0001
 1   *  *  *  *  *  *  *  *  *  *  *  *  *  *  *  *  *
 2   
 3   
 4                  TEXAS LOTTERY COMMISSION
 5                          MEETING
 6   
 7                       JULY 19, 2006
 8   
 9   *  *  *  *  *  *  *  *  *  *  *  *  *  *  *  *  *
10   
11   
12   
13   
14   
15   
16   
17               BE IT REMEMBERED that the TEXAS LOTTERY
18   COMMISSION meeting was held on the 19TH of JULY, 2006,
19   from 9:00 a.m. to 2:15 p.m., before Brenda J. Wright,
20   RPR, CSR in and for the State of Texas, reported by
21   machine shorthand, at the Offices of the Texas Lottery
22   Commission, 611 East Sixth Street, Austin, Texas,
23   whereupon the following proceedings were had:
24   
25   
0002
 1                        APPEARANCES
 2   
 3   Chairman:
 4               Mr. C. Tom Clowe, Jr.
 5   
 6   Commissioners:
 7               Mr. James A. Cox, Jr.
 8   
 9   General Counsel:
10               Ms. Kimberly L. Kiplin
                 (NOT PRESENT)
11   
12   
     Executive Director:
13   
                 Mr. Anthony J. Sadberry
14   
15   
     Charitable Bingo Executive Director:
16   
                 Mr. Billy Atkins
17   
18   
19   
20   
21   
22   
23   
24   
25   
0003
 1                   INDEX - July 19, 2006
 2                                                   PAGE
 3   Appearances....................................    2
 4   AGENDA ITEMS
 5   Item Number I..................................    5
     The Texas Lottery Commission will call the
 6   meeting to order
 7   Item Number II.................................   57
     Report, possible discussion and/or action on
 8   lottery sales and revenue, game performance, new
     game opportunities, market research, and trends
 9   
     Item Number III................................  104
10   Report, possible discussion and/or action on
     lottery advertising and/or promotions
11   
     Item Number IV.................................  107
12   Report, possible discussion and/or action on
     transfers to the State
13   
     Item Number V..................................  109,
14   Consideration of and possible discussion and/or  123
     action on the agency's FY 2007 Operating Budget
15   and/or legislative appropriation request
16   Item Number VI.................................  114
     Consideration of and possible discussion and/or
17   action on external and internal audits and/or
     reviews relating to the Texas Lottery Commission
18   and/or on the Internal Audit Department's activities
19   Item Number VII................................    5
     Report, possible discussion and/or action on
20   GTECH Corporation, including proposed acquisition
     of GTECH
21   
     Item Number VIII...............................   39,
22   Consideration of and possible discussion and/or  116
     action on the lottery operator contract, including
23   whether the negotiation of the lottery operator's
     contract in an open meeting would have a detrimental
24   effect on the Commission's position in negotiations
     of the lottery operator contract
25   
0004
 1             INDEX - CONTINUED - July 19, 2006
 2                                                   PAGE
 3   Item Number IX.................................  117
     Report, possible discussion and/or action on the
 4   procurement of advertising services
 5   Item Number X..................................  118
     Report, possible discussion and/or action on the
 6   agency's contracts
 7   Item Number XI.................................  118
     Report, possible discussion and/or action on the
 8   79th Legislature
 9   Item Number XII................................  124
     Commission may meet in Executive Session
10   
     Item Number XIII...............................  125
11   Return to open session for further deliberation
     and possible action on any matter discussed in
12   Executive Session
13   Item Number XIV................................  120
     Report by the Executive Director and/or
14   possible discussion and/or action on the agency's
     operational status, and FTE status
15   
     Item Number XV.................................  121
16   Report by the Charitable Bingo Operations
     Director and possible discussion and/or action
17   on the Charitable Bingo Operations Division's
     activities
18   
     Item Number XVI................................  122
19   Public Comment
20   Item Number XVI................................  125
     Adjournment
21   
22   Reporter's Certificate.........................  126
23   
24   
25   
0005
 1                       JULY 19, 2006
 2                  CHAIRMAN CLOWE:  Good morning.  We'll
 3   come to order.  It's July the 19th, 2006, 9:00 a.m.
 4   Commissioner Cox is here.  My name is Tom Clowe.  I'll
 5   call this meeting of the Texas Lottery Commission to
 6   order.
 7                  And I would like to move to item number
 8   seven, report, possible discussion and/or action on
 9   GTECH Corporation, including proposed acquisition of
10   GTECH, first.  Director Sadberry.
11                  MR. SADBERRY:  Good morning, Chairman,
12   Commissioner Cox.  For the record, my name is Anthony
13   Sadberry, Executive Director.
14                  Commissioners, this agenda item has to
15   do with the proposed acquisition of GTECH by
16   Lottomatica, the operator of the Italian lottery.  As
17   you will recall, at the Commission meeting on
18   May 17th, Lieutenant Mark Riordan and Sergeant
19   Cliff Manning of the DPS made a presentation about
20   their due diligence review of the individuals and
21   entities involved in the transaction.  At that
22   meeting, you also heard from David Mattax, Division
23   Chief of the Financial Litigation Division of the
24   Attorney General's Office, and the Commission's
25   outside counsel, Patrick Thompson and Rod Edens, with
0006
 1   the law firm of Graves, Dougherty, Hearon & Moody.
 2                  You took no action at that May 17th
 3   meeting.  Today, Lieutenant Riordan and
 4   Sergeant Manning are here to provide an update on
 5   their investigation for the Commission's information
 6   and consideration.  Mr. Thompson is also here to
 7   answer any questions you may have about their work on
 8   this matter.
 9                  At this time, subject to your pleasure,
10   I would ask Lieutenant Riordan and Sergeant Manning to
11   give you their report.
12                  CHAIRMAN CLOWE:  Very good.
13                  Good morning, gentlemen.
14                  MR. RIORDAN:  Good morning, sir.  I
15   have some handouts that I would like to give you.
16   I'll do that through Director Sadberry.
17                  CHAIRMAN CLOWE:  Great.
18                  MR. RIORDAN:  Thank you very much for
19   inviting us this morning, once again, to present to
20   the Commission.  For the record, my name is
21   Mark Riordan.  I'm a lieutenant with the Texas
22   Department of Public Safety Criminal Intelligence
23   Service, stationed in Houston, Texas.
24                  MR. MANNING:  Cliff Manning, Sergeant
25   with the Texas Department of Public Safety Criminal
0007
 1   Intelligence Service, stationed in Houston.
 2                  MR. RIORDAN:  As I have explained, we
 3   have put together a team at the request of the
 4   Commission to look at the acquisition, proposed
 5   acquisition of GTECH by Lottomatica, and we have
 6   presented to you in the past the -- an update on the
 7   Italian company that will be doing the acquisition.
 8   And we actually still have one issue to -- to be yet
 9   resolved from that that we will report to you as soon
10   as we get it.  But today we would like to come and
11   give you our overview of GTECH, the company that
12   currently has the contract and that will, of course,
13   be acquired, ultimately acquired, perhaps, if
14   everything works out, by the Italian companies.
15                  I have a prepared statement that I
16   would like to read, and then myself and the case
17   agent, Sergeant Cliff Manning, will be available for
18   any questions that you might have.
19                  CHAIRMAN CLOWE:  Very good.
20                  MR. RIORDAN:  Criminal Intelligence
21   Service investigators began the overall investigation
22   of the Italian companies and GTECH at the end of
23   January 2006.  Emphasis was placed on the Italian
24   companies first and then, subsequently, to GTECH.
25   Throughout this time, we shared the time spent on this
0008
 1   investigation with our other routinely assigned
 2   organized crime and counter terrorism intelligence
 3   investigations.
 4                  Six investigators and two civilians
 5   were assigned to this investigation, and even though
 6   assigned to other investigations, several of them
 7   worked fairly much full-time.  The team that was
 8   created has a combined 145 years of law enforcement
 9   and investigative experience.  And over the past few
10   months, approximately 3,000 hours has been spent on
11   this investigation.
12                  Now, we do anticipate that some
13   additional information may come in on GTECH and
14   De Agostini, the parent company and the majority
15   stockholder, who is anticipated to be the majority
16   stockholder of the newly-created company, and
17   Lottomatica.  And we will, of course, continue to
18   inform your legal office when these items come in and
19   report them accordingly.
20                  For one reason that we have -- we've
21   maintained so many contacts with the other law
22   enforcement agencies and other lottery investigators
23   that are conducting similar investigations.  We
24   continue to work with them, so of course, we
25   anticipate additional information coming in and will
0009
 1   provide that.
 2                  CHAIRMAN CLOWE:  Mark, may I ask you a
 3   question at this point --
 4                  MR. RIORDAN:  Yes, sir.
 5                  CHAIRMAN CLOWE:  -- because you brought
 6   that subject up, and I think Commissioner Cox and I
 7   are very interested in that.
 8                  Give us, if you would, just your
 9   informal opinion of what other states and other
10   investigative activities have amounted to relating
11   what you have done, working with the Attorney General
12   and the law firm, and any other impressions about that
13   that you might have.  Is this an appropriate time for
14   you to comment on that?
15                  MR. RIORDAN:  Yes, sir.  Sure.
16                  This is a -- this has been from the
17   start a team effort.  We were tasked by the Commission
18   and by Lottery Commission personnel of determining the
19   character and ethics and reputation of all the
20   companies involved.  The law firm that was hired was
21   tasked with doing the financial investigation.  And,
22   of course, the Lottery Commission has had a lengthy
23   relationship with GTECH, so there was a lot of that
24   that was already known.  What we wanted to do was make
25   sure that, in doing our investigation, that we
0010
 1   utilized the investigative efforts by other agencies
 2   that we knew were also conducting an investigation.
 3   So at the start, we contacted every state that we knew
 4   of that had a contract with GTECH, who might be doing
 5   one of these background investigations, and also
 6   several countries that might be doing these background
 7   investigations.  And through that process, we maintain
 8   and continue to maintain a fairly close relationship
 9   with several of those states and countries.  And so as
10   their process has continued and their background
11   investigative process has continued, so has ours, in
12   some cases, paralleling each other.
13                  We do know that, of course, there was
14   a -- NASPL, the large organization that I -- I assume
15   is the same organization, the same states that have
16   the big lottery contract, has also conducted an
17   investigation.  There have been a combination of some
18   states who hired outside legal counsel or outside
19   accounting firms to do the investigation.  Other
20   states have done it strictly internally, such as what
21   Texas has done -- at our end of it anyway -- and other
22   states have had a combination of outside law firms and
23   internal investigations such as what Texas has done.
24                  We -- we made the determination early
25   on that we would do as thorough of an investigation as
0011
 1   we could possibly do within the time limits and the
 2   resources.  And we had the luxury of being able to put
 3   our best team members on it, our best investigators on
 4   it, and we also had the luxury of giving them carte
 5   blanche to spend as much time as they needed to do
 6   this investigation.  Part of that luxury of time came
 7   from yourselves, who told us to do a good job and not
 8   put a time limit on it.  And so with all of those
 9   parameters, we have found that since we have done this
10   investigation, that we have put in considerably more
11   time and effort than we believe anybody else.  We --
12   our interviews with company officials lasted hours,
13   several hours, compared to other agencies who simply
14   didn't take as much time and look as thoroughly as we
15   did.  Consequently, we believe, at the end of the day,
16   we have probably the best handle on this pending
17   transaction and the companies involved and the people
18   involved as any agency that GTECH contracts with.  And
19   I believe I'm confident in saying that, very
20   confident.
21                  CHAIRMAN CLOWE:  Okay.  Thank you.
22                  MR. RIORDAN:  We know that there are
23   several states and several countries yet to do their
24   investigation that are -- for whatever reason.
25   Perhaps their contract extension isn't coming up for
0012
 1   some period of time, and so they've made the
 2   determination to wait to do their background.  We know
 3   that other agencies perhaps have waited for Texas's
 4   background to be finished so that they could use that
 5   as a baseline.  And so the process in other states and
 6   in other countries will probably continue for another
 7   year, in some cases, because of the contract extension
 8   dates coming up, and so on and so forth.  We expect
 9   this process to be ongoing in other agencies for a
10   long time.
11                  CHAIRMAN CLOWE:  Very good.  Thank you.
12                  MR. RIORDAN:  Yes, sir.
13                  GTECH is a global company primarily
14   involved in the lottery business, and also involved in
15   various capacities in casinos, video gaming,
16   pari-mutuel tracks, and scratch-offs.  In some
17   jurisdictions contracting with GTECH, GTECH also
18   provides commercial services through their lottery
19   terminals or networks.
20                  The State of Texas has contracted with
21   GTECH for many years to provide all lottery services
22   to Texas.  And as we've already reported, there is an
23   offer on the table for the Italian lottery company,
24   Lottomatica S.p.A. and their parent company,
25   De Agostini S.p.A., to purchase GTECH.  And the result
0013
 1   of this purchase will be a global company that,
 2   according to media reports, will control two-thirds of
 3   the world's lotteries.
 4                  But this is a complete financial buyout
 5   of GTECH by Lottomatica.  The newly created company
 6   will be majority owned by De Agostini S.p.A., and a
 7   portion of its -- the ownership of GTECH -- or of
 8   Lottomatica, will be publicly traded on the Milan
 9   Stock Exchange.
10                  While this is -- and as I've already
11   reported in prior discussions, while this is a
12   financial takeover of GTECH by Lottomatica,
13   De Agostini, the parent company, has designed the new
14   company so that it will be led by the current GTECH
15   management.  GTECH's CEO, Bruce Turner, who has served
16   as permanent CEO of GTECH since August of 2002, is
17   expected to be the CEO of the new Lottomatica.  In the
18   words of Bruce Turner, "It will be my company to run."
19                  DPS Criminal Intelligence Service
20   personnel traveled extensively and conducted hundreds
21   of interviews to conduct an administrative background
22   investigation at the request of the Texas Lottery
23   Commission.  DPS was tasked with determining the
24   character, reputation and ethics of GTECH as well as
25   of De Agostini and Lottomatica, since GTECH will run
0014
 1   the new company.
 2                  Current GTECH board members who are
 3   expected to transfer to a position on the Board of the
 4   new newly created Lottomatica or to a position with
 5   the company are as follows:  Robert Manson Dewey,
 6   Junior, who is the current chairman of GTECH's Board
 7   of Directors; Anthony Ruys, who is a current GTECH
 8   Board member; and James Francis McCann, who is a
 9   current GTECH Board member, will be independent
10   directors on Lottomatica's Board.
11                  Sir Jeremy James Hanley, who is a
12   current GTECH Board member, will serve on a
13   Lottomatica executive committee, as required by UK
14   law, and is expected to become a Board member of
15   Lottomatica in the near future.
16                  GTECH is governed by a Board of
17   Directors who, with the exception of Bruce Turner, are
18   all independent of the company.  In contrast, the
19   planned membership of the Lottomatica's Board of
20   Directors will have De Agostini Board members in a
21   majority position.  As DPS investigators have noted,
22   De Agostini Board members are involved in the current
23   Lottomatica management.  Lottomatica's officers have
24   stated that no major decision is made at Lottomatica
25   without De Agostini's input.
0015
 1                  Bruce Turner has stated that many of
 2   GTECH's current officers have agreed to sign five-year
 3   contracts to work for the newly-created company if the
 4   acquisition occurs.  Two of GTECH's officers, Timothy
 5   Nyman and Marc Crisafulli, who are both
 6   vice-presidents, declined to accept the contracts.
 7   Nyman retired and Crisafulli was terminated.
 8                  No disqualifying criminal history was
 9   located on any of the GTECH personnel interviewed by
10   DPS personnel, including those who provided disclosure
11   statements.
12                  Texas is also well aware of GTECH's
13   aggressive nature with some well-known and reported
14   infamous historical and unethical events here.
15                  Bruce Turner admits that their past
16   continues to follow them and will always be associated
17   with their company.  He states, however, that they no
18   longer conduct their operations in an unethical or
19   questionable manner.  He also reported that several
20   high-profile company officers have been fired for
21   unethical behavior and that their policy is that that
22   type of behavior is not acceptable.
23                  With that said, I would like to talk
24   about Brazil.  This is a complicated matter that is
25   the subject of a long-term and extensive investigation
0016
 1   by Brazilian authorities and, according to the news
 2   media, by the Securities and Exchange Commission.  We
 3   will discuss here only a few of the many issues in
 4   Brazil concerning GTECH's contract.
 5                  In recent years there have been
 6   numerous revelations of corruption involving political
 7   officials and parties in Brazil.  Most of the
 8   allegations involve bribery by officials of
 9   state-owned companies or contractors, with the money
10   being allegedly used for political campaigns.  Some of
11   the companies involved include energy companies,
12   garbage companies and gaming companies.  This was so
13   prevalent that one politician interviewed in 2005
14   stated that it was "...an obligation to try to get
15   financial contributions for the [political parties]
16   from contractors."
17                  These were the conditions under which
18   GTECH operated since 1997 as the only provider of
19   lottery services to Caixa, the state-owned bank that
20   runs the national lottery in Brazil.  The Brazilian
21   lottery contract amounted to approximately ten percent
22   of GTECH's revenues.
23                  GTECH's contention is that under these
24   conditions they did not use bribery or payoffs in
25   order to obtain contracts or contract extensions in
0017
 1   Brazil.  GTECH indicated that the bribery allegation
 2   against them actually was an extortion attempt that
 3   was a result of political corruption in Brazil.
 4                  Criminal Intelligence Service personnel
 5   traveled to Brazil and reviewed evidence and conducted
 6   interviews with some relevant parties and witnesses.
 7   Additionally, interviews were conducted in the United
 8   States with various persons who have knowledge of this
 9   case.
