1 1 2 3 4 * * * * * * * * * * * * * * * * * 5 6 TEXAS LOTTERY COMMISSION 7 EMERGENCY MEETING 8 9 JANUARY 31, 2001 10 11 * * * * * * * * * * * * * * * * * 12 13 14 15 16 17 18 BE IT REMEMBERED that the TEXAS LOTTERY 19 COMMISSION EMERGENCY meeting was held on the 31ST of 20 JANUARY, 2001, from 9:00 a.m. to 9:45 a.m., before 21 Brenda J. Wright, RPR, CSR in and for the State of 22 Texas, reported by machine shorthand, at the Offices 23 of the Texas Lottery Commission, West Sixth Street, 24 Austin, Texas, whereupon the following proceedings 25 were had: WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 2 1 APPEARANCES 2 3 Chairman: Mr. C. Tom Clowe, Jr. 4 Commissioners: 5 Ms. Elizabeth D. Whitaker (not present) Mr. Anthony J. Sadberry 6 General Counsel: 7 Ms. Kimberly L. Kiplin 8 Executive Director: Ms. Linda Cloud 9 Charitable Bingo Operations Director: 10 Mr. Billy Atkins 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 3 1 INDEX 2 3 Appearances...................................... 2 4 AGENDA ITEMS 5 Item Number 1.................................... 4 6 Reporter's Certificate........................... 31 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 4 1 JANUARY 31, 2001 2 COMMISSIONER CLOWE: Good morning. It 09:11 3 is 9:03 a.m., January the 31st. I am calling to order 09:11 4 this meeting of the Texas Lottery Commission, which is 09:11 5 an emergency meeting. And my name is C. Tom Clowe, 09:11 6 Junior. Commissioner Anthony Sadberry is present. 09:11 7 Commissioner Betsy Whitaker is absent. 09:11 8 I'm going to ask the general counsel to 09:11 9 comment on the nature of this meeting. 09:11 10 MS. KIPLIN: Good morning. For the 09:11 11 record, my name is Kimberly Kiplin. Based on the 09:11 12 facts as I understand them to be currently and after 09:12 13 consultation with key members of the staff and with 09:12 14 the chairman, in my opinion, the emergency meeting was 09:12 15 justified in noticing it up and is necessary because 09:12 16 of an urgent public necessity -- necessity, pardon me, 09:12 17 to take immediate appropriate action regarding 09:12 18 information provided by the Texas Lottery Commission 09:12 19 in connection with its instant games. 09:12 20 It has come to the very recent 09:12 21 attention of the Texas Lottery Commission that some of 09:12 22 the information provided may not be correct in some 09:12 23 aspects. Based on recent information that has been 09:12 24 made available to the Lottery Commission, the 09:12 25 commission is presented with the reasonably 09:12 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 5 1 unforeseeable situation that in the view of the 09:12 2 Lottery Commission, requires immediate appropriate 09:12 3 action by the agency. The Lottery Commission believes 09:12 4 the information is such that waiting until a regularly 09:12 5 posted meeting will adversely delay its efforts to 09:12 6 take immediate appropriate action. 09:13 7 As I understand it, the facts presented 09:13 8 that necessitated this meeting were -- arose suddenly 09:13 9 and unexpectedly and were not caused by any neglect or 09:13 10 any admission of any staff in question, and did 09:13 11 require -- justified the call for appropriate 09:13 12 immediate action. 09:13 13 Under the law, Commissioners, the 09:13 14 existence of an emergency depends on the facts in any 09:13 15 given case, and I think as the meeting progresses 09:13 16 today, you will have a better understanding of those 09:13 17 particular facts. As you know, the notice for today 09:13 18 has been limited to solely one item, and that is, the 09:13 19 consideration of and possible discussion and/or action 09:13 20 in connection with the Commission's instant games and 09:13 21 associated informational materials. 09:13 22 And with that, I'll be glad to answer 09:13 23 any questions that you may have of me. 09:13 24 COMMISSIONER CLOWE: I don't think we 09:14 25 have any at this time. I'll ask Linda Cloud to make 09:14 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 6 1 her presentation, please. 09:14 2 MS. CLOUD: Good morning, 09:14 3 Commissioners. You're back to Austin? I didn't 09:14 4 expect you to be back so soon, but I do appreciate you 09:14 5 hastily rearranging your schedules in order to be 09:14 6 here. 7 As you know, protecting the integrity 09:14 8 and security of our games is the most important job 09:14 9 any of us can do working for the Texas Lottery 09:14 10 Commission. It is part of our business that requires 09:14 11 vigilance and oversight as well as tireless dedication 09:14 12 and perseverance. I have given each of you and our 09:14 13 players a personal pledge to do my part to make sure 09:14 14 our games remain fair, that our accounting and 09:14 15 tracking systems are accurate, and that when issues 09:14 16 arise with potential of causing problems for this 09:14 17 lottery, either real or perceived, that I will take 09:14 18 immediate steps to provide adequate notification of 09:14 19 those issues, and to take immediate action to correct 09:14 20 or resolve them. By some accounts, today's issue may 09:14 21 be considered more a current business practice concern 09:15 22 than anything else, based on today's practices and 09:15 23 industry standards. Let me explain. 