly, a significant focus of these
financial statements is determining net proceeds available for transfer to the OELTF.
The OLC is also required to transfer annually the first $500,000 of unclaimed prize money to the
Oklahoma Department of Mental Health and Substance Abuse Services (“ODMHSAS”). This is
discussed further on page 5 of Management’s Discussion and Analysis.
FINANCIAL AND ACTIVITY HIGHLIGHTS
Revenues from lottery games totaled $198,153,932 and $199,747,294 respectively for the fiscal
years ending June 30, 2011 and 2010. The OLC returned $106,600,824 and $105,092,616 to
winners of lottery games; paid commissions and incentives to retailers totaling $13,219,310 and
$13,150,714; incurred other game related expenses of $5,895,707 and $5,903,703; and had
operating expenses of $6,596,129 and $7,994,755 for each of the respective fiscal years of 2011
and 2010. The OLC’s net assets decreased by $3,628,714 in fiscal year 2011 and $2,249,841 in
fiscal year 2010. Transfers made and due to the OELTF were $69,396,091 and $69,974,064
respectively for fiscal years ending June 30, 2011 and 2010.
OKLAHOMA LOTTERY COMMISSION
MANAGEMENT’S DISCUSSION AND ANALYSIS--Continued
4
FINANCIAL AND ACTIVITY HIGHLIGHTS--Continued
The following table summarizes the OLC’s Statement of Net Assets as of June 30:
2011 2010 2009
Current Assets $ 23,964,528 $ 22,624,734 $ 24,723,406
Noncurrent Assets
Deposit with MUSL 3,921,842 3,749,310 3,465,906
Capital Assets, Net 148,503 234,050 398,509
Total Assets 28,034,873 26,608,094 28,587,821
Current Liabilities 22,485,986 17,429,577 17,154,697
Noncurrent Liabilities 56,910 57,826 62,592
Total Liabilities 22,542,896 17,487,403 17,217,289
Net Assets
Invested in Capital Assets, Net 148,503 234,050 398,509
Restricted Expendable Net Assets 5,343,474 8,886,641 10,972,023
Total Net Assets $ 5,491,977 $ 9,120,691 $ 11,370,532
The following table summarizes the OLC’s Statement of Revenues, Expenses and Changes in
Net Assets for the years ended June 30:
2011 2010 2009
Operating Revenues
Gaming revenues $ 198,153,932 $ 199,747,294 $ 193,164,684
Other revenues 120,614 178,604 161,359
Total 198,274,546 199,925,898 193,326,043
Less Prize Expense 106,600,824 105,092,616 95,922,950
Less Retailer Commissions/Incentives 13,219,310 13,150,714 12,753,727
Less Other Direct Game Costs 5,895,707 5,903,703 5,675,014
Less Operating Expenses 6,596,129 7,994,755 8,109,261
Total Expense 132,311,970 132,141,788 122,460,952
Nonoperating Revenue (Expense)
Interest Income 304,801 440,113 592,790
Transfers to ODMHSAS ( 500,000) ( 500,000) (500,000)
Transfers to OELTF (69,396,091) ( 69,974,064) ( 69,226,501)
Net nonoperating revenue (expense) ( 69,591,290) ( 70,033,951) ( 69,133,711)
Increase (Decrease) in Net Assets (3,628,714) ( 2,249,841) 1,731,380
Net Assets, Beginning of Year 9,120,691 11,370,532 9,639,152
Net Assets, End of Year $ 5,491,977 $ 9,120,691 $ 11,370,532
OKLAHOMA LOTTERY COMMISSION
MANAGEMENT’S DISCUSSION AND ANALYSIS--Continued
5
FINANCIAL AND ACTIVITY HIGHLIGHTS--Continued
Sales increased from fiscal year 2009 to fiscal year 2010. Online sales during this period
decreased mainly due to a decline in larger Powerball jackpots. The addition of the Mega
Millions game in the last half of the fiscal year provided additional online sales for the year.
There was an increase in the income from Scratcher products which offset the decrease in online
sales. Sales from fiscal year 2010 to fiscal year 2011 were slightly down. The Mega Millions
game had its first full year of sales in fiscal year 2011, which helped offset some of the loss from
the other multi-state jackpot game sales. Scratcher product sales for fiscal year 2011 were more
than in fiscal year 2010, offsetting the decline in sales for the online products.
