0001 1 * * * * * * * * * * * * * * * * * * * * * * * * * * * 2 3 TEXAS LOTTERY COMMISSION 4 MEETING 5 6 AUGUST 26, 2004 7 8 * * * * * * * * * * * * * * * * * * * * * * * * * * * 9 10 11 12 13 14 15 16 BE IT REMEMBERED that the TEXAS LOTTERY COMMISSION 17 meeting was held on the 26th day of August, 2004, from 18 8:02 a.m. to 1:14 p.m., before Shelley N. Jones, RPR, CSR in 19 and for the State of Texas, reported by machine shorthand, 20 at the Offices of the Texas Lottery Commission, 611 East 6th 21 Street, Austin, Texas, whereupon the following proceedings 22 were had: 23 24 25 0002 1 APPEARANCES 2 3 Chairman: Mr. C. Tom Clowe, Jr. 4 Commissioners: 5 Mr. James A. Cox, Jr. Mr. Roland Olvera 6 General Counsel: 7 Ms. Kimberly Kiplin 8 Executive Director: Mr. Reagan E. Greer 9 Deputy Executive Director: 10 Mr. Gary Grief 11 Director, Charitable Bingo Operations Divisions: Mr. William L. Atkins 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 INDEX 2 3 Appearances....................................... 2 4 5 AGENDA ITEMS 6 ITEM NUMBER I.................................... 4 ITEM NUMBER II................................... 4 7 ITEM NUMBER III.................................. 7 ITEM NUMBER IV................................... 8 8 ITEM NUMBER V.................................... 9 ITEM NUMBER VI................................... 10 9 ITEM NUMBER VII.................................. 11 ITEM NUMBER VIII................................. 11 10 ITEM NUMBER IX................................... 14 ITEM NUMBER X.................................... 63 11 ITEM NUMBER XI................................... 66 ITEM NUMBER XII.................................. 69 12 ITEM NUMBER XIII................................. 69 ITEM NUMBER XIV.................................. 89 13 ITEM NUMBER XV................................... 123 ITEM NUMBER XVI.................................. 126 14 ITEM NUMBER XVII................................. 131 ITEM NUMBER XVIII................................ 131 15 ITEM NUMBER XIX.................................. 135 ITEM NUMBER XX................................... 136 16 ITEM NUMBER XXI.................................. 139 ITEM NUMBER XXII................................. 87 17 ITEM NUMBER XXIII................................ 88 ITEM NUMBER XXIV................................. 142 18 ITEM NUMBER XXV.................................. 146 ITEM NUMBER XXVI................................. 156 19 ITEM NUMBER XXVII................................ 158 ITEM NUMBER XXVIII............................... 161 20 Reporter's Certification......................... 162 21 22 23 24 25 0004 1 August 26, 2004 2 Texas Lottery Commission Meeting 3 CHAIRMAN CLOWE: If everyone will be 4 seated, we'll call the meeting to order. 5 The Texas Lottery Commission will come to 6 order. Commissioner Olvera and Commissioner Cox are here. 7 My name is Tom Clowe. It's 8:00 a.m., August the 26th, 8 2004. 9 We move to the agenda, consideration of, 10 possible discussion and/or action including adoption of new 11 rule 16 T.A.C. 402.520 relating to temporary licenses. 12 Ms. Joseph, good morning. 13 MS. JOSEPH: Good morning. 14 For the record, my name is Sandy Joseph, 15 assistant general counsel. 16 Before you for consideration for final 17 adoption is a new rule relating to temporary licenses. The 18 purpose of the new rule is to clarify for the licensee and 19 the general public, the requirements for conducting 20 charitable -- charitable bingo under a temporary license. 21 In order to clarify these factors for the 22 licensees and the general public, the new rule defines 23 terms, provides the requirements for obtaining the temporary 24 license and sets the standards for conducting bingo under a 25 temporary license. 0005 1 At a previous commission meeting, the 2 commission voted to propose the new rule. The Texas 3 Register published the rule for public comment on July the 4 16th, 2004. No comments were received during the 30-day 5 comment period. I would like to note, however, that 6 subsequent to the comment period, I understand that there 7 was a question about the intent of Section B(1,) which is 8 found on the second page of the rule. 9 And it's in that section it states that the 10 commission may not issue a temporary license if the 11 applicant has failed to file a report, failed to pay a prize 12 fee of penalty or interest, or does not distribute the 13 proceeds calculated on a quarterly report for a charitable 14 purpose. 15 I wanted to just clarify that the intent 16 here was that this would relate only to violations or 17 failures that are current. If the problem has been taken 18 care of, this would not apply. It would not affect your 19 temporary license if you had a problem in the past, but it's 20 been taken care of. This is if there is a current ongoing 21 problem. I just wanted to clarify that for the record. 22 Would you like to make any comments from, 23 Mr. Atkins? 24 MR. ATKINS: I agree, commissioners, with 25 Ms. Joseph's clarification of the intent of that section. 0006 1 And it would be staff's recommendation that the 2 commissioners vote to adopt Charitable Bingo administrative 3 rule 402.520 without changes as published in the Texas 4 Register. 5 CHAIRMAN CLOWE: Are there any questions or 6 comments? 7 Is there a motion? 8 THE COURT: 9 COMMISSIONER OLVERA: So moved. 10 COMMISSIONER COX: Second. 11 CHAIRMAN CLOWE: Okay. All in favor, 12 please, say aye. 13 THE COMMISSIONERS: Aye. 14 CHAIRMAN CLOWE: Vote, no? 15 The vote is 3-0 in favor. 16 Do you have an order? 17 MS. JOSEPH: Yes, sir. 18 COMMISSIONER OLVERA: Excuse me. 19 CHAIRMAN CLOWE: Next item III, report by 20 the Bingo Advisory Committee chair, possible discussion 21 and/or action regarding the Bingo Advisory Committee 22 activities including the August 11th, 2004, committee 23 meeting. 24 Ms. Taylor. 25 MR. ATKINS: Commissioners, I received an 0007 1 e-mail from Ms. Taylor on August 18th indicating that she 2 would not be attending the commission meeting. You have in 3 her notebook her original report that she submitted. 4 The one item that I would like to comment 5 on, there was a discussion at that meeting of an 6 administrative penalty rule that the staff had been working 7 on. At that time, it had been our intent to get a copy of 8 that draft rule to the working group within a week. We have 9 since then, in association with the legal division, been 10 doing some additional work to that rule, so it's not ready 11 for us to present to the work group yet. But we are still 12 working on it. 13 Other than that, Commissioner Cox did have 14 the opportunity to attend the meeting. And I think probably 15 the most outstanding thing about the meeting is it may have 16 been one of the shortest meeting that the advisory committee 17 has ever had. 18 CHAIRMAN CLOWE: Did he have anything to do 19 with that? 20 MR. ATKINS: Well, we're just going to 21 assume that he's good luck. 22 CHAIRMAN CLOWE: He -- he always knows how 23 to put it, doesn't he. 24 COMMISSIONER COX: That's right. 25 CHAIRMAN CLOWE: Anything further in that 0008 1 regard, Billy? 2 MR. ATKINS: No, sir. 3 CHAIRMAN CLOWE: Next item number IV, 4 report and possible discussion on the calendar year 2004, 5 seconds quarter bingo financial information and statistics. 6 Mr. Atkins. 7 MR. ATKINS: Commissioners, you have in 8 your notebook under financial and audit, the second quarter 9 of 2004. And this report is going to be kind of a good 10 news, bad news report. The -- first of all, the -- the good 11 news is that pull-tab sales increased almost 40 percent over 12 the same time period last -- last year. So for the second 13 quarter of 2003 to the second quarter of 2004, pull-tab 14 sales have increased by, I believe, it is almost 11 and a 15 half million dollars. The bad news is that this is the 16 first decrease that we've seen in pull-tab sales since the 17 event tickets were first approved in September of 2002. 18 Now, historically the second quarter gross 19 receipts are lower than the first quarter of gross 20 receipts. And in keeping with that historical trend, gross 21 receipts are down from the first quarter of 2004 by about 22 $2.1 million. And I think it is a little too early for the 23 staff right now to really estimate what the trend in pull- 24 tab sales will be in the near future. If they are going to 25 more or less level out at this current level as a result of 0009 1 the event tickets or if we will see any type of continued 2 decrease in that area. 3 CHAIRMAN CLOWE: Any questions or comments? 4 Thank you, Billy. 5 Next item number V, report, possible 6 discussion and/or action on lottery sales and trend. 7 Mr. Deviney. 8 MR. DEVINEY: Good morning, commissioners. 9 You may have found in your notebook is the report on lottery 10 sales and trends. This morning I have passed you one 11 hundred -- you have before you the current lottery sales 12 report for the week ending August 21st, 2004. I'll 13 summarize that report for you. 14 Through August 24th's, 2004, fiscal year 15 two -- fiscal year sales have amounted to $3.4 billion. 16 This is a 10.8 percent increase over where we were in fiscal 17 2003 at that point. At this point a year ago, we were at 18 3.07 billion The weekly sales average is $66.7 million 19 compared to where we were in 2003, which was $60.2 million. 20 Comparing fiscal year 2004 to -- to 2003 by 21 product, our leaders in terms of sales growth are Pick Three 22 and instant tickets. Comparing the last two full weeks 23 ending August 21st and August 14th, total lottery sales 24 increased by 0.8 in percent. Sales of the instants, Lotto 25 Texas, and Mega Millions increased from week to week. And 0010 1 as of the most recent week, we -- we sold $67.6 million 2 which was a million dollars above our weekly average for the 3 year. And that is my report on sales. 4 CHAIRMAN CLOWE: Anything to add, 5 Mr. Greer? 6 MR. GREER: No, sir. I will be discussing 7 some of these points further in the future. 8 CHAIRMAN CLOWE: Commissioners, any 9 questions or comments? 10 COMMISSIONER OLVERA: No, sir. 11 CHAIRMAN CLOWE: Item number VI. 12 Thank you, Mr. Deviney. 13 Report, possible discussion and/or action 14 on HUB and/or minority business participation including the 15 agency's mentor protegee program. 16 Good morning, Joyce. 17 MS. BERTOLACINI: Good morning, 18 commissioners. 19 For the record, my name is Joyce 20 Bertolacini, and I am the agency's HUB coordinator. 21 Included in your notebook is the July 22 monthly HUB minority contracting activity report, which 23 includes all fiscal year 2004 expenditures paid from 24 September 1st, 2003, through July 31st of 2004. 25 Our total qualifying expenditures as of 0011 1 July 31st were one million, 32.6 million dollars. And our 2 estimated HUB utilization was $37.2 million dollars, which 3 equates to 28.08 percent. 4 And we have no updates regarding the 5 commission's mentor protegee program at this time. However, 6 I would be happy to answer any questions you might have. 7 CHAIRMAN CLOWE: Any questions or comments? 8 Thank you, ma'am. 9 Number VII, report, possible discussion 10 and/or action on the agency's contract. 11 Mr. Deviney. 12 MR. DEVINEY: Commissioners, tab seven 13 includes the weekly status report on our commission 14 contracts that had an estimated value of $25,000 or more. 15 If you have any questions, I'll try to answer them or have 16 someone from one of the divisions. 17 CHAIRMAN CLOWE: Are there any questions? 18 Thank you, Mr. Deviney. 19 Next item number VIII, report, possible 20 discussion and/or action on the agency's financial status. 21 MR. DEVINEY: Commissioners, under tab 22 eight you will find a report on transfers made to the 23 foundation school fund and allocations and unclaimed prize 24 money. The transfer of July sales to the foundation school 25 fund amounted to $85.3 million. We made that transfer 0012 1 earlier this month. A second transfer of estimated August 2 sales will be made this week, and we anticipate the total 3 fiscal year 2004 transfers to the foundation school fund 4 only will exceed a billion dollars. Through three quarters 5 of fiscal year 2004, transfers of unclaimed prizes to the 6 state have amounted to $32.9 million. 7 The next report of this section is the 8 report on lottery revenues, expenditures, and transfers from 9 fiscal year 1992 to date. Total transfers to this date have 10 amounted to $11.7 billion through July. 11 You'll find an orange divider page. Behind 12 that orange divider page is the budge report through the 13 month of July, 2004. Through July, the lottery extended 14 approximately $172.7 million. And this exceeded the 15 lottery's base appropriation by approximately $5 million. I 16 thought I would bring that to your attention just to explain 17 how that happens. And the difference is due to the lottery 18 appropriation which funds the lottery contract's 19 administrative expenses when lottery sales exceed 20 performance targets, which has occurred. For -- for the 21 fiscal year ending August 31st, we're anticipating exceeding 22 our base appropriations for the lottery and the lottery 23 operations by approximately $12 million. 24 All other expenditures and last funds for 25 the fiscal year will be determined when the books are closed 0013 1 late September, early October is when we'll have the books 2 on that. 3 For the charitable bingo division, we are 4 anticipating full expenditure of administrative funds for 5 fiscal year 2004. And then expenditures for bingo prize fee 6 allocations will exceed the base appropriation for fiscal 7 year 2004. And once again, that's a situation where the 8 legislature, you know, makes an estimated appropriation of 9 those prize fee allocations. And, in fact, we have exceeded 10 that, but we have the authority to -- to make -- pay those 11 payments as needed. 12 I'll be pleased to answer any questions you 13 have regarding the budget, and I'll be getting back to the 14 budget under the LAR tab. 15 CHAIRMAN CLOWE: Very good. Are there any 16 questions at this point? 17 MR. GREER: Commissioners. 18 CHAIRMAN CLOWE: Yes, sir. 19 MR. GREER: I would like to just mention in 20 reference to the reaching the billion plus figure for the 21 foundation school fund. I think it's significant to note 22 that the high points of 1996 and -- 1996 and 1998 fiscal 23 years were in the billion plus range. This is the first 24 time that the commission has transferred over a billion 25 dollars since the 1999 fiscal year, and I think that's worth 0014 1 noting. And we're very proud of that fact. 2 CHAIRMAN CLOWE: Very good. Any further 3 comments or questions? 4 Thank you, Lee. 5 Next item IX, report, possible discussion 6 and/or action on the commission's on-line lottery gaming. 7 Mr. Martin, Mr. Tirloni, and Ms. Jambor. 8 Good morning. 9 MS. JAMBOR: Good morning. 10 MR. TIRLONI: Good morning. 11 MR. MARTIN: Good morning, commissioners. 12 For the record, I'm Steve Martin, the 13 marketing director. 14 MR. TIRLONI: Good morning. 15 For the record, I'm Robert Tirloni. I'm 16 the on-line products marketing coordinator for the Texas 17 Lottery. 18 MS. JAMBOR: Good morning. 19 For the record, I'm Liz Jambor, instant 20 product marketing coordinator and acting senior research 21 specialist. 22 MR. MARTIN: We are back this month with an 23 update on on-line sales with a focus on Lotto and Mega 24 Millions, and we have some follow-up items on some issues 25 that -- or items that came up in the last meeting commission 0015 1 meeting. 2 I'm going to turn it over to Robert and Liz 3 for Lotto and Mega Millions updates, and then I'll be back 4 with an update on self-service terminals. 5 MR. TIRLONI: Commissioners, we'll start 6 with a quick update on our two major jackpot games, Lotto 7 and Mega Millions. Our current Lotto jackpot for the 8 Saturday drawing is 29 million. This roll cycle began on 9 Saturday, July the 10th. We've been rolling ever since. 10 It's been a slow but steady roll. And I provided you with 11 the interest rate factor that we used during yesterday's 12 estimation, which was 1.6749. And I just provide that to 13 you so you can see what the interest rate is. We've talked 14 about it in the past, that jackpot rolls are based on 15 sales. And the interest rate plays a major roll in how we 16 roll our jackpot. 17 This roll cycle is not much different from 18 the previous roll cycle where we rolled up to 145, and we've 19 been rolling at pretty much the same -- same intervals. But 20 I just wanted to continue to give you information about the 21 interest rate factor, as it is a crucial part of our -- of 22 our Lotto estimation and our Lotto rolls. 23 On Mega Millions there was a jackpot ticket 24 sold in Ohio for a 52 million-dollar drawing on Friday the 25 20th. That roll cycle began on Friday, July the 30th. It 0016 1 was short in terms of the way Mega Millions typically 2 rolls. We started back at ten million for this past 3 Tuesday's draw, and tomorrow's night draw is advertised at 4 $12 million. 5 Lee touched on the week ending 8/21/04, 6 this past Saturday. This depicts stats and a visual for 7 you-all, as you see instants making up the bulk of the 8 sales, shows normal at 49.4 million with Lotto in the -- the 9 Lotto jackpot 20 million-dollar range, below 20s. We're 10 seeing 6.4 million in sales for the last full week. Cash 11 Five, 2.1 million. We also mentioned Pick Three, a very 12 strong performer for us, very consistent with a very loyal 13 player base coming in at 5.1 million. Two Step, 785,000. 14 To the -- due to the hit on Mega Millions, our sales for the 15 week ending 8/21/04, 3.1 million. And Megaplier coming in 16 at 743,000. 17 Again, I've been providing you an update on 18 calendar year-to-date sales and as I've explained, until we 19 have a full fiscal year where we can do a apples to apples 20 comparison, this is the best comparison we can give 21 on our -- on our big jackpot games. And this is due to the 22 fact that Mega Millions started in December after we were 23 three some-odd months into the -- into the current fiscal 24 year. So looking at calendar year-to-date sales, we see 25 Lotto Texas coming in at just over $338 million. Mega 0017 1 Millions, just over 162 million. And Megaplier coming in at 2 38 million, 38.2 million. 3 This time last year for Lotto, our calendar 4 sales were about 372.5 million. So although our calendar 5 year sales on Lotto this year are slightly less, when you 6 look at the big picture in terms of large jackpot games in 7 Texas, we are way ahead of where we were last year. 8 These are stats from the start up of Mega 9 Millions in Texas, which was December through the week 10 ending last Saturday, the 21st of August. The total Mega 11 Millions sales are 186.6 million; total Megaplier sales 44.7 12 million. And if you add those together, we come up with 13 231.3 million for the game as a whole since it started in 14 December. 15 Quick update on winners, we have had 68 16 175,000-dollar winners in the state. 12 of them have 17 Megaplied their purchase. And for third tier prize, which 18 is a 5,000-dollar prize, we've had 329 winners. And 81 of 19 those winners have had Megaplied their purchase. 20 To continue to track Mega Millions and 21 Megaplier sales for you, see, this was the 10 million-dollar 22 jackpot that was sold in New York. We started a new roll 23 cycle. And as I said, that was a short roll -- short roll 24 cycle for Mega Millions standards. The jackpot climbs up to 25 52 million before it was hit, and then we began our last 0018 1 roll cycle that we are currently in this past Tuesday with 2 10 million. 3 Worth noting, you probably see that the 4 sales for this 10 million are somewhat lower than for the 5 previous two, and I would attribute that to the fact that 6 there has been some consistent jackpot wins in Mega Millions 7 we've been having lately built up to a considerable large 8 jackpot for that game. 9 Tracking Megaplier sales, they're holding 10 steady 19.3 percent of the sales are for Megaplier. And 11 as -- as I said, that's pretty steady and we have -- we've 12 seen this would be a pretty consistent trend for the game. 13 This slide will show all of the roll cycles 14 that we have experienced on Lotto and Mega since November. 15 Here's where Mega Millions started. You can see all of the 16 Mega Millions roll cycles. This was the Mega Millions roll 17 up to 290 million. And, again, you seen after that 290 18 million-dollar jackpot, there have been short roll cycles on 19 Mega. And you see after we built up to our 145 million- 20 dollar jackpot on Lotto, we tend in Texas to have somewhat 21 of a short roll cycle where we built up to nine and then the 22 current roll cycle that we're in has, as I said, some slow 23 but steady growth of our current advertised jackpot of 24 twenty-nine. 25 Continuing to track for all the states 0019 1 participating in Mega Millions, again, we don't see much of 2 a change. You can see here what we experienced in Texas 3 with the Mega Millions sales and the Megaplier versus the 4 big drop off from the advertised 52 million-dollar jackpots 5 to the ten. And, again, you see the consistency across the 6 stage. For example, this is New York. You see this 7 ten million-dollar sales mark that is less than the previous 8 two, ten million-dollar -- the sales for the previous two, 9 ten million-dollar jackpots. And, again, I would just 10 attribute that to the fact that we have not see the -- our 11 buildup to a large jackpot on Mega Millions. 12 This is for the last complete roll cycle on 13 Mega Millions. That was when we started at ten and built up 14 to 52. This is the per capita sales. And we have not seen 15 real -- any real change. Texas has been 38 points per 16 capita, right above the state of Washington which is at 35. 17 We continue to work on educating our 18 players and our retailers about the Mega Millions game and 19 its benefits. 20 COMMISSIONER COX: Robert, does the per 21 capita sales there by state correlate with anything like the 22 number of years they've been in the pool or whether or not 23 they have their own lotto game or some factor like that? 24 MR. TIRLONI: I -- I would think that, yes, 25 that would be the case. I would think that the -- the 0020 1 longer the states are in the game, the higher per capita 2 they're going to realize. And I also think and I know -- I 3 believe we have talked about this in the past. States 4 usually see an increase in game sales and -- and an increase 5 in per capita once they have a winner in the Mega Millions 6 game. 7 And Ohio has been pretty fortunate here 8 they haven't had a winner for quite a while, and here lately 9 they seem to have had, I want to say a few winners in 10 succession. But in the past few months they've -- they've 11 experienced, I want to say about two to three jackpot 12 winnings. And that certainly helps the game and brings more 13 publicity too in the state, and I believe that would help 14 the sales and, therefore, help the per cap. So I think that 15 the length of time in the game does have a direct impact 16 on -- impact on these numbers. 17 COMMISSIONER COX: Okay. The -- that's 18 opposite the normal curve which is declining Lotto sales. 19 Would you take a look at that and get us some more 20 information next time of how -- how this correlates to every 21 day and what, if anything else, it might correlate to. If 22 we can anticipate growing sales from this game, that is 23 great. But it's contrary to our experience with other 24 games. 25 MR. TIRLONI: I can look at that for the 0021 1 next meeting. Sure. 2 MS. JAMBOR: One of the things that we 3 continue to look at once we introduced Mega Millions to the 4 state is the sales regarding Texas. This slide shows the 5 comparison of FY '03 for 51 weeks, which is almost a 6 complete fiscal year, to FY '04. And what we're seeing is a 7 9.4 percent sales shift. Nicely, this is less than we had 8 anticipated for Lotto Texas, and it's most likely attributed 9 to the 145 million-dollar jackpot that we experienced just a 10 short time ago. 11 If we look at 48 weeks pre- and post-Mega 12 Millions start, again, we're seeing an increase in Lotto 13 Texas sales of 6.5 percent. Again, this would be attributed 14 to the 145 million-dollar jackpot. We know that Lotto Texas 15 is truly a jackpot driven game and that -- that high level 16 jackpot really helped with Lotto Texas sales for FY '04. 17 Overall when we look at a comparison of 18 almost complete fiscal year of FY '03 and FY '04. For 19 on-line games we're seeing an 8.6 percent increase and this 20 includes all of our on-line games. Total sales which would 21 then include instants and on-line, we're seeing a 10.8 22 percent increase over last year, the same time period. 