10                  During March and April of 2003, GTECH
11   was negotiating for an extension of the Brazil
12   contract.  Bruce Turner was the CEO of GTECH during
13   this time.  GTECH ultimately won an extension.
14   Brazilian news sources reported in 2004 that GTECH had
15   been involved with individuals who had allegedly
16   solicited bribes from GTECH in order to renew the
17   contract.  GTECH denied that money had ever been paid
18   in response to what they termed to be extortion.
19                  GTECH indicated that it was only after
20   they were made aware of the 2004 news reports, they
21   had hired a firm to investigate the allegations, and
22   that the only output of the investigation firm was a
23   PowerPoint presentation given to GTECH's Board
24   members.  When questioned about obtaining a record of
25   this presentation to the Board members, Texas Lottery
0018
 1   Commission personnel were told that the presentation
 2   was not in the Board minutes nor was it able to be
 3   heard on any recordings of the minutes.  The fact that
 4   no written report had been made was told to Texas
 5   Lottery Commission personnel, and also told to
 6   Criminal Intelligence Service personnel during
 7   interviews with GTECH's officers and Board members and
 8   during the July 13th interview with Bruce Turner.
 9   That's July 13th, 2006.
10                  Criminal Intelligence Service personnel
11   learned that GTECH had actually hired the firm to
12   investigate a request for a suspicious payment by a
13   GTECH employee in Brazil.  This firm was hired shortly
14   after the contract extension was obtained in 2003, and
15   DPS investigators learned that the initial written
16   report produced by the firm indicated that no employee
17   of GTECH had violated the Foreign Corrupt Practices
18   Act.  Later, the same firm had produced a second
19   report in 2004, in PowerPoint format, after having
20   been tasked with looking at the media allegations.
21                  Multiple requests to GTECH to produce
22   all written reports that they initially denied existed
23   but have now acknowledged exist have gone unanswered
24   as of this date.
25                  Another major issue surrounding the
0019
 1   contract extension in Brazil involves GTECH's
 2   involvement with Rogerio Buratti, an individual GTECH
 3   considered hiring as a consultant after Buratti was
 4   introduced to GTECH.  As Bruce Turner explained, when
 5   GTECH put out the word that they were looking for a
 6   Government Relations consultant, Buratti showed up.
 7   It was Buratti who GTECH alleges was attempting to
 8   extort money from GTECH in return for the successful
 9   contract extension in Brazil.  In fact, GTECH was
10   negotiating with several entities regarding their
11   contract extension in Brazil, and Buratti's attempted
12   extortion was not the only one that allegedly
13   occurred.
14                  GTECH explained that they attempted to
15   vet Buratti, and they immediately learned that he was
16   not qualified as a consultant and therefore his
17   services were not utilized.
18                  Criminal Intelligence Service personnel
19   learned, however, that the vetting process for Buratti
20   was not as cut and dried as GTECH had indicated.  In
21   fact, according to evidence found in Brazil, the
22   April 2003 request from GTECH headquarters to their
23   vetting firm was informal and not a formal vetting
24   process.  Additionally, Rhode Island personnel asked
25   that there be no trace of the informal check on
0020
 1   Buratti that could be discovered by either GTECH
 2   officials or the government.
 3                  GTECH indicated that the vetting
 4   process found that Buratti would not pass; however, as
 5   stated above, there was no vetting process, so
 6   subsequently no record was made on the vetting of
 7   Buratti.
 8                  DPS investigators also reviewed
 9   evidence indicating that a clean break from Buratti
10   was not made because additional meetings with Buratti
11   occurred even after the contract extension was signed.
12   This was because GTECH and their vetting firm believed
13   that Buratti may have been important enough to the
14   contract extension process that they could not
15   immediately cut off their relations with him.
16                  Further, DPS investigators interviewed
17   Anfranio Nabuco, a consultant who was retained by
18   GTECH early on in the 2003 contract extension process.
19   Nabuco explained that he resigned from GTECH's employ
20   when he learned that GTECH was associating with,
21   quote, crooks, and that GTECH was holding secret
22   meetings where he was not invited.  He further stated
23   that he was given no guidance in negotiations he was
24   taking part in with Caixa.  Criminal Intelligence
25   Service personnel reviewed a copy of his resignation
0021
 1   letter sent to GTECH that corroborated his statement.
 2   GTECH officials stated that Nabuco was terminated,
 3   though no explanation for his termination was given.
 4                  Criminal Intelligence Service personnel
 5   learned that GTECH Brazil made a November 18, 2002,
 6   payment to Dreamport Brazil 1.542 million dollars.
 7   That same date, Dreamport Brazil transferred the money
 8   to Dreamport USA, a company in Boca Raton, Florida
 9   that Bruce Turner stated was created in the mid-1990s
10   to enter into casino business opportunities, among
11   other things.  Turner explained that Dreamport USA had
12   been used as a means of moving cash out of Brazil.
13   Information received by DPS investigators suggests
14   that Rogerio Buratti had an account at the same bank
15   where Dreamport USA had its account.
16                  The amount of money paid and
17   transferred is also approximately the same amount of
18   money that Buratti was allegedly attempting to extort
19   from GTECH.
20                  Also of note is that DPS investigators
21   were told by Bruce Turner that Dreamport USA had been
22   closed in the year 2000.  On July 13th, 2006, Turner
23   explained that the fact that the company's account
24   remained active was not unusual, as contractual
25   expenses and revenue from the company often continues
0022
 1   long after they are closed.  Turner continued to
 2   affirm that no money was paid to Buratti.
 3                  In an April 19th, 2006 conference call
 4   by GTECH's legal counsel, Michael Prescott, Prescott
 5   indicated that GTECH had discovered an improper
 6   payment that they were concerned about discussing
 7   because he did not want anyone in Brazil to focus on
 8   it.
 9                  DPS investigators discovered that the
10   improper payment referred to was made on February
11   10th, 2003, for more than 380,000 dollars, and was
12   made to the Brazilian Institute for Social
13   Development, a nongovernmental organization, known in
14   Brazil as IBDS.  Criminal Intelligence Service
15   personnel learned that the Brazilian authorities were
16   aware of the payment to IBDS and that IBDS was a paper
17   company suspected to be used in Brazil as a means for
18   laundering money and making illegal political
19   contributions.
20                  Our investigation revealed that the
21   head of IBDS, Fabio Rolim, has an extensive criminal
22   history in Brazil.
23                  Bruce Turner explained that the payment
24   to IBDS was made at the request of one of GTECH's
25   Brazilian attorneys and that Turner did not know what
0023
 1   the payment was for.  Turner stated that GTECH would
 2   not pursue criminal action against the Brazilian
 3   attorney because it would not accomplish anything.
 4                  In explaining the Brazilian incidents,
 5   Bruce Turner stated to DPS investigators that some of
 6   his GTECH Brazil employees may have, quote, "...flown
 7   dangerously close to the sun."
 8                  Ultimately, Brazil has split their
 9   lottery contract into four main areas that include
10   technology, communications, terminals, and supplies.
11   This new model developed by Caixa for contracting
12   lottery services resulted in increased competition for
13   those contracts.  GTECH chose not to participate in
14   competing for those contracts, and it is expected that
15   GTECH will be completely out of business in Brazil as
16   early as August the 1st, 2006.  Turner explained that
17   he believes that governments should not get into the
18   technology business, and that this new Caixa lottery
19   concept ultimately would not affect their company.
20                  Trinidad Tobago:  GTECH personnel
21   disclosed to Criminal Intelligence Service personnel
22   that the country of Trinidad Tobago discovered that
23   payments made by GTECH to Flexx Avitar, a company
24   based in California, were actually diverted to pay
25   Trinidad Tobago National Lottery Control Board
0024
 1   officials in the amount of 1.9 million dollars.  These
 2   alleged payments occurred between 1999 and 2001.
 3   According to media reports, this is one of multiple
 4   investigations being conducted in Trinidad Tobago on
 5   GTECH.
 6                  GTECH explains that they hired Flexx
 7   Avitar to provide for community programs in Trinidad,
 8   and that the amount of the agreement was 2.8 million
 9   dollars.  This agreement was part of their lottery
10   contract extension or renewal.  According to Bruce
11   Turner, Flexx Avitar came to GTECH and presented their
12   proposal to provide those community programs.  GTECH
13   approached the Trinidad NLCB, the National Lottery
14   Control Board officials, who gave their approval to
15   hire Flexx Avitar.
16                  Interestingly, Bruce Turner admitted
17   that there was no written contract with Flexx Avitar.
18   He also indicated that GTECH relied on their Trinidad
19   employee to oversee their agreement with Flexx Avitar.
20   No other audits occurred.
21                  Board members who were interviewed
22   explained that they don't suspect that GTECH will be
23   found to have committed any wrongdoings.
24                  Criminal Intelligence Service personnel
25   are aware that an independent auditor has been hired
0025
 1   by Trinidad to conduct an investigation and that
 2   Trinidad has asked the Securities and Exchange
 3   Commission to conduct an investigation.
 4                  Poland:  In an effort to look at a
 5   similar consultant or lobbyist relationships such as
 6   Brazil and Trinidad, Criminal Intelligence personnel
 7   were made aware of the consultant hired by GTECH to
 8   assist them in obtaining the lottery contract for
 9   Poland.  This came to the attention of DPS personnel
10   while conducting interviews in Rhode Island and after
11   questioning GTECH personnel concerning co-terminus
12   contracts.  GTECH personnel advised that their
13   contract with Josef Blass was a co-terminus contract,
14   though we later determined that none of the four
15   existing contracts GTECH has with Blass were based on
16   a percentage of earnings or revenue.  DPS
17   investigators learned that Blass' original co-terminus
18   contract was bought out in the year 2000 for over six
19   million dollars.
20                  The issue that Criminal Intelligence
21   personnel had with the Poland contract was not in the
22   wording of the contract.  The issue has to do with the
23   amount of money that Blass was to get over the
24   contract's life compared with the relatively little
25   amount of work that Blass admittedly did for the
0026
 1   money.  Blass stated that he never was personally
 2   involved in consulting activities in Poland.  He, in
 3   fact, had only traveled there once recently for other
 4   reasons.  As we've discussed concerning the Brazil and
 5   Trinidad issues, similar large payments for little or
 6   no work have resulted in alleged illegal activity by
 7   GTECH personnel in some countries.  Similarly, also,
 8   GTECH has admittedly not audited the work done by
 9   Blass, just as in Brazil and in Trinidad.
10                  According to Bruce Turner, only
11   Don Sweitzer, a GTECH Senior Vice-President of Global
12   Business Development and Governmental Affairs,
13   monitors and manages consultant contracts.  All
14   consultant contracts are reviewed by Turner annually.
15                  The largest contract between GTECH and
16   Blass was to ultimate total nearly 18 million dollars
17   over a ten-year period.  Blass advised Criminal
18   Intelligence personnel that he hired two people to
19   monitor the government in Poland, which Blass billed
20   back to GTECH as expenses, but that he refused to
21   allow them to use his name in connection with their
22   duties.  GTECH advised Criminal Intelligence Service
23   personnel that Blass was hired for his "name" and his
24   influence in Poland that was gained from his
25   participation in the Solidarity Movement.
0027
 1                  Blass further admitted that he believed
 2   that he received the contracts because he was friends
 3   with a former co-founder of GTECH, Victor Markowicz.
 4   Turner admitted that Markowicz had recommended to
 5   GTECH that a contract be negotiated with Blass.
 6                  Criminal Intelligence Service personnel
 7   questioned GTECH Board members about this contract,
 8   especially after seeing numerous questions by Board
 9   members in the review of GTECH's Board minutes.  Board
10   members admitted that they knew a lot of money was
11   going to Blass for little work.  Bruce Turner admitted
12   to Board members, as written in the minutes, and he
13   has also admitted to DPS personnel that he alone
14   approved Blass' largest contract.
15                  After these issues were brought up to
16   GTECH's Board members by Criminal Intelligence
17   personnel, and during the July 13th, 2006 interview
18   with Bruce Turner, he stated that at his direction,
19   Josef Blass' largest contract had been recently bought
20   out for a percentage of its remaining value, said to
21   be approximately six million dollars.
22                  Actually, we believe that figure to be
23   a bit higher.
24                  Czech Republic:  Bruce Turner was asked
25   on July 13th, 2006, about a Board of Directors meeting
0028
 1   minutes comment about the Board not wanting another
 2   UK-type incident.  Bruce Turner indicated that that
 3   statement was in reference to the Board's concern
 4   about a 20 million dollar loan from GTECH for a sports
 5   stadium to be built in the Czech Republic that was
 6   negotiated during the time that the Czech Republic's
 7   contract with GTECH was negotiated.
 8                  Criminal Intelligence Service personnel
 9   asked Turner for details about the 20 million dollar
10   loan and whether or not GTECH was in the business of
11   loaning money.  Turner advised that this was a
12   necessary business expenditure.
13                  In summarizing, I would like to bring
14   up the following major points of consideration that I
15   wanted to re-emphasize.  Number one, GTECH's current
16   management is expected to be the management team over
17   the planned new company.
18                  Number two, no disqualifying criminal
19   history was located on current GTECH personnel who
20   provided disclosure statements.
21                  Number three, GTECH's Board of
22   Directors are currently all independent with the
23   exception of Turner himself, and according to our
24   interviews with each of them, are not familiar with
25   the day-to-day operations of the company.  They rely
0029
 1   upon and accept Bruce Turner's explanations for
 2   business operations.  Under the newly-designed company
 3   that will not be the case.  Lottomatica's Board of
 4   Directors is expected to have De Agostini Board
 5   members as a majority influence.  Only three current
 6   GTECH Board members will have a place on Lottomatica's
 7   planned new Board.
 8                  Number four, Brazil is a complicated
 9   matter involving political corruption and a climate
10   that appeared to require bribes to conduct business
11   with state-owned companies.  Under these conditions,
12   and fully aware of the corruption in Brazil, as the
13   head of GTECH Brazil had already acknowledged as early
14   as 2000, GTECH's contract extension was approved.
15                  There is a suspicious GTECH money
16   transfer that has not been fully explained by GTECH to
17   a closed subsidiary named Dreamport USA.
18                  GTECH misrepresented the output of
19   their internal investigation of this incident and has
20   not provided requested documents despite multiple
21   requests.
22                  GTECH's explanations of their
23   relationship with Buratti are questionable.
24                  And GTECH made a questionable payment
25   to IBDS, a suspect organization in Brazil that has
0030
 1   also not been fully explained.
 2                  Number five, GTECH blames one of their
 3   contractors for the alleged illegal activity in
 4   Trinidad Tobago.  They also state that their Trinidad
 5   Tobago employees should have watched this company
 6   closer.  Criminal Intelligence Service personnel note
 7   that GTECH entered into an agreement for 2.8 million
 8   dollars with this company with no written contract.
 9                  Number six, Josef Blass, a consultant
10   hired for his influence in Poland and whose largest of
11   four contracts was recently bought out by GTECH,
12   admittedly did little or nothing for that 18 million
13   dollar contract.
14                  Number seven, GTECH's willingness to
15   loan 20 millions dollars to help finance a sports
16   stadium in the Czech Republic that was described by
17   Bruce Turner as a necessary business expenditure,
18   appears to be completely outside the normal business
19   activity of GTECH; however, is evidence to their
20   aggressive contractual negotiation behavior.
21                  Number eight, GTECH's past management
22   style indicates their willingness to spend large
23   amounts of money for consultants with little or no
24   audit process and no accountability for consultant's
25   actions.
0031
 1                  Number nine, GTECH's operating style is
 2   very aggressive and contracts will likely continue to
 3   be pursued by the newly-planned company in the current
 4   GTECH manner since GTECH will manage the new company.
 5                  And, number ten, ultimately, GTECH is
 6   likely continue to take the position that they are the
 7   only company that is capable of providing lottery
 8   services for the State of Texas.
 9                  At this time, we'll be available for
10   any questions that you might have.
11                  COMMISSIONER COX:  This is a remarkable
12   report.
13                  CHAIRMAN CLOWE:  It is indeed.
14                  COMMISSIONER COX:  What are your
15   observations, Mr. Chairman?
16                  CHAIRMAN CLOWE:  Well, I'm concerned
17   about it.  I would like to call on Mr. Mattax, who is
18   in the Office of the Attorney General, and has been
19   here in the office -- in the audience and heard this
20   report, and is our attorney, for his reaction.
21                  MR. MATTAX:  Good morning.  My name is
22   David Mattax.  I'm the Chief of the Financial
23   Litigation Division at the Office of the Attorney
24   General.
25                  Well, as the Chairman has noted, there
0032
 1   are concerns that this report does raise with respect
 2   to the methodology that GTECH has apparently employed
 3   in the past.  And I think that my observations would
 4   be two.  One, these investigations are ongoing in the
 5   various -- in Brazil, there are apparently SEC
 6   investigations ongoing, the results of which may or
 7   may not result in any criminal indictments or criminal
 8   charges.  At this stage, no criminal charges have been
 9   levied.  But I think it's something, particularly if
10   the transaction is consummated with Lottomatica and
11   with the De Agostini group, that we -- this Lottery
12   Commission should watch and should basically caution
13   the new owners, frankly, of GTECH about, that we will
14   be watching this.  That we anticipate, based on the
15   representations that have been made to the Department
16   of Public Safety by De Agostini group that this is not
17   the way they do business, that we would anticipate
18   that things of this nature would not occur in the
19   future.  And I would ask, again, the Department of
20   Public Safety to comment on their conversations with
21   some of the Lottomatica folks with respect to at least
22   the assurances I think we've gotten that this type of
23   behavior is not what they plan.  If that's the correct
24   statement.
