0001 1 * * * * * * * * * * * * * * * * * 2 3 4 TEXAS LOTTERY COMMISSION 5 MEETING 6 7 NOVEMBER 16, 2004 8 9 * * * * * * * * * * * * * * * * * 10 11 12 13 14 15 16 17 BE IT REMEMBERED that the TEXAS LOTTERY 18 COMMISSION meeting was held on the 16TH of NOVEMBER, 19 2004, from 8:00 a.m. to 1:50 p.m., before Brenda J. 20 Wright, RPR, CSR in and for the State of Texas, 21 reported by machine shorthand, at the Offices of the 22 Texas Lottery Commission, 611 East Sixth Street, 23 Austin, Texas, whereupon the following proceedings 24 were had: 25 0002 1 APPEARANCES 2 3 Chairman: Mr. C. Tom Clowe, Jr. 4 Commissioners: 5 Mr. Rolando Olvera Mr. James A. Cox, Jr. 6 Assistant General Counsel: 7 Mr. Ridgely Bennett 8 Executive Director: Mr. Reagan E. Greer 9 Deputy Executive Director: 10 Mr. Gary Grief 11 Charitable Bingo Executive Director: Mr. Billy Atkins 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 INDEX 2 3 Appearances.................................... 2 4 AGENDA ITEMS 5 Item Number 1.................................. 4 6 Item Number 2.................................. 4 Item Number 3.................................. 61 7 Item Number 4.................................. 94 Item Number 5.................................. 99 8 Item Number 6.................................. 100 Item Number 7.................................. 101 9 Item Number 8.................................. 103 Item Number 9.................................. 106 10 Item Number 10................................. 110 Item Number 11................................. 121 11 Item Number 12................................. 121 Item Number 13................................. 125 12 Item Number 14................................. 129 Item Number 15................................. 143 13 Item Number 16................................. 142 Item Number 17................................. 143 14 Item Number 18................................. 152 Item Number 19................................. 154 15 Item Number 20................................. 164 Item Number 21................................. 171 16 Item Number 22................................. 171 17 Reporter's Certificate......................... 172 18 19 20 21 22 23 24 25 0004 1 CHAIRMAN CLOWE: Good morning. We will 2 call this meeting of the Texas Lottery Commission to 3 order. It is 8:00 a.m., November the 16th, 2004. 4 Commissioner Cox is here, Commissioner Olvera is here. 5 My name is Tom Clowe. 6 We will take up, first, item number two 7 on the agenda, report and possible discussion on 8 calendar year 2004, third quarter bingo financial 9 information and statistics. Mr. Atkins. 10 MR. ATKINS: Good morning, 11 Commissioners. 12 The third quarter of 2004 ended 13 September 30th with the due date for conductor 14 quarterly reports being October 25th. You have in 15 your notebook, for item two, the following 16 information, after my cover memo. The first is a 17 one-page spreadsheet titled Quarterly Comparison. The 18 top half of the spreadsheet compares the third quarter 19 of 2003 to the third quarter of 2004, and the bottom 20 half of the spreadsheet compares the second quarter of 21 2004 to the third quarter of 2004. 22 Behind that is another spreadsheet 23 titled Quarterly Comparison Detail Report, and this 24 spreadsheet shows each quarter broken down by year. 25 Referring back to the first document, 0005 1 the first spreadsheet, the top half of the quarterly 2 comparison spreadsheet shows decreases in all 3 categories, except for instant bingo sales, which were 4 almost 19 percent greater than the third quarter of 5 2003, and instant bingo prizes awarded, which were 20 6 percent higher than the third quarter of 2003. 7 However, if you look at the bottom half of the 8 spreadsheet, you will see that total gross receipts 9 for the third quarter of 2004 are down from the second 10 quarter of 2004 by 8.3 million dollars, or just over 11 five and a half percent. 12 The bottom half of the first 13 spreadsheet shows decreases across all categories for 14 the third quarter of 2004, those being total sales, 15 total prizes, expenses, distribution, and attendance. 16 As you'll recall, licensees have been reporting six 17 consecutive quarterly increases in instant bingo sales 18 since the fourth quarter of 2002. This is due to the 19 new event tickets which were authorized by the 20 adoption of amendments to Charitable Bingo 21 Administrative Rule 402.554 in September of 2002. 22 This increase continued until the last 23 quarter when licensees reported the first decrease in 24 instant bingo sales since the new tickets were 25 approved. We will, of course, continue to monitor 0006 1 this particular line item, but it appears at the time 2 that although instant ticket sales remain higher than 3 in the recent past, the newness of the event tickets 4 seems to be wearing off and we don't expect the 5 consecutive quarterly increases that we've experienced 6 in the past to continue. And I'd be happy to answer 7 any questions you might have. 8 CHAIRMAN CLOWE: Are there any 9 questions? 10 COMMISSIONER COX: Billy, is there 11 anything in the arsenal that will come along and boost 12 sales as the instant tickets have for the last six 13 quarters? 14 MR. ATKINS: Well, there have been 15 discussions in the past, Commissioner Cox, during 16 various legislative sessions, about a variety of other 17 types of bingo games that could be authorized in the 18 state of Texas that would require statutory changes. 19 Those include things like progressive bingo games 20 where a jackpot is allowed to grow over a period of 21 time, and the increased jackpot is something that 22 draws in players to those games. There has been a 23 discussion of what is referred to as either a linked 24 or satellite bingo game, where bingo halls across the 25 state are linked via a network, very similar to the 0007 1 network that the Lottery operates. Again, because you 2 have more players buying into a pot, you're able to 3 grow that jackpot. There are states, I believe, 4 Washington and Michigan are currently experiencing -- 5 or have experience with linked or satellite games, and 6 it's quite common in the Canadian provinces. 7 Other options that have been discussed 8 in the past include things like instant bingo 9 card-minders where you would be able to, on an 10 electronic card-minding device that you're familiar 11 with in our testing lab, play an electronic 12 representation of a pull tab as opposed to a paper 13 pull tab. And then, also, there has been a discussion 14 about amending the methodology by which pull tabs are 15 offered for sale in the state. Currently, pull tabs 16 can only be sold during an organization's licensed 17 bingo time. But there are other jurisdictions -- the 18 one that comes immediately to mind is Minnesota -- 19 where pull tabs are allowed to be sold in bars and 20 taverns, with the proceeds going to the charitable 21 organizations. 22 COMMISSIONER COX: But none of these 23 changes are within your authority; those would all 24 require legislation? 25 MR. ATKINS: That's correct. 0008 1 COMMISSIONER COX: Okay. Thank you. 2 CHAIRMAN CLOWE: Billy, let's look at 3 this exhibit that you've given us on these quarter 4 differences in 2003 and 2004, third quarter, and then 5 2004, second and third quarter. Am I understanding 6 this correctly that total sales for the third quarter 7 were down 3.33 percent; the charitable contributions 8 were down 8.76 percent? 9 MR. ATKINS: Yes, sir. 10 CHAIRMAN CLOWE: And then, in the 11 quarter to quarter in 2004, second to third comparison 12 you gave us, revenue was down 5.62 percent, or total 13 sales, but the charitable contributions were down 14 16.57 percent? 15 MR. ATKINS: Yes, sir. 16 CHAIRMAN CLOWE: Do you have any 17 rationale for why that increase in reduction would 18 come about in the year 2004, second to third quarters? 19 MR. ATKINS: I'm not sure I entirely 20 followed your question. 21 CHAIRMAN CLOWE: Charitable 22 contributions went off 16 and a half percent. 23 MR. ATKINS: Okay. 24 CHAIRMAN CLOWE: With a 5.62 decrease 25 in total sales in the -- 0009 1 MR. ATKINS: Is your question, why the 2 percentage decrease is so much higher in charitable 3 distributions as opposed to -- 4 CHAIRMAN CLOWE: Yes. 5 MR. ATKINS: No, Commissioner Clowe, I 6 don't have a direct answer for that. Again, I think 7 it's important to keep in mind that even though the 8 reported distributions are down, organizations were 9 only required, under the statute, to distribute 1.7 10 million dollars, but they actually distributed 6.6 11 million. 12 COMMISSIONER COX: So some of this may 13 be attributable to the fact that the charitable 14 distributions are not formulaic, they are rather 15 somewhat arbitrary, if you will. That they're making 16 larger distributions than required, so it could be 17 that in one period, they made that much more than 18 required as compared to the other periods. 19 MR. ATKINS: That's correct. And there 20 are -- we do have organizations that cover the entire 21 spectrum. As you know, we have organizations that 22 make no charitable distribution, we have organizations 23 that make only the distribution they are required to, 24 per the statute, and then, like you say, we have some 25 organizations that make distributions that far exceed 0010 1 their required distribution. 2 COMMISSIONER COX: And that's what I 3 guess throws this in a -- makes this hard to -- 4 MR. ATKINS: To pin down. 5 COMMISSIONER COX: -- look at 6 statistically? 7 MR. ATKINS: Yes, sir. 8 CHAIRMAN CLOWE: Billy, I want to 9 revisit the recommendation of the Sunset Committee 10 relative to charitable distributions. What was that 11 recommendation, do you recall? 12 MR. ATKINS: My recollection, 13 Mr. Chairman, is that the final recommendation made by 14 Sunset would be that organizations would be required 15 to distribute a hundred percent of their net proceeds, 16 net proceeds being total gross receipts, minus prizes, 17 minus expenses. 18 Yes. Just wanting to make sure I had 19 the right recollection. 20 And the figures that we worked out to 21 are -- when we apply that formula, the figures are 22 closer to the actual reported distribution. When we 23 apply that formula -- 24 CHAIRMAN CLOWE: I wanted an 25 explanation, too. 0011 1 COMMISSIONER COX: Okay. 2 MR. ATKINS: Again, if we apply the 3 formula in the statute to all of the organizations, 4 you get a required distribution of, say, 15 million 5 dollars, 12 to 15 million dollars. But when you apply 6 the formula that would require the distribution of all 7 net proceeds, after prizes and expenses, you come 8 closer to the actual figure of what organizations are 9 reporting distributed. It gets us closer to pinning 10 that figure down. 11 CHAIRMAN CLOWE: You have a question? 12 COMMISSIONER COX: Well, I had an 13 observation. 14 MR. ATKINS: Let me, if I could, real 15 quickly. Also, I believe that requirement included a 16 requirement that organizations had to make 17 distributions and they had to show a positive cash 18 flow. So that got us away from the organizations that 19 weren't making the distribution. 20 COMMISSIONER COX: Billy, I'm 21 looking -- the Chairman called attention to total 22 sales compared to charitable distributions. Another 23 way to look at that might be to look at the net 24 revenue, which is the money from which distributions 25 can be made, as compared to distributions. And in 0012 1 that case you've got a mixed bag in that in the 2 comparison '03 to '04 third quarter, net revenue was 3 down 12 percent, while charitable distributions were 4 down a smaller percentage. Whereas, if you look at 5 the second and third quarter '04, you find net revenue 6 down eight percent and charitable distributions down 7 16.7, so in different periods, it's going different 8 directions. 9 MR. ATKINS: Okay. 10 COMMISSIONER COX: I don't know what 11 you know when you know that, but there is at least one 12 period here where revenue went down and distributions 13 went up. 14 MR. ATKINS: Well, and one thing that 15 we do know is, when you see those columns where 16 distributions are higher than net revenue, that 17 organizations, we suspect, are using some of their 18 proceeds undistributed, that is, their savings to make 19 additional distributions. 20 COMMISSIONER COX: Uh-huh. And what we 21 see here is in fourth quarter of -- third quarter of 22 2004, the distributions were in excess of the net 23 revenue, so they had to go into their operating 24 accounts to make contributions. Is that what that 25 would say? 0013 1 MR. ATKINS: Yes, sir. And it would 2 say the same thing for the third quarter of '03 and 3 the second quarter of '03. 4 COMMISSIONER COX: Uh-huh. 5 COMMISSIONER OLVERA: Billy, 6 historically, what is the highest number, if you know, 7 in terms of charitable distributions? I see here 7.9 8 being the highest on the second quarter of 2004. 9 MR. ATKINS: I don't have the amount 10 for a single quarter with me, but we can get that for 11 you. We certainly have that. Distributions as a 12 total per year peaked out around '91, '92. 13 CHAIRMAN CLOWE: I think we're going to 14 see this visited again as this Commission goes 15 through, this agency goes through Sunset. So much, it 16 seems to me, the way I recall it, of our Sunset review 17 in the last regular session had to do with bingo. And 18 this is one of the issues that I think, if I remember 19 correctly -- Commissioner Olvera was not on the board 20 at that time -- the Commission voted to take a 21 different position regarding this issue than the 22 Sunset Committee recommendation. 23 And I think we would do well to get 24 some more statistics on this and have you give us a 25 lengthier report on what the relationship between 0014 1 total sales, net revenue, and charitable distributions 2 is, say, for the last three to five years, so that we 3 can review this and be in a position to respond to 4 questions that I anticipate will be forthcoming from 5 Sunset about the issue that Commissioner Cox raised 6 regarding, what can be done to increase revenue. And 7 my thumbnail comment on that would be that the Bingo 8 Enabling Act is 20 years old and it's highly 9 restrictive. And the bingo industry is doing what it 10 can to increase sales, but it is not able to do many 11 things that it would like to do. On the other hand, 12 there has got to be a clear definition of expenses, 13 and then the issue of, will there be a mandatory 14 distribution come out of the Sunset review in the 15 legislation. And I would like the department, your 16 division and the commissioners, to have this 17 information before them and be fresh on it so that if 18 that issue comes up, we can deal with it and help by 19 being a resource. 20 MR. ATKINS: We can do that. In fact, 21 I had discussions with Lee Deviney, the director of 22 the Finance Division, as late as yesterday regarding 23 their assistance on the analysis of a lot of the 24 different financial data that the Charitable Bingo 25 Division collects. 0015 1 COMMISSIONER COX: Billy, there is 2 another concern that you and I talked about many 3 times, and that is, on the one hand, we have a concern 4 that charitable distributions are not large enough. 5 On the other hand, when you see charitable 6 distributions greater than net revenue, that tells you 7 that the operating accounts are being drawn down. And 8 that causes me to be concerned about the financial 9 stability of the operators. That operating cash is 10 their bankroll that assures that prizes will be paid, 11 and if that gets drawn down too far and a couple of 12 bad months come along, then the operator might not be 13 able to pay his prizes. So I hope when you're 14 capturing the information Chairman Clowe mentioned, 15 you'll try to capture something about the operating 16 accounts as well. 17 MR. ATKINS: We do. 18 COMMISSIONER COX: Okay. 19 CHAIRMAN CLOWE: And I think, in that 20 area, there were a number of questions from the Sunset 21 Committee about what the appropriate size of an 22 operating surplus account was. Am I not remembering 23 that correctly? 24 COMMISSIONER COX: That's correct. 25 CHAIRMAN CLOWE: And I don't think we 0016 1 ever got a definitive answer on the record on that, 2 did we? 3 COMMISSIONER COX: I don't recall. 4 MR. ATKINS: I don't know if all of 5 that discussion occurred necessarily with Sunset. I 6 do know that there was pretty extensive discussion 7 with the industry regarding some sort of cap on the 8 operating amount that organizations had because, 9 again, some of our analysis came out and showed that 10 there were some organizations with 300,000 dollars or 11 more in their operating account. 12 CHAIRMAN CLOWE: And you have that 13 information, don't you? 14 MR. ATKINS: We do. I just don't have 15 it here with me. 16 CHAIRMAN CLOWE: I think that's 17 something the Commissioners would like to be made 18 aware of as well. 19 Does that kind of bring you up to speed 20 on some of the things that happened that you're 21 probably going to have to be a party to and deal with 22 in this upcoming session? 23 COMMISSIONER OLVERA: Sure. No, I 24 think that's a good summary of what I needed to know. 25 MR. ATKINS: Okay. 0017 1 CHAIRMAN CLOWE: Anything further on 2 this item? Steve, did you want to make a comment on 3 this subject? 4 MR. FENOGLIO: Briefly, if I may, 5 Mr. Chairman. 6 CHAIRMAN COX: Sure. 7 MR. FENOGLIO: Mr. Cox, you're 8 absolutely correct. One of the key focuses should be 9 the net revenue, not the total sales, for some of the 10 reasons that we discussed in the last Sunset 11 Commission, and that's one of the industry's 12 recommendations. And you're absolutely correct about 13 some charities feeding on muscle in the sense that 14 they are taking operating revenues to distribute. 15 As a part of the Sunset recommendation, 16 there -- well, there was no Sunset recommendation in 17 the last session as far as being able to retain some 18 operating revenues, but as a part of the bill as it 19 was -- weaved its way through the system, the industry 20 and staff worked together closely in developing a 21 recommendation that would allow charities to not 22 disgorge all of their operating revenue for the 23 same -- for the reason you just referenced. 24 Mr. Chairman, you know, bingo is very 25 cyclical, and I know we've had these discussions 0018 1 before, but it bears repeating. The second and third 2 quarters, or at least months in the second and third 3 quarters are the weakest months in the bingo in the 4 summer. And, you know, any time you want to look at 5 the industry, if you look at just a -- a particular 6 quarter, or calendar quarter, you can perhaps draw 7 misleading conclusions. And in the months of June, 8 July, and August, most halls, at least -- I'm not 9 going to say every session, but the majority of those 10 halls are going to be bleeding red for a large portion 11 of the time. And so they draw down operating revenues 12 that they've saved during the good months. And so, 13 having said that, we would like to have some input on 14 some of the analysis. We do agree that these are 15 questions that have been raised in the legislative 16 process about trying to understand the bingo numbers 17 and what it means for the charities that depend on 18 those revenues. And we'll be happy to work with staff 19 on that. 20 CHAIRMAN CLOWE: Steve, from your 21 knowledge and experience in representation of bingo 22 interests, what would you say the last three to five 23 years history represents in the way of trends 24 regarding total sales, net income, and charitable 25 contributions? Have you familiarized yourself with 0019 1 those statistics enough to make a comment at this 2 point? 3 MR. FENOGLIO: Yes. Generally, bingo 4 is on a decline. There is no question about it. The 5 numbers will speak for themselves. We did, as Billy 6 mentioned, with the change in the instant bingo rule, 7 energize those revenues, but regular bingo revenues 8 and electronic bingo revenues are all -- both on a 9 steady decline and, historically, they have been the 10 mainstay of the base of bingo revenue. And these 11 numbers that Billy has discussed reflect that trend 12 just for the roughly six quarters that -- that he has 13 comparisons over, but certainly over the three to 14 five-year horizon, those -- revenues are down. 15 Expenses are going to follow in decreasing, but as you 16 gentlemen know from running businesses, you can't 17 necessarily cut your expenses as quickly as the 18 revenues fall. Rent is one that's hard to cut. There 19 are a lot of fixed costs that take time to implement 20 reductions. The cost of the card minders has not 21 fallen nearly as fast or as far as the revenues from 22 the decline of revenues. So those are things that the 23 halls wrestle with. But overall, it has been a 24 decline, I'm sorry to say. Thank you, Mr. Chairman. 25 I'll be happy -- 0020 1 CHAIRMAN CLOWE: Before you finish, 2 Steve, do you have any supplemental comments regarding 3 the discussion that we've had here this morning 4 relative to my characterization of the interest of the 5 Sunset Committee and their recommendations, and where 6 this Commission ended up in regard to that issue about 7 a minimum contribution, or anything other regarding 8 the Sunset process that might be beneficial for us to 9 hear? 10 MR. FENOGLIO: Well, the industry did, 11 I think we all agreed, on the last round of Sunset 12 recommendations requiring a charity to always -- I 13 mean, the devil can be in the details. Requiring a 14 charity to always make a minimum distribution, it 15 depends on the horizon for which that applies. If 16 it's on a quarterly basis, that recommendation will 17 ensure that charities go out of the business because 18 of the reasons we discussed where there are months 19 where revenues are off substantially. 20 CHAIRMAN CLOWE: Now, you're saying 21 charities will go out of business. 22 MR. FENOGLIO: Yes. Well, the bingo -- 23 CHAIRMAN CLOWE: The operator or 24 whoever is conducting the game? 25 MR. FENOGLIO: Yes. The -- 0021 1 CHAIRMAN CLOWE: Not really -- unless 2 the charity is the operator, not really the recipient. 3 Am I -- 4 MR. FENOGLIO: Well, there are -- the 5 charities are the conductors, and those -- and 6 charities do fail. Certainly, their licenses will be 7 lost. And there are substantial numbers of charities 8 in which bingo plays -- I'm not going to say a hundred 9 percent revenue, the substantial number -- but there 10 are some charities where bingo plays a substantial 11 portion of those revenues. Perhaps a few where it's a 12 hundred percent. So if they are on the edge and a 13 mandatory requirement is on a quarter basis, for 14 example, you must make a distribution, then it is 15 very -- I don't think anyone would quarrel that some 16 charities will lose their licenses because of that 17 recommendation because they won't be able to make the 18 distribution and the sanction would be loss of 19 license, and that some of those charities probably 20 would go out of business altogether. 21 On the other side of the hall, the 22 bingo halls themselves, the commercial lessors, there 23 has been a steady decline in the number of licenses 24 that have been regularly renewed, so there are 25 businesses that have gone out of business. There are 0022 1 halls that have closed. So I don't think there is any 2 question, if the revenues continue to decline, and 3 Billy suggested several recommendations that we have 4 worked with staff on and with the industry work groups 5 on new recommendations, new legislative changes that 6 may energize bingo. So I hope I answered your 7 questions, Mr. Chairman. 8 CHAIRMAN CLOWE: Yeah, you did. Thank 9 you. 10 Billy, do we have statistics on what 11 Steve just said, on the number of halls that have 12 closed over the last three to five years? Could you 13 correlate that? 14 MR. ATKINS: Well, you mean -- to make 15 sure that we have our terminology correct. We have 16 the number of organizations, charitable organizations 17 that have lost their license. And then we also have 18 the number of lessors that have lost their license. 19 We -- I'm sure that we could. It would probably take 20 a little work, but we could identify -- tie those 21 organizations to a specific hall. 22 CHAIRMAN CLOWE: And, Steve, you were 23 referring to both entities, weren't you? 24 MR. FENOGLIO: Yes. And, you know, 25 North Dallas Bingo is the best example, I think, that 0023 1 we all know about. It was a pure charity-run bingo 2 hall with charities, they're out of business and they 3 closed six months or nine months ago, something like 4 that. He may not know which business actually closed. 5 He will -- the division certainly knows the number of 6 licenses that were issued in 2000 and coming forward, 7 and the number -- you can deduct, then, the number 8 that have not been issued and which of those renewed 9 versus new -- brand new conductor licenses or lessor. 10 But certainly, between the two of us, we can pretty 11 well identify the number of halls that have actually 12 physically closed and have not reopened on the other 13 side of Dallas County, for example. That is fairly -- 14 it can be done. 15 MR. ATKINS: Sure. It can be done, and 16 we have the information to do it. It's just -- it 17 will take some actual man hours because what we'll 18 have to do is, we'll have to tie the physical 19 locations where the organizations conducted to a 20 physical location where there was a lessor's license. 