23 This slide shows the sales by jackpot -- 24 well, actually sales by week and then I've indicated certain 25 level jackpots. And what we're seeing is still a loyalty of 0022 1 a higher sales by jackpot for Lotto Texas than we're seeing 2 for Mega Millions. And, again, some of this is related to 3 loyalty to the in-state game and some of this is related to 4 maybe -- maybe a lack of education or a lack of awareness of 5 the Mega Millions. But as that grows, we -- we anticipate 6 as we've seen with other games, that the sales for Mega 7 Millions will grow. 8 And as I have said in the past, with an 9 increase in game variety and choice comes an increase in 10 sales. We are generating more dollars with the inclusion of 11 Mega Millions, that generation of the lottery dollars means 12 that we are able to return more money to the state. 13 MR. MARTIN: Commissioners, we will now 14 follow up on a few items raised from the last -- last 15 month's commission meeting. Including a self-service 16 terminal update, Lotto Texas jackpots winnings, 17 Massachusetts ranking, and automated drawings. 18 First, for self-service terminals, we 19 currently have 683 terminals installed across the state 20 which are primarily in grocery store locations. HEB 21 deployments are going great. We have over a hundred 22 installed and about 112 pending. Other installs is about 23 40. This will leave 165 self-service terminals for market 24 expansion key accounts. 25 CHAIRMAN CLOWE: Steve, what's the current 0023 1 total for the contract we have in place? 2 MR. MARTIN: That is 1,000. 3 This market expansion will be dedicated to 4 opportunities of new channels including the HEB pantry food 5 locations, chain shores, such as Walgreens and Eckerds, 6 airport terminals, and hotels. 7 Average weekly sales for S.S.T.s tended to 8 follow the jackpot amounts, but they have shown strong 9 performance compared to our projections. The average weekly 10 sales are at -- currently at $360 a week per unit while they 11 were projected to be $236 per week for '04, and our 12 projections for '05, fiscal year '05, were $308 per week, so 13 we're -- we're trending relatively well. HEB -- sales at 14 HEB are a great example of the market -- 15 CHAIRMAN CLOWE: Steve, go back to that 16 prior slide would you please 17 MR. MARTIN: Certainly. 18 CHAIRMAN CLOWE: Commissioner Cox, with 19 your background and knowledge, how does that look to you 20 just from a retailing outlet standpoint? My reaction is 21 it's somewhat low. Do you have any idea on where we ought 22 to be going with that? 23 COMMISSIONER COX: Well, the -- my 24 understanding from GTECH that the average I.S.I.S. terminal 25 that's out there in the retailers does about $1200 a day. 0024 1 Is -- Gary, is that right? 2 MR. GRIEF: A week. 3 COMMISSIONER COX: A week. I'm sorry. And 4 so given that, which is a behind-the-counter machine, it 5 seems that this is doing pretty well for a machine that's 6 just standing there trying to look practical. 7 CHAIRMAN CLOWE: Unattended. 8 COMMISSIONER COX: Yes. 9 MR. MARTIN: And this -- the deployment has 10 been over time too. So, I mean, the 683 that we have in now 11 have been going on for several months on the installation. 12 CHAIRMAN CLOWE: Does GTECH have any goal 13 in mind for these units? 14 MR. MARTIN: As far as dollars -- 15 CHAIRMAN CLOWE: Yes. 16 MR. MARTIN: -- sales. 17 CHAIRMAN CLOWE: Dollars per week. 18 MR. MARTIN: We do have -- I mentioned that 19 our FY '04 goals were $236 per unit a week and our '05 goals 20 are $308 per unit per week. 21 CHAIRMAN CLOWE: Yeah. That's your goals. 22 Does GTECH have any goal? Did GTECH tell you what other 23 states, for example, are generating? 24 MR. MARTIN: I can get that information for 25 you. I do not have it with me. 0025 1 I can tell you that with HEB, for example, 2 if you look at locations that have had an S.S.T. unit with 3 four -- four or more weeks of sales, those sales are on the 4 average about $700 per week. So that gives you a good 5 example of a location that had not had lottery sales for 6 quite some time with this new unit. 7 CHAIRMAN CLOWE: Well, it seems like you 8 would have more pedestrian traffic at HEB, Central Market 9 than you would have in a lobby of a small total. Is there a 10 selection criteria wherein you decide where to put these 11 machines and where not to? When -- when you hit this 12 thousand and you have a request from others that may be high 13 volume, what's your plan on taking them away from people 14 where you have a low volume? Is -- have you thought through 15 that program? 16 MR. MARTIN: Yes. We are looking at 17 certain criteria for that market expansion. You mentioned 18 hotels. We're looking at hotels that do have high foot 19 traffic, say, for example, hotels close to the convention 20 center, as a matter of fact, close to the San Antonio 21 Riverwalk, those areas that have high -- high occupancy 22 hotels. 23 MR. GRIEF: Mr. Chairman? 24 CHAIRMAN CLOWE: Yeah. 25 MR. GRIEF: Could I interrupt and say just 0026 1 a couple of points? 2 CHAIRMAN CLOWE: Certainly. 3 MR. GRIEF: The answer to your question, 4 yes, we are taking a strong look at the criteria where these 5 S.S.T.s are ongoing. In fact, the commission will probably 6 see and hear something about a change in how we are going to 7 deploy those. We want to carefully deploy the remainder of 8 those machines that we have left. A couple of things about 9 S.S.T.s that -- that I want to make sure the commission is 10 clear on, we are using S.S.T.s, number one, to get into some 11 locations that previously didn't sell lottery tickets at 12 all. That's one of our -- our goals, and that's a -- it's 13 great recruiting tool to do that. 14 What's also lost in a slide like this is 15 the amount of instant tickets that are then sold at a 16 location that previously didn't sell Lotto at all. And as 17 the commission is well aware, instant tickets are about two 18 thirds of our total sales. So you can probably 19 conservatively project that whatever sales you see at the 20 S.S.T., you're going to have substantially more instant 21 ticket sales that go along with that. 22 CHAIRMAN CLOWE: I think I understand 23 that. And I think what you have reiterated is that in the 24 beginning, the mind set was to get these machines out, these 25 S.S.T.s out and increase sales overall. But what I'm 0027 1 wanting to focus on is that we'll reach a point where we've 2 got them out and there aren't anymore to be distributed, but 3 we'll be hopefully seeing where there are opportunities to 4 place these machines and achieve the kind of sales that you 5 just identified. And I think we should have an idea of how 6 we are going to shift the number of machines that we have 7 available to the higher volume locations if we are winning 8 by a number. And currently Steve says the number is a 9 thousand. 10 These machines are expensive and -- and, 11 you know, we -- I don't think we can afford to have them in 12 a location where we have minimal sales. I hope we are 13 thinking about that estimate. And so as the time comes that 14 we need to move the machine from a low volume, nonactive 15 location to an area where there's more potential, we should 16 have thought that through and had that understanding with 17 some kind of agreement with whoever is in control of that 18 location. We have just so many of these and we want them to 19 be the most productive they can be, as opposed to your 20 machines at our retailers, where they license and man the 21 machine and -- the volume there is there concern. 22 The volume on these machines seems to be 23 our concern, so I would just like you to think that through 24 and make these machines the most productive they can be over 25 a period as this aspect of a retail outlet matures. In my 0028 1 view, it is immature at this time. You are still looking to 2 place machines. But it's an asset that we want to maximize 3 a return on in a mature market. 4 MR. GREER: I -- I would like to make a 5 point that I fully support what you said, that Gary and I 6 have both been involved in this process as far as the 7 placement and the future planning. You know, one of the 8 things that I think is going to be interesting to watch is 9 how the jackpots affect -- which was very good that we had 10 that high jackpot roll because we got a lot of people up 11 there. And I have said this example before and I have seen 12 it in the airport all the time, as people become more 13 familiar with it, I think they'll begin to use word of mouth 14 to tell their friends this is the way to go and get 15 assistance on how to use the machines. We'll continue to do 16 things to promote utilization of the machines and the new 17 locations that we're in. 18 But I want to assure you that I also am 19 involved in the process and feel good that working with 20 GTECH and marketing, that we will be very consistent and 21 selective in how we place the remaining machines. 22 CHAIRMAN CLOWE: Well, it's a return on 23 investment capital kind of calculation in my mind. And 24 right now you're just trying to get them all out, get them 25 utilized and it's an overall increase in sales, but there 0029 1 will come a day when this market matures and you come back 2 to the commission and say, well, we want a thousand more of 3 these machines. I think the question the commission would 4 ask is what's our return and how can it be maximized on the 5 thousand that you have out there now. 6 MR. GREER: I agree. 7 CHAIRMAN CLOWE: Okay. 8 MS. KIPLIN: Commissioners, Mr. Chairman in 9 particular, since this your -- the questions you've raised, 10 you-all did adopt a rule on on-line self-service terminals, 11 the S.S.T.s, 401.369. And there are provisions in that rule 12 that address this particular issue in terms of retailers 13 maintaining a minimum sales criteria that is established by 14 the executive director. The executive director has to 15 provide that minimum sales criteria at least 30 days before 16 implementation of that criteria. And then there's a -- a 17 sales review period for each retailer to look at their sales 18 and determine whether they do, in fact, reach that minimum 19 sales criteria. And if not, the rule does give the 20 authority to remove those terminals. So it's been 21 contemplated. And I -- what I'm hearing is that at the 22 point where it's becoming an issue, a minimum sales criteria 23 will be established and retailer sales on these S.S.T.s will 24 be monitored. 25 CHAIRMAN CLOWE: So the procedure is in 0030 1 place. We're not yet there to implement it, but the day may 2 come. 3 MR. GREER: I agree. 4 CHAIRMAN CLOWE: Very good. 5 COMMISSIONER COX: Mr. Chairman, I thought 6 of one thing along that line. 7 Robert, the influence of that very large 8 jackpot is obviously an influence. And the 360 is probably 9 a little higher than we might have gotten on average. That 10 doesn't mean it isn't still growing. But let's just -- 11 let's take a round number. Let's say $300 a week. And 12 let's say that 30 -- let's say that those are all 13 incremental sales, that none of them cannibalize any other 14 outlet. And let's say that 30 percent of that goes to the 15 bottom line. So you got about -- would that be 90 dollars a 16 week going to the bottom line? Let's make a week -- a month 17 be four weeks. You've got about $360 a month going to the 18 bottom line. What are we paying each month for that 19 machine? 20 MR. TIRLONI: I don't know that. I don't 21 know that. I don't know what the amount is. 22 MR. GRIEF: Commissioner, if you recall, 23 when we obtained the services of these fees, that was a one 24 time payment to GTECH. 25 COMMISSIONER COX: Oh, a one time payment. 0031 1 MR. GRIEF: Yes, sir. 2 MR. MARTIN: It's not a monthly payment. 3 CHAIRMAN CLOWE: Yeah. But that's right. 4 But his question is still very valid. You know, what's the 5 life of that machine and what's the appreciated cost or the 6 pro rata expense per month. That's -- that's very 7 important. 8 MR. GRIEF: The return on investment. 9 CHAIRMAN CLOWE: That's the return on 10 investment. 11 MR. GRIEF: Right. 12 CHAIRMAN CLOWE: Commissioner Cox is right 13 on target, and we should know that and be calculating that 14 because that's our goal. 15 MR. GRIEF: Well, Mr. Chairman, we are 16 diligently reviewing that. We have sat and dedicated to 17 putting together a full presentation on the return on 18 investment on those S.S.T.s. I have been working directly 19 with Commissioner Cox on that issue, and we hope to have 20 that available in the very near future. 21 CHAIRMAN CLOWE: Great. 22 COMMISSIONER COX: Good. 23 Thank you, Gary. 24 MR. MARTIN: So we are definitely in the 25 ramp up phase, but as I mentioned, like an example with HEB, 0032 1 with four more weeks of sales, their average is about $700 2 per week per unit. 3 MR. GREER: And I want to mention in 4 reference to HEB, which obviously we are very excited about, 5 they are very pleased with what's happening. And we have 6 worked together with them on some marketing pieces. And 7 they're really wanting to step out to let their customers 8 know that they have the machines, but they're not going to 9 make a large announcement or anything until they're in all 10 the stores because they didn't want to slight the stores 11 where they're not yet. So I think if we continue to see, 12 you know, some input from their marketing staff working with 13 our marketing staff on how we can best reach their 14 customers, that we're going to continue to see some positive 15 things. And the fact that they're a new corporate player I 16 think will be beneficial to the overall growth. 17 COMMISSIONER COX: Robert, is there 18 anything remarkable about that decline at H.E. -- in the HEB 19 line from 496 in early July to 281 in early August? 20 MR. TIRLONI: I believe that their average 21 is gradually going down because of the number of terminals 22 being deployed during that time. At the beginning of 23 this -- at the beginning of this chart was at the beginning 24 of the deployment for HEB, so you see that the numbers start 25 to gradually come down as the number of terminals increased 0033 1 at the HEB locations. 2 MR. MARTIN: Which has a less sales time 3 frame. 4 COMMISSIONER COX: So does that mean, then, 5 that we prioritize the locations and put them first in the 6 places that we thought had the greatest potential? Or did 7 we go about it geographically? Or did we go about it 8 randomly? How -- how did we -- 9 MR. TIRLONI: The deployment -- 10 COMMISSIONER COX: -- determine the 11 installation schedule? 12 MR. MARTIN: For HEB? 13 COMMISSIONER COX: Uh-huh. 14 MR. MARTIN: That has -- HEB is basically 15 directing us as far as locations -- 16 CHAIRMAN CLOWE: Okay. 17 MR. MARTIN: -- as far as their roll out. 18 CHAIRMAN CLOWE: And how did they make the 19 determinations? 20 MR. MARTIN: That was not disclosed to us. 21 MR. GREER: From my perspective -- we've 22 been keeping up on this -- it was utilized from a geographic 23 perspective. They looked at the highest volume stores in 24 those locations and then had systematically moved around the 25 state. 0034 1 MR. MARTIN: And it's primary store 2 locations have had a business center in place. They do have 3 locations that do not, and they're looking at the business 4 center as well as the HEB pantry food locations that I 5 mentioned earlier. 6 COMMISSIONER OLVERA: Well, Mr. Greer, that 7 brings up a following question with respect to the previous 8 issue. In the future, would you have the ability to direct 9 HEB to move a terminal to a different HEB location? 10 MR. GREER: Based on the rule, we would. 11 And, you know, we're hoping that as we continue to build a 12 relationship with them, it will, you know, be on the same 13 page as we look at the numbers. But we do have it within 14 the rule that will give us that authority. 15 COMMISSIONER COX: How many stores does HEB 16 have, and how many of those are -- are planned locations for 17 S.S.T.s, Reagan? 18 MR. GREER: The number off the top of my 19 head, the number of stores that they have is 292 and the 20 number of stores that will have S.S.T.s is around 230 21 something. And the pantry stores is -- is the differential 22 there. They have in the smaller communities a -- a smaller 23 footprint, I guess you would say, and no business center, 24 and they're sort of working their way into that. But their 25 ultimate goal from my understanding in the e-mails that I've 0035 1 had and the correspondence that I've had with them is they 2 want them in all their stores. They want to start out with 3 the big ones that have the business centers and look at the 4 big picture. 5 MR. MARTIN: I believe there are 83 pantry 6 locations. 7 CHAIRMAN CLOWE: And -- and we would be 8 happy for Brookshire or Albertsons or anyone else that is 9 interested in this to participate in it. I'm certain you're 10 contacting these entities along with the good work you're 11 doing with HEB. 12 MR. MARTIN: Yes, sir, we are. Those -- 13 the other 165 that we will have left over for market 14 expansion will be for locations like Brookshire Brothers, 15 Lubbock supermarkets out of Lubbock and other locations 16 similar to that. 17 COMMISSIONER COX: So Brookshire Brothers, 18 the Lufkin company has signed up? 19 MR. MARTIN: No, sir. They -- they have -- 20 I -- I think it's a franchise called Ole Foods that they're 21 looking to put in as a test, and then they will go from 22 there. 23 COMMISSIONER COX: Good. Well, what about 24 Brookshire Food in Tyler? 25 MR. MARTIN: We are contacting them. And 0036 1 then, basically, I think a lot of these companies see that 2 HEB has this and, you know, they don't want to be out of the 3 competitive advantage, so the interest is there. 4 MR. GREER: And I -- I met with them 5 personally. I went to Tyler and talked to them. They had 6 some reservations and wanted to -- I think that they wanted 7 to kind of see what happened. And once HEB signed up I'm 8 sure they're monitoring that. And we'll utilize the numbers 9 of HEB and the success that they have to go back to them as 10 a follow-up, but we have talked to both of them. And I'm 11 going to be personally involved in corporate outreach to the 12 executives because I think it's that important. 13 COMMISSIONER COX: So they have not closed 14 the door on it? 15 MR. GREER: No, sir. 16 COMMISSIONER COX: Okay. 17 MR. TIRLONI: And we do have -- we do have 18 S.S.T.s in Albertsons locations as well. 19 CHAIRMAN CLOWE: How many? 20 MR. TIRLONI: Do you have the number? 21 MR. MARTIN: Let's see. 22 MR. TIRLONI: Get you -- we can get you the 23 number at this point. Yeah. 24 MR. MARTIN: I can get you the number, a 25 report on basically all of the -- 0037 1 MR. GREER: Yeah. Let's do an overview 2 because some -- there are some in Krogers, you know, some of 3 our larger corporate accounts. 4 MR. MARTIN: Randalls. 5 MR. GREER: Randalls is another one. Tom 6 Thumb. 7 MR. TIRLONI: Fiestas. 8 MR. GREER: Fiestas. There -- there's a 9 very good cross-section of our corporate chains, 10 specifically grocery stores that had interest to where we 11 are accommodating those interests. 12 CHAIRMAN CLOWE: Why don't you show us a 13 list where they all show interests. 14 MR. TIRLONI: I can get that to you. 15 MR. GRIEF: Mr. Chairman, I'm thinking back 16 to Commissioner Olvera's question a moment ago working with 17 a some chain like HEB to better implement these machines. 18 And I want to -- I appreciate counsel pointing out the fact 19 that the rule does allow us that flexibility to look at 20 sales criteria. But that will be the major consideration as 21 well, when we have a large chain that has S.S.T.s in all of 22 their locations, we'll have to work through the nuances of 23 moving machines either within that chain to other locations 24 or pulling them away from that chain, similar to what we 25 went through when the lottery started up. 0038 1 There are chains that have significant 2 number of stores, some of them do very well. Some don't. 3 But, yet, to please the chain and keep them as a valued 4 customer, sometimes you have to allocate machines to some of 5 their stores that might not do as well. So what I -- I 6 raise that issue just to make sure that commissioners are 7 aware that we're going to study that issue as well and make 8 sure that we're prepared in that regard to have those 9 discussions. 10 COMMISSIONER OLVERA: In other words, it 11 would be conceivable that every -- every terminal is 12 exceeding the minimum requirements, but the -- the 13 commission may desire a -- a terminal be moved elsewhere 14 and -- and you're saying that -- that we obviously would 15 have to work with that entity. 16 MR. GRIEF: Yes, sir, we would. 17 COMMISSIONER COX: Are there any of these 18 yet in convenient stores? 19 MR. GREER: Not yet. 20 COMMISSIONER COX: Has -- have you looked 21 at whether these would make sense in the large convenient 22 stores? I know they don't make sense at the corner store. 23 MR. TIRLONI: Yes. 24 COMMISSIONER COX: Over on 31st and 25 Jefferson, off campus, at the big lucky tiger or whatever. 0039 1 Tiger Marts. 2 MR. GREER: I personally went to Valero 3 which has 790 something-odd stores in the state, and they're 4 very interested and stuff. But in the convenient store 5 world, there's such a limited amount of space, that with 6 what we're dealing with is going to be a pilot project and 7 they're wanting to incorporate sort of a kiosk effect into 8 the footprint of the new stores that they're looking at 9 putting it into. 10 MR. MARTIN: 7-Eleven as well. 11 MR. GREER: 7-Eleven as well. We've talked 12 to a number of them but because of the constraints in 13 reference to where they could put it -- I mean, every inch 14 of that store is, you know, prime real estate for them to 15 utilize. So we're taking that slowly and working with them 16 to incorporate into the future space planning. But they're 17 very interested also and that goes back to the chairman's 18 point a moment ago of being sure, you know, that we're 19 carefully placing them and we're looking at other options so 20 that we can continue to see this thing in a positive 21 direction and keep the corporate citizens happy across the 22 board. 23 COMMISSIONER COX: Now at one time it was 24 contemplated that these were going into airport terminals 25 MR. GREER: Yes, sir. 0040 1 COMMISSIONER COX: Are there any in airport 2 terminals? 3 MR. GREER: There aren't. We are still 4 working on that. There's -- that's a very complicated issue 5 in working with airports because you get into working with 6 entities from government to private. The way that we're 7 approaching that right now is we have to -- 8 CHAIRMAN CLOWE: You mean we have to work 9 with the government? 10 MR. GREER: City government, county 11 government involving different airports. 12 COMMISSIONER COX: Jeez. 13 MR. GREER: There's airport authorities and 14 all that. We've talked to Love Field, DFW, San Antonio 15 airport. We're working with the Austin airport right now. 16 And the way that we're approaching it is a little simpler 17 from the perspective of working directly with the retailer 18 that is currently in the airport versus trying to work with 19 the airport itself. That way it's kind of doing both. 20 There has been a receptivity to that because of the 21 opportunity for, you know, the profits. They get a portion 22 as well. But we're working through the logistics, and it's 23 very complex. 24 COMMISSIONER COX: Well, let's just take 25 what must be a prime target, and that's DFW. There you've 0041 1 got however many terminals and however many different 2 airlines. Do you get involved when you try to place those 3 with the individual airlines as -- that occupy the terminal 4 as well as the authority. 5 MR. GREER: Potentially it could, but we 6 started with the authority. And if they're not on board, 7 then the secondary aspect of the airlines doesn't play in. 8 So far, the authority at DFW has got some issues and 9 concerns. And because of the expanse of DFW, it's more 10 complicated as to -- you have to decide as to where you 11 would put them and that's where you -- probably the airlines 12 would say we want it here, we don't want it here. But right 13 now we're still in the initial phase with them specifically, 14 and -- and the authority has issues. 15 COMMISSIONER COX: At DFW there might be 16 how many terminals would we have on average? 17 MR. GREER: We've never gotten that far. I 18 mean, we wanted to start into a scenario. Let's figure 19 where we can put one and see what it does, and two and 20 three. You know, that's a such a huge airport and there's 21 so many A, B, C, and you have to ride the tram and all that 22 type scenario. We would work with them to find the highest 23 traffic area. That would be the simplest. 