Net proceeds of the OLC must be transferred to the State Treasurer for the OELTF with the
following exceptions: 1) the cost of property and equipment, net of depreciation and related
debt, and 2) other assets which can not be transferred due to statutory or other legal restriction,
including restricted cash from unclaimed prizes, deposits with MUSL and the Restricted
Fidelity Fund. Unclaimed prizes, after required transfers to the Department of Mental Health
and Substance Abuse Services, must be added to a pool from which future prizes are awarded
or used for special prize promotions. Deposits with MUSL result from a set aside of prize
expenses paid to MUSL and are available for prize reserves and promotional expenses of MUSL
games. The Restricted Fidelity Fund is derived from the licensing fees of new retailers, which
may be retained by the OLC up to the budgeted expenses from the fund for the next fiscal year
plus $500,000 and used to cover losses the OLC may experience due to nonfeasance,
misfeasance, or malfeasance of a lottery retailer and to pay the costs of vendor, retailer and
employee background investigations conducted by the OSBI and for audits conducted by the
State Auditor and Inspector.
For the years ended June 30, 2011 and 2010, the total transfers made or due to the OELTF
related to operations were $69,396,091 and $69,974,064, respectively. Since inception to June 30,
2011, total transfers made or due to the OELTF were $418,532,912. For each of the years ended
June 30, 2011 and 2010, the OLC transferred $500,000 in unclaimed prize funds to the
Department of Mental Health and Substance Abuse Services for the treatment of compulsive
gambling disorders and educational programs related to such disorders. From inception to
June 30, 2011, total transfers to the Oklahoma Department of Mental Health and Substance
Abuse Services were $2,544,600.
OKLAHOMA LOTTERY COMMISSION
MANAGEMENT’S DISCUSSION AND ANALYSIS--Continued
6
FINANCIAL AND ACTIVITY HIGHLIGHTS--Continued
The following is a condensed version of the OLC’s Statement of Cash Flows for the years ended
June 30:
2011 2010 2009
Cash Provided (Used) By:
Operating Activities $ 67,706,571 $ 65,578,691 $ 67,346,826
Noncapital Financing Activities (65,629,521) (68,632,345) (78,893,647)
Capital and Related
Financing Activities (15,417) (35,727) (30,261)
Investing Activities 307,971 449,435 638,104
Net Increase (Decrease) in Cash 2,369,604 (2,639,946) (10,938,978)
Cash at Beginning of Year 13,085,908 15,725,854 26,664,832
Cash at End of Year $ 15,455,512 $ 13,085,908 $ 15,725,854
POTENTIAL FACTORS IMPACTING FUTURE OPERATIONS
On July 5, 2011, the Oklahoma Lottery introduced a new online game, Pick 4. This new game
expanded the product offering for our players and in return will increase our contribution to
education. United States lotteries including the OLC are in the process of developing a national
lottery game. The OLC is also considering options for a regional game to increase sales and
profits. OLC continues to review options for other lottery game opportunities and will continue
to release new fun and entertaining Scratcher games in fiscal year 2012.
CONTACTING THE LOTTERY’S FINANCIAL MANAGEMENT
This financial report is designed to provide a general overview of the OLC’s financial activity
for all those interested in the OLC’s operations. Questions concerning any of the information
provided in this report, or requests for additional financial information, should be addressed to
the Director of Administration, Oklahoma Lottery Commission, 405-522-7700, 3817 N. Santa Fe
Oklahoma City, Oklahoma 73118.
STATEMENTS OF NET ASSETS
OKLAHOMA LOTTERY COMMISSION
ASSETS
2011 2010
CURRENT ASSETS
Cash and cash equivalents $ 14,033,880 $ 7,948,577
Cash - restricted 1,421,632 5,137,331
Retailer accounts receivable 7,401,763 9,022,140
Accounts receivable - Multi-State Lottery 1,107,253 516,686
TOTAL CURRENT ASSETS 23,964,528 22,624,734
CAPITAL ASSETS, net 148,503 234,050
DEPOSIT WITH MULTI-STATE LOTTERY 3,921,842 3,749,310
TOTAL NONCURRENT ASSETS 4,070,345 3,983,360
TOTAL ASSETS $ 28,034,873 $ 26,608,094
LIABILITIES AND NET ASSETS
CURRENT LIABILITIES
Due to Oklahoma Education Lottery Trust Fund $ 13,665,516 $ 9,398,946
Due to Multi-State Lottery 1,113,907 1,188,475
Prizes payable 6,100,543 5,641,613
Accounts payable 1,045,081 718,578
Accrued liabilities 139,596 159,299
Deferred revenue 421,343 322,666
TOTAL CURRENT LIABILITIES 22,485,986 17,429,577
ACCRUED COMPENSATED ABSENCES, net 56,910 57,826
TOTAL LIABILITIES 22,542,896 17,487,403
NET ASSETS
Invested in capital assets, net 148,503 234,050
Restricted net assets - expendable 5,343,474 8,886,641
TOTAL NET ASSETS 5,491,977 9,120,691
TOTAL LIABILITIES AND NET ASSETS $ 28,034,873 $ 26,608,094
See notes to financial statements.