09:15 24 For the past several weeks, an internal 09:15 25 audit has been underway involving some of our instant 09:15 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 7 1 ticket games. That audit is not yet complete. 09:15 2 However, I wanted to make you are aware of one 09:15 3 preliminary finding that has been brought to my 09:15 4 attention. It involves game information on some 09:15 5 printed materials such as this, and I'm talking about 09:15 6 the selling sheets that we send to our retailers and 09:15 7 our winning tickets remaining, and our website, which 09:15 8 also displays the selling sheets. As you can see, the 09:15 9 selling sheets provides approximate total number of 09:15 10 prizes for each prize level for that particular game, 09:15 11 based on an approximate number of total tickets 09:15 12 printed. This information comes from game specs or 09:16 13 working papers, which we coordinate with our vendors. 09:16 14 It may be easier to visualize if you think of the 09:16 15 working papers as a blueprint set of instructions the 09:16 16 manufacturer uses to create tens of millions of 09:16 17 individual instant tickets. 09:16 18 On Friday evening at the close of 09:16 19 business, Texas Lottery Commission internal auditor 09:16 20 Debra McLeod, based on an internal audit finding, this 09:16 21 is what happened. The information provided in the 09:16 22 selling sheets contains data we request in our 09:16 23 blueprint or working papers provided to our instant 09:16 24 ticket manufacturer. However, this data is based on 09:16 25 hypothetical mathematical models that assumes 100 09:16 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 8 1 percent delivery of all tickets requested. Of course, 09:16 2 this would require error-free printing without any 09:16 3 glitches, dye problems, or other manufacturing defects 09:16 4 which, of course, is inconceivable. In the real 09:17 5 world, this never happens. To compensate, we build in 09:17 6 variances or accept -- acceptable tolerances, 09:17 7 tolerance limits, to allow more or less of whatever 09:17 8 variable is being requested. In other words, an 09:17 9 acceptable limit may result in a few additional top 09:17 10 winning tickets being shipped or all winning tickets 09:17 11 being shipped than we requested, or a few less 09:17 12 tickets. It may also result in the total ticket 09:17 13 shipment totaling more or less tickets than the 09:17 14 millions of tickets that we requested from the working 09:17 15 papers. 09:17 16 Where this becomes an issue for us and 09:17 17 may potentially confuse our players, occurs as the 09:17 18 tickets are being sold. That's because every two 09:17 19 weeks we also issue another document like this one 09:17 20 that has winning tickets remaining in the game. This 09:17 21 information comes directly from our inventory control 09:18 22 data. It's not an approximate data. The data on the 09:18 23 selling sheets and the winning ticket remaining flyers 09:18 24 for instant tickets games and the information that we 09:18 25 have on our website does not match, because one uses 09:18 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 9 1 approximate numbers and the other uses actual numbers. 09:18 2 And there is no room in this lottery for any fuzzy 09:18 3 math. 09:18 4 As a result of this discrepancy in 09:18 5 information and during the duration of this ongoing 09:18 6 internal audit review, I am taking the following 09:18 7 immediate steps to correct this. Number one, in 09:18 8 addition to calling this meeting to inform you, I have 09:18 9 also brought this to the attention of the legislative 09:18 10 leadership. Number two, I have immediately instructed 09:18 11 Mr. King at Gtech to remove any incorrect print 09:18 12 materials from retailer locations, and I have asked 09:19 13 our marketing department to suspend production of all 09:19 14 instant ticket game information for new games that 09:19 15 might be incorrect. And we will begin immediately 09:19 16 adjusting any confusing information regarding active 09:19 17 winning tickets that may be on the lottery's website. 09:19 18 I am pleased to report, however, I have 09:19 19 also been informed by our auditor and want to assure 09:19 20 you and the public that the overall odds of winning 09:19 21 any prize for each instant ticket reviewed, which is 09:19 22 the number we print on the back of each ticket, is 09:19 23 correct and was unaffected. Audit findings at this 09:19 24 point also indicate the overall prize payout 09:19 25 percentage for each game was also unaffected. 