24 One of the issues that certainly is worth 25 mentioning is that for those travelers that are going 0042 1 through there, part of what has to be considered is the fact 2 that they are -- may do a scratch off or an on-line ticket 3 and win, and there has to be somebody there that can pay 4 them before they get on plane and go wherever. And so 5 that's a key consideration to being fair and to be customer 6 friendly with the individual that might win. I mean, we 7 have a lot of winning tickets sold. And so that's one of 8 the issues we also have to address. 9 COMMISSIONER COX: Well, I would encourage 10 you to think about selecting one of your more cooperative 11 airport authorities, one of your more interested airport 12 authorities as a pilot and then put the others aside for a 13 while. And let's see how much time and money we have to 14 invest in selling them and then what we've sold and see if 15 it makes any sense to be going after that market. 16 MR. GREER: I agree. And I will tell you 17 that based on other states that are in airports, it has been 18 very lucrative, especially when you get high jackpots. You 19 know, people are excited and they may live in that same 20 state and just don't have time to make it home to buy a Mega 21 Millions ticket, for example, when they're right there and 22 they got down time. 23 So based on the research that we did in 24 other airports -- and I can give you that information where 25 when they are -- I know when I was at -- in New York and 0043 1 they were there, the retailer was selling them in the 2 airport. That was an example. But I -- I agree with you 3 totally, and we'll continue to look at that. 4 COMMISSIONER COX: And I -- I know that -- 5 or perceive that if the cost benefit analysis showed to 6 break even that we would want to do it because of the 7 visibility that it gives the Texas Lottery. 8 MR. GREER: Yes, that is a consideration. 9 MR. MARTIN: But GTECH has talked with both 10 Dallas Love and Austin Bergstrom, you know, of the concerns 11 in that sense. 12 CHAIRMAN CLOWE: Well, I would think that 13 Dallas Love Field and Houston Hobby would be the two 14 airports -- 15 MR. MARTIN: Yes, sir. 16 CHAIRMAN CLOWE: -- where you would have 17 the fewest airlines to deal with, where you have a high 18 degree of local traffic. And I would just immediately think 19 of those two as potential entities along the lines of 20 Commissioner Cox's comments. 21 MR. GREER: I agree. I'm going to commit 22 to all of you again that this -- this is a huge thing and 23 I'm -- I'm really excited about the potential for what it 24 could do. So I'm going to stay personally involved. And I 25 will go when we get to a point that they're ready to, you 0044 1 know, visit and want more information, I'll go personally to 2 the airport. And I haven't been to any yet. We haven't 3 gotten past that first hurdle, but once we get there, I'll 4 keep you apprised of that. And I will personally stay 5 involved in it because it's an exciting opportunity for 6 retailers in the airport and an exciting new source of 7 revenue that we want to continue to pursue. 8 CHAIRMAN CLOWE: Perhaps a follow-up 9 thought. Steve, I would imagine that in the beginning an 10 aggressive marketer like HEB does, in fact, study where they 11 want these machines. 12 MR. MARTIN: Yes, sir. 13 CHAIRMAN CLOWE: But I doubt, although I 14 may be wrong, that they are scrutinizing it on an ongoing 15 basis the way we are. And it would seem to me that if we 16 produce figures for them similar to what you're showing us 17 and go back and talk to them about this on a continuing 18 basis, it would sharpen their focus on what they're trying 19 to achieve and help them come to our way of thinking. I 20 understand now from what our general counsel told us, we 21 have the authority to make these decisions, but they ought 22 to be joint and collegial in nature and what they may not 23 have that we do is this good information that would help 24 them move towards more profitability. And for them as for 25 us, it's not just revenue. It's the bottom line 0045 1 contribution. 2 MR. MARTIN: Yes, sir. And we are working 3 with them on different code marketing activities, helping 4 them produce programs that would direct traffic to their 5 self-service terminals, basically promoting the fact that 6 that service does exist in their store, looking at, I guess, 7 opportunities with second chance drawings for them to do 8 something in-store with the system. So it would be -- the 9 self-service terminal opens up a lot of other 10 possibilities. And HEB is in embracing the promotional 11 activities that we are -- always present to them. 12 MR. GREER: And I would like to add that, 13 you know, one of the elements to S.S.T.s is the ability to 14 shut them down if there's underage. And so that's a part of 15 the consideration as far as the placement. And what some of 16 the stores have done which has been interesting, Fiesta is 17 an example here in Austin, working together with their 18 marketing people, we've, you know, come to the idea that 19 they have some footprints that go over to the machine. 20 They've got signage around the store. 21 So in cooperation with the particular 22 entity and the manager of that store, there is a number of 23 things that we will be doing all the time just to create 24 awareness. Because generally where they're located where 25 I've seen -- and I have been out to a number of locations -- 0046 1 it's a line-up of various products that are there, a Coke 2 machine; that ball, you know, the thing where you dip -- 3 drop the hand and it picks up a prize for a child. So 4 there's a number of issues, the key being the ability for 5 the business center individual to be able to shut the 6 machine down. And with that in mind, there's going to be 7 some tricky marketing opportunities that we'll do to take 8 advantage of that. 9 MR. TIRLONI: And if I could add, 10 Mr. Chairman, GTECH does have corporate account staff 11 dedicated to corporate accounts such as the HEBs, 12 Albertsons, Krogers, so on and so forth. And they are 13 visiting with those accounts regularly. Especially HEB 14 since it -- since they embraced the S.S.Ts and the ITVMs and 15 it began selling lottery again, the corporate account staff 16 is visiting with HEB regularly, providing them with their 17 sales updates. And there's cases that we did, the lottery 18 marketing staff paid a visit to the HEB headquarters in San 19 Antonio with the corporate account staff. It was a very 20 good, successful meeting where we discussed promotional and 21 marketing type events at their stores. 22 There's been -- recently the contact at HEB 23 has changed. And so we are planning, with the corporate 24 account staff, another meeting so we can go down, meet with 25 the new contact and open up communication so that we can 0047 1 keep the -- keep this whole process going smoothly and 2 ensuring that their sales stay high and are successful with 3 these terminals in their locations. 4 CHAIRMAN CLOWE: Have you talked to any 5 race tracks? 6 MR. TIRLONI: I don't believe so. 7 MR. MARTIN: No, sir. I don't believe so. 8 CHAIRMAN CLOWE: I'm sorry. I couldn't 9 hear your answer. 10 MR. MARTIN: No, sir, we have not. 11 MR. GREER: Horse racing tracks? 12 CHAIRMAN CLOWE: Or dog tracks. 13 MR. GREER: Or dog tracks. 14 That is on the radar screen. A lot of them 15 do sell lottery products. It's up to that -- the 16 individual. But there's scenarios that enter into as far as 17 the selling alcohol, and you have to red line and things 18 like that. I know at the San Antonio track, I can -- you 19 can buy a lottery ticket there. So a lot of them do have, 20 you know, that ability, but we will continue to pursue 21 that. 22 CHAIRMAN CLOWE: Do they have on-line 23 terminals? 24 MR. GREER: They have -- no. They have an 25 I.S.I.S. People are lined up there is they way I've noticed 0048 1 it in the past. So that's a great suggestion though. 2 CHAIRMAN CLOWE: Those are people that are 3 there with cash money to wager, as I understand it. And -- 4 and, you know, they may not want to stand in line to buy a 5 lottery ticket or what have you. And it seems like to me 6 it's a natural. And you've answered the question that 7 lottery tickets can be sold where there is pari-mutuel 8 wagering, but, of course, not where there's alcohol. 9 MR. GREER: Yes, sir. 10 CHAIRMAN CLOWE: So it seems to me a 11 natural to look at that and see what the potential is. 12 MR. MARTIN: We will definitely check that 13 out. That's a good idea. 14 MS. KIPLIN: Mr. Chairman, this item, I 15 think, was noticed or by used, Chairman, under on-line -- 16 the on-line games, and it's probably more appropriate under 17 another item that has to do with lottery sales. And I'll 18 just put that on the record. 19 CHAIRMAN CLOWE: You mean, we have to 20 repeat all this? 21 MS. KIPLIN: No. 22 CHAIRMAN CLOWE: Okay. But you want us to 23 stop? 24 MS. KIPLIN: No. I -- if you want to 25 continue, I just want there to be a clear record that it's 0049 1 covered by an item that has been noticed properly, but not 2 sales. 3 CHAIRMAN CLOWE: And that is? 4 COMMISSIONER COX: You just want us to know 5 that somewhere in there we're supposed to talk about this. 6 MS. KIPLIN: Yes. 7 MR. GREER: We're not done yet on this 8 topic. I know there are some more slides so... 9 MR. MARTIN: Well, that's about what I have 10 for S.S.T. update. We do have some other follow-up items 11 that we can get into. 12 MR. TIRLONI: Last month, Commissioners, I 13 shared some information with you. Commissioner Cox, you had 14 asked about the bonus ball matrix performance. This is a 15 repeat slide from last month. 16 We had come back and told you that there 17 were reasonable predictions in the Lotto Texas game, that we 18 should have three to four jackpots between 65 to 100 million 19 dollars in a 52-week period, in a year. And I showed you 20 this slide last month to show you what had happened between 21 May of 2003 and June of 2004. And, Commissioner Cox, you 22 asked if I would go back in time further than that to show 23 the results prior to the May of 2003 period. And I will 24 show that you slide. 25 I'm going to have to preface it by saying 0050 1 that there are -- it's going to be a little unclear because 2 of the large number of hits that we did experience prior to 3 the matrix exchange. I've done a recap slide after this. 4 I'll use the pointer to kind of try to point out where it's 5 a little fuzzy. You can see over here, these are very close 6 together. These are two four million-dollar hits back to 7 back. Right over here, these are two nine million-dollar 8 hits back to back, meaning we had a win at $9 million. We 9 started back at four, climbed to nine, and had a -- had a 10 jackpot win. 11 Right over here you see four hits in very 12 rapid succession. That was a six. We went back down to 13 four. We went up to seven and had a win. And then we were 14 hit at four again. So we had a win at six, four, seven, and 15 four. And over here you can see we had three wins back to 16 back pretty much at five million dollars. 17 So let me give you a recap screen. As I 18 said, this is difficult to -- 19 COMMISSIONER COX: Where -- where is the 20 line? 21 MR. TIRLONI: I'm sorry? 22 COMMISSIONER COX: Where is the matrix 23 change line? 24 MR. TIRLONI: The matrix change line is 25 right over here. 0051 1 COMMISSIONER COX: So it's very obvious 2 that the matrix change is doing at least part of what it was 3 intended to do. 4 MR. TIRLONI: Yes, sir. That's correct. 5 COMMISSIONER COX: It may not be building 6 as many huge jackpots as we would have liked, but it's 7 clearly eliminating those jackpots where we have to go into 8 our reserves to pay for them. 9 MR. TIRLONI: Absolutely. That's correct. 10 And here's the recap. Again, I apologize 11 for that slide. There's just large amounts of data to put 12 on that. 13 But for March of 2002 to April of 2003, 14 there were 28 jackpot wins. Again, we made the matrix 15 change in May of 2003, and from May of 2003 to June of 2004 16 there were nine wins. I just wanted to provide you with 17 that follow-up. 18 COMMISSIONER COX: Thank you. 19 MR. TIRLONI: Chairman Clowe, you asked 20 last month when we were talking about where Texas stood in 21 the per capita lotto ranking, you asked me where 22 Massachusetts stood in that ranking. And I did not have 23 that at that time I provided that. Massachusetts, for -- 24 this is fiscal year '03, the last full fiscal year that 25 we -- for which all the states are reporting, and you see 0052 1 Massachusetts at 29 cents which puts them in about 7th 2 place. 3 CHAIRMAN CLOWE: That's interesting. 4 COMMISSIONER COX: It sure is. 5 CHAIRMAN CLOWE: Florida being so high, 6 that's surprising. You think that might be the number of 7 retired people in the state that might be driving that? 8 MR. TIRLONI: I'm -- I'm sorry, sir. I 9 didn't hear your question. 10 CHAIRMAN CLOWE: The number of retired 11 people in Florida would have an impact. That's the only 12 thing I can think of that sets them apart. 13 MR. TIRLONI: I would think that -- I would 14 think that's part of it. We also -- yes? 15 CHAIRMAN CLOWE: People on vacation maybe. 16 MR. TIRLONI: I think the other part of 17 Florida and California being up towards the top is the fact 18 that they are two of the major states that don't have multi- 19 state as well. They only with have their in-state 20 offering. Florida and California. 21 CHAIRMAN CLOWE: I'm sure that can have an 22 impact. I'm surprised New Jersey is so low. 23 MR. TIRLONI: New Jersey is a Mega Millions 24 state. They have -- they have quite a few on-line games in 25 their mix that can have an impact on that. 0053 1 CHAIRMAN CLOWE: This supports really, I 2 think, the good news that we haven't had the migration from 3 Lotto Texas to Mega Millions that we had forecast. There's 4 a high level of loyalty. And as time goes on, more people 5 are playing Mega Millions, but we have a very loyal group 6 that are staying with Lotto Texas. 7 MR. TIRLONI: That's correct, sir. I would 8 agree. 9 CHAIRMAN CLOWE: And -- and, Gary, what's 10 your take on the instant tickets? As we changed the tickets 11 is -- can we talk about tickets, Counselor? 12 MS. KIPLIN: I think it goes to sales. 13 CHAIRMAN CLOWE: Okay. 14 COMMISSIONER COX: That's a yes. 15 CHAIRMAN CLOWE: I think so. Is there a 16 group that likes to see the tickets change and a group that 17 likes to stay with tickets? I mean, you're constantly 18 changing them. I mean, what -- what's your just top of your 19 head reaction to that in comparison? 20 MR. GRIEF: Referring to instant tickets? 21 CHAIRMAN CLOWE: Yes. 22 MR. GRIEF: Yes, sir. The majority of our 23 players seem to want new, fresh, exciting, different-looking 24 games all the time, different prize points, different 25 themes. I think we're starting to see that the licensed 0054 1 games that have been carefully picked can be very successful 2 as well. 3 CHAIRMAN CLOWE: Okay. 4 COMMISSIONER COX: But what this says -- 5 correct me if I'm wrong -- is that we have the highest per 6 capita lotto sales of any state that participates in a 7 multi-state lottery. 8 MR. TIRLONI: That would be correct. 9 COMMISSIONER COX: The only ones that are 10 ahead of us are in neither Powerball or Mega Millions. 11 MR. TIRLONI: That's correct. 12 MR. GREER: California -- California does 13 have a relationship with the MUSL group, and they coordinate 14 their TV show through that. But that statement is true that 15 they do have some support in reference to their big spend 16 game and that -- Florida has nothing as far as multi-states. 17 CHAIRMAN CLOWE: And you've had some 18 conversations with at least one of those two states about a 19 three-state game, haven't you? 20 MR. GREER: Yes, sir. And I'm going to 21 report on that during my report of the executive director 22 report about that one. 23 MR. TIRLONI: I had some follow up also 24 from last month on automated drawings. 25 Commissioner Cox, you asked that we send 0055 1 the Megaplier draw results to Doctor Eubank. I have 2 coordinated that through our security division. And 3 Megaplier draw results from when Mega Millions and Megaplier 4 started in December of '03 through the end of last month, 5 the last full month, July of 2004, were sent to Doctor 6 Eubank. He is working on analyzing those, and he will be 7 submitting a report. He couldn't get it in, in time for 8 today's meeting, but I suspect by next month we should have 9 a detailed report from him on his findings. 10 We also talked about animated drawings last 11 month. And you asked if I could find some recent clips or 12 snippets of animated drawings being used, and I did obtain 13 those. And I would like to be able to show those to you 14 now. 15 I'll give you a little introduction. We're 16 going to see an animated drawing from Pennsylvania. That 17 will be the first one. You're going to see a Pick Three 18 drawing, and then after the Pick Three drawing takes place, 19 they're going to run a promotional drawing called Go for the 20 Green. And when that -- when the green ball is drawn, that 21 causes them to do a second Pick Three drawing. It's -- it's 22 a promotion that they're running. And then you'll see the 23 remainder of their animated drawings. And then we'll watch 24 a drawing from Minnesota and then one from the Atlantic 25 Lottery Corporation in Canada. 0056 1 (The video recording plays.) 2 MR. TIRLONI: The next drawing is from 3 Minnesota. Before we started Megaplier in the fall, we 4 watched one of the Minnesota animated drawings. You'll 5 notice or you may remember they've changed the scene. It's 6 gone from a winter scene to a summer scene in this, and 7 that's one of the benefits that animation gives you. 8 (The recorded video plays.) 9 MR. TIRLONI: I will tell you we did 10 sacrifice a little quality. That causes us to sacrifice a 11 little in the quality for the picture, and I apologize for 12 that. But I did want to just give you a little idea of what 13 some different states are doing in terms of animated 14 drawings and to kind of let you see what was out there. 15 I also have a list for you of different 16 lotteries that are using automated drawing machines and are 17 animated drawings, and that list is up on the slide for 18 you. We have gone over this back in the fall, but I thought 19 it would be good to -- when we were considering the 20 Megaplier drawing -- but I thought it would be good to 21 provide that information to you again. 22 CHAIRMAN CLOWE: Commissioners, what's your 23 reaction? 24 COMMISSIONER COX: Well, the horse race was 25 better than the dot race. 0057 1 COMMISSIONER OLVERA: I would have a -- a 2 legal question comes up, Counselor, as to whether the 3 animated pin ball would -- would have some kind of 4 misleading connotation that it's not a computerized event, 5 that perhaps the public would be misled to believe that 6 there's actual balls falling. 7 MS. KIPLIN: I think -- I think there are 8 several issues surrounding using the animated random drawing 9 like we've seen, and I think it's going to come down to the 10 graphics, where -- exactly what is being proposed for use. 11 And then we can run traps on that. The one that I saw and 12 I'll -- I'll just raise this as an issue and I haven't even 13 vetted it, is the racing and whether there's a problem with 14 that in terms of a particular provision that has to do with 15 sports. And so it's just going to come down to exactly 16 what's being proposed and then vetting it. 17 And in terms of something that may be 18 misleading to the public, I think that we're going to be 19 very careful about those kinds of concerns. There are folks 20 that I think we can consult with that may have a better -- a 21 better legal expertise in that area. And in particular I'm 22 thinking of the Consumer Protection Division of the Office 23 of the Attorney General. And we have consulted with them in 24 the past on other matters. And so we'll continue to do 25 that. 0058 1 CHAIRMAN CLOWE: I guess I have a couple of 2 reactions. You're just looking for comments now. This is 3 in a very early discussion stage. 4 MR. TIRLONI: Yes, sir. I just wanted to 5 show you what was -- what was out there. 6 CHAIRMAN CLOWE: And that's helpful, and 7 I'm glad you did. 8 On the first one where they had the green 9 ball. 10 MR. TIRLONI: Yes, sir. 11 CHAIRMAN CLOWE: You know, our players, it 12 seems to me, are very comfortable with the set up that we've 13 had since 1991. And when they had those four white balls 14 and that one green ball and the green ball came out of the 15 circle and the voice said, congratulations, it's a green 16 ball, I thought, who said so. You know, I just saw that 17 ball come out. I can see it was a green ball, but who made 18 that selection. There's a certain amount of trust implied 19 there, and I'm not sure that our players have -- maybe they 20 can learn to have it -- about how that green ball came out 21 of the circle. 22 Second reaction, on the horse racing, the 23 numbers changed a lot, and I'm not sure our players have 24 ever seen anything like that, where the winning numbers are 25 not the winning numbers that are put up. And a lot of 0059 1 people I guess like -- like horse racing. Maybe people -- 2 there are some people who don't like horse racing or don't 3 like dog racing. You know, they like the lottery. I mean, 4 they like to see balls come out of a machine. I think we 5 should do some research on that. 6 There was a statement made in, I think, the 7 second example you gave us, Robert, where a disclaimer was 8 issued that these issue numbers are not the winning numbers 9 until they are certified and verified. Do we -- we don't 10 issue that kind of disclaimer on our drawings, do we? Or do 11 we? 12 MR. TIRLONI: Yes, sir, we do. 13 CHAIRMAN CLOWE: After every drawing? 14 MR. TIRLONI: We say that the numbers 15 are -- I don't have the exact language, but we basically say 16 that the numbers that are drawn are unofficial until 17 certified by the Texas Lottery. 18 CHAIRMAN CLOWE: And how long does that 19 take? 20 MR. TIRLONI: Until the security draw team 21 finishes through the whole draw process and the internal -- 22 I'm sorry, not the internal, the independent audit firm 23 representative certifies the drawing. 24 CHAIRMAN CLOWE: And -- and how long is 25 that? 0060 1 MR. TIRLONI: Usually the drawings are at 2 10:12. By 10:22, 10:20, the drawing is certified. 3 CHAIRMAN CLOWE: Okay. So we say that, but 4 we do it very promptly -- 5 MR. TIRLONI: Yes, sir. 6 CHAIRMAN CLOWE: -- making the numbers 7 official. 8 MR. TIRLONI: That's correct. 9 CHAIRMAN CLOWE: And then we don't announce 10 what the roll value is until that certification is in, I 11 assume. 12 MR. TIRLONI: During the draw program we 13 state if there are no jackpot winners, then the jackpot 14 rolls to X amount. 15 CHAIRMAN CLOWE: So we announce that 16 afterward. 17 MR. TIRLONI: Yes, sir. During the 18 program. 19 CHAIRMAN CLOWE: Okay. Well, those are 20 just a couple of reactions that I wanted to give you what I 21 saw. You know, our players are a pretty interesting group. 22 They like what they like. 23 MR. TIRLONI: Yes, sir. 24 CHAIRMAN CLOWE: And I think we should be 25 mindful of that. And when we think about changes, we should 0061 1 try to make change that -- that there will be a high level 2 of acceptance. And I -- I keep thinking about that example 3 of Coca Cola. You know, they almost messed up a good thing 4 there. 5 MR. TIRLONI: Yes, sir. 6 CHAIRMAN CLOWE: You know, we want to be 7 very mindful of what our players like and don't like. And 8 I'm -- I'm very pleased with the numbers that you've shown 9 us. I think it shows that the players like the matrix of 10 Lotto Texas. It has improved the jackpot amounts. Players 11 like that. It's a winnable game. They are supporting it. 12 They are staying with it in a larger number than we 13 anticipated when we introduced Mega Millions. Very 14 positive. But we have a large group playing Mega Millions 15 and Megaplier. It's a win-win for the people of the state 16 and the lottery. 17 So we want to maintain the kind of 10.8 18 percent increase on a fiscal year basis that we see in the 19 future years. We've got a great product here and the people 20 are supporting it and we want that to continue. 21 MR. TIRLONI: Yes, sir. 22 CHAIRMAN CLOWE: That's what you wanted me 23 to see, wasn't it? 24 MR. TIRLONI: Yes, sir. 25 MR. GREER: Mr. Chairman, I would like 0062 1 to -- to add on that, in reference to the animated 2 drawings. When we got the Megaplier scenario up and 3 running, that was partially to sort of test the water, I 4 guess, you would say, and -- and to begin to allow 5 individuals to respond as far as their dollars and their 6 comments in reference to Megaplier. That's gone smoothly, 7 and I think part of it was because it was a new game. So 8 we're going to be even more careful, based on what you just 9 said. We fully support those statements. Before we jump 10 into another game and look at animation, to take all those 11 considerations that you mentioned into account as we make a 12 decision on that and we'll keep you apprised as we move 13 forward. 