21 We have the information, we'll just have to put it 22 together manually. 23 CHAIRMAN CLOWE: Okay. Where I'm 24 coming from on this issue is that, you know, in 25 regulating this business, the State is in a position 0024 1 to do so much and no more. We are confined by the 2 Bingo Enabling Act to that role. And the bingo 3 industry is in a state, which I think we have common 4 agreement, of declining interest, total sales, net 5 income, and contributions overall. I would like for 6 this Commission to be able to respond to questions in 7 this upcoming session of the legislature, what is it 8 that needs to be done to be, as a resource, helpful to 9 the bingo industry. It's not, as I see it, this 10 Commission's task to go out and promote private 11 enterprise, which the bingo operation is, as I see it. 12 But I would like to be able to answer the question in 13 a more definitive way in the future than I think we 14 ever have in the past: How can bingo, if that's what 15 the State and the legislature wants, be allowed to do 16 the things that we're doing, for example, in the 17 Lottery side. And we have been very creative and 18 innovative in the Lottery side. I think, at last 19 count, sales were up 13 percent on a year-to-date 20 basis. We just finished the second best year. And 21 from my view, I see a lot of the things that we've 22 done relative to changing the games and managing the 23 product being successful. And it's something that the 24 players like. 25 In my experience with bingo, I think 0025 1 there is a high degree of restraint there, as it comes 2 from the Bingo Enabling Act, which is 20 years old. 3 And if that issue is on the table as this agency goes 4 through Sunset, I would like for the Commissioners and 5 the division to be able to respond to questions about, 6 well, what needs to be done here, as a resource. And 7 that's the reason I wanted this information. And I 8 appreciate your comment, and I think Mr. Bresnen wants 9 to comment as well. And it's important that I think 10 the members of the industry understand, as I see it, 11 that this Commission can't carry their flag for them. 12 They have to carry their flag themselves and be active 13 in this, as I know both of you all were in the last 14 regular session, but the Commission can be helpful 15 with statistics and information, and it can take a 16 position like we did on mandatory contributions. 17 Mr. Bresnen, you've filled out an 18 appearance. Do you want to join in at this point? 19 MR. BRESNEN: Yes, sir, Mr. Chairman, 20 if I could -- 21 MR. BENNETT: If I could interrupt just 22 for a second. Steve, if you could, identify yourself 23 for the record. 24 MR. FENOGLIO: Stephen Fenoglio, 25 attorney in Austin. 0026 1 MR. BRESNEN: I'm Steve Bresnen and I 2 represent the Bingo Interest Group. 3 Mr. Chairman, I've never been more 4 excited this early in the morning than to hear this 5 part of this conversation. We've produced about a 6 15-page -- on the other hand, I'm a little bit 7 embarrassed because we've been thumping the drum, but 8 apparently in exactly the right places or the most 9 effective way. We've produced about a 15-page white 10 paper, in conjunction with the special session that 11 occurred recently, on how to help charitable bingo. 12 And it has analysis in it of the kinds of things that 13 you're talking about, probably a little bit -- not 14 quite down to the level of detail that you're looking 15 for, and we'll certainly work with the staff to get 16 that to you. But let me just -- there is all kinds of 17 problems here, and one of the things that we tried to 18 do with House Bill 2519 is to start straightening out 19 some of the accounting mess and some of the ridiculous 20 barriers that interfere with people acting like normal 21 people operating something that's supposed to generate 22 a profit. And we've made some recommendations to 23 Representative Flores's committee, working with the 24 staff, to continue that -- that sort of thing. But 25 there are some really interesting facts that you 0027 1 should know. There is about three letters, Billy, 2 that I think you guys have sent to Chairman Flores, as 3 a result of his requests, that have some very 4 revealing charts it in. One is the number of 5 licensees in each category. And what you'll see is, 6 the number of charities, I think, is down about 40 7 percent from '91 -- most these numbers run from '91, 8 as I recall. The number of commercial lessors is 9 down, not quite as much, but significant. If you 10 multiplied the number of organizations licensed to 11 conduct by the maximum number of sessions that they 12 could play in a year, and compared that to the actual 13 number of sessions played, you'll see that there is a 14 tremendous underutilization of capacity, if you will. 15 In other words, the regulatory system would allow a 16 lot more bingo to be played than is being played, 17 which tells me something about a problem on the demand 18 side. Otherwise, those folks would be out there in 19 the marketplace, offering their games. We have got to 20 have some help on the demand side, which is right 21 where you were going. 22 When the Lottery has had a problem, 23 when sales have come down, y'all have been able to 24 maneuver in the marketplace and add new products. 25 When working with the staff and with y'all, you gave 0028 1 us the new games and the new event tabs and those 2 things, sales shot up. But in a way, it's sort of 3 exacerbated a problem. First of all, those are labor 4 intensive items to deliver. You have to have a sales 5 force working the floor and you have to pay those 6 people and you have to train them and you have to have 7 charities that are conducting these games to 8 understand it and think in a marketing fashion, and 9 all of that takes some time to ramp up, but your costs 10 go up a little bit too. In addition, the payouts on 11 those games, as I understand it, are higher. And 12 Mr. Cox, you and I have talked about this on a number 13 of occasions, those sales go up, those players with 14 those high payouts play that money back, which drives 15 your sales up, but that's no more revenue. That's 16 that same dollar. I've just about worn myself out 17 explaining that that's that same dollar circulating 18 and not necessarily any more money coming into the 19 hall over there. So we have really have to look at 20 thee net revenue numbers, we have to look at the way 21 this information is reported to y'all, because it's 22 deceptive. 23 Compare, if you will, the fiscal note 24 estimates that the Commission provided in the course 25 of the legislature's consideration of VLTs. You will 0029 1 not find a sale number in that information. In those 2 fiscal notes, there is no sale number. They are based 3 on a net revenue per machine. And I think, 4 Commissioner Cox, you ran into this when a member of 5 the legislature, and I think it was on the House side, 6 asked, what would the sales be necessary to generate 7 this number. And I forget what the number you gave 8 him was, but I mean, everybody literally came up out 9 of their chair like this because it -- how are we 10 going to take 26 billion dollars out of the Texas 11 economy? Well, it's the same money circulating. So 12 there is a lot of misunderstanding. 13 If I could, I would like to just take a 14 second to kind of reorient you to the process that I 15 think is occurring right now. In Sunset last time, 16 the Sunset staff made some recommendations. And it 17 was determined that those would have a devastating 18 effect on the number of charities that would be 19 conducting charity -- bingo in the state. 20 CHAIRMAN CLOWE: Now, be more specific 21 on that particular item, if you will. That's a little 22 too broad. 23 MR. BRESNEN: Okay. What the Sunset 24 staff recommended was that 25 percent of the revenue 25 remaining after prizes be required to be distributed 0030 1 off the top. And you may recall, we ran some numbers 2 on those and we came to y'all, we had an interesting 3 discussion about the effect of that, and the estimates 4 were between 50 and 70 percent of the organizations in 5 the state would be knocked out of business if you 6 tried to just impose a mandated profit on the -- what 7 we all refer to as adjusted gross income, this gross 8 sales number minus prizes. 9 Well, it was incumbent -- we worked 10 hard and we got the Sunset Commission -- and I believe 11 y'all's recommendation was not to accept that 12 recommendation, and the Sunset Commission eventually 13 agreed with us on that. But then it was incumbent 14 upon us to respond to some of the concerns that exist 15 out there, and so we did. And to their credit, we 16 worked very hard with the staff over on the Senate 17 side to come up with a -- a scheme where the charities 18 would be able to have adequate working capital, and 19 our definition of that was, to be able to retain one 20 quarter's worth of expenses based on a four-quarter 21 retrospective rolling average. So every quarter, they 22 would have enough in their account, up to 50,000 23 dollars. And that was to accommodate the varying 24 classes of charities where some of them play one time 25 and they're in that lower class and some of them are, 0031 1 you know, more robust operations. And to require that 2 they have net revenue during their license period, so 3 you didn't have charities out there that were just 4 conducting bingo for the purpose of conducting bingo 5 and weren't making any money for their charitable 6 purposes. 7 A key component of that, though, was to 8 get away from this -- right now the law says, you 9 can't transfer money back into the bingo account from, 10 say, your general revenue, your general fund, without 11 getting a loan -- permission for a loan from the 12 Commission. So you've got a little bit of time there, 13 although I think the staff has been fairly quick about 14 approving those, but there is a little bit of a time 15 lag, and if you're going to make a loan, then you have 16 to repay the loan. And so what we said was, let these 17 people operate their accounts. Because people don't 18 get any credit for a distribution until they take the 19 money out of their bingo account and either put it in 20 their general fund or contribute it to another 21 organization, organizations have been building up 22 robust amounts of money in their bingo account, 23 distributing the minimum amount, and artificially 24 suppressing what is being report as distributions, 25 even though some of them had pretty nice net revenues. 0032 1 So we've been advocating, let's get on a net revenue 2 basis. Let's look at this on a consolidated account 3 basis. Let them keep operating capital in their 4 account that is sufficient to go through these ups and 5 downs that Steve talked about, require them to 6 distribute everything above that out of their account. 7 If they need money back in the account because of 8 whatever reason, market conditions, force majeure, 9 whatever, let them put the money back in the account 10 and merely notify y'all. So if the auditors want to 11 go in and look and see, was that for a reasonable and 12 necessary expense, which you have the power to do 13 under current law, then they could do that. And give 14 them some fluidity and ability to manage these 15 accounts in a businesslike fashion. 16 That's sort of the -- well, maybe a 17 little less than the 50,000 foot overview. Where we 18 are now, the Sunset staff at this time basically 19 recommended to the Sunset Commissioners that they sort 20 of set all that aside, in light of the passage of 21 House Bill 2519, the changes y'all have made with the 22 Bingo Advisory Committee and other things that have 23 been happening, to sort of put all that part aside and 24 focus on the model licensing things that are part of 25 every agency's recommendations that they do. That's 0033 1 what is coming out of the Sunset Commission this time. 2 On a parallel track, chairman Flores 3 had an interim charge to look at bingo in depth, the 4 amount it gives to the charities, see how 2519 was 5 being implemented. He has had hearings on that. 6 Billy and Phil and I don't know who else have -- 7 Nelda, we've all met at least a couple of times on 8 these issues with the staff. The staff has a draft 9 report, pending approval by the committee and the 10 chairman. I believe they're going to want to go to 11 back to something similar to Senate Bill 270, which 12 was the Sunset bill that eventually died. You may 13 recall all the work that we did at -- with the staff. 14 When the Senate Bill -- the Sunset bill went over to 15 the House, Chairman Wilson got a hold of it. It bore 16 no resemblance to its former self at that point, and 17 eventually the Sunset bill died, which is why we're in 18 the Sunset process again at this time. 19 I think Representative Flores's 20 committee has looked at our materials, we worked very 21 hard to explain to them that we're trying to wrench 22 out the last inefficiencies that we can out of the 23 statute, and make this as transparent as absolutely 24 possible. But we've also communicated to them that 25 without something additional to participate with in 0034 1 the marketplace, especially if VLTs come along, bingo 2 is going to be deader than a door nail. To their 3 credit, the staff has given members of the legislature 4 estimates of what we could do if we get instant bingo 5 card-minders, moving instant bingo up to an electronic 6 platform. We think we can increase sales for the 7 charities, improve the bottom line dramatically. 8 And I just want to say one other thing 9 while I'm here, and then I'll shut up and answer 10 questions. The commercial lessor has been hit a lot 11 over the years and has worn the black hat in this 12 industry. We had, through Chairman Flores, we've 13 asked the staff on two occasions to break out the 14 numbers on the average rent per session from how many 15 lessors fell in the zero to a hundred dollar category, 16 100 to 200, 200 to 300, up to, in the top category, 17 500 to 600, which is the maximum amount per session 18 allowed by law. 72 percent of the lessors in the 19 state charge less than 300 dollars per session. And 20 I've had this cut about six different ways. I'm 21 convinced that the problem is not there on the expense 22 side. I have looked at -- we've looked at labor costs 23 amongst my clients. I'm convinced that they're not 24 abnormal labor costs amongst my clients. The bottom 25 line is, the revenue has gone down dramatically 0035 1 from -- 1991 was the peak period. Revenue has gone 2 down dramatically, the bingo population has gotten 3 older, the property taxes, insurance, labor costs, 4 everything affecting the expense side has gone up, and 5 you're seeing licensees dropping out in substantial 6 numbers over that period of time. And the -- I think 7 the -- I think we can do some more efficiencies and we 8 ought to do them, but I think the bottom line is, 9 without new games to work with, bingo will not survive 10 another five years. 11 CHAIRMAN CLOWE: Questions? 12 COMMISSIONER COX: Stephen and Steve, 13 either of you or both of you, I understand that near 14 many of the bingo halls there are eight-liner parlors. 15 I wonder whether you have any way of quantifying what 16 kind of effect those are having on bingo. It seems to 17 me that if they're near bingo halls that the reason 18 they would be near bingo halls would be to pick up 19 people who are on their way to gamble and offer a more 20 attractive product or at lease a more competitive 21 product. What are y'all's thoughts on that idea? 22 CHAIRMAN CLOWE: Before you answer 23 that, and I would love to hear the answer to that -- 24 Ridgely, I want to make sure we're within the agenda 25 item. Are we still -- 0036 1 MR. BENNETT: We're getting close. The 2 agenda item that you were currently taking was the 3 third quarter bingo financial information. Also 4 noticed up was report, possible discussion and/or 5 action on the 78th and 79th legislature, which I think 6 covered most of what Mr. Bresnen was talking about. 7 CHAIRMAN CLOWE: Just keep us on the 8 agenda so that we don't stray off, if you will. 9 MR. BRESNEN: And the Sunset 10 legislation, by the way, last time did have a 11 component that addressed eight-liners. 12 COMMISSIONER OLVERA: Well, and let me 13 just jump in before you answer. That is the most 14 consistent complaint that I get from -- from bingo 15 operators, that either there is video arcades or, now, 16 Hold 'Em tournaments or Internet gambling, what can we 17 do to assist the loss of business that they're 18 complaining of. 19 MR. FENOGLIO: Sure. Well, Internet 20 gambling is probably the most difficult from a legal 21 perspective to reach out -- and I know the Attorney 22 General, both U.S. and State, Texas Attorney General, 23 have wrestled with that issue. There has been one, to 24 my knowledge, enforcement action against Internet 25 gaming where it was in -- similar to an eight-liner 0037 1 parlor, where they were playing computers, they were 2 playing on the Internet, and they were, in effect, 3 renting the computer to people to come down and play 4 Internet gaming. We see those on occasion. They're 5 not -- they're hard to manage from a -- I gather, from 6 a business perspective. But Internet gambling, if 7 it's in your own home, is -- you know, there are a lot 8 of challenges to reaching out and grabbing that. 9 Taking them in reverse order, then, the 10 Texas Hold 'Em tournament, we're seeing a lot of those 11 spring up. There are bowling centers that are 12 sponsoring Texas Hold 'Em tournaments in Austin, Texas 13 today. There are restaurants in Austin that sponsor 14 Texas Hold 'Em tournaments -- and I'm assuming y'all 15 know what a Texas Hold 'Em tournament is -- where 16 they're either playing for a hundred dollar Wal-Mart 17 certificate or cash where the merchant may be acting 18 more or less as a bank, in that they rent the table or 19 they receive some economic benefit, some of the 20 winnings, if you will. There are also Texas Hold 'Em 21 tournaments where they're just, you know, playing for 22 fun. And I've talked with TABC, who has looked at 23 that issue. I've talked with prosecutors who have 24 looked at that issue. And I think that will continue 25 to grow in Texas as the popularity of Texas Hold 'Em 0038 1 continues to increase. And I'm sure some of y'all 2 have seen the cable TV shows on that. 3 On eight-liners, it's a mixed bag. And 4 it's a mixed bag because, for example, in certain 5 counties, the eight-liners are no longer the -- the 6 casino-style game rooms, I'm talking about, are no 7 longer in operation. And as soon as they close one 8 county off, another county may pop open. For example, 9 Dallas County, there are very few casino game rooms in 10 operation today. Certainly, in the city of Dallas 11 there are very few. And this goes back to one of the 12 impacts on bingo is the large Indian casino just 13 across the border from Texas that has an impact on 14 bingo and entertainment in general. 15 Travis County, I don't think there 16 are -- well, there are probably a dozen stand-alone 17 casino game rooms. A lot of them try to operate as 18 private clubs with a lock on the door, and if you 19 don't -- if you're not someone they recognize, they 20 don't allow you in. It can have a detrimental impact 21 on bingo, but at the same time -- and this is personal 22 observation of some of my -- of me as well as 23 clients -- a lot of the patrons in some of the 24 eight-liners are not bingo patrons, for whatever 25 reason. I mean, they -- they -- occasionally, they'll 0039 1 say, they're the blue-haired lady types who really 2 don't want to go to a bingo hall for whatever reason. 3 Obviously, from the bingo perspective, we would like 4 to have them in the hall. But it really is a mixed 5 bag. 6 I know the Lottery Commission did a 7 study on that, or I guess helped pay for a study on 8 the impact of eight-liners. I guess it depends on 9 what they're doing, and it's the particular location. 10 Travis County, some of the charities that I have, have 11 been very upset that some of those eight-liner casino 12 game rooms are operating, and yet some of those halls 13 are very nervous about operating even within the 14 confines of what is a very gray area of law on 15 eight-liners. 16 COMMISSIONER COX: Stephen, 17 specifically -- and I think this may be one of your 18 clients -- one of the members of the Bingo Advisory 19 Committee told me that there is a bingo hall out on 20 Braker Lane, I believe, and two doors down, there is 21 an eight-liner parlor. Is that a specific instance 22 that you know about? 23 MR. FENOGLIO: Yes. 24 COMMISSIONER COX: Are you able, in 25 that instance, to determine what kind of impact that 0040 1 may be having on the hall, based on when it opened or 2 how -- when it gets closed down, if it gets closed 3 down? 4 MR. FENOGLIO: Yes. And we know that 5 that location has adversely impacted that hall, 6 without question, and we have had discussions with law 7 enforcement. And, as you know, Commissioner Cox, 8 sometimes in discussions with law enforcement, it's 9 hard to be able to see if they -- if you're having any 10 impact. It is a difficult law to enforce. And I've 11 litigated on that issue successfully and 12 unsuccessfully. So, you know, I'm not -- I'm not 13 trying to throw a grenade at law enforcement on that, 14 because it is a difficult law to enforce and 15 investigate, when there may be other priorities within 16 the community. But there is no question that that 17 particular instance has adversely affected the hall. 18 We have had customers who will play bingo, and while 19 they may have typically been -- and we've done a lot 20 of market research to know our customers -- their 21 average spend could be 35 dollars or 50 dollars, and 22 now they're only spending half of that. You go up and 23 ask them. Well, because after we finish here, we'll 24 go down two doors down and play for an hour and a half 25 and have fun. And -- okay. 0041 1 COMMISSIONER COX: Thank you. 2 MR. BRESNEN: Could I just make two 3 quick points about that? One of the things that's 4 been done and -- and tried in some places, to offset 5 that, is to -- is for people associated with the bingo 6 hall, sometimes the lessors, sometimes the charities, 7 to have eight-liners in proximity to the bingo hall 8 and then only award bingo paper or pull tabs or try to 9 drive that money, you know, out of the machine and 10 into the hall. And so that's one defensive measure 11 that's been taken out there. 12 The other thing is, those people that 13 are going to play eight-liners, I think Steve is 14 right -- and just anecdotally, I think they're not the 15 people that showed up in the survey that your -- what 16 was it? Marketing people that -- the research survey 17 that was done -- y'all did that? You know, it sort of 18 had the -- not stereotypical, but what a prototypical, 19 I guess, bingo player described in it, but they are 20 people that if we're going to enliven bingo and bring 21 it back, you've got to get some of those people back 22 in the bingo hall. They're going there to do 23 something that they enjoy doing and spending their 24 money, and -- but they're not spending it in the bingo 25 hall. And so we're looking for ways, not -- if 0042 1 eight-liners went off the face of the planet right 2 now, we would still have a problem, for example, in 3 the Dallas/Fort Worth area of people going to 4 Louisiana and Oklahoma to engage in similar conduct, 5 albeit much more lucrative -- or potentially 6 lucrative. So we've got to have help to offset those 7 competing things. I've been -- the eight-liner issue 8 has been a lively one since our now president walked 9 into my office in '95 and showed me a -- this was in 10 June or July -- it must have been July of '95, with a 11 four-color brochure of an eight-liner and asked me, 12 said, Bresnen, what does this look like to you? I 13 said, that looks like a slot machine to me. And he 14 said, they put one over on me. And then, as y'all 15 know, he immediately set about to try to do something 16 about eight-liners. That was a long time ago. I'm 17 not convinced that eight-liners are going to be 18 eradicated from the state of Texas, period. 19 And so we have got to have some 20 mechanism to get people, a younger player, a more 21 diverse population, into the bingo hall as -- it's 22 just a practical market problem, the same problem you 23 have as when you operate your business on behalf of 24 the State of Texas is the one that we've got. Most of 25 your marketing materials, when you talk about these 0043 1 things, you could scratch out "lottery" and put in 2 "charity" or put in "bingo," and they would be just as 3 applicable. 4 And we -- I'll get you a copy of our 5 white paper. We're happy to work with the staff on 6 any information that you need so you can understand 7 exactly what is happening in the bingo world out 8 there. 