0001 1 2 3 * * * * * * * * * * * * * * * * * 4 5 TEXAS LOTTERY COMMISSION 6 COMMISSION MEETING 7 8 MAY 10, 2005 9 10 * * * * * * * * * * * * * * * * * 11 12 13 14 15 BE IT REMEMBERED that the TEXAS LOTTERY 16 COMMISSION meeting was held on the 10th day of May, 17 2005, from 8:00 a.m. to 2:40 p.m., before Kimberlye A. 18 Furr, RPR, CSR in and for the State of Texas, reported 19 by machine shorthand, at the offices of the Texas 20 Lottery Commission, 611 East 6th Street, Auditorium, 21 Austin, Texas, 78701, whereupon the following 22 proceedings were had: 23 24 25 0002 1 APPEARANCES 2 3 Chairman: 4 Mr. C. Tom Clowe, Jr. 5 Commissioners: 6 Mr. Rolando Olvera 7 Mr. James Cox, Jr. 8 Committee Members: 9 Mr. Billy Atkins 10 Ms. Kimberly L. Kiplin 11 Mr. Reagan E. Greer 12 Mr. Gary Grief 13 Reporter's Certificate ......................... 196 14 INDEX 15 AGENDA ITEMS 16 17 Item Number 1 ................................... 6 18 Call the meeting to order 19 Item Number 2 ................................... 6 20 Consideration, possible discussion and or action on 21 appointment to the Bingo Advisory Committee. 22 Item Number 3 ................................... 7 23 Consideration, possible discussions and/or action on 24 the Bingo Advisory Committee work plan. 25 Item Number 4 ................................... 10 0003 1 Report, possible discussion and/or action on lottery 2 sales and revenue, game performance, including Mega 3 Millions multiplier feature, new game opportunities, 4 and trends. 5 Item Number 5 ................................... 25 6 Report, possible discussion and/or action on the 7 agency's drawings, including television coverage, 8 animation, random number generation, and/or drawings 9 equipment. 10 Item Number 6 ................................... 91 11 Report, possible discussion and/or action on the 12 lottery advertising and promotions. 13 Item Number 7 ................................... 109 14 Report, possible discussion and/or action on Mega 15 Millions Game, including adoption of Amendments 16 TAC 16 401.315 relating to Mega Millions online game. 17 Item Number 8 ................................... 125 18 Report, possible discussion and/or action on HUB and 19 other minority business participation, including the 20 agency's mentor/protege program. 21 Item Number 9 ................................... 128 22 Report, possible discussion and/or action on the 23 agency's contracts. 24 Item Number 10 .................................. 129 25 Report, possible discussion and/or action on the 0004 1 agency's financial status. 2 Item Number 11 .................................. 132 3 Report, possible discussion and/or action on the 79th 4 Legislature. 5 Item Number 12 .................................. 136 6 Consideration of and possible discussion and/or action 7 on external and internal audits and/or reviews relating 8 to the Texas Lottery Commission and/or the Internal 9 Audit Department's activities. 10 Item Number 13 .................................. 139 11 Consideration of and possible discussion and/or action 12 on the broadcast studio and production services 13 procurement. 14 Item Number 14 .................................. 124 15 Executive session 16 Item Number 15 .................................. 124 17 Return to open session 18 Item Number 16 .................................. 157 19 Consideration of the status and possible entry of 20 orders in dockets designated by the letters A through 21 M. 22 Item Number 17 .................................. 180 23 Report by the executive director and/or possible 24 discussion and/or action on the agency's operational 25 status and FTE status. 0005 1 Item Number 18 ................................. 190 2 Report by the charitable 3 bingo operations director and possible discussion 4 and/or action on the charitable bingo operations 5 division's activities 6 Item Number 19 ................................. 194 7 Public comment 8 Item Number 20 ................................. 195 9 Adjournment 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0006 1 (AGENDA ITEM NO. 1) 2 CHAIRMAN CLOWE: Good morning. It is 3 8:00 a.m., May the 10th of 2005. Commissioner Cox is 4 here and Commissioner Olvera is here. My name is Tom 5 Clowe. I call this meeting of the Texas Lottery 6 Commission to order. 7 (AGENDA ITEM NO. 2) 8 CHAIRMAN CLOWE: We'll move to Item 9 Number Two on the agenda: Consideration, possible 10 discussion and or action on appointment to the Bingo 11 Advisory Committee. Mr. Atkins. 12 MR. ATKINS: Thank you, Commissioners. 13 You have in your notebook the nominations of Ms. 14 Rosalie Lopez of Odessa for an appointment to the 15 vacant charity position on the Bingo Advisory 16 Committee. Each of you have had the opportunity to 17 individually interview Ms. Lopez and talk to her, and 18 if it's the Commission's desire, the time would be ripe 19 for her to be appointed to the Advisory Committee. 20 This will be for a full three-year term. 21 CHAIRMAN CLOWE: And what is her 22 position on the BAC, Billy? 23 MR. ATKINS: It would be as a charity 24 representative. 25 CHAIRMAN CLOWE: Commissioners, it's my 0007 1 understanding as well that each one of us has had the 2 opportunity to interview this person. I found her very 3 suitable and would invite any comments that any of you 4 might have. 5 COMMISSIONER COX: I agree. 6 CHAIRMAN CLOWE: Is there a motion? 7 COMMISSIONER OLVERA: So moved. 8 COMMISSIONER COX: Second. 9 CHAIRMAN CLOWE: All in favor, please 10 say aye. Opposed? The vote is three/zero in favor. 11 Thank you, Billy. 12 (AGENDA ITEM NO. 3) 13 CHAIRMAN CLOWE: Item three: 14 Consideration, possible discussions and/or action on 15 the Bingo Advisory Committee work plan. Mr. Atkins. 16 MR. ATKINS: Commissioners, at your last 17 meeting Susan Taylor, the Chair of the Bingo Advisory 18 Committee, presented to you a draft of the work plan 19 for the upcoming year that the BAC was proposing for 20 your consideration. What the staff has done in the 21 cover memo on this item is prepared a side-by-side 22 comparison between the existing work plan, which is 23 located on the agency's web site as well as the 24 proposed web site. As you'll see, there are really 25 only three new items that the BAC has proposed: The 0008 1 first is number three, comment on the effect of 2 administrative rules and regulations on bingo 3 operations; item number seven, review of any 4 legislation including utilization and impact study; and 5 number nine, review specific recommendations for 6 improvement of bingo operations. 7 Item number four they have combined two 8 of the previous items, that is the review of the Bingo 9 Bulletin and the Charitable Bingo Web Site, and on item 10 five, the study of alternative styles of bingo games, 11 they have included instant bingo card minders to the 12 list of items that they would be reviewing. The staff 13 has had the opportunity to review this and wouldn't 14 have any additional recommendations to make to it at 15 this time, so if there are no other comments or 16 direction that the Commission wishes to give to the 17 Advisory Committee, it's my understanding that they're 18 seeking approval of the proposed work plan that was 19 submitted to you at the last meeting. 20 CHAIRMAN CLOWE: Are there any questions 21 or comments? 22 COMMISSIONER COX: I have a couple of 23 questions. 24 CHAIRMAN CLOWE: Please. 25 COMMISSIONER COX: Billy, number three, 0009 1 it says it's a new item. Is that a new activity or 2 have they been doing that all along? 3 MR. ATKINS: I'm looking, Commissioner 4 Cox, at the draft that was submitted to you. It's 5 behind my cover memo. 6 COMMISSIONER COX: Right. 7 MR. ATKINS: And it would appear, 8 because they are referencing potential effects of new 9 rules and the BAC has commented extensively on proposed 10 new rules, so I do see where that is something that 11 they have been doing that would be more in conjunction 12 with item two. 13 COMMISSIONER COX: Okay. And then on 14 item seven, review of new legislation and study the 15 impact of new legislation having to do with bingo 16 operations. This is not pending some proposed 17 legislation but actually enacted legislation? 18 MR. ATKINS: That would be my 19 understanding, yes, sir. 20 COMMISSIONER COX: So this is not, we're 21 going to look at proposed legislation and go lobby? 22 MR. ATKINS: No, sir. This would -- 23 it's my understanding this would be legislation that 24 has been enacted into law and is being implemented by 25 the division. 0010 1 COMMISSIONER COX: Thank you. 2 CHAIRMAN CLOWE: Thank you, Commissioner 3 Cox, for that last comment. I echo that. I think that 4 was important to say. 5 Commissioner Olvera, do you have 6 anything further? 7 COMMISSIONER OLVERA: I have no comment. 8 CHAIRMAN CLOWE: Do you want a motion on 9 this, Billy? 10 MR. ATKINS: Yes, sir. 11 CHAIRMAN CLOWE: So moved. 12 COMMISSIONER OLVERA: Second. 13 CHAIRMAN CLOWE: All in favor, please 14 say aye. Opposed, no? The vote is three/zero in 15 favor. 16 MS. KIPLIN: And the motion is to 17 approve the Bingo Advisory Committee work plan? 18 CHAIRMAN CLOWE: That is the motion. 19 Thank you, Billy. 20 (AGENDA ITEM NO. 4) 21 CHAIRMAN CLOWE: Next Item Four: 22 Report, possible discussion and/or action on lottery 23 sales and revenue, game performance, including Mega 24 Millions multiplier feature, new game opportunities, 25 and trends. 0011 1 MR. DEVINEY: Good morning, 2 Commissioners. I'm Lee Deviney, financial 3 administration director, and Robert Tirloni and Dale 4 Bowersock will be presenting this item for you this 5 morning. 6 Starting with Lottery sales and revenue 7 to the state, this slide depicts fiscal year 2005 sales 8 through the month of April 2005. Our sales to date 9 have been $2.74 billion and the sales contribution from 10 sales was $925.8 million, or about 37.4 percent. Our 11 price expenses debit is a billion and a half and our 12 net revenue to the state thus far this fiscal year is 13 $636.7 million. 14 Any questions? 15 COMMISSIONER COX: Lee, are you going to 16 be comparing that to last year? 17 MR. DEVINEY: No. I don't have a 18 comparison at this point in time. 19 COMMISSIONER COX: We keep getting 20 comparisons in sales, but sales contribution and net 21 revenue, I don't seem to be getting the comparisons. 22 MR. DEVINEY: If you'd like comparisons, 23 we'll get you comparisons. 24 CHAIRMAN CLOWE: I agree with 25 Commissioner Cox, We'd like to see that. 0012 1 MR. DEVINEY: Okay. The next slide what 2 we've done is broken down sales and revenue for each 3 product. The instant tickets are at $1.8 billion, or 4 just under $390 million, in revenue to the state. 5 Lotto Texas, we had a -- I think we're on a fairly good 6 run right now, and it's pulled ahead of Pick Three. I 7 think we were -- when we showed this to you last month, 8 they were running about equal in terms of sales and 9 revenue, and Lotto Texas is ahead of Pick Three right 10 now. Also, Mega Millions, we just ran up to a $200 11 million-plus jackpot and our sales were really picking 12 up right at the last draw before it hit, and we were at 13 $121 million in sales and just under $47 million in 14 revenue. Again, the total is $2.474 billion and $636 15 million in sales. 16 The next slide shows our lottery sales 17 broken out into a pie chart just to give you a 18 graphical representation. Again, the instants make up 19 about 74 percent of our sales at this point in fiscal 20 year. Lotto Texas and Pick Three follow, and Mega 21 Millions is almost five percent in sales. 22 In terms of revenue, Instants are 23 61.2 percent of revenue. Lotto and Pick Three at very 24 close at just under 12 percent each. Mega Millions is 25 a strong performer in revenue at 7.4 percent, and then, 0013 1 of course, the Megaplier, it's only brought in 2 $12 million in revenue, but it has a real good margin. 