14 CHAIRMAN CLOWE: Well, I think it's good 15 for us to express these concerns to you. I think so much of 16 what you're doing is -- is excellent, but I -- I think you 17 have a natural inclination to want to do things that will 18 increase sales and you have a bias in that direction. And 19 I'm appreciative and supportive of that, but I've seen 20 products that were really good and they tried to change them 21 to make them better, and it didn't work. And you go through 22 a rough period when that happens. And I'm so pleased with 23 what the results are for this fiscal year. They're better 24 than I anticipated. And I think we have a loyal group of 25 players, and I want to respect that and keep pleasing them. 0063 1 MR. GREER: Yes, sir. 2 MR. TIRLONI: In conclusion, Commissioners, 3 Mr. Chairman, you just mentioned Mega Millions and Lotto and 4 the player loyalty to Lotto and the successful results for 5 this fiscal year, I just wanted to let the commission know 6 that -- that we are continuing to and we always do evaluate 7 our product mix. And we did have a meeting with GTECH 8 marketing and sales staff. GTECH brought in some members of 9 their country from around the country, and we met with -- 10 met with them in a two-day planning session. And we have 11 begun to look ahead for '05 and '06. And I just wanted to 12 let you know that that is always ongoing, but I just wanted 13 to bring that to your attention that we had just recently 14 done that. And we'll be sharing more information with you 15 in the future pertaining to that. 16 And that concludes our presentation. And 17 we would be more than happy to answer any questions that you 18 may have. 19 CHAIRMAN CLOWE: Are you there any 20 questions? 21 Thank you-all very much. 22 MR. TIRLONI: Thank you. 23 MR. MARTIN: Thank you. 24 CHAIRMAN CLOWE: Next item X, report 25 possible discussion and/or action on lottery advertising and 0064 1 promotions. 2 MR. MARTIN: Again, Commissioners, for the 3 record I'm Steve Martin, the marketing director. I would 4 like to update you on lottery advertising and promotion 5 activities. 6 TV and radio advertising for the fiscal 7 year has been completed, for fiscal year '04. Both DDB 8 Dallas and the King Group are planning their next 9 advertising flights to begin in mid-September. 10 DDB Dallas will start the fiscal year with 11 the jackpot TV and radio campaign for the summer, to lead 12 off -- and then the King Group will lead off the fiscal year 13 with a brand-new instant game advertising campaign entitled 14 Right Now. 15 DDB Dallas will be conducting a test of the 16 jackpot TV and radio spots. They will be tagged with 17 jackpot amounts and will roll with the jackpot rolls. That 18 will be both for Lotto and for Mega Millions. This test 19 will be conducted in the Dallas, Fort Worth market. 20 The lottery promotions team will be at the 21 State Fair of Texas, which runs September 24th through 22 October 17th. We will have banners on 20 outdoor billboards 23 in the DF -- DFW area announcing the lottery's presence at 24 this event. 25 That concludes my report, if y'all have any 0065 1 questions. 2 CHAIRMAN CLOWE: Any questions? 3 COMMISSIONER COX: I have a question on the 4 general topic of advertising. 5 CHAIRMAN CLOWE: It falls within the 6 agenda. 7 COMMISSIONER COX: Okay. Steve, this is 8 McClure's July, August. 9 MR. MARTIN: Yes, sir. 10 COMMISSIONER COX: And it says the 11 Massachusetts Lottery's ad budget was almost 10 million in 12 fiscal 2005. I know we've been looking for data on pay back 13 on our advertising dollar. 14 MR. MARTIN: Yes, sir. 15 COMMISSIONER COX: Would you check with 16 Massachusetts and see what they did that caused them to 17 double their advertising dollars? 18 MR. MARTIN: Definitely. And we pulled 19 some reports from other states as well regarding that. 20 MR. GREER: And I have a personal 21 relationship with the executive director there, Joe 22 Sullivan. And I can bring some information because he and I 23 talked about this at length in the past. 24 MR. GRIEF: Commissioner, as -- as a 25 reminder, that's going from zero. They -- they were at zero 0066 1 just a couple years ago. 2 MR. MARTIN: And they went to five -- 3 COMMISSIONER COX: They went from zero to 4 five. 5 MR. MARTIN: -- and then 10. We'll look at 6 that again. 7 COMMISSIONER COX: Thank you. 8 MR. MARTIN: Thank you. 9 CHAIRMAN CLOWE: I believe there are no 10 further questions. Thank you-all very much. 11 MR. MARTIN: Thank you. 12 MS. JAMBOR: Thank you. 13 CHAIRMAN CLOWE: The next item is XI, 14 report possible discussion and/or action on the 78th 15 legislature. 16 Ms. Trevino, good morning. 17 MS. TREVINO: Good morning, Commissioners. 18 For the record I'm Nelda Trevino, the director of 19 governmental affairs. 20 I have a very brief report today on the 21 78th legislature. It is our understanding that the house 22 committee on licensing and administrative procedures chaired 23 by Representative Kino Flores is planning to hold a 24 committee hearing sometime during the month of September to 25 discuss several of the committee's interim charges. One of 0067 1 those charges specifically relates to charitable bingo. 2 While the hearing date has not been confirmed, we have been 3 in communication with the committee staff and will 4 coordinate any requests for information that they may need 5 for this committee hearing. 6 Additionally, the Senate finance committee 7 chaired by Senator Steve Ogden, will conduct hearings to 8 review agency's legislative appropriations requests. They 9 will conduct these hearings beginning September the 13th and 10 conclude them during the month of November. As the 11 committee finalizes a schedule, the agency will be contacted 12 with a date and time that the -- our agency is to testify. 13 The Senate finance committee hearing will 14 be a separate hearing that the agency -- where the agency 15 will present its LAR, so we will have a hearing that we'll 16 go before the staff of the legislative budget board and the 17 governor's office of budget and planning on September the 18 16th. 19 Lee Deviney will be addressing the agency's 20 LAR under a separate agenda item. We will keep you advised 21 of any dates of these committee hearings. 22 And that concludes my report, and I'll be 23 happy to answer any questions. 24 CHAIRMAN CLOWE: Counselor, the 25 commissioners can attend those meetings and not constitute a 0068 1 quorum. Am I correct in that? 2 MS. KIPLIN: Let me take a look at the 3 precise language. As I recall, it says legislative 4 committee hearings, so I don't know that this would be 5 considered to be a legislative committee hearing. 6 MS. TREVINO: The Senate finance 7 committee? 8 MS. KIPLIN: Oh, I'm sorry. I was thinking 9 of the staff of the -- 10 MS. TREVINO: Oh, the -- the September 16th 11 hearing. 12 MS. KIPLIN: The Senate finance committee 13 hearing certainly is a legislative committee hearing. A 14 board can attend and not have to notice that up. All 15 deliberations or discussions have to occur in that room to 16 the Senate finance committee, but yes. 17 CHAIRMAN CLOWE: Well, I -- I would 18 encourage all three of us to attend as many of those 19 committee meetings as possible. 20 And if you'll keep us informed and make 21 certain, if there's a meeting we cannot attend, Counselor, 22 you'll let us know on that. 23 MS. KIPLIN: Yes, I will. 24 CHAIRMAN CLOWE: Thank you, Nelda. 25 The next item is yours as well. Item XII, 0069 1 report, possible discussion and/or action on the Sunset 2 process involving the agency. 3 MS. TREVINO: Commissioners, I have nothing 4 new to report on this agenda item, but I'll be happy to 5 answer any questions that you have regarding the Sunset 6 review process. 7 CHAIRMAN CLOWE: Are there any questions? 8 Thank you, Nelda. 9 MS. TREVINO: Thank you. 10 CHAIRMAN CLOWE: We will now recess for 11 about ten minutes, and then we will reconvene. 12 I am told that Commissioner Olvera has a 13 requirement to leave at 11:00 a.m. So I anticipate us going 14 into executive session possibly within the next 20 minutes 15 and then we will go back into the public session when that's 16 concluded. 17 Right now we're recessing for about ten 18 minutes, and then we'll go back into the public session. 19 (Recess.) 20 CHAIRMAN CLOWE: We'll come back to order. 21 The time is 9:45 a.m. 22 Next is Item XIII, consideration of and 23 possible discussion and/or action on the agency's 24 legislation -- legislative appropriations request. 25 Mr. Deviney. 0070 1 MR. DEVINEY: That's a mouthful. Or LAR 2 for short. 3 CHAIRMAN CLOWE: I just wanted to make sure 4 that everybody knew what it was. 5 MR. DEVINEY: Okay. 6 Commissioners, tab 13 is -- again, I'm Lee 7 Deviney, financial administration director. 8 And under tab 13, the item is the 9 legislative appropriations request, which is not in your 10 notebook. You'll have a separate copy. We mailed a final 11 draft to you that you should have received earlier this 12 week. On the cover, to distinguish it from the first draft, 13 it is dated 8/20/04, in case there was any confusion about 14 that. 15 Prior to each session of the legislature, a 16 legislative appropriations request is submitted to both the 17 legislative budget board and the governor's office of budget 18 and planning. The LAR includes fiscal year 2003 and 2004, 19 expended or historical information. It also incorporates 20 the fiscal year 2005 operating budget and the agency's 21 request for fiscal year 2006, 2007 appropriations. 22 Each of you has been individually briefed 23 by staff on this LAR, and all suggestions from those 24 briefings have been incorporated into the final draft before 25 you. 0071 1 The development of the LAR was an agency- 2 wide effort. Every division, executive management, and 3 commissioners contributed to the development of a new 4 transparent budget structure, performance measures 5 improvements, and projections of future budget needs within 6 the baseline request budget approved by the two budget 7 offices. 8 In developing the LAR, the commission met 9 with and consulted with the staff of the LBB and the 10 governor's office of budget, policy, and planning, regarding 11 initiatives related to the budget structure, performance, 12 planning, and reporting. 13 I believe we have one representative from 14 the legislative budget board in the audience today in case 15 you have any questions regarding the budget policy and how 16 it affects our -- our LAR. 17 Finally, I would -- before we get into the 18 highlights, I would like to thank two members of the 19 financial administration staff, in particular, for their 20 careful and hard work, our two budget analysts, Suzanne 21 Christopher and Charity Gallagher. And also I would like to 22 acknowledge Karen blizzard for her assistance in developing 23 the narratives for the LAR. 24 I would like to go through the -- if this 25 works for you, go through a few of the highlights of the LAR 0072 1 and then also go through a few changes to the -- to the LAR 2 as it was presented to you in the initial briefings. 3 Among the highlights is the administrator's 4 statement. The administrator's statement provides an 5 overview of the commission's mission, highlights of its 6 business operations, accomplishments of the agency, a 7 discussion of internal and external budget drivers, and 8 competitive conditions of the impact of legislative policy 9 or other factors that impact the agency's budget performance 10 and business operations. The LAR identifies historical 11 projected performance and its outcome to output proficiency 12 measures. 13 Turning to the -- to the amounts requested 14 in the LAR, this appropriations request is limited to 95 15 percent of the agency's 2004, 2005 biennial budget. And 16 this was at the request of the -- of the leadership from the 17 governor's office and the legislature's. Therefore, the 18 agency is reducing from current budget level to its funding 19 request for both lottery operations and charitable bingo 20 operations. This LAR is in compliance with leadership 21 instructions and -- and does not include any additional 22 requests for funding of exceptional items. 23 The budget request for fiscal 2006, 2007 24 and the base, which is at the baseline limit, amounts to 25 $367.1 million out of the state lottery account. 0073 1 Appropriations request for major obligations for the lottery 2 are based on sales estimate and others factors that are 3 derived at costs of attractive services. Looking to the 4 budget request for charitable bingo operations, this amounts 5 to $23.6 million. That amount would be funded out of the 6 state's general revenue fund. 7 In order to meet the baseline limit for 8 general revenue appropriations, the LAR does not request 9 funds for building lease space for the bingo strategies. 10 Those costs would be absorbed in lottery strategies. This 11 treatment is consistent with other overhead costs of the 12 agency, which are budgeted in central administration of 13 lottery operations. 14 There is a new budget strategy sent to your 15 briefing. We discussed it at the briefings. And that is we 16 have approval to have a new budget strategy for bingo prize 17 fee allocations. This has been approved, and it's line item 18 B.1.5. And what we're requesting in that line item is the 19 estimated appropriation for bingo prize fees. 20 The agency is requesting authority to set 21 the executive director's salary to a maximum -- up to the 22 maximum rate for group five acquisitions. The 23 appropriations request for mass media advertising, you'll 24 note, is reduced from the current budget level of $34 25 million each year to $33 million. This is due to a 0074 1 projected increase in the prize pay out percentage that we 2 identified this fiscal year. 3 The lottery sales estimate for 2006, 2007 4 is estimated to be $3.291 billion. That number is the 5 average of fiscal year 2003 and 2004 sales. The budget 6 request from the lottery operator contract strategy is based 7 on this sales estimate, and it -- and the sales estimate is 8 identifying both the estimated revenues, like its reporting 9 schedule and also in rider, of course, which is our -- our 10 performance funding rider for additional sales. 11 Another section of the LAR of interest 12 is the capital budget -- 13 COMMISSIONER COX: Lee, let me ask you a 14 question -- 15 MR. DEVINEY: Yes, sir. 16 COMMISSIONER COX: -- before you go on. 17 Did we average all our FY '03 and FY '04 18 sales use that to forecast the future? 19 MR. DEVINEY: Correct. 20 COMMISSIONER COX: Because somebody told us 21 to or because we thought that was a good idea or because 22 we've always done it that way? 23 MR. DEVINEY: No. We have not always done 24 it that way. 25 The agency is free to determine its own 0075 1 estimation. We determined -- we as staff determined that 2 that was a reasonable method for estimating future lottery 3 sales because, as you know, lottery sales are variable. 4 The -- particularly the on-line -- the on-line games are -- 5 you know, are random games. 6 You know, we've had a very good year this 7 year. Obviously we are doing everything we can to make sure 8 that we continue to have good years, but we can't guarantee 9 that, you know, we will always have an increase as long as 10 there is variability built into it. So we view this as a 11 reasonable method for estimating sales. 12 COMMISSIONER COX: Okay. We've got a 13 couple of long range plans out there. We've got our 14 strategic plan, and we're working now on our business plan. 15 Do those have five-year financial forecasts in our plans in 16 them? 17 MR. DEVINEY: The strategic plan does have 18 an estimate of -- of -- I believe it has an estimator of 19 sales goals. And a sales goal would be different than a 20 sales estimate. The long range business plan I can't tell 21 you exactly what's in there, you know, in terms of what -- 22 you know, exactly what we estimate or project. I know that 23 was part of the thought process being used in, you know, 24 developing that. 25 COMMISSIONER COX: Okay. Please be careful 0076 1 that we're not getting one set of numbers out there for one 2 purpose and another set for another purpose and not have any 3 rationale for the difference other than there's a 4 difference. 5 MR. DEVINEY: I know when developing the 6 strategic plan, we discussed this extensively. 7 COMMISSIONER COX: Good. 8 MR. DEVINEY: And we were very careful to 9 identify the -- I know there was one table in the -- in the 10 strategic plan where we've identified goals for sales. And 11 in this document, these are reasonable estimates of what the 12 sales are, as opposed to our highest and best desires. 13 COMMISSIONER COX: Good. 14 MR. DEVINEY: Regarding the capital budget, 15 I'll just identify some of the projects that are in there. 16 The capital budget is -- is always a matter of legislative 17 interest. We've got funds. We're requesting funds for 18 animated drawing equipment phase-in; a local area network 19 upgrade is a refreshment of the agency's personal computers, 20 networks, or upgrades. We also have some dollars requested 21 for routine replacement of mechanical drawing equipment and 22 uninterruptible power supply for our disaster recovery site. 23 And those were -- and that's what's in the capital budget. 24 Another important part of the LAR are the 25 requested riders and rider revisions. Generally, we've gone 0077 1 through the riders and we've updated dates and announced for 2 funds appropriately restricted by the rider due to the 3 change moving to a new time, a.m., or changes in estimates. 4 Regarding rider four, we -- we're requesting some additional 5 language there to clarify the comptroller's interpretation 6 of the lottery's authority carried forward, unextended 7 balance as appropriated by that rider for the first year and 8 the second year of the biennium. 9 We're requesting the deletion of rider 11 10 since necessary actions could increase lottery sales if they 11 were implemented and certified by the comptroller. We're 12 asking for an easing of some of the travel restrictions in 13 rider number seven. And we're asking for some additional 14 language in rider number 11, and it will probably be new 15 rider 11. This one relates to the bingo prize fee 16 allocations, just to make sure it's crystal clear that that 17 has an estimated appropriation. That was another situation 18 where we had to get an interpretation. 19 And if you would like, I can go through 20 when we sent out the final draft LAR, I provided a summary 21 memo on changes. And these would be changes to which you 22 were briefed on. If it's your pleasure, I can go through 23 those changes with you or just identify some of the key 24 ones. 25 CHAIRMAN CLOWE: Commissioners, what's your 0078 1 pleasure? 2 COMMISSIONER COX: I read it. If that's 3 the one that was -- we had in advance. 4 MR. DEVINEY: Yes, sir. It's dated August 5 20th, 2004. 6 COMMISSIONER COX: I read it, and I didn't 7 have any questions. 8 COMMISSIONER OLVERA: I don't have any 9 questions unless you want to highlight some of the key ones 10 or something. 11 MR. DEVINEY: Let's see. One we haven't 12 already discussed. The -- the most -- there were some 13 changes made to page 84. This is the estimated revenue 14 collections schedule for the state lottery account, and I -- 15 I alluded this already. We updated the -- the lottery sales 16 estimate which drives -- everything drives off of that. So 17 that was a change from what you originally saw, and I -- 18 but, anyway, we've got the latest sales estimates for those 19 out here, 3.291 billion. And then other numbers on the 20 table may drop or change from that. 21 MR. GRIEF: Lee. 22 MR. DEVINEY: Yes, sir. 23 MR. GRIEF: If I could, I think there is 24 one -- one issue that I think our general counsel could 25 probably best highlight for us, that is a constant struggle 0079 1 for us as we work through this LAR. 2 Kim. 3 MS. KIPLIN: Commissioners. Commissioners, 4 it has to do with using lottery -- proceeds from lottery 5 sales to fund bingo matters, and this has been a constant 6 struggle since the -- since bingo has been part of the 7 lottery and the operative provision is in the State Lottery 8 Act. That's 466.355. 9 It's a very difficult issue because of the 10 fact that there are support services that flow to bingo from 11 essentially every part of the agency. It has been built 12 into the LAR probably this go-round more clearly than it has 13 in the past under strategies, but I wanted to make sure that 14 you-all were aware of -- of this issue. And when you look 15 at these strategies, you'll see that even under a strategy 16 that is lottery revenue or lottery sales, you'll see 17 references to bingo. The authority is not -- I don't think 18 is -- is clear, but it is something that we plan to make a 19 record on throughout the legislative appropriations process 20 and it's -- it's just because of the way that this agency is 21 structured and, I think, funded. And I'll -- I may be 22 incorrectly using the word "funded" and when -- you know, 23 will it be accepted. 24 MR. DEVINEY: The way I look at the funding 25 issue is we have two sources of funding: the state lottery 0080 1 account, the general revenue fund. But the appropriations 2 bill pattern doesn't say -- doesn't distinguish in making 3 appropriations for -- for our strategies. You know, it 4 doesn't distinguish between, you know, which -- which -- one 5 fund or another. It just happens that the -- the lottery 6 oriented strategies, the total sum of those appropriations 7 is -- is equal to funding from the state lottery account and 8 bingo related strategies and some of those appropriations is 9 equal to the general revenue fund method of financing. 10 But in some agencies you might have, say, a 11 rider restriction that says, from this pot of money, you 12 shall only -- you may only spend for these purposes. We 13 don't have those restrictions. We are free to, you know, 14 make adjustments -- adjustments on our source of funding is 15 how I I interpret our bill pattern. 16 CHAIRMAN CLOWE: Are there any questions on 17 that issue or any others? 18 Is there a motion? 19 MR. DEVINEY: Hold on. I've got two 20 changes, if I -- 21 CHAIRMAN CLOWE: Go ahead. 22 MR. DEVINEY: -- if I may. Okay. 23 You have a second memo dated August 25th 24 from the draft that you received in the mail telling you 25 that we were asking you to approve -- I would like to change 0081 1 two pages with your approval. The first one is page 14. We 2 identified that we had left out a -- the performance target 3 for the -- well, we have the performance measure versus 4 outcome measure percent complaints that produced a result, 5 resulting in disciplinary action. We didn't show the target 6 in 2003, 2004 of eight percent. So we would like you to 7 amend that page to show the target in '03 and '04. 8 The second item would be page 83. This is 9 the estimated revenue collections schedule for the general 10 revenue fund. A couple of things, on the line item 3170 11 bingo prize fees, we reduced our -- from the prior graph we 12 reduced the estimate of prize fee collections in fiscal year 13 2005, six, and seven. Earlier Mr. Atkins had referenced the 14 fact that we had seen a decline, at least over one quarter, 15 in -- in prize fee collections, and we amended that estimate 16 downward slightly to reflect that. 17 Item -- in your memo, Item Number III, I've 18 actually already covered and that is we made an adjustment 19 to one, third party reimbursements in one fiscal year, to 20 reflect -- in fiscal year 2004, to reflect actual 21 expenditures. 22 And the last change on that schedule under 23 deductions towards the bottom of the page, if you'll look at 24 the line item styled expended budget requested, that row. 25 We've updated that number substantially or we've updated it 0082 1 for a -- or changed the way we report that number. 2 Historically when we've produced these budget schedules or 3 these revenue schedules in budget reports, what we've shown 4 is just expenditures for administrative purposes. 5 And I believe that's a -- that goes back to 6 when bingo prize fees were not appropriated in a -- in a 7 strategy line item. Now that bingo prize fees are 8 appropriated as a strategy line item, I believe it is more 9 appropriate and correct to show those expenditures on this 10 row, expended budget requested. So from the prior graph, we 11 added in the approximately $10 million a year. 12 CHAIRMAN CLOWE: And that's the what the 13 change is basically. 14 MR. DEVINEY: Yes, sir. So I would ask 15 that we substitute pages 14 and 83 to your graph. 