June 30
7
STATEMENTS OF REVENUES, EXPENSES AND CH ANGES IN NET ASSETS
OKLAHOMA LOTTERY COMMISSION
2011 2010
REVENUES
Scratcher games $ 102,969,295 $ 88,966,304
Pick 3 game 5 ,849,788 6 ,279,596
Cash 5 game 4 ,713,329 5 ,445,698
Hot Lotto game 9,514,730 12,467,350
Mega Millions game 20,954,777 6 ,938,995
Powerball game 54,152,013 79,649,351
TOTAL REVENUE FROM THE SALE OF LOTTERY TICKETS 198,153,932 199,747,294
Retailer application fees 1 12,380 1 15,585
Other 8,234 63,019
TOTAL REVENUES 198,274,546 199,925,898
DIRECT COSTS
Prize expense
Scratcher games 60,780,047 53,159,059
Pick 3 game 2,847,450 2 ,980,480
Cash 5 game 2,170,004 2 ,706,052
Hot Lotto game 4 ,411,148 5 ,894,100
Mega Millions game 10,436,364 3 ,621,713
Powerball game 25,955,811 36,731,212
TOTAL PRIZE EXPENSE 106,600,824 105,092,616
Commissions and incentives to retailers 13,219,310 13,150,714
Instant and on-line costs 5,895,707 5 ,903,703
TOTAL DIRECT COSTS 125,715,841 124,147,033
GROSS PROFIT 72,558,705 75,778,865
OPERATING EXPENSES
Advertising 2 ,493,063 3 ,406,740
Promotion 5 30,206 5 49,825
Salaries, wages and benefits 2,888,869 3 ,091,050
Contracted and professional services 1 58,711 2 38,146
Depreciation 1 00,964 2 00,186
Equipment 27,449 23,096
Rent expense 2 05,136 2 29,973
Office supplies 33,024 62,328
Travel 15,338 27,284
Other general and administrative 1 43,369 1 66,127
TOTAL OPERATING EXPENSES 6,596,129 7 ,994,755
OPERATING INCOME 65,962,576 67,784,110
NONOPERATING INCOME (EXPENSE)
Interest income 3 04,801 4 40,113
Transfers to Oklahoma Department of Mental Health and
Substance Abuse Services (500,000) (500,000)
Transfers to and due to Oklahoma Education Lottery Trust Fund (69,396,091) (69,974,064)
NET NONOPERATING INCOME (EXPENSE) (69,591,290) (70,033,951)
CHANGE IN NET ASSETS (3,628,714) (2,249,841)
NET ASSETS, beginning of year 9,120,691 11,370,532
NET ASSETS, end of year $ 5,491,977 $ 9,120,691
See notes to financial statements.
June 30
Years ended
8
STATEMENTS OF CASH FLOWS
OKLAHOMA LOTTERY COMMISSION
2011 2010
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from retailers $ 186,141,085 $ 185,481,464
Cash payments to prize winners (106,216,462) (105,789,408)
Cash payments to suppliers for goods and services (9,136,032) (10,701,660)
Cash payments to employees for services (2,909,488) (3,128,301)
Cash payments to fund deposit with Multi-State Lottery (172,532) (283,404)
NET CASH PROVIDED BY OPERATING ACTIVITIES 67,706,571 65,578,691
CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES
Payments to Oklahoma Department of Mental Health and
Substance Abuse Services (500,000) (500,000)
Payments to Oklahoma Education Lottery Trust Fund (65,129,521) (68,132,345)
NET CASH USED FOR NONCAPITAL FINANCING ACTIVITIES (65,629,521) (68,632,345)
CASH FLOWS FROM CAPITAL AND RELATED
FINANCING ACTIVITIES
Purchase of capital assets (15,417) (35,727)
NET CASH USED FOR CAPITAL AND RELATED
FINANCING ACTIVITIES (15,417) (35,727)
CASH FLOWS FROM INVESTING ACTIVITIES
Interest received 307,971 449,435
NET CASH PROVIDED BY INVESTING ACTIVITIES 307,971 449,435
NET CHANGE IN CASH AND CASH EQUIVALENTS 2,369,604 (2,639,946)
CASH AND CASH EQUIVALENTS, beginning of year 13,085,908 15,725,854
CASH AND CASH EQUIVALENTS, end of year $ 15,455,512 $ 13,085,908
OPERATING ACTIVITIES
Operating income $ 65,962,576 $ 67,784,110
Adjustment to reconcile operating income to
net cash provided by operating activities
Depreciation 100,964 200,186
Bad debt expense 4 1,574 30,714
Changes in operating assets and liabilities
Retailer accounts receivable 1,575,633 (1,028,222)
Accounts receivable - Multi-State Lottery (590,567) 446,915
Deposit with Multi-State Lottery (172,532) (283,404)
Due to Multi-State Lottery (74,568) (572,228)
Accounts payable and accrued liabilities 305,884 (165,708)
Prizes payable 458,930 (525,258)
Deferred revenue 98,677 (308,414)
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 67,706,571 $ 65,578,691
See notes to financial statements.