3 MR. CHALONIE: Good morning, 4 Commissioners. For the record, my name is Robert 5 Chalonie. I am the products manager for the Texas 6 Lottery. 7 Following up on what Lee was just 8 talking about on instants, this next pie chart shows us 9 instant sales but in breaks it down by price point. No 10 real changes from what we've seen over the past few 11 months. The $2 and the $5 prize points are our 12 strongest performers in terms of sales followed closely 13 behind by the $1 prize point. And translating these 14 sales numbers into revenue, once again, you see the 15 bulk of the revenue coming from the $2 and $5. The $1 16 follows closely after that, and behind is that is the 17 $10 prize point in revenue. 18 Commissioners, I'll be back in a few 19 slides, but we're going to have Dale Bowersock, our 20 instant lotto coordinator, talk to you and give you an 21 update on one of our more popular instant games and our 22 marketing efforts surrounding that instant game 23 MR. BOWERSOCK: Good morning, 24 Commissioners. For the record, my name is Dale 25 Bowersock. I'm the instant product coordinator. 0014 1 At this time, I'd like to present to the 2 Commissioners a game marketing concept that I believe 3 might interest you. Getting to a game in this 4 presentation is one of our core games, it's called 5 Break the Bank. As it mentions here, this game was 6 introduced on December 6th, 1995 as game number 60. 7 Since then we've releases a total of 14 game with this 8 brand name. With each release, we maintain the same 9 ticket design, but we color pulse the game's background 10 colors between gold and silver to let the players know 11 that a new game is available. This strategy has 12 obviously worked well for us with sales today of over 13 $1.4 billion and sales contribution of over $500 14 million for these Break the Bank games. 15 Looking at this game, we had to ask, 16 what were the true selling features that set this game 17 apart from the others? Well, when we launched this 18 game, the playing grid was truly unique. Most of the 19 other games all had the typical square number or symbol 20 match play grids, and even though this is a number 21 match style game, the design was original and stood out 22 next to the other games available at the retailers. 23 Also, the $30,000 top prize is an exciting prize for a 24 $2 ticket even today. Usually this is only surpassed 25 by an annuity style game such as Weekly Grand. 0015 1 The staff believes that this brand has 2 built a lot of equity, so our next question was quite 3 simple: How do we further capitalize on the success of 4 this brand? Well, the first step was to test a $5 5 version, Bonus Break the Bank, this game was so 6 successful that within its first four weeks, our 7 warehouse was totally out of inventory. Of course, the 8 selling features being the Break the Bank brand 9 recognition, the use of the familiar and popular 10 tumbler style play grid, and the fact that the extended 11 play -- that we extended the play action for this game 12 by adding a second tumbler. We also increased the top 13 prize to an exciting $75,000. We do have another game 14 with the Bonus Break the Bank name being produced at 15 this time and we look forward to its relaunch on 16 June 15th. The sales figures shown here are as of 17 April 30th and, as you see, for this one game, sales to 18 date are over $26.6 million and sales contributions is 19 over $8.5 million. 20 And now to our next step in the 21 marketing strategy for Break the Bank, Junior Break the 22 Bank. This $1 version of the game concept offers many 23 of the same features that the players expect from a 24 Break the Bank game. We kept the tumbler play grid but 25 we gave it a junior look and feel by changing the 0016 1 concept of our version from a safe to a padlock, and it 2 also has an attractive prize for a $1 ticket of $2,000. 3 We anticipate this game will be as successful as its $2 4 and $5 versions and we plan to also color pulse this 5 game between gold and silver background colors with 6 each future release of Junior Break the Bank games. 7 This game is scheduled to launch this coming July and 8 the staff is anxious to monitor its success. 9 And that's my presentation on our 10 feature game this month. 11 CHAIRMAN CLOWE: Thank you. 12 MR. CHALONIE: Commissioners, the color 13 pulsing that Dale referred to has been very successful 14 for us when we have a game like Break the Bank that's 15 been out that players are familiar with. It's a very 16 affective way to let the players know and the retailers 17 know that a new version of the game has arrived and is 18 for sale. 19 I have a Mega Millions update for you 20 this morning as well. These stats are from December of 21 2003 when Texas joined through the draw on Friday, 22 April 29th. In terms of Mega Million sales, we have 23 sold over $310 million and Megaply draw sales are over 24 $71 million. You see the revenue for Mega Millions is 25 over $118 million and Megaplier revenue is over 0017 1 $33 million. No change in the number of jackpot 2 winners in Texas. We're still at two. The total Texas 3 winners is over 7 million and the winners who have 4 Megaplied are over 1.7 million. Breaking it down a 5 little further, we have had 114 second-tier winners, 6 and that's currently the $175,000 prize, and 19 of 7 those 114 second-tier winners have Megaplied. 8 CHAIRMAN CLOWE: Robert, if you have the 9 information, what was the amount of the two jackpot 10 winners' individual winnings? 11 MR. CHALONIE: I believe they were both 12 $100 million jackpots. 13 MR. REAGAN: $112 and $101. 14 CHAIRMAN CLOWE: Thank you. 15 MR. CHALONIE: Commissioner Cox, you 16 had a question in a previous meeting about the 17 percentages as they -- what the relationship was 18 between the percentages for the Megaplier draw sales, 19 the winners who Megaply, and the second-tier winners 20 who Megaplied and you asked me to run those by our 21 statistician, and I want to let you know that Dr. 22 Eubank has reviewed all of the data regarding the 23 Megaplier drawings, the sales, the number of winners, 24 so he's looked at this from several different 25 perspectives and he has also considered the effects of 0018 1 other covariants, including jackpot levels, and after 2 performing this analysis, he has determined that there 3 is no statistical significance in the difference among 4 those numbers, and we can continue to look at that and 5 continue to monitor that for you and give you updates 6 periodically. 7 COMMISSIONER COX: Well, if that's a 8 worthwhile thing. If y'all think that's a worthwhile 9 thing to do, go ahead, but I was curious mainly on a 10 one-time basis because those numbers seemed so 11 different. Thank you, Robert. 12 MR. CHALONIE: You're welcome. 13 Commissioners, I have two slides that I 14 wanted to show you that I think are interesting about 15 the Mega Millions Game and draw sales for that game. 16 This chart shows the growth in draw sales from a Friday 17 drawing to a Friday drawing and what this is showing is 18 the sales increased from the Friday, April 15th drawing 19 when the jackpot was $144 million to the Friday, 20 April 22nd drawing where the jackpot was $205 million, 21 and you can see that Texas realized an 87 percent 22 increase in draw sales from one Friday to the next. 23 And we come back to this I'm going to show you a slide 24 from the previous Fridays to kind of illustrate the 25 difference. 0019 1 This is the growth in draw sales from 2 Friday, April 8th through Friday, April 15th when the 3 jackpot was growing from 102 to 144, and you see that 4 Texas' growth from one Friday to the next was 5 27 percent. So going back to this slide, I think 6 this -- what this shows us is that what we've been 7 saying about the Mega Millions Game in Texas is true, 8 in that, Texans truly see this as a triple digit 9 jackpot game, and even more so than a triple jackpot 10 game, while we see increased play once we get over that 11 $100 million mark, when we cross that barrier and get 12 up to 200 or greater, we see what I think I called last 13 month the jackpot chasers start to jump into the game 14 and we see some phenomenal increases from one week to 15 the next based on the jackpot amount, so I thought this 16 would be interesting for you to see since we had talked 17 about the perception of Mega Millions in the public's 18 mind. 19 COMMISSIONER COX: So, Robert, in that 20 slide, it was $105 million to 144? 21 MR. CHALONIE: Yes. This was going 22 from -- I'm sorry. This was going from 102 to -- 23 COMMISSIONER COX: 102 to 144. And that 24 is 27 percent. 25 MR. CHALONIE: Yes. 0020 1 COMMISSIONER COX: Nobody got all that 2 excited, but then the next slide, you go from 144 to 3 205 -- 4 MR. CHALONIE: Yes. 5 COMMISSIONER COX: -- and folks get 6 interested. 7 MR. CHALONIE: And these are Fridays to 8 Fridays, yes, very Interested once we cross that 9 $200 million mark. 10 I still have some information for you on 11 Pick Three. Lee referenced a little earlier when he 12 was going through the sales numbers by game, he talked 13 about the Pick Three game, and last month we had talked 14 about briefly our successful our Pick Three game was, 15 and I don't believe we've showed this to you 16 graphically, and so we thought it would be interesting 17 to do that for you this month. 18 Pick Three was first introduced in the 19 fall of 1993, so that's our fiscal year '94, and you 20 can see that Pick Three sales have grown every single 21 year since the game was introduced. Actually, it's the 22 only product in our entire product portfolio that has 23 seen an increase every year since its introduction, and 24 the actual sales numbers are detailed here at the 25 bottom. The last fiscal year '04, we saw $277 million 0021 1 in Pick Three sales, and you can see the Pick Three 2 sales contribution. Pick Three averages about a 3 50 percent payout. In April of 2002, that was then 4 fiscal year '02, we introduced the day draw, and so you 5 can see we believe that also helped to increase the 6 Pick Three sales products because we then had two 7 drawings per day every Monday through Saturday. 8 And last month when we talked about Pick 9 Three, the concept was, a discussion came up about a 10 Pick Four game, and I wanted to let you know that a 11 Pick Four has been on our radar screen for quite some 12 time. As early as last fall, we did some preliminary 13 research on this product via the Internet and the 14 results were positive. I will tell you that our 15 biggest concern or hesitation about the Pick Four game 16 has been the impact, or the potential impact, on the 17 Pick Three game, and since that product has been so 18 successful for us, we've kind of treaded lightly in 19 terms of doing anything to cannibalize the sales on 20 that game. Where we are right now is, we are talking 21 to our research staff and we plan to gather some more 22 detailed information via focus groups, but we would 23 like to focus on the actual Pick Three player and talk 24 to them about what could potentially happen to their 25 spending habits if we were to introduce a Pick Four 0022 1 game so that we can really try to gauge the impact that 2 a Pick Four game would have on a Pick Three game. 3 COMMISSIONER COX: Is Pick Three a daily 4 game? 5 MR. CHALONIE: Yes, sir. 6 COMMISSIONER COX: It's a daily numbers 7 game? 8 MR. CHALONIE: It's a daily numbers 9 game, and we're drawing it twice a day. 10 COMMISSIONER COX: And the Pick Four 11 would be a daily numbers game as well? 12 MR. CHALONIE: Yes, sir. 13 COMMISSIONER COX: And you would draw it 14 twice a day also? 15 MR. CHALONIE: You certainly could draw 16 twice a day. Most states do. Most states that have a 17 Pick Three and a Pick Four have moved them to two 18 drawings a day. 19 COMMISSIONER COX: Is there any 20 indication that they appeal to different folks? 