1 1 ****************************************************** 2 BEFORE THE 3 4 TEXAS LOTTERY COMMISSION 5 6 AUSTIN, TEXAS 7 8 FEBRUARY 29, 2000 9 ****************************************************** 10 11 BE IT REMEMBERED that the above-entitled matter 12 came on for hearing on the 29th day of February, 2000, 13 beginning at 10:53 a.m. and ending at 1:04 p.m., at 14 the TEXAS LOTTERY COMMISSION, 611 East Sixth Street, 15 Austin, Texas, and the following proceedings were 16 stenographically reported by MARY SCOPAS, RPR, CSR for 17 the State of Texas. 18 19 APPEARANCES 20 CHAIR HARRIET E. MIERS 21 COMMISSIONER C. TOM CLOWE, JR. 22 COMMISSIONER ANTHONY J. SADBERRY 23 MS. KIMBERLY L. KIPLIN, GENERAL COUNSEL 24 MS. LINDA CLOUD, EXECUTIVE DIRECTOR 25 MR. BILLY ATKINS, CHARITABLE BINGO OPERATIONS DIRECTOR 2 1 CHAIR MIERS: Good morning. I would 2 like to call our February 29th, 2000 meeting in the 3 Texas Lottery Commission to order. And we will begin 4 by a report, possible discussion and/or action on 5 lottery sales and trends, including new game concepts. 6 MS. SMITH: Good morning, 7 Commissioners. For the record, I'm Toni Smith, 8 Marketing Director of the Texas Lottery Commission. 9 Year-to-date total sales for week ending February 10 26th, 2000, to date are $1,271,252,405.05. This is 11 down 4.92 percent from the FY '99 total sales to date 12 of 1,337,020,159.00. The fiscal year 2000 weekly 13 sales average is 48,894,323.29 which also reflects 14 that 4.92 percent decline from FY '90 [sic] sales 15 average of 51,423,852.27. And those are our 16 year-to-date sales. 17 CHAIR MIERS: Okay. So let's see if we 18 understand what is occurring here. The instant 19 tickets remain stable. 20 MS. SMITH: Yes, ma'am. They are 21 actually up 11 percent year to date this time compared 22 to last year. It is our online products, particularly 23 Lottery Texas, is down from last year. We are 24 experiencing -- this is our sixth $4 million jackpot 25 roll, which is the first for us to have six in a row 3 1 at the $4 million level. So that has definitely had 2 an impact on our lotto sales. 3 MS. CLOUD: Commissioners, if I may? 4 Last week instant sales was 35.7 million. And most 5 importantly we have averaged almost 37 million for the 6 last four weeks, 36.7 million to be exact. We haven't 7 seen numbers this high consecutively for our instant 8 games since March of '98. The reduced payout took 9 time to have an effect on sales just like it took time 10 for the sales to decline when the payout reduction 11 took place. All indications are that this sales train 12 will continue. For the last three months we have 13 averaged 33.2 million per week in instant games. We 14 have an aggressive instant game plan in place and we 15 plan to continue that aggression. 16 The not-so-good news that I have to 17 report today is that Lotto Texas, our flagship game, 18 is 60 percent of our online sales. And as you know, 19 sales in this game are continuing a downward trend 20 primarily due to the lack of significant jackpots. In 21 fact, our Lottery Texas jackpot has been 4 million for 22 six draws now and was hit last Saturday night and will 23 remain at 4 million this Wednesday night as part of 24 this six consecutive draws. 25 This consecutive string of the lowest 4 1 level jackpot has never occurred in the history of the 2 Texas lottery. At this rate, we will be compelled to 3 lower the initial jackpot minimum to $3 million. This 4 is going to have to happen within the next couple of 5 weeks if we continue at the $4 million level. 6 Lotto jack -- Texas jackpots for fiscal 7 2000 have averaged $7 million. To give you a 8 comparison, last year Lotto Texas jackpots averaged 9 11.4 million and the prior year, 1998, the average was 10 12.2 million. The only solution to this situation is 11 to introduce larger jackpots for Texas players. Our 12 experience in Texas is identical to trends in other 13 lotteries across the country providing higher jackpots 14 to equate to higher sales. 15 There are only two feasible solutions 16 to this problem. One is to change the existing Lotto 17 Texas game, which, as you know, we attempted to do. 18 And another is to join a multi-state game. Right now 19 Powerball, which is two states adjoining Texas, has a 20 $100 million jackpot. So we are losing players this 21 week on the borders to the Powerball states, which 22 would be New Mexico and Louisiana. The LaFleur's that 23 came out yesterday which shows the actual sales ending 24 for calendar year 1999, we have dropped to fourth 25 place on the list of rankings. You have number one as 5 1 being New York, number two is Massachusetts, number 2 three is California, and number four is Texas. And 3 Florida and Georgia are within 300 million to our 4 total at the end of the fiscal year -- at the end of 5 the calendar year. 6 So we could end up in sixth place or 7 seventh because Ohio's -- they are all -- the states 8 are all -- the numbers are very close to each other 9 right now and that is the third level ranking down. 10 So, although we have turned our instant 11 games around, our online game product line is hurting 12 us. It is not helping us reach that goal that we 13 tried so hard and so desperately to get back to. And 14 we can't -- we can certainly say they are our instant 15 product and based on the fact that the legislature 16 gave us our payout back, it is working. That is, that 17 that product line is coming back. 18 So we have to -- I'm sad to say we have 19 reached the limit to where we can go with trying to 20 hold out on our minimum jackpot at $4 million, and it 21 is going to be necessary to make an announcement to 22 our players within the next couple of weeks that we 23 are going to have to reduce the minimum jackpot. 24 CHAIR MIERS: Compare our jackpot 25 amounts, Linda, to the competitive states. For 6 1 example, California, what jackpot amounts do they 2 offer? 3 MS. CLOUD: California has a minimum of 4 $4 million, if I'm not mistaken. 5 Keith, is that correct? $4 million? 6 We did a survey here recently and Texas and California 7 had the highest minimum. 8 CHAIR MIERS: So if we have the highest 9 minimum, why do we have difficulty competing? 10 MS. CLOUD: Your players -- the 11 minimum, wherever you set it, the players get used to 12 that. And so, initially, they were playing -- Lotto 13 Texas was a very popular game, our sales were high and 14 we had one of the highest ratings in the industry for 15 lotto sales. Players have gotten used to our big -- 16 bigger jackpot and they don't play at the $4 million 17 level now for the most part. And the ones that are 18 playing are loyal dedicated players to Lotto Texas and 19 they are playing less money and they are playing less 20 frequent, but they are playing and we're getting hit. 21 So the higher -- a lot of our players 22 wait to come into the game at the $18 million level. 23 They think, well, I will just wait until it rolls over 24 and I will come into it later. And when it gets to 25 that, they spend more than an average five dollars. 7 1 They usually spend $20 to -- you know, to play. You 2 can really see a difference when you get up to that 3 level in the sales. 4 CHAIR MIERS: Well, I think we have 5 historically understood why New York and Massachusetts 6 are able to compete given what New York allows by way 7 of play style. In Massachusetts, we historically 8 heard the story there. Do you have any explanation, 9 Linda, for the ability of California to do better with 10 their Lotto Texas or is it Lotto Texas that they are 11 doing -- or the Lotto game that they are doing better 12 with? 13 MS. CLOUD: Madam Chair, I told you 14 earlier -- I misspoke apparently. I had understood 15 Keno had been taken away from California, but it looks 16 like $222 million of their sales is Keno. They do 17 have Keno. So that -- I think it was taken away for a 18 while. Maybe we can clarify that. Larry King might 19 can answer that question for us, but they have it back 20 now. 21 CHAIR MIERS: Okay. So again -- 22 MS. CLOUD: So three states with Keno 23 is now overselling us. Although, you know, I 24 personally feel like if we had maybe gone ahead with 25 our -- which is hindsight now. If we had gone ahead 8 1 with our lotto change -- Florida did take our plan and 2 they went with it. And they didn't ask anybody but 3 the governor, and he approved it. So they put it in 4 place and the players were upset about it at first, 5 but now they have had two major jackpots. They have 6 had a $78 million and over $50 million jackpot and it 7 has increased their sales almost three times as much. 8 So they have been able to provide the incentive for 9 players to come in the game with a higher jackpot and 10 also increase their sales. 11 CHAIR MIERS: Is Florida playing a 12 multi-state -- 13 MS. CLOUD: No. 14 CHAIR MIERS: Questions? 15 MR. CLOWE: Linda, how many balls or 16 numbers does California have? 17 MS. CLOUD: I think California's is 18 just six. Six out of 50. I might can tell you from 19 one of these reports. 20 MR. CLOWE: Basically, it is the same 21 as our lotto? 22 MS. SMITH: It is 51. 23 MS. CLOUD: 51? Six out of 51. 24 MR. CLOWE: Is there a free ball in 25 that 51? 51 numbers? 9 1 MS. CLOUD: No. No. 2 MR. CLOWE: You said Florida took our 3 ideas and went with it. Would you explain what you 4 mean by that? 5 MS. CLOUD: Florida, initially, had one 6 draw a week. They had six of 49 in their initial 7 roll-out of their lotto game. And it stayed that way 8 for almost 13 years. They did change their minimum 9 jackpots several times within that period of time 10 because of not meeting the minimum, but then they went 11 back when they could go back up. They went to a six 12 of 53, they added four balls, like we had recommended 13 here. 14 CHAIR MIERS: And when did they do 15 that? 16 MS. CLOUD: Right -- 1st of January. 17 Ours was in October -- we were trying this in October. 18 They were really side by side with us during that 19 time. And maybe it was December 1st when they 20 implemented theirs. And they did get a lot of concern 21 from the players and they railroaded them. They 22 changed their game, you know. But Florida went to -- 23 not only did they change their matrix, they changed 24 the draws. They went to two draws a week instead of 25 one. So to their players it was a considerable 10 1 change. 2 MR. CLOWE: So the way you explained 3 the reduction in revenue, if I understand it 4 correctly, is that the instant games, which is the 5 majority of our revenue, is increasing as we 6 anticipated with the return payout and is showing 7 increased player interest and is a healthy operation. 8 MS. CLOUD: Yes. 9 MR. CLOWE: The online games are where 10 we are seeing a reduction in player interest as 11 reflected by the revenue. And although Texas Million 12 shows the greatest decrease because of its lesser 13 dollar amount, it is not as significant as -- 14 MS. CLOUD: Right. 15 MR. CLOWE: -- the Big Game, which is 16 60 percent Lotto Texas. 17 MS. CLOUD: Right. 18 MR. CLOWE: And you made the comment 19 that there have been more winners every draw or hits, 20 as you call it -- 21 MS. CLOUD: Right. 22 MR. CLOWE: -- than any other time 23 since the game has been initiated in 1992. And how 24 many in a row is that that you said? 25 MS. CLOUD: We are on our sixth draw. 11 1 MR. CLOWE: Sixth draw in a row? 2 MS. CLOUD: With tonight -- 3 MR. ATKINS: With tomorrow. 4 MS. CLOUD: Tomorrow. 5 MR. CLOWE: You have explained that 6 that takes away player interest. Now, my recollection 7 is we need 6.4 million in sales to cover a winner of a 8 $4 million draw. Is that correct? 9 MS. CLOUD: That's correct. 10 MR. CLOWE: What is the answer, if you 11 have one, as to the reason that we have had six 12 winners in a row on Lotto Texas? 13 MS. CLOUD: Our lottery game is 14 becoming a more winnable game than it has in the past. 15 It is -- it is hard to say. Someone might could say 16 it is the luck of the draw, but a lot has to do with 17 population. Our population initially was around 18 16 million when we started Lotto Texas. And we set -- 19 the matrix at that time was set at 15.8 million and 20 today our population is more like 20 million, not 21 playing public, but population of Texas. So we 22 haven't increased player base. Although sales 23 aren't -- it doesn't make a whole lot of sense the way 24 I am trying to explain it. That -- from our research, 25 it shows us that players are saying that they are 12 1 playing less money. So they are going in and buying 2 one or two plays for Lotto Texas where they might have 3 been going and buying ten plays, $10 worth of tickets. 4 They are playing less and they are playing less often. 5 So -- and we're hearing from a lot -- we have heard 6 for years from a lot of the players that they want to 7 see bigger jackpots. So they don't even come into the 8 game until the jackpot gets up to -- 9 CHAIR MIERS: And I think that's not 10 really responsive, I don't think, to the question. 11 MS. CLOUD: I am not -- 12 MR. CLOWE: Let me try to help you. 13 MS. CLOUD: Okay. 14 MR. CLOWE: I am not getting the answer 15 that I am looking for because although the population 16 of the state has increased, the price of the play is 17 still a dollar. 18 MS. CLOUD: That's correct. 19 MR. CLOWE: So whether you have 15 20 point something or you have 22 plus million people in 21 the state, it is still a dollar a play. And people, 22 whether you've got 50 million potential players, are 23 playing less. We can value that because of the price 24 is still a dollar a ticket. 25 MS. CLOUD: Right. 