June 30
Years ended
9
NOTES TO FINANCIAL STATEMENTS
OKLAHOMA LOTTERY COMMISSION
June 30, 2011
10
NOTE A--REPORTING ENTITY
The Oklahoma Lottery Commission (the “OLC”), was formed by the citizens of Oklahoma upon
passage of a legislative referendum authorizing the Oklahoma Education Lottery Act (the “Act”),
codified as Title 3A, Section 701, et. seq., of the Oklahoma Statutes. The OLC is a component
unit of the State of Oklahoma (the “State”) responsible for administering lotteries in accordance
with the Act. The Act established a board of seven trustees appointed by the Governor to
oversee operations of the OLC. The Board of Trustees exercises powers comparable to those of
the governing board of an entrepreneurial organization. The OLC transfers net proceeds as
defined by the Act. Therefore, the OLC is reported as a discretely presented component unit in
the State of Oklahoma’s Comprehensive Annual Financial Report (“CAFR”).
NOTE B--SIGNIFICANT ACCOUNTING POLICIES
Method of Accounting: The OLC is accounted for as an enterprise fund. Enterprise funds are used
to account for activities that are financed and operated in a manner similar to private business
enterprises where the costs of providing lottery games to the general public on a continuing
basis are to be financed through the sale of lottery game tickets. The Act requires that all costs of
providing lottery games, including capital costs, be recovered from the sale of lottery game tickets.
The Governmental Accounting Standards Board (“GASB”) is the recognized standard setting body
for accounting principles generally accepted applicable to governmental proprietary activities
in the United States of America. The OLC applies all applicable GASB pronouncements and all
applicable Financial Accounting Standards Board (“FASB”) pronouncements issued on or before
November 30, 1989 when not in conflict with GASB pronouncements. In accordance with GASB
Statement No. 20, the OLC has elected not to implement FASB Statements after the applicable date.
Basis of Accounting: The financial statements are prepared using the economic resources
measurement focus and the accrual basis of accounting in accordance with accounting principles
generally accepted in the United States of America. Under this method, revenues are recognized
when they are earned and expenses are recognized when they are incurred.
The primary operating revenue of the OLC is ticket sales from games. Nonoperating income
consists mostly of interest income. “Operating expenses” are defined under the Act as “all costs of
doing business, including but not limited to prizes, commissions, and other compensation paid to
retailers, advertising and marketing costs, personnel costs, capital costs, amounts held in or paid
from the fidelity revolving fund, administration and operation of the OLC and other operating
costs”. All expenses not meeting this definition are reported as nonoperating expenses. The only
nonoperating expenses are statutory required transfers to the Oklahoma Education Lottery Trust
Fund (“OELTF”) and the Oklahoma Department of Mental Health and Substance Abuse Services.
NOTES TO FINANCIAL STATEMENTS--Continued
OKLAHOMA LOTTERY COMMISSION
June 30, 2011
11
NOTE B--SIGNIFICANT ACCOUNTING POLICIES--Continued
Use of Estimates: The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Revenue Recognition: Revenue for Pick 3, Cash 5, Hot Lotto, Mega Millions and Powerball
(collectively referred to as “on-line games”) is recognized when tickets are sold to the public by
contracted retailers, except for tickets sold in advance of the draw date for which deferred
revenue is recorded. Revenue for scratcher games is recognized upon activation of ticket packs
for sale by the retailers.
Every scratcher ticket game has a predetermined number of free tickets in its prize structure.
The majority of free tickets relate to scratcher ticket games. Revenue and prize expense are
shown net of free tickets.
Commissions: Retailers receive a 6% commission on total sales and 0.75% commission on prizes
cashed.
Prizes: Prize expense for scratcher ticket games is recorded as an estimate at the time the
related revenue is recognized based on the predetermined prize structure for each game;
periodically, the prize expense is adjusted to reflect amounts actually won. Prize expense for
on-line games is recorded at the time the related revenue is recognized based on the known
prizes.
Unclaimed Prizes: Prizes must be claimed within 90 days after the game-end (end of sales) for
scratcher games and within 180 days after the draw date for on-line games. The first $500,000 of
unclaimed prize money accruing annually must be transferred to the Oklahoma Department of
Mental Health and Substance Abuse Services for the treatment of compulsive gambling
disorders and educational programs related to such disorders.
In accordance with section 724 of the Act, unclaimed prizes are added to a pool from which
future prizes are awarded or used for special prize promotions. Under the Act, unclaimed
prizes do not constitute net lottery proceeds and are restricted funds that are not available for
transfer to the OELTF. Total unclaimed prizes amounted to $4,612,086 and $6,065,325 for fiscal
years 2011 and 2010, respectively. Unclaimed prizes are netted against prize expense in the
statement of revenues, expenses and changes in net assets.