09:19 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 10 1 In closing, let me add, based on the 09:19 2 audit information that I have been given so far, in my 09:19 3 opinion, no player has been adversely affected either 09:19 4 and the security and integrity of our instant games 09:20 5 has not been compromised. And with that, I would like 09:20 6 to turn the report over to Debra McLeod and let her 09:20 7 explain to the Commission. 09:20 8 CHAIRMAN CLOWE: Thank you. Good 09:20 9 morning, Debra. 09:20 10 MS. McLEOD: Good morning, 09:20 11 Commissioners. 09:20 12 Just by way of clarification, I would 09:20 13 personally just say that the audit began this month. 09:20 14 And as Linda has outlined, we have begun some work, we 09:20 15 have looked at approximately -- let me get my exact 09:20 16 numbers here. 09:20 17 65 total open games. We've looked at 09:20 18 to date 45 and verified those. We've also verified 09:20 19 three recently closed games, and the information she 09:20 20 relays on the overall odds and prize payout are based 09:20 21 on the review of those 45 open and three closed games. 09:20 22 As Linda has outlined, there is an acceptable variance 09:21 23 for prize level, and by way of just material, I would 09:21 24 like to share with you selling sheets so I could walk 09:21 25 you through this. 09:21 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 11 1 CHAIRMAN CLOWE: Debra, in referring to 09:21 2 the selling sheets, will you identify how this 09:21 3 material is placed in the hands of various parties? 09:21 4 MS. McLEOD: I would rather call on 09:21 5 Toni Smith in marketing to answer that question for 09:21 6 you, Commissioner. 09:21 7 CHAIRMAN CLOWE: Toni, for the 09:21 8 Commission's benefit, I want to understand, before we 09:21 9 have the exact explanation of the selling sheet, where 09:21 10 it goes and who has it and who relies on it. 09:22 11 MS. SMITH: Yes, sir. The selling 09:22 12 sheet is produced as a means of educational 09:22 13 information for our retailers prior to a new game 09:22 14 start, so that when they receive the tickets, they 09:22 15 have an understanding of how the game is played, what 09:22 16 the game features are, the top prize, et cetera. 09:22 17 These are produced, and our normal routine is to try 09:22 18 to get these out to all the retailers, obviously, 09:22 19 before the new game starts. So it take our field reps 09:22 20 two weeks to complete a cycle. So our goal is to get 09:22 21 them out to the district offices so they can be 09:22 22 delivered prior to the game start. Some retailers do 09:22 23 display the selling sheets in their play station. 09:22 24 There is a window that it can slide in. So it is 09:22 25 information that can be viewed by the players. 09:22 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 12 1 CHAIRMAN CLOWE: Thank you. 09:22 2 MS. McLEOD: In addition, we -- as 09:22 3 Linda had referred, we have the same information 09:22 4 reported on our website. And so as a result, I'm just 09:22 5 using this as a point of example, but pretty much 09:23 6 similar information is also relayed onto the website. 09:23 7 As you can see, we have, in this particular game, a 09:23 8 top prize of 21,000 and an estimated 20 winners for 09:23 9 the 21,000 dollar prize. The prize level, of course, 09:23 10 is the 21,000, the 1,000, the 500, 150, and so forth 09:23 11 and so on. Our understanding is that with regard to 09:23 12 the vendor, we have allowed an acceptable variance of 09:23 13 plus or minus two percent on each one of those prize 09:23 14 levels, based on the working papers, and then what 09:23 15 they finally produced for us in the end report. 09:23 16 The -- likewise, we have also allowed 09:23 17 with the vendor a plus or minus three percent 09:23 18 acceptable variance in the total quantity of tickets 09:23 19 shipped. So if it's confusing to understand why the 09:24 20 overall odd is still the same and why is the prize 09:24 21 payout percentage the same, it's because, for 09:24 22 example -- very quickly. 09:24 23 MS. KIPLIN: Debra, do you have a mike? 09:24 24 MS. McLEOD: No, but I'll talk loud 09:24 25 enough. 09:24 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 13 1 MS. KIPLIN: I need you on the record. 09:24 2 CHAIRMAN CLOWE: Let's pause here for 09:24 3 just a minute while we get you a microphone while 09:24 4 you're preparing your exhibit -- or your information. 09:24 5 (OFF THE RECORD.) 09:25 6 MS. McLEOD: Let me go back to this 09:25 7 particular game. What we have found to date in this 09:25 8 game is that we have some variance on each prize 09:25 9 level. We have not completed our audit work to date, 09:25 10 so we can't determine at this point whether it's due 09:25 11 to decreased shipment yet. What we have found, that 09:25 12 several of the prize levels that we had asked for in 09:25 13 our marketing working papers, we did not receive. 