13 1 MR. CLOWE: So I don't accept the idea 2 that there are more people in the state and that is 3 making it easier to win. I am still looking for that 4 answer. Why is there a statistic answer, statistical 5 justification for it? What is the answer the experts 6 say we have had a winner six times in a row? 7 MS. CLOUD: Well, experts had been -- 8 we haven't consulted them about the six in a row. 9 However, we have been talking to them about what is 10 going on. Toni, is Pam in the room? 11 MS. SMITH: No. 12 MS. CLOUD: Larry King, can you come up 13 and try to lay this out a little better than I have 14 for the Commissioners? 15 MR. CLOWE: Good morning, Larry. Do 16 you understand the question I am asking? 17 MR. L. KING: For the record, I am 18 Larry King. I am with GTECH. 19 MR. CLOWE: Set all this aside about 20 the players don't want to play until it is 18 or 21 20 million. I think -- I understand that. 22 My question goes to why are we having 23 this run that is creating the reduction in interest 24 and is there a -- 25 MR. L. KING: This may not be the 14 1 answer you want to hear, but it is a bad -- it is a 2 string of bad luck. I mean, the odds are still the 3 same. 4 MR. CLOWE: I understand that. 5 MR. L. KING: Okay. I wish I had a 6 statistical answers to say that, you know, people are 7 playing more. That is not the case as evidence of 8 sales, but it is the first time in Lotto Texas history 9 and it is a string of bad luck. 10 Unfortunately, this string has been 11 happening for about 13 or 14 months. After the first 12 month I came back, I kept raising my hand and 13 everybody kept saying it is bad luck. I have a hard 14 time buying that we're in a string of bad luck, but 15 that is the only valid reason I can get. The odds are 16 still the same in the game. They haven't changed. 17 MR. CLOWE: Really nothing has 18 changed -- 19 MR. L. KING: Right. 20 MR. CLOWE: -- as far as the odds and 21 the price of a play or anything. 22 MR. L. KING: That's right. 23 MR. CLOWE: It really is just the 24 players have picked winning numbers unusually. 25 MR. L. KING: Exactly. 15 1 MR. CLOWE: Numbers in a row. 2 MR. L. KING: Right. 3 MR. CLOWE: Okay. 4 MS. CLOUD: It is good for our players. 5 I mean, even when we have to reduce the minimum 6 jackpot, what you have to think of is that you are 7 making more millionaires in Texas and it is -- the 8 players see it as good for them. It is just that we 9 have to look at both sides of this fence and it is 10 hurting sales on the lottery side. And not be able to 11 roll that jackpot and increase the interest and 12 bringing more people into the game. 13 MR. CLOWE: Well, the players spoke 14 very loudly about the increasing to 54 balls and the 15 free ball and changing the game. There was a question 16 at one point in time of whether we heard from people 17 who wanted to change the game and maybe we heard more 18 from people who didn't want to change, but we 19 certainly heard from people that didn't want to 20 change, loud and clear. 21 MS. CLOUD: We sure did. 22 MR. CLOWE: And I think we have a real 23 dilemma here in that you laid out one other choice for 24 us and that is go to a multi-state game. And that is 25 an issue that we haven't dealt with from a policy 16 1 standpoint at this point in time. 2 MS. CLOUD: That's correct. 3 MR. CLOWE: What are the odds, Larry, 4 in your opinion, of the luck getting good for -- and I 5 think we've got to be careful about -- we are having a 6 discussion about something that has issues on both 7 sides of it. Many people might say, well, we want to 8 see a winner twice a week. And then there are others 9 that say, well, we don't want anybody to win for three 10 weeks. What are the odds of the luck changing and 11 flowing the other way? 12 MR. L. KING: I don't have them in 13 front of me, but statistically we should have -- and 14 we've -- I can provide those to you. We should have 15 so many jackpots at a certain level per year. We 16 have, obviously, not seen those this fiscal year. 17 Now, right around October of 1998, and I believe when 18 we were comparing sales, we had that $65 million 19 jackpot. We haven't seen that since September of this 20 year. So that's causing a lot of our decline in the 21 sales. We just haven't had that one or two big 22 jackpots that we normally have throughout the year. 23 MR. CLOWE: Last week in the 24 legislative briefing that you had you used one slide 25 that was excellent and during the course of this 17 1 meeting this morning, if you would have that 2 reproduced and give it to the Commission, I think it 3 would be very beneficial. And it shows in a tangible 4 way how instant tickets sales have increased in an 5 excellent way. And I think there is a very positive 6 aspect to that. You have more people playing because 7 the odds are increased in winning. It is almost a 8 win-win situation. 9 And then on Lotto Texas it shows 10 exactly the point that you just made, that you had a 11 couple of peaks on that chart there, too and then the 12 trend line is down. And, in my view, there is no 13 reason, except luck, to think that is going to change. 14 And we are going to have to deal with the issue of, 15 number one, changing the game. And in those two areas 16 of decision making, the players have said they don't 17 want the basic game changed. The other issue is the 18 multi-state game. And we have got to deal with that 19 or we are going to continue to see this trend go on 20 unless our luck changes. 21 MR. L. KING: If I may? 22 MR. CLOWE: Being a businessman, I have 23 never gotten any comfort in the idea that our luck was 24 going to change. 25 MR. L. KING: And if I may add, 18 1 Commissioners, this is -- it is highly unusual for a 2 state to not change their lottery game after seven 3 years. I would probably challenge the fact that there 4 is no state out there that has kept the exact same 5 game for seven years. It is also highly likely that 6 when you do make a change, that there is a segment of 7 the population that is not going to be favorable to 8 it. In fact, every state that has made a change, you 9 can expect some negative press, some negative players 10 coming forward, but usually after the first or second 11 big jackpot, it is all forgotten and you are back to 12 where you used to be. I know for a fact Illinois 13 changed their lotto game I believe three times in 14 about an 18-month period. 15 So even though it may be a big step for 16 Texas, it is not an unusual step for the industry 17 other than the fact, you know, there is the 18 multi-state option. With the multi-state games, the 19 Big Game in Powerball, they also changed the matrix as 20 well. They have gone from odds of 1 in 60 to 1 in 21 80 million, and, again, were received fairly 22 negatively when they did, but, once again, on both 23 borders you are seeing a $100 million jackpot. So 24 people are still playing the game and they will have 25 record sales this week. 19 1 CHAIR MIERS: Well, one thing that 2 seems logical is we did hear from a lot of players who 3 were concerned about changing the game, but now we 4 have players throughout the state voting with their 5 dollars. 6 MR. L. KING: That's correct. 7 CHAIR MIERS: And they are not voting 8 in a positive way. So at some point we ought to 9 accept that message and make some necessary changes. 10 MS. CLOUD: I agree. 11 MR. CLOWE: Does your company have a 12 recommendation? Have you advised what your thinking 13 is on this issue? 14 MR. L. KING: As a matter of fact, I 15 think we were before this Commission in November of 16 '98, I believe. And at that point in time, we 17 recommended against the multi-state game because your 18 lotto game was at 76 percent -- 76 cents per cap. And 19 what we recommend was reevaluating about every three 20 months to see that trend line to see who was the most 21 healthy -- one of the most healthy lotto games in the 22 country. 23 Since then, I believe your lotto game 24 is approaching, you know, the high 50s, low 60s per 25 cap and we have gone back and revisited. And I think 20 1 our first recommendation was to change your existing 2 lotto game. We know there is a loyal player base 3 there. And when that attempt was, I guess, scrapped, 4 we recommended a multi-state game. I think that is a 5 valid option. There are 20 -- I believe there are 27 6 states in the U.S. right now that play a multi-state 7 game. So you really have two options: Change your 8 existing lotto game or join a multi-state. 9 CHAIR MIERS: Well, question: Are they 10 mutually exclusive? I mean, would you only do one? 11 MR. L. KING: I believe so, yes. I 12 don't think you want two competing big jackpot games. 13 Although, some states are thinking about it right now. 14 I know that with Powerball, for instance, it is played 15 on a Wednesday, Saturday, a draw such as the Lotto 16 Texas game. There are some states talking about the 17 idea of having another big multi-state game that is 18 drawn on Tuesday, Friday, such as the Big Game. 19 CHAIR MIERS: So what is the -- how do 20 you go about evaluating which of the two options would 21 be best? 22 MR. L. KING: For Texas, if you were to 23 join a multi-state game, we would recommend the Big 24 Game. And for the simple reason that there are only 25 seven states that are a member of that consortium. 21 1 They are all big states. You have got Illinois. Big, 2 compare to some of the other Powerball states. 3 Illinois, Michigan, New Jersey, Georgia, 4 Massachusetts. 5 If you were to join the Powerball 6 states, you are going to be joining 21, I believe, 7 states that you will be a member with, Idaho and with 8 Kentucky. In that case Texas would produce an 9 exorbitant amount of winners, which is great for 10 Texas. It is bad because the states like Kentucky and 11 Idaho won't see those winners that they used to see 12 maybe once every two months. It will now be every 13 other -- every other winner will be in Texas because 14 of the population. And, sure enough, those states 15 will probably, after a year or so, say we don't want 16 to be a member of your consortium. 17 With the Big Game and with the 18 population, you would add 20 million to an existing 19 population of maybe 50 right now and I think the 20 winners will be spread out. Now, with your 21 population, we would -- you would be likely to see one 22 big jackpot winner about every four draws. Once 23 again, good for Texas, but probably unnoticeable for 24 the other states that are members. 25 CHAIR MIERS: Well, so as between 22 1 Powerball and the Big Game, we should consider the Big 2 Game. As between changing our current game and doing 3 a multi-state game, what are the steps you would take 4 to evaluate which of those is the better alternative? 5 MR. L. KING: I think we could do sales 6 forecasts for both games and look at those. The one 7 thing with the Big Game is it is drawn on Tuesday and 8 Friday. And we potentially believe that would 9 generate more sales because it would compliment your 10 current product mix. Your lotto game is currently on 11 Wednesday, Saturday. This game would be drawn on 12 Tuesday, Friday. So I think if we compare the sales 13 projections, we would say the Big Game would generate 14 more revenue for the state. 15 However, if that is not an option or, 16 you know, if there is an issue of public policy, the 17 lotto change, matrix change would be a valid -- 18 depending on what you change it to, I think we could 19 certainly recoup some of the sales that we have lost 20 and start that trend upwards again, such as Florida. 21 MR. CLOWE: And, Larry, is it a proper 22 assumption that if the Commission, this agency, 23 adopted entering into the Big Game and you have draws 24 there other nights than Wednesday and Saturday nights 25 Lotto Texas that, in fact, you would have players that 23 1 would leave Lotto Texas and go to the Big Game. So 2 you would see a further reduction, which would have to 3 be offset in revenues to the state by entering in the 4 Big Game? 5 MR. L. KING: That's correct. 6 MR. CLOWE: And that would be something 7 that you would have to accept as an eventuality and 8 hope that the total of the two reflected an increase. 9 MR. L. KING: You are exactly correct. 10 You would see, as we term it, a cannibalization of 11 your existing product mix. So I think the most recent 12 state to join the Big Game, New Jersey, they did see 13 their lotto game drop 4 percent. Now, overall their 14 sales were up, I believe, somewhere in the 15 neighborhood of 20 to 25 percent. So they made up for 16 the difference that they lost. I think our early 17 projections where we took just extremely worse case, 18 even if we lost 16 percent of our lotto sales, we 19 would, in fact, make up, you know, more than enough 20 revenue to offset the losses. 21 MR. CLOWE: That is just something I 22 think we all ought to be aware of. 23 MS. CLOUD: Commissioners, in 24 ascertaining the idea that we might want -- or which 25 direction we go from here, the one thing I want to -- 24 1 to remind you about, we're not talking about 2 increasing gaming. We are planning on taking down a 3 game that has not been as successful for us -- 4 CHAIR MIERS: That was my next 5 question. 6 MS. CLOUD: -- to replace with a game 7 that would do better, perform better for us. 8 MR. CLOWE: I asked that this be handed 9 out to the commissioners and to anyone else that is 10 interested. And I think it really tells the story 11 graphically. This was an excellent presentation that 12 Linda and Nelda and others made to legislative 13 individuals last week. And it clearly shows that the 14 instant ticket sales on a linear basis are improving. 