NOTES TO FINANCIAL STATEMENTS--Continued
OKLAHOMA LOTTERY COMMISSION
June 30, 2011
12
NOTE B--SIGNIFICANT ACCOUNTING POLICIES--Continued
Net Assets: The OLC's net assets are classified as follows:
Invested in capital assets - This represent's the OLC’s total investment in capital assets.
Restricted net assets – expendable - This represents cash maintained in the OLC’s restricted
fidelity fund, deposits with the Multi-State Lottery (“MUSL”), and balance of unclaimed
prizes to be used on future prizes or special prize promotions.
Gross Proceeds: Gross proceeds, as defined by the Act, consist of all revenue derived from the
sale of lottery game tickets or shares and all other monies derived from the lottery games.
Net Proceeds: Net proceeds, as defined by the Act, consist of all revenue derived from the sale
of lottery game tickets or shares and all other monies derived from the lottery games, less
operating expenses and prizes.
Operating Expenses: Operating expenses, as defined by the Act, in the determination of net
proceeds, consist of all costs of doing business including, but not limited to, prizes,
commissions, and other compensation paid to lottery retailers, advertising and marketing costs,
rental fees, personnel costs, capital costs, depreciation of property and equipment and other
operating costs.
Cash and Cash Equivalents: The OLC’s cash and cash equivalents are considered to be cash on-hand
and interest bearing demand deposits held by the Oklahoma State Treasurer.
Retailer Accounts Receivable: Retailer accounts receivable represents lottery proceeds due from
retailers for on-line ticket sales and activated ticket packs for scratcher games less commissions
due to retailers and prizes paid by the retailers. Lottery proceeds are collected weekly by the
OLC from retailer trust accounts established in trust for benefit of the OLC.
Capital Assets, Net: Capital assets, which consist of machinery, equipment, computers and
software are stated at cost less accumulated depreciation. The OLC capitalizes all property and
equipment purchases of $500 or more. Depreciation is computed using the straight-line method
over the estimated useful lives of three, five and ten years. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from the accounts, and
any resulting gain or loss is reflected in the results from operations in the period of disposal.
NOTES TO FINANCIAL STATEMENTS--Continued
OKLAHOMA LOTTERY COMMISSION
June 30, 2011
13
NOTE B--SIGNIFICANT ACCOUNTING POLICIES--Continued
Restricted Cash: In accordance with the Act, retailers contribute a fee to a fidelity fund upon
acceptance as a retailer for the OLC. The fund is used to cover losses the OLC may incur due to
misfeasance, nonfeasance or malfeasance of retailers and to contract for investigations, reviews
or audits. At the end of any fiscal year, the OLC must transfer to the OELTF any amount in the
restricted fidelity fund which exceeds the budgeted expenses from the fund for the next fiscal
year plus $500,000. At June 30, 2011 and 2010 no amounts were available for transfer as net
proceeds. During fiscal years 2011 and 2010, $41,574 and $30,714 respectively, was used to
reimburse the OLC for retailer accounts that were delinquent and in collection status. Receipts
from retailers in collection status are deposited back to the fidelity fund. The fidelity fund is
held in a separate account and appears in the accompanying statement of net assets as restricted
funds and expendable restricted net assets.
Deposits with MUSL are included in expendable restricted net assets. These funds are in the
possession of the MUSL and serve as a contingency to protect members from unforeseen prize
liabilities.
Current unclaimed prizes in excess of $500,000 and the balance from prior years are included in
restricted cash. These funds are to be utilized to enhance future OLC prizes or promotions.
As of June 30, 2011 and 2010, restricted cash totaled $1,421,632 and $5,137,331 respectively.
Risk Management: The OLC is exposed to various risks of loss related to torts, destruction of
assets due to theft or damage, errors and omissions, injuries to employees, and natural
disasters. The OLC has coverage to substantially cover these risks through a self-insured pool
for agencies of the State of Oklahoma. This coverage is administered by the Risk Management
Division of the Department of Central Services for the State of Oklahoma.
Compensated Absences: Employees earn the right to be compensated during absences for
vacation and compensatory time. Unused leave benefits are paid to employees upon separation
from service. The cost of vacation and compensatory time is accrued in the period in which it is
earned.
Deposit with MUSL: The OLC has contributed to a set prize reserve fund separately maintained
by the MUSL (Note J) to pay certain prizes associated with Powerball, Hot Lotto and Mega
Millions. With certain restrictions, the OLC's portion of this prize reserve fund is refundable
upon termination of the OLC's agreement with the MUSL or upon the disbanding of the MUSL.