16 CHAIRMAN CLOWE: All in? 17 MR. DEVINEY: Yes, sir. That said, we just 18 need your approval, the chair's signature on the -- on the 19 cover page. And then also there's the dual certificate 20 which Kim Kiplin might want to discuss with you now. 21 MS. KIPLIN: Commissioners, you may recall 22 in connection with the agency's operating budget, there were 23 three individuals who were required to sign a certificate. 24 Mr. Chairman, you were one; Lee Deviney; and then Reagan 25 Greer. And we had concerns with the text of that 0083 1 certificate. We've worked with the legislative budget board 2 folks regarding proposed language, and I've got an approval 3 on -- on one certificate. There was an issue at the recess 4 that Commissioner Cox raised, and we've made the change, I 5 think, reflects -- to reflect that issue. And I left a 6 voice mail. So at this point what I would like to do is -- 7 is suggest proceeding on the one in which I've left the 8 voice mail. And if there is a concern, then, Mr. Chairman, 9 we'll take that up with you. 10 This had to do with making the language, I 11 think, more precise. Before, it required a representation 12 that the information contained in -- at the time, it was the 13 operating budget -- was accurate and that what was -- that 14 the electronic submission was identical to the paper copy 15 submission when, in fact, it was not. It could not be 16 because there were certain documents that could not be 17 submitted electronically. So, therefore, it was not 18 identical. 19 Changes have been made to where it -- it -- 20 the language will now be -- has been prepared. The LAR has 21 been prepared based on assumptions that we believe to be 22 reasonable and has been properly compiled and that the 23 electronic submission and the bound paper copy -- copies are 24 substantially identity. 25 What I sent last night in terms of a draft 0084 1 to the folks at the legislative budget board, instead of the 2 word "substantially," it used the word "materially." And so 3 that would be the one change from what was submitted to them 4 last night that I received approval on this morning. 5 CHAIRMAN CLOWE: Understanding that, are we 6 needing two motions then? 7 MS. KIPLIN: No. I think -- I think it's 8 one motion to approve the legislative appropriations request 9 for the agency, and in conjunction with that is the 10 certificate goes along with that. 11 CHAIRMAN CLOWE: The certificate is covered 12 by that. 13 MS. KIPLIN: Yes, sir, I believe it is. 14 CHAIRMAN CLOWE: With the explanation that 15 you've given. 16 MS. KIPLIN: Yes, sir, I believe it is. 17 CHAIRMAN CLOWE: Anything more, 18 Mr. Deviney? 19 MR. DEVINEY: No. If you'll vote to 20 approve it, we'll turn it in tomorrow. 21 CHAIRMAN CLOWE: Is there a motion? 22 COMMISSIONER COX: So moved. 23 COMMISSIONER OLVERA: Second. 24 CHAIRMAN CLOWE: Second. 25 All in favor, aye. 0085 1 THE COMMISSIONERS: Aye. 2 CHAIRMAN CLOWE: Opposed? 3 No. 4 The vote is 3-0 in favor. 5 Mr. Bennett, I'm going to ask you to come 6 up next, if you will, preparatory to a motion to go into the 7 executive session about a consideration of item number 21 8 relative to whether or not the commission needs to consider 9 under the executive session activity, possible change in the 10 contract with the lottery operator. 11 It's my understanding we have to discuss 12 that and have a motion if we want to discuss that in 13 executive session. I think it would be appropriate for you 14 to tell the commissioners what you have in mind on that at 15 this point in time, and we'll deliberate in public whether 16 we want to consider that in executive session prior to 17 moving to go into executive session. 18 MR. BENNETT: Thank you, Commissioners. 19 For the record my name is Ridgely Bennett. 20 I'm the deputy general counsel of the Texas Lottery 21 Commission. I want to provide you with some documents. 22 Commissioners, what I have provided -- 23 provided you with is a draft of amendment number six to the 24 contract of lottery operations and services between the 25 Texas Lottery Commission and the GTECH Corporation. 0086 1 As you have been previously informed, the 2 player connect system, that's the internet-based player 3 registration base and database that GTECH previously 4 provided to the commission, has been eliminated. Amendment 5 number six will require GTECH to provide refurbished ITVMs 6 and related services to the Lottery Commission in lieu of 7 providing the player connect system. 8 Staff doesn't necessarily require an action 9 on the part of the commission at today's meeting. We're 10 providing you with a draft of the document so that you have 11 sufficient time to consider it and provide direction to the 12 commission at the next commission -- to the agency staff at 13 the next commission meeting. 14 Also -- 15 CHAIRMAN CLOWE: Commissioner -- 16 MR. BENNETT: I'm sorry, Commissioner. Go 17 ahead. 18 CHAIRMAN CLOWE: I'm sorry. I thought you 19 were finished. 20 MR. BENNETT: Also agency staff has 21 prepared a benefit analysis and other documents relating to 22 the amendment that you may wish to consider. 23 CHAIRMAN CLOWE: Commissioners, if we want 24 to discuss this contract in executive session, we have to 25 deliberate and vote to do so. I'm asking for your pleasure 0087 1 on this. My sense is that we ought to, wherever possible, 2 discuss these kinds of matters in the public, in the open 3 conference. There may be instances where we really, because 4 of intense negotiations and competitive factors, need to do 5 this. My personal judgment is that it's not appropriate at 6 this time, but I bow to the greater wisdom of the other two 7 commissioners. 8 What's your pleasure? 9 COMMISSIONER COX: I agree with you. 10 COMMISSIONER OLVERA: I agree, 11 Commissioner. 12 CHAIRMAN CLOWE: Thank you, Mr. Bennett. 13 MR. BENNETT: Thank you. 14 CHAIRMAN CLOWE: Commissioners, if it's 15 your pleasure at this time, I will make a motion executive 16 that we go into executive session. 17 At this time I move the Texas Lottery 18 Commission go into executive session to deliberate the 19 duties and evaluation of the executive director and/or 20 deputy executive, internal audit director, and charitable 21 bingo operations director pursuant to section 551.074 of the 22 Texas Government Code; to deliberate the duties of the 23 general counsel and security director pursuant to section 24 551.074 of the Texas Government Code; to receive legal 25 advice regarding pending or contemplated litigation and/or 0088 1 to receive legal advice pursuant to section 551.071, paren, 2 one, close paren, paren, A, close paren, or, paren, B, close 3 paren, of the Texas Government Code; and to receive legal 4 advice pursuant to section 551.071, paren, two, close paren, 5 of the Texas Government Code, including but not limited to: 6 Patsy Henry versus Texas Lottery Commission; Sandy Surber, 7 et al., versus GTECH Corporation; Yolanda Garza versus SSP, 8 et al.; Linda Cloud versus Mike McKinney, et al.; James T. 9 Jongebloed versus Texas Lottery Commission; Steven W. 10 Hieronymus, et al., versus Texas Lottery Commission and 11 Gametech International, Inc.; employment law, personnel law, 12 procurement and contract law, evidentiary and procedural 13 law, and general government law. 14 Is there a second? 15 COMMISSIONER OLVERA: Second. 16 CHAIRMAN CLOWE: All in favor, please say 17 aye. 18 THE COMMISSIONERS: Aye. 19 CHAIRMAN CLOWE: The vote is 3-0 in favor. 20 The Texas Lottery Commission will go into 21 executive session. The time is 10:10 a.m. The date is 22 August 26th, 2004. 23 (Recess.) 24 CHAIRMAN CLOWE: The Texas Lottery 25 Commission is out of the executive session. The time is 0089 1 11:30 a.m. 2 Is there any action to be taken as a result 3 of the executive session? 4 I believe not. 5 We will then move to Item Number XIV, 6 consideration of and possible discussion and/or action on 7 the external and internal audits and on the news relating to 8 the Texas Lottery Commission and/or the internal audit 9 department's activities. 10 Ms. Melvin. 11 MS. MELVIN: Good morning, Commissioners. 12 For the record my name is Catherine 13 Melvin. I'm the director of the internal audit division. 14 I have a few items to discuss this morning. 15 Let me begin with external audits. The State Auditor's 16 Office released their report entitled SAO Audit of Selected 17 Controls Over Instant Tickets at the Texas Lottery 18 Commission, on August 9th. I would like to go over some 19 points from that audit. 20 First of all, I would like you to know that 21 the state auditor's office conducted their audit at the 22 request of the Texas Lottery Commission in answer to a 23 letter from you, Chairman Clowe. The audit began in June of 24 2003. Their objective was to determine whether the 25 operation of TLC's instant ticket games reasonably ensures 0090 1 their integrity. The focus of the audit was specifically on 2 controls regarding three areas in the administration of 3 instant tickets: the reconstruction of tickets, returned 4 tickets, and those tickets that are used internally for 5 promotion and investigative purposes. 6 The auditors found no evidence of misuse in 7 their testing of instant ticket controls and in some 8 instances the auditor's testing went back three years. The 9 state auditor's office did identify some weaknesses that 10 could create a risk of internal misuse and made 11 recommendations to improve the agency's procedures and 12 processes. The state auditor's office concludes, however, 13 that these weaknesses are unlikely to be exploited by the 14 general public. The SAO acknowledges that the specific 15 areas of the audit, the reconstructions and return tickets, 16 do represent a relatively small percentage of the overall 17 lottery's business. 18 The auditors do characterize some of the 19 issues as significant weaknesses, the auditors have 20 expressed that this is their opinion. And I believe the 21 agency had discussions with the auditors to reconsider the 22 use of the word "significant" since this is a judgmental 23 term, not necessarily subjected to a defined standard. I 24 also wanted to share with you that the agency does rely on 25 an annual SAS, SAS 70 audit and a biennial security audit 0091 1 that may cover many of the aspects that were reviewed in the 2 audit that the state auditor's office did. 3 These issues that they brought out in their 4 audit were not reported in prior SAS 70 audits nor in prior 5 biennial security audits; however, internal audit has 6 requested that these issues be considered in upcoming 7 audits. 8 And that concludes my discussion of the 9 state auditor's office audit. 10 CHAIRMAN CLOWE: Any questions? 11 COMMISSIONER COX: Reagan, does -- do you 12 have any observations relevant to that audit? 13 MR. GREER: Yes, sir, Commissioner. Thank 14 you for asking. 15 Specifically, I think this is a proper time 16 to put some responses out there in reference to some of the 17 things that came out of that audit. And if I could, I would 18 like to go into that at this point if it's okay with the 19 commissioners. 20 CHAIRMAN CLOWE: You may, but before you 21 do, Ms. Recorder, I want the record to reflect that 22 Commissioner Olvera is absent and departed during the 23 executive session. The commission still has a quorum and is 24 authorized to continue in conducting its business. 25 Pardon me. 0092 1 MR. GREER: Thank you, Mr. Chairman. 2 As Catherine mentioned, the state auditor's 3 office did -- the state auditor's office did conduct a audit 4 that was requested by you, sir. And that agency contact was 5 made with the SAO on May 29th, 2003, regarding the 6 allegations. And the SAO responded with an audit team at 7 the headquarters starting in June of 2003. 8 The agency appreciated the review that was 9 conducted by the SAO and valued the opportunity to review 10 the findings and recommendations and respond to the report 11 were appropriate. Based on the results of the review, the 12 agency is secure in knowing that the integrity of the 13 state's instant ticket games is intact and being maintained 14 and that no instances of misuse have been identified. 15 The agency agrees with the SAO and they 16 have identified opportunities to improve agency procedures 17 and processes that will further secure the integrity of the 18 instant ticket process is welcome and assist -- and they are 19 assisting the agency and through these recommendations to 20 maintain the highest standards of security in the agency. 21 The agency has carefully considered the recommendations of 22 the SAO and has either already incorporated the SAO 23 recommendations or is considering other alternative actions 24 necessary to make the recommended improvements. As always, 25 you know, we're basing our actions on sound business 0093 1 principles and fiscal responsibility considering costs and 2 benefits, while keeping the industry best practices in mind. 3 There were specific chapters that were 4 outlined in the report, and I would like to go into a few of 5 those for your information as well as to put on the record 6 some of the things that we have been doing in reference to 7 that. 8 The state auditor found in chapter one of 9 the report which addresses issues relating to instant ticket 10 reconstructions that the agency has implemented procedures 11 whereby the reconciliation of instant ticket reconstruction 12 requests against the records of the vendor will be performed 13 on a monthly basis. The agency has implemented procedures 14 requiring justification on every reconstruct request and 15 supervisor approval on multiple tickets of ten or more to a 16 pack. The agency is working with the instant ticket 17 manufacturers and vendors to update the methodology used to 18 request ticket reconstructions and provide enhanced access 19 controls to the vendor system. 20 The agency has implemented procedures 21 requiring authorized users to change passwords at maximum 30 22 to eight intervals. The agency is updating current 23 procedures to reflect all implemented changes in the chapter 24 one area. 25 Regarding the recommendations of the state 0094 1 auditor, found in chapter two of the report, which addresses 2 issues relating to tickets returned to the lottery by 3 retailers, the agency has implemented bar code scanning 4 technology for reported ticket return ranges in the ProSys 5 system which will ultimately reduce the overall number of 6 and the need for the ability to perform an undo of the 7 transaction which is a part of that process. The agency has 8 enhanced monitoring of the undo feature through the 9 implementation of an automated report in ProSys that allows 10 management to monitor all undo transactions. The agency has 11 implemented an automated report to assist in evaluating 12 instant ticket returns that results in an undo transaction 13 request. The report includes specific comments as to why 14 the undo request was required and who was involved in doing 15 that. 16 The agency is evaluating the development of 17 additional automated reports that will monitor and 18 investigate cashing activity for tickets that have gone 19 through the undo process along with other alternatives that 20 may provide additional controls for tickets affected by the 21 process. The agency has implemented a bag count 22 reconstruction process, a reconciliation process that is 23 performed at the time that bags containing returned tickets 24 are delivered to the instant ticket warehouse. The agency 25 has implemented a verification process for all manual ticket 0095 1 returns. The agency is evaluating the development of system 2 functionality to allow manual returns to be documented in 3 the instant ticket management module of the ProSys system 4 prior to tickets being shipped to the instant ticket 5 warehouse. 6 The agency is working with the lottery 7 operator to implement a more effective means of maintaining 8 and supporting information regarding returned tickets. The 9 agency has addressed shared access with lottery operator 10 staff and implemented work station lock features in 11 reference to that. The agency has worked with the lottery 12 operator to limit the use of user -- users' access to 13 multiple session in ProSys. The agency is updating current 14 procedures to reflect all implemented changes. 15 Regarding the recommendations of the state 16 auditor found in chapter three of the report which addresses 17 issues relating to the use and control of instant tickets 18 used in promotions and/or security purposes. The agency has 19 reinforced the proper signature requirements for the lottery 20 operator for the handling and promotional tickets and will 21 conduct periodic reviews to ensure the procedure is being 22 followed. The agency will conduct a quarterly 23 reconciliation of the number of instant tickets requested 24 for promotions to the number of tickets issued in the ProSys 25 system to ensure accurate accounting of promotional tickets. 0096 1 The agency is developing procedures for the 2 storage and safekeeping of unused promotional tickets and 3 has ordered a fireproof safe to store such tickets in, in 4 use or destruction process. The agency is implementing a 5 tracking process that will identify the status of all 6 promotional tickets. The agency is evaluating destruction 7 programs for tickets submitted to the agency where the 8 claimant cannot be identified thereby ensuring that tickets 9 are not destroyed until after the time period for claiming 10 prizes and all agency records retention requirements have 11 been met. The agency is updating current procedures to 12 reflect all implemented changes. 13 Regarding the recommendations of the state 14 auditor found in chapter four of the report which addresses 15 issues relating to the system log-in procedures, the agency 16 has reviewed and is updating the procedures regarding the 17 use of computer system accounts. The agency has made 18 software modifications to the ProSys application that will 19 allow timely and appropriate activation and deactivation of 20 user accounts. 21 In summary, we feel that the state 22 auditor's office has made some excellent recommendations in 23 their report. We continually -- continuously strive to 24 ensure the integrity, security, and effectiveness of our 25 instant ticket program, and these recommendations will help 0097 1 us continue to improve. 2 And I want to publicly thank the state 3 auditor's office for their assistance in this matter and 4 hope that this clarifies some of the issues that came 5 forward and just want to reassure you that we will continue 6 to look at ways that we can make this process better and 7 utilize these recommendations. 8 COMMISSIONER COX: Reagan, that's an 9 excellent report. It sounds like we have done what, of 10 course, we should and that is take the recommendations of 11 the state auditor very seriously and act on them 12 immediately. 13 MR. GREER: Yes, sir. 14 COMMISSIONER COX: Now I recall in the 15 discussions with the state auditor that we indicated that 16 there were some of their recommendations that we agreed with 17 in principle, but we hadn't put a pencil to as far as the 18 cost benefit relationship, et cetera -- 19 MR. GREER: Yes, sir. 20 COMMISSIONER COX: -- recognizing that 21 every control must justify itself. You can't spend a dollar 22 to save a penny. 23 MR. GREER: Yes, sir. 24 COMMISSIONER COX: Are there any in that 25 category that are still awaiting cost benefit analysis 0098 1 before implementation or awaiting investigation among 2 alternative controls before implementation? 3 MR. GREER: Yes, sir. I mentioned some of 4 those in that report of the various chapters. We're going 5 to continue to look at that and monitor that. But I wanted 6 to bring to your attention specifically what we've already 7 done which a lot of what we've had implemented is doing 8 things within there. But there are some areas that we are 9 going to continue to evaluate from a cost benefit 10 perspective, and we'll keep you apprised of that. 11 COMMISSIONER COX: Okay. Will -- will 12 y'all let us know when everything in that report has been 13 addressed. 14 And, Catherine, is it appropriate for 15 Reagan to work those things with you and make sure that -- 16 that you're satisfied with what management is doing, 17 satisfies what the state auditor recommended? 18 MS. MELVIN: Absolutely. It's your wish, 19 of course. Management can assert that they have implemented 20 recommendations. If you would like another level of 21 assurance, internal audit can certainly verify that those 22 actions have actually occurred. One thing I would suggest, 23 though, is to take it maybe just another level. It's one 24 thing to say that we've implemented recommendations. I 25 guess I'm a little more focused on making sure that we've 0099 1 corrected the issue. And sometimes that may not always be 2 the same thing. 3 What a recommendation may, you know, be 4 made at one point in time and as the business changes or a 5 process is changing, it may take a different action to 6 correct that condition. So all of this -- I mean, from 7 internal audit's point of view, all I was focused on was 8 whether the condition that was reported, whether that's 9 actually being corrected. So that's certainly something 10 that internal audit can do is verify that these actions were 11 taken. 12 COMMISSIONER COX: Okay. Now the other 13 thing is that we know the next time that the state auditor 14 comes in for an audit, that they're going to check to see if 15 we -- is what we said and that we followed their 16 recommendations. 17 Is it appropriate what Reagan has done, 18 what he's going to do -- and you've looked at it -- to 19 invite the state auditor over and ask them to say, hey, we 20 don't want to wait until your next examination; we want you 21 to help us right now see if we have implemented the letter 22 and spirit of your recommendations. 23 MS. MELVIN: That's a very proactive 24 stance. We certainly can do that. The state auditor's 25 office does ask agencies annually -- it might be 0100 1 biannually -- to report on the status of all recommendations 2 that they've made in the past. The most recent report we 3 did of that was in February of '04, I think. And sometimes 4 they -- they may not ask an agency to report on the status 5 of all recommendations they've made. They may say, here are 6 some that we're interested in; please, let us know where 7 you're at. And the state auditor's office typically 8 compiles a report that they have in the past provided to the 9 legislature before it meets, so we can anticipate something 10 like that coming annually. But regardless of that process, 11 we can certainly be proactive and ask them, you know, to 12 come in and see -- or invite them to come in and review. 13 Whether they choose to or not is, of course, is up to them. 14 But a good thing to do. 15 COMMISSIONER COX: I think it's a good 16 thing to do in this case. They spent a lot of time on this, 17 and they did a very thorough audit and made some good 18 recommendations. And I think, as Reagan said, this is a 19 good opportunity for us. 20 MR. GREER: Well, Gary and I will embrace 21 that idea and continue to keep you apprised of it. A number 22 of things is that while the audit was taking place, they 23 brought it to our attention and that's why that we still had 24 implemented -- so many had implemented, statements made, 25 when I was giving feedback in reference to that. But we'll 0101 1 be happy to, you know, work with Cathy in that regard and 2 welcome the opportunity. 3 CHAIRMAN CLOWE: Very good. 4 MS. MELVIN: Okay. Let me move on to the 5 next item under external audit, and that's the annual 6 financial audit. The agency has engaged the firm Maxwell, 7 Locke & Ritter to perform the required audit for the fiscal 8 year ending August 31st, 2004. 9 In addition, for the first time, the audit 10 will include an agreed upon procedures engaging of Mega 11 Millions transactions. These procedures are, of course, 12 required of all the Mega Millions participating lotteries. 13 We held an entrance conference with the 14 auditors on Tuesday of this week. Commissioner Cox attended 15 that entrance. The auditors are scheduled to conduct the 16 physical inventory on September 4th, Saturday, and begin 17 their onsite field work on September 22nd. 18 Do you have any questions about that? I'm 19 happy to answer. 20 CHAIRMAN CLOWE: Thank you. 21 MS. MELVIN: Okay. I do have three items 22 to discuss regarding activities of the internal audit 23 division. The first item is Lotto jackpot prize payments. 