15 And as I say, I think it is almost a win-win 16 situation. I see no reason to believe that we are 17 going to have good luck on Lotto Texas. We had these 18 two peaks, one of which Larry mentioned. But you can 19 see the wins that are bringing the linear line down 20 and the game is headed in that direction because 21 player interest is weaning and they are going 22 somewhere else. It may be that they are going to 23 instant tickets. And I just want everybody to get 24 that clearly in their mind. I don't think it has 25 anything to do with the population of the state. We 25 1 haven't changed the price of the ticket. It's just 2 that people want something different. 3 MR. L. KING: They want some excitement 4 and $4 million to a lot of players is not exciting. 5 MR. CLOWE: It is not exciting. And if 6 we drop it to three, it is going to be less exciting. 7 MS. CLOUD: And when we -- and that's 8 right. I was fixing to say that is going to add to 9 the reduction, I'm afraid, in sales, when we have to 10 lower the jackpot. 11 CHAIR MIERS: Which doesn't make common 12 sense because there is an awful lot of enthusiasm for 13 $1 million these days. 14 MS. CLOUD: I know. That was the 15 question answered for the legislature, wasn't it? 16 CHAIR MIERS: Now, I still am a bit 17 curious, though, about Commissioner Clowe's original 18 question and Linda, your original answer. 19 How was the original matrix for Lotto 20 Texas impacted by the original 16 million population? 21 MS. CLOUD: Lotto Texas was a very 22 successful game. Right, Larry? You can help me with 23 this. You were in sales. 24 CHAIR MIERS: You connected those two. 25 Why did they connect? 26 1 MR. L. KING: I guess, back to the 2 answer that, you know, I still firmly believe. It is 3 a string of bad luck. But I would tell you, when we 4 design a matrix for a population, it is definitely 5 based on the amount of people you have. In other 6 words, back in '91, I believe, when we were down here 7 researching the population, what the matrix should be, 8 we came up with what we thought was the ideal 6 of 50 9 based on the population. If we were to come in here 10 brand new and you didn't have a lottery and we started 11 tomorrow, we would base it on one -- or 20 population 12 and the odds would certainly be a lot more. I don't 13 know the answer to why are we getting hit more, but I 14 do know that you certainly base your matrix on the 15 population, including multi-state games. 16 CHAIR MIERS: There really must be a 17 reason for that. And if we are going to look at a 18 multi-state game, we ought to understand that 19 connection. So in the presentation it would be 20 helpful to know that it doesn't have any relevance or 21 that it does. It clearly does. 22 MR. L. KING: And we would be happy to 23 come and present, if you would like at your next board 24 meeting, the pros and cons, the -- you know, anything 25 you would like to see as far as population, the 27 1 matrices of other lotteries. 2 MS. CLOUD: Also, we could probably get 3 our statistician. He has been working with us on 4 these options that we have been looking at along with 5 GTECH's statistician. And we could have them all come 6 in and let you talk to the experts in the numbers 7 field about what they think. Mr. Eubanks has been 8 with us since day one. So he has walked this walk 9 with us for a long time. 10 MR. CLOWE: Okay. Let me explain to 11 you very clearly what the disconnect is in my thinking 12 about the population issue. You designed it for 13 15 million. We have over 20. There are fewer people 14 playing. See, that's the thing you can't get around. 15 There are fewer people playing it and yet you have 16 more winners. So what I see is you've got more people 17 in the state, but you've got fewer people playing and 18 you've got more winners. Now, there is the disconnect 19 that I can't -- you can't get me over it with what I 20 have heard so far. 21 MS. CLOUD: I don't think we disagree 22 with you either. 23 MR. L. KING: If you figure that out, 24 would you let me know? 25 CHAIR MIERS: Okay. Well, this has 28 1 been helpful. Obviously, the steps ought to be 2 considered to improve our sales to the extent we are 3 able to do so within public policy limits. So if we 4 will have those presented to us, I would believe the 5 Commission would like to move with as much dispatch as 6 possible to consider what our options are because I 7 can't escape that as every day passes, you know, the 8 people of the state are voting with their dollars. 9 And it is a pretty convincing vote at this point. 10 MS. CLOUD: It is that. And, 11 Commissioners, I have a -- Patsy and I are going to a 12 world lottery conference, international conference 13 talking about what happens to older lotteries and 14 sales and Internet gaming and a lot of other topics 15 that are high on the list of interest for us right 16 now. And at that meeting I am meeting with the Big 17 Game state directors. That meeting was supposed to 18 have taken place before now, but Rebecca Paul's mother 19 passed away and -- at the time that that last meeting 20 was scheduled. So we were not able to have the 21 meeting with them to get the numbers. We have to know 22 what any of these games would change their matrix to 23 if Texas came in. They are going to have to change 24 their matrix. 25 CHAIR MIERS: I guess I have one 29 1 additional concern and that is that we not miss the 2 fact that you just mentioned, Linda, that there is an 3 increased competition for these dollars. And whether 4 it is Internet or casinos or they are close by, or 5 whatever, we do see competition that was not there 6 earlier. So we need to make sure that we are making 7 changes responsive to real issues as opposed to 8 factors that we can't address. 9 MS. CLOUD: Absolutely. And I can tell 10 you it is very frightening to see that already we have 11 650 gaming sites on the Internet and we do have Texas 12 players playing those games. We have international 13 lotteries that are doing Internet gaming already. You 14 have Texas players registered to play their games. We 15 are going to lose our better players, our players that 16 are higher up on the income bracket, or some of their 17 discretionary dollars, to that type of gaming 18 interest. The only hope that we have got is that the 19 Federal Government will pass a law illegalizing 20 Internet gaming, except for state's rights. Giving us 21 the right to have gaming if we want it in our own 22 state, but that is strictly up to our leaders to 23 decide that. But we need that protection of our 24 boundaries. 25 CHAIR MIERS: Okay. Thank you very 30 1 much. 2 MS. CLOUD: May I ask -- Pam, do you 3 have anything? We have Pam in here now. She has been 4 working with Mr. Eubanks. Do you have anything to add 5 to what we have already discussed here? 6 MS. UDALL: I just have one item. 7 MS. CLOUD: This is Pam Udall. She is 8 the online product manager. 9 MS. UDALL: I think it is important to 10 know that over the years, we have found through our 11 research that we track and our focus group research in 12 everything we do is that we still have a really strong 13 loyal player base. Probably the most significant 14 thing that is happening is those players used to spend 15 five dollars every Wednesday and Saturday. What they 16 have done is they have made a decision to spend less 17 money. So I think a lot of the trend we are seeing, 18 especially at the base level of 4 million, which used 19 to be around the average 6 million per draw, now they 20 are drawing four and a half, is that they are spending 21 less money each time because they budget. It is a 22 planned purchased. The instant tickets is a 23 spontaneous purchase. The online ticket is a planned 24 purchased. So then you start thinking about how much 25 you are spending. So they are making a conscious 31 1 decision to spend two dollars a week versus ten. 2 So I think it is really important that 3 everybody understands it is a very strong game and a 4 very low player base, but people after seven years are 5 saying I can only afford to spend so much. So that's 6 what you are really seeing is that drop. You know, it 7 is a very strong player base, but they are consciously 8 not spending as much money. 9 CHAIR MIERS: Let me -- excuse me. 10 MR. CLOWE: Go ahead. 11 CHAIR MIERS: I was just going to say, 12 Pam, is our -- the effect of our research that they 13 are spending less and putting those dollars into some 14 other form of gaming or they are just spending less, 15 period? 16 MS. UDALL: I think we have seen both. 17 I think we have seen some players who are spending 18 money like when we introduce other games, such as 19 Cash 5 or Pick 3 or the instant product. You can see 20 that -- the fluctuation in dollars when we have a new 21 instant game. We see some of that. But I think our 22 players have basically said I am going to spend so 23 much money on lottery games and they mix those dollars 24 around. And we can see, too, when the jackpot is 25 18 million or higher, then we see that, you know, our 32 1 online sales really go up in all products, Cash 5, 2 Pick 3, Texas Million, and the instant products 3 sometimes may go down. So you can really kind of see 4 that fluctuation amongst all of the different 5 products. 6 CHAIR MIERS: Well -- 7 MR. CLOWE: That makes a lot of sense 8 to me. 9 CHAIR MIERS: It does. And, again, if 10 someone decides to not play, then the money stays with 11 them to do whatever else they need to do. So that is 12 logical and understandable. And maybe -- I guess my 13 question was not so much dollars transferred among our 14 games, but dollars going to some other form of gaming 15 not sponsored by Texas. 16 MS. UDALL: One other thing that we 17 kind of laugh about. We are losing some players to 18 the Stock Market. The stock market has been so active 19 as well lately that we were talking about that not too 20 long ago. That a lot of our high rollers are putting 21 their money in stocks because now they can buy stocks 22 on the Internet as well. And that is one concern that 23 the lottery industry also is seeing. 24 MR. CLOWE: So that is the 25 competition -- 33 1 MS. UDALL: That is the competition as 2 well. 3 MR. CLOWE: -- for the dollar along 4 with the Internet gambling? 5 MS. UDALL: Uh-huh. 6 MR. CLOWE: But I think back to your 7 point about the attractiveness of the games and 8 whether people budget a higher amount or a lower 9 amount. I think we are seeing that same logic in the 10 instant tickets. That the winners are increasing, 11 people are feeling better about it and, therefore, the 12 money now is migrating in that direction. 13 MS. UDALL: Uh-huh. 14 MR. CLOWE: I think that is the same 15 point. And I thank you, Pam, for what you said 16 because that helps me understand what I think is 17 happening. 18 MS. UDALL: The players want to win. 19 And the good thing is with Lotto Texas, even though we 20 are getting hit a lot, we are producing a lot of 21 winners. So Lotto Texas is extremely winnable. It 22 hits it twice a week. So it is a good game. Thank 23 you. 24 MS. CLOUD: Commissioners, I -- at this 25 time, I would like to say we are losing Pam. She is 34 1 leaving us to go to an advertising agency. So we 2 regret that, but she is going to be with us another 3 week and she is moving on. But we just want to make 4 sure that you were aware of that. 5 CHAIR MIERS: Well, we appreciate your 6 service, Pam, and we will miss you. And I hope you 7 are at least staying in Texas. 8 MS. UDALL: Across the street. 9 MR. CLOWE: You can play Lotto Texas. 10 CHAIR MIERS: Those winnable games. 11 Thank you very much. Thank you, Linda, for letting us 12 know that. 13 MS. CLOUD: Toni, I am not sure -- I 14 think I interrupted her. I am not sure she is 15 finished with her sales report. You have anything 16 else? 17 MS. SMITH: I am finished with numbers 18 and what we attached to your report are samples of the 19 latest scratch-off games that have been introduced 20 since the last Commission meeting for you to see. And 21 that's all I have to report on sales. 22 CHAIR MIERS: And, Toni, you have Item 23 3 also. The report, possible discussion and/or action 24 on lottery advertising and promotions. 25 MS. SMITH: Yes, ma'am. We just 35 1 completed an online TV campaign, TV and radio, that we 2 call "Don't Forget." And it is to remind players to 3 play Lotto Texas on Wednesday and Saturdays. And it 4 will run every other week. It started on January 17th 5 and there are three spots that will rotate -- will run 6 through the end of May. And then the radio is ongoing 7 through that time of January through May. 8 And we are wrapping up production on 9 the third of our instant TV commercials of the coin 10 campaign. This one is called "Change Tray." And it 11 shows a penny popping around actually at the retail 12 level, at the clerk and the player level. And it is 13 sort of in the same vein of how the coins are used to 14 scratch. And that will run for three weeks starting 15 March 6th. And we have also been meeting with the 16 King Group on some -- a campaign, more of a sort of an 17 awareness campaign to reach our minority markets. So 18 we have got some good advertising coming out. That's 19 all I have. 20 MS. CLOUD: Okay. Commissioners, under 21 the topic of advertising, just to bring you up to date 22 on what we're doing with our advertising agencies -- 23 and both of them are represented here today. So if 24 you have any questions when I finish my little spill 25 here, they are here to answer those questions for you. 36 1 MR. CLOWE: Identify who is here, 2 please. 3 MS. CLOUD: Mr. King from the King 4 Group, he and his wife are here and Fogarty/Kleine is 5 represented by Charlie and -- 6 UNIDENTIFIED SPEAKER: Kyle. 7 MS. CLOUD: Kyle. I'm sorry, Kyle. 8 Your name slipped me all of a sudden. 