09:25 14 Vice versa, on the top tier, we had asked for 20 and 09:25 15 advertised 20 21,000-dollar prizes, and we received 09:25 16 22. So we have an over and under of prizes reported 09:25 17 or advertised. What this comes out to is, although 09:26 18 the prize level or prize payout is the same as what we 09:26 19 asked for, and the overall odds are also the same, for 09:26 20 this particular game, we're looking at approximately 09:26 21 39.6 million in potential revenue, which is the total 09:26 22 number of quantity of tickets we received, which is 09:26 23 19,815,000, times the two-dollar prize -- I mean, 09:26 24 times the two-dollar price of the ticket, gives us 09:26 25 39,630,000 in potential revenue. If we were to take 09:26 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 14 1 the difference that we discovered on this one game and 09:26 2 divide it by that potential revenue, what we're 09:26 3 looking at currently on this one game is 0.7 percent 09:26 4 variance. 09:26 5 The other thing by way of understanding 09:27 6 that I want to explain the purpose of this audit -- 09:27 7 CHAIRMAN CLOWE: Just a minute, Debra. 09:27 8 Is there a question at this point in 09:27 9 time? 09:27 10 MR. SADBERRY: I had a question that 09:27 11 really doesn't necessarily tie into this point in the 09:27 12 presentation. I did want to get clarification, Debra, 09:27 13 and you and Linda both have referred to approximate 09:27 14 winners in each particular category. I do see the 09:27 15 approximate 20 million dollar tickets in game as an 09:27 16 asterisks. Actually, I think you said estimated. Are 09:27 17 you saying that that disclaimer gives an indication 09:27 18 that the winners in each category might be affected by 09:27 19 the estimate of tickets -- 09:27 20 MS. McLEOD: Yes, sir. 09:27 21 MR. SADBERRY: -- produced changing? 09:27 22 Is that what you're talking about? 09:27 23 MS. McLEOD: Exactly. And all we found 09:28 24 by way of this audit is that we also receive from the 09:28 25 vendor a report after they print all the tickets, and 09:28 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 15 1 what we raised to management late Friday was that 09:28 2 there is a better source of information that we could 09:28 3 use and put out on our website that will show exactly 09:28 4 an accurate number of what we received from the 09:28 5 vendor, and therefore, can give that more up to date 09:28 6 information to the public. 09:28 7 MS. CLOUD: Can I explain something 09:28 8 here? Once the tickets are printed and the tickets 09:28 9 are shipped, the instant ticket manufacturer produces 09:28 10 a production tape, and that tape reflects all the 09:28 11 tickets in the game on one tape and all the prizes in 09:28 12 the game on another tape. That tape is encrypted. It 09:28 13 comes to our security division, our security division 09:28 14 goes to our lottery operator and loads the tape. All 09:28 15 those prizes are encrypted and we don't know what 09:28 16 those prizes are until a report is printed after it's 09:28 17 been loaded. So that's one reason this is kind of 09:29 18 like calling the -- getting the horse before the cart 09:29 19 when we put this information out based on our working 09:29 20 papers, but we cannot get the exact information until 09:29 21 the game starts to be shipped. 09:29 22 MR. SADBERRY: If I may follow this 09:29 23 channel. 09:29 24 CHAIRMAN CLOWE: Yes. 09:29 25 MR. SADBERRY: If I understand, Toni 09:29 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 16 1 Smith, you are saying, Toni, there is a value -- a 09:29 2 necessity, as your department sees it, in getting the 09:29 3 advance information out. 09:29 4 MS. SMITH: Yes, sir. 09:29 5 COMMISSIONER SADBERRY: On this 09:29 6 marketing sheet. For purposes of getting familiar 09:29 7 with the game and introducing it and any other things 09:29 8 where you feel it justified to use this data, even 09:29 9 though you are disclaiming that it is an 09:29 10 approximate -- 09:29 11 MS. SMITH: Yes, sir. 09:29 12 MR. SADBERRY: -- database. 09:29 13 CHAIRMAN CLOWE: And I had a couple of 09:29 14 questions as well. Would you restate the percentages, 09:29 15 Debra, that -- I assume when you give us those, they 09:30 16 are in the contract with our vendors that must be 09:30 17 adhered to? 09:30 18 MS. McLEOD: If I'm understanding you 09:30 19 correctly, you're asking about the two percent plus or 09:30 20 minus acceptable variance in the prize level? 