25                  MR. RIORDAN:  If you want to comment.
0033
 1                  MR. MANNING:  One of the -- one of the
 2   things I found interesting in my interviews with the
 3   De Agostini group is, they fully believe that
 4   everything that we have discussed occurred before the
 5   Bruce Turner regime took over, which is not the case.
 6   They have a very positive opinion of Bruce Turner, and
 7   I believe they are going to allow Bruce Turner to
 8   continue to run the company as it has run due to their
 9   belief that he runs a very tight operation.  And
10   things will continue to run the same unless something
11   happens, again of this nature, where Bruce Turner is
12   the CEO.  At that time, they may take action, but
13   until that occurs, I feel that De Agostini is going to
14   continue to allow Bruce Turner to run the operation
15   and has voiced that in the interviews that I had with
16   them.
17                  MR. RIORDAN:  And if I may say
18   something also.  In our discussions with Mr. Turner,
19   as I state in here, he has assured us that that type
20   of behavior is not currently acceptable by the
21   company.  And in -- in discussions about our report,
22   and when we had Mr. Turner at our offices on
23   July 13th, we went over every one of these points with
24   him.  He knew very well exactly what we were going to
25   say.  My discussion with Mr. Turner was that I believe
0034
 1   at some point, you will probably be asked to -- to
 2   acknowledge what you're doing to make sure this does
 3   not happen again.  And I believe that is -- that would
 4   certainly be something that needed to happen at some
 5   point.
 6                  MR. MATTAX:  And if I could follow up
 7   on that.  And I think as is apparent from the
 8   thoroughness and the depth of the investigation that's
 9   been performed by the Department of Public Safety, it
10   should be apparent to GTECH that we are watching, and
11   that we're going to continue to watch what they're
12   doing, and that should additional things occur, which
13   they've now made representations that, you know, these
14   things are -- types of things are not going to happen
15   in the future, that we will expect them to make sure
16   those things don't happen and that we will continue to
17   be watching.  So I think that, like I said at the
18   outset, nothing criminal has been -- you know, no
19   one -- Mr. Turner or anyone like that has not been
20   indicted, but the very fact that we've done an
21   investigation of this depth and confronted GTECH with
22   it, you know, establishes the fact that we are going
23   to be watching them.  They've made representations
24   this won't happen again in the future, and I think
25   that, as Lieutenant Riordan said, we need to hold them
0035
 1   to that word.  And my recommendation would be that we
 2   continue to have DPS, to the extent possible, do some
 3   monitoring and then following-up investigations with
 4   other states and with other governments that they've
 5   been working with.
 6                  MR. MANNING:  Mr. Chairman, on that,
 7   I've had some very lengthy considerations with the
 8   officers at GTECH, and the firm that was hired to do
 9   the investigation on Brazil by GTECH recommended
10   several changes be made by GTECH to enforce some of
11   the policies that they had in place and expand some of
12   those policies.  And GTECH has taken those steps to
13   expand those policies.  I think that it's still yet to
14   be determined whether or not they work, but several
15   changes have been made at GTECH to oversee some of
16   their contracts and many of their contracts with the
17   consultants.  And Board approval is now required on
18   the majority of the consultant contracts that GTECH
19   enters in with them.
20                  COMMISSIONER COX:  Mr. Chairman, I
21   thought that we had been assured in 2002 by Mr. Turner
22   that things like this would not happen on his watch,
23   and I think I hear DPS saying that they have happened
24   on his watch.  I don't know exactly where to go with
25   that, because they report there have been no
0036
 1   convictions, maybe not even any criminal charges, but
 2   they've happened.  Where does that put us?
 3                  CHAIRMAN CLOWE:  Well, I think that's
 4   the question.  And as I said, I think the report is
 5   concerning.
 6                  The nonresponsiveness of GTECH is
 7   something, Mark, that you have mentioned more than
 8   once.  And I would like to ask for your opinion in an
 9   attempt to begin to answer Commissioner Cox's
10   question, why you feel you run into that situation and
11   what is the resolution of that situation, if you see
12   any.
13                  MR. RIORDAN:  The -- let me say that,
14   initially, our ability to gather information, talk
15   candidly with the Italian companies, was very good,
16   and remains good.  Our ability to do that, to talk
17   candidly and to get whatever we wanted from GTECH has
18   not been as good.  The withholding information refers
19   to documents that were prepared in an investigation by
20   the law firm, and I suspect that perhaps not everyone
21   knew that the documents were created.  But they have
22   been acknowledged as existed.  They've been
23   acknowledged to Attorney General Mattax, and -- who
24   has requested them.  They were promised.  We requested
25   them from -- again from their legal staff.  They were
0037
 1   promised.  We requested them from Mr. Turner, on the
 2   13th, and we haven't seen them yet.  So if I had to
 3   make an opinion of the issue, I would say there may be
 4   an issue on their part with some type of, perhaps,
 5   organization or proprietary information that may be in
 6   that document, maybe some other type of confidential
 7   business information that may be in those documents
 8   that they're not willing to -- to let out.  But
 9   they've been promised to us.  We still don't have
10   them.
11                  CHAIRMAN CLOWE:  They have been
12   promised.
13                  MR. RIORDAN:  They have been promised.
14                  MR. MANNING:  And initially, those
15   documents were denied to ever exist, period.  And we
16   later determined, through our investigative process,
17   that there was actually multiple documents.  And once
18   we determined their existence and those documents were
19   actually viewed, it was later -- they were later
20   formally requested multiple times.  But they
21   originally denied that they ever existed.
22                  COMMISSIONER COX:  And, Cliff, do you
23   believe that they denied it because they didn't know
24   they existed, or do you believe that they were not
25   telling you the truth --
0038
 1                  MR. MANNING:  Initially, I may have
 2   believed that.  But in reviewing their Board minutes,
 3   the Board of Directors request several times to see
 4   the written report.
 5                  COMMISSIONER COX:  So you -- you
 6   believe they were not telling you the truth.
 7                  MR. MANNING:  Yes, sir, I do.
 8                  COMMISSIONER COX:  And I see in your
 9   report, Mark, that you say, GTECH indicated that the
10   vetting process found that Buratti would not pass.
11   However, as stated above, there was no vetting
12   process.
13                  MR. RIORDAN:  Yes, sir.  That's
14   correct.
15                  COMMISSIONER COX:  That looks like
16   another instance where they didn't tell you the truth.
17                  MR. RIORDAN:  Well, it's another
18   instance where they misrepresented the vetting
19   process.  In our opinion, when you say "vetting
20   process," you mean the formal process of vetting
21   someone, where records are kept.  And, in fact, the
22   process they used was informal, and they actually
23   requested that no record be made that can be traced
24   back to either the government or to their own
25   officials, their own GTECH officials.
0039
 1                  COMMISSIONER COX:  So that could have
 2   been a case -- could -- put it this way.  Could that
 3   have been a case in which they thought a vetting
 4   process was one thing and you thought it was something
 5   much more stringent?
 6                  MR. RIORDAN:  If I were them, I would
 7   use that argument, yes, sir.
 8                  COMMISSIONER COX:  Thank you.
 9                  CHAIRMAN CLOWE:  As we get into this, I
10   want to point out for the record that item number
11   eight on the agenda, Commissioner Cox, allows the
12   Commission, should they so decide, to go into
13   executive session to discuss this contract.  My sense
14   is that it ought to be discussed in the public.  And
15   I'm very comfortable with the discussion we're having
16   now, but I would like to call everyone's attention to
17   that.  Those of you gentlemen with the Department of
18   Public Safety, the Attorney General, and the law firm,
19   so that if at any time we reach a point in this
20   discussion in the future, that option is open.  As I
21   said, I prefer, and I believe Commissioner Cox does,
22   too, to have this discussion in the public, but I want
23   to --
24                  COMMISSIONER COX:  Yes.
25                  CHAIRMAN CLOWE:  -- point that out to
0040
 1   you.  I don't want to put you in a position in this
 2   public discussion that you don't want to be in and,
 3   legally, you shouldn't have to be in.
 4                  Having said that, Mr. Mattax, I would
 5   like to turn you.  I view you in these proceedings as
 6   our attorney.  And I would like to ask for guidance
 7   from you.  You made the comment that there have been
 8   no indictments, and Commissioner Cox amplified on
 9   that, and that this investigation is ongoing.  My
10   sense at this time is that we are not finished with
11   this subject.  There is more to be done and there may
12   be conclusions to be reached at some point in time in
13   the future when more information is determined.  I
14   think we would like your guidance in this regard and a
15   suggested course of action.
16                  MR. MATTAX:  Yes.  Chairman, I think
17   that's a fair assessment, and I think that where we
18   would start would be -- you know, GTECH has said that
19   they -- you know, again, although I think they've said
20   this a couple of years ago as well -- but they do now
21   have more formal proceedings so that the types of
22   issues that have been discussed today won't happen in
23   the future.  That information has been sent to me and
24   I have reviewed it.  And so I think that would be step
25   number one is, basically, get with GTECH and say, you
0041
 1   know, you have said these are the processes you are
 2   going to have in place to prevent these things from
 3   happening again in the future.  Are you going to use
 4   them, and follow up and make sure they are used in the
 5   future.  Because that's the fundamental issue with
 6   respect to GTECH, if you have a corporate culture that
 7   is designed to prevent these things from happening,
 8   then it's unlikely they'll be repeated in the future.
 9   If you have a corporate culture that is paying lip
10   service to this, and that's not, in fact, intent on
11   issuing -- on the safeguards to make sure it doesn't
12   happen again in the future, then it'll probably be
13   repeated.  And I think that's fundamentally what is
14   key here in this transaction or in this situation is
15   making sure the representations that have been made
16   about the processes that GTECH is going to have in
17   place to prevent this from happening in the future
18   actually are in place.  And I think that's number one
19   where the assurance needs to be -- to come from.  I
20   think that's the most important.
21                  Secondly, I would agree that I think
22   the investigations are going to be continuing.  It's
23   not just our investigation but, you know, Brazil is
24   pursuing things, and the SEC is pursuing things.  And
25   I think we need to follow those and to the extent that
0042
 1   additional information comes out or things get more
 2   serious, then that could result in action needing to
 3   be taken by this Commission.
 4                  At this point, I think the information
 5   is troubling, but I don't think it rises to the level
 6   of requiring any specific action by the Commission
 7   other than, as I said, you know, perhaps sending a
 8   letter back to GTECH saying, you know, here are the
 9   processes that you have said are going to be
10   implemented to prevent these actions from happening
11   again in the future and we expect you to fully comply
12   with those.  And like I said, then continue with
13   the -- monitoring the investigations, and if
14   additional information comes forward, bring it back to
15   the Commission.  But I think that's where we need to
16   be right now.
17                  COMMISSIONER COX:  David, as you do
18   that, would you look also at what representations
19   they've made to us in the past, formally or
20   informally, because I believe that Mr. Turner told us
21   when he became CEO that this was part of the history
22   of that company and these things would not happen on
23   his watch.  And if, in fact, he told us that and they
24   have happened on his watch, I'm going to be real
25   concerned about his credibility that this time we've
0043
 1   really changed.
 2                  MR. MATTAX:  Well, I'll do that.  I
 3   don't think I focused particularly on that aspect, but
 4   I think we should go back and review the records and
 5   see what has been said and compare that with what the
 6   Department of Public Safety has found, and perhaps
 7   then ask him for an explanation.  And we certainly can
 8   report back to the Commission with respect to what we
 9   find in that regard.
10                  COMMISSIONER COX:  Good.
11                  CHAIRMAN CLOWE:  Director Sadberry, do
12   you have a comment?
13                  MR. SADBERRY:  Chairman, I have a
14   comment that concurs entirely with the observation I
15   have heard from you and Commissioner Cox, and that is
16   from an overall standpoint.  From the agency, we are
17   very comfortable and confident in the configuration of
18   the team and the process that has been carried out by
19   this team that has been assembled.  We're privileged
20   and fortunate in that respect, in my belief, that
21   we've been able to have access to the best resource
22   available to the agency for this purpose.  And as you
23   have indicated in prior meetings, it is our intent, to
24   the extent protocol permits, to continue this assembly
25   and this process, to carry it to its logical and
0044
 1   ultimate conclusion, wherever that might lead.  It is
 2   my intent, as I have personally interacted and
 3   interfaced with GTECH and Mr. Turner in this process,
 4   as well as our team members and his staff, to see that
 5   every aspect of any issue that has been raised is
 6   followed in a legitimate way and in a way that gets to
 7   the information that is helpful and appropriate to the
 8   Commission to make any decisions and determinations
 9   that it -- you might at some point deem appropriate.
10                  You asked earlier that lieutenant --
11   Sergeant Riordan comment further on the work that is
12   being conducted by other agencies or combinations of
13   consortiums, and we are mindful of that process in
14   other states, other consortiums, and we are in the
15   process of making certain that we use every avenue
16   available to this agency to pursue, through our team
17   as well as our own resources, in obtaining any
18   information that might be available to which we are
19   entitled through legal means to obtain.  So put
20   simply, we are at the switch.  We recognize and -- the
21   importance of all of this and are mindful of it.
22                  The specific matter before you, which
23   came in the making of the Lottomatica transaction,
24   which is the matter that we wanted to be certain that
25   you have received a full and complete report from our
0045
 1   team in that respect as it proceeds to -- or it
 2   appears from all indications we've had -- ultimate
 3   conclusion that it will occur.  That process is one
 4   thing.  That's this particular item on the agenda.  As
 5   you point out, we have other matters under our
 6   contract that can come before you and may come before
 7   you in future meetings that this is the beginning
 8   process in that regard to give you a baseline of
 9   information to alert you what we believe you should
10   know and to give you the opportunity of indicating any
11   direction you wish us to take, or to indicate where
12   you might feel we stand in that regard.  And that
13   would be agenda item eight, as we pointed out.
14                  So with that, I would say, from the
15   agency's standpoint, we are pleased with the process
16   and appreciative of the team effort and feel that you
17   have received, for your benefit, the best there is to
18   offer from the investigative process of this entire
19   matter.
20                  CHAIRMAN CLOWE:  Mr. Thomas, we have
21   not heard from you.  Do you have any comments for us?
22                  MR. THOMPSON:  Commissioner, I'm
23   Patrick Thompson with Graves, Dougherty, Hearon &
24   Moody.  And there are just two points that I would
25   like to make, having listened to the discussion this
0046
 1   morning.  One is that very often when you read in the
 2   media about a situation where some company is alleged
 3   to have paid bribes to a government in order to get a
 4   contract, that investigation comes out of the fact
 5   that the product itself has turned out to be defective
 6   or insufficient.  And that's not the case here.
 7   The -- we have not seen any evidence in our
 8   investigation and I'm not aware of any evidence
 9   discovered by the DPS in its investigation that GTECH
10   has delivered substandard or deficient products to the
11   companies -- to the countries that it has contracted
12   with but, in fact, the reputation of GTECH is a
13   company that actually has a high degree of proficiency
14   in delivering complex, reliable systems that perform
15   according to their specifications.  So the issue here
16   is not one of where some sort of artifice was used to
17   put a product that was insufficient in place or one
18   that had not been sufficiently evaluated.  The issue
19   here is the behavior of the company.  The -- as you
20   know, under the Foreign Corrupt Practices Act, the
21   position of the United States is that while people may
22   contend that in other parts of the world certain types
23   of payments that would be considered improper here are
24   just part of the regular course of doing business, but
25   under the Foreign Corrupt Practices Act, the United
0047
 1   States has made the statement that if you do business
 2   here, you will not do -- do not do business in that
 3   manner elsewhere.  And so the -- so all of that is
 4   important to the examination of GTECH.
 5                  In the contract negotiations with GTECH
 6   that I participated in, the Lottery Commission has
 7   always heavily emphasized the obligation that the
 8   Lottery Commission has under the law to keep the
 9   lottery operating in a way that is beyond reproach.
10   And in those negotiations, it has been emphasized to
11   GTECH that it's important even to avoid the appearance
12   of impropriety.  That it goes beyond actual strict
13   adherence to the law, that the parties have an
14   obligation to avoid the appearance of impropriety.
15                  Payment of large sums of money to
16   consultants who perform very little work gives rise,
17   in some cases -- on occasions to suspicions that --
18   that the money doesn't stop with that consultant, that
19   it's going elsewhere, and that somehow that could
20   potentially be a vehicle for making improper payments
21   to decision-making personnel.  And I'm not making the
22   accusation that that has happened here, but to
23   continue the practice of making large payments to
24   consultants for -- and then not auditing their
25   performance or not reviewing the tasks that they
0048
 1   actually perform for those large sums of money is
 2   potentially an issue with respect to this issue of the
 3   appearance of impropriety.
 4                  And so one of the options that would
 5   seem available to you -- and I support everything that
 6   Mr. Mattax has said today in terms of the proper
 7   course of action -- is that possibility that the
 8   Lottery Commission of Texas and the other lotteries in
 9   the United States, for example, those associated with
10   NASPL, could use their bargaining power to reform the
11   company if the company needs reforming.  And that
12   would include amending practices that lead to the
13   appearance of impropriety.
14                  As Mr. Mattax said, there are ongoing
15   investigations and those will either lead to
16   indictments or convictions or they will not.  Whether
17   they do or not still leaves open the issue of whether
18   the company has engaged in behavior that gives rise to
19   suspicions or -- and that it is one of your rights
20   under your contract to deal with the company on that
21   issue and, most likely, a similar right under numerous
22   other state lottery contracts with GTECH.
23                  So what I'm saying is that the -- that
24   as long as the product itself is not defective and
25   there is an interest in continuing to do business with
0049
 1   a company that is capable of delivering a reliable
 2   product, then an alternative course of action to you,
 3   other than looking for a replacement, is to use your
 4   ability, with your contract and your marketability, to
 5   persuade the company to adopt practices that will
 6   avoid in the future even the appearance of
 7   impropriety.  And so I don't know if you -- it is up
 8   to you to decide whether that is a sufficient course
 9   of action or whether it's likely to bear fruit, but it
10   appears -- it seems to me that it's one of the options
11   available.