21 MR. CHALONIE: I have anecdotally heard 22 that from people in the industry, that you might have a 23 different demographic that would play a Pick Four game 24 as opposed to a Pick Three game, but logically, because 25 there is -- you play the games pretty identically, I 0023 1 would want to see some more research about that before 2 pursuing that again because I am concerned about what 3 that game could do to the success of the Pick Three 4 game. 5 MR. DEVINEY: Commissioners, I'd like to 6 take you back to a question you asked previously about 7 year over year comparisons. We didn't have a slide 8 prepared as I think you'd like to see it; however, in 9 your notebook under tab four, we do have year over year 10 comparisons of sales. The first memo -- 11 COMMISSIONER COX: Sales wasn't what I 12 was talking about. 13 MR. DEVINEY: Right, but that's half of 14 it. 15 COMMISSIONER COX: I see that every 16 week. What I don't see is a sales contribution 17 demographically on a comparative basis. 18 MR. DEVINEY: We'll work on that. We 19 may -- looking backwards to a prior fiscal year, we may 20 have to extrapolate a number for a point in time. 21 COMMISSIONER COX: Yeah. They may not 22 be exactly on, but, you know, "X" number of weeks or 23 end of a month or whatever, just some general idea, are 24 we way ahead, way behind, of just about the same is all 25 I'm looking for. 0024 1 MR. BOWERSOCK: Commissioners, we are 2 currently advertising a $34 million jackpot for 3 tonight's Mega Millions drawing and we are currently 4 advertising a $59 million jackpot for tomorrow night's 5 Lotto Texas drawing. 6 And that concludes our presentation. We 7 would be happy to answer any questions that you might 8 have this morning. 9 CHAIRMAN CLOWE: Are there any 10 questions? 11 COMMISSIONER COX: One question. 12 Robert, I liked the presentation on the product. 13 MR. CHALONIE: Yes, sir. 14 COMMISSIONER COX: And I think that it's 15 good for us to get familiar with some of the individual 16 products. Do you do any product advertising with the 17 instant product? 18 MR. CHALONIE: Yes, sir, we do. 19 COMMISSIONER COX: I don't remember 20 seeing those advertisements. Maybe next time, will you 21 feature one that you've done some product advertising 22 with and let's see both? 23 MR. CHALONIE: We can certainly do that. 24 We have a campaign that we've run on the instant side 25 that DVD produced for us and it was called Scratch 0025 1 Dance, and we can show that to you next month. 2 COMMISSIONER COX: Oh, I've seen Scratch 3 Dance advertisement. 4 MR. CHALONIE: Okay. And, basically, 5 there's a part at the end of that that -- the way that 6 commercial was produced, it was produced so that we 7 could drop product in at the end of the spot, so it's 8 kind of a generic spot but it gives us the ability to 9 drop in our latest game or a game that we're really 10 putting an emphasis behind, and we can certainly do 11 that for you next month. 12 MR. REAGAN: And I've mentioned that, 13 currently, there's a flight on a daily scratch off 14 ticket that we'll bring to your attention next month 15 called Mustang Money. You can win some Mustang 16 Convertibles. I saw it this morning on K-View, so it's 17 currently in the mix, and we have had good success. 18 We've seen a lift from utilizing that Scratch Dance and 19 then plugging in a game at the end. 20 CHAIRMAN CLOWE: Very good. Thank you 21 all. 22 (AGENDA ITEM NO. 5) 23 CHAIRMAN CLOWE: Next Item Five: 24 Report, possible discussion and/or action on the 25 agency's drawings, including television coverage, 0026 1 animation, random number generation, and/or drawings 2 equipment. 3 MR. TIRLONI: Good morning again, 4 Commissioners. For the record, my name is Robert 5 Tirloni. I am the products manager for the Texas 6 Lottery. This morning item five pertains to the 7 Commission's drawings program and includes information 8 about the two different aspects of that program. 9 Chelsea McCullough, the Texas Lottery's creative 10 coordinator, will present first this morning. She has 11 some updates for you on questions that were raised last 12 month. And then after Chelsea's presentation or 13 comments, I will be back to introduce the second phase 14 of the agenda item which will provide information about 15 the Commission's Megaplier drawings. 16 MS. McCULLOUGH: Good morning, Mr. 17 Chairman, Commissioners. For the record, may name is 18 Chelsea McCullough. I'm the creative coordinator for 19 the Texas Lottery Commission. Today I'd like to 20 provide you with an undate on our progress in regards 21 to the television drawing surveys that was presented in 22 the last commission meeting. 23 As you may recall, in efforts to 24 determine the number of television stations that aired 25 the lottery live drawings, we worked with DVD and Award 0027 1 Group to survey 74 stations. Once we received the 2 results of the survey, which include a very low 3 participation rate, our next step was to re-survey 4 these stations in efforts to understand why the 5 drawings weren't being aired and what the Lottery 6 Commission could do to increase the participation 7 levels. We have recently received the results of the 8 secondary survey and we are currently reviewing the 9 information and examining the applications for the 10 Texas Lottery Commission. We look forward to sharing 11 these with you at the next commission meeting. 12 In closing, I'd like to take this 13 opportunity to address some of the concerns that were 14 posed in the last commission meeting regarding the 15 California lottery and the New Mexico Lottery's 16 practices towards buying media time to air their 17 drawings. We determined that California does not 18 purchase media space, per se, but they do guarantee a 19 station in their 12 markets a percentage of the media 20 buy in exchange for airing their drawings. In 21 addition, they provide stations the opportunity to sell 22 advertising during their big spend game show. Now, New 23 Mexico does purchase media space to air their drawings; 24 however, they only have one major market there. 25 Thank you. That concludes my 0028 1 presentation. I'll be happy to answer any questions 2 you may have. 3 CHAIRMAN CLOWE: Any there any 4 questions? Thank you very much. 5 MR. TIRLONI: Commissioners, this 6 morning we wanted to take the opportunity to present 7 you with an update on the statistical analysis of the 8 Megaplier drawing as well as provide you with 9 information about the use of automated draw machines 10 for lottery drawings and the randomness of these 11 machines. We have some guests with us this morning and 12 we're going to come up one by one, and we can have 13 questions however you see fit and we can all come up at 14 the end to try to answer any questions you may have as 15 well. 16 Dr. Eubank, the lottery's independent 17 statistical consultant, will brief you first on the 18 analysis that he has completed regarding the Megaplier 19 drawing data. Michael Fisk, from Telecom Game Factory, 20 with follow Dr. Eubank. Telecom Game Factory is the 21 vendor that provides the agency's automated draw 22 machines and the animated digital draw system. The 23 automated draw machines are used to select a Megaplier 24 number and the animated digital draw system then 25 represents that number graphically through the animated 0029 1 drawing. Mr. Fisk will be explaining for you in more 2 detail the relationship between these two systems. 3 And, lastly, Dave Ablett from Counter Concepts 4 Consulting will be providing information on the 5 randomness of automated drawing machines, and 6 Mr. Ablett is a subcontractor to Telecom Game Factory. 7 And so we're going to start with Dr. 8 Eubank. 9 CHAIRMAN CLOWE: Thank you, Robert. We 10 welcome all of you gentlemen and look forward to your 11 presentations. 12 DR. EUBANK: Good morning, 13 Commissioners. For the record, my name is Randy 14 Eubank. I'm a professor of statistics at Texas A&M 15 University. I'm here this morning to discuss some 16 analysis that I've done with Megaplier values and 17 associated data that's produced by the automated 18 drawing machines. The gist of this you've got in a 19 report that I -- I think it's a letter that's dated 20 March 21. It was in the packet that you had. This 21 concerned drawings from the very beginning of Mega 22 Millions in Texas, so the very first Megaplier drawing 23 was I think December 5th through February 25th, and 24 since then, I have updated that analysis to include the 25 last two months, so it now includes both March and 0030 1 April, so initially there was 129 draws that went from 2 December 5th, 2003 through February 25th, and now the 3 analysis concerns 147 draws. It goes all the way from 4 the December 5th start date through April 29th. 5 The plan here is to talk a little bit 6 about the analysis that I've conducted and then to talk 7 about some of the conclusions that I've reached. If 8 you have questions at any point in time, I'd welcome 9 you to stop me. I'm a college professor, so I don't 10 feel good unless I get stopped at least one or twice 11 just for a break so you can sort of catch up with all 12 the numbers I'm going to throw at you. 13 All right. To make this sort of make 14 sense here, probably the starting point here is to at 15 least talk a little bit about the data that I've 16 actually gotten, the data that's produced by the ADM's, 17 and tell you a little bit about that, and then I'll 18 talk about the things that I do differently. Now, for 19 any given draw, the ADM produces a lot of different 20 numbers. First of all, the things that are probably 21 the most immediate are the actual Megaplier values 22 drawn, either two, three, or four, which are supposedly 23 ideally being drawn with a probability of two over 21 24 for two, seven over 21 for three, and 12 over 21 for 25 four. Now, to get these two, three, and four values, 0031 1 the way this is accomplished is the machine generates a 2 number between one and 21 all of equal probability, one 3 over 21 for one, two, and so on, and then if one to 12 4 occurs, that corresponds to the Megaplier four. If 13 5 through 19 occurs, that's a Megaplier for three, and so 6 on, so that's the way the actual Megaplier values are 7 determined. So both of these numbers are generated by 8 the ADM, but before any of that happens, there's a lot 9 of internal tests that are conducted, and in 10 particular, there are 250 pretests that are conducted, 11 and these pretests are done the following way: 12 2100 numbers between one and 21 are 13 generated by the machine and that process is repeated 14 250 times. Now, for these 2100 numbers between one and 15 21, the observed frequencies of one, two, three all the 16 way to 21 are compared to the expected frequency. 2100 17 numbers all with equal probability between one and 21, 18 we would expect to see about 100 numbers of one, 102, 19 103 and so on, so the observed frequencies that one 20 two, three, all the way to 21 come up are compared to 21 the expected frequency, which would be 100. 22 Now, the way this comparison is 23 conducted is using something called a Chi square 24 statistic. A Chi square statistic is a number that 25 compares the observed and expected frequency. It's 0032 1 non-negative, or positive, and it gets bigger if the 2 observed frequencies depart -- as the observed 3 frequencies depart more and more from the expected 4 frequencies, so these large values of this Chi square 5 statistic indicate that something may not be correct. 