NOTES TO FINANCIAL STATEMENTS--Continued
OKLAHOMA LOTTERY COMMISSION
June 30, 2011
14
NOTE B--SIGNIFICANT ACCOUNTING POLICIES--Continued
Deposit with MUSL--Continued: As a member of the MUSL, the OLC is required to make
deposits in various prize reserve funds maintained by the MUSL. These deposits are included
in the 50% prize expense computed on Powerball and Hot Lotto sales, and in the 51.5% prize
expense computed on Mega Millions sales. The net amount of 50% or 51.5% prize expense, less
the amount required to pay non-jackpot prizes within the State, is paid to the MUSL. This
payment is to cover the OLC’s share of current jackpot prizes based on the OLC’s percent of
sales for each drawing and the OLC share of the prize reserve fund. The prize reserve fund
serves as a contingency reserve to protect all the MUSL members, including the OLC, from
unforeseen prize liabilities. The balances of the deposits are made up of the following:
June 30, 2011 June 30, 2010
Set Prize Reserve Account $ 663,044 $ 867,753
Prize Reserve Account 3,240,467 2,878,099
Balance of Unreserved Account 18,331 3,458
$ 3,921,842 $ 3,749,310
Bad Debt Expense: The OLC recognizes bad debt expense when retailer account receivables are
greater than 90 days old. The accounts receivable balance due to the OLC is satisfied at that time
by a transfer of funds from the restricted fidelity fund. The OLC may continue its effort to
collect these accounts. Any collection from a retailer balance previously charged to bad debt
expense will be deposited back to the restricted fidelity fund. For the years ended June 30, 2011
and 2010, bad debt expense was $41,574 and $30,714, respectively.
Reclassifications: Certain amounts in the prior year’s financial statements have been reclassified
to conform with the current year presentation.
NOTE C--CASH AND DEPOSITS
Custodial credit risk is the risk that in the event of a bank failure, the government's deposits
may not be returned to it. The OLC does not have a deposit policy for custodial credit risk.
However, all of the OLC's bank deposits are held by the Oklahoma State Treasurer (“OST”) and
therefore, as required by Oklahoma State Statutes, all bank deposits held by the OST are insured
by Federal Deposit Insurance, collateralized by securities held by the cognizant Federal Reserve
Bank, or invested in U.S. government obligations and therefore are not considered to be
exposed to custodial credit risk. As of June 30, 2011 and 2010, the carrying amounts of the
OLC’s deposits with the OST were $15,455,512 and $13,085,908, respectively, and the bank
balances were $15,490,266 and $13,101,320, respectively.
NOTES TO FINANCIAL STATEMENTS--Continued
OKLAHOMA LOTTERY COMMISSION
June 30, 2011
15
NOTE D--CAPITAL ASSETS, NET
The following is a summary of changes in capital assets and accumulated depreciation during
the fiscal year indicated:
Beginning Ending
Balance Additions Deletions Balance
Capital Assets
Machinery and equipment $ 736,965 $ 15,417 $ - $ 752,382
Computers and software 400,006 - - 400,006
1,136,971 15,417 - 1,152,388
Accumulated depreciation
Machinery and equipment 505,331 99,769 - 605,100
Computers and software 397,590 1,195 - 398,785
902,921 100,964 - 1,003,885
Total capital assets, net $ 234,050 $ (85,547) $ - $ 148,503
Year Ended June 30, 2011
Beginning Ending
Balance Additions Deletions Balance
Capital Assets
Machinery and equipment $ 703,536 $ 33,429 $ - $ 736,965
Computers and software 397,708 2,298 - 400,006
1,101,244 35,727 - 1,136,971
Accumulated depreciation
Machinery and equipment 378,772 126,559 - 505,331
Computers and software 323,963 73,627 - 397,590
702,735 200,186 - 902,921
Total capital assets, net $ 398,509 $ (164,459) $ - $ 234,050
Year Ended June 30, 2010
NOTES TO FINANCIAL STATEMENTS--Continued
OKLAHOMA LOTTERY COMMISSION
June 30, 2011
16
NOTE E--COMPENSATED ABSENCES
Compensated absences: The following is a summary of changes in the OLC's liability for
compensated absences during the period ended June 30:
Beginning Ending Current
Balance Additions Deletions Balance Portion
Compensated absences 2011 $ 173,477 $ 130,553 $ 1 33,300 $ 170,730 $ 113,820
Compensated absences 2010 $ 187,401 $ 132,309 $ 1 46,233 $ 173,477 $ 115,651
NOTE F--OPERATING LEASES
The OLC has entered into various operating leases for office space and equipment used in its
daily operations. Pursuant to Oklahoma State Statutes, the OLC's operating leases are limited
to terms of one year and must be renewed annually. Accordingly, the OLC has no long-term
commitments under the operating leases as of June 30, 2011 or 2010. Rent expense under all
operating leases was $205,136 for the year ended June 30, 2011, and $229,973 for the year ended
June 30, 2010.