9 I really appreciate y'all fomenting 10 this discussion, and had I anticipated we would get 11 this far into it, I would have loaded the room up with 12 people from the organizations and involved in the 13 industry, because it's a serious problem and something 14 has got to be done. 15 CHAIRMAN CLOWE: Well, Steve, I want -- 16 the reason that I maybe brought this up to the extent 17 that we've discussed it, is that I want the division 18 and the Commissioners to be attuned to these issues 19 because I think this is coming up. I don't think it's 20 necessary to load the room up here. I think the issue 21 is going to be decided elsewhere. 22 MR. BRESNEN: It is. And we're going 23 to load those rooms up, too. 24 CHAIRMAN CLOWE: And that's really 25 where I think you ought to be focused. 0044 1 There was some lack of unanimity, I 2 guess, on who the players are for eight-liners, and 3 that may be something that you don't really get a 4 definitive answer on. Could we agree that the people 5 of Texas and the state and charities don't benefit in 6 any way from the operation of eight-liners? Whether 7 they are what is termed a legal or an illegal gambling 8 device? 9 MR. BRESNEN: What I was trying to 10 describe is a scenario in which some charities have 11 benefited from the presence of eight-liners, but 12 primarily being adopted in a defensive mode, watching 13 this market collapse around them. So with that -- 14 with that caveat, yes, sir. On the other hand, the 15 legislature did pass a law over there. That law means 16 something, and there has been a lot of argument about 17 what it does mean, but it sure meant something. 18 CHAIRMAN CLOWE: Well, and that's back 19 to Steve Fenoglio's comment about enforcement. 20 MR. BRESNEN: Yes, sir. 21 CHAIRMAN CLOWE: And that is somewhat 22 of a different situation depending on where you are in 23 what county, and what the -- 24 MR. BRESNEN: Yes, sir. But it 25 shouldn't be, and let me just give you an example, 0045 1 Mr. Chairman. You know, if Tarrant County does -- 2 takes one policy and Dallas County or Denton County or 3 Wise or any of -- just work your way around that 4 Metroplex, then it's useless, because people will 5 travel. And, you know, you can get around the 6 Metroplex real easy. You can get to Oklahoma real 7 easy. Exit 1 is -- you don't have to go far. So 8 there has got to be a coherent statewide policy 9 actually in effect. I am not -- I'm pessimistic that 10 there is going to be such a policy. I have been 11 watching it for nine years. Sometimes, you know, they 12 say, if you -- the definition of insanity is doing 13 what you do over and over and expecting a different 14 result. I just don't think we're going to get there. 15 I think bingo has to have -- and this is what I'm -- 16 we'll come back to you with a specific proposal and 17 look for ways for you to serve as a positive resource 18 for us in this process, but we have got to have other 19 avenues to compete out there, because I don't think we 20 can rely on law enforcement or what happens in 21 Oklahoma or Louisiana to save us. I think we've got 22 to go save ourselves, and we need the tools to do it. 23 CHAIRMAN CLOWE: Well, I think that's a 24 problem the industry needs to focus on and be 25 realistic about. 0046 1 MR. BRESNEN: We are. We have a 2 coalition of manufacturers, distributors, lessors, 3 charities, we have had substantial meetings. Many of 4 the manufacturers and distributors have hired 5 additional personnel to talk to the legislature. We 6 have -- we were thoroughly organized and deployed. We 7 had discussions with your staff and members of the 8 legislature on the various legal issues involving 9 class two and class three gaming during the session. 10 I mean, we're actively out there working it. I know 11 y'all have limitations in what you can do in your 12 role, but I will say that the staff has been very 13 helpful in the production of what I think are 14 conservative but realistic estimates of what can 15 happen for charities and the State if we're given some 16 new games to work with. The Comptroller has given us 17 a positive fiscal outlook on that. I think we have a 18 substantial amount of support, but I think until the 19 legislature does something overall on its whole 20 revenue picture, we're probably, you know, bogged down 21 a little bit, the same way y'all are. But we're 22 working on it. 23 CHAIRMAN CLOWE: We're not bogged down. 24 We have the Bingo Enabling Act. That's where we are. 25 MR. BRESNEN: No, no. I was thinking 0047 1 in terms of what you do in the future with VLTs or, 2 you know, whatever other new games might come about. 3 We're all -- 4 CHAIRMAN CLOWE: We just do whatever 5 the legislature tells us. 6 MR. BRESNEN: I understand. 7 CHAIRMAN CLOWE: Now, you stated 8 Commissioner Cox's position correctly earlier. I want 9 to argue with you and him about that dollar rolling 10 through. 11 MR. BRESNEN: Oh, golly. I hope I 12 didn't misstate his position -- 13 CHAIRMAN CLOWE: And that's why I want 14 to give him the opportunity. You know, we have to 15 discuss this in the open conference. We can't, the 16 three of us, go over a cup of coffee and argue about 17 it. 18 MR. BRESNEN: That's real unfortunate. 19 CHAIRMAN CLOWE: But it seems to me 20 that if the Lottery Commission or a bingo operator, 21 anyone who is legally gaming, takes a dollar and pays 22 out a prize, then that prize money is a loss. That's 23 an expense. And then if you get those dollars back, 24 those are additional dollars of revenue that offset 25 the loss. Would you help me understand how that is 0048 1 wrong at the end of the day when you draw the line? 2 COMMISSIONER COX: Let me tell you how 3 I look at this. 4 CHAIRMAN CLOWE: That's what I want to 5 hear. 6 COMMISSIONER COX: Let's take a 7 situation with a typical -- let's say that a typical 8 slot machine is set with a ten percent hold, 90 9 percent return to the players. So if you come to that 10 machine with a hundred dollars and put that hundred 11 dollars in and keep -- don't let things fall in there, 12 but keep track of this money over here, and you put a 13 hundred dollars in and you count what's in the tray, 14 there should be 90 dollars in there. You're still 15 playing with the original hundred, but you've picked 16 up that 90 now and you've put it through, and by the 17 time this is all over with, to win your hundred 18 dollars, we will have accounted for revenue of a 19 thousand dollars. That was, I believe, the point that 20 we were talking about. 21 MR. BRESNEN: That's the point. 22 CHAIRMAN CLOWE: I understand it that 23 way. 24 MR. BRESNEN: Yes, sir. 25 CHAIRMAN CLOWE: But the way you said 0049 1 it, it was -- it's not offsetting a loss. The way I 2 think Steve said it, you've got to stay at the machine 3 and keep playing. 4 COMMISSIONER COX: And the key to 5 that -- or the key that offers us, I think, is that we 6 should be looking not at sales, as Billy and I have 7 talked about in their report in here, we should be 8 looking at net revenue, because that's the real 9 number. And I think that's the point that Steve was 10 trying to make as well. 11 MR. BRESNEN: Yes, sir. And, listen, 12 this is what difference it makes. It's real practical 13 to me. I go down to the legislature and they say, how 14 much do the charities get? Now, if I'm -- and, 15 frankly, I'm real ashamed that it took me like eight 16 years to understand this, and I've, you know, humbled 17 myself before Commissioner Cox a number of times on 18 that very thing. But if I go down to the legislature 19 and they say, how much does bingo get, and I use this 20 gross sales number that we've been using since the 21 Bullock era, then they get six percent or eight 22 percent, depending on the year. But if I go down 23 there and talk to them, what percentage of the 24 after-prize money, of the whole do the charities get, 25 it's 17 to 25 percent, depending on the year. Now, 0050 1 you know, I -- I'm smart enough to figure that I would 2 rather have 17 or 25 percent of something than six or 3 eight percent. And the members of the legislature are 4 under the impression that these charities are getting 5 six or eight percent of the money, but they're not. 6 Number one, they're getting all of the money that's 7 left after expenses. 8 COMMISSIONER COX: As Billy pointed out 9 here, in the quarters that are shown in the schedule 10 that we have that you don't see, I don't think -- 11 MR. BRESNEN: Yes, sir. 12 COMMISSIONER COX: -- the charities got 13 more than all of it. 14 MR. BRESNEN: Yes, sir. And, you know, 15 in some cases we -- you know, we need to be worried 16 about the long-term trend of going into the muscle, as 17 Steve says. But, you know, frankly, there is a few 18 charities -- there is one charity out there that has 19 got about 300 grand in its bingo account, and you 20 can't really justify that, except -- I inquired, and 21 they had their reasons for having that that were very 22 good operational reasons. They were saving for a 23 building that they were -- I queried several of them 24 that had pretty high balances. They were saving for a 25 building. They were just saving in their bingo 0051 1 account. Probably not the most efficient thing for 2 them to have been doing. But that's another example. 3 The vast majority of them are -- don't have gross -- I 4 don't mean gross in the accounting sense, but they 5 don't have absurd amounts of money in their accounts. 6 So you have to be -- we have to be real careful how we 7 bring that down and get the outliers. That's why I'm 8 saying, we can wring some more efficiencies out of 9 this, but at the end of the day, once we've done 10 everything we can do there, unless we get the numbers 11 up and more people in the bingo hall, more money 12 coming into the bingo hall, it's not going to change 13 the downward decline of bingo. And we've got to have 14 some new games and new ways to go about it in order to 15 do that. 16 CHAIRMAN CLOWE: Thank you both. 17 COMMISSIONER COX: Mr. Chairman, as 18 you've pointed out on a number of occasions, our role 19 vis-a-vis bingo is different from our role vis-a-vis 20 the lottery. On the lottery side, we have asked the 21 staff to identify for us two things: One is, what 22 kind of additional revenue opportunities do we have 23 within the Lottery Act; and, two, what kind of 24 opportunities might we have if the Lottery Act were 25 changed, because in that case, we believe we should be 0052 1 a resource in the event the legislature asks that 2 specific question. 3 Now, what kind of a stance should the 4 bingo staff take in that model, given that we are 5 regulators there and not producers of revenue? 6 CHAIRMAN CLOWE: That's an excellent 7 question. And I'll give you my answer, and then if 8 Billy wants to disagree with me, or Steve, either of 9 the Steves, or Joe Garcia, who is coming up here in 10 just a minute wants to comment. Well, come on up 11 Steve -- or Joe, if you'd like to, and be prepared to 12 give your testimony. 13 I think the staff of the Bingo Division 14 has been well prepared, at least over the last couple 15 of regular sessions when I've been on this board, in 16 being able to respond and give responses to 17 legislative inquiries about their view from their 18 regulatory experience of what would benefit the bingo 19 industry. And I think Billy has been right up to 20 first class on that. I don't know if he's been able 21 to give fiscal notes. I'm a little unclear. Have 22 you? 23 MR. ATKINS: Yes, sir, we have. 24 CHAIRMAN CLOWE: I feel pretty good, 25 Billy, about the role you and your division have taken 0053 1 in that regard. And I think, to answer Commissioner 2 Cox's question, we know what the bingo industry wants, 3 and I think we're in a position, as a resource, to say 4 we think that would probably be a good thing for them, 5 without endorsing anything or sponsoring anything, 6 which is not our role. So I -- my response to you is, 7 I think the Bingo Division is doing a good job in that 8 area. 9 MR. ATKINS: And we have, Mr. Chairman, 10 in response to requests, either from individual 11 members or as result of legislation that's been filed, 12 provided fiscal notes on what we would anticipate the 13 impact to the state, the division, the organizations 14 themselves, and local jurisdictions would be as a 15 result of the implementation of any of those new forms 16 of bingo, many of which I discussed earlier, 17 Commissioner Cox, progressive, et cetera. 18 COMMISSIONER COX: Yes. Thank you. 19 CHAIRMAN CLOWE: Thank you. 20 Anything further from Mr. Fenoglio or 21 Mr. Bresnen? 22 MR. BRESNEN: No. And thank you very 23 much. It's really important to us and we have a bunch 24 of them coming in for the BAC meeting tomorrow. I'll 25 be sure to let them know y'all took this level of 0054 1 interest. 2 CHAIRMAN CLOWE: We'll be there. 3 Commissioner Cox will be there and I'll be there. You 4 won't have to do that; we'll do it for ourselves. 5 MR. BRESNEN: Good deal. Thank you. 6 CHAIRMAN CLOWE: Mr. Fenoglio, do we 7 have an appearance form for you? 8 MR. FENOGLIO: I have it here, 9 Mr. Chairman, and I'll give it to Mr. Bennett. 10 CHAIRMAN CLOWE: Great. 11 Mr. Garcia, you would like to make a 12 comment? 13 MR. GARCIA: Yes. Good morning. Just 14 some comments regarding the conversation taking place 15 this morning. 16 My name is Joe Garcia and I represent 17 both a distributor and a manufacturer of electronic 18 bingo equipment. 19 Two things: I think in the existing 20 Enabling Act, things that I think you can do is in 21 regards to product approval. And I want to commend 22 Billy because he started this initiative. One of the 23 main complaints that we -- manufacturers have lodged 24 toward me is that the approval process of products can 25 be rather lengthy. I think there has only been one 0055 1 company that's gone through the whole process without 2 any disapproval, and that just happened recently. On 3 average, the approved products take anywhere from 60 4 to 120 days or longer in some cases. And we think -- 5 the manufacturers believe that going to a third party 6 testing facility may be a better route and a more 7 efficient route, based on the time efforts that it 8 takes to approve a product. And I know that Billy and 9 his staff have already started investigating that. 10 We've gotten -- I've gotten calls from Mr. McDade in 11 that process, seeking manufacturer input on that 12 arena, and I just wanted to say that we fully support 13 Billy's effort in that area. 14 The second part is in new initiatives. 15 Obviously, there are many products out there that can 16 be brought into the market, but it requires 17 legislative change, and that's the difficult part. 18 Two of the difficult questions that -- 19 as a distributor and as a manufacturer that we ask 20 ourselves is, the cost to implement the product into 21 the market. And, secondly, the big question that the 22 legislature always puts before us is the small VFW 23 hall versus the large commercial hall and how we can 24 make it a level playing field for all those involved. 25 You know, we've talked about removing caps on prizes. 0056 1 Right now, the cap is 2500 dollars an occasion. In 2 the past when we've tried to move that up, we get 3 concerns from the smaller halls that barely are able 4 to make that 2500 dollar prize. So as we look at what 5 we can bring, and with Texas being as diverse as it is 6 in areas, very small, Rockdale VFWs or Granger VFWs or 7 Lion's, we have to try to figure out how we can spread 8 that cost all around and make it fair. 9 And the other problem that I think we 10 have with the legislature is the revenue generation. 11 We just cannot produce the amount of revenue in many 12 cases to the State that, let's say, a VLT will or a -- 13 the Lotto did, the jackpot -- or the big Lotto prize. 14 There is a -- there is just no comparison that, for 15 example, satellite bingo may bring 12 million dollars 16 to the State in additional revenues through the prize 17 tax. So those are some of the elements that we 18 manufacturers/distributors are trying to address as we 19 move forward in the legislature and some of the 20 challenges that we meet. 21 CHAIRMAN CLOWE: Joe, let me just 22 respond to your last comment, and I invite 23 Mr. Fenoglio or Mr. Bresnen to give their comments, or 24 the Commissioners. The comments that I have heard 25 regarding revenue, as you describe it, from 0057 1 legislators has been more attuned to benefit of the 2 charity than to increased revenue to the State. 3 MR. GARCIA: What I -- my point was, is 4 that as you look at alternatives in the legislative 5 initiatives, money tends to be a generating interest. 6 In other words, what kind of revenue will this bring 7 to the State in order to make it a -- an attractive 8 product. 9 CHAIRMAN CLOWE: In a general sense. 10 MR. GARCIA: In the general sense, yes. 11 CHAIRMAN CLOWE: And I understand that. 12 But the concerns that have been expressed to me, more 13 on an individual basis is, you know, how can more 14 money be able to be flowed to the charities. And that 15 is the thing that I think would be a keystone, if I 16 were in your position, of achieving change in the 17 Bingo Enabling Act, a methodology that would put more 18 dollars in the charities. I think there is a general 19 sense that bingo should benefit charities first, and 20 then some revenue comes to the State, but charities, 21 in my mind, are looked on as the number one recipient 22 of bingo operations. I think that's one of the 23 reasons -- my history doesn't go back this far -- that 24 bingo was authorized by the legislature. Is that 25 correct or do you know? 0058 1 MR. GARCIA: I think that's the general 2 reason it was authorized, is to benefit the charities. 3 And we certainly have implemented, in legislation that 4 we've advocated for in the past, we've put a direct -- 5 for example, in the satellite bingo game, we've 6 directed that 25 percent off the top goes to the 7 charity. That's been one initiative. And I think one 8 of the big issues -- and I think we saw this in 9 electronic bingo. When it first came in, you know, 10 the cost to the charity was substantial because there 11 was a substantial amount of capital investment made by 12 the providers of the electronic equipment. Over the 13 course of the last -- since the implementation, the 14 prices have gone down dramatically. And as that cost 15 has been recovered, the benefit to the charity has 16 gotten greater. And you're seeing that. Now, as more 17 products come into the market and make it more 18 competitive, it's certainly -- you're seeing that 19 right now, with two new additional manufacturers that 20 have been approved in the state of Texas, you're 21 starting to see additional reductions in prizes and in 22 the cost to the charities. So, yes, the overriding 23 factor is, how we get more money, and we believe these 24 new products bring customers into the bingo hall and, 25 therefore, all the dynamics that happen in the bingo 0059 1 hall increase dramatically. 2 CHAIRMAN CLOWE: Billy, did you have 3 any comment on the outsourcing of testing? 4 MR. ATKINS: I can just provide you a 5 brief update. A lot of it came about, Commissioner 6 Cox had recommended a book by Jeff Bergman, entitled, 7 License to Steal, and it talks about the development 8 of the -- the, I guess, regulatory structure in 9 Nevada, and then they talked about some situations 10 that involved devices in that jurisdiction. So that 11 was contemporaneous with us looking at the outsourcing 12 of the testing of these products, and we're currently 13 working with the Financial Administration Division on 14 the development and finalization of a cost-benefit 15 analysis. 16 CHAIRMAN CLOWE: Thank you. 17 Thank you, Joe. Anything further, 18 Commissioners? 19 MR. ATKINS: If I could, Commissioners, 20 just comment on two last things. There has been a lot 21 of discussion about the data that we get in, the 22 information that we have available to you. And I'm 23 hoping that we'll able to make a presentation to you 24 at your next Commission meeting on some changes that 25 we have planned for the quarterly reports that 0060 1 organizations submit that will provide more detailed 2 information as it relates to the expenses the 3 organizations have, their distributions, and their 4 final net proceeds. That's something that we've been 5 working with the industry since April on, and our 6 current plan is to have it implemented for the first 7 quarter of 2005. 8 Then the second thing is, Steve Bresnen 9 talked quite a bit about the competition I think that 10 bingo faces in this state, and Steve Fenoglio also 11 alluded to it, the fact that it's growing, and it's in 12 some not so obvious places. For example, as you know, 13 prizes at bingo games are limited to 2500 dollars per 14 occasion, whereas a raffle, which is essentially 15 unregulated in the state, can award a prize with a 16 value of up to 50,000 dollars. Likewise, there was a 17 discussion about poker tournaments going on. I know 18 of at least two jurisdictions right now, New Hampshire 19 and Michigan, where legislatures may be considering 20 the regulation of those types of games as charitable 21 activities. But to the best of my knowledge, we have 22 yet to be asked to provide any information to the 23 legislature, so we don't know if that's anything that 24 this coming legislature will have under consideration. 25 COMMISSIONER COX: Chairman, just one 0061 1 more thing. 2 CHAIRMAN CLOWE: Yes, sir. 3 COMMISSIONER COX: Ridgely, you heard 4 what Stephen said about the Hold 'Em tournaments? 5 MR. BENNETT: Yes. 6 COMMISSIONER COX: Do you think those 7 are legal? 8 MR. BENNETT: I have not taken a close 9 enough look at them to provide you with a legal 10 analysis. I'll be happy to do that if you'd like. 11 COMMISSIONER OLVERA: Commissioner, 12 it's my understanding that the Penal Code has some 13 loopholes in it that, basically, the only way a -- a 14 citizen can play poker is in a private residence and 15 with private invitees. My opinion is that they are 16 illegal when they're held in a public forum and cash 17 is distributed. 18 COMMISSIONER COX: That will be fine, 19 Ridgely. That is -- thank you, Commissioner. 20 CHAIRMAN CLOWE: Let's take a 21 ten-minute recess, please. 22 (RECESS.) 23 CHAIRMAN CLOWE: Let's come back to 24 order, please. Next we'll take up item three on the 25 agenda, report, possible discussion and/or action on 0062 1 lottery sales, game performance, and trends. 2 Mr. Deviney. 3 MR. DEVINEY: Good morning, 4 Commissioners. I'm Lee Deviney, Financial 5 Administration Director, and with me is Robert Tirloni 6 and Patty Leo, and the three of us will run through 7 this presentation for you. 8 Starting with report on sales. Our 9 unaudited fiscal year 2005 sales to date, and that's 10 through November 13th, are 688 and a half million 11 dollars. This is a 14.3 percent increase over where 12 we were in 2004. Sales through mid November were 602 13 million dollars in fiscal year 2004. 14 Comparing 2005 sales by product to 2004 15 sales for the same time period, instant tickets show a 16 19 and a half percent increase. However, we've 17 reached an anniversary date, that being November 9th, 18 2003, when we changed the internal settlement 19 procedures for instant tickets, therefore, instant 20 ticket sales appear to be artificially lower in fiscal 21 year 2004. The actual increase for 2005 over 2004 22 would be somewhat lower than 19 and a half percent had 23 we not changed the instant ticket settlement procedure 24 a year ago. And that was a one-time deal, and it's 25 just reflected in this report. 0063 1 Total on-line sales are up 2.4 percent. 2 The individual on-line games are trending somewhat 3 behind 2004 sales for the same time period. This is 4 expected and reflects the issue of the Mega Millions 5 game by us in December. The upcoming anniversary date 6 of December 3 for Mega Millions should start -- we 7 should start seeing a downward effect on the on-line 8 games year-to-year comparisons once we pass that 9 anniversary date. This is the existing games. 10 This is looking at the most recent week 11 ending November 13th, 2004. You'll see that for that 12 week, our instants represented 72 percent of sales and 13 our total weekly sales for that week were 69.3 million 14 dollars, which of course is a very healthy number 15 considering we didn't have a super high jackpot. 16 COMMISSIONER COX: Lee, let's look at 17 that one for a minute if we could. We've got two tiny 18 slices there. The Megaplier is a tiny slice and the 19 Two Step is a tiny slice. The Megaplier probably 20 requires minimal additional efforts beyond Mega 21 Millions, kind of a by-product of Mega Millions riding 22 on the same cost base. The Two Step is such a tiny 23 generator of revenue that I wonder if it's even a 24 profitable thing at the bottom line. 25 MR. DEVINEY: We generate net revenue 0064 1 off of Texas Two Step, so I would say it is a 2 profitable game. I cannot tell you, if we didn't have 3 Texas Two Step, whether our overall net revenue would 4 be greater than without it, but we do make money off 5 of Texas Two Step. 6 COMMISSIONER COX: Well, I know we make 7 net revenue. That is, we sell more tickets than we 8 pay out in prizes. But we advertise it, we prepare 9 materials, people in our staff work on it, GTECH works 10 on it. My question is, do we make money on Texas Two 11 Step? 12 MR. DEVINEY: Sitting here -- 13 COMMISSIONER COX: I'm not asking you 14 to answer it right now, but -- and I know that we're 15 looking carefully at this game, but I want to be sure 16 that we are looking at the right number, which is the 17 bottom line, not the net revenue line. 18 MR. TIRLONI: Commissioner Cox, if I 19 could comment on that. 20 COMMISSIONER COX: Sure, Robert. 