24 Commissioners, internal audit was asked by 25 the executive director to look into prize payment concerns 0102 1 expressed at the house licensing administrative procedures 2 committee hearing. Concerns were also expressed at our last 3 commission meeting regarding this topic. Internal audit has 4 reviewed the work performed by the previous internal audit 5 director in this area. I have also conducted preliminary 6 interviews with key financial administration division staff. 7 Based on the concerns that were expressed and my review of 8 the work performed -- or prior work performed, I have 9 determined that a full audit of Lotto jackpot prize payments 10 would be needed. I am in the process of preliminary scoping 11 for this audit and, however, expect to issue an engagement 12 letter outlining the scope -- the scope, the objectives, 13 and, of course, an anticipated time line for this audit 14 shortly. 15 Do you have any questions regarding that? 16 CHAIRMAN CLOWE: Thank you. 17 MS. MELVIN: Okay. The next item is 18 contract financial administration. 19 Commissioner Clowe, I had reported at the 20 last commission meeting that internal audit would be 21 deferring a review of contract management for inclusion in 22 the '05 internal audit's plan. You expressed some concerns 23 about that, and -- and we went back and looked at that. We 24 went ahead and initiated that project this month, and 25 actually you were foresightful -- I don't know if that's the 0103 1 right word. But legal division has also expressed a desire 2 to convene a work group and so management is in the process 3 of putting that work group together to look at contract 4 management administration processes and make recommendations 5 to better the process for FY '05. So my understanding is 6 that the group will have a very specific focus to look at 7 some changes that can be helpful in the coming around the 8 contracts. Internal audit will be providing assistance to 9 this work group. 10 CHAIRMAN CLOWE: Very good. 11 MS. MELVIN: Okay. And then the last time 12 is the fiscal year 2005 risk assessment and internal audit 13 activity plan. We are in the process of completing an 14 agency-wide risk assessment which will lead to the 15 development of the FY '05 internal audit activity plan or 16 audit plan. 17 Internal audit staff has completed several 18 interviews -- I think they're almost finished -- with 19 various levels of management as part of this process. Our 20 internal audit activity plan is required by professional 21 auditing standards in the Texas Government Code 2102 which 22 the Texas Lottery Act. Our goal is to present this plan for 23 approval at the next regular commission meeting. 24 We are, of course, committed to being a 25 valuable resource in improving the agency's operation and 0104 1 will use the plan as our guide to perform agency audits and 2 advise research that's based on potential risks identified. 3 Finally, I would like to thank management's assistance and 4 time in providing input and information that will lead to 5 the development of the plan. It's integral work that 6 internal audit work with management in identifying where the 7 risks lie. 8 That concludes my presentation. And I'm 9 happy to answer any questions that you have. 10 CHAIRMAN CLOWE: Thank you. 11 MS. MELVIN: Okay. Thank you. 12 CHAIRMAN CLOWE: I have a witness 13 affirmation form from Ms. Dawn Nettles who wishes to make a 14 comment on Item Number XIV. 15 Ms. Nettles, would you come forward and be 16 more explicit in what your interest is, please. 17 MS. NETTLES: Good morning, Commissioners. 18 CHAIRMAN CLOWE: Good morning. 19 MS. NETTLES: Thank you for giving me an 20 opportunity to speak. My name is Dawn Nettles with the 21 Lottery Report out of Dallas. 22 And with regard to Item Number XIV on the 23 agenda, first of all, we would like to say thank you for 24 taking the time to look at this. We appreciate that very 25 much and any consideration that the commission would give. 0105 1 CHAIRMAN CLOWE: Now Item Number XIV 2 included a number of subjects. Could you -- 3 MS. NETTLES: Oh, I'm sorry. 4 CHAIRMAN CLOWE: -- tell us what your 5 interest is? 6 MS. NETTLES: Yes, sir. My interest is in 7 the jackpot prize payments. And I testified last month. 8 And there's a couple of things from last month that I would 9 like to correct. But what I really want to do is provide 10 you written testimony, if I could, so that it's really 11 clear. I believe it will help the auditor in her 12 investigations. 13 Is that okay if I -- 14 CHAIRMAN CLOWE: Let me just ask 15 Commissioner Cox and the general counsel. 16 Where we are, I think, on this is that 17 executive director has asked the internal auditor to review 18 the issue of correctness of awards for an extensive period 19 in the past. The internal auditor has reported to us this 20 morning that her preliminary investigation warrants a 21 further audit, if I'm understanding her report correctly. 22 That is an ongoing process. Ms. Nettles made comments to 23 the commission in a prior meeting and is now -- as I 24 understand, Ms. Nettles -- wanting to furnish additional 25 information to the commission which would go to the 0106 1 investigation or the audit that the internal auditor is 2 conducting. 3 So I guess at this point in time, I'm 4 looking from the general counsel for an opinion as to if 5 this is a correct presentation of information in regard to 6 the audit that the internal auditor is going to conduct and 7 from the commissioners, if they want to hear this additional 8 information in the conference or to ask that it be directed 9 to the internal auditor. 10 I guess I'll ask you first, Counselor. 11 MS. KIPLIN: Well, it -- always the 12 first -- the first hurdle is the Open Meetings Act and under 13 the Open Meetings Act, citizens or people who wish to 14 provide comment are -- are -- well, let me back -- let me 15 back up. Let me put it a different way. Under the Open 16 Meetings Act the public has a right to be present and to 17 hear what is occurring during the course of the open 18 meeting, but they don't have a right to participate or 19 provide public comment. That's a decision that the 20 commission can make. This commission has, in the past, 21 decided to allow for comment. It's really at the will of 22 the commission. 23 I -- I think if you can establish a pattern 24 of receiving comment, then that -- that is a pattern that 25 the public can rely on. I think your question really has to 0107 1 do with a process that is beginning or initiating in terms 2 of an audit or a review and where best should that comment 3 or information go. Correct -- 4 CHAIRMAN CLOWE: That is -- 5 MS. KIPLIN: -- me if I'm wrong. 6 CHAIRMAN CLOWE: -- correct. And -- any my 7 concern is to proceed in a correct manner so that the audit 8 is not biased in some way. Or if a decision comes to the 9 commissioners, we are not biased in some way in any decision 10 that we need to make. 11 As I understand it, the executive director 12 has asked the internal auditor to conduct the audit. The 13 internal auditor has now reported to us that she is going to 14 conduct that audit. The internal auditor reports directly 15 to the commissioners, and we have approved that audit. I 16 want whatever it is that Ms. Nettles has that's germane to 17 come in, but I want it to come in correctly. 18 MS. KIPLIN: Okay. I'm sorry. I 19 understand. I think that's really up to the internal 20 auditor. I -- I wouldn't want to have anything occur that 21 would affect that audit. She -- she does, in fact, report 22 to you-all. It will be a report that is issued to, you and 23 if you want -- if you want to hear from her -- she may 24 correct me on how she wants to proceed and how she wants to 25 receive information and be able to verify that information. 0108 1 I think it's really more her call in terms 2 of how she would want to procedure. In terms of a bias, for 3 you-all, you're going to be receiving a report. It's not 4 something that you will or will not take action on. It's 5 not something that you approve. It is a report. The 6 question at this point, I think, is more apropos for 7 Ms. Melvin on how she wants to receive information. 8 What you're hearing here today is, of 9 course, unsworn testimony, and it's -- 10 CHAIRMAN CLOWE: No. No. I think if 11 Ms. Nettles signs a witness affirmation form, she's sworn. 12 MS. KIPLIN: Well, I -- then I'll stand 13 corrected on that. 14 CHAIRMAN CLOWE: Am I -- 15 MS. KIPLIN: -- but I don't see anybody 16 issuing an oath. 17 CHAIRMAN CLOWE: Well -- 18 MS. KIPLIN: So they -- and I may be wrong 19 on that. 20 CHAIRMAN CLOWE: -- is she not sworn? 21 MS. KIPLIN: Okay. I'm sorry. So you're 22 hearing sworn testimony, and -- but it -- but I don't know 23 if it's opinion or fact or -- or whatever it is. 24 CHAIRMAN CLOWE: But it is sworn 25 testimony? 0109 1 MS. KIPLIN: Yeah. I'm sorry. I apologize 2 for that. 3 CHAIRMAN CLOWE: So, you know, she's under 4 oath and -- and she -- she goes forward at this point. The 5 commission takes that as a sworn statement. 6 MS. KIPLIN: Let me answer yes. 7 CHAIRMAN CLOWE: Okay. 8 MS. KIPLIN: I still think it goes to -- 9 goes to the internal auditor. It's her audit, how she wants 10 to proceed, how she wants to receive information. That's 11 my -- my position, and I will defer to the internal auditor 12 who works in that role. 13 MS. NETTLES: May I ask a question? 14 CHAIRMAN CLOWE: Sure. 15 MS. NETTLES: I'm just curious on the 16 internal auditor. She's separate from everybody else. But 17 I was curious on her -- the -- the last auditor's report. 18 In it, it stated that it had counsel's -- had consulted with 19 counsel in some way. And I was just curious on how the 20 internal auditor, who is supposed to be separate, why she 21 goes to legal counsel for help in writing her report. I 22 mean, how does that tie together? I don't understand how 23 she -- 24 CHAIRMAN CLOWE: She's entitled to seek 25 legal counsel as any division director who needs legal 0110 1 counsel or commissioner -- 2 MS. NETTLES: I see. 3 CHAIRMAN CLOWE: -- is entitled. 4 MS. NETTLES: I see. 5 CHAIRMAN CLOWE: So it's very proper for 6 her to seek legal counsel. 7 MS. NETTLES: Okay. 8 CHAIRMAN CLOWE: Commissioner Cox, before 9 we ask the internal auditor on advice -- advice of the 10 general counsel, do you have any feelings about this? 11 COMMISSIONER COX: No, I really don't. 12 CHAIRMAN CLOWE: Okay. Ms. Melvin, do you 13 understand the concern that I have? 14 MS. MELVIN: I do. 15 CHAIRMAN CLOWE: And I -- I think the 16 commissioners would be happy to hear from Ms. Nettles as 17 long as it doesn't bias her testimony or in any way affect 18 your investigation. 19 What's your sense of how her information 20 should come in? 21 MS. MELVIN: Well, I -- I can't give you an 22 answer on whether or not she should present her testimony 23 here, but I can say for the prudence of the audit and for 24 information that needs to come in to help with my audit, I 25 would want to hear from Ms. Nettles directly. 0111 1 She indicated that she had a correction to 2 her testimony at last -- at the last commission meeting, and 3 I would like to know what that was. And I think that 4 regardless of what testimony she provided in this meeting, I 5 would still want to hear from her and receive whatever 6 information that she felt would be helpful to my audit. 7 CHAIRMAN CLOWE: Okay. In that light, 8 Ms. Nettles, could I ask you to do this. Could you be 9 satisfied with making some general comments to the 10 commission at this time and provide specific information to 11 Ms. Melvin in regard to specifics that you have? 12 MS. NETTLES: Yes, sir. Can I not -- I 13 have written comments here. Can I not provide that to the 14 commission? I ask this. I have done this in the past and 15 it's always appeared in the record, and I wanted to make 16 sure that I didn't make any mistakes like the last time, you 17 know, when I speech it -- when I -- when I talk. I mean, 18 Reagan is smart over there. His is all written, and he gets 19 to read his so he can't mess it up. But when you start 20 talking to me about dates or I start talking about dates, 21 it's real easy to foul up. And I don't want to misinterpret 22 anything. So, therefore, before I came today, I have it in 23 writing, a time line of events and activities. And I wanted 24 to set the record straight on a couple of things -- 25 CHAIRMAN CLOWE: Sure. 0112 1 MS. NETTLES: -- so... 2 CHAIRMAN CLOWE: I think that you're doing 3 that right now, and I want to point out to you what I think 4 is the difference in some comments you've made to the 5 commission in the past when it's been relevant to rulemaking 6 for example. The public comment is broad and far-reaching 7 in many cases, in those instances. What you're wanting to 8 comment on now is an audit investigation that is underway. 9 The commission has not received that. It is in progress. 10 And I want to be very careful at this juncture about dealing 11 with the task the internal auditor has been assigned. I 12 think what I'll ask you to do is to give your written 13 statement to the internal auditor, and you-all have a 14 conversation about that. 15 I think the commission at this point will 16 be happy to receive general comments. For example, you have 17 said you want to be precise and you want to correct maybe 18 some information that you commented on in the past, with 19 correctness. But I don't want you to get in a position 20 where you have influenced in any way, improperly, the work 21 the internal auditor is doing and thereby bias the 22 commissioners if her report comes to us and we have to make 23 a decision on it. 24 MS. NETTLES: Okay. Does it matter, 25 Commissioner Clowe, that this is the second investigation on 0113 1 this particular issue? 2 CHAIRMAN CLOWE: I think it -- 3 MS. NETTLES: How does that play in? 4 CHAIRMAN CLOWE: I think it is factual. 5 I -- I think that the executive director who was not here 6 when the first investigation took place has reviewed it and 7 asked the internal auditor to conduct a second 8 investigation. And I heard her say this morning that her 9 preliminary review indicates that an audit is indicated, 10 that she's about that task. 11 MS. NETTLES: Okay. I -- I would still 12 like to make a few comments to the commission. I will be 13 more than happy to provide -- 14 CHAIRMAN CLOWE: Catherine Melvin. 15 MS. NETTLES: I'm sorry. Not enough 16 sleep. I will be more than happy to provide Catherine with 17 what I brought today, to clarify some things so that it is 18 in writing and there is no mistake. 19 CHAIRMAN CLOWE: Okay. We'll be happy to 20 receive your general comments. 21 MS. NETTLES: My general comments. Okay. 22 Well, before -- okay. I'll cover this one 23 first. When I was here last month and I was trying to quote 24 the dates and how much was -- was not received from the 25 prize pool, I -- I would just rather just sum it up in that 0114 1 when I came here and testified on September the 28th, 2001, 2 before Kim, that the summary of what I told her that day was 3 that between September 11th, '96 and August 29th of 2001, 4 there was 182 winning tickets. Out of those 182 winning 5 tickets, 136 received more than the allocated amount of 6 sales, that they received the investment cost instead. 7 Okay? 19 of them received the exact amount in the prize 8 pool, the 32 percent that was allocated. But of those, one 9 had two different investment costs related to the win. 10 One -- one of those investment costs was higher; one was 11 lower. But the winner received the exact amount in the 12 prize pool. 13 CHAIRMAN CLOWE: Okay. Now just let -- let 14 me interrupt you to say that I think what you're telling us 15 is you think the incorrect prizes were awarded. 16 MS. NETTLES: I'm giving you a breakdown of 17 the facts based on your audit report and it coincided with 18 mine on those winning tickets to how they were paid. 19 CHAIRMAN CLOWE: And aren't you saying that 20 it was incorrect? Is that your -- is that your statement to 21 us. 22 MS. NETTLES: Well, what I said last 23 month -- I didn't exactly get it all correct, and so this 24 time I wanted to make sure. It's only a breakdown of four 25 different categories here and -- 0115 1 CHAIRMAN CLOWE: Okay. And I'm -- I'm 2 going to ask you to give it to Ms. Melvin and -- rather than 3 give it to the commission. 4 MS. NETTLES: Okay. With regard to the 5 hundred million in overpayments that we just -- that I 6 failed to do last month, that I forgot to mention, when you 7 asked me about that and I responded about the hundred 8 million in overpayments, the -- the commission has told 9 me -- I believe you told me yourself, Commissioner Clowe, 10 here about a year or so ago -- and, of course, I've heard it 11 elsewhere in another meeting or I figured -- that the funds 12 from the overpayment came from the reserve fund and you 13 asked -- 14 CHAIRMAN CLOWE: No, I did not tell you 15 that. 16 MS. NETTLES: You did not tell me that they 17 came from the reserve? 18 CHAIRMAN CLOWE: I did not tell you that. 19 MS. NETTLES: Okay. Okay. Well, either 20 way, it doesn't really matter whether you did or you didn't 21 because it has been stated that the excess payments did come 22 from the reserve fund. 23 At any rate, what I was trying to tell you 24 is that if the funds to pay -- to over pay between 25 September -- or, actually, February of 1997 through February 0116 1 of 2002, that those funds came from the revenue -- from the 2 reserve fund that was in place or mentioned, it would be my 3 opinion that funds were actually misappropriated because the 4 only funds that were supposed to go into the reserve fund at 5 that time -- in that time period by the rule was carried 6 over from the fourth prize and the two percent that was 7 withheld from the players' share. The rule stated 8 that the -- for the first -- and there was two rules. There 9 was the original rule that carried from 1992 to 19 -- to 10 February of '97. And then there was a new rule in 1997 that 11 carried through July of 2000 when we -- when -- when we went 12 with the 6 and 54 rule. 13 Both of those rules had basically the same 14 language with two exceptions here. But as far as the prize 15 payments, the first prize was allocated 64 percent of the 16 prize pool. That was a direct prize category. The indirect 17 prize category contribution which may be increased by the 18 lottery director will include the rollover from the previous 19 draw. Of course, this is, as you know, the number of rolls 20 that you don't have a winner, it rolls over and that is six 21 of six winner share is carried forward. That money does not 22 going into the reserve fund at all. That's just the prize 23 category of contributions. 24 As you know from the rule change that took 25 place in 2002, when we put the word "shall" back in, it has 0117 1 come to my attention that when they changed this rule in 2 1997 to include paying the cash radio option, and they did 3 change the word in the first sentence, the first prize, it 4 read: "The first prize, the direct prize category, may be 5 64 percent of the prize pool for the drawing." And in 6 the -- the second sentence it's the indirect prize category 7 which may be increased by the executive director will 8 include the roll over from the previous winning. 9 I realize that you can't have in a legal 10 document the word "shall," and then in the next sentence 11 pertaining to that prize "may," that somebody may increase 12 it. So to me, the rule is even more emphatic that all 13 winners were supposed to receive all that was in the prize 14 pool. And where the interpretation problem is the 15 commission has stated was the problem, the staff 16 interpretation which is what came out of the first audit 17 report, the interpretation -- the fact that so many -- a 18 hundred and -- what did I say -- 136 received more than -- 19 or no. 19 received the exact amount of the prize pool, and 20 136 received more than what was in the prize pool. 21 And ironically four of those, the 22 investment cost was identical to the amount in the prize 23 pool, and I -- that's just -- well, what are the odds? You 24 know, when you hit the lottery you say, well, what are the 25 odds. Well, for the -- for the figures to be the identical 0118 1 same figures, the investment cost and the amount of the 2 prize pool, just really amazes me. But the monies coming 3 from the reserve had previously been transferred from the 4 general revenue fund, the excess. I believe that was back 5 in 1998. And that was just a ton of money. I forget how 6 many millions it was that they took. And that came from the 7 rolls -- the carry over or the -- the funds that were not 8 needed to fund the fourth prizes as a guaranteed prize and 9 the two percent that was withheld. 10 So when you asked me about the hundred 11 million, my statement that the state had lost a hundred 12 million, absolutely they lost a hundred million because that 13 money was taken and paid from the reserve fund, which had 14 previously been sent to the state, because had those winners 15 not been over paid on that amount, the state would have seen 16 that money. And I don't think I made that real clear during 17 the last commissioner's meeting. 18 CHAIRMAN CLOWE: My recollection of our 19 conversation is very different than yours. 20 MS. NETTLES: What? Did I make it clear? 21 Is that what your saying? 22 CHAIRMAN CLOWE: No. I -- I -- my question 23 to you was very different, and your answer was very 24 different than what you're recalling. But that's not 25 significant. 0119 1 The thing that you continue to say, I 2 think, is you feel the prize amounts awarded were not the 3 correct amounts. And if you will furnish that information 4 to Ms. Melvin, I think it will be very helpful for her to 5 help that. 6 MS. NETTLES: I will do that, Commissioner 7 Clowe. And Commissioner Cox earlier made a statement when 8 they were talking about the Lotto Texas and how the new rule 9 had successfully accomplished at least not having to take 10 from the reserve to pay the winners now, these rules that 11 were in effect never did call for you to take from the 12 reserve. The rule said that it was a pari-mutuel game in 13 prizes would -- let me think -- would never be the same 14 because they were pari-mutuel. Pari-mutuel is -- is the 15 percentage of sales. 16 So the rule up until 2002 never did call to 17 pay the advertised amount or the investment cost. So from 18 2002 when they did that rule -- which this is covered, by 19 the way, in -- in my testimony I was going to try to give 20 you-all. That being the rule, Commissioner Cox, until 2002. 21 That was adopted February 12th, 2002, when they wrote it 22 into rule that they would pay the amount -- the greater of 23 either the investment cost, which is the advertised amount, 24 or the amount in the prize pool. So only up to 2002. And I 25 don't recall if you were here in 2002. I don't think you 0120 1 were when that rule came to pass. 2 So I will give these papers to -- 3 CHAIRMAN CLOWE: Catherine Melvin. 4 MS. NETTLES: Thank you. 5 CHAIRMAN CLOWE: Thank you. We're happy -- 6 MS. NETTLES: Oh. 7 CHAIRMAN CLOWE: -- to have that. 8 MS. NETTLES: Okay. 9 CHAIRMAN CLOWE: And appreciate your input. 10 MS. NETTLES: Okay. 11 COMMISSIONER COX: Mr. Chairman, may I ask 12 Ms. Nettles a question? 13 CHAIRMAN CLOWE: Certainly. 14 COMMISSIONER COX: Ms. Nettles, what you're 15 talking about here, as I understand it, is a period of time 16 well before the current era, if you will. You're talking 17 about a period of time -- what -- what is the period of time 18 you're talking about? 19 MS. NETTLES: For which aspect? 20 COMMISSIONER COX: Well, for -- 21 MS. NETTLES: For -- for -- 22 COMMISSIONER COX: -- for this $100 23 million, for instance. 24 MS. NETTLES: Okay. The $100 million -- 25 and that's what I was giving to you. I have me a new 0121 1 spreadsheet that breaks that down, and that's real simple. 2 The hundred million in overpayments according to my 3 spreadsheet and calculations in Excel is from 9/11/1996 4 through last month's date, whatever that was. 5 COMMISSIONER COX: Last month? 6 MS. NETTLES: Well, yes. It's that nothing 7 has been overpaid since May of 2003. So the truth is, is 8 really and truly that time period would be from 9/11/1996 9 through May the 3rd, 2003, because I don't believe anybody 10 has won the Lotto or been overpaid. That's just my 11 recollection. But I believe that that's the time period. 12 The time period for these payments that this investigation 13 is conducting is from basically 1997, from February of '97, 14 okay, through February of 2000. Since February -- since 15 March of 2000 is when I posted on my website -- I began 16 posting and telling people how much they would win if they 17 won the Lotto, not one winner has ever received less than 18 the amount in the prize pool, and that goes back to 2000. 19 But the overpayments where this just 20 calculated -- that's where I got the number -- was in -- was 21 from September 11th, 1996, through May 3rd, 2003. 