09:30 21 CHAIRMAN CLOWE: Yes. 09:30 22 MS. McLEOD: The two percent is stated 09:30 23 within, my understanding, an amendment to the RFP that 09:30 24 both -- that all the parties were aware of when they 09:30 25 were looking at the proposal. The plus or minus three 09:30 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 17 1 percent acceptable variance for shipping is what is on 09:30 2 the marketing work papers within each instant ticket 09:30 3 game. Therefore, also, both Linda and the vendor 09:30 4 signed those work papers as agreement, like a work 09:30 5 order agreement as to what each individual instant 09:30 6 game will look like. 09:30 7 CHAIRMAN CLOWE: And in the example 09:30 8 that you gave us, there was an overrun of two prizes 09:30 9 at the 21,000 level, being a total of 22. Am I 09:30 10 correct in what I understood there? 09:31 11 MS. McLEOD: Yes, sir. 09:31 12 CHAIRMAN CLOWE: And you're seeing 09:31 13 examples at the prize levels of some being greater and 09:31 14 some being lesser than this estimate? 09:31 15 MS. McLEOD: Correct. 09:31 16 CHAIRMAN CLOWE: Which comes from the 09:31 17 working papers and is incorporated into what you're 09:31 18 identifying as a selling sheet that goes to the 09:31 19 retailers and, thus, to the players. And it's then my 09:31 20 understanding what you've told us, Linda, that it is 09:31 21 your plan to change this practice and to use the 09:31 22 actual data in information that you are sending to the 09:31 23 retailers, putting on the website, and using in other 09:31 24 means of communication to state the odds of prizes at 09:31 25 each level. 09:31 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 18 1 MS. CLOUD: We think it's still 09:31 2 important to allow the retailers to see what the 09:31 3 makeup of the game is, what the prizes are in the 09:31 4 game. What we are planning to do is not print the 09:31 5 number of tickets for each of those prize levels on 09:32 6 our selling sheets anymore, leave the number in the 09:32 7 game out, and then when we receive the tapes and run 09:32 8 the tapes, to know what our prize breakout is, then 09:32 9 we'll actually key that into our website so the 09:32 10 players, those having access to a computer, then, 09:32 11 could get the exact number of prizes per prize level 09:32 12 off the Web, and that would be accurate. 09:32 13 CHAIRMAN CLOWE: Now, what I'm driving 09:32 14 at here is an understanding from a player's viewpoint 09:32 15 of what you have told us. And what I think I am 09:32 16 hearing is that the overall prize payout in the game 09:32 17 is in tolerance. It that correct? 09:32 18 MS. CLOUD: That's correct. 09:32 19 CHAIRMAN CLOWE: The issue is, for 09:32 20 those that look at the different prize levels, because 09:32 21 of the difference in what is delivered as opposed to 09:32 22 what is ordered and approved by you, I think, at the 09:33 23 time the order is placed, could cause some variance 09:33 24 both up and down in the actual number at different 09:33 25 layers and that could affect the players as they view 09:33 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 19 1 this game. 09:33 2 MS. CLOUD: That's right. 09:33 3 CHAIRMAN CLOWE: All right. And that 09:33 4 would be a player's view of what you're telling us. 09:33 5 Am I correct in that assumption? 09:33 6 MS. McLEOD: I won't go to whether 09:33 7 it'll affect the players, it's just a matter of 09:33 8 getting more accurate information to the public and 09:33 9 wondering whether the asterisk, where we -- while we 09:33 10 say that the overall odds are -- like on this game, 09:33 11 4.02, we verified that that is correct. 09:33 12 CHAIRMAN CLOWE: That's correct. 09:33 13 MS. McLEOD: And we verified that the 09:33 14 prize payout for this game, which is not advertised, 09:33 15 is also correct. 09:33 16 CHAIRMAN CLOWE: Correct. I understand 09:33 17 that. 09:33 18 MS. McLEOD: We just want to make sure 09:33 19 while we've asterisked this game up there, it says, 09:33 20 based on approximately 20 million total tickets in 09:33 21 game, we just want to make very clear that this is an 09:34 22 estimate and that people are not relying that, for 09:34 23 this particular game, there was 20 21,000-dollar 09:34 24 prizes. 09:34 25 CHAIRMAN CLOWE: And you have that 09:34 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 20 1 stated here on this selling sheet. 09:34 2 MS. McLEOD: Correct. 09:34 3 CHAIRMAN CLOWE: And the basis for my 09:34 4 question is, as a player, if I heard this, I would 09:34 5 want to ask the question, what does this mean to me. 09:34 6 MS. McLEOD: Exactly. 