NOTE G--EDUCATION LOTTERY ACCOUNT
In accordance with the Act, all net proceeds of the OLC are transferred to the Education Lottery
Account. Net proceeds consist of all revenue derived from the sale of lottery game tickets or
shares and all other monies derived from the lottery games less operating expenses and prizes.
Beginning in fiscal year 2009, the OLC makes transfers to the OELTF calculated at 35% of the
total revenue year-to-date, less amounts previously paid. The net proceeds transfer
requirement percentage for years prior to fiscal year 2009 was 30%. All remaining net income at
the end of the fiscal year is also remitted to the OELTF, unless specifically exempted by statute.
According to the Act, amounts transferred to the OELTF are to be appropriated by the
Legislature to education programs according to the parameters established in the Act.
Following is an executive summary of these statutory provisions. For the full text, see Title 3A,
Section 713 of the Oklahoma Statutes available on the OLC website.
NOTES TO FINANCIAL STATEMENTS--Continued
OKLAHOMA LOTTERY COMMISSION
June 30, 2011
17
NOTE G--EDUCATION LOTTERY ACCOUNT--Continued
The following is a summary of the amounts available for transfer to the OELTF during the years
ended June 30, 2011 and 2010:
June 30
2011 2010
Net assets, beginning of year $ 9 ,120,691 $ 11,370,532
Change in net assets before transfers to OELTF 65,767,377 67,724,223
Net assets available for transfer to OELTF
before amounts invested in capital assets
and restricted net assets 74,888,068 79,094,755
Less: Net assets invested in capital assets (148,503) (234,050)
Less: Restricted net assets - expendable (5,343,474) (8,886,641)
Transfers to and due OELTF for the year $ 69,396,091 $ 69,974,064
5% Teachers’ Retirement System Dedicated Revenue Revolving Fund
5% School Consolidation and Assistance Fund (“SCAF”): if the SCAF equals
$5,000,000, this 5% will be allocated to public schools to purchase technology
equipment to conduct on-line testing
45% Kindergarten through twelfth grade public education, including compensation and
benefits for public school teachers and support employees; and early childhood
development programs
45% Tuition grants, loans and scholarships to citizens of this state for attending colleges
and universities located within this state, or to attend Oklahoma Department of
Career and Technology Education institutions; construction of educational facilities
or capital outlay projects or technology for elementary school districts, independent
school districts, the Oklahoma State System of Higher Education, and career and
technology education; endowed chairs for professors at institutions of higher
education operated by the Oklahoma State System of Higher Education; and
programs and personnel of the Oklahoma School for the Deaf and the Oklahoma
School for the Blind
NOTES TO FINANCIAL STATEMENTS--Continued
OKLAHOMA LOTTERY COMMISSION
June 30, 2011
18
NOTE H--RETIREMENT PROGRAM
The OLC contributes to the Oklahoma Public Employees Retirement System (“OPERS”) cost
sharing multiple-employer defined benefit plan. OPERS was established in 1964 by the
Oklahoma Legislature and covers substantially all employees of the State except those covered
by six other plans sponsored by the State and also covers employees of participating counties
and local agencies. The plan provides that all eligible persons, except those specifically
excluded, shall become members of OPERS as a condition of their employment. The
supervisory authority for the management and operation of OPERS is its Board of Trustees.
OPERS offers retirement and disability benefits, cost of living adjustments on an ad-hoc basis,
life insurance benefits and survivor benefits. The Plan's provisions are established under Title
74 of the Oklahoma Statutes.
The following is a recap of OPERS' mandated contribution rates for fiscal years:
2011 2010 2009
Employee contributions 3.50% 3.50% 3.50%
Additional % for members electing stepup 2.91% 2.91% 2.91%
Employer contributions 15.50% 15.50% 14.50%
For the years ended June 30, 2011, 2010 and 2009 the OLC's contributions to OPERS were
$295,643, $317,954 and $295,497, respectively. All employer contributions were equal to the
required contribution rates for the year.
A comprehensive annual financial report containing financial statements and required
supplementary information for the Oklahoma Public Employee Retirement System is issued
and publicly available by writing the Oklahoma Public Employee Retirement System, Post
Office Box 53007, Oklahoma City, Oklahoma 73152-3007.
NOTE I--CONTINGENCIES
The OLC is subject to litigation in the ordinary course of its operations. In the opinion of the OLC's
management and its legal counsel, the outcome of such litigation will not have a material impact
on the financial position or cash flows of the OLC for the years ended June 30, 2011 and 2010.
NOTES TO FINANCIAL STATEMENTS--Continued
OKLAHOMA LOTTERY COMMISSION
June 30, 2011
19
NOTE J--CONTRACTUAL ARRANGEMENTS
In August 2005 the OLC entered into a contract with Scientific Games International, Inc. ("SGI")
to provide amongst other things, services and equipment to operate its lotteries. Due to
Oklahoma Statutes, the OLC may not contract for a period longer than one year. However, the
contract with SGI does contain six one-year renewal options which the OLC's Board of Trustees
may renew annually. Under the terms of the contract, the OLC pays SGI a fee based on a
percentage of the OLC's sales. For the years ended June 30, 2011 and 2010, the OLC paid SGI
$5,895,707 and $5,903,703, respectively.