6 Now, this statistic behaves in a way that is well 7 understood and it, not surprisingly, follows something 8 called a Chi square distribution, and the Chi square 9 is -- it's a particular type of Chi square 10 distribution. Chi square distributions have sort of an 11 index number that goes along with them, and so this 12 thing follows a Chi Square distribution with 20 degrees 13 frequent, and because we know this distribution, we can 14 compare the values that we get from these pretests to 15 known values of the tabulated distribution and see 16 whether or not they're too big or too small. 17 And so because these things follow the 18 Chi square distribution, it's possible to actually test 19 whether or not they're behaving like they should and 20 the ADM does that and it does this using yet another 21 chi square. You're going to hear Chi square again and 22 again and again over the next few minutes, but it does 23 this using yet another chi square statistic and it 24 takes the chi square values that come out of the 25 pretest and breaks them up in -- and breaks the 0033 1 range -- the line from zero to infinity into 2 subintervals, ten subintervals, and then calculates 3 frequencies in those intervals. To make a long story 4 short, it gives you another chi square statistic with 5 this time nine, so there's internal checks that are 6 done, and then the -- that's some of the information. 7 The last two bits here, which are -- 8 they're important as well, is the actual random number 9 generator that was used and there's three 10 possibilities, Elkins Kiss, MT, and the ADM. Now, 11 that's the information that's provided on any given 12 draw, so all of that information is provided in -- it's 13 provided on every given draw and then there's 147 draws 14 up to the end, so that's the data that I have. Now, 15 you can break this down a lot of different ways. I'm 16 going to work my way sort of probably from the least 17 interesting thing possibly to the Commission to the 18 most interesting thing, so I'm going to start off with 19 the pretest. 20 Now, the pretest in some ways, they're 21 the least visible aspect of this, but there's a 22 tremendous amount of information that's in these 23 things, and in some sense, as a statistician, to me 24 they're the most interesting part of the data that's 25 produced by the ADM because it provides a lot of 0034 1 information about how the ADM actually works, so if you 2 take 250 pretests times 147 draws, you get 36,750 3 pretests. Now, as a statistician, you cannot be more 4 excited with 36,750 Chi squares that are sitting right 5 there in your lap, so that's the total amount of data. 6 You know, it's wonderful that there's all different 7 types of folks in the world. I feel luck to find 8 something that exciting, but it's truly exciting for 9 me. And so you get all these numbers and they provide 10 such a wealth of information about the way the ADM is 11 behaving. Now, if everything is working right, these 12 36,750 data values should behave like values that have 13 been drawn from Chi square distribution with 23 14 frequency. That's the way they should behave 15 Now, there's all sorts of ways of 16 subsetting this, and I look at this in all different 17 directions, so if you think about this, this is the 18 totality of all the information that you've got, but 19 this came from a lot of different sources. It came 20 from the ADMA, it came from the ADMD, it came from the 21 Elkins, the Kiss, the MT random number generator, and 22 so on, so you can break this down a lot of different 23 ways, so it makes sense, for example, to take out the 24 10,500 pretest Chi squares that came from the Elkins 25 random number generator and look at those alone and see 0035 1 specifically if the Elkins random number generator is 2 behaving as it should, so I subset this a lot of 3 different ways and look at it in a variety of different 4 directions. 5 There's lots of ways to do this. The 6 ADM does this itself using these -- you take the 7 pretest Chi squares and there's another Chi square, but 8 there's lots of other ways that people do this, and 9 this is an example -- these Chi squares are examples of 10 something called continuous -- they're realizations of 11 continuous random variables, and for continuous random 12 variables, there are some established tests that people 13 use, and three of the industry standards here are the 14 Primera DC, the Anderson Darling, and the Kolmogorov 15 Smirnov and Smirnov test. Anybody that drinks a lot is 16 going to know that Smirnov is not a current name. I 17 don't know anybody named Smirnov now, so you know that 18 this has been around for at least a while, and these 19 sort of go back into the '40's and so on, so these are 20 well understood, well documented tabulated -- with 21 distributions of a tabulated testing. 22 So looking at these and applying these 23 to the pretest data and all the different sort of 24 directions that I talked about, I found nothing of 25 statistical significance at the five percent level, no 0036 1 indication that the Chi square 20 model, which is a 2 function of this uniform probability being assigned to 3 the numbers one through 21, which, in turn, reflects on 4 the two over 21, seven over 21, 12 over 21 probability 5 for Megaplier values, I found no indication that that 6 model was not correct. Now, there's two things to say 7 here. What about five percent, what is the level of 8 significance? Five percent is industry standard, and 9 in a court of law, this would be the numbers that come 10 up. The level of significance is by chance of being 11 wrong in making the decision that I made. It's very 12 roughly like the reasonable doubt in a trial by jury, 13 so it's -- the model that's kept on file here and my 14 reasonable doubt is the chance of saying I'm wrong and 15 that it's not really what it really is, so that's my -- 16 that's the -- and this is sort of the standard way that 17 people need to establish. There's actually -- this is 18 quite impressive in a certain sense in that there are a 19 total of about 18 tests is being done at the five 20 percent level but not all tests are covered at the five 21 percent level. In fact, it's something substantially 22 higher than that, and that means when I say aggressive, 23 it's looking -- I say -- we would pick up things that 24 would be false positives here. We would have a very -- 25 something higher than a five percent chance of picking 0037 1 up something with a false positive or thinking 2 something is wrong and they're really isn't, so five 3 percent in some sense is probably too big a number and 4 we should have something -- you could use something 5 smaller and you would have an even less chance of 6 picking something up, so I'm saying that, if there's 7 something here then I think we would have found it. 8 Now, the other thing that I did, I also 9 did something called a QQ plot, and I'll show that to 10 you real quick. I'm proud of the graphics that I was 11 to do here. I've never used PowerPoint before, so I'm 12 very impressed with my ability to paste a figure in 13 after about four tries. Now, this is a plot of 14 percentiles versus percentiles here, so these are the 15 sample percentiles and these are the true percentiles 16 that would be followed if the model is really correct. 17 You see that you get some wiggles up in here. Now, 18 this is the 99.7 percentile, so this is way out for 19 distribution. This is where you usually see some -- 20 other percentiles are very variable, and so this is not 21 at all surprising, and if you actually generated data 22 from a Chi square of 20, you could see something very 23 much like this, and, in fact, I've done this multiple 24 times, and you'll see stuff that has wiggles out in 25 here, so the punch line behind all this is that I don't 0038 1 see anything of statistical significance in the pretest 2 data that indicates anything untoward about the 3 performance of the ADM. 4 Now, there's other information, as I 5 said, that comes out of this, all the random number 6 generators that are selected, the ADM's and so on, so 7 let me talk about that data for just a minute. Let me 8 just say something about -- and you see that I found 9 what Word Art was here. This sort of made me think 10 Star Wars or something like that. This is sort of the 11 high point of the presentation, by the way. If you 12 look at this -- if you look at -- for example, I did 13 this with the ADM and the random number generators that 14 are used, and really didn't talk about the random 15 number generators because it's the same story either 16 way, so we've got Elkins, Kiss, and MT, and I want to 17 test a hypothesis that these three random number 18 generators are being selected with equal probability of 19 one third, and so the P-value -- I did a Chi square 20 test for that, and the P-values is 45 percent, so that 21 begs the question of, what is a P-value? 22 Well, this is a term that's come up 23 recently and so let me talk about it for just a second. 24 And there's a couple of caveats here. The first is 25 that, in this situation, you really want to look at 0039 1 both tales of the distribution, so very small values of 2 Chi squares -- I'll talk about this more in just a 3 second, but very small values of Chi square in some 4 ways are just as important as very large values of chi 5 square. And I said a Chi square being large indicates 6 that the model isn't really fitting, that there's some 7 deviation from the expected proportions, but very small 8 values are also a problem, and I'll talk about that 9 again, as I said, in just a second. 10 So, in the case of looking at both 11 tales, P-values are pretty well understood in a case 12 where you have a symmetric distribution that you're 13 working with, but the Chi square distribution is not, 14 so there's some issue about what a P-value actually 15 would be here, and some statisticians will probably 16 argue with you about writing something down. It's okay 17 to talk about this as long as you sort of know what 18 you're talking about and use it in a proper way. And 19 so in terms of the way that this particular phrase 20 P-value has been used, what it means is the chance of 21 seeing a value from the chi square distribution. The 22 chance of drawing a random value from the chi square 23 distribution that's a big -- or bigger than the one 24 that you actually produced from the data, so that's 25 what P-value means, so it's looking for something 0040 1 that's extreme in a certain sense. 2 Now, if I go back here to this P-value 3 of 45 percent, that says that -- the Chi square value 4 that came up here was like .55. In the Chi square 5 distribution, there's three categories, Elkins, Kiss, 6 and MT, so you compare this value of .55 to something 7 from a Chi square distribution and you ask, what's the 8 probability of getting a larger variable than .55, and 9 the answer is 45 percent. So what does that mean? 10 Well, what are we looking for in terms of P-values? 11 Well, P-values are percentages. They fall between zero 12 and 100. 100 means that the probability of seeing 13 something large -- how do I say this? Zero means the 14 probability of seeing something larger than this is 15 zero, and so that means that you've seen something very 16 unusual. A value very close to zero means that you're 17 seeing something very unusual, so five percent -- one 18 percent means that you're way out in the tail of this 19 distribution, you're seeing something initial. 20 Similarly, 100 percent is unusual as well because now 21 you're in the lower tail, so the value is smaller. 