9 So they are here to respond to any 10 questions you have. As you know, based on our 11 experience in the past, we have put some guidelines in 12 place for our subcontractor advertisers. And letters 13 went out to each and every one of them explaining our 14 guidelines as of January 28th. We have had only a 15 very few, maybe three or four complaints about the 16 guidelines. The other advertisers are complying with 17 what we have requested them to. 18 We have a spreadsheet here for your 19 information to show how many responses we're getting 20 based on the information we have requested. Both 21 advertising agencies have been receiving copies of 22 audit reports, which is one of their requirements in 23 order for the subcontractors to receive advertising 24 dollars from the lottery. We have had some very 25 strong concerns from a couple of individuals and we 37 1 have tried to address those concerns. 2 I have no intention, unless I am guided 3 by my commission, to take a different route to change 4 what I am doing. These guidelines are in place. They 5 are -- we worked with the state auditors in order to 6 come up with these guidelines and I think, based on 7 the fact that I personally did not have confidence in 8 some of the audit firms that are conducting the 9 audits, I would like to have this information so that 10 we have the ability to cross reference information 11 with the audit reports we are receiving. The -- it 12 could be that down the road we decide not to require 13 the audits if we don't have confidence in them. And 14 that would be less expense on the advertisers if we 15 did that. 16 But what we're looking at here, from 17 what I understand, and Mr. King and Fogarty can -- 18 Charlie can probably talk more about this. These 19 audit firms make a phone call to the advertisers and 20 ask them what their print runs are, what their 21 circulations are and that is their report. And they 22 charge $200 or more for that service. And they call 23 it an audit. Well, I don't call that an audit. An 24 audit is going in and verifying documents and to know 25 that these things happen. That they printed 200,000 38 1 copies. That they distributed, circulated 200,000 2 copies. And as we know, we got burned pretty bad in 3 the past year under a different vendor, that these 4 guidelines weren't being followed, and nobody was 5 checking on that. 6 So I don't want to see that happen to 7 this agency again. And I feel like that it is my 8 responsibility to put the guidelines in place so that 9 it doesn't happen. And just so you know, I'm sure you 10 received some of these letters now, received phone 11 calls from legislative bodies concerning complaints 12 that have gone directly to them. We have been able to 13 explain our position to them and, for the most part, 14 they have been satisfied with our explanation. 15 CHAIR MIERS: Linda, we appreciate your 16 keeping the commissioners advised of this because I 17 know there have been some very vocal concerns 18 expressed. But I am pleased that once someone hears 19 an explanation of the necessity and what we're doing 20 and why, that that is an accepted story. So I'll ask 21 the commissioners if they have any interest in 22 directing Linda to revise her process. 23 MR. CLOWE: I have been given a memo 24 here this morning from an assistant state auditor. 25 And I assume that this deals with the subject that you 39 1 brought up as far as past practices. 2 MS. CLOUD: Yes. 3 MR. CLOWE: And since then we have 4 changed the relationship. And I guess my questions go 5 to the fact that we are doing this to make certain 6 that the state is getting what it is being charged and 7 what it is paying for. 8 MS. CLOUD: That's correct. 9 MR. CLOWE: Now, are we treating 10 everybody the same? 11 MS. CLOUD: Yes, sir. This letter went 12 to over 140 advertisers, including Houston Chronicle, 13 Austin-American Statesmen, Dallas Morning News, 14 anybody that we place ads with out of our advertising 15 dollars got a copy of this letter. 16 MR. CLOWE: And so the issue of 17 fairness and of equal treatment to all the people who 18 are doing business with the agency is one of equity 19 for everyone. Is that correct? 20 MS. CLOUD: Yes, sir. Yes, sir. And I 21 think either one of the advertising agencies can speak 22 to that if you -- 23 MR. CLOWE: And the requirements that 24 we have laid out in order to correct this situation 25 and make a good businesses practice in place are 40 1 reasonable and are obtainable by business conducting 2 advertising in the normal courses of business? 3 MS. CLOUD: Yes, sir. From the 4 information we are receiving back, it is reasonable. 5 One position has been brought to my attention, and my 6 question to that position is tell me what will give me 7 as much confidence. And that is those newspapers who 8 do their own printing, who don't send the print out to 9 a printer to print their newspapers. And then I 10 say -- my answer to that is come back to me with a way 11 you can provide documentation to show what you have 12 printed. To show us -- give us confidence that you 13 are actually producing what we are paying you to 14 produce for us. I mean, we're flexible in that we are 15 willing -- if you have a better plan that would be 16 less burdensome, but gives us the information we are 17 requiring, we'll listen to that. 18 MR. CLOWE: Good. 19 CHAIR MIERS: Okay. Anything further 20 on this issue? I think you are hearing your 21 commissioners say that it is a necessary process 22 directed by the State Auditor's Office and we're doing 23 what we feel we need to do to protect the agency. So 24 I don't hear any sentiment from the commissioners to 25 change it. Toni, do you have any questions or -- 41 1 MS. SMITH: No, ma'am, thank you. 2 MS. CLOUD: You may have someone who 3 wants to speak to you on this issue that just came in. 4 CHAIR MIERS: Okay. We are on Item 5 Number 3 of our agenda. And I understand that Roy 6 Malonson is here and would like to speak. 7 Mr. Malonson? 8 MR. MALONSON: I would like to say good 9 morning. Good morning. 10 CHAIR MIERS: Good morning, sir. 11 MR. MALONSON: My name is Roy Douglas 12 Malonson. I have some packages to give you. Do I 13 give them to you? 14 THE REPORTER: Would you spell your 15 last name, sir. 16 MR. MALONSON: It is M-a-l-o-n-s-o-n. 17 Roy Douglas Malonson. I am the publisher of the 18 African-American News & Issues. I have received a fax 19 reply -- I received a certified letter from Ms. Linda 20 Cloud and I assume by Ms. Cloud. And I had great 21 concerns about the letter that I receive certified. I 22 did receive a reply from her Friday through -- via fax 23 after I called and I still haven't talked to Ms. Cloud 24 yet. But some of my concerns in the letter that was 25 given -- and I just deal with some of the concerns 42 1 that was given to us by Ms. Cloud in a certified 2 letter and what I received Friday -- by being a 3 businessman and being a black man, there is some 4 language in this letter -- and I don't know if you-all 5 received a copy of the letter that she sent me Friday. 6 But there is some language in this letter. 7 Number one, publication normally prints 8 false, misleading, slanderous, licentious, obscene 9 information. I am an African-American newspaper. I 10 have an African-American audience. It is black. Been 11 a black man all my life. I've always had to prove 12 things to people. And I have always been about 13 changes. But changes always affect black folks. And 14 when people come at black folks, I have serious 15 problems with that. And according to this letter I 16 received, that means none of the -- none of the white 17 media mainstream daily newspaper will ever receive any 18 ads from any lottery, according to what I received 19 Friday, based on how the slander and misuse and 20 misleading information they have done to black folks. 21 According to this letter I received, I know they will 22 not receive any more advertising from the lottery 23 based on the information and what I have seen all my 24 life of what they have done to black folks, according 25 to the letter of Ms. Cloud. 43 1 Well, let me just give you a history. 2 I have done everything possible to position my 3 newspaper. It is one of the companies that we own. 4 We started off four years ago printing 5,000 copies a 5 month. In four years, we just completed our first 6 weekly edition and in there is your request of my 7 press bill. We just printed 175,000 copies this week. 8 That is a print bill right there. We are the only 9 African-American newspaper audited in the United 10 States by one of the top auditing companies, Verified 11 Audit Circulation, and according to the America's 12 number rated book, there is a copy of how you rate the 13 audit companies. We have got BPA, ABC and Verified. 14 I am the only one. 15 Now, you-all need to decide whether 16 you-all are going to audit -- accept audit companies' 17 audits or are you-all going to become an audit 18 company. That is what the decision is. But to put us 19 in a situation that we are providing all this 20 information to you-all on any time that you give us an 21 ad is ludicrous, ridiculous and one of the most 22 insulting things that I ever seen, without any 23 commitment. And that's the way I take it. No one 24 dictates my editorial without any fear or any favor. 25 It is an African-American newspaper. And a lot of you 44 1 might want to dictate it because you want everybody to 2 get along. Everybody cannot get along and everybody 3 will not get along. Being this complexion, raised up 4 in a black neighborhood, I caught holy hell, but we 5 need to learn to respect each other. 6 Now, you either want to reach an 7 African-American audience, Hispanic audience or 8 whatever. I am open, in Ms. Cloud's closing 9 statement, to work with anyone that is willing to work 10 with me. I know legal terms. I have ten lawyers 11 working for me. And that's why I have a high school 12 education and I have two or three experts working for 13 me. 14 But business is business, and insults 15 are insults. I have taken that letter as a direct 16 insult. We do not make the news. We will print the 17 news. And I would like to go on record if it means 18 the lottery pulling whatever little ads they give us 19 away. We will double and triple our distribution in 20 Texas. We are officially the largest black paper in 21 the United States and we will probably become the 22 largest in the world. We don't need this. What we 23 need to do is work with people that have several 24 concerns. Are you going to be an audit company? I'm 25 wasting money spending on an audit company. 45 1 I do admit that there is people misuse 2 the whole system. I have been fighting for years to 3 be in compliance of everything. Being a black man, I 4 have done everything that it take and then I wind up 5 being overqualified. Now I am winding up saying my 6 paper is too big. It is not in compliance with the 7 other papers. I know it is not in compliance with the 8 other papers. It is bigger than all of them. So, I 9 mean, how do you get overqualified and how do you get 10 too big? 11 So I don't understand. I need some 12 help here. I am real confused. But no one -- I am 13 not here to insult the lottery, but I am not here to 14 let the lottery insult me. I am not. I am not here 15 to go at the lottery, but if the lottery want to come 16 at me, I am not going to run. I am here to work with 17 anyone that is willing to work with us. But the black 18 press is the black press, the Hispanic press is the 19 Hispanic press. And you check any records, any 20 documents, anything, African-Americans, if they was a 21 nation, they would be number 12 in the world. And the 22 number one most respected media out of radio, TV, that 23 they trust more than anything is the black newspaper. 24 And I will close with that. Any 25 questions, any statistics, anything you want to know. 46 1 I fought hard being the chairman of the Texas 2 Association of African-American Chamber to get an 3 office here, to form a relationship with the black 4 caucus, to have a presence here, to get the lottery to 5 the table just to do business with black folks. Now, 6 I am a victim of that and I come by myself this time. 7 By myself because I am willing to work. I didn't 8 bring no legal forces, no support, nothing. I have 9 NOKOA with me. They are an Austin newspaper. We just 10 picked them up from the airport. I am here -- I am 11 here to work with anyone that is willing, but not to 12 disrespect me. No money, no money is worth that. And 13 I will not take any insults on black folks or my black 14 newspaper. And I will close with that, open for 15 questions. Thank you. And I will respond to 16 Ms. Cloud's letter that I got in the fax Monday. I 17 mean, Friday. 18 CHAIR MIERS: Mr. Malonson, I do hope 19 you understand that one of the governmental bodies 20 that we work closely with is the State Auditor's 21 Office and they come frequently, not just in 22 procurement issues but on other issues related to the 23 lottery, and scrutinize what we're doing and advise us 24 when they feel that our practices need to be tightened 25 or re-advised so that we're doing our job. And the 47 1 procurement activities that resulted from one of those 2 periods of scrutiny is part of what, I believe, you 3 are complaining about. And I guess what I am -- would 4 be helpful to hear is exactly what it is that the 5 lottery is asking that you feel you can't or shouldn't 6 have to do. I take it because you feel it is an 7 insult. 8 MR. MALONSON: Number one, we spend all 9 this money getting audits. And I know that there is 10 problems. And that's why we tried to separate 11 ourselves from all of those problems. And that's why 12 we are the only African-American newspaper in this 13 country that is audited by Verified Audit Circulation. 