09:34 7 CHAIRMAN CLOWE: And I'm trying to get 09:34 8 clarification, and I think you have clarified that. 09:34 9 MS. McLEOD: We just feel there is 09:34 10 more -- or from our internal audit, we just feel 09:34 11 management is given more accurate information at the 09:34 12 point we receive the tickets from the vendor and the 09:34 13 tape load with a report, that that information could 09:34 14 also be distributed to the players to give them, as 09:34 15 well, the most up to date information that management 09:34 16 has received. And that is the purpose of what we 09:34 17 have -- 09:34 18 CHAIRMAN CLOWE: I understand that and 09:34 19 it's clear in my mind. And now, Linda, again, this is 09:34 20 redundant, but I want to state it. You plan to change 09:34 21 this information from what is preliminary and going 09:35 22 out two weeks before the game goes to the retailers, 09:35 23 it's on our website, it's in other information going 09:35 24 out, to reflect exactly what is delivered in the final 09:35 25 production of the game to Gtech and then to the 09:35 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 21 1 retailers. Is that correct? 09:35 2 MS. CLOUD: That's correct. 09:35 3 CHAIRMAN CLOWE: All right. I think I 09:35 4 have a good understanding. 09:35 5 MS. SMITH: For clarification, 09:35 6 Commissioner, what we would send out in advance would 09:35 7 not show the number of prize levels by price point if 09:35 8 we want to get it out prior to the game. So we would 09:35 9 have to delete that information, but we could show 09:35 10 that update on the website. 09:35 11 CHAIRMAN CLOWE: All right. 09:35 12 MS. SMITH: Because we don't have the 09:35 13 information about the actual end of production -- 09:35 14 CHAIRMAN CLOWE: You would withhold 09:35 15 that information until you got the final. What do you 09:35 16 call the final run? What's the term? 09:35 17 MS. SMITH: The end of production prize 09:35 18 structure. 09:35 19 CHAIRMAN CLOWE: All right. 09:36 20 MR. SADBERRY: And if I may, 09:36 21 Mr. Chairman. What's the timing of that document in 09:36 22 relationship to this -- the previous practice was the 09:36 23 advance marketing sheet. How does it relate to the 09:36 24 actual production of the game when you can really 09:36 25 state how many tickets are in each category? 09:36 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 22 1 MS. CLOUD: About three weeks. We send 09:36 2 that out to -- we print that more than three weeks 09:36 3 out, but we send that out about two weeks prior to the 09:36 4 game hitting the street, so by the time we get the 09:36 5 game and load the tapes and ship the tickets, it's 09:36 6 about three weeks. 09:36 7 MR. SADBERRY: And you can produce the 09:36 8 actual accurate data when? At the time the game is 09:36 9 produced? 09:36 10 MS. CLOUD: At the time the game is 09:36 11 shipped. 09:36 12 COMMISSIONER SADBERRY: Is shipped? 13 Okay. 14 And if I may, Mr. Chairman, one final 09:36 15 point. It's kind of back to the contracting issue. 09:36 16 Do I understand you to say, Linda, that your 09:36 17 understanding -- and Toni, of the contract is, these 09:36 18 variances that establishes the tolerances where in 09:36 19 some instances you might have 20, and then the exact 09:36 20 number you requested, and in this example, the 09:37 21 21,000-dollar category, you might have 22, which would 09:37 22 be an overage, or you might have 18, which is under. 09:37 23 You're saying that that is allowable under the 09:37 24 contract with the vendor? 09:37 25 MS. CLOUD: Only two percent is 09:37 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 23 1 allowed. 09:37 2 MR. SADBERRY: In the variance. 09:37 3 MS. CLOUD: Within the variance. 09:37 4 Anything over that is outside of the variance. And 09:37 5 that we'll have to deal with by the time we get 09:37 6 through with the audit. That's not what we're 09:37 7 addressing today, but that will be what we look at. 09:37 8 MS. McLEOD: Specifically, on this 09:37 9 particular game, we had agreed to 20 top-tier prizes. 09:37 10 Two percent of that is .4, so anything beyond .4 of a 09:37 11 ticket is a -- a question we have back to the vendor. 09:37 12 In this case, we have two tickets, so we would be 09:37 13 looking at the difference between the two tickets over 09:37 14 they gave us and the .4 of the variance we would 09:37 15 accept. So we're looking at 1.6 greater, for that 09:37 16 particular prize level. 17 MS. KIPLIN: For this particular prize 09:38 18 level. 09:38 19 MS. McLEOD: For this particular prize 09:38 20 level at this particular game. 09:38 21 CHAIRMAN CLOWE: Intolerance overall, 09:38 22 intolerance insofar as the requirements, but a 09:38 23 variance at the prize level. That's what you're 09:38 24 pointing out. 09:38 25 MS. CLOUD: And Commissioners, I would 09:38 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 24 1 like to say that this seems to be an industry 09:38 2 standard. It kind of is something that is addressed 09:38 3 by that -- that has been an -- not an issue, but a 09:38 4 situation with all vendors, and that's -- we're 09:38 5 looking at that now. 09:38 6 CHAIRMAN CLOWE: All right. You've 09:38 7 come to my next question, then. And Debra, we have 09:38 8 not completed your report, I understand, but I think 09:38 9 these questions are important. 09:38 10 MS. McLEOD: Certainly. 