21 MR. TIRLONI: When we introduced Texas 22 Two Step back in 2001, that was our first bonus ball 23 game that we introduced in the state. And we knew at 24 that time that that game would not be -- it was not a 25 long-term game. We knew it would not be around for 0065 1 ten years by any means. We have started discussions 2 with GTECH and their game creation division in Rhode 3 Island about potential changes we can make to Two Step 4 to enhance it, or we have even discussed the 5 possibility of replacing Two Step with a different 6 game. So we are looking at the Two Step game and 7 analyzing its place in the overall product mix. 8 COMMISSIONER COX: Good. 9 MR. DEVINEY: This slide represents 10 calendar year-to-date weekly sales through the week 11 ending November 13th. Our bottom line, our total 12 year-to-date weekly sales is 3.2 billion dollars. The 13 trend has been pretty consistent. About two-thirds of 14 our sales are instant tickets, 67.3 percent, and then 15 we have Lotto Texas. Now, just looking at the 16 dollars, 407 million, Pick Three, 243; Cash Five, 102 17 million; Two Step that we were just discussing, 39.4 18 million so far this year; Mega Millions, 205; and 19 Megaplier, 48 million dollars. 20 This slide shows you calendar 21 year-to-date weekly sales. This is, again, a 46-week 22 period, calendar year '04 compared to '03. Our 23 calendar year '04 year-to-date sales are almost 15 24 percent above calendar year '03, our on-line sales are 25 up 18.3 percent. Instant sales are up 13.4 percent. 0066 1 And, again, you should know that that figure is 2 misleading because we changed the instant ticket 3 settlement procedures a year ago. I think that date 4 is incorrect. I think that should be November 9th, 5 instead of January 9th, 2003. 6 MR. TIRLONI: Commissioners, we'll move 7 into some discussion on the two major jackpot games, 8 Lotto Texas and Mega Millions. 9 Since we met in late October, we have 10 our two jackpot games almost at the opposite ends of 11 the spectrum. On Lotto Texas, we are advertising a 13 12 million dollar jackpot for tomorrow night's drawing. 13 We began this current roll cycle on the 20th of 14 October, right before the last meeting. We have eight 15 draws to date. We're -- tonight on Mega Millions, we 16 are advertising a 126 million dollar drawing. Tonight 17 is our hundredth Mega Millions drawing in which Texas 18 is participating. This roll cycle that we're 19 currently in began earlier in October, on the 5th, to 20 be specific, and there have been 12 draws to date. I 21 will point out, the vast difference in the jackpot 22 amounts in terms of the number of draws, you see it's 23 taken us eight draws to get to 13 million on our 24 in-state game, and with 12 draws on the Mega Millions 25 game, we're at a triple-digit jackpot. And, of 0067 1 course, that just shows the power of 11 states pooling 2 sales to build a jackpot. 3 Some quick stats for you since we began 4 the game, again, almost a year ago, December 5th of 5 '03, we have seen over 224 million in Mega Millions 6 sales, over 53 million in Megaplier sales. That 7 accounts for 19.2 percent, and we'll look at that on a 8 later slide in a little more detail. Our average 9 jackpot has been just over 57 million. Of course, our 10 highest jackpot since we've participated in the game 11 has been 290 million. And we've had 16 draws where 12 the jackpots have been over a hundred, and 44 draws 13 where the jackpots have been over 50 million. 14 Some stats on winners and prizes. 15 Again, this dates back to the start of the game in 16 Texas. We have had over 5.2 million winners in Texas. 17 We've paid out over 102 million in prizes to those 18 winners, and we have had over 1.2 million winners who 19 have Megaplied, and we have paid those winners over 22 20 million. I'm sure we all remember, we have had one 21 jackpot winner in Texas since we joined, 81 22 second-tier winners, that's the 175,000 dollar prize. 23 And out of those 81 second-tier winners, 14 have 24 Megaplied and, therefore, increased their prize 25 amounts. 0068 1 We started looking at this slide last 2 month. And I'll go over what we looked at. The blue 3 line is the previous roll cycle, and we started at ten 4 and we built all the way up to an advertised jackpot 5 of 101 million dollars. And this was the win in 6 Texas, so that is the blue line. That's 12 draws. 7 The red line is the next roll cycle, and it's actually 8 the current roll cycle that we're in right now. And 9 this starts at -- at ten million, and, again, it rolls 10 all the way up to where we currently are -- well, this 11 was for the last Friday drawing, this was the 12 106 million jackpot. 13 When we met last month, we discussed 14 how the current roll cycle was, for the first few 15 draws, trending somewhat ahead of the previous roll 16 cycle. And then you see when we get up around the 17 seven, eighth draw, we're still somewhat ahead, and 18 then over here by the ninth draw, we're almost dead 19 even. At this point in the roll cycle, we fall a 20 little behind. We come right back up a little above 21 the previous roll cycle, and then, once again, we're a 22 little behind the previous one. So there is 23 fluctuation back and forth. And when we saw this 24 slide, we tried to think about what would be the 25 reason for this picture that's being painted by this 0069 1 slide. When we first had the Mega Millions win in 2 Texas, there was a great deal of media attention. We 3 changed our traffic reads in our major markets around 4 the state, and there was a great deal of retailer 5 interest and chatter because, if you remember, the 6 retailer bonus for selling the Mega Millions jackpot 7 ticket is a million dollars. And I think Reagan 8 talked about last month, retailers that he met with 9 were quite enthused about that. So our assumption is 10 that right after that ticket was sold, there was a lot 11 of interest and a lot of enthusiasm about the ticket 12 being sold in Texas. But as time wears on, that 13 chatter and that enthusiasm starts to die down a 14 little bit, and that's what has happened in the latter 15 part of this current roll cycle. There will be 16 another slide and, I believe, two slides that will 17 possibly also show that there could be a little bit of 18 jackpot fatigue. That's a problem in the industry as 19 a whole. We've experienced jackpot fatigue on Lotto 20 Texas. You know, years ago when you had a 50 or 60 21 million dollar jackpot, it had humongous sales. 22 People were very enthused about that. And years 23 later, you know, it takes a 70 or 80 million dollar 24 jackpot to get the same level of enthusiasm. So that 25 could be a possibility as well. 0070 1 COMMISSIONER COX: Is it also possible 2 that that's just normal variation in the noise level? 3 MR. TIRLONI: I think it could be also, 4 yes. And we're going to continue to watch that and 5 we'll plot the next roll cycle that starts on that 6 chart as well so we can see how they compare. 7 This next slide compares Mega Millions 8 and Megaplier sales. We've been looking at this 9 monthly. Again, we'll look at the -- I'll point out 10 some interesting things. You can see the fluctuation 11 between the Tuesday and the Friday draws. This is a 12 Tuesday draw and a Friday draw. Again, Tuesday and 13 Friday. This is very similar to what we see on Lotto 14 Texas. Our Saturday draws usually experience larger 15 sales than our Wednesday draws. And you see that 16 fluctuation continues. I think the interesting point 17 is right at this point here, because this is -- we do 18 not see a dip here. This is a Friday draw and this is 19 a Tuesday draw. So around the 66 million dollar 20 jackpot level, we're either seeing new players come in 21 at that level or we're seeing existing players begin 22 to spend more at that level. And then, of course, as 23 we've discussed, as we get closer and closer to the 24 triple digit jackpot, you see the growth increase very 25 rapidly for both Mega Millions and, actually, for the 0071 1 Megaplier. And they both follow the same trend. 2 This slide shows -- in the background, 3 the green background is the Mega Millions jackpot 4 amount; in the foreground is the Mega Millions and 5 Megaplier sales. So this -- and I'm pointing to the 6 green -- this was the roll up to the advertised 101 7 million dollar jackpot where we had our winner, and 8 then this was the roll up to our current. And, again, 9 this is through the end of last week, so this takes us 10 to the 106 million dollar jackpot that we had for last 11 Friday. And when I talked about the possible jackpot 12 fatigue, I think you can see that pretty clearly on 13 this chart. It's not dramatic or drastic, but it is 14 evident. And this red bar is our Mega Millions sales 15 for the 101 million dollar jackpot, and over here are 16 our Mega Millions sales for the 106 million dollar 17 jackpot. So you can see that there is a bit of a 18 difference. Again, not dramatic, not drastic, not 19 anything unheard of in the industry, but you can see 20 that slight difference there. 21 And, again, Megaplier sales are 19.2 22 percent of the total sales. The spending on Megaplier 23 goes up as the jackpot increases, but as a percentage 24 of the whole, it drops down a little bit. And, again, 25 I believe we've talked about that. What we believe is 0072 1 happening is, as the jackpot approaches those triple 2 digit marks, you see your base players who probably 3 have spent on Megaplier earlier on in the roll cycle, 4 probably take that dollar and apply it to the base 5 game for a chance to win millions instead of on trying 6 to wager on multiplying or increasing their prize. 7 COMMISSIONER COX: And that's something 8 we'll know more about as we do our market research? 9 MR. TIRLONI: Yes, sir. 10 We've been updating you on our draw 11 sales by participating state. Again, this is since we 12 joined the game in December of '03. In terms of draw 13 sales by state, Texas falls right behind New York, 14 pretty much in the second slot out of 11. But then as 15 we have discussed, in terms of per cap, we fall closer 16 towards -- towards the bottom. And, you know, we have 17 talked about that in the past, and we are working with 18 GTECH on -- and the sales force on ways to increase 19 the per cap and increase Mega Millions and Megaplier 20 sales overall. 21 This is just a good visual because it 22 does date back almost a full year at this point. And 23 the red in the background is the Lotto Texas jackpots 24 and the blue in the foreground is Mega Millions. And 25 this just shows the progression of the jackpots, 0073 1 basically, over the past year. You see the large 2 run-up of Lotto to 145. You see the run-up of Mega 3 Millions to 290. And, again, you see our 101 million 4 dollar advertised jackpot where we had a winner in 5 Texas, and then where we're at currently. Again, this 6 is through the end of last week, so this is 106. We 7 are at 126 for tonight, and that's not represented on 8 this chart. 9 This is just a view of what the Lotto 10 Texas sales are compared to the Mega Millions and 11 Megaplier sales. And you see from when we started in 12 the game, Lotto Texas sales total over 434 million, 13 Mega Millions and Megaplier sales total over 277 14 million. And when you break that down to per capita 15 draw sales, you see Lotto Texas at 39 cents and Mega 16 Millions and Megaplier right at a quarter. 17 And Patty Leo has some follow up from a 18 question that was asked last month, Commissioner Cox, 19 about instant ticket sales and how they responded 20 during the Mega Millions jackpot roll. 21 MS. LEO: I looked at the sales for 22 instant tickets during the period starting December 23 the 3rd through November the 8th, this year compared 24 to that same time period the year before, to see how 25 instant ticket sales changed. And we saw a 10.8 0074 1 percent increase in instant ticket sales between those 2 two years. So, obviously, instant ticket sales 3 increased after the start of Mega Millions. However, 4 Mega Millions isn't -- you know, it's just one of the 5 factors that affects instant ticket sales, so I tried 6 to look at other things that might contribute to that 7 with -- you know, without just saying, oh, well, 8 Mega Millions increased sales. And we did see that 9 one of the big things -- influences on instant ticket 10 sales is the introduction of new games. And we saw 11 that after Mega Millions started, we had 93 new 12 instant ticket games, whereas that same period a year 13 before, we had only 78. So part of the 10.8 percent 14 increase would be attributable to just the fact that 15 we introduced more new ticket games. 16 Here is a graph showing -- 17 COMMISSIONER COX: Patty? 18 MS. LEO: Yes. 19 COMMISSIONER COX: From that, then, 20 would we conclude that the more games we introduce, 21 the higher the revenue will be? 22 MS. LEO: We've seen that the more new 23 games that we have, that we have had increases in 24 instant ticket sales. 25 COMMISSIONER COX: So why wouldn't we 0075 1 stop at 93? Why wouldn't we go to 300? 2 MS. LEO: Well, I don't know that there 3 is not an upper limit to that. In fact, you know, we 4 may be seeing a leveling out. But just so far, we've 5 been over the last several years, rather aggressive in 6 instant ticket thing, and we've seen instant ticket 7 sales respond to that. Now, whether that could be 8 continued -- you know, that sales response could be 9 continued indefinitely, you know, I don't -- I don't 10 know yet. 11 COMMISSIONER COX: Well, we've got 12 several things that could be affecting those sales. 13 MS. LEO: Right. 14 COMMISSIONER COX: Product is one of 15 them. You've saying new product, higher sales. But 16 do we know that's the reason? Have we found that out 17 from our focus groups and our surveys or are we 18 guessing? 19 MS. LEO: I would have to defer to 20 marketing about the focus groups, or whatever. The 21 revenue analysis from looking at the stream of revenue 22 would indicate that there has been a positive 23 response, but -- 24 COMMISSIONER COX: It would indicate 25 that. 0076 1 MS. LEO: Right. 2 COMMISSIONER COX: But it doesn't tell 3 you that. 4 MS. LEO: Not -- you know, I wouldn't 5 be able to say a hundred percent definitively. 6 COMMISSIONER COX: You can't say in any 7 percent because you haven't done a correlation 8 analysis, I suspect. 9 MS. LEO: I can do a formal one. I'm 10 saying, from my observation of following the revenue 11 streams that has seemed to follow, even in the past, 12 when we were not introducing as many new games, our 13 revenue was lower. I'm not going to attribute all of 14 it to it because there is other things going on that 15 affect that stream, too. It's just a -- 16 COMMISSIONER COX: Well, until we do 17 that analysis, we can't really attribute any of it to 18 it because we know there are other things and we don't 19 know what share accompanies that, is my point. 20 MS. LEO: Okay. 21 MR. GREER: And I would mention that we 22 are currently analyzing a new game plan for next year 23 on instant tickets, and one of the things you don't 24 see up there is the price points, and I think part of 25 that is attributable to the fact that we have had a 0077 1 good response to our higher-priced tickets, being the 2 ten and the 20 dollar and 25, and now 30-dollar 3 ticket. And we're re-analyzing the responsiveness to 4 each of those games. So in reference to the 93, I 5 think the number was, a moment ago, we may alter that 6 number this year, looking at a different strategy with 7 more core games responsive to the focus groups that 8 you talked about, what players are looking at. So 9 there are a number of factors that I think also go 10 into that. And we'll continue to analyze that and get 11 back to you with a instant number -- 12 COMMISSIONER COX: And, Patty, Reagan 13 put his finger right on the issue that I had. And 14 that is, I've been told that the higher price point 15 games are doing great. I've been told that we are 16 having some success in correlating the effectiveness 17 of our advertising with increased ticket sales. And 18 so I hate to see you just grossly attribute all of 19 that to the introduction of new games when I know 20 there are other factors that are playing a significant 21 role it in. 22 MS. LEO: And I wasn't -- if I came 23 across saying that I was attributing all of it, I just 24 said it was a factor. This slide shows the mix of the 25 price points here, and that was the next thing that I 0078 1 was going to indicate is that if you look at the 93 2 games, you'll see that we've added price points of 25 3 and 30 that were not in -- actually, more of the 20 -- 4 you see more of the higher-priced games added in the 5 93. So that's another factor is the mix of the games. 6 So we've had more games, we've had a different mix of 7 the games in response to the popularity. I just was 8 trying to look at some of the factors that could be 9 contributing to that 10.8 percent increase and not 10 attribute it all to Mega Millions. You know, that 11 would be simplistic. 12 During that same time period, we also 13 had that record high Lotto jackpot, and if you'll move 14 to that. I looked to see, did we see a sales response 15 to Mega Millions, you know, with that -- the higher 16 jackpots where we've seen the increased number of 17 ticket sales for Mega Millions. And I tried to look 18 at those sales for those periods compared to the 19 average for the lower jackpots. And, you know, we can 20 look at this graph, and on Friday is the red and 21 Tuesday is the blue, and the average is the line. But 22 when the jackpots do get up and the people do come in 23 the store, they seem to be buying higher than average 24 instant tickets, also. I have looked at this issue on 25 Lotto and we've seen that pattern, too. So, you know, 0079 1 while there is a 10.8 percent increase in the period 2 after Mega Millions compared to the year before, there 3 is lot of factors feeding into it. But I think we can 4 see that the people coming into the stores to buy the 5 Mega Millions tickets are increasing their instant 6 ticket sales, too. But I -- we can't -- I can't at 7 this point attribute a specific percent to the 8 addition of Mega Millions. I would say it has a 9 positive influence, but it's certainly not -- doesn't 10 account for the whole 10.8 percent increase that we've 11 seen because there is other positive things that have 12 also changed during that period from the year before. 13 CHAIRMAN CLOWE: In regard to the 93 14 active games, if you know, what is the average number 15 that each retailer has stocked and is selling? 16 MS. LEO: I don't have that 17 information, but I'm sure that that could be worked 18 up. 19 MR. TIRLONI: I don't have that 20 information off the top of my head, but we'll get it 21 for you momentarily. 22 COMMISSIONER COX: Ramon looks like he 23 may have that information. 24 MR. RIVERA: Good morning, 25 Commissioners. I'm Ramon Rivera. I'm the account 0080 1 general manager for GTECH. 2 And that is an extremely good question 3 because part of the strategy that the Texas Lottery 4 has developed is to customize inventory to the retail 5 location. So there are -- there are retailers who can 6 receive and handle adequately one or two books or 7 packs of instant tickets, while other retailers can 8 handle upwards of ten or 15. So part of the success 9 of instant -- of the instant ticket performance for 10 the Texas Lottery has been the ability to customize 11 the -- the tickets to that particular retailer, not 12 only in terms of the number of tickets that the 13 retailer receives, but in terms of the kinds of games 14 that the retailer can sell. Because there are 15 differences between retailers in different geographic 16 areas. So a big part of the success of instant 17 tickets has been the ability to -- to adjust the 18 distribution strategies to accommodate for those 19 differences both in size and in player desires or 20 propensity to play. So the realm of the number of 21 packs that a retailer can receive can go from one pack 22 to upwards of 20 packs in some cases. 23 CHAIRMAN CLOWE: Well, that's exactly 24 where my thought was going. And beyond that, in 25 selling, in many cases, a retail outlet will look to 0081 1 their vendor to stock their inventory, because the 2 vendor knows what merchandise is selling in a broader 3 spectrum than any one given retail location. And I 4 just wonder what effort we are making to, out of 93 5 active tickets, inform the retailers where the hot 6 tickets are, game-wise, I mean, and acceptance-wise, 7 player acceptance-wise, and steering them to those 8 tickets. Can we do that? Is that a problem? It 9 seems like a sound marketing strategy. Is there a 10 problem there? 11 MR. RIVERA: No, sir. In fact, I 12 believe the Texas Lottery was a pioneer in that type 13 of distribution strategy, in something that's called 14 PRO-CALL. And PRO-CALL really stands for Proactive 15 Distribution of Instant Tickets. And essentially, 16 what happens with a retail location is that there are 17 two points of contact that are made with that 18 retailer. The first is, a visit by a sales 19 representative, who looks at the retailer sales, their 20 existing inventory, consults with the retailer in 21 terms of the proper game mix that that retailer should 22 have, and also makes adjustments to the inventory 23 by -- by calling our distribution facility to make 24 sure that that retailer is well-stocked with the 25 appropriate games. 0082 1 The second point of contact -- and this 2 is where Texas pioneered distribution -- and there is 3 essentially a virtual look at that particular 4 retailer's inventory via a computer. And there is a 5 staff in Austin that reviews every retailer at least 6 twice a -- twice a month, and we're able to determine 7 the history of games that are selling, we look at the 8 on-hand balance, and we actually place the order 9 without having to contact the retailer. So that 10 we're -- we're essentially pushing the product, than 11 waiting for the retailer to pull. And to a great 12 extent, between those two points of contact, between 13 the sales rep visiting and the ITS representative 14 analyzing, we have made tremendous strides in terms of 15 getting that retailer the appropriate amount and 16 variety of games that are best suited for that 17 individual retailer. So we consider that every -- 18 every one of our 16,500 retailers has distinct and 19 separate characteristics that we must understand and 20 accommodate for. 21 CHAIRMAN CLOWE: Is that your staff or 22 ours? 23 MR. RIVERA: It's GTECH staff, but 24 we -- the design of this entire system took place in 25 working in conjunction with the Lottery staff, and we 0083 1 actually exercise and implement the strategy. 2 CHAIRMAN CLOWE: And you know what 3 we're talking about there is shelf space and having 4 the winning tickets, the attractive tickets on the 5 shelf, crowding off the tickets that aren't active and 6 aren't selling well. That's dead weight. And I'm 7 really glad to hear that focus is active in that 8 regard on a two point -- that's excellent. I'm really 9 glad to hear that. I did not know that and I think 10 that's one of the reasons that we're seeing the 11 success that we are. 12 MR. GREER: Well, let me add a couple 13 of points to that. One is that, about a year ago, 14 Gary brought to me something that he had been working 15 on for a while in reference to addressing the issue of 16 tickets that were not performing well, and we did take 17 action on that, working with GTECH. And I think 18 that's part of the success that we're seeing is that 19 we are taking a more aggressive role technologically 20 in being able to identify those tickets moving off the 21 shelf and what speed they're moving and what players 22 really like. 23 The second point I wanted to make is 24 that it's been interesting to me as I go out and visit 25 with retailers, you'll see everything from 12 games 0084 1 and an ITVM, or even some places I see less. I mean, 2 I think they had ten. To one retailer that I was able 3 to visit in Dallas recently, I think they might have 4 had 75 or 80 games out there, the number, games that 5 their players continue to respond to. So being able 6 to customize the inventory to specific retailers, I 7 think, has been very good. And GTECH has done an 8 admirable job in working with those retailers and 9 identifying their issues along the way. This goes 10 back to what we talked about a minute ago to even 11 price points. There are some retailers that see a 12 very good response to higher-priced tickets and some 13 that don't. You know, you've got to really work with 14 each one individually. 