14 But when -- you need to make a decision what audit 15 companies are you going to audit and what you are not 16 going to audit. Because you come back and you 17 position yourself to be an audit company. Well, that 18 means my audit just goes out the window that I spend 19 all that money for. So you need to make a decision 20 which ones you are going to audit and which ones you 21 don't. 22 The second of all, you need to be very 23 careful of saying the editorial contents of my 24 newspaper. My newspaper is African-American 25 newspaper. They target my audience. And based on the 48 1 first amendment, that is kind of a thin line to ride 2 on. To kind of deal with. And if you read the 3 letters that was written to me, I didn't write them. 4 I give them back to you. There is thin lines all 5 through that letter. There is thin lines all through 6 that letter dictating editorials. You don't do that. 7 CHAIR MIERS: I don't -- I think the 8 only issue that is of concern here is what the state 9 auditor's need for us to ensure -- to make sure that 10 the monies spent are spent getting a product in 11 return. And there is absolutely no interest in 12 editorial content or in any way impacting the 13 editorial content of a publication. Although, 14 obviously, there are some state public policies, which 15 I think were probably generally referenced by Ms. 16 Cloud, that the lottery has to follow. But what -- I 17 take it what you are telling us is that you think that 18 the Verified Audit Circulation ought to be sufficient 19 to comply with the audit requirements. 20 And, Linda, I guess -- is there 21 something about that process that is, in our 22 experience at least, incomplete ? 23 MS. CLOUD: The one references -- I 24 think it was made in Mr. Malonson's letter to me -- 25 was the fact that we had used the language of 49 1 publications that knowingly print false, misleading, 2 slanderous -- we were referring to publications that 3 we would not want to be associated with. 4 CHAIR MIERS: And I understood that. 5 And I -- but you don't have any -- you are not raising 6 any question as to this publication concerning 7 editorial content? 8 MS. CLOUD: Absolutely not. This went 9 to every single advertiser that we have. 10 CHAIR MIERS: So what you were looking 11 for here was an auditing opportunity. And is the 12 Verified Audit Circulation report sufficient or not, 13 and if not, why not? 14 MS. CLOUD: Commissioners, again, I am 15 not familiar with this particular firm. We might can 16 ask one of our advertising vendors more about this 17 firm. But this looks like an audit. However, the 18 original information that was sent in by Mr. Malonson, 19 his -- that audit information, it appeared to me 20 looking at it at face value that his audit expired 21 March 31st, 1999. Now, this particular audit carries 22 in from October 1 through March 31st. 23 I guess we need to ask Mr. Malonson if 24 this company actually comes in and verifies the 25 information in your location, Mr. Malonson, or they do 50 1 these surveys over the phone? 2 MR. MALONSON: Okay. Well, number one, 3 we need to get someone that understands audits. And, 4 number two, an audit -- my audit is not annual as she 5 just stated. So I am up for another one next month. 6 It is done on an annual basis before we -- see, this 7 thing is really not to open a can of worms. My -- you 8 know, editorial contents will reflect a high standard 9 of journalism ethics and must consist with the quality 10 of other publications in similar size. I am up for 11 another audit on an annual basis next month. My audit 12 company comes in and they are like -- the Internal 13 Revenue is kind of friendlier. They are worse than 14 the Internal Revenue and they go through everything. 15 They come in, they go through everything. 16 CHAIR MIERS: I think that says it is 17 not a telephone audit. 18 MS. CLOUD: Correct. 19 CHAIR MIERS: What I would -- might 20 recommend is that the person you would think most 21 appropriate, Linda, meet with Mr. Malonson. It 22 doesn't sound like there may be any issue here except 23 maybe communication difficulty. So if the audit 24 company is doing what is needed and it is an issue of 25 timing and it is about to be done, maybe that could be 51 1 resolved. So why don't we just put someone together 2 and see if we can't work this out. 3 MS. CLOUD: We will do that. The 4 auditors that we have been given a list of, there is 5 only one or two firms that Mr. Malonson -- this may be 6 one of those firms that actually does a physical 7 audit. The rest are doing telephone audits. 8 CHAIR MIERS: Well, I heard him say 9 that they come in and audit him physically. 10 MS. CLOUD: Right. 11 CHAIR MIERS: And if that is the case, 12 then that may be satisfactory, if I understand what 13 you are saying. So why don't we just see if we have 14 an issue or if we don't. 15 MS. CLOUD: Okay. I will be glad to 16 research that some more. 17 MR. MALONSON: I would like to go on 18 the record to say, I put this in your package. It is 19 from the Kleppner's advertising procedures, an old 20 copy I grabbed running out of the office this morning 21 at 4:00. It is the 12th edition. And they rate the 22 top three auditing companies in the United States. 23 And this is the Kleppner, which is well respected in 24 the industry. This is bigger than my publication. I 25 don't care if I get one hand from the lottery. This 52 1 is real big. The ones that are doing wrong, I don't 2 support any of that regardless to what color they are, 3 especially African-Americans. The ones that are doing 4 right -- this is bigger than just kind of work with 5 just my publication. This is something that needs to 6 be handled, and handled very carefully and very right 7 for the first time and come up with a procedure that 8 is right. And if my publication is in violation, 9 scratch it. I am not here advocating for ads for my 10 paper. I am advocating the black press. And this 11 letter that we received and -- it is public record. 12 And this is something. 13 So if you work out something for me, 14 you work out something for all the African-American 15 newspapers. And that is what I be comfortable with. 16 I am one of the different ones. We losing around 17 5,000 to $10,000 a week by being so large. So it 18 don't matter if I lose another little bit. But this 19 needs to be handled as far as how you deal with the 20 press and especially African-American because they 21 don't want to get hurt. I got certified all kinds of 22 witnesses. 23 Somebody the other day told me I am not 24 black. Come on. Why do I have to prove that I'm 25 black? Don't I look black? I don't understand these 53 1 rules and this litigious. Hell, I have been complying 2 with rules all my life. If somebody come with the 3 word called litigious, I know what it means. Even 4 though I don't have a college degree, but I have six 5 or seven academic scholarships to the University of 6 San Antonio, Harvard, Purdue, but I chose not to go. 7 And I am 100 percent disabled. I am a post-polio 8 victim. This is big. But this is serious. But 9 nothing is wrong with my mind and nothing is wrong 10 with somebody playing words. And nothing is wrong 11 with somebody trying to hurt an organization of black 12 people. And I do and I will take issues with that and 13 we will not let it rest. I am open to work with you 14 to get it straight on all of the black press, but I am 15 not open here to just benefit personally. 16 CHAIR MIERS: Well, we certainly want 17 uniformed treatment, sir. And if the audit were 18 effective for you, it would be effective as to anyone 19 else. 20 Now, you mentioned Mr. Evans, I 21 believe, or NOKOA. Mr. Evans, did you want to speak 22 also? 23 MR. EVANS: Yes. 24 CHAIR MIERS: All right. 25 MS. CLOUD: Commissioners, can I just 54 1 add here? And I think you both read -- all of you 2 read the letters that have gone out. There has not 3 been any discrimination whatsoever for anyone that is 4 advertising with this agency. 5 CHAIR MIERS: We understood that. 6 MS. CLOUD: Okay. 7 CHAIR MIERS: Mr. Evans? 8 What, Linda, we had understood before 9 today, as well as today, is that whatever has 10 transpired with respect to the media has been 11 uniformed. 12 MS. CLOUD: Yes, ma'am. 13 CHAIR MIERS: Mr. Evans, could you 14 state your full name for the record, please. 15 MR. EVANS: Gladly. My name is Akwasi 16 Evans. I am the publisher of NOKOA newspaper here in 17 Austin, Texas. We have been in business for 12 years 18 now. And we are a weekly newspaper that is not a 19 black newspaper, but it is African-American owned. I 20 am the owner. But we are a progressive newspaper. We 21 serve the entire community and we circulate throughout 22 the entire community. I am also a member of the Texas 23 Publishers Association and the National Newspaper 24 Publishers Association. I am the past chairman. I 25 served three terms as president of the Texas 55 1 Publishers Association. 2 When the lottery was first started, the 3 Texas Publishers Association went to the newly 4 appointed commissioner and sat down with her and said 5 we represent the African-American community and the 6 African-American media in this state. We have 27 7 papers throughout the state. We would like for you to 8 work with us to make sure that the lottery is fairly 9 allocated to our community. The lottery said they 10 would use an advertising firm to work with us. And 11 they did that for a year or two. 12 And we realized, looking at other 13 papers throughout the state, that there was a 14 discrepancy in the dollars that the Lottery Commission 15 was spending on promoting the lottery in the 16 African-American media and other medias, especially 17 mainstream media. And we called on Senator Royce West 18 of Dallas. We called the commissioners in for a 19 special meeting at the capitol. And we sat down and 20 we looked through the figures. And they ascertained 21 that at that time approximately 69.7 percentage -- 22 69 percent of the lottery dollars was spent on 23 mainstream media, 27 percent was spent on Hispanic 24 media and four percent was spent on black media. 25 Although, over 12 percent was -- of the revenue was 56 1 coming from the black community. 2 The Lottery Commission at that time 3 decided that they would make some adjustments to try 4 to bring about fairness and balance. And they 5 increased the spending in black media from four 6 percent to nine percent. And that went on for about 7 two years. And since then we have seen a steady 8 decline in appeal to our readers from the Lottery 9 Commission. 10 CHAIR MIERS: Now, what in -- are you 11 telling this commission has resulted in that decline? 12 MR. EVANS: The changes in advertising 13 agencies that the lottery uses, the fact that the 14 lottery has to pay half of the agencies' commissions 15 instead of going to the publishers who get the word 16 out. I can't attribute, specifically, to anybody 17 because I don't know who made what decisions, but we 18 know that there has been a dramatic decline in 19 promoting the lottery from black newspapers in the 20 last three or four years. And it is still going down. 21 MS. CLOUD: Commissioners, this is why 22 we -- one of the reasons that we split out our 23 minority advertising contract and the new vendor has 24 only had this contract for a little over a month or 60 25 days. And they are now placing ads with the minority 57 1 community. I can't speak to exactly what the numbers 2 were with our former vendor without going back and 3 looking at the records, but I can tell you we have 4 made an attempt to correct our minority spending with 5 our entire minority advertisers. 6 MR. SADBERRY: When did this meeting 7 with Senator West take place? 8 MR. EVANS: I'm not certain of the 9 year. It was, I think -- I am thinking '92 or '93. 10 MR. SADBERRY: One of the reasons I 11 asked is I have been with the Commission since 12 start-up and I have not attended one of those 13 meetings. And I can understand how -- when you say 14 the Commission, I believe that is where you might mean 15 members of the staff. I don't recall this issue being 16 brought to this level of attention, the commissioners, 17 to my knowledge. I don't -- 18 Nelda, I am seeing you shake your head 19 back there. So I wanted to know what time frame of 20 reference we are talking about here because, you know, 21 we had the Commission -- the lottery under the 22 Comptroller's Office for, what was it, one year, two 23 years? 24 MS. TREVINO: That's correct. 25 MR. SADBERRY: And then we created 58 1 the -- that state agency was created. I don't recall 2 this being brought to a commissioner-meeting level of 3 attention. 4 MS. TREVINO: Commissioners, my 5 recollection, I think, to the meeting that Mr. Evans 6 is referring to was a meeting that took place early on 7 during the start-up of the lottery. And this we -- 8 like you said, Commissioner Sadberry, this was when we 9 were a division of the Comptroller's Office. So it 10 was really staff who attended that meeting with 11 Senator West. 12 MR. SADBERRY: And have we had ongoing 13 dialogue to any level to your knowledge, Nelda, where 14 this has been raised as an issue? I acknowledged 15 Linda's comment about the creation of the separate 16 contract. Did that result from something or was that 17 just an evolution of management decision on a better 18 way to go about accomplishing the objectives that we 19 are setting out to do? 20 MS. TREVINO: If you are referring to 21 the initial meeting, I think just like with many 22 issues that we were dealing with at start-up, we were 23 trying to put some policies and procedures in place. 24 And at the time GSD&M was the advertising vendor and 25 they also attended that meeting. And so I think as 59 1 Mr. Evans said, we were kind of looking at where we 2 were spending our advertising dollars at the time and 3 trying to come up with, again, a policy and a program 4 that I think would benefit all parties involved. 