09:38 11 CHAIRMAN CLOWE: I would like a more 09:38 12 definitive comment from you on what is the situation 09:38 13 with other lotteries in regard to this particular item 09:38 14 and what is perceived in your mind as industry 09:38 15 practice in regard to this. It can be necessarily a 09:38 16 broad and not have to be very specific, but I think 09:38 17 it's a fair question. Is this situation recognized in 09:39 18 the industry? 09:39 19 MS. SMITH: Oh, okay. Linda was 09:39 20 looking at me. The tolerance of the plus or minus of 09:39 21 three percent has -- as far as I know, is an industry 09:39 22 standard of the total number of tickets received. The 09:39 23 jurisdiction that I worked in before I came here to 09:39 24 Texas, we did not have in our working papers or in our 09:39 25 agreements a tolerance within prize level. I feel 09:39 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 25 1 like we have gone -- taken that extra step in even 09:39 2 having that information and those requirements in our 09:39 3 working papers, so that the -- that by prize level 09:39 4 what I'm aware of could vary from jurisdiction to 09:39 5 jurisdiction, but the overall number of tickets 09:39 6 received is pretty much an industry standard. 09:39 7 CHAIRMAN CLOWE: And then is it a 09:39 8 practice to advertise the number of prizes at each 09:39 9 level? 09:39 10 MS. SMITH: I can only speak from my 09:39 11 experience. We can look, though, and do a poll of 09:40 12 other states if you wish. At the Kentucky lottery 09:40 13 where I worked prior to coming here, we did it exactly 09:40 14 the same way. You know, you would list the prize 09:40 15 amount and the number of prizes by prize level and 09:40 16 then have the disclaimer that it was based on an 09:40 17 approximate total number of tickets printed. 09:40 18 CHAIRMAN CLOWE: And that information 09:40 19 would come from the working papers rather than the 09:40 20 completed count. 09:40 21 MS. SMITH: Yes, sir. 09:40 22 CHAIRMAN CLOWE: Well, I like the move 09:40 23 you're making. I think that we ought to do everything 09:40 24 we can to be as accurate as possible. It sounds to 09:40 25 me, based on what you're saying is, that we're going 09:40 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 26 1 beyond, insofar as accuracy and correctness, what is, 09:40 2 as you know it, in the industry practice. 09:40 3 MS. CLOUD: That's correct. 09:40 4 MS. SMITH: Yes, sir. 09:40 5 CHAIRMAN CLOWE: All right. Debra, I 09:40 6 think we can continue with your report, please. 09:40 7 MS. McLEOD: I would like to just jump 09:40 8 back to the prize payout, quickly address that, and 09:40 9 then move on to the remaining portions of the audit 09:41 10 and bring you up to date on that. 09:41 11 Is that okay? 09:41 12 What I have outlined here is an example 09:41 13 of 100 tickets, if this was the total shipped tickets, 09:41 14 and 60 of those tickets were winners, you have, 09:41 15 therefore, a 60 percent prize payout. If we were 09:41 16 short-shipped by the vendor, while this is not a three 09:41 17 percent, I'm trying to explain it in numbers that are 09:41 18 clear, that if the vendor had shipped 80 tickets 09:41 19 instead, and we have 48 winners, therefore, you keep 09:41 20 the same prize payout. So it's very simple as to why 09:41 21 the prize payouts remain the same. When they 09:41 22 short-ship, they make adjustments with the number of 09:41 23 winners. 09:42 24 And the same thing goes for the overall 09:42 25 odds. So that's why we have confidence that the 09:42 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 27 1 overall odds and the prize payout -- now, the prize 09:42 2 payout has a point -- excuse me, has a half a percent 09:42 3 variance that we have allowed. And all the 45 instant 09:42 4 ticket games we have reviewed so far, all are within 09:42 5 that half a percent variance. We have not had as yet 09:42 6 an opportunity to quantify these over and unders, 09:42 7 quantify the overall impact of the prize payout 09:42 8 percentage, and that therefore will be future audit 09:42 9 steps. And once we gather that information, we will 09:42 10 report to you as well. 09:42 11 We have looked at this audit in three 09:42 12 different levels. One has been the relationship with 09:42 13 the vendor, the vendor contract; the other is the 09:42 14 player, the information that has gone to the player, 09:42 15 and that's the aspect we're here today about. The 09:42 16 third layer is the financial aspect. What we've 09:43 17 reported to the State as our prizes claimed, the 09:43 18 expenses, and the amount of the transfer that goes 09:43 19 back to the State. We have yet to do the financial 09:43 20 portion and to follow through on all the issues with 09:43 21 the vendor contract. So that's where we are to date. 09:43 22 That's all I've got. 09:43 23 CHAIRMAN CLOWE: Any questions of 09:43 24 Debra? Thank you, Debra. 