15 And then the last point I wanted to 16 make is that as recently as yesterday, we were having 17 a meeting about our game plan that I touched on a 18 moment ago, and the technology that our instant ticket 19 vendor, Scientific Games has, I was able to see last 20 week, which I'm going to report on in a minute, to a 21 visit that I had there, but we can track what these 22 tickets are doing in other states, and as we look at 23 these new games that we're talking about rolling out 24 for next year, not only can we see how they're 25 potentially going to perform in Texas, but we can base 0085 1 that decision on an educated, knowledgeable database 2 of how they're performing in other states. So there 3 is just so many neat things that we're able to do now 4 that we couldn't do before that I think we have the 5 potential to see an increase in instant sales. 6 CHAIRMAN CLOWE: To me, that's real 7 marketing research that Commissioner Cox was speaking 8 about, and to be able to focus on what is going to 9 sell and spread that word to these almost 17,000 10 retail outlets. Whether they have ten or 75 tickets 11 available, they want the hot sellers. And then to 12 know -- to be able to break it down, what is 13 attractive in their area, that's the way we'll see 14 these sales increase in a real and lasting way. 15 MR. GREER: Well, and it also goes to 16 the new way that we're rolling out the tickets in a 17 suite of games, and the price points that come out 18 with that, and giving them information, which we're 19 currently focused on ahead of time so they can plan 20 ahead and answer questions ahead of time. The point 21 of sale materials are changing. We're seeing a lot of 22 things that have been successful in other states and 23 we're able to monitor that. New York specifically is 24 one we're watching, as well as Massachusetts, being 25 that they're one and two above us, watching what 0086 1 they're doing. 2 CHAIRMAN CLOWE: And in my mind, that's 3 where Commissioner Cox was driving in his questions. 4 You know, it's great to have these increases in sales, 5 but we want to know why and we want to know where it's 6 coming from, and then we want to concentrate on that 7 and magnify it and improve on it. And it sounds to me 8 like you're thinking right. I like what I'm hearing. 9 COMMISSIONER COX: And Reagan, one 10 other thing. Did I understand that y'all recently 11 engaged a Professor Huff and Doctor Jarrett on the 12 second phase of their work? 13 MR. GREER: Yes, sir. We're going to 14 be reporting on that today, as a matter of fact. 15 COMMISSIONER COX: I think their first 16 phase was looking at the uncontrollable factors, the 17 demographic factors over which we have no control. 18 Their second phase is going to be looking at the 19 product mix, the things we're talking about here, the 20 controllable factors. Is that correct? 21 MR. GREER: Yes, sir. 22 COMMISSIONER COX: So we're going to 23 know a lot more about that a few months from now? 24 MR. GREER: Yes, sir. We have really 25 gotten aggressive on being better informed, and I 0087 1 think that's part of the success we're seeing and will 2 continue to see, and certainly, that study is a part 3 of where we're going with this. 4 MR. RIVERA: Mr. Chair, if I could just 5 maybe give a plug for the Lottery staff. Equally as 6 important as understanding what sells is understanding 7 what doesn't sell. And within the last year, the 8 marketing staff, working in conjunction with the 9 Executive Director, developed the cost-benefit 10 analysis to determine at what point a particular game 11 was becoming a detriment to the -- to returns to the 12 Foundation School Fund, because we are competing for 13 space in the retail environment. And based on the 14 basis of that -- of that analysis, we are now able to 15 remove tickets from a retail location which aren't 16 selling, to make room for the new and exciting games, 17 which is a -- which has been a very important 18 strategic addition to the ability to customize that 19 retailer. And that happened within the last year or 20 so. 21 COMMISSIONER COX: And to focus in on 22 my point of 93 versus 78, is that good or bad. The 23 math is, 78 is one and a half new games per week. 93 24 is almost two new games per week. I don't believe 25 there are quality games in that quantity out there, 0088 1 and that our focus should be on higher quality games 2 and not on more games. 3 MR. RIVERA: Yes, sir. And that is -- 4 that is the direction that the marketing organization 5 is taking us, your marketing organization is taking us 6 for the game plan for the next fiscal year. 7 CHAIRMAN CLOWE: And I guess you 8 brought up all those arguments with that retailer in 9 Waco that you were trying to reacquire, and I 10 understand from Mr. Anger you have not been successful 11 so far, but you haven't given up. Is that right? 12 MR. RIVERA: Mr. Chair, and 13 Commissioner Cox knows this, we don't give up. We'll 14 get him. 15 CHAIRMAN CLOWE: Great. 16 MR. RIVERA: Thank you. 17 CHAIRMAN CLOWE: Thank you. And if you 18 know, before sometime in the future, give us the 19 number of active games that the retailers have on 20 the -- 21 MR. RIVERA: Yes, sir. I will. 22 CHAIRMAN CLOWE: Thank you. 23 MS. LEO: Back to the question of the 24 response of instants to Mega Millions. I think the 25 most that we could say is that we are -- we see 0089 1 instant ticket sales increase with the higher jackpots 2 as more people come in, but I certainly wouldn't 3 attribute the 10.8 percent increase that we've seen 4 during that period to Mega Millions. There are so 5 many other factors, and what Ramon had to say just, 6 you know, was -- reinforced that that, you know, 7 number of games, price point paying -- price point of 8 games, the difference in managing inventory, all of 9 these things are going to affect the sales, so I would 10 hesitate to attribute a particular number to Mega 11 Millions. But I think this slide here shows that when 12 the people go in for the high jackpots, they are 13 buying those well-arranged and selected games while 14 they're there. 15 MR. TIRLONI: Commissioners, I wanted 16 to give you a brief update on some promotional efforts 17 that we have been working on in conjunction with GTECH 18 and their sales force. This fall, we decided to place 19 a concentrated effort and focus on the Cash 5 game. 20 There were many aspects to that. And running clerk 21 and player commissions are nothing new to us here. We 22 do those all the time. But we have strived to bring 23 our ad agencies together to the table with GTECH and 24 the sales force and the marketing division and come up 25 with a very strong focus or a concentrated focus. And 0090 1 I think we've successfully done that over these past 2 few weeks, and I wanted to just share some of the 3 information with you. 4 We started our promotional efforts with 5 a clerk promotion that ran in late October, the 24th 6 through the 30th, and we followed that up with a 7 player free ticket promotion that started on the 31st, 8 it ran for two weeks, through the 13th. That was on 9 all of our on-line terminals statewide. We just began 10 the second two-week phase on the SSTs, and the offer 11 is, buy five dollars' worth of Cash 5 and you receive 12 a one-dollar Cash 5 Quick Pick for free. In addition 13 to that, we worked with very closely with GTECH on 14 developing a sales contest by their GTECH sales 15 districts where we identified retailers that were not 16 our top performing Cash 5 retailers. We would 17 categorize them as our -- not our A retailers, but our 18 B retailers. We felt that they had room for growth in 19 terms of Cash 5 sales, so we identified those 20 retailers, gave them a sales goal. In addition to 21 that, GTECH tied their sales staff incentives to the 22 success of Cash 5 sales during this time period. And, 23 lastly, to continue the effort, there was a brand new 24 point of sale printed that talked about the Cash 5 25 game and its benefits. 0091 1 And this chart shows what we feel are 2 positive results of this promotion. You could see, 3 the purple colored bar is the Cash 5 sales by week, 4 and so you see, at the beginning of the month, we had 5 Cash 5 sales averaging right around two million 6 dollars. The teal line is our -- or the teal bar are 7 our Cash 5 validations during the same time periods. 8 And then this was the first -- the first week of the 9 free ticket promotion that ran statewide, and we did 10 realize a nine percent increase over the prior week. 11 We got up to just about 2.2 million dollars in Cash 5 12 sales. That continued into the second week, slightly 13 lower, but right in the same ballpark, right around 14 2.19 million for that week. And you see that we gave 15 away 220,000 free Cash 5 tickets the first week and 16 just about 230,000 free Cash 5 tickets the second 17 week. We can update you next month on how the 18 promotion continued through the rest of the month. We 19 would not expect to see as many free Cash 5 tickets 20 over this next two-week period because this next 21 two-week period, the promotion is only running on our 22 self-service terminals. And we've worked out that 23 promotion with our corporate accounts that have the 24 self-service terminals in their locations. 25 COMMISSIONER COX: Robert, let me see 0092 1 if I understand what that says. I'm looking over at 2 November 6th and November 13th. 3 MR. TIRLONI: Yes, sir. 4 COMMISSIONER COX: It looks to me like 5 sales went up by less than the free tickets you gave 6 away. 7 MR. TIRLONI: The sales went up about 8 200,000 -- by about 200,000 dollars, and we gave away 9 about 220,000 free tickets. And we're running these 10 numbers -- before we run any of these promotions, we 11 basically come up with a mini cost-benefit analysis, 12 and we're running these numbers back through that 13 spreadsheet now. 14 COMMISSIONER COX: My intuition tells 15 me that you're going to find that the cost is greater 16 than the benefit because you gave away more than your 17 increase in sales. 18 MR. GREER: Well, what I don't think 19 that shows, at least from my recollection of looking 20 at sales, is overall sales were like 2.4 million and 21 our -- what we saw at the Lottery was 2.2, and then 22 the other -- so you add the 2.2 plus the 220,000. 23 COMMISSIONER COX: Okay. 24 MR. GREER: That slide is somewhat 25 deceptive because, specifically, based on the fact 0093 1 that it's just basically reminding players, this game 2 is out there, it's got one in eight overall odds, it's 3 a good game. I've been tracking the sales, and we are 4 almost at the 2.5 mark, and that was the goal. 5 COMMISSIONER COX: What that would say, 6 then, is this is a loss leader. 7 MR. GREER: Well, it's -- it basically 8 stopped the bleeding from the perspective of sales 9 were declining and they came back. And what I'm 10 attributing it to is the fact that what that slide 11 does not show is the overall amount. 12 COMMISSIONER COX: But, again, if the 13 overall amount were up and if it were attributable to 14 this, this is still a loss leader. And so I think we 15 have to be real careful on our cost-benefit analysis 16 of a loss leading strategy, to be doggone sure that 17 that increase over there is a result of this and not 18 of six other things that we can't identify. 19 MR. GREER: We'll look at that. 20 CHAIRMAN CLOWE: On a cost basis, 21 you're exactly right. Now, can you take it to a net 22 basis? You gave away more than you increased in 23 sales, does your net improve overall, then there would 24 be a real benefit. 25 COMMISSIONER COX: There would be, if 0094 1 you could prove that it resulted from that giveaway. 2 CHAIRMAN CLOWE: Or from the increased 3 sales, which I don't think you can, one or the other. 4 MR. GREER: We'll look at that -- 5 CHAIRMAN CLOWE: Is that a cell phone? 6 Would somebody please turn it off if they have a cell 7 phone on in here, please? Thank you. 8 Is that reasoning -- 9 COMMISSIONER COX: Exactly. 10 CHAIRMAN CLOWE: I think you're exactly 11 right on a gross basis. I mean, we can't get into the 12 net because we can't track it that way. 13 MR. GREER: We'll use that as a part of 14 our reasoning when we come back with the overview next 15 month. 16 MR. TIRLONI: That concludes our 17 presentation for today. We would be happy to answer 18 any additional questions you may have. 19 CHAIRMAN CLOWE: Thank you all very 20 much. 21 The next item, four, report, possible 22 discussion and/or action on HUB and/or minority 23 business participation, including the agency's 24 mentor-protege program. 25 MS. BERTOLACINI: Good morning, 0095 1 Commissioners. My name is Joyce Bertolacini, and I'm 2 the coordinator of the TLC's historically 3 underutilized business program. 4 The TLC subcontracting report 5 submission deadline did not allow time to complete the 6 October monthly HUB minority contracting activity 7 report for this meeting. This report will be 8 presented to you at the next scheduled meeting. 9 However, included in your notebooks today is a series 10 of summary reports which analyze the Commission's HUB 11 performance for fiscal year 2004, based on the Texas 12 Building and Procurement Commission's annual statewide 13 HUB report. I would like to highlight some of the key 14 points of these reports for you this morning. 15 The Commission's overall HUB 16 participation for fiscal year 2004 was 27 percent. 17 This represents an increase of 8.6 percent in the 18 Commission's overall percentage from FY 2003. During 19 FY 2004, the Commission exceeded the goal for the 20 Professional Services category, and made a significant 21 increase of 8.96 percent in the category of Other 22 Services. Also, from FY '03 to FY '04, the 23 Commission's direct spending with minority vendors 24 increased by over 4.4 million dollars. During this 25 period, subcontracting remained about the same for 0096 1 minority vendors, but increased by over 10.6 million 2 dollars for women-owned businesses. A more detailed 3 breakdown shows that African-Americans made a 4 significant gain of 4.9 million dollars in direct 5 spending during FY '04, while Hispanics had a modest 6 increase of 73, 213 dollars. Finally, the Commission 7 ranked number one by overall HUB percentage among the 8 ten largest spending State agencies for the second 9 year in a row. These reports demonstrate that the 10 Commission is continuing to progress and to improve 11 its HUB participation. I would be happy to answer any 12 questions that you may have regarding the Commission's 13 HUB performance based on these reports. 14 CHAIRMAN CLOWE: Are there any 15 questions? 16 Joyce, I just wanted to say that the 17 Commission is very pleased to see this improvement and 18 this outstanding position, and we would love to see 19 this kind of participation continue. 20 MS. BERTOLACINI: Thank you, 21 Commissioner. And just regarding the Mentor-Protege 22 Program, I wanted to let you know, I have had some 23 conversations with some of our prime vendors about 24 participating this year. I believe DDB Dallas has 25 submitted an application to me. I haven't yet 0097 1 received it. I also will continue to explore some 2 other opportunities as they present themselves to 3 increase participation in our Mentor-Protege Program, 4 and I hope to have some more news to report to you by 5 the next meeting. 6 CHAIRMAN CLOWE: Very good. 7 MR. GREER: Mr. Chairman, I would like 8 to mention a couple of things. One is the fact that 9 HUB participation is very much watched by the 10 legislative branch. And, certainly, a number of 11 Senators and House members have asked us to keep them 12 informed on that. I did want to make you all aware -- 13 and I don't know if there is a copy in your packet -- 14 but we did send a letter to the legislature and the 15 leadership of the state in reference to the fact that 16 we did have a successful year as far as our HUB 17 participation, and that was well received. 18 CHAIRMAN CLOWE: Very good. Thank you. 19 MS. BERTOLACINI: Thank you. I think I 20 pointed out last month -- but I don't remember now -- 21 that I believe that this 27 percent actually 22 represents a ten-year high for the Commission in their 23 overall -- in the overall participation. So, of 24 course, I'm very happy about that, and hopefully we 25 can work harder in FY '05 to improve some of the areas 0098 1 that still need a little bit of work. 2 CHAIRMAN CLOWE: And I think is the 3 second year that we've been first among the ten 4 largest spending agencies. 5 MS. BERTOLACINI: That's correct. 6 CHAIRMAN CLOWE: That's great. Thank 7 you very much. 8 COMMISSIONER COX: Mr. Chairman, I 9 noticed that looking at the total expenditures, that 10 we are tenth of ten. So as we continue to control our 11 expenses and as others grow, we may fall out of the 12 top ten. 13 CHAIRMAN CLOWE: That's all right. It 14 happens. 15 MS. BERTOLACINI: And Commissioner Cox, 16 that has happened at some point in the past. There 17 was one year, I believe, where we fell down to number 18 12 in terms of our overall spending. When that 19 happens, it makes it a little more difficult to put 20 this report together, but I can adjust it. I believe, 21 that time, I had to include at top 15 spending 22 agencies to sort of see where we fell. But another 23 thing I should point out is that the total 24 expenditures for the purpose of this report only 25 includes certain object codes as determined by the 0099 1 TBPC and the Texas State Comptroller. So, of course, 2 that total number doesn't include all lottery 3 expenditures. So, again, you're right, we can fall 4 off the top ten in terms of our spending if we reduce 5 our overall spending. 6 COMMISSIONER COX: And that would not 7 necessarily be bad. 8 MS. BERTOLACINI: No, not necessarily. 9 CHAIRMAN CLOWE: Would it be fair to 10 say, the more money we spend, the more money we make 11 for the State? 12 COMMISSIONER COX: I'd like to think 13 that's the case, but I think the measure would 14 probably be, how much do we make as opposed to how 15 much do we spend. 16 CHAIRMAN CLOWE: So we want to spend 17 less, make more, and stay number one. 18 COMMISSIONER COX: There you go. 19 CHAIRMAN CLOWE: There is your job, 20 Joyce. 21 MS. BERTOLACINI: Okay. Thank you, 22 Commissioners. 23 CHAIRMAN CLOWE: Thank you. 24 Next is item five, report, possible 25 discussion and/or action on the agency's contracts. 0100 1 Mr. Deviney. 2 MR. DEVINEY: Commissioners, again, I'm 3 Lee Deviney, financial administration director. And 4 under tab five you will find the agency's report on 5 contracts having -- status report on contracts having 6 a value of 25,000 dollars or more, where these 7 contracts are in progress. If you have any questions, 8 I'll try to answer them. 9 CHAIRMAN CLOWE: Any questions? Thank 10 you, Lee. 11 Next, number six on the agenda, report, 12 possible discussion and/or action on the agency's 13 financial status. 14 MR. DEVINEY: Commissioners, I'll just 15 highlight a few numbers in this report and bring your 16 attention -- we're only two and a half months into the 17 fiscal year. First, our total transfers to the State, 18 we had some discussion when we would hit the 12 19 billion dollar mark, and we'll report that to you next 20 month. We're almost there. Total transfers to the 21 State, through the month of October, came out to 22 11.983 billion dollars. Our transfer to the 23 Foundation School Fund made on November 9th, for the 24 month of October, was 72.8 million dollars. We also 25 made one transfer to -- unclaimed prize money, to the 0101 1 Categorical Teaching Hospital account. However, that 2 was '03 -- '04 money that we transferred in '05. And 3 later on in the year, we'll be transferring more money 4 into that account and into the Department of Health 5 account. 6 Behind the orange divider page you'll 7 find a monthly budget report. There is not much of 8 significance to report this early in the year, other 9 than, you'll note, in fiscal year 2005, we've reserved 10 some budget in case we have to reduce our advertising 11 budget. As you know, there is a formula that applies 12 to the amount of money that we can spend on 13 advertising, and so we're just -- we've got a 14 contingency in case we do have to reduce our 15 advertising budget. Other than that, there is nothing 16 of significance in the budget. 17 Do you have any questions? 18 CHAIRMAN CLOWE: Are there any 19 questions? Thank you, Lee. 20 Next item, seven, report, possible 21 discussion and/or action on the lottery advertising 22 and promotions. Mr. Tirloni. 23 MR. TIRLONI: Good morning again, 24 Commissioners. For the record, I am Robert Tirloni, 25 the on-line product marketing coordinator for the 0102 1 Texas Lottery. 2 I'll give you a quick update on 3 activities of both of our ad agencies. The Scratch 4 Dance campaign aired as scheduled the week of 5 October 25th and November 1st. We did change the 6 schedule for the last week of the flight, and that was 7 due to the Mega Millions jackpot. We changed our 8 schedule and began airing the Jackpot Song spot. That 9 was tagged with the current Mega Millions jackpot 10 level. The King Group is off air at this time. They 11 will come back on air on November 22nd. That flight 12 will feature the Right Now Scratch Off campaign, and 13 that campaign will be focusing on the Commission's 14 Holiday Scratch Off games. And I do not have any 15 updates on our promotional efforts at this time. Now 16 that State Fair is over, things are somewhat quiet 17 until the spring. 18 COMMISSIONER COX: Are you going to run 19 one of the ads for us? 20 MR. TIRLONI: I don't have one to run 21 today. We can next month if you would like to see it. 22 COMMISSIONER COX: You have some pretty 23 good ones lately. 24 MR. GREER: We're going to continue to 25 monitor what goes on with those ads in reference to 0103 1 the fact that we've got some measurability now. We're 2 specifically identifying certain games, and I think 3 that it'll be interesting as we bring that information 4 to you. 5 COMMISSIONER COX: All right. 6 CHAIRMAN CLOWE: Thank you, Robert. 7 MR. TIRLONI: Thank you, sir. 8 CHAIRMAN CLOWE: The next item, eight, 9 report, possible discussion and/or action on the 78th 10 and/or 79th legislature. Ms. Trevino. Good morning. 11 MS. TREVINO: Good morning, 12 Commissioners. For the record, I'm Nelda Trevino, the 13 director of governmental affairs. 14 Several interim committee reports of 15 the 78th legislature have recently been released. And 16 it is our understanding the issuance of the interim 17 reports from the House Licensing and Administrative 18 Procedures Committee and the Senate Finance 19 Subcommittee on State contracting practices will be 20 here in the very near future. We will keep you 21 apprised of these committee recommendations when they 22 become available. 23 Prefiling of legislation for the 79th 24 legislature began November the 8th. The Governmental 25 Affairs staff will track and monitor legislation that 0104 1 could have an impact on the agency. We have provided 2 you this morning with a copy of our bill tracking 3 report that includes legislation filed thus far that 4 may impact the agency. And as you will note, there 5 are no bills that have been filed to date that 6 directly relate to the Lottery or to Charitable Bingo. 7 Lastly, as noted in your notebook material, we are 8 planning to schedule our next legislative briefing for 9 December the 15th, and we've included a copy of the 10 draft agenda in your notebook. 11 That concludes my report, and I'll be 12 happy to answer any questions. 13 CHAIRMAN CLOWE: Are there any 14 questions? 15 COMMISSIONER COX: Nelda, what can you 16 tell us about HB 103? Have you seen that bill? 17 MS. TREVINO: That is HB 103 by 18 Representative Van Arsdale and that's related to the 19 punishment for the offense of possession of a gambling 20 device, equipment, or paraphernalia. And, 21 Commissioner, I have to tell you, I have not taken a 22 direct look at that bill so I'm not for sure what the 23 language might be contained in that. 24 COMMISSIONER COX: I would like to see 25 a copy of that if you could provide it to me. 0105 1 MS. TREVINO: Absolutely. We'll get 2 that for you before you leave today. 3 MR. ATKINS: Commissioner Cox, just 4 pointing it up real quickly. Apparently, what it does 5 is it amends Section 47.06(e) of the Penal Code, and 6 makes -- and just changes the offense from a Class A 7 misdemeanor to a state jail felony. 8 COMMISSIONER COX: State jail felony. 9 Thank you. 10 CHAIRMAN CLOWE: And what is the 11 definition of a gambling device? 12 MR. ATKINS: That's not contained in 13 the body of the bill, so I defer to counsel. 14 CHAIRMAN CLOWE: I think that's 15 important. I would like to know the answer to that 16 question. 17 MS. TREVINO: We can get that for you. 18 Any other questions? 19 CHAIRMAN CLOWE: And I think one of the 20 issues is defining eight-liners as illegal gambling 21 devices, isn't it, Ridgely? 22 MR. BENNETT: I believe by being a 23 gambling device, by definition, it would be illegal. 24 But, yes. 25 COMMISSIONER COX: Well, unless it's 0106 1 qualified under the -- 2 MR. BENNETT: The exceptions. Right. 3 COMMISSIONER COX: -- exceptions, which 4 is where they try to hide. 5 MR. BENNETT: As one of the specific 6 illegal gambling devices, that's correct. 7 CHAIRMAN CLOWE: With a fuzzy toy, it's 8 a legal gambling device. If you get over that, over 9 five dollars, it becomes an illegal gambling device, 10 if my memory serves. 11 COMMISSIONER COX: Well, they don't 12 call it a legal gambling device. They call it an 13 amusement device. But it still looks like a duck -- 14 MR. BENNETT: It is an exemption to 15 the -- under the definition of gambling. But we'll be 16 happy to provide you with the definition out of the 17 Penal Code of gambling device. 