12                  And I just wanted to avoid a possible
13   misimpression, leaving here, that what we're talking
14   about here is some sort of trick or artifice that was
15   used by GTECH to -- for example, to obtain the Texas
16   contract.  My understanding is, the performance of
17   GTECH under the contract, while there are issues that
18   the Commission has raised and continues to raise with
19   GTECH on a regular basis, that there isn't an
20   accusation here that GTECH misrepresented itself with
21   respect to obtaining that contract.  And though -- not
22   with respect to obtaining it, though there could be
23   issues ongoing as to whether some of these things
24   should have been disclosed to you.
25                  What it all amounts to is the fact that
0050
 1   you have the right under your contract to monitor
 2   GTECH very closely.  You have the right of access to a
 3   great deal of information about the company and its
 4   operations.  And -- and you can exercise that right to
 5   help persuade the company to adopt practices that may
 6   cause you to have less concern in the future about the
 7   behavior of the company, and maybe increase their
 8   transparency to your investigators, so that in the
 9   future your investigators don't have to work for
10   several months to get the answers to their questions.
11                  COMMISSIONER COX:  Patrick, you were
12   engaged to help us -- help the Texas Lottery negotiate
13   the contract with GTECH, weren't you?
14                  MR. THOMPSON:  Yes, sir, I was.
15                  COMMISSIONER COX:  Do you recall, when
16   that contract was being negotiated, whether we
17   received assurances that these things of things would
18   not occur in the future?
19                  MR. THOMPSON:  The attorneys that I was
20   dealing with directly in the contract negotiations,
21   those issues didn't come up.  We were dealing with the
22   terms of the contract itself.  However, my
23   understanding was that at that time, there were higher
24   level meetings going on between representatives of
25   GTECH and people from the Lottery Commission, where
0051
 1   those representations were being made.  That is, that
 2   the -- that some of very publicized incidences in the
 3   past, including Great Britain and Ireland, that those
 4   were done by people who were no longer with the
 5   company and that the company's practices had changed.
 6                  COMMISSIONER COX:  What -- what kind of
 7   Sarbanes-Oxley requirements might be involved and
 8   might have already required that these controls be in
 9   place?  Compliance with laws, I think, is certainly an
10   important part of any corporate governance structure,
11   and these seem to be -- there seem to be questions
12   that Mark and Cliff are raising as to whether these
13   acts are, in fact, legal.
14                  MR. THOMPSON:  The -- one of the issues
15   that we have been dealing with in the course of this
16   review is the -- what changes will occur as a result
17   of GTECH no longer being a publicly-traded corporation
18   in the U.S., which is going to be one of the end
19   results of this transaction.  And, certainly, in terms
20   of monitoring by the SEC and rights of U.S.
21   shareholders of access to information about the GTECH
22   Corporation itself, those will be radically altered.
23                  The -- we have attempted to address
24   those issues by notifying GTECH that the Texas Lottery
25   Commission is going to exercise its rights under the
0052
 1   contract to demand continuing access to certain items
 2   of information that it may lose access to under normal
 3   circumstances as a result of the company no longer
 4   being publicly traded.  Certainly, there is no doubt
 5   about it, that GTECH is subject to the Foreign Corrupt
 6   Practices Act, and it is now and will continue to be,
 7   after this transaction, though jurisdiction for
 8   enforcing it or prosecuting GTECH could change from
 9   the SEC to the Department of Justice as a result of
10   this transaction.  So there is no doubt that they are
11   subject to these laws.
12                  With respect to their obligation to
13   divulge information to shareholders, that -- that is a
14   little bit more complicated question, and if you're
15   interested in the answer to it, we'll be happy to
16   prepare a report for you on it.  But it involves the
17   fact that GTECH will be part of a corporation which is
18   traded on the Milan Stock Exchange.  And then
19   De Agostini, which of course holds controlling
20   interest, is not a publicly-traded corporation
21   anywhere; it's privately held and fairly closely held.
22   So I -- I don't know that we can count on the statutes
23   in the United States that give people rights of access
24   to information about the affairs -- the internal
25   affairs of the company as much maybe as you can rely
0053
 1   on your contractual relationship with them for access
 2   to that information.  But if you want to know what
 3   information you will continue to have simply by virtue
 4   of GTECH being a company that operates in the United
 5   States, we'll be able to provide that for you.
 6                  COMMISSIONER COX:  Well, I think the --
 7   I'm intrigued by your idea that this is not a question
 8   of defective product, but maybe a defective process
 9   back in Rhode Island and that maybe one can be fixed
10   and the other, therefore, we can continue to avail
11   ourselves of.  But I think we're on a slippery slope
12   here when we say, well, if you just tell us that
13   you're going to be good folks in the future that we'll
14   just buy into that, unless we have a way of monitoring
15   that or we know that someone is monitoring that.  So
16   as I ask that as y'all go forward you consider how
17   much reliance we can actually place on the assurances,
18   whatever they may be, that we receive because of the
19   lack of visibility and transparency here.
20                  MR. THOMPSON:  Yes, sir.  That's an
21   excellent point, and I do think it's a very legitimate
22   issue at this point, to what extent you'll be able to
23   rely on their representations that practices have
24   changed, or even if they implement new practices and
25   the extent to which we'll be able to rely on the
0054
 1   belief that the -- that they will be enforced.  And
 2   increase methods of monitoring the company may be
 3   appropriate under those circumstances.  It's -- that's
 4   one of the decisions that is for you to make.
 5                  COMMISSIONER COX:  Thank you,
 6   Mr. Chairman.
 7                  CHAIRMAN CLOWE:  I'll try to sum up my
 8   thinking.  Perhaps I can speak to some extent on
 9   behalf of Commissioner Cox and Director Sadberry.
10                  I am most appreciative to each of you
11   and to the three entities you represent for the
12   thoroughness and the thoughtfulness of the work that
13   you've done.
14                  Lieutenant Riordan, especially I want
15   to tell you how much I appreciate in your report all
16   of it, but the summation of the major issues.  I think
17   that you have done an excellent job of stating the
18   things that we need to be focused on, and I'm
19   appreciative of the effort that went into the
20   summation as you have crafted the verbiage.  I think
21   that you hit on the things that are of concern to this
22   Commission.
23                  You have mentioned management style,
24   and aggressive style for obtaining contracts, and
25   being less than forthcoming, and those are the things
0055
 1   that have certainly come to the level of attention
 2   that I think we have our concern about.  And I --
 3   although I say I'm concerned about this, I am at the
 4   same time appreciative of it, and the work that you've
 5   done and that we hope you'll continue to do.
 6                  I think Commissioner Cox has properly
 7   expressed the thought that we felt like, some time
 8   ago, we were at the point, Patrick, where you say, you
 9   know, we need to get to of saying, everything is in
10   the past and then we're going to go forward and
11   everything is going to be just right.  And I -- that's
12   a question that clearly is in his mind and my mind,
13   just where are we with Mr. Turner and with GTECH.
14                  And I am mindful of your comments,
15   Mr. Mattax, that, you know, we have a situation here
16   where we need to be in balance.  We are not a
17   prosecutor, we are not a -- a judge, and there are
18   worldwide indications here of activity, but we are
19   concerned about our responsibilities and our rights
20   within our contract.
21                  My sense is that we must pursue this
22   and that we must continue to communicate with
23   Mr. Turner, and I think -- I think that is your role,
24   Director Sadberry, and to ask for responses and
25   probably to have him here at a point in time to
0056
 1   discuss this in the open and to hear what a person of
 2   his position would say to the questions that you have
 3   raised and that we now have in our minds.  And we have
 4   a responsibility, as I see it, to the people of Texas,
 5   to pursue this matter and to reach a level of
 6   confidence or satisfaction that where we are is where
 7   we should be.
 8                  And I think it's particularly
 9   important, Lieutenant Riordan, as you pointed out,
10   that Lottomatica and the Italian personnel were very
11   forthcoming.  You didn't get that level of response
12   with GTECH.  But GTECH is to be the surviving entity
13   of this acquisition and merger, and that culture which
14   exists in that entity in the United States, in the
15   state of Rhode Island, I assume, from everything we
16   have had as an indication, will be the surviving
17   culture.  And I think that's what we're focused on.
18   We're not focused on the points that you properly
19   made, Mr. Thomas, about the performance.  We're not
20   seeking failure-to-perform criteria.  We're looking at
21   a culture of how this entity does business.  And
22   that's important to us.  That's important to the State
23   of Texas and to the people that we have to look after
24   as far as defending their rights in a contract that we
25   put into place on behalf of this agency.
0057
 1                  So I would say, thank you very much.  I
 2   think we're, as a group, very impressed with the
 3   thoroughness of the work that you have done in this
 4   project.  With your continued devotion, all three of
 5   you in your roles, have helped us tremendously and I
 6   hope you'll continue to do that.
 7                  Mr. Mattax, I think at this point,
 8   we're looking to you to work with Executive Director
 9   Sadberry to carry it forward and to keep us advised.
10                  MR. MATTAX:  Very good.  We'll proceed
11   along those lines.
12                  CHAIRMAN CLOWE:  Anything further on
13   this subject?  Let's take a short recess.
14                    (RECESS.)
15                  CHAIRMAN CLOWE:  We'll come back to
16   order.
17                  Director Sadberry, I have an appearance
18   form only for Lieutenant Mark Riordan, and we'll need
19   those for the other gentlemen who appeared on the
20   record.  If you'll see that those are accomplished and
21   we get those in the record.  It's just an oversight, I
22   think.  We'll -- we'll make that a housekeeping
23   matter.
24                  Next, we'll go to item number two on
25   the agenda, report, possible discussion and/or action
0058
 1   on lottery sales and revenue, game performance, new
 2   game opportunities, market research, and trends.
 3   Ms. Pyka and group.
 4                  MS. PYKA:  Good morning, Commissioners.
 5   Thank you.  To my right with me this morning, I've got
 6   Robert Tirloni, our Products Manager, and Doctor David
 7   Sizemore, our Research Coordinator.
 8                  Our first chart for you this morning,
 9   Commissioners, reflects revenue --
10                  CHAIRMAN CLOWE:  Kathy, I don't think
11   your mike is on.  Thank you.
12                  MS. PYKA:  -- reflects revenue from
13   sales and net revenue to the State through the week
14   ending July 8th, 2006.  Total sales for this 45-week
15   period amounted to 3.3 billion, while estimated net
16   revenue to the State for this period was 874.3
17   million.  Fiscal year 2006 sales to date reflect a
18   113.7 million-dollar increase over fiscal year 2005
19   sales.  And net revenue to the State reflects a 4.2
20   percent increase as compared to the 839 million figure
21   for the same period in fiscal year 2005.  Our prize
22   expenses as a percent of sales are reflected at
23   62.7 percent for the current time period, just a
24   slight increase over the same period in fiscal year
25   2005.
0059
 1                  Our next slide includes fiscal year
 2   2006 year-to-date sales by game.  As noted on this
 3   slide, 75.6 percent of sales, or 2.5 billion, was from
 4   instant tickets, followed by 7.7 percent of sales, or
 5   253.4 million, from Pick 3.  Lotto Texas includes 6.4
 6   percent of sales and 209.5 million, followed by
 7   Mega Millions at 174.7 million and 5.3 percent of
 8   sales.
 9                  And our following slide is simply a
10   graphical presentation of the 3.3 billion year-to-date
11   sales by game.
12                  MR. TIRLONI:  Good morning,
13   Commissioners.  For the record, my name is Robert
14   Tirloni.  I am the Products Manager for the
15   Commission.
16                  Before moving on to the next slide,
17   Commissioners, you asked last month that we gather
18   information that shows the instant on-line sales
19   percentages in other states.  We have gathered all of
20   that information.  I have not had an opportunity to
21   share it with Ms. Pyka yet.  We have discussed it.
22   We're going to look at that over the next couple of
23   weeks, and so we will have that for you in the August
24   meeting.  And I just wanted to let y'all know about
25   that.
0060
 1                  CHAIRMAN CLOWE:  Off the top of your
 2   head in that regard, Robert, are we on the high end of
 3   what you've seen or in the middle or the low end?
 4   What is your --
 5                  MR. TIRLONI:  I would -- I would say
 6   we're towards the high end.  We're not by ourselves.
 7   Massachusetts I would put in the same arena with us,
 8   and there are actually a few other small states that
 9   were surprising to me that were also in that same
10   ballpark.  I want to say Vermont and New Hampshire
11   have over 70 percent of their sales coming from
12   instants as well.
13                  You all specifically asked about some
14   of the -- some of the bigger states -- New York,
15   Florida, Georgia, California, and we have that, but I
16   believe we're going to also share with you some of
17   those other ones that jumped out that were very
18   similar to us in the about 70/30, 75/25 ballpark, just
19   for comparison purposes.
20                  COMMISSIONER COX:  Robert, as you're
21   looking at those, we've talked in the past about the
22   few states that have significantly higher per capita
23   sales than Texas.  I know we've talked about
24   Massachusetts, and I remember a number like nine
25   dollars as opposed to our three dollars.  Would you
0061
 1   also see what kind of explanations are out there today
 2   for those states that are significantly above us, as
 3   to why -- what you put your finger on to appear to get
 4   that much higher per capita sales to?
 5                  MR. TIRLONI:  Absolutely.
 6                  Commissioners, this next slide we look
 7   at regularly, every month.  This is the pie chart
 8   which is representing our year-to-date instant sales,
 9   which is 2.5 billion.  That's through the week ending
10   July 8th.  The five-dollar price point continues to be
11   our leading price point, followed by the twos and then
12   the tens.  So we've not seen much change in -- in
13   terms of where our instant sales are coming from in
14   terms of price point.
15                  And now we have some follow-up slides,
16   some information that was requested last month.
17   Commissioner Cox, one of the questions you asked was,
18   how has Pick 3 done over time, is it a growing game,
19   and how does it compare to Lotto, and then to Lotto
20   and Mega Millions.  So we worked with Kathy's staff,
21   and we have the following slides to share with you.
22                  This first slide is simply Lotto Texas
23   sales by fiscal year.  And that's represented by the
24   green line.  I'll point out some -- some things.
25   Lotto started in October of '92, which was our fiscal
0062
 1   '93.  The highest year ever achieved in terms of sales
 2   was 1995, where their sales were over 1.1 billion.
 3   The year 2000 was the first ever matrix change from
 4   the original six-of-50 to the six-of-54.  The fiscal
 5   year 2001 was the 85-million-dollar jackpot.  That was
 6   realized after we made that matrix change.  And then
 7   in 2003, the second matrix change was made, and that
 8   was when we changed from the six-digit game to the
 9   bonus ball game.
10                  What we have done here is, since
11   Mega Millions started in December of 2003, we have
12   shown you the combination of Lotto, Mega Millions, and
13   Megaplier.  So for 2004, when you add all three of
14   those together, you see that the -- the sales impact.
15   So we had a significant increase in 2004.  It's
16   probably worth noting, in that fiscal year of 2004, we
17   had those two very large record jackpots, one on Lotto
18   Texas and one on Mega Millions.  In 2004, right at the
19   end of that fiscal year, Lotto climbed to a record
20   145 million dollars, and at the same time,
21   Mega Millions was climbing to the 290-million-dollar
22   jackpot.  So in a matter of a few -- of -- I think
23   within two weeks of each other, we had those -- those
24   two very high triple-digit jackpots.
25                  COMMISSIONER COX:  Okay.  Now, Robert,
0063
 1   what I just heard you say was that 2004 is an anomaly
 2   because of some very high jackpots.  So I'm going to
 3   take it off the chart for just a second.
 4                  MR. TIRLONI:  Okay.
 5                  COMMISSIONER COX:  And I'm going to say
 6   what this shows me is that Mega Millions, including
 7   Megaplier, has been totally cannibalistic of Lotto
 8   Texas, and we're right back where we were.  We just
 9   now have more games.
10                  MR. TIRLONI:  I -- I agree with you
11   about 2004 because, as you can see, 2005 -- yes.  And,
12   in fact, 2005, the sales for all three in 2005 were
13   524 million.  And if you look back to 2003, the sales
14   for Lotto by itself were 526 million.
15                  COMMISSIONER COX:  So if we did
16   anything, we stopped the downward trend in on-line
17   sales -- big -- on big game on-line sales, but we
18   didn't really gain much.
19                  MR. TIRLONI:  I agree.  I think what we
20   did was we brought in a -- we brought in another game
21   that has the potential to, when it climbs up to the --
22   I'll say, the right jackpot amount, and you know that
23   varies by person -- I would think in Texas now it's in
24   the upper 100-million-dollar range, probably around
25   200-million-dollar range.
0064
 1                  COMMISSIONER COX:  Really?
 2                  MR. TIRLONI:  I do think that that's
 3   the case based on some of the last roll-ups that we've
 4   seen.
 5                  COMMISSIONER COX:  Then we've gone from
 6   30 to 70 to nearly 200, in your mind, in a very short
 7   period of time.
 8                  MR. TIRLONI:  Yes, I believe that to be
 9   true.  So we brought in a game that has the potential,
10   when it climbs up to the right jackpot amount, to
11   deliver strong sales results.  But as you've said and
12   as -- and I completely agree with your comment about
13   2004, I do think that is an anomaly because of --
14   because of those jackpots that we achieved right at
15   the end of that fiscal year.
16                  The other thing worth noting is, you
17   know, in 2003, we -- and we've discussed this -- we
18   did make that change to the bonus ball game on Lotto,
19   and we did see an immediate sales decrease after
20   introducing that bonus ball feature on Lotto.  So that
21   had an impact as well.