22 COMMISSIONER COX: Okay. So -- 23 MS. NETTLES: The overpayments -- this is 24 real important -- was not okay until February the 12th of 25 2000. Now, I don't know exactly what date that rule took 0122 1 effect, but I know it was adopted by the commission on 2 February the 12th of 2002. The rule was changed to read 3 that the jackpot prize winner would receive the greater of 4 either the amount advertised or the amount in the prize 5 pool, whichever figure was greater. 6 COMMISSIONER COX: Okay. If I could, 7 that's plenty of information to answer my question. As I 8 understand it, everything you have there relates to a period 9 2003 or prior. You're not making any -- you're not 10 questioning anything we're doing now for an ongoing basis. 11 MS. NETTLES: I am not questioning anything 12 you have done in regard to payments to the jackpot winners 13 since 2002. 14 COMMISSIONER COX: Okay. Thank you. 15 MS. NETTLES: Thank you. And there was 16 never anything actually, as far as I'm concerned, February 17 of 2000 -- February of 2000, because, to me, when you won 18 the Lotto, you won 32 percent of sales. And after March of 19 2000, everyone that has played the lottery and won has 20 received at least the allocated amount of sales. 21 And getting off the subject, I did have a 22 couple of other comments I wrote in 14 because that came to 23 me. But as I was listening to your meeting -- 24 CHAIRMAN CLOWE: Ms. Nettles, we really 25 called on you in regard to comments you have relative to the 0123 1 internal audit work. And if you have other comments, I 2 would ask to you reserve those until we come to the public 3 comments section. 4 MS. NETTLES: Okay. 5 CHAIRMAN CLOWE: Thank you very much. 6 Next is Item XV, consideration of and 7 possible discussion and/or action on the agency's security 8 function. 9 Mr. Grief. 10 MR. GRIEF: Commissioners, based on the 11 charge received from the Commission at the last meeting 12 regarding the security function of the agency, Mr. Greer has 13 asked me to undertake this project and lead this initiative. 14 I formed a work group comprised of 15 appropriate senior agency management to take a fresh look at 16 the security function within our agency. The group includes 17 Billy Atkins, Michael Anger, Mike Pitcock, Kim Kiplin, Mike 18 Fernandez, and me. Now, Mike Pitcock is a source of 19 information for current activities occurring in the security 20 division. Mike Anger and Billy Atkins serve as the division 21 directors and leaders of the core divisions of the agency, 22 and they are the key drivers of the security function 23 activities. 24 Mike Fernandez has served on a previous 25 committee related to looking at the security division and he 0124 1 is an experienced manager of very large staff divisions in 2 other state agencies and Mike is also an expert at 3 identifying any opportunities for outsourcing. 4 Kim is involved because there must be 5 critical coordination between the legal division and the 6 security division to ensure that the needs of the agency are 7 effectively met. 8 Catherine Melvin is also going to be 9 participating in this work group. She will assist us by 10 looking at our recommendations that ultimately come out from 11 both an efficiency standpoint and she will be analyzing our 12 actions for potential risk. And Diane Morris will be 13 providing legal advice to the work group. 14 We had an initial meeting early last week 15 in this work group, and in this meeting we clearly defined 16 our goals for the project, which include, one, defining a 17 scope of services for the security function of the agency; 18 two, prioritizing those services; three, allocating 19 resources, including identifying any opportunities for 20 outsourcing; and, four, implementing the appropriate 21 organizational structure. 22 We are currently gathering information from 23 other state lotteries regarding the role of the security 24 function in those states, as well as from some other Texas 25 state agencies that either a law enforcement or 0125 1 investigative function within their agency. We're using 2 NASPL, the National Association of State and Provincial 3 Lotteries to help us gather the information from other 4 lotteries. And we have included in our request, a request 5 for organizational charts as well as any type of charter or 6 other defined scope of services for the security or 7 investigative function that those lotteries or other state 8 agencies may have. 9 And, in addition, we're also reviewing some 10 past staff recommendations regarding certain functions 11 performed by the security division as it stands today. Once 12 we have reviewed all of this information as a group, our 13 plan is to focus on the first two goals, defining a scope of 14 service and prioritizing those services. And when we have 15 defined those issues, our plan is to bring these concepts 16 back to you in front of the commission hopefully at the 17 September commission meeting, and we want to ensure that our 18 concepts are in line with the will of the commissioners 19 Once we fully understand the commission's 20 position on these priorities, we will be prepared to make 21 recommendations to the executive director on resources and 22 an organizational structure. I'm pushing this project 23 forward, and my goal is to reach a conclusion on this issue 24 in time to lay out our plans in a comprehensive manner at 25 the October commission meeting. 0126 1 And that concludes my report, and I or any 2 member of the work group would be happy to try and answer 3 any questions that you may have. 4 COMMISSIONER COX: Gary, that's an 5 excellent group that you pulled together, and I think what 6 you're doing is -- is very important work. 7 Have you considered or specifically 8 identified any need for consulting experts to work with that 9 group? 10 MR. GRIEF: We have not discussed that, 11 commissioner, as a group. But now that you have laid out 12 that concept, we can make than an agenda item for our next 13 meeting. 14 COMMISSIONER COX: That's all I have, 15 Mr. Chairman. 16 CHAIRMAN CLOWE: Thank you, Gary. 17 Next Item XVI, consideration of and 18 possible discussion and/or action on the agency's business 19 plan. 20 Mr. Anger. 21 MR. ANGER: Good afternoon, Commissioners. 22 For the record my name is Michael Anger, 23 and I'm the lottery operations director. I'm here this 24 afternoon to give you a brief report on the agency's 25 business plan. 0127 1 Commissioners, at the July 29th meeting, I 2 provided you with a draft copy of the staff's comprehensive 3 agency business plan. And at that time, y'all indicated 4 that you would like a meeting to be scheduled, a working 5 meeting, to go over the plan and have an open and frank 6 discussion about the plan and -- and provide comment on 7 that. 8 That meeting is tentatively scheduled for 9 Wednesday, September 8th, and I have been working with the 10 general counsel, and it is my understanding that she's going 11 to be noticing that up for a public meeting. 12 And that concludes my comments for today. 13 We are prepared to go forward on that date. If you have any 14 questions, I will be glad to answer those. 15 COMMISSIONER COX: Were we able to find a 16 date, Michael, at which both Doctor Cadenhead and his 17 principal associates would be at the meeting. 18 MR. ANGER: Doctor Cadenhead and his lead 19 project manager, Dan Schmisser, will be present first thing 20 at the scheduled time for the meeting. And Ron Kessler, 21 another group member, will be joining us a little later due 22 to a previous engagement that he had. But all -- all will 23 be in attendance. 24 COMMISSIONER COX: Okay. Good. 25 MR. ANGER: Yes, sir. 0128 1 CHAIRMAN CLOWE: What time do you want to 2 commence that meeting? 3 MR. ANGER: That's your preference, 4 Commissioners. 5 CHAIRMAN CLOWE: I think it would be a good 6 idea for you to talk to Commissioner Olvera and see if we 7 might make it easier for him to come in from Brownsville by 8 starting around 10:00 a.m. He has some trouble, you know, 9 with that flight schedule. 10 MR. ANGER: Yes, sir. 11 CHAIRMAN CLOWE: And let's see how we can 12 accommodate him. How many hours do you anticipate we'll 13 need for the meeting? 14 MR. ANGER: I would hesitate to speculate 15 on the time. That's going to be really your pleasure and 16 how much comment and interaction will be necessary. 17 COMMISSIONER COX: Let me ask it another 18 way, Michael. 19 MR. ANGER: Yes, sir. 20 COMMISSIONER COX: If we didn't have any 21 questions, how long would the presentations be? 22 MR. ANGER: I would say no longer than an 23 hour, sir. 24 CHAIRMAN CLOWE: We'll have questions. 25 COMMISSIONER COX: Oh, I know that. 0129 1 CHAIRMAN CLOWE: Probably lengthy 2 questions, wouldn't you imagine? 3 Okay. So if we start at 10:00 a.m, we'll 4 probably finish by sundown. 5 MR. ANGER: Yes, sir. I will be prepared 6 to continue until sundown. 7 CHAIRMAN CLOWE: Where are we going to have 8 this meeting? 9 MR. ANGER: It will be right here, I 10 believe. And -- and I'll make arrangements. I -- I'll make 11 sure that it -- staff are going to be present 12 participating. All agency -- you know, a large number of 13 agency staff will be participating, and they will all be 14 present. And I will arrange to have a book of presentation 15 and the document available on a projector for us to review, 16 if you wish. 17 CHAIRMAN CLOWE: And this will be an open 18 meeting so we will need a court reporter and a record to be 19 made. And we will need to make a provision for members of 20 the public to attend if they so desire. 21 And my suggestion, Commissioner, is that, 22 if possible, we have the table arrangement informal in a 23 sense of a round table or a rectangular table that will 24 promote a discussion and a give-and-take, rather than the 25 more formal set up that we have for commission meetings. 0130 1 COMMISSIONER COX: That's an excellent 2 idea. 3 CHAIRMAN CLOWE: And although it's a 4 Wednesday, I think if people wanted to dress informally as 5 opposed to informal Fridays, that would certainly be 6 acceptable. 7 MR. ANGER: Yes, sir. 8 CHAIRMAN CLOWE: Okay. Now, what will the 9 agenda be, Michael, in a generic sense? 10 MR. ANGER: What I anticipated doing was 11 introducing the members of the consulting team that assisted 12 the agency staff in -- in preparing this document. I've 13 worked with them and -- and will continue to do so leading 14 up to that meeting. But they will be offering a 15 presentation to you that -- that essentially covers the 16 scope of our project, what work has taken place, the 17 milestones, and kind of lays out a history. And at that 18 point I think we're prepared to open up the document for 19 review and discussion. 20 CHAIRMAN CLOWE: Any comments, Reagan or 21 Billy? 22 MR. GREER: No, sir. I will implement the 23 no-tie rule. 24 CHAIRMAN CLOWE: Okay. Thank you, Michael. 25 MR. ANGER: Thank you. 0131 1 CHAIRMAN CLOWE: The next is Item XVII on 2 the agenda, consideration of and possible discussion and/or 3 action, including adoption on amendments to 16 TAC 401.362 4 relating to retailer's financial responsibility for lottery 5 tickets received, for winning lottery tickets paid, and for 6 lottery -- lottery related properties. 7 Ms. Kiplin. 8 MS. KIPLIN: Mr. Chairman, if I could, I 9 would like to ask you also to take up the next item that has 10 to do with adoption, consideration of adoption on new rule 11 16 Texas Administrative Code 401.370. These rules were 12 companion rules. 13 CHAIRMAN CLOWE: Very good. We'll also 14 consider that item, Number XVIII, as you just recited it. 15 MS. KIPLIN: Thank you. 16 Commissioners, what you have before you and 17 I sent each of you individually, electronically, the same 18 document that you now in have in your hand for each of these 19 rules. 20 With regard to 401.362, that is an existing 21 rule and the staff is recommending that you do adopt 22 amendments to that rule without changes from the Texas -- 23 that was published in the Texas Register. On the other 24 rule, that is a new rule and the staff is requesting that 25 you adopt the new rule without changes to the Texas -- as it 0132 1 was published in the Texas Register. 2 Each of these rules -- each of these 3 rulemakings you considered at the June 30th commission 4 meeting and you voted to propose the rulemakings for public 5 comment. We also noticed up a public comment hearing on 6 each of the rulemakings to receive comment. We received no 7 written comment during the 30-day public comment period. We 8 did receive comments from one commenter at the comment 9 hearing, and it was in an oral fashion. There was no 10 written testimony that was submitted. 11 The comment that has been received was -- 12 has been summarized, and the -- the agency's response is 13 also part of the preamble. The comment does did not, in the 14 staff's view invite, or necessitate a change to the text of 15 the rule. The reasons why the staff proposed these two 16 rulemakings to you remains the same. 17 And I will turn it over to Mr. Anger if he 18 has any additional comments, but at this time the staff does 19 recommend to you that you do adopt both of these rulemakings 20 on 362, amendments to that rule, and on 370, the new rule 21 itself. 22 MR. ANGER: Commissioners, the only comment 23 that I would add is that 401.362 used to encompass all of 24 the elements of what is now encompassed in these two rules, 25 and for purposes of clarification, we felt it was best to 0133 1 split the concepts out into these two separate rules. So 2 all of elements of these two rules as they now exist were 3 under 401.362, irrespective of the changes that we've made 4 and -- and presented. 5 MS. KIPLIN: The only thing that might be a 6 little different than other rulemakings is that on one, we 7 are asking that they -- they differ in effective date, be 8 set by the commission and that would be December 1. 9 As I understand it, there are software 10 changes that need to be made to implement that. So we're 11 asking for adoption on 370 to be effective December 1, the 12 other one be effective under normal circumstances which is 13 20 days after filing with the Register. 14 CHAIRMAN CLOWE: What was the comment you 15 received? 16 MS. KIPLIN: The comment we received was 17 that the -- the fee that was in the rule, the $25 18 administrative fee imposed a burden on the retailers and did 19 not reflect true costs of the agency with regard to 20 administering the matters under each of these rules. And 21 the draft response is that the -- we do not believe that the 22 cost is an administrative burden. There are costs, both 23 direct and indirect, that are incurred not only by the 24 lottery but also the lottery operator. And when the lottery 25 operator is having to work on these issues, it's detracting 0134 1 from work that he can do. That's the indirect cost. 2 Additionally, there's another purpose for 3 the -- the administrative fee and that is to provide an 4 incentive to the retailers to safeguard our tickets. Under 5 statutes the retailers are responsible for these tickets 6 outright, and we are trying to work with the retail 7 population or environment in recognizing the issues that 8 they have raised but also wanting to continue to provide an 9 incentive for safeguards. 10 There was another comment that was made by 11 the commenter that really was not relevant to this 12 particular rulemaking and it had to do with looking at a 13 cashing bonus for retailers and it also had to do with 14 providing a tiered approach on commissions for retailers. 15 And one in particular we did provide in a draft response was 16 the subject of a prior rulemaking, basic comment received 17 about the negative fiscal implications that rulemaking did 18 not continue into an adoption on the cash-in bonus. 19 CHAIRMAN CLOWE: Any questions? 20 COMMISSIONER COX: No. 21 CHAIRMAN CLOWE: Will one motion do it 22 all? 23 MS. KIPLIN: Yes, one motion will. It will 24 be a motion to adopt the amendments to rule 16 TAC 401.362 25 and a motion -- and an adoption of new rule 16 TAC 401.370, 0135 1 with the effective dates as we mentioned on the record. 2 CHAIRMAN CLOWE: So moved. 3 COMMISSIONER COX: Second. 4 CHAIRMAN CLOWE: All in favor please say 5 aye. 6 THE COMMISSIONERS: Aye. 7 CHAIRMAN CLOWE: Opposed? 8 No. 9 The vote is 2-0 in favor. 10 MS. KIPLIN: Commissioners, I have orders 11 on that. 12 CHAIRMAN CLOWE: Next when we sign these, 13 we'll take up Item Number XIX, report, possible discussion 14 and/or action on the instant ticket and services 15 procurement. 16 Mr. Marker. Give us just a minute, Andy. 17 Thank you. 18 MR. MARKER: Good afternoon, Commissioners. 19 My name is Andy Marker, assistant general 20 counsel. I'm here to provide an update on the commission's 21 instant ticket procurements. Proposals were received on 22 August 6th. The evaluation committee conducted site visits 23 of the four main markets and received their proposals. 24 Evaluation of their proposals is ongoing. The announcement 25 of the appearance of the successful proposer is scheduled 0136 1 for August 31. 2 I would be happy to answer any questions 3 that I can. 4 CHAIRMAN CLOWE: Thank you, sir. 5 MR. MARKER: Thank you. 6 CHAIRMAN CLOWE: Next item XX, report, 7 possible discussion and/or action on the agency's audit 8 services procurement. 9 Mr. Bennett. 10 MR. BENNETT: Thank you, Commissioners. 11 Again, for the record, my name is Ridgely 12 Bennett, deputy general counsel. 13 Commissioners, as you're aware, on June 14 8th, 2004, the commission issued a request for proposals for 15 audit services that encompassed the commission's financial 16 audit, security audit, and Mega Millions agreed upon 17 procedures. The commission did not receive any proposals in 18 response to that RFP. As a result, the commission issued 19 two emergency solicitations for price quotations. One for 20 the financial audit and Mega Millions agreed upon procedures 21 and the other one for the -- for a security review services. 22 The EFPQ for financial audit and the Mega 23 Millions agreed upon procedures resulted in the commission 24 entering into a contract with Maxwell, Locke & Ritter to 25 perform those functions. The EFPQ for the security review 0137 1 services is still ongoing. Proposals are due on September 2 7th, 2004, and the announcement of the apparent successful 3 proposer is scheduled to be announcement on September 13th, 4 2004. 5 I would be happy to answer any questions 6 that you may have. 7 COMMISSIONER COX: Ridgely, how many 8 proposals did we get on the financial statement audit? 9 MR. BENNETT: Can you help me? 10 MS. MELVIN: I think there were three. 11 MR. BENNETT: Three, I believe, 12 Commissioner. 13 COMMISSIONER COX: And what was the -- what 14 was the selection process. 15 MR. BENNETT: The -- there was an 16 evaluation committee that consisted of the director of 17 internal audit and internal audit staff, and they evaluated 18 in generally the same way we evaluate an RFP. They 19 evaluated based on the technical proposal and then the cost 20 proposals was added into those scores. 21 COMMISSIONER COX: Okay. So this was not a 22 just give it to the low bidder deal. We looked at the 23 qualifications of the firm as well as the fee that they 24 would charge. 25 MR. BENNETT: Most definitely, yes. 0138 1 CHAIRMAN CLOWE: Thank you, Ridgely. 2 MR. BENNETT: Thank you. 3 CHAIRMAN CLOWE: Gary, we've come to and -- 4 and handled Item XXI. We determined not to discuss that 5 contract in executive session. My understanding from an 6 earlier conversation was that that item would be on the 7 agenda for open meeting discussion, but I don't see it 8 anywhere else. That's a question. 9 MR. GRIEF: You mean relating to the 10 lottery operator contract? 11 CHAIRMAN CLOWE: Yes. 12 MR. GRIEF: Is -- is your question is that 13 that the only place it's -- it's in the agenda? 14 CHAIRMAN CLOWE: Yes. I don't see it up 15 for discussion anywhere else, and I was under the impression 16 that we wanted to discuss that in the open session. The 17 commissioners indicated that desire. Am I losing it 18 somewhere? 19 MR. GRIEF: No, sir. I believe that it -- 20 it -- I think counsel has advised me it's appropriate to 21 discuss that item under Item Number XXI, if you wish to do 22 so. 23 CHAIRMAN CLOWE: So we can now take it up? 24 MS. KIPLIN: Yes. 25 CHAIRMAN CLOWE: Very good. We're ready 0139 1 for it. Thank you. 2 MR. BENNETT: Commissioners, I previously 3 provided to you a draft of the -- a draft of the amendment 4 number six and discussed with you what that would do. 5 We would be happy to answer any questions 6 or provide you any additional information that you may 7 desire. 8 MR. GRIEF: Would you like me to sum up 9 what the amendment is? 10 CHAIRMAN CLOWE: Yes. 11 MR. GRIEF: The player connect system is 12 something that the agency looked at with fresh eyes and we 13 performed a cost benefit analysis on that system. And what 14 we found was that it was in its current formatting with the 15 technology available and the amount of dollars it would 16 cost, it was not cost effective to continue that. That was 17 something that was called for in the GTECH contract. So in 18 that situation, we felt it was appropriate to go back to 19 GTECH and ask for substitute -- not similar but substitute 20 performance in another area that the commission desired and 21 that we could mutually agree on with GTECH. 22 I asked Mike Fernandez, once we -- once we 23 landed as a management team on the fact that we felt 24 additional instant ticket vending machines would be an 25 appropriate item to pursue with GTECH. I asked Mike 0140 1 Fernandez to -- to handle the negotiations on that. And he 2 negotiated with GTECH management to a point. I took over 3 negotiations towards the latter part of that process, and 4 what we have mutually agreed to do is removed the -- the 5 player connect function from the contract and replaced it 6 with 140 additional refurbished instant ticket vending 7 machines? 8 CHAIRMAN CLOWE: Mike, do you have any 9 comment on this? Did he go away? 10 MR. GRIEF: He's not in the room -- 11 CHAIRMAN CLOWE: Okay. 12 MR. GRIEF: -- at the time. 13 CHAIRMAN CLOWE: Okay. Commissioner Cox, 14 Gary called me earlier this week and told me that the 15 conclusion of these negotiations had occurred this week. 16 And, Mike, I'm going to call on you in just 17 a minute in case you have any comment on this contract. 18 And my response to him in that conversation 19 was that I -- I really didn't feel comfortable about 20 bringing this to the commission for a vote today because I 21 didn't feel like I, for one, had had the opportunity to sit 22 down and review this in more detail. We are two instead of 23 three as it is right now. And if you're in agreement, I 24 would like to suggest that this be put on the agenda for our 25 next meeting. I think there's a strong sense of the Sunset 0141 1 Committee, they want commissioners to oversight. And I 2 would feel more comfortable on this. I'm sure our staff has 3 made a great effort and done a good job, but I would just 4 like a little opportunity myself to review it and be 5 comfortable with it before it comes before the commission. 6 Are you comfortable with that? 7 COMMISSIONER COX: I'm completely 8 comfortable with that. 9 And, Gary, I would like to ask, as you're 10 doing this that you help us understand -- now, these instant 11 ticket vending machines are the things that we've had for 12 some time in grocery stores. I see one at the Randalls at 13 35th and wherever it is over there. The Y at 35th and 14 38th. These are just these almost generic-looking vending 15 machines that you can buy an instant ticket out of? 16 MR. GRIEF: Correct. 17 COMMISSIONER COX: I would like to know at 18 the same time what those things are worth or some kind of a 19 capitalized earnings or growth or discounted cash flow 20 approach, not what they cost but what they're worth. 21 MR. GRIEF: And, Commissioner Cox, you and 22 I have had some discussions about this. I have been working 23 with the staff in the financial administration division to 24 take another look -- well, let me back up -- to review the 25 cost benefit analysis that was done originally on ITVMs, and 0142 1 now I'll take a look at it again with fresh eyes to make 2 sure it is a good use of state resources. And I think in 3 the interim time between now and our next commission 4 meeting, we would be happy -- the staff would be happy to 5 share with each commissioner, if -- if they desire, the 6 results of that cost benefit analysis as well as perhaps 7 provide a more detailed briefing about the proposed 8 contract. 9 COMMISSIONER COX: That's great. 10 CHAIRMAN CLOWE: Thank you. 11 Mike, did you have anything to add on those 12 comments that have been made? 13 MR. FERNANDEZ: No. No, sir. 14 CHAIRMAN CLOWE: Thank you, Ridgely. 