18 CHAIRMAN CLOWE: Great. Anything 19 further for Nelda? Thank you, ma'am. 20 Next item, nine, consideration of and 21 possible discussion and/or action on external and 22 internal audits and/or reviews relating to the Texas 23 Lottery Commission and/or on the Internal Audit 24 Department's activities, including the fiscal year '05 25 Internal Audit Activity Plan. Ms. Melvin. 0107 1 MS. MELVIN: Good morning. Thank you, 2 Commissioners. For the record, my name is Catherine 3 Melvin, and I'm the director the Internal Audit 4 Division. 5 Before you today in your notebooks is 6 the proposed fiscal year 2005 internal audit activity 7 plan, of which I'm requesting your approval. We 8 appreciate the opportunity to provide our vision for 9 internal audit efforts at the Texas Lottery Commission 10 during the 2005 fiscal year. This document provides 11 our audit plan, as required by Professional Auditing 12 Standards and the Texas Internal Auditing Act. I 13 would like now to turn this over to the assistant 14 director of internal audit, Greg Royal, who will 15 provide some additional information about the 16 development of the plan. 17 MR. ROYAL: Good morning, 18 Commissioners. And for the record, I'm Greg Royal. 19 The internal audit division is 20 committed to being a valuable resource in improving 21 the agency's operations, in proposing a plan that 22 targets key areas yet builds in flexibility, allowing 23 the Commissioners' and management's input and special 24 requests. We budgeted time for special requests so 25 that we can be responsive to the immediate needs of 0108 1 the Commissioners and management. Audit plans act as 2 a guide for audit shops, and our plan lists proposed 3 projects that we felt should be reviewed this fiscal 4 year. 5 This year our plan was developed using 6 a comprehensive risk assessment process, and we began 7 by interviewing over 30 key staff members, asking key 8 questions on processes and potential risks in their 9 areas. We also compiled a list of concerns and used 10 input from the interviewees on ranking their 11 divisions. I would like to thank management for their 12 assistance and honesty we received while visiting with 13 them. And after our review -- or interviews, we came 14 up with a list of 60 potential projects, and we 15 whittled those down to the current eight that you see 16 on page one. And we used four factors to determine 17 the ranking of projects that we felt should be 18 included in this year's plan. 19 Potential scope of the proposed 20 projects is shown on page -- that's the eight projects 21 on page one, the scope is on page two, although this 22 could change once we actually start a project. We 23 also tied in the agency's mission statement and core 24 values to pick the projects that scored highest on our 25 risk assessment, and how the projects tie into the 0109 1 agency's core values, and this is shown on page six. 2 It is important to note that the 3 projects selected provide coverage to all the 4 divisions within the Lottery Commission. And this is 5 shown on page seven. 6 I'll turn it back over to Cathy. 7 MS. MELVIN: While the list of proposed 8 projects results from our consideration of a wide 9 ranging scope of projects, it does not address nor 10 provide coverage for all TLC components and systems. 11 And so that's important to keep in mind. Our goal is 12 to optimize our limited resources to provide 13 reasonable coverage in the areas we believe require 14 the most attention. However, we cannot, of course, 15 address every risk area. It is important for the 16 Commission and management to understand the 17 limitations of audit coverage and the risks that they 18 assume in areas not audited. We believe, however, 19 that that plan allocates the resources of the internal 20 audit division to the most important priorities and 21 risks of the agency at this point in time. We 22 definitely again want to thank management's assistance 23 and time with providing input and information that 24 brought to this plan's development. 25 And that concludes our presentation. 0110 1 We're happy to answer any questions. 2 CHAIRMAN CLOWE: Are there any 3 questions? 4 This requires a motion, doesn't it, 5 Ridgely? 6 MR. BENNETT: It does, yes, 7 Commissioners. 8 CHAIRMAN CLOWE: Is there a motion? 9 COMMISSIONER COX: Yes. I move that we 10 approve this plan. 11 COMMISSIONER OLVERA: Second. 12 CHAIRMAN CLOWE: All in favor please 13 say aye. Opposed, no. The vote is three-zero in 14 favor. 15 Anything further? 16 MS. MELVIN: No, sir. Thank you. 17 CHAIRMAN CLOWE: If you'll bring that 18 up, I'll sign it. And we'll take a short recess of 19 about ten minutes. Thank you. And next, we'll go to 20 item ten when we come back. 21 (RECESS.) 22 CHAIRMAN CLOWE: We'll come back to 23 order and take up item number ten on the agenda, 24 consideration of, possible discussion and/or action on 25 the agency's business plan. Mr. Anger. 0111 1 MR. ANGER: And I believe Reagan has 2 some opening comments for this agenda item, 3 Commissioners. 4 CHAIRMAN CLOWE: Very well. 5 MR. GREER: Commissioners, following a 6 recommendation in the Sunset Advisory Commission staff 7 report, issued in August of '02, the latter was 8 restated in April of 2004 in the staff report, the 9 agency began developing a comprehensive business plan. 10 There is five major milestones in the development of 11 the agency's business plan, and I just wanted to touch 12 on those five points for the record. 13 The first is mission, on our vision and 14 our values, and the committee was formed and the 15 Lottery's mission statement was revised as a result of 16 that. We also came forward with a vision statement 17 and core values for the agency and identified them now 18 they're in writing. 19 The second aspect of the plan was the 20 business plan with a look at the structure, and that 21 we decided to move out in the element of outside 22 sources and pulled in a consulting services contract 23 to assist in the development of the plan. Mike Anger 24 was named the project manager. He has done a great 25 job on helping to begin the research and development 0112 1 process and put the structure in place to make the 2 comprehensive business plan and request for proposals 3 part of what we were doing, and also in obtaining the 4 consultation services to assist the agency in the 5 development of the plan. 6 In reference to that, number three is 7 that the consulting services and staff development 8 planning process moved forward and the agency entered 9 into a contract with Doctor Gary Cadenhead of the 10 University of Texas on February the 9th, 2004, to 11 assist executive management and staff in developing 12 the final plan. The executive management and staff 13 participated in three day-long planning sessions and 14 several follow-up meetings and drafting sessions to 15 develop the plan. And I think that was a very 16 positive thing that we did, and I know that the 17 chairman was able to participate in some of that and 18 think you may have some comments along how that helped 19 us develop the plan, and I was very pleased with that 20 process. 21 The fourth aspect of it was that the 22 business plan work group came forward, and we had a 23 commission meeting so that we could include each of 24 you in the process and to help develop the draft plan. 25 And it was presented to you for consideration and 0113 1 comment at a September the 8th Commission meeting 2 dedicated to review. 3 The final aspect of it was that the 4 final aspect of draft development came forward 5 following that meeting, staff went back and worked on 6 revisions based on your input and assistance. As far 7 as the consulting team, they came forward with ideas 8 that they had, and we prepared the draft that we're 9 presenting to you today, which is before you. 10 Mike is going to walk through some 11 changes that were made most recently, and then we'll 12 be able to discuss it. But we're prepared today to 13 put this into its final format and ask for your 14 approval. 15 CHAIRMAN CLOWE: Very good. 16 MR. ANGER: Good morning, Chairman and 17 Commissioners. For the record, my name is Michael 18 Anger and I'm the lottery operations director. 19 Commissioners, there are a couple of 20 documents in front of you. The first is a draft of 21 the business plan, including changes since the 22 September 8th meeting since you last saw that 23 document. Additionally, there is also a separate 24 sheet that will have highlighting on it. You should 25 have two pages, and I'm going to start with that 0114 1 document first. There are basically three areas where 2 we made substantive changes as a result of our 3 conversations during the September eighth work group 4 meeting to discuss the business plan. The first 5 occurred on page nine of the draft document that you 6 have in your hands, and that was in the Products 7 section. The original draft of the plan contained 8 fiscal year 2004 forecast sales, and we updated that 9 related to the development of the plan and the 10 schedule that we're currently on to reflect fiscal 11 year 2005 year sales. And I will walk you through 12 those. 13 On that page, on page nine, Instant 14 Games, the last line was changed to read, the fiscal 15 year 2005 sales forecast for instant games is 2.6 16 billion dollars. 17 For Lotto Texas, the fiscal year 18 2005 -- 19 COMMISSIONER COX: Michael, did I get 20 that right? You're changing the word "goal" to 21 "forecast" and that's the change? 22 MR. ANGER: The change is, we updated 23 from -- we had 2004 projected sales forecasts in the 24 original draft of the plan, and these are 2005. So we 25 basically updated the plan to reflect 2005, based on 0115 1 the fact that we're now releasing the plan at this 2 time. 3 COMMISSIONER COX: My book says "goal." 4 You said "forecast." 5 COMMISSIONER OLVERA: The handout that 6 has the outline says -- 7 CHAIRMAN CLOWE: You beat me on that. 8 COMMISSIONER COX: Okay. 9 COMMISSIONER OLVERA: The handout says 10 "sales" and the book says "forecast." 11 MR. ANGER: Yes. And I'm sorry -- 12 COMMISSIONER OLVERA: The handout says 13 "forecast," and the book says "goal." 14 MR. ANGER: -- I read to you from the 15 draft document. And I can walk you through -- 16 CHAIRMAN CLOWE: No. He's good. 17 COMMISSIONER COX: I was just on the 18 wrong page. 19 MR. ANGER: All right. Lotto Texas, 20 the last line of that paragraph was updated to read, 21 the fiscal year 2005 sales goal for Lotto Texas is 440 22 million dollars. 23 Texas Two Step, the final line -- 24 CHAIRMAN CLOWE: And just -- this begs 25 the question. Commissioner Cox, I think, just made 0116 1 the point. What is the difference in the word 2 "forecast" and "goal"? You've used forecast in the 3 first -- sales forecast, in the first change you gave 4 us, and now you're using Lotto Texas sales goal. 5 MR. ANGER: Yes. And I apologize. The 6 draft document that I provided to you here, the first 7 line says forecast, but in the plan document, each 8 line reads goal. And that is a goal. That's a 9 projected forecast goal for sales for each of those 10 different areas. So the plan -- the final draft of 11 the plan will read "goal" on every line. 12 COMMISSIONER COX: This that I was 13 reading says "goal," and goal is correct? 14 MR. ANGER: That is correct, 15 Commissioner. 16 CHAIRMAN CLOWE: Then this addendum 17 that you gave us that's got the yellow highlighter is 18 incorrect? 19 MR. ANGER: That's correct. I 20 apologize for the confusion on that. 21 The Texas Two Step final line will 22 read, the fiscal year 2005 sales goal for Texas Two 23 Step is 40 million dollars. 24 The Pick 3 final line will read, the 25 fiscal year 2005 sales goal for Pick 3 is 290 million 0117 1 dollars. 2 Cash 5 will read, the fiscal year 2005 3 sales goal for Cash 5 is 100 million dollars. 4 The Mega Millions -- there is a line 5 that is just above the Megaplier line there that 6 reads, the fiscal year 2005 sales goal for Mega 7 Millions is 225 million dollars. 8 And then the final line of that 9 paragraph will read, the fiscal year 2005 sales goal 10 for Megaplier is 55 million dollars. 11 And, finally, in that section -- I'm 12 sorry. I just read that line to you. 13 Those are all the changes in the 14 Products section. The next section that contained 15 revisions was related to action plan number two, and 16 that's tabbed in your booklet. And that's going to be 17 on page 16. And if you'll look at the bottom of the 18 second paragraph in that action plan, and the action 19 plan is, implement internal vendor monitoring program 20 to identify potential financial or reputation risks 21 for business disruption. The final line in paragraph 22 two has been modified. The original reading of that 23 line read, a zero tolerance policy will be adopted and 24 penalties imposed for violations, including monetary 25 forfeitures, license revocation, and/or contract 0118 1 termination. And the draft document that you have has 2 been revised to read, a zero tolerance policy will be 3 adopted and contract sanctions imposed for breaches of 4 the contract, including the assessment of monetary 5 sanctions, liquidated damages, and/or contract 6 termination. 7 MR. GREER: And Commissioners, 8 that's -- this correction aspect is noted in your book 9 under the tabs. Like you have the handout on the 10 other one, this is in your notebook. 11 MR. ANGER: And the final section that 12 obtained updates is also in your Commissioners 13 notebook, and that has to do with the next action 14 plan, which is action plan number three. Action plan 15 number three, originally titled, assess cost/benefit 16 of voluntary Sarbanes Oxley adoption, was modified to 17 more broadly capture the intent of the review in this 18 action plan. The new action -- 19 COMMISSIONER COX: Michael, I need to 20 get on the same page you are. Okay. I think I've got 21 it here. Action plan number three, assess 22 cost/benefit of voluntarily -- okay. Thank you. 23 MR. ANGER: Okay. The new action plan 24 title has been modified to read, assess cost/benefit 25 of voluntary adoption of private-sector corporate 0119 1 governance practices. And throughout that action plan 2 and in the marked-up version that is contained in your 3 Commission meeting notebook, it will reflect all the 4 changes. But specifically, that action plan has been 5 changed throughout to remove references to 6 Sarbanes Oxley and more specifically tie into private 7 sector corporate governance practices, as far as that 8 review. And that completes all of the substantive 9 changes that have occurred since our meeting on 10 September 8th. I will note to you that action plan 11 number six regarding a bingo annual report was an item 12 of extensive discussion, but ultimately we landed on 13 not making any changes to that plan since the time we 14 reviewed it on September 8th. 15 That concludes my comments. I would be 16 glad to answer any questions that you have. 17 CHAIRMAN CLOWE: Are there any 18 questions? 19 Ridgely, has legal embraced this 20 document? 21 MR. BENNETT: It has been reviewed by 22 the legal department, yes, it has. 23 CHAIRMAN CLOWE: And it meets all the 24 requirements insofar as your department is concerned? 25 MR. BENNETT: There are no statutory 0120 1 requirements for the business plan because there is no 2 statutory requirement for a business plan. But we 3 think that it would pass if challenged. 4 CHAIRMAN CLOWE: Very good. Does this 5 require a motion on the behalf of the Commission? 6 MR. BENNETT: It does not because you 7 are not statutorily required to adopt the plan. 8 However, if it's the Commission's desire, you most 9 certainly may have a motion to approve the plan. 10 CHAIRMAN CLOWE: Commissioners, what is 11 your pleasure? 12 COMMISSIONER COX: They've done an 13 awful lot of work. I think that if we can 14 appropriately take action on it, we should. 15 CHAIRMAN CLOWE: Well, I believe that 16 we're advised that we can, so in light of that, I will 17 ask, is there a motion? 18 COMMISSIONER COX: I move that we 19 approve this plan as presented. 20 COMMISSIONER OLVERA: Seconded. 21 CHAIRMAN CLOWE: All in favor, please 22 say aye. Opposed, no. The vote is three-zero in 23 favor. 24 Thank you, Michael, and everyone who 25 participated in the development of this document and, 0121 1 more importantly, the implementation and carry-out of 2 the plan. And we look forward to seeing great 3 results. 4 MR. ANGER: Thank you, Commissioners. 5 CHAIRMAN CLOWE: Next item, 11, report, 6 possible discussion and/or action on the services 7 provided by Ipsos Reid. Mr. Fernandez. Good morning. 8 MR. FERNANDEZ: Good morning, 9 Mr. Chairman and Commissioners. For the record, my 10 name is Mike Fernandez, and I'm the acting marketing 11 director. 12 And on this particular item, 13 Mr. Chairman and Commissioners, we would like to pass 14 this item and bring it back before the Commission at a 15 later date. 16 CHAIRMAN CLOWE: Any objection? 17 COMMISSIONER COX: No, sir. 18 CHAIRMAN CLOWE: Thank you. 19 The next item, number 12, report and 20 possible discussion on the agency's demographic study 21 of lottery players. Mr. Fernandez. 22 MR. FERNANDEZ: Again, good morning, 23 Commissioners. As I'm sure each of you are aware, the 24 executive director of the Commission is required by 25 law to every two years conduct or have conducted a 0122 1 demographic study. And this study would be done prior 2 to each legislative session. And then it would then 3 be presented to the Commission, to the Governor's 4 Office and to the legislature. The agency prepared 5 and released an RFP earlier this year, and although we 6 did receive some interest in terms of discussions with 7 potential bidders, we failed to receive any bids. 8 Okay? So at that time, we began looking for -- for 9 someone that could -- that we could engage to perform 10 this demographic study. We entered into some 11 discussions with the Earl Survey Research Center Lab 12 with Texas Tech University, and we have concluded that 13 by entering into an interagency agreement to -- for 14 the conduct of this demographic study. It's our 15 understanding, as part of that interagency agreement, 16 that that will be completed, we should have that final 17 report by December the 20th. And certainly, 18 immediately after that, I'm sure we will present that 19 to the management team and to the Commission. 20 CHAIRMAN CLOWE: Questions? 21 COMMISSIONER COX: Well, if this is 22 within the agenda, this is not the first time that 23 we've had an RFP go out there that attracted no bids? 24 MR. FERNANDEZ: That's correct. 25 COMMISSIONER COX: Are we too hard to 0123 1 deal with? What do you think is going on there, Mike? 2 MR. FERNANDEZ: Well, I think in this 3 particular instance, it might have been timing of 4 other events that were occurring in the firms that -- 5 that do this. It's my understanding that 6 conversations with those that had shown an interest 7 when we spoke with them, that they had other things 8 that they were engaged in and couldn't take the time. 9 COMMISSIONER COX: Well, the UT School 10 of Communication has been doing this for years and 11 they didn't even bid. 12 MR. FERNANDEZ: No, they did not. No, 13 sir, they did not. I think the other thing that we 14 can do, and we've had these discussions -- staff has 15 had the discussions regarding maybe expanding the 16 breadth of the distribution of that. There are some 17 other folks like Steve Murdock, who was formerly at 18 Texas A&M University, he is the state demographer now 19 at UTSA, they do that kind of work. And in the course 20 of looking at -- at prospective firms to do this, we 21 spoke with him. And, again, just the timing of that. 22 I think that they would be very interested in doing 23 that, and I'm sure that there are other research 24 centers out in the universities and perhaps in private 25 that would be -- but I think just the timing at the 0124 1 end, that they were engaged in other work. 2 COMMISSIONER COX: So it's due in time 3 to go to the next legislative session? Is that the 4 due date? 5 MR. FERNANDEZ: Yes, sir. 6 COMMISSIONER COX: We didn't put the 7 RFP out until when? 8 MR. FERNANDEZ: Well, the original bid 9 went out -- was issued October the 4th. 10 COMMISSIONER COX: And I encourage you 11 to try to get those bids out much sooner than that. 12 You know, I don't know what the date as of which the 13 study is supposed to be done, if there is any 14 particular date, but if it's now September 30th and we 15 could move it back to June 30th and put that RFP out 16 in April. 17 MR. FERNANDEZ: Absolutely. I agree 18 wholeheartedly. And the fact is, after this has -- 19 after we come through the session, that might be an 20 appropriate time to take a look at that and see if 21 there are some things that we would like to 22 restructure or are there other things that we would 23 like to identify as the course of the study, to go 24 ahead and put it out then. You know, I don't think 25 that there is any reason that we can't. 0125 1 COMMISSIONER COX: Good. 2 CHAIRMAN CLOWE: Anything further? 3 MR. FERNANDEZ: No, sir, not on that. 4 CHAIRMAN CLOWE: Thank you, sir. 5 Next is item 13, report, possible 6 discussion and/or action on the market research 7 services provided by the University of Texas. 8 MR. FERNANDEZ: Good morning. Again, 9 this is an informational item. And this is to inform 10 you -- I know Commissioner Cox addressed this earlier, 11 as did our director. But we have entered into the 12 phase two agreement with Doctors Jarrett and Huff with 13 the University of Texas, and this is phase two of 14 estimating market potential and constraints and 15 approaches for enhancing lottery participation. They 16 are currently working, and that study should be 17 concluded -- fully concluded by next summer, in 18 August. 19 The first -- the first phase of that is 20 a detailed review of the methodology and statistical 21 results and recommendations regarding the matrix 22 study. So as soon as -- and we hope to -- we hope to 23 have that report probably either late January or early 24 February, depending on how the holiday schedules play 25 out. But we're looking forward to seeing those 0126 1 results. 2 CHAIRMAN CLOWE: Any questions? Thank 3 you, Mike. 4 I have an appearance form signed by 5 Ms. Nettles. Ms. Nettles, you indicate you would like 6 to speak on advertising and promotion of lottery 7 sales? Is that correct? 8 MS. NETTLES: And various other things, 9 yes. 10 CHAIRMAN CLOWE: That was item number 11 seven, I believe, and we passed over that. Do you 12 want to make your comment now? 13 MS. NETTLES: It doesn't matter. I'll 14 wait or -- because I have several comments I want to 15 make, so I'll wait. 16 CHAIRMAN CLOWE: All right. Would 17 you -- if you have anything in addition to advertising 18 and promotion, and you have point of sale, and then 19 you have various comments, would you list what those 20 are so we could understand what your comments are 21 going to cover? 22 MS. NETTLES: Yes, sir. For the 23 record, my name is Dawn Nettles. And when I filled 24 out that form, I called it that, because I had a 25 comment to make here. 0127 1 The Texas Lottery, as you know, 2 produces a point of sale piece, and y'all were talking 3 about that earlier, and I thought, well, this is the 4 perfect time to mention it. This is a point of sale, 5 called a sell-in sheet, that has just recently been 6 printed with regard to game number 507, Holiday 7 Million Wishes. And I had a problem with it because 8 they printed -- if it's like always, they printed like 9 17 million of these, and these are what retailers 10 receive, and the clerks read these heavily. For those 11 who do -- who do any selling, who try to sell, they 12 read this for information and they pass this 13 informational along to the players. This particular 14 sheet states that each pack has two 40-dollar and two 15 70-dollar winners in each pack, and the retailers live 16 by that. 17 The website, if you go to the website 18 and just look at the page on the website for the 19 graphics on it, it doesn't say anything about that. 20 But if you do the -- if you press on print the sell-in 21 sheet on your website, then it comes up and it says, 22 there is one 40-million dollar and one 70-million 23 dollar -- or I'm sorry. One 40-dollar winner and one 24 70-dollar winner in each pack. And that's a -- a very 25 major point to me, because people are paying 30 0128 1 dollars for these tickets and this information is 2 incorrect that's out there. And so I just wanted to 3 call this to your attention and ask you which is 4 correct and why the retailers are displaying this with 5 incorrect information on it. And that's what I meant 6 when I wrote that on there. 7 CHAIRMAN CLOWE: Reagan, would you 8 follow up on that? 9 MR. GREER: Yes, sir. We've addressed 10 this issue. It came to our attention, and we 11 immediately pulled those sheets that were -- that were 12 incorrect and put the correct sheet out. It was a 13 mistake, but it's been worked through. 