22                  CHAIRMAN CLOWE:  Before you leave that
23   slide, Robert --
24                  MR. TIRLONI:  Yes, sir.  I'll go back.
25                  CHAIRMAN CLOWE:  In regard to your
0065
 1   discussion with Commissioner Cox, we're talking about
 2   either 6.4 percent of our sales -- you're talking
 3   about Lotto Texas, or with Lotto Texas and Mega
 4   Million and the multiplier added in, you're talking
 5   about 13 or 14 percent of our sales.
 6                  MR. TIRLONI:  Yes.  That's right.
 7                  CHAIRMAN CLOWE:  And the instant
 8   tickets are now over 75 percent.
 9                  MR. TIRLONI:  Correct.
10                  CHAIRMAN CLOWE:  Haven't the people who
11   want to play the lottery games gravitated towards that
12   opportunity for higher payouts and a better
13   opportunity to win?
14                  MR. TIRLONI:  I believe that that is
15   the case.  You know, we talked about this last month
16   after the -- the story that took -- or we discussed it
17   in a meeting, the story that was on the NBC Today Show
18   about that subject, not only in Texas but
19   about nation -- nationwide.  People seem to have --
20   seem to be moving from the on-line games to the
21   instant games for a variety of reasons.  You just
22   noted some of them.  Better --
23                  CHAIRMAN CLOWE:  I think the two most
24   important are, there is a higher payout.
25                  MR. TIRLONI:  Absolutely.
0066
 1                  CHAIRMAN CLOWE:  And there is a better
 2   chance to win.
 3                  MR. TIRLONI:  Absolutely.  We have --
 4   we have 25- and 30-dollar scratch off games that have
 5   overall odds of one in less than three, one in 2 point
 6   something, one in three.  And you're looking at
 7   on-line games, such as Lotto Texas, that have overall
 8   odds of one in 71.  Mega Million's overall odds are
 9   one in 40.  So the winning experiences are far more
10   frequent on scratch or instant than they are on
11   on-line.
12                  CHAIRMAN CLOWE:  And you can win a
13   million dollars.
14                  MR. TIRLONI:  You can.  That's --
15   that's the other aspect of the scratch off games is as
16   the price points have increased, so have the top
17   prizes.  So you're -- you know, you're not -- you're
18   not playing for 5 or 10,000 dollars on scratch offs.
19   You're playing for large amounts of money, similar to
20   what you used to play for on lotto-style games years
21   back.
22                  CHAIRMAN CLOWE:  I just -- frankly, I
23   just think we've been focused on Lotto Texas and --
24   you know, I -- I think we're really kind of missing
25   the boat by spending so much time.  I don't want to
0067
 1   give 6.4 percent of our sales away.  That's for sure.
 2   But there is so much media attention on Lotto Texas.
 3   This last attention you have gotten from national
 4   television on the instants is the first that I've
 5   heard of.  The whole thing has shifted.  And I think
 6   you've got to give the players credit.  They've
 7   identified where the higher payout is and where the
 8   increased frequency of winning is.  And so now, unless
 9   it's 200 million, they're spending 75 percent of their
10   money in that venue.  And we tried to change the rules
11   for Lotto Texas one time to make it more attractive,
12   and we were unsuccessful in that.  You know, I just
13   think we've got to realize what is a reality of the
14   market.
15                  How do you feel about that,
16   Commissioner Cox?
17                  COMMISSIONER COX:  Well, I think one
18   thing that I would add to -- to the appeal of the
19   instants is the instant gratification.
20                  MR. TIRLONI:  Absolutely.
21                  COMMISSIONER COX:  That's -- it's a
22   known fact that there has been a trend in American
23   society from deferred gratification to instant
24   gratification, particularly among younger people.  And
25   Lotto Texas is a slow game.  Megaplier is a slow game.
0068
 1   It might be three days after you buy a ticket before
 2   you know whether you've won.  And then, if you've won,
 3   you have got to come back in.  The obvious benefits of
 4   the ticket -- scratch off tickets are, you don't have
 5   to wait.  You don't have to make two trips if you win.
 6                  CHAIRMAN CLOWE:  And -- and, you know,
 7   I liken that to my experience in the convenience store
 8   yesterday.  I -- I was in line, waiting to pay for
 9   gas, and there were two or three people ahead of me.
10   And they bought cold soft drinks, and they bought
11   scratch off tickets.  And the minute they were out of
12   line, they opened their soft drink and they took a
13   drink, and they scratched off their tickets, just what
14   you're saying.  And -- and I just think we've got to
15   step back and look at this whole picture and, to a
16   certain extent, quit beating ourselves up about Lotto
17   Texas and start telling, you know, what is a fact,
18   that it's just an old game that people aren't drawn to
19   like they were in '92.
20                  Robert, what happened in '95 to '96?
21   What caused that precipitous drop?
22                  MR. TIRLONI:  I didn't look at the
23   jackpots for that year, but I'm -- there were no major
24   changes to the game, so I would assume that that had
25   to do with jackpot levels that caused that -- that
0069
 1   decrease.  There was one other game introduction in
 2   '95, and that was Cash Five.  That -- that could have
 3   played a -- that -- that could have been a factor, but
 4   I'm -- I would have to assume it has to be
 5   jackpot-related.
 6                  CHAIRMAN CLOWE:  What year did the
 7   legislature reduce the payout?
 8                  MR. TIRLONI:  That was '97, and I
 9   believe on the instants we started seeing the impact
10   in fiscal '98.  So that was prior to that.
11                  CHAIRMAN CLOWE:  Okay.
12                  COMMISSIONER COX:  Mr. Chairman, as to
13   what we see here and what we -- maybe we can do about
14   it, I have asked Gary to look at some other issues
15   that we have looked at before, which is, maybe Lotto
16   Texas needs more frequent draws.  The last time we
17   looked at that, it didn't bear out as a viable
18   alternative, but I think we need to continue to look
19   at things that will move it in the direction of our
20   more attractive products, if we can.
21                  CHAIRMAN CLOWE:  I do, too.  And --
22   and, you know, this subject was really raised in the
23   audit by the State Auditor, in regard to the
24   establishment of the estimated jackpots relative to
25   projected sales.  And my contention is that if we set
0070
 1   it so that it's always at estimated sales, we're going
 2   to see a further deterioration.  And I've asked
 3   Ms. Pyka to look into how this works out on an
 4   annualized basis as to whether or not this practice --
 5   and, of course, we had the practice of setting the
 6   jackpot higher than estimated sales, initially at the
 7   four million dollars and then at the next three rolls,
 8   for years.  And that policy was never questioned then.
 9   And I'm not quite sure why it wasn't in regard to
10   setting it at the 11-million or 12-million-dollar
11   level, but nonetheless, I still see us as the house
12   trying to ante up to get people to -- interested in
13   playing this game.  And I think you've got to manage
14   the game to keep the interest that you have.  And
15   right now, we're doing a lot better job with the
16   instants than we are in any other area, except for
17   Pick 3, it seems like.
18                  Kathy, did you have a comment?
19                  MS. PYKA:  I do not.  And I think that
20   as we continue through the slides and walk through the
21   Pick 3 slides, it'll certainly support all of these
22   statements as we've looked at all of the historical
23   sales in the games.
24                  CHAIRMAN CLOWE:  Okay.  Well, I -- I'm
25   just a little weary, frankly, of all these questions
0071
 1   about what is wrong with Lotto Texas.  I -- I think I
 2   can see what is wrong with Lotto Texas.  And I -- I,
 3   for one, would like to say it so that we can identify
 4   that it's just not attractive to players like it was
 5   in '92 and '93 and '94.
 6                  MR. TIRLONI:  And I think the cliche
 7   is, you can't go home again.  And, you know, Lotto --
 8   Lotto, in 2006, will not be the game it was in -- in
 9   '92 or in its heyday of -- of '95, when it started and
10   it was brand new, and the lottery itself was new to --
11   to the citizens of Texas.
12                  COMMISSIONER COX:  But I'm going to
13   defend this tired fellow here.
14                  CHAIRMAN CLOWE:  Good.  Somebody needs
15   to.
16                  COMMISSIONER COX:  Tired fellows can
17   make important contributions.
18                  MR. TIRLONI:  That they can.
19   Absolutely.
20                  COMMISSIONER COX:  This game puts 100
21   million dollars in Texas education every year.  And
22   that's worth preserving.  If we were to begin to call
23   Lotto Texas a game that is only one that is supported
24   by a percentage of sales, we would be taking the very
25   large percentage of 100 million dollars off our bottom
0072
 1   line.
 2                  CHAIRMAN CLOWE:  That's right.  We
 3   would be giving that up.
 4                  COMMISSIONER COX:  Because we already
 5   have that game.
 6                  MR. TIRLONI:  Uh-huh.
 7                  COMMISSIONER COX:  What's the name of
 8   it, Robert?
 9                  MR. TIRLONI:  Well, you could be
10   converting -- what we would do would -- we would be
11   converting Lotto to a cash game, basically.
12                  COMMISSIONER COX:  Okay.  And we
13   already have that game.
14                  MR. TIRLONI:  We have the Cash Five
15   game, yeah.
16                  COMMISSIONER COX:  So we could call
17   Cash Five Lotto Texas, but it wouldn't be Lotto Texas.
18   It would still be Cash Five.
19                  MR. TIRLONI:  I think if you drop the
20   starting jackpot from 4 million and have a starting
21   jackpot that is completely supported by sales, then,
22   basically, what you have done is you have -- you have
23   created a -- a cash game.
24                  COMMISSIONER COX:  So we have -- we
25   have doubled up on a game we already have and --
0073
 1                  MR. TIRLONI:  Yes.
 2                  COMMISSIONER COX:  -- eliminated one
 3   that produces 100 million dollars at the bottom line.
 4                  MR. TIRLONI:  Absolutely.  And we
 5   are -- we are -- you know, when we made the game
 6   recommendation to you in the fall to go back to the
 7   six-of-54, we told you that there were things that we
 8   were looking at down the road after we got some sales
 9   data on the change, and those -- those items are still
10   on the table -- more frequent drawings, adding new
11   prize levels, adding add-on games to the games -- to
12   the Lotto game.  Those are still on the table.  We're
13   waiting to get a little sales history and sales data
14   under our belt from this recent change and see which
15   we think is the best option to implement first.
16                  COMMISSIONER COX:  Okay.
17                  MR. TIRLONI:  I think this discussion
18   about -- and we talked a little bit about this last
19   month -- about the instant gratification and the
20   better odds and the frequency lends itself to the next
21   slide, which really went to -- the heart of your
22   question was Pick 3.  And I told you all last month
23   that -- Commissioner Cox, you asked me, well, why do
24   you think Pick 3 is -- is a good game?  Why is it
25   doing well?  And I -- I told you both that I thought
0074
 1   one of the reasons it was doing so well was because it
 2   was the closest thing we had on the on-line side of
 3   the house to an instant game because there were two
 4   drawings a day.  So you -- there is 12 drawings a
 5   week.  You could play in the morning.  There is a noon
 6   day draw.  There is then an evening draw.  I thought
 7   that it -- it was as close to an instant game as we
 8   could get on the on-line side.
 9                  And this -- this slide is the Pick 3
10   sales history from inception.  Pick 3 started in
11   October of '93.  So, again, that's fiscal '94.  And I
12   think the amazing thing, besides seeing the consistent
13   yet slow growth is that, no matter what we've done on
14   the -- with the other on-line products -- adding
15   games, taking games away, changing games -- it's never
16   had an impact on the Cash Five sales over time.  For
17   example --
18                  CHAIRMAN CLOWE:  Now, you said Cash
19   Five.  Do you mean --
20                  MR. TIRLONI:  I'm sorry.  Pick 3 sales
21   over time.  I apologize.  I was going to say, in 1995,
22   we introduced Cash Five.  In 1998, we introduced a
23   two-dollar on-line game called Texas Million.  In
24   2000, we made our first change to Lotto.  In 2001, we
25   replaced Texas Million with Texas Two Step.  I'm kind
0075
 1   of just giving you these milestones to show that as we
 2   tweaked and changed the on-line product mix, Pick 3
 3   has been pretty resilient and has slowly grown over
 4   all of these years.
 5                  And now, basically, on this next slide
 6   what we've done is we've just overlaid the first
 7   chart, which showed the Lotto and the Mega Millions
 8   sales history, and we've -- we've overlaid the Pick 3
 9   sales history onto that same chart.
10                  COMMISSIONER COX:  So if you put a
11   trend line through the Lotto Texas game, it would be
12   almost the inverse of the Pick 3?
13                  MR. TIRLONI:  Yes.  And we have a -- I
14   can -- let me jump to the next slide because the next
15   slide we've taken Mega Millions off of the Lotto line.
16   And so now this is strictly Lotto and strictly Pick 3,
17   through time.  And in 2004, this gap, Lotto did about
18   477 million, and Pick 3 did 277 million.  So to your
19   point, Commissioner Cox, there is a 200-million-dollar
20   gap between Pick 3 and -- and Lotto Texas sales.  2005
21   is where those lines almost completely merge.  Lotto
22   did 306 million, with Pick 3 doing just under 285.
23   And then our current situation -- and this is only
24   through June, but we've been talking about this for
25   months now -- Pick 3 is above Lotto in terms of sales
0076
 1   thus far this fiscal year.
 2                  CHAIRMAN CLOWE:  But that is just Lotto
 3   Texas alone --
 4                  MR. TIRLONI:  That's correct.  It's --
 5                  CHAIRMAN CLOWE:  And we brought
 6   Mega Millions in right at that time, so --
 7                  MR. TIRLONI:  Absolutely.  That's
 8   correct.
 9                  CHAIRMAN CLOWE:  I think, back to
10   Commissioner Cox's point, we've stopped the slide, if
11   nothing else, but it's way down.
12                  MR. TIRLONI:  By bringing in
13   Mega Millions, yes.  And, anecdotally, I -- I attended
14   a retailer and sales district meeting in El Paso.  And
15   I asked the -- separately, in separate meetings, I
16   asked both the retailers and the sales staff, what is
17   going on with Lotto?  You know, we -- we made the game
18   change.  We went back to the six-of-54.  What do you
19   see in your stores?  And -- and these are very high
20   volume retailers.  And they said, it's the jackpot.
21   People come in and ask what the highest jackpot is,
22   and -- and that's what they play.  And sometimes
23   that's Lotto, and sometimes it's Mega Millions.  And I
24   think it also depends on the -- on the roll cycle.
25   And -- and I -- I have been in a pattern here the past
0077
 1   few months, on the second Wednesday of every month,
 2   telling you that there was a Mega Millions jackpot
 3   sold the prior night, and I'm here again today to tell
 4   you the same thing.
 5                  COMMISSIONER COX:  49 million.
 6                  MR. TIRLONI:  49 million, sold in --
 7   sold in Maryland last night.  So since June 2nd, there
 8   have been four jackpot tickets sold, three of them in
 9   the month of June -- 47, 34 and then 23 million -- and
10   then less than a month later, last night, 49 million
11   in Maryland.
12                  COMMISSIONER COX:  What kind of
13   coverage is there at 49 million?
14                  MR. TIRLONI:  Based on the preliminary
15   sales report that I saw come out this morning, based
16   on the sales for the draw for all of states, we would
17   approximate the coverage at somewhere between 6 to 10
18   percent.
19                  COMMISSIONER COX:  So we had something
20   like a one-in-ten to one-in-16 chance of being hit,
21   and we were?
22                  MR. TIRLONI:  Yes.  The coverage in
23   Texas alone was .65 percent.  So it wasn't even 1
24   percent in Texas.
25                  COMMISSIONER COX:  Why have Texans not
0078
 1   embraced this game like folks in other states have?
 2                  MR. TIRLONI:  From research that we
 3   did -- let's see, Mega Millions was launched in
 4   December of 2003 -- we did brand equity research about
 5   six or seven months after.  The feedback -- and we
 6   haven't done it since then.  The feedback then was
 7   that it was visualized as the big multistate game that
 8   you played with 11 other states at -- at that time or
 9   ten other states at that time.  It was the -- what
10   people referred to as the high greed game.  If you
11   wanted to win hundreds and hundreds of millions of
12   dollars, that was the game you played.  And your odds
13   of winning it were -- were long.  And you didn't have
14   a very good shot, which is all --
15                  COMMISSIONER COX:  All true.
16                  MR. TIRLONI:  -- all true.  And -- and
17   at that time, that's why people said they continued to
18   embrace what they called the hometown or the -- you
19   know, the in-state game.  And at that time, people
20   actually reported -- you know, there was almost like
21   an emotional connection to the Lotto game because it
22   was the only game that they had in Texas that they
23   could play to have a chance to win multimillion dollar
24   prizes.
25                  COMMISSIONER COX:  Robert, there was a
0079
 1   time when you were putting graphs like this on a log
 2   scale so that, proportionately, those slopes would be
 3   similar.  Could we go back to doing that?
 4                  MR. TIRLONI:  Uh-huh.
 5                  COMMISSIONER COX:  Because I think the
 6   slopes would look very similar if they were on a log
 7   scale.
 8                  MS. PYKA:  We can do that.
 9                  COMMISSIONER COX:  Now, this Pick 3
10   game is the legal equivalent of numbers or policy.
11   Right?
12                  MR. TIRLONI:  Yes, that's correct.
13                  COMMISSIONER COX:  Now, typically, the
14   numbers policy, illegal games, the street games, did
15   not have a drawing.
16                  MR. TIRLONI:  I believe that to be
17   true.
18                  COMMISSIONER COX:  The winning
19   numbers -- the winning numbers were typically
20   something like the first three digits or the last
21   three -- last three digits, I think, in the handle at
22   the local race track.  Something that was going to be
23   published in the paper.
24                  MR. TIRLONI:  Yes.
25                  COMMISSIONER COX:  So you could rush
0080
 1   out and get the morning paper and see whether you had
 2   won or not.