22 Whether it's five percent or four percent or three 23 percent it also indicates that something strange is 24 going on. And so if we go back here, the numbers that 25 these things would usually be compared to would be five 0041 1 percent, 95 percent, or two and a half percent, 97 and 2 a half percent, and you see that both of these numbers 3 we're testing with the ADM, they're coming up with 4 equal frequency and RMG's are coming up with equal 5 frequency or sort of right in the pocket, a long ways 6 away from either one of the two extremes, five percent 7 and 95 percent. 8 All right. Now to sort of the whole 9 point of -- it's taken a while to get here, but here's 10 the bottom line. This has to do with the -- recently, 11 there's been some discussion about the P-value for the 12 actual Megaplier draws, and I think this was a meeting 13 in March, and so at the March meeting, I think the 14 P-value was around 8 percent and there was some 15 discussion about that. Well, since then, there have 16 been an additional 18 draws or something like that, and 17 now the P-value for the hypothesis that the numbers 18 two, three, and four are being slated with a 19 probability of two over 21, seven over 21, and 12 over 20 21 is around 22 percent, which is, again, a long ways 21 away from these extremes of five percent or 95 percent. 22 So this says that there's no indication here that -- 23 there's no statistical significance in terms of any 24 indication of departure from this idealized model of 25 two over 21, seven over 21, or 12 over 21, so as far as 0042 1 I can tell statistically, there's no occasion in the 2 data that things aren't being drawn exactly as they 3 should be. 4 Now, to conclude this, let me just 5 discuss very briefly sort of how I think P-values 6 should behave, and this -- what I've list -- what I've 7 shown you here is the P-values which are being tracked 8 as a function of a draw number, so we started about 9 draw 55 with a Chi square statistic that all this is 10 based on that sort of begins to be meaningful, and you 11 can see here, as draws go along, we've got these 12 P-values which are sort of going down, they move 13 around, they go down, they go up. This is an example 14 of something called a sarcastic process and there is 15 dependence here. This fellow right here departs from 16 this fellow right here by one draw, one Megaplier value 17 and so on, so you see that these things sort of move 18 around. 19 Now, what I've drawn down here, this is 20 the five percent line, this indicates something that's 21 unusual in the sense that you only see this sort of 22 thing five percent of the time when the model is 23 correct. This is the 95 percent line up here, which 24 indicates this is the place that you will, again, only 25 see about five percent of the time if the model is 0043 1 correct. What I expect to see if everything is working 2 correctly is that this thing mosies around between here 3 and here. It's okay in a certain sense if it goes 4 below here every once in a while because those sort of 5 things can happen, but it shouldn't stay in either one 6 of these, and, in fact, you can show that if there is 7 something wrong with the way this model is working, so 8 if it's two over 21, 12 over 21, seven over 21, if 9 those probabilities are correct, then it's going to go 10 down in here and it's going to stay, and, in fact, it 11 will flatten out at zero at some point. 12 Now, what happens over here? Well, this 13 is a case where things become predictable, and I don't 14 know if this is a very good example, so let me give 15 this to you: Let's suppose that we said that this has 16 a value of 100 with a chi square statistic of zero, so 17 let's suppose that I told you that the probabilities 18 two over 21, seven over 21, and 12 over 21 had to be 19 met exactly. Now, draws -- 20 draws have occurred, 12 20 of them were fours, seven of them were threes, one of 21 them was a two and the probability had to be met 22 exactly, the next draw has to be a two. Right? So 23 that means it's predictable, so if I knew that, then I 24 would be able to tell you exactly what Megaplier was 25 going to come up and that wouldn't help me at all that 0044 1 I would be able to tell you that. So, 100 percent is 2 just as much of a no-no. It means that the random 3 number generator is behaving -- is conforming too 4 much -- is behaving too slatishly and it becomes 5 predictable, so each one of these two extremes are just 6 as bad as the other. 7 So, to summarize, I've looked at this 8 data from pretty much every perspective that I can 9 think of and I've seen nothing of any statistical 10 significance that would indicate to me that the ADM is 11 not behaving exactly as it's supposed to. Questions? 12 CHAIRMAN CLOWE: Doctor, I was excited 13 when you were excited and I was pleased when you were 14 pleased with your P-values and I think your summary 15 really said it all. I'm going to defer to my colleague 16 for questions of a more specific nature. 17 COMMISSIONER COX: The only question I 18 have, Mr. Chairman: Dr. Eubank, what I heard you say 19 is that 22 percent is okay and that the eight percent 20 that Professor Bashan told us about a couple of months 21 ago is okay also? 22 DR. EUBANK: Sure. Absolutely. 23 CHAIRMAN CLOWE: You want to take a 24 crack at it? 25 COMMISSIONER OLVERA: I'm full of 0045 1 values. 2 DR. EUBANK: Well, everybody stayed 3 awake. I was very impressed. My class at A&M wouldn't 4 have done that well. 5 CHAIRMAN CLOWE: Before you leave, 6 you're presentation borders on overwhelming, but I 7 think it's important for us to listen to you and for 8 you to have done the analysis that you did because we 9 want to feel confident, and I think you've given us 10 that confidence, that our system is operating properly, 11 and this sort of evaluation in an ongoing way is very 12 important to this Commission and this agency, and 13 although I don't think -- I certainly am not capable of 14 understanding everything you've told me, it does give 15 us a feel that we're on the right track, we're doing 16 the right thing, and that our staff is performing as 17 they should to the benefit of the people of Texas, and 18 we thank you for this and we want to continue to call 19 on you to help us verify that we're doing the right 20 thing in the right way. 21 DR. EUBANK: Thank you very much. 22 MR. REAGAN: Mr. Chairman, I'd like to 23 make a comment if I may. This topic has come up in 24 numerous settings, from the media as well as from 25 legislative members who have had questions in reference 0046 1 to using the random number generator, specifically the 2 Megaplier, and I have been put in a position of having 3 to defend our decision to get into the random number 4 generator setting and I want to reassure each of you as 5 commissioners and I want to reassure the public, as you 6 have done, that this is something that we are looking 7 at in a very serious manner. The integrity and the 8 security of our drawings is of utmost importance, and I 9 have reassured legislators of that. Dr. Eubanks has 10 reassured all of us, myself included, about that today 11 with his presentation, and I just want to go on record 12 that this is something we're going to continue to 13 monitor and that we will bring any out of the ordinary 14 to your attention immediately. Robert has taken this 15 on as a task as well and I know members of our drawing 16 team are here today, so I want to just reassure the 17 entire process, being all those in the forum, that the 18 presentation today was extremely important to the 19 agency as a whole and will be something we'll being 20 falling back on when questions come forward. Because 21 some of the remarks and misinformation that's been out 22 there has been highly inflammatory and unacceptable 23 from my perspective, in that, there was accusations 24 made that we were creating an environment here that I 25 think questioned our integrity, and so I want to thank 0047 1 you for your words today and I want to thank you for 2 bringing this item up today on the agenda. 3 CHAIRMAN CLOWE: Very good. Robert, 4 let's take a five-minute break before we begin the next 5 presentation, please. 6 (A short break was taken.) 7 CHAIRMAN CLOWE: Robert, we'll continue 8 on with your presentation. 9 MR. TIRLONI: Commissioners, Michael 10 Fisk from Telecom Game Factory is next. I'll turn it 11 over to Michael and let him give you a briefing on the 12 automated draw machines. 13 CHAIRMAN CLOWE: And will you identify 14 the relationship we have with your company, please, 15 sir? 16 MR. FISK: Good morning, Commissioners 17 and Chairman. For the record, my name is Michael Fisk, 18 managing director of Telecom Game Factory. We were 19 awarded the contract to develop the digital drawing 20 system, which includes the ADM and the broadcast system 21 which takes the numbers drawn and makes it into a 22 graphic animated representation. We are still under 23 contract on a maintenance agreement that this is 24 delivered and has been in production for a year now. 25 Well, actually, longer than that, because Mega Millions 0048 1 began in Texas in December of 2003, so it's actually 2 been over 18 months. 3 CHAIRMAN CLOWE: And where is your 4 company headquartered? 5 MR. FISK: My company is headquartered 6 in Atlanta, George. 7 CHAIRMAN CLOWE: Thank you. 8 MR. FISK: As I said, our system is two 9 complete systems, and we've done that to isolate the 10 number drawing. Essentially, we don't need an ADM. We 11 could animate and make the broadcast entertaining with 12 a mechanical pull machine. We chose and recommend 13 ADM's because of the cost savings. In D.C. alone they 14 save over $1 million a year by doing they're drawings 15 using an ADM and our system. In addition, what we can 16 provide is double verification of the numbers list 17 format. When the ADM numbers are drawn, the auditor 18 and the draw personnel get to verify the numbers, 19 verify the broadcast before it goes out, so there's -- 20 in implementing the system, we've implemented a method 21 that ensures that less mistakes are made and also that 22 there's an audible and trackable format. As I said 23 before, the digital drawing system, what it's called 24 here the ADDS, it's really just an entertaining box. 25 It takes the numbers, it creates it in 3-D, it renders 0049 1 up any type of animation to represent it, and then it 2 produces a broadcast signal. 3 When we started with the contract, we 4 defined specific requirements that we wanted out of the 5 ADM, and Dave Ablett will go into more detail, but we 6 implemented the ADM to make sure that it produces as 7 random, as fair, as unbiased, as unpredictable as the 8 ball machines themselves. In addition to that, we 9 worked with and we defined a major requirement of the 10 ADM, that it's completely certifiable, not just in the 11 fairness of the draws, but also, as Dr. Eubank said, 12 that we can test it and it can be certified by an 13 independent agent that it does produce fair draws and 14 does not produce any patterns. Another requirement was 15 that it be highly secure in the manner that, if there's 16 any tampering that this can be detected and prevent as 17 much as possible people gaining access to that that are 18 not authorized. What we also require is that the data 19 be available -- as Dr. Eubank said, he loves the data 20 that this machine gives -- so that we can do and the 21 lotteries can do offline and third-party statistical 22 analysis. And the last, and I consider one of the most 23 important, is, we require this machine to be extremely 24 reliable. The animation system, like I said, is 25 entertainment. What is important is that the draws 0050 1 occur when they're supposed to and that there's no 2 failures. 3 The certification process that we 4 recommended, but the Texas Lottery, basically, was in 5 charge of it, because we don't do the certification. 