14 MS. NETTLES: Commissioner Clowe, 15 yesterday on -- from Dallas to Austin -- I thought I 16 said it backwards -- I stopped at a number of stores 17 and I did still find this sheet out there. I saw one 18 or two stores that had a black and white version of 19 this that did say one that was corrected. But I 20 identified and picked up a number of these sheets 21 myself. 22 MR. GREER: We'll look at that. The 23 instruction was given to pull the sheets, and I know 24 the GTECH reps are in the process of doing that. 25 MS. NETTLES: And as I went through 0129 1 those stores, I was really amazed, too, because they 2 could -- some of the stores couldn't even find their 3 packs of information that GTECH has, that the GTECH 4 reps have, their envelopes and their sign-in sheets, I 5 couldn't even find the sign-in sheets in a number of 6 those stores. The personnel had no idea that the rep 7 was ever supposed to sign anything, and that was -- 8 because I spent a lot of time doing this yesterday in 9 the stores. But I still want to comment later on 10 another subject. 11 CHAIRMAN CLOWE: Very good. Thank you. 12 The next item, 14, report, possible 13 discussion and/or action on the agency's contract 14 management activities, including contract compliance 15 functions. Mr. Grief. 16 MR. GRIEF: Good morning, 17 Commissioners. The purpose of this agenda item is to 18 provide you with an update regarding the agency's 19 efforts of contract management and contract 20 compliance. 21 First and foremost, I want to assure 22 the Commission that appropriate attention is being 23 given to these very important issues, and that our 24 agency indeed does have a very active and effective 25 contract management and compliance monitoring program 0130 1 in place. The responsibility of contract management 2 and contract compliance crosses divisional lines, and 3 it involves staff throughout the agency at all levels. 4 We actively manage all of our contracts, regardless of 5 the dollar amount of any particular contract. And the 6 primary responsibility for managing the contract and 7 monitoring lies in the administering division who is 8 actually using the services provided by that 9 particular contract. For those very large contracts, 10 such as our lottery operator contract or the instant 11 ticket services contract, aspects of contract 12 management can involve multiple divisions, crossing 13 over divisional lines, and multiple staff within the 14 agency. 15 In addition, we're constantly reviewing 16 and evaluating the effectiveness of our contract 17 management and compliance efforts. We have just 18 recently put together an agency work group whose focus 19 will be to comprehensively review the agency's overall 20 procurement process. The initial phase of that work 21 group's review will be to focus on our agency's 22 process for issuing requests for proposals or RFPs. 23 The group will work through this issue and ultimately, 24 we hope, make recommendations for improvements to both 25 the pre-issuance of the RFP and the post-issuance of 0131 1 the RFP processes. We have included subject matter 2 experts from various divisions to serve on this work 3 group, and the scope of their work will also include a 4 consideration of all relevant rules, statutes, and 5 best practices, including a best practices report that 6 has recently been issued by the Texas Building and 7 Procurement Commission, as well as a progress report 8 that has recently been issued by the Senate Finance 9 Subcommittee on State Contracting Practices. Almost 10 every division in the agency has staff with contract 11 compliance job-related duties. In addition, we have 12 certain designated employees within the agency whose 13 primary focus is on contract compliance. For example, 14 within the Lottery Operations Division, we have a 15 lottery operator liaison staff person who focuses 16 primarily on contractual compliance issues related to 17 the Lottery operator contract. And we also have the 18 contract compliance coordinator in the Financial 19 Administration Division whose duties include 20 maintaining a central repository of all contracts and 21 contract issues for the agency. This repository 22 includes a master contract file that is created when a 23 contract is originally signed, and compliance 24 documentation that is gathered over time from all the 25 administering divisions impacting that particular 0132 1 contract. Our coordinator also performs an annual 2 lobbyist ethics review on our major vendors. 3 Components of our major contracts, such as the Lottery 4 operator contract or the instant ticket services 5 contract, are monitored on an ongoing basis, and we 6 have quarterly meetings, which are attended by 7 division representatives, to discuss relevant issues 8 that have come up regarding our major contracts. 9 Also, we provide the Commission with a monthly 10 contracts report in your notebooks each month, and 11 that's presented for your review and any questions can 12 be answered at each Commission meeting. We have found 13 that when State agencies encounter difficulty in 14 managing contracts, the problems frequently seem to 15 center on issues such as double billing, or inaccurate 16 invoice processing. And I believe our agency has 17 adequate controls in place to address those issues. 18 For example, the Financial Administration Division has 19 specific procedures and processes in place to preclude 20 double billing by our vendors. In addition, we have 21 designated staff in the Marketing Division to closely 22 review the advertising invoices that come in, by far, 23 the most complex billing that our agency deals with. 24 And finally, as a part of our agency's external audit 25 process, auditors test certain contract payment 0133 1 controls. And they may review the procedures related 2 to contract payments as a part of the required annual 3 financial audit. 4 And that concludes my overview this 5 morning and I or any member of the staff would be 6 happy to answer any questions you might have. 7 CHAIRMAN CLOWE: Are there any 8 questions? 9 Ridgely, your presentation in the next 10 item on the agenda is on basically the similar 11 subject, is it not? 12 MR. BENNETT: This item is on an 13 amendment to the GTECH contract, specifically, an 14 amendment to Section 3.30 of the contract that relates 15 to contract compliance reports that GTECH is required 16 to -- 17 CHAIRMAN CLOWE: So it's more specific 18 in nature? 19 MR. BENNETT: It is more specific in 20 nature. 21 CHAIRMAN CLOWE: But it requires 22 Commission oversight? 23 MR. BENNETT: That's correct. 24 CHAIRMAN CLOWE: And I would like to 25 make a comment at this point, Gary, to your 0134 1 presentation, and I think it applies to Ridgely's 2 presentation that will be next. I appreciate the 3 problems that you've pointed out, and I'm sure they 4 are real and you're correct in that. But on the other 5 hand, on my time on this board, the criticism of this 6 agency -- and I've been involved in it each time -- 7 has been whether or not the Executive Director had the 8 authority to execute a contract and whether, when a 9 contract was made, it was within the scope of the 10 agency's authority and its fiscal capability. And, 11 again, referring back to the current Sunset review, I 12 think there is an underlying desire on the part of the 13 Sunset Commission that the Commissioners be more 14 involved in oversight, on a policy basis, the 15 execution and operation of contracts more in the 16 future than they have in the past. Would you agree or 17 disagree with that? 18 MR. GRIEF: Completely agree. 19 CHAIRMAN CLOWE: And I think that those 20 are the things that come to mind when we talk about 21 your report here, what you had to say. It's -- the 22 things that you mentioned to me are more basic and 23 almost mechanical, that a good business organization 24 won't allow double billing, and it would never occur 25 to me that this agency would pay twice for a service 0135 1 or a tangible product. I think we're better business 2 people than that. I hope I'm never proven wrong. 3 But these other things that I have 4 mentioned are, to a certain extent, judgmental or 5 maybe a perception issue enters into it. And I think 6 that by having the Commissioners more involved and 7 asking for their oversight, when you and Reagan -- and 8 Reagan has so much authority as Executive Director of 9 this agency, I think it goes beyond what I've seen in 10 other agencies, using these Commissioners as an 11 oversight group, a policy sounding board, if you will, 12 I think is where I believe the Sunset Commission wants 13 us to head and where you should expect your 14 Commissioners to lead. And I would just like to say 15 this so that the flavor of my thinking is entered into 16 this report that you've just made, and I invite the 17 Commissioners to give their comments on it. These are 18 big contracts, they're important contracts, and 19 they're long contracts, particularly in the case of 20 one. Although I know there is a 30-day cancellation, 21 that would be an interesting roller coaster to get on. 22 And, you know, we want to do these things right and we 23 want to maintain them through their lives and execute 24 them correctly. And then we want to be proud of the 25 period that we've been in contract with the vendor, 0136 1 and we want to be treated fairly, and we want them to 2 be treated fairly. So I just want the flavor of 3 Commissioner involvement and participation where I 4 understand the authority in many cases lies with the 5 Executive Director to issue, to consummate, and to 6 create contracts, and then the Commissioners are an 7 appeal body and have that oversight. But I think, as 8 we go along, you've got a very proactive, interested 9 board here that you ought to be using. 10 COMMISSIONER COX: That has been one of 11 my -- perhaps disappointments is too strong a word, 12 but the contractual process is one with which I'm -- 13 have a lot of experience, and yet we're precluded from 14 participating at any time when we can be constructive. 15 CHAIRMAN CLOWE: Well, help me 16 understand that. Can't you be called on for counsel 17 and advice and guidance by the Executive Director? 18 COMMISSIONER COX: I don't know where 19 the line is, but the legal department has made it very 20 clear to me that there is a line. 21 CHAIRMAN CLOWE: Well, I understand, I 22 think, that the Commissioners cannot deliberate and 23 give the Executive Director directions. But my 24 experience has been that I've been briefed by the 25 Executive Director and there have been discussions and 0137 1 I've had the opportunity to give some input. And I'm 2 maybe not searching for that line as precisely as you 3 are. 4 COMMISSIONER COX: Well, I wasn't 5 searching for it. It was thrust upon me. 6 CHAIRMAN CLOWE: I can't imagine we 7 would do that. 8 COMMISSIONER OLVERA: Could we clarify 9 that, though, because my experience has been sort of 10 the Chairman's experience in that I am updated or 11 briefed during various stages of contractual 12 negotiation and I've not yet received any notification 13 that that is improper. 14 MR. BENNETT: The State Lottery Act 15 gives contracting authority to the Executive Director. 16 It also says that the -- that a proposer, if they are 17 not happy with the decisions made by the Executive 18 Director, may appeal to the Commission. And so at 19 some point in time you get -- if the Commission is 20 integrally involved in the procurement process, then 21 they are no longer an appeals board; they've more or 22 less precluded themselves from doing that. So while 23 there is no bright line, there is a fuzzy area of how 24 much involvement the Commission can -- 25 CHAIRMAN CLOWE: See, that's where I 0138 1 think Commissioner Cox, because of his expertise and 2 his experience, would really like to roll up his 3 sleeves and get into it. But if he does that, then he 4 is disqualifying himself as an appellate body member 5 if there is an appeal. Am I understanding that 6 correctly? 7 COMMISSIONER COX: That's the way I 8 understand it. 9 CHAIRMAN CLOWE: And I think that's the 10 way I understand it, but I'm not as eager to get into 11 the detail as you are, or don't have the expertise, 12 maybe both, and that's why I want the Commissioners to 13 be called on for their counsel and advice and guidance 14 in this process. Gary has assured us that the process 15 is being executed well in the agency, but I didn't 16 hear anything about Commissioner oversight and 17 involvement. Now, you know, we may have an 18 opportunity to discuss this with the Sunset 19 Commission, if it's the desire of the Commission at 20 some point in time, but if we get involved in these 21 contracts with the Executive Director, then we're 22 going to lose that impartial appellate status. And I 23 think they're going to hold us responsible either way. 24 COMMISSIONER COX: And I think that the 25 important point to me is that they understand that we 0139 1 are precluded from participating in this process in a 2 way that we might choose, and that the responsibility 3 be appropriately placed for the things that we're 4 doing. 5 CHAIRMAN CLOWE: That's a good point. 6 I guess my answer to that is, I think we are held 7 responsible ultimately as board members by anybody 8 that chooses to have an opinion on that, don't you? 9 COMMISSIONER COX: I think so. That 10 would be the natural inclination. 11 CHAIRMAN CLOWE: It's like the 12 corporation's CEO may lose his job, but the board is 13 responsible. I feel that responsibility, and that's 14 why I have been involved to the extent that I have. 15 And I understand what you say is troubling to you, and 16 I think, legally, we are precluded from getting into 17 the detail that Reagan gets into with staff. And I 18 guess, Ridgely, it would take a change in the Lottery 19 statute to change that. 20 MR. BENNETT: To some extent. Or to 21 some extent, if you want to segregate out one 22 Commissioner to not be part of the appeal process, 23 that's also a possibility. What I would like to do is 24 to do more legal research on the issue and provide the 25 Commissioners with legal advice outside of an open 0140 1 meeting regarding this issue. 2 CHAIRMAN CLOWE: We could do that? 3 MR. BENNETT: Yes. 4 CHAIRMAN CLOWE: I think this is a 5 really good subject to pursue, and if nothing happens 6 in the way of change, clarification would be 7 excellent. 8 COMMISSIONER OLVERA: We do need to 9 establish what that line is, Ridgely. In other words, 10 we're forced to be advocates to a limited extent and 11 yet then switch hats and then be judges. So we need 12 to know what that line is. 13 MR. BENNETT: I'll work on that for 14 you. 15 CHAIRMAN CLOWE: Are you comfortable 16 with that? 17 COMMISSIONER COX: Yes, sir. 18 MR. GREER: I would like to make a 19 couple of comments on that. First off, to just 20 reinforce my perspective, how much I welcome your 21 input and totally support the recommendation. I have 22 followed legal's advice and tried to keep you updated 23 as best I could to get up to the line and will 24 continue to do that. I appreciate your involvement in 25 the process and realize the magnitude of some of these 0141 1 contracts and the effect they can have on the agency. 2 So I will continue to be proactive in keeping you 3 updated on that, with legal at my side to be sure we 4 don't cross that line, and yet give you as much 5 information as possible. 6 COMMISSIONER COX: And let me emphasize 7 that the reason I know that there is a line is because 8 management was reaching out to me to involve me in the 9 process and the legal department said, no, you have to 10 step back. 11 CHAIRMAN CLOWE: They were calling on 12 you as a resource, and I know a valuable one, and I 13 can understand what legal told you. I've been told 14 that myself, so I think we understand that situation. 15 Okay. Well, let's pursue this for another meeting. 16 And, Gary, that's an attempt on my part to help you in 17 what you're doing and your role and to be supportive. 18 I've not offered it up for anything other than that 19 sense. 20 MR. GRIEF: Understood. 21 CHAIRMAN CLOWE: Okay. Commissioners, 22 with your approval, I would like to deviate from the 23 public agenda and defer Ridgely's presentation and 24 other public matters until after the executive 25 session, in light of the fact that Commissioner Olvera 0142 1 needs to leave the building, I think, about 12:30 this 2 afternoon. Is that all right? 3 COMMISSIONER COX: Yes, sir. 4 CHAIRMAN CLOWE: At this time, I move 5 the Texas Lottery Commission go into executive session 6 to deliberate the duties and evaluation of the 7 Executive Director and/or Deputy Executive Director, 8 Internal Audit Director, and Charitable Bingo 9 Operations Director, pursuant to Section 551.074 of 10 the Texas Government Code. 11 To deliberate the duties of the General 12 Counsel and Security Director pursuant to Section 13 551.074 of the Texas Government Code. 14 To receive legal advice regarding 15 pending or contemplated litigation and/or to receive 16 legal advice pursuant to Section 551.071 (1) (A) or 17 (B) of the Texas Government Code and/or to receive 18 legal advice pursuant to Section 551.071 (2) of the 19 Texas Government Code, including but not limited to: 20 Patsy Henry versus Texas Lottery Commission 21 Sandy Surber et al versus GTECH Corporation 22 Linda Cloud versus Mike McKinney et al. 23 James T. Jongebloed versus Texas Lottery Commission 24 Steven W. Hieronymus et al versus Texas Lottery 25 Commission and GameTech International, Inc. 0143 1 Felipe Chavez versus Texas Lottery Commission and 2 Sergeant Marvin J. Collins 3 Don McCaffety verus Texas Lottery 4 Employment law, personnel law, procurement and 5 contract law, evidentiary and procedural law, and 6 general government law. 7 Is there a second? 8 COMMISSIONER OLVERA: Second. 9 CHAIRMAN CLOWE: All in favor, please 10 say aye. The vote is three-zero. The time is 11 11:22 a.m. Today is November the 16th, 2004. 12 (EXECUTIVE SESSION.) 13 CHAIRMAN CLOWE: The time is 1:14 p.m., 14 the Commission is out of executive session. Is there 15 any action to be taken as a result of executive 16 session? If not, let's move on to item 15, 17 consideration of, possible discussion and/or action on 18 the lottery operator contract, including approval of 19 an amendment to the operator -- to the lottery 20 operator contract and/or whether the negotiation of 21 the operator's contract in the open meeting would have 22 a detrimental effect on the Commission's position in 23 negotiations of the lottery operator contract. 24 Commissioner Cox, in the past it's been 25 generally the Commission's policy to deal with issues 0144 1 like this in the open meeting. Do you have any 2 feeling differently from that at this time? 3 COMMISSIONER COX: Not at all. 4 CHAIRMAN CLOWE: Then we're ready to 5 take up item number 15. Mr. Bennett. 6 MR. BENNETT: Commissioners, I believe 7 Mr. Grief is going to lay out this item for the 8 Commission. 9 MR. GRIEF: Thank you, Ridgely. And 10 Catherine Melvin is also going to assist me. 11 Commissioners, this morning -- or this 12 afternoon, rather, now, we're proposing an amendment 13 to the GTECH contract for lottery operations and 14 services. The contractual issue addressed by the 15 proposed amendment that we have before you to today 16 relates to a section of the contract that requires 17 GTECH to provide the Lottery with an annual contract 18 compliance report, to be performed at the expense of 19 GTECH by an independent accounting firm. Catherine 20 Melvin, our internal audit director, is here to share 21 some more information with you about this requirement 22 and the proposed amendment. 23 MS. MELVIN: Commissioners, as 24 Mr. Grief has stated, the current contract with -- 25 requires an annual compliance review to be performed 0145 1 at the expensive of GTECH and submitted to the Texas 2 Lottery Commission. It is this auditor's opinion that 3 the provision as it currently reads is very broad and 4 provides limited ability for the agency to assure the 5 useful, appropriate, or timely information as 6 reported. Further, the nonspecific, broad language of 7 the current provision is challenging for the agency to 8 enforce. The amendment proposed today is intended to 9 strengthen the agency's position in overseeing and 10 monitoring this contract. It is the agency's intent 11 to establish a continuous monitoring effort which will 12 supplement and enhance existing monitoring efforts 13 regarding GTECH's compliance with the contract. 14 Quarterly reports focused on sections of the contract 15 at a time will provide the agency with timely and more 16 in-depth information to help assess compliance and 17 address any issues as they are discovered. So that 18 will be a change from what we've had before. Internal 19 audit is fully supportive of the changes. We have 20 worked with General Counsel, management, and the 21 vendor in crafting these provisions to ensure the 22 agency's interests are best protected. 23 MR. GRIEF: Commissioners, from 24 management's perspective, this proposed amendment will 25 accomplish several things. First, while we're aligned 0146 1 with the statewide goals relating to contract 2 compliance, we believe that this activity will 3 actually assist the agency in a stricter scrutiny of 4 contract compliance related to the GTECH contract. 5 Also, the proposed methodology, we 6 believe, will provide us with some meaningful data. 7 And from that data we will want to sit down with the 8 lottery operator, GTECH, and determine if certain 9 areas of the contract are being addressed 10 appropriately. 11 Third, we think the proposed amendment 12 will allow for revisions to the scope and the schedule 13 of the work by the independent firm, based on work 14 previously done in other reviews or audits, such as 15 the SASS 70 audit, the security audit, the financial 16 audit, as well as other work that might be performed 17 by this independent accounting firm. And that will 18 allow the agency to fully leverage the services that 19 are being provided under this agreement. 20 Fourth, by changing the reporting time 21 frame, as Catherine mentioned, from annually to 22 quarterly, we believe that management will be better 23 able to respond to issues found in the review in a 24 more timely and in a more effective manner. 25 And finally, by acknowledging that a 0147 1 review of the magnitude contemplated in this amendment 2 may indeed stretch well beyond a full year, we believe 3 that the independent firm will be able to devote the 4 necessary time and resources to those parts of the 5 contract that the agency believes are the most 6 critical to our success. 7 Catherine and I will be happy to answer 8 any questions you may have about this. 9 CHAIRMAN CLOWE: Are there any 10 questions? 11 COMMISSIONER COX: Gary, I heard you 12 say "accounting firm," and then I heard you say 13 "independent firm." The document here says 14 "independent firm." Is there a presumption that this 15 will be an accounting firm or might it be something 16 else? 17 MR. GRIEF: Did I misspeak, Ridgely? 18 MR. BENNETT: I believe the document is 19 correct. It is an independent firm. It does not 20 necessarily have to be an accounting firm. And that's 21 the direction that we're going. 22 COMMISSIONER COX: Okay. 23 MR. BENNETT: It may be -- 24 MR. GRIEF: My mistake, Commissioner. 25 COMMISSIONER COX: Will we procure 0148 1 these services or will GTECH? 2 MR. BENNETT: GTECH will procure the 3 services. However, we are able to agree to who -- to 4 the vendor that they're procuring. We have oversight 5 there. 6 COMMISSIONER COX: Will GTECH be able 7 to place any scope restrictions on these folks, either 8 directly or indirectly, by limiting the fee? 9 MR. BENNETT: I think I am going to let 10 Catherine address that. 11 MS. MELVIN: Good point. What GTECH 12 must do is submit to us a contract compliance plan, 13 and so we have approval authority over that. So when 14 GTECH sets out, here are the provisions of the 15 contract that we're going to make assertions about and 16 that that we're going to ask the auditors to test, the 17 Lottery Commission will have input as to that regard. 18 So that allows us control in the sense that we can 19 say, wait a minute, you're not even going to look at 20 this section? I need it looked at. We will have 21 input there. So, you know, I can't see that they 22 would be in a position of somehow restricting the 23 auditor's ability to look at any section. 24 COMMISSIONER COX: Where is the wording 25 that you're counting on there, Catherine, to keep us 0149 1 from being -- that gives us the authority to reject a 2 plan and require them to insert another plan? 3 MS. MELVIN: In 3.30.3. 4 COMMISSIONER COX: Okay. 5 MS. MELVIN: It details that GTECH 6 shall develop a contract compliance attestation plan, 7 and if you read further, it says, the compliance plan 8 shall cover all sections and subsections. And, 9 further, it should say that the Lottery Commission -- 10 oh, it shall be submitted to the Lottery. 11 COMMISSIONER COX: Where does it say 12 that we can make them change it? 13 MS. MELVIN: I'm reading here. 14 COMMISSIONER COX: I see where it says, 15 if it's ever changed, it has to meet our approval. 16 But I'm not seeing where it says, the initial plan 17 requires our approval. 