 3                  MR. TIRLONI:  Uh-huh.
 4                  COMMISSIONER COX:  Have we considered a
 5   game like that, where -- a game where there isn't a
 6   drawing?  Or do I -- does the law require that we have
 7   a drawing, or can the outcome be something that's
 8   independently determined, like the last three digits
 9   of the handle at Retama Park, for instance?
10                  MR. TIRLONI:  I would have to check
11   with -- I would have to look that --
12                  COMMISSIONER COX:  I think we're about
13   to get a legal opinion.
14                  MR. TIRLONI:  I think we are, and I'm
15   glad that we are.
16                  MS. WOELK:  Thank you.  This is Sarah
17   Woelk, Special Counsel.
18                  No, the law does not require a drawing.
19   And there is always some sort of question about
20   what -- what the legislature authorized, what the
21   constitution authorized when they authorized the State
22   to operate lotteries.  But one of the things that is
23   actually mentioned, one of the early Attorney General
24   opinions that looked at this issue, was -- they were
25   talking about what people had in mind, and numbers
0081
 1   games is one of the things that's mentioned.  A
 2   numbers game is exactly what you're talking about,
 3   something that's measured against some sort of
 4   independently published figure.  And the law -- once
 5   you have a drawing, there is a number of regulations
 6   that apply to what has to happen in the drawing.  But
 7   as I understand our law, there is -- well, clearly,
 8   there's -- there is no drawing in instant games, and
 9   there is instant games and on-line games all
10   authorized under the same general authority to -- to
11   conduct lottery games.  And so I don't see any legal
12   impediment to the general idea of having a game where
13   the winning numbers were extracted from some external
14   source that we didn't control in any way.
15                  COMMISSIONER COX:  Okay.  Why don't we
16   take a look at that?  That might be fun.
17                  CHAIRMAN CLOWE:  Let me bring up a
18   couple of points.  I want to say that we need to be
19   mindful of those people in this state who do not like
20   legalized gaming.  And there was some mention of
21   numbers and illegal games, and I -- I think anything
22   that comes from that heritage might be questioned by
23   those folks.  I think having numbers that are
24   determined outside of the control of the Lottery could
25   bring up another issue.  And, you know, Commissioner
0082
 1   Cox, you mentioned Retama.  And you and I know Retama,
 2   but I'm not sure the folks in Amarillo or East Texas
 3   know what Retama is.  And, you know, there -- there is
 4   always the question, for those who are adversarial,
 5   of -- when numbers are determined to be the winners,
 6   who -- who chose those numbers.  And we've touched in
 7   the area of a random number generator with that
 8   argument.  And I just think we ought to vet this out
 9   very carefully, from an adversarial standpoint and a
10   perception view, before we rush into it.  I would just
11   like to bring those issues up.
12                  COMMISSIONER COX:  And -- and I totally
13   agree.
14                  MR. TIRLONI:  I will tell you -- tell
15   you both that because of the success that we've
16   realized from Pick 3 and the very positive sales
17   history and -- and because it is a game that I think
18   we all agree does get as close to an instant game as
19   possible, we are working on some enhancements, not to
20   change the base game in any way, shape, or form, but
21   to add on to that game and to also consider another
22   daily numbers game that we're looking to bring to you
23   both in the very near future, that are not jackpot
24   related, jackpot driven games like -- you know, as
25   Pick 3 is not.
0083
 1                  COMMISSIONER COX:  When -- when someone
 2   wins this game, this Pick 3 game, what might they win?
 3                  MR. TIRLONI:  Well, if they bet --
 4   it -- it all -- and, you know, that's another aspect
 5   about Pick 3 that I think players like is they have a
 6   lot of flexibility as to how they can play.  So if you
 7   bet in exact combination, say you bet 1-2-3 and you
 8   bet that to come up in exact order, and you wager a
 9   dollar, you win 500 dollars.
10                  COMMISSIONER COX:  Okay.
11                  MR. TIRLONI:  And Pick 3 is also
12   the game -- the only game that allows a 50-cent wager.
13   More flexibility.  So that same wager I just described
14   at 50 cents, wins the player 250 dollars.
15                  CHAIRMAN CLOWE:  And, Robert, so we'll
16   all have the same definition, I think you and
17   Commissioner Cox are ahead of most of us on your
18   knowledge of these games.  How is the jackpot set
19   like -- you said, Commissioner Cox, like the numbers.
20   Define that for us, would you, please?
21                  MR. TIRLONI:  I don't know that I --
22   I'm -- I don't know that I understand your question,
23   Chairman.  That --
24                  CHAIRMAN CLOWE:  Didn't you say that
25   Pick 3 is like the numbers?  It's like a cash game?
0084
 1                  COMMISSIONER COX:  Yes.  Well, it's --
 2   it's -- as Sarah said, it's -- it's -- it is a numbers
 3   game except that it -- the winner is determined by a
 4   draw rather than some published number from an
 5   independent third party, if you will.
 6                  CHAIRMAN CLOWE:  But what makes it a
 7   numbers game in that definition?
 8                  COMMISSIONER COX:  Well, the -- and the
 9   typical numbers are policy game.  A player will pick
10   a -- some number of numbers, usually three, like
11   9-9-9, for instance.  And if those numbers come up,
12   they win a prize.
13                  CHAIRMAN CLOWE:  So that's what makes
14   it a numbers game?
15                  COMMISSIONER COX:  Yes, sir.  You pick
16   numbers.  Lotto Texas is a numbers game as well.  But,
17   typically, the one that attracts that name or that
18   label is one that involves three numbers.
19                  CHAIRMAN CLOWE:  Three numbers.
20                  COMMISSIONER COX:  Yes sir.
21                  CHAIRMAN CLOWE:  So that's really a
22   comparison that you were making, and I -- I didn't
23   understand --
24                  MR. TIRLONI:  And on -- on -- Lotto and
25   Cash Five are a little bit different because a lot of
0085
 1   those prize levels are -- are pari-mutuel prize
 2   levels.  And it depends how much you sell for the
 3   drawing and how many winners there are at a prize
 4   level, and that determines the prize amount.  Pick 3,
 5   there is no rolling jackpot.  All the prizes are --
 6   are guaranteed.  They're -- they're fixed prize
 7   amounts.  And they're all published.  So you know if
 8   you bet 9-9-7 or 9-9-9, in exact order, and you wager
 9   a dollar, you know exactly what you win before the
10   drawing ever takes place.
11                  COMMISSIONER COX:  And you know --
12   if -- if the winning number is 7-7-7, you know you
13   lost money that day.
14                  MR. TIRLONI:  Absolutely.
15                  COMMISSIONER COX:  Because a lot of
16   people bet 7-7-7.
17                  MR. TIRLONI:  The triples are very
18   popular combinations amongst players.
19                  CHAIRMAN CLOWE:  In Pick 3, do the
20   jackpots ever -- paid out ever exceed the -- the
21   actual sales?
22                  MR. TIRLONI:  They do.  In some
23   drawings, especially when you have a triple, the
24   payout will exceed the sales.  But Kathy's staff
25   tracks the payout, and the payout on Pick 3,
0086
 1   historically, averages right about 50 percent.  So you
 2   would have some drawings where you may pay out way
 3   above what you take in, but in a lot of other drawings
 4   you're paying out a lot less than what you take in.
 5   So it all averages out to be right around the
 6   50 percent, which is the expected payout for that
 7   style of game.
 8                  CHAIRMAN CLOWE:  And then the State of
 9   Texas wins.
10                  COMMISSIONER COX:  In the end, the
11   State of Texas wins.  The house always wins,
12   Mr. Chairman.  I have seen months in casinos where a
13   given game that had a very high percentage of return
14   to the casino lost money.  I have never seen a quarter
15   or a year.
16                  CHAIRMAN CLOWE:  That's our point.
17                  COMMISSIONER COX:  Yes, sir.
18                  CHAIRMAN CLOWE:  We keep going back to
19   it.
20                  And -- and what did you say about the
21   pari-mutuel games, Robert?
22                  MR. TIRLONI:  Well, the pari-mutuel
23   games -- you know, for example on Lotto Texas, the
24   second-tier prizes, you have to match five out of six
25   numbers to win the second tier.  And we can estimate
0087
 1   what that -- what that prize amount would be, thanks
 2   to the help of our statistician and our -- the game
 3   designers at GTECH, over time, what that should be.
 4   But it -- it truly is drawing to drawing.  It's
 5   determined on the sales for that particular drawing
 6   and then what gets allocated to that prize tier,
 7   divided by the number of winners at that prize tier.
 8   And that, ultimately, for that specific drawing,
 9   determines the prize amount.  In Pick 3, they're --
10   they're guaranteed up front.
11                  CHAIRMAN CLOWE:  Why wouldn't that work
12   for the jackpot for Lotto Texas?  Pari-mutuel?  What
13   is the objection to that?
14                  MR. TIRLONI:  Well, you know, the
15   jackpots for Lotto are, in a way, pari-mutuel because
16   if you -- if you do have three or four winners,
17   they -- they would end up splitting -- they would end
18   up splitting the jackpot prize.
19                  CHAIRMAN CLOWE:  But that doesn't set
20   the jackpot amount.
21                  MR. TIRLONI:  No, that doesn't --
22                  CHAIRMAN CLOWE:  Which is the true
23   definition of a pari-mutuel game.
24                  COMMISSIONER COX:  Well, let me --
25                  CHAIRMAN CLOWE:  Is it?
0088
 1                  COMMISSIONER COX:  -- add, it doesn't
 2   set the jackpot amount until we reach about 10 or 11
 3   million, and then it does.
 4                  CHAIRMAN CLOWE:  That's right.
 5                  MR. TIRLONI:  Once -- once we get
 6   beyond being underfunded, then that does -- that does
 7   play a role in what the jackpot is -- is rolled to.
 8                  CHAIRMAN CLOWE:  But we still set the
 9   jackpot amount by estimating it, even when we are
10   totally funded.
11                  COMMISSIONER COX:  That's the -- when
12   we're totally funded, that's when we set it by
13   estimation.  Before we're totally funded, we set it by
14   policy.
15                  CHAIRMAN CLOWE:  Right.  But it's not
16   pari-mutuel at -- at either level, is it?
17                  COMMISSIONER COX:  I believe that it
18   is -- it is pari-mutuel at all levels in the sense
19   that Robert indicated that --
20                  CHAIRMAN CLOWE:  In that sense, but if
21   there is only one --
22                  COMMISSIONER COX:  -- if there are
23   ties, you -- each one doesn't get the full amount.
24                  CHAIRMAN CLOWE:  Right.
25                  COMMISSIONER COX:  Whereas in Pick 3,
0089
 1   all the ties win the same amount of money.
 2                  CHAIRMAN CLOWE:  Okay.
 3                  COMMISSIONER COX:  The advertised
 4   prize.
 5                  MR. TIRLONI:  Which is why, on Pick 3,
 6   you can pay out more than you've taken in for a
 7   drawing because if you draw a triple, say like 7-7-7,
 8   and there are a large number of -- of people that
 9   placed a wager on that combination, you pay out, to
10   everybody that has that combination, whatever their
11   prize would be.
12                  CHAIRMAN CLOWE:  Okay.  I want to get
13   back to Lotto Texas, in that we set the jackpot amount
14   either by advertising or based on estimated sales.
15                  COMMISSIONER COX:  We -- we set it
16   based on -- if we -- in all cases, we advertise it.
17                  CHAIRMAN CLOWE:  Right.
18                  COMMISSIONER COX:  We set it based on
19   policy, starting at four and progressing it at least
20   one, until it reaches a point where sales support the
21   jackpot, and then we advertise what is estimated as
22   opposed to what policy tells us to advertise.
23                  CHAIRMAN CLOWE:  And, in fact, that is
24   not a pari-mutuel setting of the jackpot, is it?
25                  COMMISSIONER COX:  Well, pari-mutuel, I
0090
 1   don't believe, has totally to do with setting the
 2   jackpot.  Pari-mutuel does have jackpots that are a
 3   percentage of sales, but it also indicates that there
 4   is equal participation in a set amount among winners
 5   as opposed to each winner receiving a set amount.
 6                  CHAIRMAN CLOWE:  So when you go to the
 7   race track, you buy a ticket, and the odds are
 8   ten-to-one or the payout is three-to-two, if your
 9   horse comes in, that's the payout.
10                  COMMISSIONER COX:  And that's how it's
11   figured, based on how many tickets were on that
12   particular win, place, or show bet on that horse.
13                  CHAIRMAN CLOWE:  Yeah.  At that moment.
14                  COMMISSIONER COX:  Yes, sir.
15                  CHAIRMAN CLOWE:  And that's a true
16   pari-mutuel betting, as I think of it.
17                  COMMISSIONER COX:  Except for the fact
18   that two-twenty is guaranteed as the minimum payout.
19                  CHAIRMAN CLOWE:  Right.  Right.  Thank
20   you.
21                  MR. TIRLONI:  Commissioners, Kathy has
22   a slide to update you on what we were just discussing
23   about Lotto Texas.
24                  MS. PYKA:  Commissioners, what we're
25   looking at here are the first four draws in a roll
0091
 1   cycle, and the very first graph is the green bar that
 2   represents the -- excuse me -- the roll cycle prior to
 3   the April 23rd matrix change.  So as we look at those
 4   first four draws in that roll cycle, sales were at
 5   8.32 million.  And then we have the matrix change, and
 6   we're looking at the roll cycle that began on May the
 7   3rd, 2006, the first four rolls, and that roll cycle
 8   generated 8.3 million.  On that particular jackpot, we
 9   were hit at 26 million.  And so then we moved to the
10   first four rolls that began on July 1st, the current
11   roll that we're in today, and the first four rolls in
12   that roll cycle generated 7.8 million.
13                  COMMISSIONER COX:  Is it too early to
14   draw any conclusions from these numbers, Kathy?
15                  MS. PYKA:  Commissioner, I believe it
16   is too early to draw any conclusions.  We only have
17   two roll cycles after the matrix change.  And I think
18   it's difficult to look at data in that small of a
19   source sample.  For example, we're looking at 8.32
20   million.  It's in the February time frame.  On-line
21   sales are great during that time frame.  So we believe
22   we don't have enough information right now to draw a
23   conclusion.  We would like to continue reviewing this
24   information and updating you.
25                  COMMISSIONER COX:  Okay.
0092
 1                  MS. PYKA:  And with that, Director
 2   Sadberry is to provide you the update on the research
 3   slide.
 4                  MR. SADBERRY:  Commissioners, Anthony
 5   Sadberry, Executive Director, for the record.
 6                  I have for you this morning the latest
 7   survey information from Ipsos Reid relating to the
 8   public perception of the Texas Lottery.  This
 9   information was compiled in the month of June.
10                  The first slide addresses the question,
11   how would you describe your overall opinion of the
12   Texas Lottery.  As shown, the percentage of negative
13   responses to this question slightly increased from May
14   to June, 39 percent to 40 percent, and positive
15   responses slightly decreased, from 42 percent to
16   41 percent over the same time period.  Neutral
17   responses remained the same, 19 percent.
18                  The second slide addresses the
19   statement, the Texas Lottery is operated fairly and
20   honestly.  From May to June, the percentage of
21   respondents who disagreed with this statement
22   increased, from 28 percent to 30 percent, while those
23   who agreed with the statement slightly decreased, from
24   51 percent to 50 percent.  Those neutral with the
25   statement decreased, from 21 percent to 20 percent.
0093
 1                  I will continue to provide you with
 2   this information on a monthly basis, and I would be
 3   happy to answer any questions.  And also at this time,
 4   subject to any questions you might have,
 5   Doctor Sizemore may have additional comments on --
 6   regarding this data.
 7                  COMMISSIONER COX:  Director Sadberry,
 8   how many points would somebody have to swing on this
 9   scale before we should be either pleased or concerned?
10                  MR. SADBERRY:  If I may, Commissioner,
11   I think that's the nature of information and comments
12   that Doctor Sizemore is able to address, which
13   we've -- the capacity to do so.
14                  DOCTOR SIZEMORE:  Good morning,
15   Chairman, Commissioner.  I'm David Sizemore, Research
16   Coordinator for the Texas Lottery Commission.
17                  And I think anything outside the margin
18   of error at this point, given the sample size, 5
19   percentage points or so, approaching 10 percentage
20   points, I would think that that's something perhaps we
21   should consider taking very seriously.  Obviously,
22   anything that splits the -- the percentage in half,
23   from 50 to 25 percent, that's an extreme change over a
24   single month.  And, previously, you have asked about
25   significance and whether the changes from month to
0094
 1   month are --
 2                  COMMISSIONER COX:  That's probably what
 3   I'm asking you, to refresh me on that.
 4                  DOCTOR SIZEMORE:  Correct.  Are -- are
 5   statistically significant.  And we have run some of
 6   those numbers, and we do see that, on occasion, the
 7   changes are statistically significant.  And Ipsos has
 8   carried out a T test, which essentially compares the
 9   changes from month to month to one another, to try and
10   figure out whether we can apply this to the general
11   population and actually say something about it
12   regarding the shift having some kind of importance in
13   the overall population.  And it's only on occasion
14   that those changes are, in fact, significant.  And for
15   this slide, the -- the fair and honest measure for
16   April and May, that changed from 43 percent to
17   51 percent agreeing, was statistically significant.
18   So we would be able to essentially accept the idea
19   that there is something going on in the population
20   with reference to this change, rather than it's just
21   due to chance.  It's not a chance issue, which some of
22   the other changes may, in fact, be.
23                  Similarly, from April to May, the
24   negative shift downward was statistically significant.
25   And there are a couple of other months, and,
0095
 1   obviously, I would be happy to discuss those as you
 2   see fit, but the most recent change was not
 3   demonstrated as statistically significant.
 4                  COMMISSIONER COX:  And I think you've
 5   previously talked to us about what you thought might
 6   have happened between April and May.