6 We recommend that an independent third party under 7 contract with the Texas Lottery do the certification. 8 With this system, we provide all the source codes, when 9 I say that, even the operating systems, the low level 10 drivers, so that the auditing agent actually reviews 11 them to make sure that this code, there's nothing 12 that's been tampered with. So there's no windows 13 operating system. This is just -- everything is -- it 14 becomes a true machine. As what was talked about 15 earlier, there's multiple algorithms that are 16 implemented. And then the system itself, when they go 17 through the certification, they also verify that the 18 system has the ability to detect tampering and produce 19 double checking, in some cases five checks, to verify 20 that the system has retained its security. What they 21 also do is, when they verify the source code, we don't 22 put that on a hard disk. We literally burn it into an 23 E prompt chip, and a certification agency is there to 24 verify that that occurs, so if there's any changes 25 required or a change in the matrix, we go through that 0051 1 again and we burn in a chip and they're there when we 2 put the chip in there, and then the certification 3 agency delivers it directly to the lottery secured and 4 maintained. So after that, once we deliver it to the 5 certifiers, we don't touch it. It's lottery property. 6 COMMISSIONER COX: Mr. Chairman. 7 CHAIRMAN CLOWE: Sir. 8 COMMISSIONER COX: Couple of questions 9 back on that slide. Tell me a little more about the 10 multiple algorithms. 11 MR. FISK: Those are the three 12 algorithms that Dr. Eubanks talked about to test the MT 13 and the -- 14 COMMISSIONER COX: Why three? Why not 15 just the best of the three? 16 MR. FISK: I think Dave Ablett will be 17 able to explain that more. He's our subcontractor, but 18 in going with three algorithms, it provides -- again, 19 we randomly pick the algorithm, so if somebody did get 20 in and modify it, they would have to modify each of the 21 three different algorithms. Also, each algorithm tends 22 to have its own, if you will, way, as Dr. Eubanks said, 23 jumping around that potential grid, so by implementing 24 three, we sort of cover more of the universe of the 25 possible numbers. 0052 1 COMMISSIONER COX: Okay. And I'm 2 assuming, Dr. Eubanks, that if one of those were not 3 acceptable, you would have told us? 4 DR. EUBANK: That is correct. 5 COMMISSIONER COX: And then the next 6 question I have. Robert, I guess this is for you: Who 7 is our auditor? Who checks this is E prompt and sees 8 if it's okay and brings it to us? 9 MR. TIRLONI: The certification was done 10 by Batel, and they are a consulting firm that does this 11 type of certification and this type of testing in the 12 lottery industry. 13 COMMISSIONER COX: And we have a 14 contract directly with them to do this testing? 15 MR. TIRLONI: We had a contract with 16 them to perform the initial certification. I don't 17 believe there's any ongoing certification since they 18 did that certification upfront when the E prompt was 19 burned and when it was delivered. 20 COMMISSIONER COX: So is there any 21 reason to have it recertified once a month or once a 22 quarter or once a year just to be sure that we're still 23 working with the same E prompt, that nobody within the 24 lottery has changed it or nobody else had access to it 25 or the like 0053 1 MR. FISK: With it being in an E prompt, 2 it literally is impossible for somebody to go in there 3 and modify it without literally pulling the board out 4 and putting the board in, so the procedure is in place, 5 as you'll see on the next slide. This machine is in a 6 locked, camera room where the only access that can be 7 made to the machine is through the perfectly secured 8 procedures. Plus, what the certification agency does 9 is, they review the source code and the process and the 10 procedures. You all do every month look at the 11 statistical ranges of the numbers that are coming up, 12 so almost think of that as like a mini certification. 13 So, in the past, we recommend that if there are any 14 changes to the machine, whether it be to add a new 15 game, whether it be to change the matrix, that it be 16 recertified and then you'll see, we also have a process 17 that if there is any failure or if the machine comes up 18 and fails the Chi square test, there's a procedure in 19 place that that machine is taken care of. 20 COMMISSIONER COX: I'm going to leave 21 that right now, but when you're up, let's talk about 22 that a little bit more. 23 MR. FISK: If y'all haven't seen it, 24 this is your ADM. The only thing in there is the ADM. 25 It's in a secured case. Everything is self-contained. 0054 1 It gets tagged out, it's secured, and it's in a video 2 room, so all access is recorded. One last thing about 3 the ADM is, it also -- it records each and every time 4 the machine is turned on. The normal procedure is 5 you -- like, it shows the number of the power up, so 6 that if somebody comes in and somehow entered the 7 machine and somehow got rid of the video camera and 8 turned the machine on, the next draw person in there 9 would see that in the log that somebody had powered 10 this thing up and wasn't authorized. 11 CHAIRMAN CLOWE: How do you turn it on? 12 MR. FISK: A lock, a key switch. It 13 doesn't even have a power switch. 14 CHAIRMAN CLOWE: So there's no pin. 15 It's a mechanical key that is inserted and turned on. 16 And how many of those keys are there? 17 MR. FISK: There's two for each 18 machine. 19 CHAIRMAN CLOWE: Who has the keys? 20 MR. FISK: The lottery are the only 21 ones. 22 CHAIRMAN CLOWE: Who has them, Robert? 23 MR. TIRLONI: I believe it's the draw 24 team. The draw team has access to all of the keys and 25 they are all secured, and the ADM itself is secured in 0055 1 the lottery's drawing studio, which has very limited 2 access. 3 CHAIRMAN CLOWE: Okay. At some point 4 during this presentation, we want a more definitive 5 answer than that, please. 6 MR. FISK: This slide shows the states 7 that are either doing ADM draws right now or moving to 8 do that. In fact, Arizona right now has just awarded 9 the contract to do ADM draws. In addition, what this 10 slide doesn't show is virtually every lottery 11 jurisdiction in North America that does Kino does it 12 with ADM's. 13 CHAIRMAN CLOWE: You couldn't do it 14 without an ADM, could you? 15 MR. FISK: It's hard. 16 CHAIRMAN CLOWE: I mean, it would be 17 like bingo? 18 MR. FISK: It would be like trying to do 19 bingo every five minutes. 20 COMMISSIONER COX: Well, let me ask you: 21 I didn't see Nevada lit up. Is Nevada still running 22 Kino games with ball sets? 23 MR. FISK: I think they're running -- 24 I'm not sure what Nevada is doing. This slide is about 25 a year old. Nevada, they haven't gone to a lottery 0056 1 yet. 2 COMMISSIONER COX: No. The regular Kino 3 game. 4 MR. FISK: The regular Kino games? 5 COMMISSIONER COX: Yeah. 6 MR. FISK: They do -- the different 7 casinos do it with either ball machines or ADM's. 8 These are just lotteries. 9 This slide talks about why we selected 10 CCC to provide our automated drawing machine. They 11 complied with all the requirements that we discussed 12 before. They -- it's used extensively in the industry. 13 It's been in use for over ten years. They delivered -- 14 they were the only ones that would deliver all the 15 source codes to make a complete certification. They 16 did very good internal automated testing. And as it 17 says, you know -- I mean, we see this as a drawing 18 machine, and those are some of the methods that the 19 system implemented. You know, it's accessed only via 20 key. They also modified the hardware, the actual 21 boards, the computer boards, to isolate the interfaces. 22 So interfaces are used. They actually went in there 23 and cut the wires, so even if somebody tries sticking a 24 USB connector or something like that on it, they're not 25 active; they've been deactivated. And then the draw 0057 1 parameters are hard coded into the machines. And what 2 I mean by that is, the draw officers don't enter in -- 3 like, the draw today is 149, they are hard coded into 4 the E prompt, so all the draw officers do is, they 5 bring it up and draw it just like you would opening up 6 the slot. 7 Let me just finish up by saying, when we 8 deliver the ADM, we actually manufacture four ADM 9 machines. Three are certified and all three are 10 delivered to the lottery. Two are kept alive, if you 11 will, active so that the draw officers pick which one 12 to use, so randomly select between A or B, randomly 13 select which outlet. If one of those falls a Chi 14 square test in the initial startup, the recommended 15 procedure is, it gets tagged out and the other machine 16 is used. If one of them is consistently showing 17 problems, the third one that the lottery owns, which is 18 locked away in a secured room, is brought out by 19 security to replace the one that is suspect, if you 20 will. That one is sent back up to our maintenance 21 facility where we have the fourth one. What we do is, 22 we take the fourth one, send it to the certification 23 agency, they certify it and it get put back in as the 24 replaced one, if you will, and then we do extensive 25 repair and testing on that one that's suspect, so 0058 1 there's always three that the lottery jurisdictions can 2 look at to make sure that this thing is secure, that we 3 don't have access to, where normally it's just security 4 officers that have access to that. 5 COMMISSIONER COX: Robert, what do we 6 pay for all of that? 7 MR. TIRLONI: All the automated 8 drawing -- 9 COMMISSIONER COX: Yeah, all these 10 machines and services and the like. 11 MR. TIRLONI: I don't know the exact 12 number, but I'll look at it for you. 13 MR. FISK: For the ADM portion including 14 the machines and the maintenance of that, the price 15 tag -- I think y'all negotiated us down -- 16 COMMISSIONER COX: I hope so. 17 MR. FISK: -- the price tag is normally 18 $60,000. 19 COMMISSIONER COX: Per machine? 20 MR. FISK: No. For all the machines and 21 the whole process supporting them, I mean, from the 22 procedures, the training, the installation. I think it 23 was negotiated down by Mr. Fernandez to like $40,000 or 24 $45,000. 25 COMMISSIONER COX: Dr. Eubank, does it 0059 1 seem like we're paying enough for a good system. 2 CHAIRMAN CLOWE: I'd like you to give 3 that response on the mic if you would, Dr. Eubanks. We 4 need to have your comment on the record. 5 DR. EUBANK: I can't say. I really 6 don't know what these things cost. 7 COMMISSIONER COX: Do we have anything, 8 Robert, to compare that to? Is this a Rolls Royce? Is 9 this a Cadillac? Is this a Kia? What do we got here? 10 CHAIRMAN CLOWE: Well, I would think 11 maybe you might want to put Toyota in there. 12 COMMISSIONER COX: Or is it a Toyota? 13 MR. FISK: This is a Hum-V. This is 14 rugged. This is built the best in the industry. 15 COMMISSIONER COX: And reliable. 16 COMMISSIONER OLVERA: Has one of the 17 machines ever malfunctioned? 18 MR. FISK: In seven years with these in 19 place running 365 days, we've never had one 20 malfunction. 21 COMMISSIONER COX: Do you have 22 competitors. 23 MR. FISK: We do now. There are two 24 other competitors out there. Both of them are less 25 expensive, but we feel that there's -- I mean, we just 0060 1 subcontract, so every time I look for a bid, I look at 2 all the different products that are out there. In 3 fact, we have our own random number generator that we 4 use for a horse racing game. We picked CCC over and 5 above our own and the other two competitors because we 6 feel that for a daily draw in the lottery, this is 7 really the most -- the best one to buy. The other two 8 are cheaper. Some of the differences, they have 9 operating systems, they're regular computers so they 10 run Windows XP. They're regular computers so they're 11 not sort of isolated for the security, and they may be 12 as random, but we really feel that we don't want a 13 random number generator in a computer; we want an 14 automated drawing machine, and this is the best 15 product. 