09:43 25 MS. CLOUD: Commissioners, I just want 09:43 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 28 1 to say that this is our step in trying -- when we go 09:43 2 and change information we put on our website that 09:43 3 applies to our prizes, or we change our method of 09:43 4 doing business with our retailers that also reflects 09:43 5 that, there can be questions about that from our 09:43 6 players as well as our retailers, and we wanted to lay 09:43 7 this out for you, and the media and the legislature, 09:43 8 so you'll know that we're up front with what we're 09:43 9 doing, we have good reason to do it, and we want to 09:43 10 make those changes. 09:44 11 CHAIRMAN CLOWE: Very good. Do you 09:44 12 have a comment for us on any other plans that you have 09:44 13 now that may come about as a result of the continuing 09:44 14 audit and the conclusion of that audit, Linda, or have 09:44 15 you covered everything that is in the program that you 09:44 16 have established at this point in time? 09:44 17 MS. CLOUD: We've covered, I think, 09:44 18 what we can cover right at this point that affects 09:44 19 the -- you know, the playing public. But the audit 09:44 20 will continue, and we may have other issues to bring 09:44 21 before the Commission at a later date. As the 09:44 22 Commissioners know, we are doing the self-evaluation 09:44 23 of all our processes with the Lottery Commission. We 09:44 24 have MAS in, which is the management assistance 09:44 25 program with the State Auditor's Office that are 09:44 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 29 1 reviewing three of our divisions to look at the 09:44 2 processes and see that we're doing things proficiently 09:44 3 and efficiently for a State government. This step is 09:45 4 another area that we're looking at with the internal 09:45 5 audit, looking at our games and following through with 09:45 6 every step that takes place from the working papers 09:45 7 all the way down to the sale of the tickets. So this 09:45 8 is just another area that is of utmost importance to 09:45 9 us that we are looking at. 09:45 10 CHAIRMAN CLOWE: So we would expect, 09:45 11 then, this project to continue, the audit to be 09:45 12 ongoing, and we would have a formal report for you -- 09:45 13 from you to us no later than our next meeting in 09:45 14 February, which at this point is not scheduled. 09:45 15 MS. CLOUD: That's correct. It may be 09:45 16 just a continuation. I'm not sure the audit will be 09:45 17 complete by that time, but we want it to be thoroughly 09:45 18 reviewed. 09:45 19 CHAIRMAN CLOWE: Very good. Any 09:45 20 questions, Commissioner? 09:45 21 MR. SADBERRY: No. 09:46 22 MS. McLEOD: By way of clarification, I 09:46 23 just want to outline that this audit was part of our 09:46 24 regularly-scheduled audits and came in the normal 09:46 25 course of looking at what are the overall risks within 09:46 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 30 1 the agency. There was nothing that highlighted one 09:46 2 way or another as to why we needed to look at this 09:46 3 now. It was just one that we had on the audit plan 09:46 4 and the next one in line to perform. 09:46 5 CHAIRMAN CLOWE: Thank you both very 09:46 6 much. It's my feeling that the primary concern of 09:46 7 this commission is to protect the integrity and the 09:46 8 perception of correctness of the business of this 09:46 9 agency. I think it's full justification for this 09:46 10 meeting this morning. We appreciate the briefing that 09:46 11 you have given us and the information that you have 09:46 12 laid out, and we look forward to the further results 09:46 13 of your work. 09:46 14 At this time, I am going to recess this 09:46 15 meeting of the Texas Lottery Commission, at 9:40 a.m. 09:46 16 It will be reconvened at the Capitol later this 09:47 17 morning for purposes of discussion of this subject, if 09:47 18 so desired, at that location. This meeting is now 09:47 19 recessed. Thank you. 09:47 20 21 22 23 24 25 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 31 1 REPORTER'S CERTIFICATION 2 3 STATE OF TEXAS ) 4 COUNTY OF TRAVIS ) 5 6 I, BRENDA J. WRIGHT, Certified Shorthand 7 Reporter for the State of Texas, do hereby certify 8 that the above-captioned matter came on for hearing 9 before the TEXAS LOTTERY COMMISSION as hereinafter set 10 out, that I did, in shorthand, report said 11 proceedings, and that the above and foregoing 12 typewritten pages contain a full, true, and correct 13 computer-aided transcription of my shorthand notes 14 taken on said occasion. 15 16 Witness my hand on this the 2ND day of 17 FEBRUARY, 2001. 18 19 20 21 BRENDA J. WRIGHT, RPR, 22 Texas CSR No. 1780 Expiration Date: 12-31-02 23 1609 Shoal Creek Boulevard, Suite 202 Austin, Texas 78701 24 (512) 474-4363 25 JOB NO. 010131BJW WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363