 7                  DOCTOR SIZEMORE:  Yes, we did discuss
 8   that, I think, in the May --
 9                  MR. TIRLONI:  I think so.
10                  COMMISSIONER COX:  Thank you,
11   Mr. Chairman.
12                  DOCTOR SIZEMORE:  If you have any other
13   questions, I would be happy to field them.
14                  CHAIRMAN CLOWE:  Well, you know,
15   I talked with Director Sadberry earlier this morning
16   about this report, and I think the question that I
17   would have is, what do they mean?  Commissioner Cox
18   says, what is driving them, and I agree with that
19   question.  And then the next question is, what are you
20   going to do about it?  We just sit here every meeting,
21   it seems like, and see this report, and I'm not
22   pleased with it.  I think we've had a higher approval
23   rating in the past.  But my question would be, again,
24   with Commissioner Cox, what is driving it, and then
25   what are we going to do about it.  We've never, to my
0096
 1   knowledge, had an effort to get a better rating from
 2   the people of Texas or the people that are answering
 3   this questionnaire.  Do we want to do that?  And if
 4   so, how do we go about it?
 5                  DOCTOR SIZEMORE:  Well, obviously,
 6   that's up to the Commissioners, as well as executives,
 7   whether we want to do something about this.  And I do
 8   think, to get at one of the initial questions, there
 9   is something to be said about this.  And over time,
10   first, the most obvious thing is that the opinions
11   have been relatively stable, and I think it's
12   important to emphasize the fact that over and over
13   again we're seeing about 40 percent of the population
14   in Texas saying they have a positive opinion of -- of
15   the lottery.
16                  CHAIRMAN CLOWE:  But that's not very
17   good, is it?
18                  DOCTOR SIZEMORE:  40 percent --
19                  CHAIRMAN CLOWE:  Wouldn't we be happier
20   if we had a lot higher percentage?
21                  DOCTOR SIZEMORE:  90 percent would be
22   nice, but I think that would be --
23                  CHAIRMAN CLOWE:  Not even half of the
24   people in the state.
25                  DOCTOR SIZEMORE:  Correct.
0097
 1                  COMMISSIONER COX:  When -- when the --
 2   the Lottery was created, that required a
 3   constitutional amendment.  Is that correct?
 4                  CHAIRMAN CLOWE:  Referendum.
 5                  COMMISSIONER COX:  Was it a referendum?
 6                  CHAIRMAN CLOWE:  Yeah.
 7                  COMMISSIONER COX:  Well, what -- what
 8   was the percentage there?
 9                  CHAIRMAN CLOWE:  60-plus percent.
10                  COMMISSIONER COX:  Wanted the money?
11                  CHAIRMAN CLOWE:  Yeah.
12                  COMMISSIONER COX:  But doesn't -- it
13   didn't mean they approved the lottery.  It just meant
14   they wanted the money.
15                  CHAIRMAN CLOWE:  Well, that's a good
16   question.  You know, over 60 percent voted for it, and
17   whether they wanted one or the other or both, they
18   didn't have to answer that question.
19                  COMMISSIONER COX:  It might have been
20   that the alternative was to reach into their pocket.
21                  CHAIRMAN CLOWE:  It could have been.
22   And that's good to call the attention to that.  But
23   that percentage stayed strong for a long time.  When I
24   came on this board, I think we were seeing, in '98 and
25   '99, over 60 percent had a positive opinion of this
0098
 1   agency.  And we had a higher percentage of players.
 2   And now we have a lower percentage of players,
 3   spending more money, and I think that ties back into
 4   this.
 5                  COMMISSIONER COX:  I think it's an
 6   excellent question.
 7                  DOCTOR SIZEMORE:  And there -- and
 8   there is research out there to suggest from the Pew --
 9   the -- the Pew Agency, I think it's called, that
10   suggests that, overall in the nation, people are
11   growing increasingly opposed to state-run lotteries.
12   We see that here in Texas as well with some of the
13   research -- excuse me -- that we've done recently.
14   Over 30 percent of respondents seem to think --
15   they're opposed or are opposed to state-run lotteries.
16   Maybe it's something to do with the State having its
17   hands in something like the lottery, or gambling,
18   generally.
19                  Now, what do we do about this?
20   Obviously, I think we're in the midst of campaigns
21   that try to convey a more positive image of the
22   lottery to the public.  Whether that works, whether
23   that will pump these numbers up, remains to be seen.
24                  CHAIRMAN CLOWE:  And I think that's a
25   good point.  And the beneficiary campaign is
0099
 1   worthwhile, in my opinion.  I -- I know I've seen it,
 2   and I think Commissioner Cox has seen it.  And that's
 3   a good point.  I'm glad you brought it up.  But I
 4   would -- I would turn it back to you, Director
 5   Sadberry, that -- what are we spending on this report
 6   a year?
 7                  MR. SADBERRY:  Chairman, as of
 8   yesterday's meeting, my understanding is just in
 9   excess of one million dollars.
10                  Am I correct on that.
11                  DOCTOR SIZEMORE:  Not for this report
12   exclusively.
13                  MR. SADBERRY:  Not for the report, but
14   for the work of Ipsos Reid.
15                  DOCTOR SIZEMORE:  Right.  Annually,
16   their contract is about that.
17                  MR. SADBERRY:  And this is part of the
18   work that they do.  I don't think we have a breakout
19   item for this specific report that we --
20                  DOCTOR SIZEMORE:  In terms of cost?
21                  MR. SADBERRY:  Cost.
22                  DOCTOR SIZEMORE:  I think monthly the
23   tracking reports are about 35,000, although off the
24   top of my head that's a rough estimate.  And this is a
25   very small portion of what we receive each month in
0100
 1   the tracking reports.
 2                  COMMISSIONER COX:  Mr. Chairman, I -- I
 3   like where you're going with this.  I don't think we
 4   can discontinue it because I think we should be
 5   criticized if we discontinue it.  But I think we ought
 6   to be doing everything we can with it.
 7                  CHAIRMAN CLOWE:  I do, too.  And, you
 8   know, I went into a small town yesterday in Texas and
 9   met with about 50 people that were just as good a
10   cross section of people as you'll ever meet, I think,
11   in this state.  And -- and their questions were those
12   which we consistently try to answer about, you know,
13   where does the money go?  And that's always the number
14   one question.  But then, beyond that, they say, you
15   know, who is playing these games?  And I have talked
16   with them about the element of people in this state
17   who are in favor of gaming and play the games and
18   those who are not in favor of gaming.  Maybe some of
19   those play.  But had gone over that background with
20   them.  And one person said, well, what are you doing
21   about this?  You know, if it's three and a half --
22   Kathy, I think the budget you're going to ask us to
23   approve shows, what?  A 3.82 billion?
24                  MS. PYKA:  That is correct, sir.
25                  CHAIRMAN CLOWE:  And the State is
0101
 1   getting over a billion.  That's important.  That's --
 2   that's big money.  As Commissioner Cox points out, 100
 3   million is big money.  And so what are you doing about
 4   it?  Maybe that's part of our responsibility.  And
 5   maybe we ought to be looking at that and -- and, you
 6   know, taking our direction from the legislature and
 7   the leadership, maybe we ought to be devoting some --
 8   some more attention to that aspect of our activities
 9   in the state, rather than just saying every month,
10   well, here it is -- here it is -- here it is -- here
11   it is.
12                  And I -- I turn to you, Director
13   Sadberry, and would ask you to look at this.  You're a
14   very thoughtful and highly experienced leader and
15   manager, and I -- I would like to hand you this
16   question and have you give it some thought.
17                  MR. SADBERRY:  Chairman, thank you.
18   That's entirely consistent with the path that I sense
19   and that we are already taking.  And I'm happy to hear
20   that that's consistent with your views and interest.
21   That's the question I've asked.  And those are the
22   nature of interests that I have in understanding how
23   we use this data and how we can use it.  I would -- I
24   would agree in a sense with what Commissioner Cox is
25   saying, because I did want to know the origin and the
0102
 1   history of why it began, why you began receiving this
 2   kind of information.  And I -- I would tend to believe
 3   that since you appear to have the tradition that we do
 4   provide it to you and you receive it, I would sense a
 5   reaction, probably a negative reaction, should we
 6   discontinue that process.  But in my mind, that's not
 7   sufficient to either justify it nor, certainly, to
 8   fully utilize it.  And that's the approach that we're
 9   looking at it now.  And -- and I wanted to know how
10   you felt about that and how our approach should be
11   directed.  I think I have that sense of direction now
12   to drill deeper and to have a full understanding of
13   what is available to us so we might be able to use the
14   information.  And we, obviously, have to recognize
15   there will be factors, probably beyond our control,
16   that impact what these numbers reflect and what people
17   react, based on these numbers.  I think, for example,
18   the beneficiary campaign will be helpful to see if
19   that is a control factor that will have an impact.
20   The return of the legend campaign, the goodwill that
21   may be associated with that.  By the way, this, as you
22   may know, was presented to our -- again to our State
23   leadership yesterday to show what you were going to
24   do.  I get the same questions, what -- what are you
25   doing, where is the money, et cetera.
0103
 1                  So I want to make certain that we use
 2   this as a tool as effectively as possible in all
 3   respects and in all dimensions.  So rather than -- be
 4   candid with you -- just have it simply presented to
 5   you each month as I've observed since I've been back,
 6   I want to do more, and I want to explore what that
 7   more is and what it can be.  And we intend that in
 8   future meetings, therefore, we will, if -- subject to
 9   your wishes, we will continue to provide this
10   information, but couple it with more of an analysis
11   approach, rather than just a presentation approach,
12   and also present to you, perhaps, information that we
13   are utilizing -- and I did misunderstand your
14   question -- on the overall work product provided to us
15   by Ipsos Reid -- and they met with us this week --
16   what is being done with all of the information that
17   they are providing to us -- what you see is just these
18   charts -- so that you and the public and those
19   interested, and staff, can understand how it plays
20   into the overall management of the games and helps us
21   direct our promotional activities and other efforts
22   in, hopefully, the right direction, at least tell us
23   what the impact of where we -- what we do may have
24   with regard to these numbers.  We -- we indicate what
25   they are.  They are perceptions.  We know that so many
0104
 1   times perceptions become reality.  Perception is
 2   reality in the minds of so many people.  So what
 3   people perceive of what we do is important.  And so we
 4   will -- I -- I see the benefit in it.  I want to make
 5   sure that we are gaining the maximum potential from it
 6   overall, including these slides.
 7                  CHAIRMAN CLOWE:  Thank you.
 8                  MR. TIRLONI:  I believe that concludes
 9   the information we have for you today.  If there are
10   any other remaining questions, though, we would
11   certainly be happy to answer those.
12                  CHAIRMAN CLOWE:  Thank you.
13                  MR. TIRLONI:  Thank you.
14                  CHAIRMAN CLOWE:  Next, we'll go to item
15   number three, report, possible discussion and/or
16   action on lottery advertising and promotions.
17   Ms. McCullough.
18                  MS. McCULLOUGH:  Good morning,
19   Mr. Chairman and Commissioner.  For the record, my
20   name is Chelsea McCullough.  I am Creative Coordinator
21   for the Texas Lottery.
22                  I'm pleased to present the Texas
23   Lottery's first ever beneficiary campaign, which we
24   were referencing earlier.  We have a copy of that spot
25   to share with you today.  The campaign will begin on
0105
 1   July 24th, run in television and radio, and will
 2   continue through August.  The spots will run in the
 3   general and the ethnic markets and be supported by
 4   outdoor in all 20 markets, as well as radio
 5   promotions, point-of-sale material, and print media.
 6                  The point of this campaign is
 7   specifically to educate Texans on where the money
 8   goes, which seems to be the question that everyone is
 9   asking.  So without further ado, we'll play the
10   30-second spot for the general market.
11                    (Ad is played.)
12                  MS. McCULLOUGH:  I'm happy to answer
13   any questions you have about the campaign or
14   advertising promotions in general.
15                  COMMISSIONER COX:  I don't have any
16   question about that.
17                  CHAIRMAN CLOWE:  I don't either.
18                  MS. McCULLOUGH:  Great.  Thank you.
19                  CHAIRMAN CLOWE:  Thank you.
20                  COMMISSIONER COX:  Mr. Chairman, I
21   was -- that taping for the voice-over there was done
22   here in Austin, and Director Sadberry invited me to
23   come listen to that.  And I'll just tell you this as
24   an indication of how thoroughly this -- how thorough
25   and how detailed the work on this 30-second spot was.
0106
 1   They must have taped that 30 times, with comments from
 2   the director each time on, change it a little bit this
 3   way, change it a little bit that way.  And then I
 4   understand that the ultimate product was going to be
 5   one that was mastered from not any one of those, but
 6   from a combination of those.
 7                  MS. McCULLOUGH:  Yes, sir.  The -- the
 8   session that you attended was really kind of a test
 9   run with the voice talent just to make sure that the
10   voice talent would mix up with the visual images that
11   we were presenting as well.  After we shot the
12   campaign, we did go back into studio with the voice
13   talent and -- and match up exactly his voice in a pace
14   with the actual visuals.
15                  COMMISSIONER COX:  And the other thing
16   I will say about that, Mr. Chairman, is that the voice
17   talent was very reasonably priced and, I think, a
18   great value, particularly as compared to some of the
19   very high fees that some folks were asking just to use
20   their voice, not to identify who they were, but just
21   to use their voice and let people guess who it was.
22                  Are we allowed to say who that was.
23                  MS. McCULLOUGH:  Yes, sir.
24                  COMMISSIONER COX:  That was Ray Benson.
25                  CHAIRMAN CLOWE:  Very good.
0107
 1                  MS. McCULLOUGH:  We think he did a
 2   great job.  There is absolutely a warmth that comes
 3   from his voice, a sense of credibility, which is
 4   really what we were seeking.
 5                  CHAIRMAN CLOWE:  Very good.  Thank you.
 6                  MS. McCULLOUGH:  Thank you.
 7                  CHAIRMAN CLOWE:  Next, item number
 8   four, report, possible discussion and/or action on
 9   transfers to the State.  Ms. Pyka.
10                  MS. PYKA:  Thank you, Commissioners.
11   For the record, my name is Kathy Pyka, Controller for
12   the Texas Lottery Commission.
13                  Tab four does include information on
14   the agency's financial status.  The first report
15   reflects transfers and allocations to the Foundation
16   School Fund and the allocation of unclaimed prizes as
17   of July 2006.  Total transfers to the State amounted
18   to 893.5 million through July, and this represents a
19   2.2 percent increase in the total amount transferred
20   in 2005.
21                  The second page of your notebook
22   reflects the detailed information for the monthly
23   transfers.  Of the 893.5-million-dollar transfer to
24   the State, 854.6 million was the amount transferred to
25   the Foundation School Fund, with the balance of 38.8
0108
 1   million transferred from unclaimed lottery prizes.
 2                  The third document in your notebook is
 3   simply the calculation of the monthly transfer amount.
 4                  And then the last document in your
 5   notebook includes a report of lottery sales,
 6   expenditures, and transfers from fiscal year 1992 to
 7   the present.  Total cash basis transfers to the
 8   Foundation School Fund through July of this year
 9   totaled 854.6 million, with a cumulative transfer to
10   the Foundation School Fund of 8.5 billion.
11                  Commissioners, this concludes my
12   presentation.  I'd be happy to answer any questions.
13                  COMMISSIONER COX:  Kathy, I'm looking
14   at the second page of your report.
15                  MS. PYKA:  Yes.
16                  COMMISSIONER COX:  And one of the
17   messages that I think is important is that 100 percent
18   of our net proceeds go to education.
19                  MS. PYKA:  Yes.
20                  COMMISSIONER COX:  And I look at this,
21   and I say that -- I would say that the -- all of our
22   net proceeds are going to the Foundation School Fund.
23   There are some unclaimed prizes that are not net
24   proceeds, but are regular -- rather, a whole different
25   kettle of fish, and they're directed someplace else.
0109
 1   But our net proceeds do go, a hundred percent, to the
 2   Foundation School Fund.  Would you agree?
 3                  MS. PYKA:  Yes, I would, Commissioner
 4   Cox.
 5                  COMMISSIONER COX:  Thank you.
 6                  MS. PYKA:  You're welcome.
 7                  CHAIRMAN CLOWE:  Thank you.
 8                  And the next item, number five,
 9   consideration of and possible discussion and/or action
10   on the agency's fiscal year 2007 Operating Budget
11   and/or Legislative Appropriations Request is your item
12   as well.
13                  MS. PYKA:  Yes.  Again, Commissioners,
14   good morning.  I'm Kathy Pyka, for the record.
15                  This morning I'm seeking your approval
16   of the fiscal year 2007 Operating Budget.  The
17   Commission's fiscal year 2007 Operating Budget is
18   193,689,199 dollars and reflects 331 full-time
19   equivalent positions.
20                  The Commission developed this budget in
21   accordance with the appropriation amounts outlined in
22   Senate Bill 1, adjusted for the Article 9 employee
23   salary increases, as well as rider appropriations in
24   the Government Code, Section 466.015(d), advertising
25   limitation, in which we took a million dollar
0110
 1   reduction.
 2                  I would like to move on to the
 3   Legislative Appropriations Request and share with you
 4   that our fiscal year 2007 Operating Budget will be the
 5   basis for developing the agency's baseline request for
 6   general revenue related funds in the fiscal year
 7   2008-2009 Legislative Appropriation Request.
 8                  Our leadership offices have instructed
 9   that each agency's baseline request for general
10   revenue related funds be limited to 90 percent of our
11   baseline amounts expended in fiscal year 2006 and
12   budgeted in fiscal year 2007, plus the amount equal to
13   the amount for employee salary increases.  Funding
14   requests for purposes that exceed the baseline will
15   need to be submitted in the agency's baseline request
16   as exceptionalized, will be required to identify any
17   of those exceptional items that represent that 10
18   percent reduction in our administrator statement.