16 COMMISSIONER COX: I think having your 17 own operating system that you can test and leaving 18 Windows, which is a wild card, out of the game sounds 19 to me to be a very good step. 20 MR. FISK: I mean, it's hard. It's hard 21 for Dave to be able to program in this system that has 22 limited capabilities, but every certification agent, 23 they just -- you know, the letters we can get from them 24 is just so much stronger because they are able to look 25 at every single lottery system and nobody else brings 0061 1 the E prompt, this is the only one. 2 CHAIRMAN CLOWE: To this point, for 3 clarification, we're talking about Mega Millions only? 4 MR. TIRLONI: The Megaplier game, which 5 is the ad on game to Mega Millions, correct. 6 CHAIRMAN CLOWE: In my mind, we are 7 using a random number generator for Quick Pick for 8 Lotto Texas. 9 MR. TIRLONI: Actually, for all the 10 online games. There's Quick Pick functionality, yes, 11 sir. 12 CHAIRMAN CLOWE: And you haven't 13 discussed that with us at all. This has all been about 14 the multiplier for Mega Millions? 15 MR. TIRLONI: That's correct. 16 CHAIRMAN CLOWE: So, at some point in 17 time, I think we would like to hear about how that is 18 being conducted and get the same assurances relative to 19 concerns that you've answered here in regard to that. 20 And I assume that's under the vendor contract and G 21 Tech is responsible for that? 22 MR. TIRLONI: That would be correct. 23 And I can tell you, some years back, Dr. Eubanks helped 24 us out by looking at Quick Pick data from the Lotto 25 Texas Game itself, and we can certainly have him 0062 1 refresh that data and we can provide information to you 2 at a future meeting. 3 CHAIRMAN CLOWE: I would like that. And 4 I'd also like to come back to a point that we made here 5 in the past and re-make it. We've been using a random 6 number generator since 1992 in the Quick Pick. 7 MR. TIRLONI: That's correct. 8 CHAIRMAN CLOWE: And this, in that 9 sense, is not knew at all. It's new now in my mind 10 because we have the Megaplier feature of Mega Millions 11 and the subject has been raised about automated 12 drawings and not having the balls drop, and so I think 13 we need to know the history about all this and rely on 14 what really is the complete picture of the Texas 15 Lottery. It's always nice to hear what the other 16 lotteries are doing, but we've been using a random 17 number generator since 1992, the way I see it. 18 MR. TIRLONI: That's correct. Actually, 19 Quick Pick on -- when Lotto first started in November 20 of '92, there was no Quick Pick functionality. That 21 was implemented in 1993, but from that point forward, 22 there was that functionality, and on every online game 23 introduced since that point has always been introduced 24 with the option for the player to select numbers via 25 Quick Pick, so everything you said about RMG's and 0063 1 random number generators is correct. 2 MR. GRIEF: Mr. Chairman. 3 CHAIRMAN CLOWE: Yes. 4 MR. GRIEF: Going back to the Quick Pick 5 feature, we have heard commissioners ask about that 6 feature and wanting to get more information about that, 7 and we are currently working with G-Tech to do a 8 complete study of the feature, and we'll come forward 9 in a future Commission meeting with a full and complete 10 presentation on that similar to what we've seen today 11 and we'll be asking Dr. Eubanks to participate in that 12 as well. 13 CHAIRMAN CLOWE: Good. 14 MR. TIRLONI: Commissioners, I think 15 Mr. Fisk wants to talk about Telecom's relationship 16 with Counter Concepts, which is Mr. Ablett's company, 17 and then Mr. Ablett is going to come forward and share 18 some information on the randomness of the automated 19 draw machines. 20 CHAIRMAN CLOWE: Okay. Before he does 21 that, I have another question. I think you made a 22 comment about $1 million a year savings outside of your 23 presentation? 24 MR. FISK: That's correct. 25 CHAIRMAN CLOWE: Was that Washington 0064 1 State? 2 MR. FISK: No. That was Washington, 3 D.C. 4 CHAIRMAN CLOWE: Washington, D.C. 5 There's a psychological issue here in my mind relative 6 to what you do and what we do today in watching the 7 balls drop. From your personal experience, do you have 8 a comment in that regard? 9 MR. FISK: The Delaware Lottery has been 10 doing animated drawings for eight years now. I believe 11 the last games they converted over was their Pick 12 Three, Pick Four Game. The director at the lottery 13 felt that it wasn't -- that it was pretty acceptable, 14 only on animated games, let's not spend a lot of money 15 and let's just do it with a regular broadcast. We did. 16 He had for Delaware a lot of calls, about 100 people. 17 We turned around and we created an animated 18 representation of the ball drops and he had about 200 19 calls thanking him for giving a better representation 20 of the game. 21 I believe that the lotteries are 22 believed to be secure and deliver a fair drawing. What 23 we try to do with our game in our representation is to 24 make the draw more entertaining, so instead of players 25 just looking to win money, we hope that what our draw 0065 1 does, our animation does, is bring them back to 2 watching the draws and giving them some entertainment 3 for watching the draws, and we've found that that is 4 the case, that where viewership is sliding down in just 5 about every jurisdiction, with animation and 6 entertaining animation, the viewership starts to come 7 back up. And what it means is then the TV stations 8 don't start charging the states or do the broadcast or 9 start requiring them to give marketing dollars. 10 D.C. saved $1 million because they were 11 able to do away with the talent, they were able to do 12 away with the studio time, they were able to do away 13 with all the balls machines, all the ball sets, all the 14 measuring all the way, and they still had to buy time 15 because they're in a DMA that is really covered by 16 Maryland and Virginia, but their viewership is up. 17 CHAIRMAN CLOWE: Thank you. 18 MR. GRIEF: Mr. Chairman, I'd like to 19 offer up something. I think there's a very important 20 distinction that we need to make between what Mr. Fisk 21 is talking about and what our Commission has heard 22 staff make presentations on. In our agency, we are 23 separating out animating the drawing results and then 24 using a random number generator. We're currently only 25 looking at the potential of animating the results of 0066 1 the mechanical draw machines to perhaps make those -- 2 the results presentation shorter and more appealing to 3 stations to pick them up. I think when Mr. Fisk talks 4 about animated drawings, he's referring to both the 5 random number generation and then taking those results 6 from animated, so I just think that's an important 7 distinction for us to make. 8 CHAIRMAN CLOWE: I agree with that and I 9 think it's well made to define those two functions. 10 Now, there have been some comments which I think Reagan 11 eluded to earlier, let's go back and just cover that 12 again. There hasn't been any decision made to change 13 anything we're doing at this point in time. There 14 hasn't been any equipment purchased, there hasn't been 15 any move of any kind made other than studies relative 16 to these issues which might result in apparently a 17 number of beneficial changes, which is the basis for 18 the study, to my knowledge, and that we accomplish 19 saving money for the taxpayers of the State of Texas, 20 making the drawings more secure and ensuring the 21 honesty and integrity of the games even to a higher 22 level than we have at this time, making the playing of 23 the games more attractive and interesting to those who 24 choose to be involved. Am I correct in that? 25 MR. GRIEF: And I would add to that, 0067 1 also, potentially making the presentation of the 2 drawings more attractive to television stations to pick 3 them up and carry them on the broadcast, but, yes, you 4 are correct, no decisions have been made, only 5 research. 6 MR. REAGAN: I'll confirm that as well. 7 CHAIRMAN CLOWE: Thank you. 8 MR. FISK: The Florida lottery, we're 9 negotiating a contract right now that they're going to 10 continue with their ball drops but put our animation 11 machine on the back end of the ball drops, so that's 12 why, in developing our system, our animation system is 13 completely separate from the ADM and the ball machines 14 can still be there. And in Florida's case, we're 15 actually going to film the ball machines, film feed 16 live into our machine and then animation is going to be 17 added on top of that. 18 CHAIRMAN CLOWE: I think this is a very 19 important subject and it goes, in my mind, beyond the 20 specifics and the mechanics of what we've been talking 21 about here this morning. 22 Reagan, we talked about identifying our 23 market and knowing what it is the players of Texas 24 want, and we're running a three and a half billion 25 dollar a year business here, and to me, this type of 0068 1 information and knowing where the market is heading and 2 what it wants is extremely important and I consider 3 that a big part of your responsibility and your job and 4 all of the staff as well. And the best example I know 5 of that, which is right before us and we're dealing 6 with in a tremendous market in this country today, is 7 how the price of gasoline has shot up and the now 8 apparent unattractiveness of large vehicles, including 9 Hummers, which consume high amounts of gasoline, and 10 all of a sudden, the Hybrid looks interesting and, you 11 know, even Toyota is now offering to share with 12 domestic manufacturers the technology that they've 13 developed in producing the Hybrid, and to me, that is a 14 lesson for American car makers and all the automotive 15 industry, and that's the kind of foresight and the kind 16 of thinking that I think we ought to be involved in 17 running a three and a half billion dollar business in 18 this state, so I'm very eager to see these kinds of 19 studies conducted and try to get out there where we're 20 doing exactly what is right for the market and for the 21 players of the state and not be behind, but be right 22 behind the cutting edge. We don't want to be the 23 first. These are the kinds of things that I think we 24 dealt with when we went into Mega Millions and these 25 are the kinds of issues that we dealt with when we 0069 1 changed the matrix in Lotto Texas. These are the kinds 2 of things we're dealing with in the instant tickets and 3 what their return is to the state after you figure what 4 the sales, and that's where we ought to be focussed in 5 our marketing, in our research, and this is a very real 6 part of it, in my mind. 7 MR. FISK: And I've been working with 8 Robert and we've been working with this, but I think it 9 is, it's important for a lottery jurisdiction to move 10 forward carefully even with my system, because you want 11 to ensure that what is paramount to the lottery, the 12 trust of the customer, is not ever in question, so it's 13 something that it takes us years and years and years to 14 get something in the field, and from a business point 15 of view, it's tough, but I think it's the way the 16 lottery has to go because that trust has been built up 17 over so many years and you never want to question that. 18 MR. REAGAN: And I would add to that 19 that, through this legislative session, there's been a 20 number of topics that have come up that are really 21 leaning toward technologies of the future, i.e., pay at 22 the pump, selling tickets over the Internet. There's 23 been a number of issues that we've had to address from 24 a resource perspective, and Gary made a comment in a 25 meeting with a group one time that I have used on a 0070 1 number of occasions that I feel is appropriate, that we 2 want to be on the cutting edge but not the leading 3 edge, and as we look at scenarios like this, what we're 4 talking about today goes back to, when we got into Mega 5 Millions and wanted to get in the Megaplier, we talked 6 about, this is an opportunity for us to be exposed to 7 new technology and to create an environment where we 8 were looking at other opportunities but wanted to 9 measure it in a very methodical and careful method, and 10 this has been a part of that process. 