The OLC is a member of the MUSL which operates games on behalf of participating lotteries.
MUSL currently operates the Powerball, Mega Millions and Hot Lotto games for the OLC.
Under the OLC's agreement with the MUSL, the OLC must remit 50% of its Powerball ticket
sales, 50% of its Hot Lotto ticket sales and 51.5% of its Mega Millions ticket sales, less the
amount of all non-jackpot winning tickets sold. The OLC is responsible for paying winning
tickets purchased in Oklahoma; therefore, it is able to deduct winning tickets sold from the
amount due to the MUSL on its ticket sales. As of June 30, 2011 and 2010, the OLC owed the
MUSL $1,113,907 and $1,188,475 for ticket sales and the MUSL owed the OLC $401,609 and
$516,686 for non-jackpot winning tickets. Additionally, the MUSL owed the OLC $705,644
related to a grand prize jackpot ticket at June 30, 2011. The OLC has recorded these items at
their gross amounts in the accompanying statements of net assets.
NOTE K--RECENTLY ISSUED PRONOUNCEMENTS
During December 2010, the GASB issued Statement No. 62, Codification of Accounting and
Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA
Pronouncements (“Statement 62”). The requirements of Statement 62 are effective for periods
beginning after December 15, 2011. Statement 62 is intended to enhance the usefulness of its
Codification by incorporating guidance that previously could only be found in certain Financial
Accounting Standards Board (“FASB”) and American Institute of Certified Public Accountants
(“AICPA”) pronouncements. Statement 62 is not expected to have a significant impact on the
OLC’s financial statements.
NOTES TO FINANCIAL STATEMENTS--Continued
OKLAHOMA LOTTERY COMMISSION
June 30, 2011
20
NOTE K--RECENTLY ISSUED PRONOUNCEMENTS--Continued
During June 2011, the GASB issued Statement No. 63, Financial Reporting of Deferred Outflows
of Resources, Deferred Inflows of Resources, and Net Position (“Statement 63”). The
requirements of Statement 63 are effective for periods beginning after December 15, 2011.
Statement 63 provides financial reporting guidance for deferred outflows of resources and
deferred inflows of resources. Previous financial reporting standards do not include guidance
for reporting those financial statement elements, which are distinct from assets and liabilities.
Management is currently evaluating the impact Statement 63 will have on the OLC’s financial
statements.
21
Independent Auditors’ Report on Compliance and Other Matters and on Internal Control
Over Financial Reporting Based on an Audit of Financial Statements
Performed in Accordance with Government Auditing Standards
The Board of Trustees
Oklahoma Lottery Commission
We have audited the financial statements of the Oklahoma Lottery Commission (the “OLC”), a
component unit of the State of Oklahoma, as of and for the year ended June 30, 2011. We conducted
our audit in accordance with auditing standards generally accepted in the United States of
America and the standards applicable to financial audits contained in Government Auditing
Standards, issued by the Comptroller General of the United States of America.
Compliance and Other Matters
As part of obtaining reasonable assurance about whether the OLC’s financial statements are free
of material misstatement, we performed tests of compliance with certain provisions of laws and
regulations, noncompliance with which could have a direct and material effect on the determination
of financial statement amounts. However, providing an opinion on compliance with those
provisions was not an objective of our audit and, accordingly, we do not express such an opinion.
The results of our tests disclosed no instances of noncompliance or other matters that are required
to be reported under Government Auditing Standards.
Internal Control over Financial Reporting
In planning and performing our audit, we considered the OLC's internal control over financial
reporting as a basis for designing our auditing procedures for the purpose of expressing our
opinion on the financial statements, but not for the purpose of expressing an opinion on the
effectiveness of the OLC's internal control over financial reporting. Accordingly, we do not
express an opinion on the effectiveness of the OLC's internal control over financial reporting.
A deficiency in internal control exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, to
prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency,
or combination of deficiencies, in internal control, such that there is a reasonable possibility that a
material misstatement of the entity’s financial statements will not be prevented, or detected and
corrected on a timely basis.
22
Our consideration of internal control over financial reporting was for the limited purpose
described in the first paragraph of this section and was not designed to identify all deficiencies
in internal control over financial reporting that might be deficiencies, significant deficiencies or
material weaknesses. We did not identify any deficiencies in internal control over financial
reporting that we consider to be material weaknesses, as defined above.
This report is intended solely for the information and use of the OLC’s Board of Trustees and
management and the State of Oklahoma and is not intended to be and should not be used by
anyone other than these specified parties.
Oklahoma City, Oklahoma
September 8, 2011