5 CHAIR MIERS: Well, this is obviously a 6 matter of great significance to the agency, and it 7 should be because it is legislatively mandated. So we 8 appreciate any suggestions or efforts that can be made 9 to better our program here and make sure it is 10 aggressive and balanced. And certainly the division 11 of the contract was a step in that direction. That 12 was staff directed to address the issue that they 13 observed, which was what Mr. Evans referred to was in 14 some decline. I'll -- I do -- I think you had a 15 further comment. 16 MR. EVANS: I wanted to add one thing. 17 We have seen reports in the mainstream media over the 18 last several months about the decline in lottery 19 sales. And if you would look at the possible impact 20 of the decline in promotion in our papers, there may 21 be a correlation. 22 CHAIR MIERS: Well, I was going to say 23 it is -- we were just dealing with that issue before 24 you gentlemen arrived and, basically, we have a number 25 of ways to address sales decline and certainly 60 1 increased advertising has been one of them. So 2 hopefully the agencies that we are working with and 3 the media representatives like yourself that we can 4 work with will help us see the kind of improvement 5 that we hope we can see, but also accomplish one of 6 our goals, which is to increase the procurement 7 through our minority representatives. So I appreciate 8 your time this morning. We understand -- 9 MR. MALONSON: Can I make a last 10 comment? 11 CHAIR MIERS: Sure, absolutely. 12 MR. MALONSON: Being the past chairman 13 of the Texas Association of African-Americans 14 Chambers, I had numerous meetings with your staff 15 about the numbers and all in a lot of different 16 agencies with the State of Texas and Senator West and 17 Representative Davis and Turner and the whole nine 18 yards of them. And one of the things was trying to 19 work with the lottery to see how we can work together 20 and get the things -- because we was looking at the 21 numbers. I have the numbers. We were very 22 instrumental in getting the HUB legislature passed. 23 The Texas Association of African-American Chamber was 24 very instrumental with Senator West and Yvonne Dukes 25 of getting that bill passed and we brought him to mark 61 1 at the end to support that bill and to get it signed. 2 We was very instrumental. 3 So we're not -- we don't have a history 4 of not trying to accomplish or work. Our track record 5 speak for itself. The part of me owning -- one of my 6 companies I own, which is the worse one, which is this 7 newspaper. And I literally mean that. It is the 8 worse one is this newspaper. I started as a hobby 9 just going to play with something. It wind up being a 10 nightmare. But we're here to work with you, but we're 11 not here to be victims. It would not -- but if we 12 wrong, we wrong. But if we not -- but we have the 13 track record and we have support to work -- and the 14 mechanism. We welcome a minority -- it is about time. 15 We welcome a minority and the African-American agency 16 coming in. And by that, they should understand the 17 market and they should get out there and work. 18 But there is all kinds of issues here 19 and we wear a lot of different hats. The hat that I 20 came with was the newspaper hat. And these meetings 21 all happen before the sessions of different bills. 22 And these issues happen -- they are beginning to take 23 issues now billing up to the next session. Thank you 24 very much. 25 CHAIR MIERS: Exactly. And that is 62 1 what -- we're in that stage. So help us. And we have 2 a common goal here. So thank you both for your time. 3 I do know there will be some follow-up on the question 4 of the audit and see if we even have an issue there. 5 MR. EVANS: Thank you. 6 CHAIR MIERS: Thank you very much both 7 of you. And I would like to call on Johnnie King and 8 the King Agency because this is a new effort. 9 Hopefully an effort that will be successful to 10 accomplish better the goals that we have. And it goes 11 without saying that although the King Agency is 12 working on this, we expect our other agency to be 13 fully engaged likewise. And I am sure you-all are in 14 your efforts to help us meet these goals. 15 Mr. King, would you state your full 16 name for the record, please. 17 MR. J. KING: Johnnie King, Jr., 18 president of the King Group. First of all, I welcome 19 this opportunity and thank you, the Commission, for 20 allowing me this opportunity. The King Agency is one 21 of the largest advertisers in the minority press in 22 America. I think we are without a doubt, I think, the 23 largest independent advertisers in the minority press. 24 Our agency upon its inception 13 years 25 ago decided to make this medium a very high emphasis 63 1 medium for ourselves. As a result, I would be the 2 first to tell you that it is a medium that does 3 require a certain amount of expertise. We are 4 currently, and hopefully, one of the biggest reasons 5 why we are awarded this contract was that we were one 6 of the few firms in the country that is actively 7 advertising and buying media in both the Hispanic and 8 African-American markets. Excuse my voice. It is not 9 the way I normally sound. But I think that our 10 expertise in the area over the years has required us 11 to look at many variable factors as it relates to this 12 medium. We certainly, I think, are considered 13 somewhat of a friend of the media as well as realize 14 our fiduciary responsibility to our clients. So in 15 that vein, we have undertaken this assignment and kind 16 of started from scratch and looked at the situation as 17 it exists today. And without going into detail, I 18 think Roy is very accurate when he says that this is 19 not a -- in some cases, this is a global issue and in 20 some cases this is an individual issue. But our task 21 as the minority advertising agency, as we see it, is 22 to ensure that the state is getting its money's worth 23 while at the same time remaining somewhat, I'll use 24 the term, loyal, but somewhat an advocate for the 25 minority press. 64 1 Our assessment, as it looks today, is 2 that, first of all, we -- I wanted to talk a little 3 bit about process because I think the thing that is 4 most important right now is that we do our job and we 5 do it properly, keeping in mind that we have a 6 responsibility to the lottery and to making sure that 7 we spend the dollars of the citizens of the State of 8 Texas wisely, as well as also unmistakably 9 understanding the passions of being a black man. 10 So our undertaking right now is very 11 simply this: To advise the Commission as to -- the 12 lottery staff as to where we are today and try to make 13 some type of an assessment and evaluation based on 14 where we are today and practices today. Second, to 15 take into consideration the auditor's report and to 16 try to dissect it to -- and analyze it to make sure 17 that we understand what the findings are and to 18 address the things that we think can rectify that 19 situation. 20 As we see it, the auditors were pretty 21 clear in what they saw with our inability to verify 22 what we're buying. It was not a slam, in our opinion, 23 on the staff or anything else. It just said that the 24 verification issue, therein lies the audit situation 25 and what these audits represent -- and what they 65 1 represent today and what they represented yesterday. 2 So what we have done is we have 3 undertaken to get into our hands the physical audits 4 of all the minorities' publications and as my 5 counterpart, I think, Charlie, will verify that he is 6 doing the same for the general market publications. 7 Being a black man, you can assure that -- you know, 8 Roy can be assured part of my task is to make sure 9 that everything is being done equitably. And we are 10 very comfortable with what staff has done so far in 11 that area. 12 Once we get our hands on the physical 13 audits, we have made some recommendations. And I 14 would agree with Roy that there are differences in 15 audit firms and the credibility and so forth of audit 16 firms is something that is in question. I think that 17 is what you pay ourselves and Fogarty for is to help 18 in making those type of assessments as to whether or 19 not one firm or the other firm might need some further 20 validation. 21 As far as the issue of where do we go 22 from here. Once we are comfortable with where we are 23 today, we have full intentions of making 24 recommendations to the staff as to the thing that we 25 think needs to be done to, basically, address the 66 1 issues raised in the audit. I think that is not only 2 fair, but also prudent for us to do. Once we have 3 done that, then we can actively evaluate what we are 4 buying with the lottery's dollars. 5 I must say one thing here. That when 6 you talk about the minority press, it is a very 7 different medium. There are a number of variables 8 that are not necessarily, you know, on the template of 9 what you would normally use to evaluate media. They 10 include things such as the age of the publication, the 11 credibility of the publication, some things that are 12 subjective and things that we try to be somewhat aware 13 of. It is very easy to determine the age of a 14 publication. It is very easy to determine whether or 15 not it is being distributed throughout the community 16 and those types of things. 17 So when we undertook the very ambitious 18 goal of making this medium an important part of what 19 we do for our clients, then we had to look at things 20 outside of the box, if you were, to make sure that 21 we're getting what we're paying for all of our 22 clients. So in that vein, I can assure that we roll 23 those things into our thinking and that we are 24 advising the staff of those things as it relates to 25 things that are not necessarily what we could call 67 1 traditional standards of measure of the media. 2 So I want to assure you and I want to 3 assure the black press and the Hispanic press and the 4 oriental press and the Asian press that we are 5 addressing those issues and that we understand them. 6 I thank the staff in allowing us this opportunity. 7 And I think it is somewhat in recognition of the fact 8 that there are things such as this that must come into 9 consideration as we evaluate the medium. 10 With that being said, we do not abandon 11 the normal standards of measure and we certainly have 12 a responsibility as it relates to efficiencies of 13 dollars to ensure that we are speaking to those 14 audiences that we think that we are speaking to. So 15 we are making -- we are meshing this combination of 16 audits, practices that we think are out there that we 17 think need to be dealt with. And the folks that know 18 us, understand us, and understand that we are not 19 afraid to take on an issue that we believe is right on 20 behalf of our clients and won't hesitate to do so. 21 So our task, as we see it, is a 22 two-edge sword. We think that we are very qualified 23 to do so. And we don't expect it to be done without 24 dealing with some issues here. We -- Dr. King and 25 myself with my partner in business have had a lot of 68 1 conversations about this prior to submitting our 2 response to the RFP because we realize that this was a 3 situation that needed to be dealt with. I would not 4 have undertaken this assignment if we didn't believe 5 that we couldn't do the job. I don't think it would 6 be done -- I have already talked to Senator West on 7 several occasions about this issue. Got a phone call 8 early on based on some of the calls he was getting 9 from the press, and we talked the thing through. I 10 believe he is very comfortable with what we are doing. 11 And he is actually the Senator -- I live in his 12 district and have known him for many, many, many 13 years. And so he knows of our personal credibility, 14 company's credibility and I think whether the folks 15 like us or -- he pretty much will tell you that we 16 pretty much shoot straight up. We plan on, the next 17 step, providing a report to the lottery staff and 18 making recommendations as to how we see them, to 19 address all the issues. We will then close with an 20 analysis based on the financials and economic subject. 21 That's all I have to say right now. If you have any 22 questions, I would be glad to address them and we're 23 excited about this opportunity. 24 CHAIR MIERS: We are excited you are 25 working with the lottery and I look forward to seeing 69 1 some real concrete results from this initiative. So 2 thank you very much and we appreciate those comments. 3 Let me ask if there -- Mr. King, if there are any 4 questions. 5 MR. CLOWE: Well, I just want to make 6 sure that I understand where we are on this subject 7 and maybe I can get you to verify what I think I have 8 heard. 9 First of all, I think this discussion 10 has been very helpful to the Commission and to the 11 staff and to all that has listened to it. It seems to 12 me we have three issues being dealt with 13 simultaneously. 14 One is that in the past, we haven't 15 done a very good job of handling our advertising needs 16 and having it verified insofar as the state auditor's 17 comments and we're attempting to improve that and to 18 do a better job. The second issue is, are we doing 19 that and are we going about that task fairly? And 20 your firm, Mr. King, has entered into this process. 