15 MR. BENNETT: Thank you, Commissioners. 16 CHAIRMAN CLOWE: Now we're ready to go Item 17 Number XXIV, consideration of the status and possible entry 18 of orders as listed by letters A through E. 19 Counselor, would you like to take us 20 through that please. 21 MS. KIPLIN: Yes. 22 Commissioners, A, B, and C items under this 23 agenda item are lottery. The first two, the Don Juan 24 Groceries and the Rio Bravo Grocery, those are a contested 25 case proceeding in which the administrative law judge has 0143 1 recommended revocation of the licenses due to insufficient 2 funds being available at the time it was kept. 3 The second one is an unusual case. We 4 don't get these very often. This is what we would call a 5 redetermination case. This is the Irving Convenience 6 Store. In -- in this particular case the retailer's spouse 7 printed Pick Three tickets and did not pay for those. That 8 went against the retailer, and it was a sizeable amount. I 9 think it was about 50, 56, 60 thousand dollars. 10 The Irving Convenience Store no longer 11 holds a license with this agency, but we -- under the law, 12 we can proceed to move forward and collect that amount. But 13 we have to first send out a -- what's called a notice of 14 determination. And we did do that, and they requested a 15 hearing. Notwithstanding the fact that they requested a 16 hearing on the redetermination, there -- there was no 17 appearance. 18 The staff proceeded to put on evidence of 19 the amount that was owed to the agency in the amount of 20 $66,000 and the administrative law judge did find that 21 Irving Convenience Store is liable to the Texas Lottery 22 Commission in that amount. And that's what the proposed 23 order for your consideration was. 24 Item D is a bingo matter, Rebekah Lodge 25 252, White Settlement. That is a contested case 0144 1 proceeding. The ALJ in that matter has recommended, I 2 believe, it's revocation of the license -- I just want to 3 check, yes -- for failure to pay prize fees and failure to 4 post a bond. 5 The last item, item E, is a proposed order 6 to you as a result of the settlement agreement between staff 7 and the entity, P.O.I.N.T. Dallas. The facts -- findings of 8 facts are that the respondent played outside of license 9 times, had -- did have an application filed but did not wait 10 for approval. Staff is recommending that you enter an order 11 that you'll require they submit to procedures, which, in 12 fact, they have and were not part of what was put into your 13 notebooks. So I would like to provide you with a copy of 14 what they have already filed with the agency. I'm sorry. 15 And essentially the -- pardon me. The 16 point of the procedures is to ensure that we've got a better 17 process in the place to -- to file these applications for 18 changes in license times, further back -- further out so 19 that they don't get jammed up. 20 And with that, I'll be glad to answer any 21 questions. The staff does recommend that you enter an order 22 as reflected in the proposals for decision, the words that 23 came from the State Office of Administrative Hearings as 24 well as the proposed order in the P.O.I.N.T. Dallas. 25 CHAIRMAN CLOWE: Questions? 0145 1 COMMISSIONER COX: No. 2 CHAIRMAN CLOWE: I'm not sure I'm clear on 3 what you've handed us here, the procedures for temporary 4 license. Is this a proposal from turning point -- 5 MS. KIPLIN: P.O.I.N.T. Dallas. That's -- 6 CHAIRMAN CLOWE: -- to P.O.I.N.T. Dallas 7 or -- 8 MS. KIPLIN: -- that's what they have 9 already filed with the Bingo Division. It should have been 10 a part of the documents that were in your notebook. 11 CHAIRMAN CLOWE: Okay. 12 MS. KIPLIN: And for whatever reason, that 13 last page just did not get reproduced. 14 CHAIRMAN CLOWE: Okay. 15 MS. KIPLIN: And I wanted to be sure you 16 had it all with you at the time of the -- 17 CHAIRMAN CLOWE: This is part of the 18 settlement agreement. 19 MS. KIPLIN: That is correct. 20 CHAIRMAN CLOWE: Okay. I -- I didn't get 21 quite get that. 22 MS. KIPLIN: Sorry for the lack of clarity. 23 CHAIRMAN CLOWE: Is one motion adequate for 24 these recommended orders? 25 MS. KIPLIN: Yes, sir, I think it is. 0146 1 CHAIRMAN CLOWE: So moved. 2 COMMISSIONER COX: Second. 3 CHAIRMAN CLOWE: All in favor, please say 4 aye. 5 THE COMMISSIONERS: Aye. 6 CHAIRMAN CLOWE: Opposed? 7 No. 8 The vote is 2-0 in favor. A through E. 9 And we will sign those orders now if you have them. 10 CHAIRMAN CLOWE: And we'll just take a 11 five-minute recess at this time. And then when we return, 12 we'll call on the executive director for his report. 13 (Recess.) 14 CHAIRMAN CLOWE: The commission will come 15 to order. The time is 12:55 p.m. 16 We will now take up Item Number XXV, report 17 by the executive director and/or possible discussion and/or 18 action on the agency's operational status, FTE status, and 19 retailer forums. 20 Mr. Greer. 21 MR. GREER: Thank you, Mr. Chairman. 22 There are a couple of items that I want to 23 bring to your attention that have taken place since we last 24 met. First, I wanted to clarify something on agenda item 25 nine which is reference to on-line games. Specifically, I 0147 1 wanted to just reinforce to you that your comments were 2 heard loud and clear on S.S.T.s and corporate outreach and 3 we'll continue to do that. 4 We discussed race tracks as a part of that. 5 We'll continue to look at that. I did want to clarify that 6 currently there are no race tracks that are selling lottery 7 products. But from time to time, which is my personal 8 experience, we do promotional events there, and that -- that 9 was the venue in which I participated. So we'll -- 10 CHAIRMAN CLOWE: Okay. And I'm glad you 11 corrected that impression because I -- 12 MR. GREER: Right. 13 CHAIRMAN CLOWE: -- I understood 14 differently. 15 MR. GREER: I just remember very 16 specifically that evening, and it was a promotional type 17 scenario. But we'll look at race tracks and work with them 18 as we continue this whole corporate outreach that will take 19 us up a notch in our fiscal year to come. 20 Lotto Texas last night had 53,216 winning 21 tickets sold out of 26 million. I mention that because we 22 are excited about the fact that we continue to see a roll up 23 there. And the fact that it is a jackpot driven game and 24 Mega Millions recently got hit, we're excited to end the -- 25 end the year out in that venue because that's a good thing 0148 1 as we look at that game. 2 A lot going on with Mega Millions right 3 now. We've had a number of second tier winners which Robert 4 touched on in his report. The most recent was out of 5 Saginaw which doesn't see a lot of second tier winners, and 6 they won $175,000 there. 7 I did also want to mention to you, that a 8 number of the issues that we discussed at our six-month 9 review, which was just a few months back, are going to come 10 up in our next Mega Millions directors' meeting which is 11 September the 13th in Atlanta. I will be attending that 12 meeting and taking our marketing director and on-line 13 product manager with me to identify some of the areas that 14 we continue to focus on with the Mega Millions group. 15 One of the things about that I think is 16 worth mentioning, Commissioner Cox, in reference to when you 17 were talking about Massachusetts. That's been one of the 18 side benefits to being in Mega Millions is being around 19 these other states, building relationships with those 20 executive directors, and being able to have a good exchange 21 with them on what they do and how we might apply it to what 22 goes on in Texas and vice versa. And there is a definite 23 value here and I'm looking forward to spending time with 24 them and touching on some of these things that we discussed 25 today. 0149 1 We had a great month in July, and my theme 2 this month is take time to smell the roses. So I want to 3 smell the roses on the month of July for just another couple 4 of minutes. We produced 22.6 million plus winning tickets 5 in that month. That translates to 277.4 million in prizes 6 that were paid out to players. That's a huge amount and 7 something to be proud of as long -- as well as the time that 8 was spent in increasing our sales over the same time in the 9 next two -- that last year of ten percent. 10 So when you look at the summer months as a 11 whole, we have bucked the system, is where I'm going with 12 this. We were fortunate to have those two huge rolls in 13 June, 145 and the 290. But we've also had a lot of success 14 with our new instant tickets sweep of games and some of the 15 licensed properties that came out as part of that overall 16 plan. 17 The new instant monopoly game is pretty 18 much out as much as it can get out, out of the warehouse, in 19 other words. They're not sold out, but as far as the demand 20 for that game, it's been very high. A lot of interest in 21 Corvette Cash, and I'm very happy to report to you that we 22 had our first Corvette Cash winning ticket verified 23 yesterday sold in Boerne, Texas, at the HEB out of an ITVM 24 at 46 and I-10. It's a very big HEB in that area. And I'm 25 looking forward to handing the keys too. The winner came 0150 1 forward and is an individual in her 70s, is very excited 2 about winning this Corvette and is -- 3 CHAIRMAN CLOWE: Don't laugh, Billy. 4 MR. GREER: She is excited about -- 5 CHAIRMAN CLOWE: We can drive Corvettes 6 too. 7 MR. GREER: She is excited in taking the 8 caller, of course, which they do get to do in working 9 through NEI which is one of our licensed vendors in 10 reference to that. But that's going to continue the 11 momentum in that game which -- which I'm really in excited 12 and we'll bring you that -- 13 COMMISSIONER COX: Did you have a Corvette 14 when you were -- 15 CHAIRMAN CLOWE: No. I had a Porsche 928 16 S4. 17 MR. GREER: That's good too. 18 On the down front, briefly I do want to 19 touch on we continue to be focused on the Latin Lotto scam 20 that was recently hit in the Baytown area, and that was 21 really upsetting. And they took $1100 from that 22 individual. I mention that because we are moving forward on 23 a number of initiatives we talked about in the past on the 24 Latin Lotto scam with the new brochure, new stickers. 25 Bobby and I are working together on a 0151 1 couple of different awareness things. We going to continue 2 to keep that as a focus. And I -- I feel good that we are 3 making some progress in that area. 4 CHAIRMAN CLOWE: Reagan, I know you 5 concentrated on that. The entire staff has. I think that's 6 very important along with another area that you've given a 7 lot of attention to, and that's the compulsive gambling. 8 MR. GREER: Yes, sir. 9 CHAIRMAN CLOWE: And I think it's incumbent 10 on this agency to continue to give that opinion in dollars 11 and focus on that, and I think it will continue to be the 12 right thing. 13 MR. GREER: Under my duties, certainly one 14 of the things that I will continue to look at is the whole 15 play responsibly aspect, and we are making progress in that 16 area. 17 A number of new scratch offs that I think 18 will continue to keep us on an upward climb in -- in 19 reference to the increases that we see there of Hot Money, 20 Cool Five, Gold Fever, and Triple Tripler are fixing to hit 21 the streets here in the next few weeks. We are very 22 confident in the fact that they are going to perform well. 23 I had a great trip to California, went to 24 the NASPL regional meeting out there in San Diego, August 25 the 10th through the 12th, touched on a number of topics, 0152 1 one of which was hot instant ticket games from around the 2 region; building a relationship with retailers. There was 3 corporate management there from Circle K and from 7-Eleven. 4 And I spent some time with those guys and got some good 5 input on some of these topics that are being touched on here 6 today, one of which was the kiosk concept in the different 7 stores. 8 We talked a lot about the trends in media 9 and marketing and advertising, new technologies that are on 10 the horizon and the different lottery jurisdictions, as well 11 as the new NASPL standards initiative project. But, 12 moreover, I enjoyed spending time with the acting executive 13 director from California discussing the idea that we work 14 together with them on a new game concept. They were very 15 open to that, spent time with their marketing people and 16 continuing to pursue that idea. 17 California is a very comparable state to 18 Texas and I want to continue to pursue the idea as well in 19 Florida and plan to go to Florida the first week of December 20 for another conference and spend some time with their 21 executive director in reference to an interest that we might 22 have in working with them. 23 I also went to El Paso last week, and that 24 was a great trip as well. We had a retail bonus check 25 presentation at the downtown Chevron, presented a 0153 1 500,000-dollar check to the retailer there, got great 2 coverage, spent some time there also visiting a couple of 3 other venues which would be the top retailers in that area, 4 got a different perspective on the way that things operate 5 in El Paso. That was good. Also went by and -- and paid a 6 call on Representative Pickett's office, Senator Shapleigh's 7 office, and Senator Madla's office. And also had time to go 8 to the Speaking Rock Casino which was one of the groups 9 that, you know, discussed video lottery when we were in that 10 position and went out to their facility. 11 Also went over to Sunnyland Casino which is 12 in New Mexico which is right in that same general area and 13 got a good overview on the number of Texas license plates 14 that were in the parking lot there which was alluded to 15 during our video lottery discussions and the different games 16 and the themes and the activity that went on with that. And 17 Bobby Heath went with me. We had a very productive trip and 18 continue to seek information to be responsive to things that 19 come from the video lottery as well in reference to that 20 part of the state. 21 COMMISSIONER COX: Reagan, what did you 22 observe about Texas license plates. 23 MR. GREER: The parking lot was full of 24 Texas license plates. That venue is right next to El Paso, 25 and there was busses. 0154 1 COMMISSIONER COX: Is that the one that is 2 just four miles from the state line? 3 MR. GREER: Yes. It is. It's four miles 4 away, a very nice facility, a race track with a, you know, a 5 racing sort of look, but a very nice facility. I paid 6 special attention to the game mix, the progressive games 7 that we talked about. I paid special attention to the way 8 they did security. And a lot of the things that I looked at 9 when we were in Rhode Island but really made a whole lot 10 more sense to me after we had been through the legislative 11 process and that, you know, all was spent with that -- that 12 time. And I learned a lot to be honest with you. It was 13 good and certainly wanted to be responsive by saying I had 14 been to a track, you know, in that area and asking if anyone 15 had questions that they might want to take a trip over there 16 themselves to see exactly what we're, you know, discussing. 17 So it was good that I -- I did that just to have a better 18 source of information. 19 CHAIRMAN CLOWE: You should always be 20 mindful of that. There are people in this state who want 21 Texans to have to go out of state to enter into those games. 22 MR. GREER: I agree. And certainly that's 23 a part of the consideration as we drove through the parking 24 lot just looking at and how that, you know, will operate 25 so... 0155 1 CHAIRMAN CLOWE: There's two sides to that 2 issue. 3 MR. GREER: I agree. 4 CHAIRMAN CLOWE: There are a lot of people 5 that are happy to have them go out of the state so... 6 MR. GREER: Well, you know, I think our 7 role as a resource on that issue is we need to be aware of 8 what's around us, and that was my intent in going over 9 there. And I'll continue to look at that, but I agree with 10 your comment. We are going to end the year out very 11 successful and -- and potentially should be the second best 12 year in the history of the lottery. The best year being in 13 1997 as far as -- fiscal year '97, as far as sales were 14 concerned. 15 You mentioned the billion plus mark. We 16 will coordinate with you and probably have some type of 17 press event, slash, press release that will go out probably 18 the second week in September to talk about how we did this 19 week. There is a lot of interest in the general market and 20 in the media market as to how we're doing and what's going 21 on over here. So we'll get that information out. 22 Lastly, I did want to mention tomorrow is a 23 holiday. It's a state holiday. It's 'ol Lyndon Banes 24 Johnson's birthday. It is a state holiday. A number of us 25 will be working, but a number of us will not. We'll be 0156 1 taking advantage of the holiday. I will be here tomorrow, 2 and we want to observe, you know, that holiday in reference 3 to our former president. So I wanted you to be aware of how 4 things would be shaking out tomorrow. 5 And, again, thank you for the opportunity 6 as we end this fiscal year to have the opportunity to be the 7 executive director of the state, a lot of challenges, a lot 8 of victories, a lot of interesting opportunities to excel, I 9 would say, along the way. But overall we had a great year 10 and very proud of the numbers and the staff's work in 11 getting us to this point. 12 CHAIRMAN CLOWE: Any questions? 13 COMMISSIONER COX: No, sir. 14 CHAIRMAN CLOWE: Thank you, Reagan. 15 Next is Item XXVI, report by the charitable 16 bingo operations director and possible discussion and/or 17 action on the charitable bingo operations division's 18 activities. 19 Mr. Atkins. 20 MR. ATKINS: Thank you, Commissioners. 21 I don't have a whole lot to add to my 22 report. We have interviews scheduled for next week to fill 23 the vacant audit position in Dallas. The next meeting of 24 the bingo advisory committee is tentatively scheduled for 25 Wednesday, November 17th. And maybe with Commissioner Cox's 0157 1 mojo, they will continue to be a shorter time period than 2 they have been in the past. 3 Also, we -- 4 CHAIRMAN CLOWE: Are you going to let him 5 get away with that? 6 COMMISSIONER COX: Well, I -- I -- I would 7 add that I thought, particularly considering it was the 8 first meeting with the new chair, Suzanne did a very good 9 job -- 10 MR. ATKINS: Yes, sir. 11 COMMISSIONER COX: -- of running that 12 meeting. 13 MR. ATKINS: Yes, she did. 14 CHAIRMAN CLOWE: I would like some credit 15 too. I was told to stay away. Nelda assigned me other 16 duties. 17 COMMISSIONER COX: I want to see who 18 touches that one. 19 MR. ATKINS: Commissioners, we made 20 allocations for the second quarter of 2004 on August 18th 21 and a memo further detailing that is available in your 22 notebooks. 23 Additionally, the bingo activity report 24 that's in your notebook covers the time period during that 25 peek time period when quarterly reports are coming in so 0158 1 you'll see the amounts of -- of dollars that were received 2 by the commission with the filing of those reports. 3 Finally, the last thing that I would draw 4 your attention to is in the news articles that are contained 5 in your notebook, there were a series of articles that ran 6 in a Virginia newspaper on August 9th that outlined the 7 bingo industry in the state of Virginia and some of the 8 issues that they have been facing and dealing with that we 9 believe were both very informative and also very interesting 10 in the number of similarities that there were in regards to 11 some of the issues that they face, that we face here in 12 Texas. 13 And that's all I have to report. 14 CHAIRMAN CLOWE: Any questions? 15 COMMISSIONER COX: No, sir. 16 CHAIRMAN CLOWE: Thank you, Billy. 17 Next Item XXVII, public comment. 18 Mrs. Nettles wishes to comment. 19 Would you come forward, please, ma'am. 20 MS. NETTLES: Good afternoon, 21 Commissioners. 22 CHAIRMAN CLOWE: Good afternoon. 23 MS. NETTLES: Good afternoon. for the 24 record, I am Dawn Nettles with the Lottery Report out of 25 Dallas. 0159 1 And I just wanted to make two comments 2 basically about earlier discussions about the S.S.T.s. I 3 thought of this as I was hearing a discussion on it, and I 4 thought perhaps y'all didn't know this or might be something 5 that you might want to check into with regard to the sales 6 that they currently producing. 7 I have understood from the retailers, quite 8 a few in Dallas, that there's a problem -- that the machines 9 are having problems, that they're down -- in fact, their 10 exact words were they were down more than they were up. And 11 the problem that the retailers are having -- from what I 12 understand, from what they said to me -- and I'm sure the 13 commission is aware of this -- is that they call GTECH, the 14 hot line, for somebody to say, hey, what's wrong with it. 15 And they're at their front desk, and the machine is over 16 yonder. And the person -- when they finally call back, the 17 machine stays down because they're taking complaints from 18 their customers about it. But when they -- when the clerk 19 or whoever calls back, they say, well, okay, now go read me 20 what's on the terminal, what it says. And the clerk says, 21 well, I can't. You know, I got a line of people here. It's 22 too much trouble for me to walk over there. I'll have to 23 get back to you. So the terminal stays down. Tom Thumb 24 actually stated that they spent more than they were worth on 25 the -- on the terminal. But if the machines are down a lot 0160 1 that will stop their sales. So it's -- it's something I 2 haven't hear you-all discuss. 3 Also, I read last week where GTECH has now 4 produced a new self-service terminal, but it's full 5 service. It sells scratch tickets and everything, and that 6 came out just seven months after. And I think that would 7 have been your best bet to have had machines that were 8 completely -- to -- to alleviate all the work for the 9 retailers. That would have been a better deal. 10 With regard to sales, I just have a comment 11 on this. I'm -- I'm sorry. You know, I track every penny 12 that y'all do up here, and it's very good that your sales 13 are up. I think you said about ten percent over last year, 14 I think, is what you said. Ten percent. The scratch ticket 15 sales alone are up 8.68 percent, and the Pick Three sales 16 are up alone about 5.82 percent. And that's a six -- 13 17 percent or 14 percent increase on those two games alone. 18 Lotto Texas, Cash Five, and Two Step are 19 all down. Lotto is down by nine percent. Cash Five is down 20 about 14 percent. Two Step is down by 32 percent. The 21 point to that is, is that I really wished y'all would look 22 seriously at those games and to try to figure out why. 23 Those games, the sales are -- are really, really bad. And I 24 feel like that the state is losing potential revenues on 25 those games, and I would like to see you-all make a change 0161 1 because the increase in sales with those -- came from those 2 two areas. It didn't come -- well, Mega Millions helped, of 3 course, on the overall picture. But to only be up ten 4 percent when you added Mega Millions, a multi-million-dollar 5 jackpot prize game and to not have the sales that you've had 6 on Mega Millions when it was, what, 200 -- what was it? 7 290 -- no. 245. And the sales in Texas was really low 8 compared to what it should have been. 9 So I just wanted to comment on the sales 10 and ask that y'all really look closely at Cash Five and 11 Lotto Texas and what the real picture is, instead of giving 12 all your credit to whatever, the ten percent increase. You 13 should have had a greater than that increase. 14 I thank you for having me. Y'all have a 15 nice day. 16 CHAIRMAN CLOWE: Okay. Thank you, 17 Ms. Nettles. 18 Is there anyone else wishing to make 19 comment to the commission at this time? 20 We are adjourned. Thank you-all very much. 21 (Concluded at 1:14 p.m.) 22 23 24 25 0162 1 REPORTER'S CERTIFICATION 2 3 STATE OF TEXAS ) 4 COUNTY OF TRAVIS ) 5 6 I, SHELLEY N. JONES, Certified Shorthand 7 Reporter in and for the State of Texas, do hereby certify 8 that the above-captioned matter came on for hearing before 9 the TEXAS LOTTERY COMMISSION as hereinafter set out, that I 10 did, in shorthand, report said proceedings, and that the 11 above and foregoing typewritten pages contain a full, true, 12 and correct computer-aided transcription of my shorthand 13 notes taken on said occasion. 14 15 Witness my hand on this 20th day of 16 September, 2004. 17 18 19 ________________________________ Shelley N. Jones, RPR, CSR #8058 20 Expiration Date: 12/31/04 Firm Registration #225 21 1801 North Lamar Boulevard Mezzanine Level 22 Austin, Texas 78701 (512) 474-4363 23 24 JOB NO. 040826SNJ 25