19   They want those clearly noted in the administrator
20   statement, as to which ones would bring us back to the
21   100 percent baseline.
22                  With that, I would be happy to answer
23   any questions about the fiscal year 2007 Operating
24   Budget or our Legislative Appropriation Request that
25   we're working on.
0111
 1                  COMMISSIONER COX:  Mr. Chairman, I -- I
 2   had a very thorough presentation, as I believe you
 3   did, from staff on this budget.  And I want to
 4   compliment Ms. Pyka and her staff for the very
 5   thorough job that they have done for this Commission.
 6   I believe they have scrubbed this budget better than
 7   any budget here that's ever been scrubbed, at least as
 8   long as I have been on this board.  And I thank you
 9   for that.
10                  MS. PYKA:  Thank you so much,
11   Commissioner.  I had a great team assist me and a
12   fantastic staff that worked on this with me.
13                  CHAIRMAN CLOWE:  And I join in that
14   comment.  I had that briefing as well, and I think you
15   and the members of your team did an excellent job.
16   And to emphasize, you have established the 90 percent
17   base in this budget?
18                  MS. PYKA:  The 90 percent base -- what
19   we've done is we've looked at the fiscal year 2007
20   Operating Budget, and we've identified every
21   reduction.  And as we go forward on the fiscal year
22   2008-2009 budget, we've identified many areas of
23   consideration for the 10 percent reduction.  We know
24   what we have got to cut in '08-'09, and now we're
25   taking that next step of the exercise of working on
0112
 1   what those cuts are, tying those or linking those to
 2   the revenue implications to the State of Texas, and
 3   then formalizing that in the work product that will go
 4   with the LAR.  So we have certainly identified many
 5   areas that we'll utilize in that 10 percent cut, and
 6   we know that we'll have to go beyond the areas we've
 7   already identified.
 8                  The -- just to -- we've calculated the
 9   baseline, and -- and, certainly, the Governor's Office
10   and the Legislative Budget Board will come back to us
11   with the exact number, but for the Lottery account,
12   it's 38.6 million for the biennium.  And the GR
13   account, it's 2.8 million.  And that's the 10 percent
14   share that we've identified of the baseline that will
15   have to be submitted separate and apart from our
16   baseline request.
17                  CHAIRMAN CLOWE:  And, Commissioner Cox,
18   a week ago last Tuesday, I attended a meeting at the
19   Capitol on behalf of this agency, as the chair, where
20   we were briefed extensively by members of the
21   Governor's staff on the effort that will go into
22   establishing this 90 percent base.  And it's going to
23   be a process that we'll go through, there are many
24   steps, and one that hopefully will have a very
25   positive result when we come out on the far side, the
0113
 1   end of it.
 2                  And so you feel, I sense by your
 3   answer, that you have established a good base from
 4   which to work on this reduction and to identify
 5   working with the Governor's staff, his budget group,
 6   and the LBB, and reach a positive outcome on behalf of
 7   the taxpayers of this state in the stewardship of
 8   their monies.
 9                  MS. PYKA:  Most definitely, sir.
10                  CHAIRMAN CLOWE:  Well, I think that's
11   an important consideration.  And I had discussed that
12   with Commissioner -- Director Sadberry, and I didn't
13   have the opportunity in the last meeting to inform you
14   of that.  I should have.  But we had a number of other
15   matters that took our attention.  But I think the work
16   that Ms. Pyka has done with her staff puts us in a
17   position to achieve that goal better because we know
18   what is in our budget.  And she has scrubbed it with
19   her team, and that always puts you in a better
20   position when you have opportunities to reduce costs
21   and to manage expenses.  And that's what we're talking
22   about.
23                  MS. PYKA:  Exactly.
24                  CHAIRMAN CLOWE:  Thank you very much.
25                  MS. PYKA:  Thank you.
0114
 1                  CHAIRMAN CLOWE:  Next, item six,
 2   consideration of and possible discussion and/or action
 3   on external and internal audits and/or reviews
 4   relating to the Texas Lottery Commission and/or on the
 5   Internal Audit Department's activities.  Ms. Melvin.
 6                  MS. MELVIN:  Good morning,
 7   Commissioners.  How are you this morning?  For the
 8   record, my name is Catherine Melvin, Director of the
 9   Internal Audit Division.
10                  This morning I have no items of update
11   regarding the internal audit function.  And regarding
12   external audits, just two audits I would like to brief
13   you on.  The State Auditor's Office has reported that
14   field work for their audit of TLC procurement
15   practices is close to completion.  An exit conference
16   is scheduled for this week, Friday, and I believe
17   they're still on track to issue a report likely at the
18   end of August.  We don't anticipate the draft of that
19   until sometime in August.
20                  And then, secondly, the agency
21   has also --
22                  COMMISSIONER COX:  Catherine, can I ask
23   you a question --
24                  MS. MELVIN:  Sure.
25                  COMMISSIONER COX:  -- about that audit.
0115
 1   How closely do you think that will parallel the
 2   post-payment audit that the Comptroller's Office does?
 3                  MS. MELVIN:  I think it'll be very
 4   different because the objectives are -- are quite
 5   different.  The Comptroller's post-payment audit is
 6   very specific in its focus, and I believe that the
 7   State Auditor's Office will be broader in that it will
 8   really look at our controls over that procurement
 9   process, including the contracting aspects, which the
10   Comptroller's post-payment audit touches on, but I
11   don't think they go as deep into.
12                  COMMISSIONER COX:  So this is going to
13   be a much broader audit and one that is potentially
14   far more useful to us than the more limited scope of
15   the Comptroller's Office?
16                  MS. MELVIN:  Yes, sir.  Speaking of the
17   Comptroller's Office, we have received notice from
18   them that -- of their intent to conduct a
19   statutorily-required recovery audit.  The purpose of
20   this audit will be to identify and collect any
21   possible overpayments to vendors resulting from some
22   type of error.  And the Comptroller's Office actually
23   has a vendor that comes to agencies to do this.
24                  COMMISSIONER COX:  Really?
25                  MS. MELVIN:  Uh-huh.  Yeah.  This
0116
 1   was -- I want to say this -- it is required under the
 2   Government Code that there is -- within our current
 3   appropriations act, there is language that says that
 4   50 percent of any overpayments recovered will be
 5   appropriated back to the agencies and -- however, the
 6   agencies pay the vendor conducting the audit a
 7   percentage of any overpayments identified.  That's how
 8   they receive their fee.
 9                  COMMISSIONER COX:  I see.
10                  MS. MELVIN:  And I -- from their
11   letter, they're anticipating going back to fiscal year
12   2004, covering 2005, and part of 2006.
13                  COMMISSIONER COX:  So if we haven't
14   made any overpayments, do we pay any fee?
15                  MS. MELVIN:  Good question.  Not from
16   the notification letter that we received.
17                  COMMISSIONER COX:  So -- so we -- at
18   least financially, we can't lose on this deal?
19                  MS. MELVIN:  No.  I think it's a good
20   thing.
21                  That's all I have to report today.
22                  CHAIRMAN CLOWE:  Thank you very much.
23                  MS. MELVIN:  Thank you.
24                  CHAIRMAN CLOWE:  We'll pass on item
25   number eight.  We have not found it necessary to enter
0117
 1   into that item.
 2                  Next, number nine, report, possible
 3   discussion and/or action on the procurement of
 4   advertising services.  Mr. Jackson.
 5                  MR. JACKSON:  Good morning,
 6   Commissioners.  For the record, my name is Tom
 7   Jackson.  I'm the Purchasing and Contracts Manager for
 8   the Texas Lottery Commission.
 9                  Agenda item number nine was included as
10   a placeholder for any questions you may have regarding
11   the advertising RFP.  I have nothing new to report
12   since the update I provided to you at last Wednesday's
13   meeting.  I would be happy to answer any questions.
14                  COMMISSIONER COX:  When do you
15   anticipate that the new contract will be in place?
16                  MR. JACKSON:  We will be starting
17   negotiations probably next week with the vendors.
18   Following negotiations, depending on how long that
19   takes, then we'll be drafting the contract and putting
20   that together.  Certainly, I would say, within the
21   next month or so we should be completely done with
22   that.
23                  COMMISSIONER COX:  So you anticipate
24   that there will be no need for an additional extension
25   on the existing contract?
0118
 1                  MR. JACKSON:  No, sir.
 2                  CHAIRMAN CLOWE:  Very good.  And you
 3   have item ten as well, report, possible discussion
 4   and/or action on the agency's contracts.
 5                  MR. JACKSON:  Commissioners, in your
 6   notebooks, under agenda item number ten, is a report
 7   on prime contracts that has been updated for your
 8   review.  There have been no changes since the last
 9   one.  I would be happy to answer any questions.
10                  CHAIRMAN CLOWE:  Thank you very much.
11                  Next, item 11, report, possible
12   discussion and/or action on the 79th Legislature.
13   Ms. Trevino.
14                  MS. TREVINO:  Good morning,
15   Commissioners.  For -- good morning, Commissioners.
16   For the record, I'm Nelda Trevino, Director of
17   Governmental Affairs.
18                  There are a couple of items that I
19   wanted to report on this morning.  And the first item
20   relates to the agency's new beneficiary campaign that
21   Director Sadberry mentioned earlier.  During an
22   earlier agenda item, you heard about the roll out of
23   the new advertising campaign, and yesterday we held a
24   briefing at the Capitol for leadership and legislative
25   offices, where we provided a viewing of the
0119
 1   beneficiary campaign television commercials.  The
 2   purpose of the briefing was to provide a preview of
 3   the commercials and to share samples of the outdoor
 4   billboards and point-of-sale material prior to the
 5   campaign being rolled out next week.  We had numerous
 6   legislative staff attend and believe that the
 7   advertising campaign was well received by those that
 8   were in attendance.
 9                  The second item that I wanted to report
10   on relates to the House Committee on Licensing and
11   Administrative Procedures, and the committee has
12   posted a hearing for Wednesday, July the 26th, at
13   1:30, in Room E2.030.  One of their agenda items
14   includes the oversight of the Texas Lottery
15   Commission.  And we understand the committee is
16   interested in hearing from the agency and the State
17   Auditor's Office on three audit reports issued by the
18   SAO which relate to the security of the Lottery
19   Commission, the Lotto Texas game, and the agency's
20   work force management.
21                  I also want to report, in our capacity
22   as a resource to the legislature, members of the
23   Governmental Affairs staff visited last week with
24   various leadership and legislative offices, including
25   those offices of the House Licensing Committee, to
0120
 1   discuss the findings and the recommendations of the
 2   two recently issued audit reports.  And we'll continue
 3   to be in communication with the committee staff in
 4   preparation for the July 26th hearing.
 5                  The other agenda item that the House
 6   Licensing Committee will consider at their July 26th
 7   hearing relates to one of their interim charges, and
 8   this interim charge states, and I quote, review ways
 9   to make Texas' racetracks more attractive to Texans
10   and to tourists in order to keep them viable and
11   producing tax revenue for the State.
12                  Lastly, the Governmental Affairs staff
13   will continue to monitor other interim House and
14   Senate committee hearings, and we'll keep you posted
15   on any developments during this legislative interim.
16                  That concludes my report, and I'll be
17   happy to answer any questions.
18                  CHAIRMAN CLOWE:  Thank you, ma'am.
19                  Next, we'll go to item number 14,
20   report by the Executive Director and/or possible
21   discussion and/or action on the agency's operational
22   status and FTE status.  Mr. Sadberry.
23                  MR. SADBERRY:  Mr. Chairman, Anthony
24   Sadberry, Executive Director, for the record.
25                  There are materials in your notebooks
0121
 1   for your review regarding status of positions as of
 2   July 11, 2006.
 3                  I also want to make you aware of a
 4   meeting that is scheduled on Monday, July 31st, to
 5   take place here at the Lottery headquarters.  This
 6   will be a meeting with Connie Laverty, who is GTECH's
 7   new senior vice-president of marketing.  The purpose
 8   of the meeting is to meet with Ms. Laverty and conduct
 9   a high level discussion of the Texas Lottery revenue
10   initiatives.
11                  That concludes my report.  I will be
12   happy to answer any questions.
13                  CHAIRMAN CLOWE:  Thank you,
14   Mr. Sadberry.
15                  Next, item 15, report by the Charitable
16   Bingo Operations Director and possible discussion
17   and/or action on the Charitable Bingo Operations
18   Division's activities.  Mr. Atkins.
19                  MR. ATKINS:  Thank you, Commissioners.
20   There are a couple of items I wanted to cover under my
21   report.  The first is a correction to the information
22   regarding the date the nomination forms for the Bingo
23   Advisory Committee were mailed out.  That should read
24   July 7th instead of July 13th.  I apologize for that
25   oversight.
0122
 1                  Additionally, the Bingo Division staff
 2   has been -- or has had several meetings with staff
 3   from Information Resources regarding the redesign of
 4   the division's Web page.  And since its inception, the
 5   primary focus of the division's Web page has been
 6   geared towards licensees.  And we're considering
 7   expanding the appeal of the Web page and making it
 8   more user friendly for licensees, as well as
 9   identifying other groups that may have an interest in
10   the Web page, such as applicants, bingo workers who
11   are on the Registry of Workers, as well as players.
12   And I bring this before you because we are planning on
13   bringing this item before the BAC at their next
14   meeting, to receive their input.
15                  And then finally, just for your
16   information, quarterly reports for the second quarter
17   of 2006 are due on Tuesday, July 25th.  So far this
18   quarter we've received 22 returns electronically,
19   which is about half of the total number of forms we
20   received electronically last quarter.  So we'll, of
21   course, continue to track those who are filing those
22   reports electronically, and I'll report back to you.
23                  CHAIRMAN CLOWE:  Thank you, Mr. Atkins.
24                  Item number 26, is there anyone wishing
25   to make comment to the Commission at this time?
0123
 1                  I would like to return to item number
 2   five on the agenda.  Ms. Pyka, your presentation of
 3   the budget, was there action requested by you?  We
 4   didn't take any.
 5                  MS. PYKA:  I was seeking the approval
 6   of the fiscal year 2007 Operating Budget.
 7                  CHAIRMAN CLOWE:  So you want a -- a
 8   vote on that, don't you?
 9                  MS. PYKA:  I would like, yes, sir.
10                  CHAIRMAN CLOWE:  Commissioner, would
11   you like to make a motion?
12                  COMMISSIONER COX:  Yes, sir.  I -- I --
13   what -- what is -- what is the action that you would
14   like taken, Kathy?
15                  MS. PYKA:  Approval of the fiscal year
16   2007 Operating Budget.
17                  COMMISSIONER COX:  Mr. Chairman, I move
18   that we approve the 2007 Operating Budget as presented
19   to this meeting.
20                  CHAIRMAN CLOWE:  Second.  All in favor,
21   please say aye.  Opposed, no.  The vote is two-zero.
22                  Thank you, ma'am.
23                  Commissioner, if you're ready, I would
24   like to move we go into executive session.
25                  COMMISSIONER COX:  Yes, sir.
0124
 1                  CHAIRMAN CLOWE:  I move the Texas
 2   Lottery Commissioner go into executive session:
 3                  To deliberate the duties and evaluation
 4   of the Executive Director and/or Deputy Executive
 5   Director, pursuant to Section 551.074 of the Texas
 6   Government Code;
 7                  To deliberate the duties and evaluation
 8   of the Internal Auditor Director, pursuant to Section
 9   551.074 of the Texas Government Code;
10                  To deliberate the duties and evaluation
11   of the Charitable Bingo Operations Director, pursuant
12   to Section 551.074 of the Texas Government Code;
13                  To deliberate the duties of the General
14   Counsel, pursuant to Section 551.074 of the Texas
15   Government Code;
16                  To receive legal advice regarding
17   pending or contemplated litigation and/or to receive
18   legal advice, pursuant to Section 551.071(1)(A) or (B)
19   of the Texas Government Code, and/or to receive legal
20   advice, pursuant to Section 551.071(2) of the Texas
21   Government Code, including but not limited to:
22                  Cynthia Suarez versus Texas Lottery
23   Commission;
24                  Sheldon Charles versus Texas Lottery
25   Commission and Gary Grief;
0125
 1                  Stephen Martin versus Texas Lottery
 2   Commission;
 3                   Employment law, personnel law,
 4   procurement and contract law, evidentiary and
 5   procedural law, and general government law.
 6                  Is there a second?
 7                  COMMISSIONER COX:  Second.
 8                  CHAIRMAN CLOWE:  All in favor, please
 9   say aye.  Opposed, no.  The vote is two-zero.  The
10   Texas Lottery Commission will go into executive
11   session.  The time is 11:43 a.m.  Today is July 19th,
12   2006.
13                    (EXECUTIVE SESSION)
14                  CHAIRMAN CLOWE:  The Commission is out
15   of executive session.  The time is 2:10 p.m.,
16   July 19th, 2006.  Is there any action to be taken as a
17   result of the executive session?  If not, I believe we
18   have completed the agenda.
19                  Commissioner, is there any further
20   business?
21                  COMMISSIONER COX:  No, sir.
22                  CHAIRMAN CLOWE:  Then we are adjourned
23   at 2:10 p.m.  Thank you all very much.
24   
25   
0126
 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 28TH day of
16   JULY, 2006.
17   
18   
19   
                      BRENDA J. WRIGHT, RPR,
20                    Texas CSR No. 1780
                      Expiration Date:  12-31-06
21                    WRIGHT WATSON & ASSOCIATES
                      Registration No. 225
22                    Expiration Date:  12-31-07
                      1801 N. Lamar Boulevard
23                    Mezzanine Level
                      Austin, Texas  78701
24                    (512) 474-4363
25   JOB NO. 060719BJW