21 You have taken a contract from the state and you have 22 told us that you feel qualified to do that and you are 23 optimistic about how the results are going to turn 24 out. As part of that, the issue has been raised about 25 communication of the requirements and we've heard that 70 1 the requirements are fair. I think we have also heard 2 here this morning that maybe we haven't done a very 3 good job of communicating that in some of the language 4 that has been used, particularly as it was referred to 5 the influencing or having something to say about 6 editorial comment. And I think there has been a good 7 airing about that, that that's not where this 8 commission is headed. We don't want to enter into 9 that process. 10 MR. J. KING: Commissioner, I must say 11 that it is not out of the question and unusual for 12 clients to require that we do editorial screening. 13 Not to impose upon the first amendment, but to make 14 sure that whatever publication that their advertising 15 is appearing in, it is appropriate in their own minds. 16 And not judging the right of their publication to 17 editorialize, but more importantly to say is this a 18 publication that I want my product to be associated 19 with. 20 MR. CLOWE: Any advertising? 21 MR. J. KING: Any advertising. It is 22 not unusual for an advertiser to make that request of 23 us. 24 MR. CLOWE: And I think the Chair 25 identified that issue of perhaps being one of 71 1 communication more than substance. 2 MR. J. KING: Right. Exactly. 3 MR. CLOWE: And the issue of 4 verification needs to, I think, be addressed in that 5 same area as far as verification of audits and what it 6 is this agency is trying to do. The issue is raised 7 of, you know, are you going to accept an audit or you 8 are not going to. And -- 9 MR. J. KING: Right. 10 MR. CLOWE: And I think that is a 11 communication issue. And then the third subject which 12 I have heard discussed is the one of the proper amount 13 of advertising going to each cultural or ethnic group 14 as deemed appropriate by the legislature. And this 15 agency intends to follow that implicitly and see that 16 that effort is successful and that was one of the 17 motivations behind splitting out the minority 18 advertising issue and employing your firm. 19 So I feel reinforced by the discussion 20 that I have heard here this morning and I hope this 21 process will now operate and communications will 22 improve and we will achieve more success in all three 23 of these areas in the future than perhaps we have in 24 the past. 25 MR. J. KING: You have our full pledge 72 1 that we are going to do everything in our power to 2 make sure that that happens. 3 MR. CLOWE: Great. 4 CHAIR MIERS: And part of your job, 5 also, Mr. King, is to make sure that the amounts of 6 monies being paid for a particular ad are the 7 appropriate level, competitive with other advertisers 8 so the state is paying what is a reasonable amount for 9 advertising. 10 MR. J. KING: I think there is a 11 critical issue. The number one issue is a dollar 12 spent and what we are buying for a dollar. That also, 13 somewhat, has to be augmented with the fact that we 14 are attempting to spend money with minority-owned 15 media. It is a -- somewhat a -- in conflict at times, 16 but I think that is not an impossible task. If we 17 did, we would not have undertaken it. But I believe 18 that, yes, there is a need to advertise with the 19 minority-owned media of all ethnicities. And, believe 20 me, I think I know every single one of them by now. 21 CHAIR MIERS: And of all sizes -- 22 MR. J. KING: And of all sizes. That's 23 correct. 24 CHAIR MIERS: -- I think is what you 25 are addressing. I am really addressing something 73 1 different. 2 MR. J. KING: Okay. 3 CHAIR MIERS: As opposed to what the 4 lottery pays versus what some commercial retailer -- 5 MR. J. KING: Right. 6 CHAIR MIERS: -- might pay. 7 MR. J. KING: Right. Exactly. 8 CHAIR MIERS: And they would -- should 9 pay the same to reach the same audience. Correct? Or 10 is there any legitimate reason why those would be 11 different? 12 MR. J. KING: There should be some 13 reasonable correlation between the two. And what our 14 concern would be is -- does that correlation exist. I 15 mean, pricing in these areas is something that is 16 very, very difficult. I won't use the term commodity 17 because it is probably a condescending term as it 18 relates to this medium. But from a pricing 19 standpoint, you have X numbers of mediums of a like in 20 a marketplace. And I think Roy's point is that he 21 feels and probably can substantiate, based on numbers, 22 that his publication is different. And I think that 23 those are the kind of judgements that we can make in 24 applying factors that are measurable. To say that if 25 a publication has a circulation of X and in the 74 1 marketplace a fair price is Y, then is the lottery 2 paying a fair price based on those factors because it 3 is market driven to a degree. These prices are market 4 driven to some degree. That is where I was trying to 5 make a point where, you know, you have got to go a 6 little bit outside of some of the boundaries to try to 7 price this medium. 8 CHAIR MIERS: Yes. And I think we 9 understand that. But we do want the state treated 10 with an evenhand, is all we're saying. 11 MR. J. KING: Exactly. 12 CHAIR MIERS: And -- but understand I 13 think you are not buying the same thing -- 14 MR. J. KING: Right. 15 CHAIR MIERS: -- when you are 16 purchasing advertising in various particular media 17 outlets. So -- and we are charged with reaching out. 18 We intend to reach out. That is not an issue. 19 MR. J. KING: Right. 20 CHAIR MIERS: Okay. Thank you very 21 much. 22 MR. J. KING: Thank you. 23 CHAIR MIERS: Our representatives from 24 Fogarty/Kleine are here too. I don't know if there is 25 anything that you would want to add at this time. 75 1 MR. PACKARD: I want to add one more 2 thing. 3 CHAIR MIERS: Okay. 4 MR. PACKARD: For the record, my name 5 is Charles Packard. And I am a vice president of 6 Fogarty/Kleine and the group account director for the 7 lottery. 8 I would say that the importance that 9 the general-market advertising agency has as a charge 10 right now is to have an open communication with the 11 minority agency, of which Mr. King and I have 12 discussed, and we certainly will. And I think it is 13 important to understand that general-market 14 advertising reaches out to all Texans, all trusting 15 Texans. And I trust very much so that the 16 African-American audience watching the Rockets or the 17 Mavericks in Boston last night was significant. And I 18 have discussed this with Mr. Allan who is a -- our 19 media director for the account to ensure that we start 20 providing delivery of those numbers in post-analysis 21 for the lottery to make a full value to make certain 22 that you are not overspending in a particular area as 23 well as underspending, and that is a consideration 24 that -- in the past, I think, that the agency would 25 have taken involved. So I think -- I think that this 76 1 move is an excellent move and we will make certain 2 that we provide those numbers in that regard. 3 CHAIR MIERS: All right. 4 MR. CLOWE: Get them to play Texas 5 Lottery. 6 MR. PACKARD: We're trying very much 7 so. 8 CHAIR MIERS: All right. Thank you 9 very much. That was very helpful. I appreciate our 10 speakers and the issues they have raised and staff's 11 work in trying to address these issues. And hopefully 12 we can move forward on a positive note. 13 We are now -- I am going to call on 14 Ridgely Bennett to address Item 4, the status report, 15 possible discussion and/or action on the lottery 16 operator audit procurement. 17 MR. BENNETT: Good morning, 18 Commissioners. Again, for the record, my name is 19 Ridgely Bennett. I am deputy general counsel. As I 20 reported last commission meeting, lottery staff awaits 21 recommendations from the State Auditor's Office 22 regarding reissuing the requests for proposals for an 23 audit of the lottery operator. Once those comments 24 are received, we will incorporate them into the RFP 25 and reissue the RFP. If you have any questions, I'd 77 1 be happy to answer them at this time. 2 CHAIR MIERS: When? 3 MR. BENNETT: I don't have a date 4 certain from the State Auditor's Office. I will be in 5 contact with them and try to find out a date from 6 them. 7 CHAIR MIERS: That would be helpful. 8 MS. CLOUD: Commissioners, I did talk 9 to Cindy Reed at the State Auditor's Office and she 10 had just completed a major audit with another agency 11 and was taking some time off, but promised to call us 12 as soon as she got back, which she is back now, that 13 we would be a priority. 14 CHAIR MIERS: Great. 15 MR. CLOWE: What's the time on this 16 audit? Are we overdue and, if so, by how much at this 17 time? 18 MR. BENNETT: The audit is not a 19 requirement. I believe the state auditor's report and 20 the management control audit -- Debra might be able to 21 help you with this -- had an issue about auditing 22 the -- GTECH and, I believe, we have actually 23 accomplished what the State Auditor's Office had 24 required. 25 MS. MCLEOD: Commissioners, under our 78 1 contract that we have had with GTECH, we've asked for 2 annual cost reports to be provided and Deloitte and 3 Touche had done a review of reports from '93 through 4 '97. So to answer your question, we have not had a 5 firm review the '98 or the '99 cost reports. So we're 6 essentially two years behind, going on three as GTECH 7 is winding down their fiscal 2000 year at the end of 8 this month. 9 MR. SADBERRY: But this audit from RFP 10 would encompass a larger mission, and wasn't it the 11 issue of whether the initial RFP for this particular 12 audit was expansive enough to accomplish the 13 objectives that we have entitlement to audit under our 14 contract with the operator, which we have not done 15 even with the comptroller. Isn't that an accurate 16 assessment? 17 MS. MCLEOD: This is exactly an 18 accurate statement. They were looking to do an audit 19 opinion, that was the direction we were given, to look 20 at the cost reports and verify that the numbers were, 21 one, tied back to their financial statements and, two, 22 to give us some indication of the business and 23 operations and how the monies were being spent. That 24 portion did not take place. What we had to do with 25 the Deloitte and Touche contract was do an agreed-upon 79 1 procedures whereby they did not provide us with an 2 audit opinion and truly verify that the numbers tied 3 into the financial statements. 4 MR. SADBERRY: Have we ever made in a 5 management response any commitment -- I think this is 6 where the initial question goes to. Any commitment of 7 a deadline or dateline by which we would accomplish 8 that process? 9 MS. MCLEOD: I don't understand the 10 question. Between us and GTECH? 11 MR. SADBERRY: No. That's in the 12 auditor's office. 13 MS. MCLEOD: I have not been part of 14 that process. I do not know. 15 MR. SADBERRY: So we are not under a 16 deadline except -- unless it is self imposed or is 17 perceived by maybe something that might be implied in 18 the auditor's report? 19 MR. BENNETT: And, Commissioner, tell 20 me if I am wrong. I believe you are referring to the 21 management control audit -- 22 MR. SADBERRY: Right. 23 MR. BENNETT: -- where it recommended 24 we conduct an audit of GTECH's financial records. And 25 I believe that is a closed issue based upon the 80 1 agreed-upon procedures that we did do with Deloitte 2 and Touche. 3 CHAIR MIERS: Well, but now, Ridgely, 4 we're to the point of having more data with the 5 passing of time. 6 MR. BENNETT: Right. 7 CHAIR MIERS: And so how do we address 8 the analysis of that data to stay current? 9 MS. MCLEOD: One of the things that we 10 are trying to do in the interim when we received 11 approval from Larry King was that when they finished 12 their year-end financial statements this year with 13 their auditors, the cost reports that they give us 14 from their CPA firm, they would let us know that those 15 numbers tied back to their audited financial 16 statements. So that goes back to the agreed-upon 17 procedures that we got from Deloitte. So at least 18 that portion of it, which satisfies what the auditors 19 wanted us to do, was to get financial information and 20 verifiable information. 21 CHAIR MIERS: So that would cover '98 22 and '99. 23 MS. MCLEOD: Yes, ma'am. 24 CHAIR MIERS: Why can't we do that with 25 '98 now? What is the hold-up on '98? 81 1 MS. MCLEOD: I don't know what the 2 hold-up is on '98. I think because -- what they are 3 doing right now is trying to close down financial 4 statements for '99. I am sure we can work with Larry 5 King's Earnest and Young auditors up there in 6 corporate headquarters and get '98 information. 7 MS. CLOUD: That is really all Deloitte 8 provided us was tying that financial information for 9 GTECH Texas to the financial statements at the end of 10 their years. 11 MR. SADBERRY: Which goes to the return 12 on investment and price analysis tied somewhat into 13 the contract renegotiations. But now we're looking to 14 win the ability for an opinion. And do we have clear 15 criteria of what we're looking for in that opinion? 16 MR. BENNETT: I think that's what we're 17 waiting from -- input from the State Auditor's Office. 18 Obviously, the RFPs that we put out in the past have 19 not attracted a lot of attention. In fact, I believe 20 at least one major audit firm stated that they didn't 21 think an opinion could be issued on the question. 22 MR. SADBERRY: And in the 23 indemnification issues as well, are we past that 24 point? 25 MR. BENNETT: I don't think we are past 82 1 that point. We are trying to address this as best as 2 we can. 3 CHAIR MIERS: Okay. I think the point 4 is that vis-a-vis the state auditors, what they 5 directed that we do, we have done. And now we just 6 are under an obligation to have an ongoing process 7 that keeps us up to date as necessary with that 8 information. 9 MR. BENNETT: That's correct. 