18 MR. BENNETT: Commissioner, it might be 19 helpful if you look at Section 3.30.1, where it says 20 that GTECH shall be required to provide the Lottery 21 with a quarterly contract compliance report, to be 22 performed at GTECH's expense by an independent firm to 23 be selected by GTECH with the concurrence of the 24 Lottery. The initial compliance -- well, actually, 25 I'm reading from the -- 0150 1 COMMISSIONER COX: And all I'm seeing 2 there, Ridgely, is it says that we can concur with who 3 the independent firm is, but my question relates to 4 the scope of that firm's work and where do we have 5 veto power there? 6 MS. MELVIN: Well, it does say that the 7 compliance plan -- further in 3.30.3, towards the end 8 of that paragraph, it says that the compliance plan 9 may be revised with the approval of the Texas Lottery. 10 COMMISSIONER COX: I see that, that 11 it -- they can't revise it without our approval, but 12 it looks like maybe they can put a plan in place 13 without our approval. 14 MS. MELVIN: That certainly is not our 15 intent. 16 MR. BENNETT: We would be happy to work 17 on that language and make it crystal clear. 18 COMMISSIONER COX: It may be in there 19 and I'm just not finding it here. 20 MR. BENNETT: If it's that difficult to 21 find, we need to make it clearer. 22 MS. MELVIN: I can share with you, 23 Commissioners, that we have been working with GTECH 24 regarding this plan and we have seen how the -- what 25 the first quarter's report will be based upon. And so 0151 1 we've looked at that, so that process is in place, and 2 if it's not clear and reflected in this amendment, 3 that's not our intent. 4 COMMISSIONER COX: It's clearly 5 implicit in the document, and I just -- I would be 6 more comfortable if it were explicit. 7 MR. BENNETT: We'll work on the 8 language. Thanks, sir. 9 CHAIRMAN CLOWE: My assumption here 10 would be that you're not asking us to approve this. 11 It's an amendment for Reagan's signature. This is for 12 advice and making us aware of it. Is that correct? 13 MR. BENNETT: Making aware and for 14 direction if you choose to give it. 15 CHAIRMAN CLOWE: Which you have 16 received. 17 MR. BENNETT: Yes. 18 CHAIRMAN CLOWE: But am I correct in 19 saying, with the suggested change that you would like 20 to make, for clarification, the Commission can 21 consider itself advised? 22 COMMISSIONER COX: I applaud the idea 23 that we're replacing a report of limited use with one 24 of significantly greater use. 25 CHAIRMAN CLOWE: Very well. Anything 0152 1 further on this, Gary? 2 MR. GRIEF: Just a clarifying question 3 of Ridgely and of the Commissioners. So if I 4 understood you right, if we make the changes suggested 5 by Commissioner Cox, then Reagan is -- is okay to go 6 forward to sign the amendment? 7 CHAIRMAN CLOWE: That's where I think 8 we are. 9 MR. BENNETT: And this amendment does 10 not involve competitive bidding. That process has 11 already occurred, and we would be happy to consult 12 with Commissioner Cox before moving forward. 13 COMMISSIONER COX: I don't need any 14 consulting on this -- you've got my point and I know 15 you all will address it if, in fact, it even needs to 16 be addressed. 17 MR. BENNETT: It will be addressed. 18 CHAIRMAN CLOWE: Very well. Then we'll 19 go on to item number 18, consideration of the status 20 and possible entry of orders as laid out, indicated by 21 letters A through K. Ridgely, will you help us with 22 that, please. 23 MR. BENNETT: Certainly, Commissioners. 24 These are all standard lottery cases where they failed 25 to have sufficient funds available for an electronic 0153 1 funds transfer. The only unique case is letter A. 2 That was not a funds case, and a proposal for decision 3 was issued in that case. However, staff of the 4 Lottery Commission has filed exceptions to that 5 proposal for decision, and the time has not yet run 6 for the administrative law judge to either keep the 7 proposal for decision the same or amend it based on 8 the exceptions. So we would ask you to pass letter A, 9 and we would ask that you sign orders in B, C, D, and 10 F, adopting the findings and conclusions of the -- and 11 the proposed recommendation for revocations in the 12 letters B through F. 13 CHAIRMAN CLOWE: And then what about G 14 through K? 15 MR. BENNETT: I'm sorry. I was on 16 the -- it should have been letters B through K. 17 CHAIRMAN CLOWE: B through K. 18 MR. BENNETT: Yes, I'm sorry. 19 CHAIRMAN CLOWE: Well, then, I so move 20 that we exclude the approval of docket number 21 362-04-8179, and approve the other dockets as 22 indicated through the letters B through K. 23 COMMISSIONER COX: Second. 24 CHAIRMAN CLOWE: All in favor, please 25 say aye. Opposed, no. The vote is two-zero in favor. 0154 1 We'll sign those orders now. And then 2 if you'll wait just a minute, Reagan, we'll go to item 3 19 and ask for your report as soon as we get these 4 signed. 5 For the record, Commissioner Olvera 6 excused himself during the executive session, and when 7 the Commission reconvened in public session, he has 8 been absent. 9 Thank you. We're ready for your 10 report. 11 MR. GREER: Thank you. I've got a 12 number of issues that I just wanted to give you a 13 quick update on. First off, we touched this morning 14 on our jackpot-driven games, and I wanted to address a 15 couple of issues on that. Currently, Lotto Texas is 16 at 13 million. We continue to be frustrated and 17 monitor the sales and the interest rate level, and I 18 mention that because on these recent rolls were 19 continuously rolls of between one million and two 20 million, which is under what we normally have done in 21 the past. So I just wanted to reassure you that we 22 are looking at what is going on in Lotto Texas. And 23 the marketing staff, as well as GTECH and Gary and I, 24 are continuing to watch that and will be bringing you 25 proposals in the future if we feel it's necessary to 0155 1 make possible changes to that game. 2 COMMISSIONER COX: So we're -- our 3 interest rate is that of the 30-year United States 4 treasury. Which has had a rough road, but it's been 5 basically down for several months. 6 MR. GREER: Currently, it's around 1.65 7 percent. 8 COMMISSIONER COX: Is the annuity 9 factor? 10 MR. GREER: Yes, sir. And we utilize 11 that as a part of our thought process as well as sales 12 and then, you know, want to stay in the black in a 13 scenario that we would get hit on, and that has kept 14 us in a conservative mode, which we will stay in. And 15 I just wanted to make you aware that we are watching 16 that and we're aware of things that are going on with 17 that game, and we'll continue to bring you up to speed 18 as we see fit. 19 COMMISSIONER COX: So Reagan -- and 20 this may be a question for another time -- but we're 21 still advertising the cash value of that paid out over 22 all of these years. 23 MR. GREER: Yes, sir. 24 COMMISSIONER COX: Which isn't affected 25 by the interest rates. But then when it comes time to 0156 1 pay up, when they want the lump sum, that's when they 2 get the realization, oh, my goodness, you're giving me 3 a lot -- go ahead, Gary. I hear you shaking your 4 head. 5 MR. GRIEF: No, sir. That interest 6 rate definitely -- interest rate affects the 7 advertised jackpot amount. 8 COMMISSIONER COX: Okay. Help me with 9 that. 10 MR. GRIEF: The advertised jackpot 11 amount is based on the payout over a period of years. 12 COMMISSIONER COX: And I thought you 13 just add those up without any interest at all? 14 MR. GRIEF: No, sir. That is what 15 we're able to fund to pay -- if the jackpot sign says 16 25 million dollars, our best estimates tell us that 17 we're able to pay a winner 25 million dollars over the 18 entire annuity period. That's how much they'll get, 19 less taxes, of course. It has no effect on the lump 20 sum value that they receive if they take a lump sum. 21 COMMISSIONER COX: Okay. So I had 22 those reversed. Okay. So the number that we 23 advertise is what the winner's share of the pool will 24 buy in a 30-year annuity? 25 MR. GRIEF: In -- I believe it's 26 -- 0157 1 Lee? 2 MR. DEVINEY: It's 25 years for Lotto 3 Texas and 26 years for Mega Millions. 4 COMMISSIONER COX: Okay. Thank you. 5 MR. GREER: I just keep that out there 6 to let you know that we are monitoring what is going 7 on with Lotto Texas, and I'll keep you apprised of 8 that. 9 Texas Two Step, right now we're on a 10 roll up, 1.1 million on the jackpot. We're seeing 11 sales of over a million a week on that. I noted 12 earlier in our conversation we talked about that 1.2 13 percent. We're continuing to evaluate that game as 14 well. 15 Mega Millions, which we've had a lot of 16 information on today, will be 126 million at tonight's 17 draw, and if it rolls, we'll go up to 149 million. 18 One of the interesting things about that is we 19 continue to see new players at the 50 million 20 increments, it seems. At 100 million there is a group 21 that comes out, at 150, and then at 200. So next 22 month when we get back together, we'll continue to 23 watch how those jackpot levels affect sales. And 24 on-line sales overall have been good because Mega 25 Millions has provided us with some high jackpots, 0158 1 which is what we're seeing right now. And we've had 2 an opportunity over the last year to look at a 3 scenario where sometimes they teeter-tottered, where 4 Lotto Texas would be high, but Mega Millions grows so 5 much faster that it's gotten a lot of attention and 6 we'll continue to, but on-line games are a -- a big 7 focus of what we're looking at right now as we plan 8 for next year. 9 Instant tickets, you saw today, 72 10 percent of our volume last week was in the instant 11 area. It continues to just really perform well. 12 Yesterday alone we did 7.9 million in sales, which is 13 very high. We're used to seeing something in the high 14 sixes. That's about a million higher than what we're 15 accustomed to. We've got some great new games that 16 are rolled out. Our holiday games are out now. 17 Twelve Days of Winning, Holiday Gold, we talked about 18 Holiday Millions, a 30-dollar ticket, which we're 19 watching very closely. The sales on that are strong. 20 And it has a high payout. People are excited about 21 that. We've also tied one of the games' 100,000 22 payout to one of our ad campaigns. And as that winds 23 down, I'll look forward to coming back and giving you 24 more information as to how we've seen sales increase 25 since the ad started. 0159 1 COMMISSIONER COX: I was in Dallas 2 Saturday afternoon and caught one of the new ads and I 3 really liked it. 4 MR. GREER: Great. Thank you. We've 5 had good response to the Scratch Stamps ad, and we've 6 also re-upped the Jackpot Song and played Mega 7 Millions' jackpot amount into it, and both of those 8 adds are very effective. There is a lot of people 9 talking about it, and that's what I base it on. So -- 10 you, too. So it's great. I know there has been some 11 other comments I'm aware. 12 COMMISSIONER COX: You don't like the 13 Jackpot Song? 14 MR. GREER: There are some that -- 15 CHAIRMAN CLOWE: I defended it. It was 16 criticized to me and I defended it. 17 MR. GREER: I think it was the dancing 18 cowboy that somebody mentioned. 19 CHAIRMAN CLOWE: It just didn't seem 20 like a Texas cowboy to the critic, and I defended it. 21 COMMISSIONER COX: He just needs to go 22 down to The Broken Spoke, doesn't he? 23 CHAIRMAN CLOWE: That's a darn good 24 idea. 25 MR. GREER: Well, there is a lot of 0160 1 dancing cowboys across the state that, hopefully, are 2 responding positively by ticket sales. 3 CHAIRMAN CLOWE: I've been known to 4 scoot a boot myself. 5 MR. GREER: I'm proud to bring you the 6 results of our SECC campaign, which is our employee 7 charitable contribution. We reached 81.4 percent of 8 our goal, which was 49 percent participation within 9 the agency, 114 donations of over 10,000 dollars. 10 Last year, we had 110 of 8700 dollars. And I was 11 excited about the fact that the employees stepped up. 12 I think it's important to embrace that statewide 13 concept and show that we're a caring organization, and 14 many did participate so that was great. 15 I was in San Antonio on October 27th at 16 the Babcock Chevron and presented a check for 360,000 17 to that retailer, which was exciting for them. 18 Senator Leticia Van de Putte joined me at that 19 presentation and participated by handing the plaque 20 and was very cordial and glad to be a part of the 21 process. 22 COMMISSIONER COX: One of the better 23 days for Babcock Chevron. 24 MR. GREER: It was a very good day for 25 Babcock Chevron. There will be some future check 0161 1 presentations, and one of the greatest days will be 2 the million dollar check presentation, that once we 3 get through all the paperwork at the Carrollton store 4 that sold the big ticket, so I'll let you know when 5 that is slated, which it's not yet. We're still 6 working through those issues. 7 We had a great customer service 8 training class here called Predator, Prey and Partner, 9 on October the 28th. The staff was very into it and 10 we had over a hundred participants. And I wanted you 11 to know that we are continuing to look at our training 12 program and will continue to upgrade what we're going 13 to be offering the employees in that area, and we'll 14 have a plan for you for the whole year of training, 15 which is something I've been working on with HR for a 16 while. I look forward to bringing that to you in the 17 coming months. 18 The 9th of November we had a wellness 19 fair. It's important for the employees to stay 20 focused on staying well through the flu season and it 21 was well received and well attended, here in the 22 auditorium. 23 Last week, I toured the Scientific 24 Games plant in Alpharetta, Georgia. I went down there 25 with our new instant ticket product manager, Dale 0162 1 Bowersock. I'm glad I went. It gave me a much 2 broader perspective on all that goes into producing 3 instant tickets and a lot of the things that go on 4 behind the scenes. I also had meetings with their 5 upper management staff as well as their marketing 6 group on other ideas that may come out, and you'll be 7 seeing that soon, as we are planning for the year now, 8 not on a quarterly basis, but looking out in a longer 9 perspective, and they're a big part of that. And I 10 appreciated the tour and appreciated their input in 11 getting me up to speed on what they do for us. 12 Lastly, as you're aware, it's 13 Thanksgiving coming up right around the corner. The 14 office will be closed on the 25th and the 26th. I 15 wanted to wish you a good Thanksgiving and thank you 16 for the opportunity to lead this organization. 17 CHAIRMAN CLOWE: Reagan, would you tell 18 us about the leadership program that you're involved 19 in? 20 MR. GREER: The leadership in reference 21 to the Governor's Leadership Workshop? 22 CHAIRMAN CLOWE: The Santa Claus 23 program. 24 MR. GREER: The Santa Claus program. 25 Thank you very much. There is a couple of leadership 0163 1 programs going on. 2 Commissioners, I wanted you to be 3 aware, I've shared it with the Chairman. I haven't 4 had a chance to show you. We are working through 5 right now with the directors a class called 6 Leadership. And it's based on a concept of Christmas 7 and Santa Claus and reindeer and elves, and it 8 basically is working off basic aspects of what 9 leadership concepts we can embrace here in the agency 10 and comparing them to some things that go on within 11 the Christmas theme. The first week, for example, we 12 talked about the mission statement and core values, 13 and how important that is. Last week we talked about 14 the importance of communication and listening. And 15 it's an eight-week course that I personally am 16 leading, amongst the directors, and we have a workbook 17 and a -- a class book, I guess you would say, that we 18 follow. And I think it's been well received by the 19 directors. And, basically, it's just to refocus -- 20 which a lot of times I think we get away from -- some 21 of the situations within an agency that go back to 22 common sense oriented leadership skills. Thanks for 23 mentioning that. 24 CHAIRMAN CLOWE: Thank you. 25 Any questions. 0164 1 COMMISSIONER COX: I want to hear more 2 about these elves. 3 MR. GREER: I have a book in my office 4 I'll be happy to share with you, sir. 5 CHAIRMAN CLOWE: Thank you, Reagan. 6 Billy, your item is next on the agenda. 7 Would you give us your report, please. 8 MR. ATKINS: I will, Commissioners. 9 We've already discussed earlier in the meeting, there 10 is a Bingo Advisory Committee meeting scheduled for 11 tomorrow at 10:00 o'clock here in this room. Also, we 12 had discussed earlier the quarterly reports being due. 13 We do anticipate making allocations for the third 14 quarter of 2004 by November 30th. 15 We have done some traveling in the 16 Bingo Division. Phil Sanderson was in Minnesota in 17 the latter part of October attending a regulators' 18 round table discussion that was sponsored by Gaming 19 Laboratories International. It gives him the 20 opportunity to stay apprised of some advances in the 21 technological arena. He was able to bring that 22 information back here as well as share it as part of 23 his responsibilities as co-chair of the charitable 24 gaming committee for NAGRA. 25 I was in Phoenix the first part of 0165 1 November on NAGRA business. We conducted a board of 2 directors meeting and then also conducted several site 3 visits. NAGRA has elected to hold their 2006 4 conference in Phoenix, so we were looking at possible 5 locations there. 6 And then the last meeting that we have 7 coming up is scheduled for the latter part of January 8 2005, when the division will be taking part in the 9 American Legion Mid-Winter Conference, and we do that 10 every year. And that's held here in Austin. The 11 American Legion brings in their officers for several 12 days of training and to make time available to us to 13 put on a program for their membership that are 14 involved in charitable bingo. 15 Then the last thing that I wanted to 16 draw your attention to is an article that went out in 17 the latest edition of the Bingo Bulletin, which is the 18 October, November and December issue. And I just 19 wanted to make you aware that there is an article that 20 we published in there at the request of the Internal 21 Revenue Service. We published it as we received it, 22 and the only reason that we would want to bring your 23 attention to it is because we have advised licensees 24 that that's not our article. If they have questions 25 about it, we're not able to answer it. We have 0166 1 referred them to the Internal Revenue Service and make 2 contact information for them available. But we just 3 wanted to bring that to your attention should you have 4 any questions posed to you about it. And that is all 5 I have. 6 CHAIRMAN CLOWE: Billy, I'm looking at 7 the agenda, tomorrow, for the BAC meeting. You 8 mentioned that. And you and I have discussed, 9 although Commissioner Cox and I have not discussed it, 10 the possibility and probability of both of us 11 attending that meeting and speaking with the BAC 12 members relative to the possibility of a joint 13 commission meeting or a state of the industry meeting, 14 following the discussion that we had in the business 15 planning meeting, which was conducted in this room 16 some time ago. While we're here together, I wonder 17 what Commissioner Cox's pleasure is relative to your 18 plans for tomorrow and your availability to meet with 19 this group and have whatever discussion you would like 20 to. 21 COMMISSIONER COX: What would be your 22 preference, Mr. Chairman? 23 CHAIRMAN CLOWE: I'm really open to any 24 schedule that you want to follow tomorrow. I can be 25 there at 10:00 a.m. or I could come after lunch, 0167 1 whatever is convenient for you. 2 COMMISSIONER COX: I could do either 3 one as well, and you're going to be out of town. 4 Which would you prefer? 5 CHAIRMAN CLOWE: Thank you for being so 6 accommodating. I would like to be here at 10:00 a.m. 7 COMMISSIONER COX: Then I'll come after 8 lunch. 9 CHAIRMAN CLOWE: So, Billy, we'll do 10 that. And if you would accommodate us by allowing us 11 to enter into the agenda with our comments. And, of 12 course, we haven't discussed how we individually feel 13 about that, but it's an opportunity for two 14 Commissioners to have a visit with the BAC members 15 about the issue of a joint meeting and the direction 16 of the BAC, and that sort of thing. 17 MR. ATKINS: Okay. As a point of 18 clarification. I guess I wasn't clear. Both of you 19 would like to address this issue, item number 12 on 20 tomorrow's agenda, with the BAC? 21 CHAIRMAN CLOWE: Yes. 22 MR. ATKINS: Okay. I'm sorry. I had 23 not -- as you pointed out, I have not had detailed 24 conversations with Commissioner Cox and I wasn't aware 25 of your desire to hold a conversation. So that's why 0168 1 you aren't listed on -- 2 COMMISSIONER COX: I don't know that I 3 had such a desire, but the Chairman has had that 4 desire, and so by God we're going to do it. 5 MR. ATKINS: I bet we can make that 6 happen. 7 CHAIRMAN CLOWE: I don't want to miss 8 an opportunity to bring our greatest asset to bear. 9 COMMISSIONER COX: My goodness. There 10 you go again. 11 CHAIRMAN CLOWE: I think he has a 12 unique view about the BAC and what he wants from them, 13 and I just think, since he's available, that both of 14 us ought to appear before the BAC and try to have that 15 discussion with them. 16 MR. ATKINS: I think they'll welcome 17 it. 18 COMMISSIONER COX: Billy, what I would 19 like to do, if it's possible, is when y'all break for 20 lunch, if you would call me on my cell phone and let 21 me know what time you would like me for me to be 22 there, and then hopefully we could have the discussion 23 that the chairman would like to have early on in that 24 afternoon session because I've got some other things 25 that are going to pull on me. 0169 1 CHAIRMAN CLOWE: And by way of 2 declaring some of my intentions, I would like to have 3 a very frank and forthright discussion with the BAC 4 members about where they see the progress they have 5 made on the current to-date basis, what we as 6 Commissioners feel they have been able to achieve and 7 what has not been able to be achieved and what the 8 shortcomings are, and if they feel differently than 9 that, that they can address that, and if a meeting of 10 the Commission and the BAC would be beneficial or a 11 state of the industry meeting, because there is a -- 12 there is a venue out there that is much broader in 13 truth and in fact than the BAC membership, and the 14 question in my mind is how representative the BAC is 15 of the industry. And I would like to hear them speak 16 to that and have their thoughts on it. And then I 17 want to point out to them that the Commission extended 18 the life of the BAC for one year, and that we are 19 going to face that issue and need to vote on that in 20 the future, and make them aware that they're in that 21 period of one year where these inputs from them will 22 help me as one Commissioner as I approach that meeting 23 where I have to cast my vote. 24 COMMISSIONER COX: When is the -- what 25 date has that been extended? 0170 1 MR. ATKINS: August 31st of 2005. 2 CHAIRMAN CLOWE: The end of the fiscal 3 year, so we're halfway through it almost. Lacking a 4 month and a half. 5 COMMISSIONER COX: Okay. 6 CHAIRMAN CLOWE: And we had a good 7 discussion, if you'll remember this, at the business 8 session. And you made a -- I think a very pointed 9 comment when you said, you didn't want to keep hearing 10 the same things over and over again. And I think that 11 message needs to be discussed, and I hope you'll do 12 that and I'll try to do the best I can about the 13 things we discussed this morning that are needs that 14 the bingo industry has. I just don't feel like we're 15 making the progress that we need to make, and I don't 16 want to leave any opportunity unused in trying to get 17 better communication within that industry and the 18 regulatory agency that's responsible for it. And I 19 think it's important that we have that face time with 20 them. 21 COMMISSIONER COX: We will have it. 22 CHAIRMAN CLOWE: Great. That was the 23 only question I had, Billy. 24 Anything further? 25 COMMISSIONER COX: No, sir. 0171 1 CHAIRMAN CLOWE: Thank you, Billy. 2 MR. ATKINS: Thank you. 3 CHAIRMAN CLOWE: Is there anyone 4 wishing to make comment to the Commission at this 5 time? We're ready for item number 21. 6 Then I believe we are ready to adjourn. 7 Thank you all very much. It's 1:45 p.m. and we are 8 adjourned. 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0172 1 REPORTER'S CERTIFICATION 2 3 STATE OF TEXAS ) 4 COUNTY OF TRAVIS ) 5 6 I, BRENDA J. WRIGHT, Certified Shorthand 7 Reporter for the State of Texas, do hereby certify 8 that the above-captioned matter came on for hearing 9 before the TEXAS LOTTERY COMMISSION as hereinafter set 10 out, that I did, in shorthand, report said 11 proceedings, and that the above and foregoing 12 typewritten pages contain a full, true, and correct 13 computer-aided transcription of my shorthand notes 14 taken on said occasion. 15 Witness my hand on this the 6TH day of 16 DECEMBER, 2004. 17 18 19 BRENDA J. WRIGHT, RPR, 20 Texas CSR No. 1780 Expiration Date: 12-31-06 21 WRIGHT WATSON STEN-TEL Registration No. 225 22 1801 N. Lamar Boulevard Mezzanine Level 23 Austin, Texas 78701 (512) 474-4363 24 JOB NO. 041116BJW 25