10 CHAIR MIERS: Okay. Anything else on 11 that particular item? 12 MR. BENNETT: I have nothing further. 13 CHAIR MIERS: Ms. McLeod? 14 MS. MCLEOD: No, ma'am. I have nothing 15 further. 16 THE REPORTER: Could you state your 17 name for me? 18 MS. MCLEOD: Debra McLeod. 19 MS. CLOUD: Internal Auditor. 20 CHAIR MIERS: Okay. Item Number 6. 21 I'm sorry, Number 5. Consideration of and possible 22 discussion and/or action on the state audit reports. 23 Debra? 24 MS. MCLEOD: Commissioners, I am very 25 pleased to announce that the Lottery Commission has 83 1 completed all actions under the management control 2 audit. That audit was performed back in '97. And 3 they have implemented the security case tracking 4 system, which was the last big project to be 5 finalized. 6 Under the other audit, procurement 7 practices, they came up with two findings. One of 8 which we have addressed quite extensively this morning 9 with the print media vendors and obtaining 10 verification of the print circulation. One issue that 11 I did not hear this morning, but I am sure 12 Commissioners are aware of, that this issue was not 13 raised necessarily by the State Auditor's Office, as 14 it is my understanding that we raised it to them. 15 That we had looked at the print circulation and there 16 was no -- as we heard from people that are in the 17 industry, not a set rate for the print circulation and 18 it varied from paper to paper. And that what we were 19 trying to do was contact other state agencies, which 20 we did. And as Mr. Evans, I believe, referred to the 21 Texas Publishers Association, they are the ones that 22 the Comptroller's Office uses. And they, likewise, 23 were to give an oversight, like we use to GSD&M and 24 now Fogarty/Kleine and now the other vendor to do this 25 sort of oversight, as to whether the media -- whether 84 1 the state agency was getting value for the media. 2 So to say that, you know, in past 3 practices we weren't doing a good job, I think from 4 the state agency's standpoint it would be fair to say 5 that this agency is going forward trying to attack 6 something that has never been done before. And when 7 the state auditors were here, we asked them could they 8 please look at this and give us some guidelines as to 9 how to come up with a fair rate, how we can ensure 10 that the dollars are being spent fairly in the state. 11 The other issue is that as they are 12 going forward with the new vendors, they are looking 13 at the process and to make it fair for both the 14 general market and the minority because of the type of 15 print medias vary from, literally, a mom-and-pop shop 16 to something, as the gentleman, Mr. Malonson, had 17 referred to as quite an extensive operation. 18 So they are trying to make it fair and 19 equitable and they are trying to look at the price. 20 And as they alluded to the audit, Mr. Malonson was 21 very correct. An audit is done at one point in time 22 and to say that this is certifiable for a year is not 23 a fair statement of an audit. It is just a snapshot 24 in time as to what takes place. We need to look at 25 the whole process. When we say that it is certified 85 1 for a year or two years, what does that actually mean. 2 And to make sure that is fair to all of the media. 3 As you can tell from the discussion 4 that has taken place, quite a lot of effort by staff, 5 primarily Brenda Flores and Toni Smith in marketing, 6 is to gather all this information, to communicate with 7 both the media and with the firms charged with the 8 oversight. So, unfortunately, we were supposed to 9 have completed this by the end of January and we're 10 still working on trying to get the information from 11 the subcontractors. So this -- from what I understand 12 today, it will take at least another month in order to 13 complete that deadline. 14 CHAIR MIERS: Okay. Anything else? 15 MS. MCLEOD: Not that I have. 16 CHAIR MIERS: Okay. We're going to 17 skip Item 6 here for a moment and come back to that. 18 Item Number 7. Consideration of 19 possible action, including adoption of amendments on 20 16 TAC 401.101, relating the lottery procurement. 21 Item 8. Consideration of and possible 22 action, including adoption, on new agency procurement 23 rules, 16 TAC 401.102 and/or 401.103. 24 MR. BENNETT: Once again, 25 Commissioners, my name is Ridgely Bennett. I am the 86 1 deputy general counsel. Our staff is requesting that 2 the Commission pass these items at this commission 3 meeting and we will make a presentation at the next 4 commission meeting. 5 CHAIR MIERS: Okay. They'll be passed. 6 MR. BENNETT: Thank you. 7 CHAIR MIERS: And we'll move to Item 8 Number 9. Report by the Bingo Advisory Committee and 9 possible discussion and/or action regarding the 10 committee's activities. 11 MR. ATKINS: Commissioners, my last 12 conversation with him he was planning on being here. 13 You have a copy of his report in your notebook. The 14 only action item, I guess, that BAC took at their 15 meeting relates to Number 3. The staff did a 16 presentation to the Advisory Committee on bingo games 17 conducted through the Internet. And our presentation 18 even included -- we logged on to several sites where 19 the games were conducted and let them observe a game. 20 They did adopt a resolution. They took 21 a vote to encourage that the Lottery Commission urge 22 the appropriate state agencies to vigorously pursue 23 legal limits on Internet bingo, and I had informed 24 them during this presentation of that, I, along with 25 the Kiplin agency's general counsel and Mike Pitcock, 87 1 the security director. I have been in at least one 2 meeting with the Attorney General's Office where 3 Internet gaming, among other activities, were 4 discussed. And that agency had notified other state 5 agencies, other law enforcement agencies, of these 6 activities and asked them to pursue them. 7 CHAIR MIERS: Well, this is just 8 another great example of how the Internet and other 9 forms of play are available and attracting people 10 away. So it is happening in bingo, it is happening in 11 the lottery. And there is not much we can do about 12 that except to look at it and see if there are 13 legislative remedies available. Anything else under 14 Item 9, Billy? 15 MR. ATKINS: No, ma'am. 16 CHAIR MIERS: Why don't we take our 17 contested case docket. We'll take Item 12 at this 18 point, the consideration of the status and possible 19 entry of orders in the docket numbers listed there. 20 These particular items -- I know that there is one 21 that needs to be pulled and reformatted for action by 22 the operations director, and that is the item that is 23 entitled Fast Track. That is an action based on prior 24 criminal record. And so we will consider that pulled. 25 The other cases are either failure to notify of going 88 1 out of business or the insufficient funds. So as to 2 the other items, I would move approval of the entry of 3 the orders as recommended. 4 MR. SADBERRY: Second. 5 CHAIR MIERS: All those in favor say 6 aye. 7 MR. SADBERRY: Aye. 8 MR. CLOWE: Aye. 9 CHAIR MIERS: Aye. They will be so 10 approved. So then it would be my intention at this 11 point to move that we go into executive session 12 pursuant to -- for a variety of items all listed under 13 Item 10. To deliberate the duties and evaluations of 14 the executive director, internal auditor, charitable 15 bingo operations director and the duties of the 16 general counsel and the duties of the security 17 director pursuant to 551.074 of the Texas Government 18 Code. To receive legal advice regarding pending or 19 contemplated litigation and/or to receive legal advice 20 pursuant to Section 551.071(1)(A) or (B) of the Texas 21 Government Code and/or report to receive legal advice 22 pursuant to 551.071 (2) of the Texas Government Code, 23 including the items listed under Paragraph 10(F) as 24 provided in the agenda. Is there a second? 25 MR. SADBERRY: Second. 89 1 CHAIR MIERS: All those in favor say 2 aye. 3 MR. SADBERRY: Aye. 4 MR. CLOWE: Aye. 5 CHAIR MIERS: We'll go into executive 6 session at 10:45. I have no estimate today. 7 MS. KIPLIN: Today is February 29th, 8 year 2000. 9 (EXECUTIVE SESSION) 10 CHAIR MIERS: Okay. The record should 11 reflect that we're coming out of executive session at 12 1:03 on February 29th. And we are ready to hear the 13 report of the executive director. 14 MS. CLOUD: Okay. Commissioners, we 15 transferred to the foundation school fund in February 16 of 2000, $78,950,118.00. We have total tranfers to 17 the state at this time of 7,082,337,668.00. Our FTE 18 status, we have 309 active FTEs. We have seven vacant 19 FTEs. And in the selection acceptance pending, we 20 have 14 in the recruiting, screening and interviewing. 21 We have one position being posted at this time and 22 only four vacant positions, but there is no activity 23 in that chart. 24 I touched a little bit on information 25 that I brought back from the conferences which has 90 1 provided some real concern from the lottery industry 2 on Internet gaming and where it is going. And we will 3 have more information to present to you when we come 4 back from this conference in Georgia. 5 On March 30th, we'll have our next 6 Town Hall meeting in Longview, Texas. And we, of 7 course, invite either one of you that might want to be 8 at that meeting. And we have sent out letters to all 9 the legislative bodies in that area. And that's my 10 report. 11 CHAIR MIERS: Any questions for Linda? 12 MR. CLOWE: Were you going to comment 13 on your meeting yesterday here? 14 MS. CLOUD: Yes. Oh, I'm sorry. Yes. 15 Our staff meeting, we had a Mardi Gras theme staff 16 meeting for all the staff. And all -- we tried to 17 make all the directors dress up in Mardi Gras. Billy 18 and I were the king and queen and we had our crowns on 19 and our jewels. It really was a lot of fun, and most 20 of the directors did participate. They didn't -- the 21 guys did not want to dress up with all the jewelry, 22 but we made them do a little something. But it was 23 fun and I think the staff really enjoyed it. We 24 made -- each division director made a presentation to 25 the staff on what was going on within their divisions. 91 1 We gave away some prizes marking POM -- 2 point of merchandise from other lotteries. What we do 3 when we go to another state is they give us T-shirts 4 and cups and things from their state and we take them 5 and pool them and that's what we use to give employees 6 prizes so we don't have to count that as their -- part 7 of their $50 a year that we can contribute to them. 8 We gave a marketing report and we showed the last 9 NASPL tape update, videotape. And we've had some 10 feedback from some of the staff that seem to really 11 enjoy it. 12 CHAIR MIERS: All right. 13 MR. CLOWE: The reason I ask you about 14 this is that is relative to the report that we 15 reviewed in our last meeting about team building and 16 communication and feedback to the employees. It is 17 very important. It is okay to act a little silly now 18 and then, dress up a little bit different as an 19 attention getter, but it makes the meeting more open 20 to exchange ideas. And you're not sitting behind a 21 desk and all communication coming to the employee. 22 That's beneficial. 23 MS. CLOUD: Well, we also opened up for 24 our employee involvement committee to refreshment -- 25 or sell refreshments right after the meeting so that 92 1 the staff could -- that contributes to their little 2 program as well. But it also provides refreshments 3 for staff that want to purchase. So we have had these 4 employee meetings -- I mean, staff meetings in the 5 past, but it was on a director -- it was on a division 6 level where the division itself had to come up with 7 the money to provide refreshments for all the lottery 8 staff and come up with a theme and come up with a skit 9 or whatever they wanted to do. And it became real 10 burdensome to the division, especially a small 11 division. So we think this will be a better plan. 12 And we plan to do this on a quarterly basis. And 13 marketing has taken the responsibility for providing 14 the theme for us in the future since they are the 15 creative bodies around here. So they did a great job 16 yesterday. And their staff all wore the green motto 17 staff shirts, lottery staff shirts. So they stood out 18 pretty much. And Kim wanted the whole staff to have 19 those green shirts. 20 MS. KIPLIN: I got carried away. 21 MS. CLOUD: But it turned out, I think, 22 to be very positive. Billy? 23 CHAIR MIERS: Great. Okay. Billy, I 24 guess we're to your report. 25 MR. ATKINS: The one thing I wanted to 93 1 point out, Commissioners, in my report, we're 2 scheduled to do our allocation for the fourth quarter 3 of '99 tomorrow. So for the next meeting, we will 4 have those figures as well as final figures for all of 5 calendar year '99. Our preliminary figures at this 6 point are going to show that total gross receipts were 7 up in 1999. However, distributions and attendance 8 were both down in 1999 over '98. But, as I mentioned, 9 we'll have those final figures and we'll be able to 10 report on those the next meeting. 11 CHAIR MIERS: Okay. Nothing else from 12 your report? 13 MR. ATKINS: No, ma'am. 14 CHAIR MIERS: Ms. Kiplin, anything you 15 want to add? Anything else to come before the 16 Commission? 17 MS. KIPLIN: (Moving head side to side) 18 CHAIR MIERS: Okay. We'll stand 19 adjourned. Thank you very much. 20 21 22 23 24 25 (PROCEEDINGS CONCLUDED) 94 1 REPORTER'S CERTIFICATION 2 3 STATE OF TEXAS ) 4 COUNTY OF TRAVIS ) 5 6 I, MARY SCOPAS, 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 13th day of 17 March, 2000. 18 19 20 21 MARY SCOPAS, RPR, Texas CSR No. 5313 22 Expiration Date: 12-31-00 1609 Shoal Creek Boulevard, Suite 202 23 Austin, Texas 78701 (512) 474-4363 24 25 JOB NO. 000229MSH