11 CHAIRMAN CLOWE: Good. 12 MR. FISK: I guess now I'd like to 13 introduce Dave, Dave Ablett, president of CCC, 14 Incorporated. He developed the first ADM in the world. 15 He was a statistics and computer scientist for British 16 Columbia Lottery. Since then, when he was with British 17 Columbia, he installed the ADM in four other locations 18 and then proceeded to develop that technology and the 19 drawing machine technology and started his on company. 20 MR. ABLETT: Good morning. For the 21 record, my name is Dave Abletts. I am, as mentioned, a 22 lottery consultant with Counter Concepts Consulting. I 23 wish to present what information I have that might be 24 useful to the Commission regarding the use of automated 25 draw machines, or, in general, computers, to conduct 0071 1 draws for winning lottery numbers. 2 COMMISSIONER OLVERA: Mr. Ablett, let me 3 interject, just for the record, is it correct to state 4 that the previous mention of the entity CCC, Inc. is 5 the entity that you represent. 6 MR. ABLETT: Yeah. I'm basically a sole 7 proprietor and that is my company. 8 I have been writing software for draw 9 machines for about 16 years. I started in 1990. I 10 have installed ADM's at over ten lotteries. They 11 currently conduct games for more than -- draws for more 12 than 40 games. The original system was built for 13 British Columbia Lottery Corporation, and after about 14 seven or eight years of doing so there, the lottery 15 decided that they had been sharing this technology too 16 much, that they were starting to become like a vendor 17 to the other lotteries, because I was basically 18 spending all my time supporting or creating new ones, 19 and so they -- BCLC decided to abandon the maintenance 20 of the technology. When they did so, several companies 21 I had already built these for asked if I would continue 22 to support them, so after discussions with BCLC, they 23 gave me the blessing to go ahead and do this, so I 24 started my own company, and BCLC is now one of my 25 primary clients, just so you know a little bit of that 0072 1 history. 2 I've also developed other games, other 3 computerized machines. I think somebody mentioned five 4 way Kino, I've developed machines that work on those 5 type of games, which are very frequent draw games, as 6 well as newer technologies which are related to the 7 multiple draw per second type of technologies. Those 8 are really new and, as you mentioned, leading edge. 9 Those are kinds of leading edge things, but if you do 10 have questions, I'd be glad to answer anything either 11 during the presentation or afterwards. I'm trying to 12 limit myself. I can talk about this for hours. I hope 13 it's not going to take up that much time. 14 CHAIRMAN CLOWE: You'll lose us if you 15 talk about it for hours, I promise. 16 MR. ABLETT: First of all, I'd like to 17 focus on what I think is a misunderstood term. A few 18 points of definition, before being able to understand 19 how a computer generates winning lottery numbers 20 fairly, it's important to understand just what it is 21 that the computer intends to do. As far as mathematics 22 is concerned, nothing real is random, and this is 23 practically by definition. While there are lots of 24 things people assume are random, the fact is, there is 25 no way to prove anything is random, be it a computer 0073 1 program or a ball machine or even the flip of a coin. 2 To be mathematically random, a coin would have to be 3 flipped an infinite number of times to generate a 4 sample and that sample would have to undergo an 5 infinite number of statistical tests and the whole 6 process would have to be repeated for an infinite 7 number of samples. Only after all of those infinities 8 have been met would you be able to say that flipping 9 the coin was random, and this is a mathematical 10 definition and it sort of flies in the face of what the 11 common understanding of the word random is, which is 12 more like haphazard or based on probability. So, when 13 someone says, well, you can't prove that these ADM's 14 are random, that's true, but you can't prove that a 15 ball machine is random either, and that I think is 16 sometimes missing in the statements about randomness. 17 So instead, there is a de facto standard 18 for what is acceptable from the perspective of the 19 lottery, and that is the ball machine. If the ball 20 machine can't be proven to be random, it is something, 21 and what we tried to do with the computerized version 22 of a ball machine is simulate what that something is. 23 CHAIRMAN CLOWE: And what would be a 24 better word? If random is not correct, what would be a 25 better word? Fair? 0074 1 MR. ABLETT: I like to use the word 2 fair. And by fair, I further define that as 3 unpredictable and unbiased. Those are the two aspects 4 of a ball machine that everybody can agree to. 5 CHAIRMAN CLOWE: Okay. 6 MR. ABLETT: So if we're trying to build 7 something that can be proven to be random, we might as 8 well stop now. It would be impossible to show on any 9 system that it is random given the strict mathematical 10 definition of the term, but since a ball machine is not 11 random and what we really want to do is to simulate a 12 ball machine with a computer, being random is not 13 really the issue. What is important is that the 14 computer version have the same characteristics of a 15 ball machine, recognizing the only characteristics that 16 need to be reproduced are that the results must be 17 unbiased and unpredictable. So long as these 18 attributes can be shown on the system regarding lottery 19 numbers, the process should be fair and acceptable. 20 Further more, this approach was accepted not only by 21 the more than ten lotteries that I've built machines 22 for, but also by certification companies such as KPMG, 23 TST, GLI, and others, Matel included. Keeping a system 24 unbiased is not actually too difficult, and, in fact, 25 it's counter intuitive in its simplest form, but I'll 0075 1 talk about that more in a moment. 2 Unpredictable is by far the hardest 3 criteria. Computers are nothing if they're not 4 predictable, so creating a computer-based environment 5 that is unpredictable requires a little thought. In 6 general, it can only be accomplished by the 7 introduction of some form of entropy. Just so I don't 8 get too far off, does everybody understand what entropy 9 is? 10 CHAIRMAN CLOWE: Oh, no. Give us a 11 definition. 12 MR. ABLETT: Well, the definition of 13 entropy is a measure of the disorder of a system. 14 Systems tend to go from a state of order, or low 15 entropy, to a state of maximum disorder, or high 16 entropy. The beauty of the word entropy as far as 17 mathematical definitions are concerned is that a system 18 can have entropy that goes from zero to infinity. It's 19 a rangeable thing; whereas, random, you either are or 20 you aren't. There is no almost random or more random 21 or less random. Those things are not mathematically 22 accurate terms. It's kind of like saying something is 23 perfect and saying, well, I'm more perfect than you 24 are. Well, that doesn't make any sense; you either are 25 perfect or you're not. The same thing with random, you 0076 1 either are random or you're not. 2 Entropy, however, is an element that 3 goes from low to high, minimum to maximum; it can 4 range. So, as we introduce entropy into something, we 5 are introducing disorder. And the difficulty with that 6 is, entropy and randomness are not the same because 7 randomness in a true random environment, you can have 8 lots of order; that's an element that can occur. I 9 don't know if you've watched draws where you get zero, 10 zero, zero or one, two, three as a result, and you say, 11 well, that appears ordered. In a random world, that 12 happens all the time. In an element where there's high 13 entropy, it doesn't necessarily hold true anymore 14 because you want disorder. So, they're two different 15 terms, but in a practical sense, the more entropy you 16 have, the more unpredictable a system is going to be. 17 Currently, the gaming industry already 18 uses computers to perform tasks that require a certain 19 degree of randomness. In some cases, the randomness is 20 not very random at all. Instant tickets and slot 21 machine chips are often designed to generate minimum 22 numbers of winners in a specific number of draws. I 23 hope you can see how that isn't really random. Also, 24 non-winners are not based upon randomness but rather 25 what is exciting to the player. Most non-winning 0077 1 results are very close to a big win even though 2 probability wise, they would not even come close to a 3 minimal win most of the time. These five minute Kino 4 games generate the winning numbers through the use of 5 special algorithms known as pseudo random number 6 generators, and I'll talk more on that in a moment. 7 And some specialty games use input from unpredictable 8 sources, such as time of day, sales levels, and network 9 traffic, et cetera. And, finally, some systems use 10 physical devices that are generated to measure the 11 output from natural phenomenon together with computers 12 to get a random value. So, in all cases, the primary 13 ingredient required to make things work is entropy. As 14 I mentioned, entropy is the measure of the disorder of 15 a system. 16 Now, entropy can be added to a system 17 through several possible means, but they generally fall 18 into three categories. Physical processes are most 19 often devices that look at a natural phenomenon that is 20 presumed to be random. These include things like 21 radioactive decay, Johnson's noise cards, lava lamps, 22 Internet traffic samples, and others. They basically 23 provide a sample from a continual process that is 24 constantly generating output. An example could be 25 looking at snow on a TV. Sampling a single picture and 0078 1 recording the color could be considered a random 2 process. Unfortunately, even these kinds of processes 3 are not absolutely random in a mathematical sense. 4 Also, they are subject to certain limitations. The 5 snow on a TV screen is updated many different pixels at 6 about 27 times per second. If a pixel is sampled twice 7 in under 127th of a second, the second result would 8 always be the same as the first. This would not be 9 random. 10 Another source of entropy, which does 11 not claim to be random at all but can introduce 12 variation into a computer process, are environmental 13 values, such as the time of day of the event or the 14 number of transactions that occurred on the system. 15 These types of input are not random, but they cannot be 16 predicted either, and if used carefully, they can be 17 used affectively to introduce entropy. 18 Finally, there is direct human 19 intervention, which is not always available, but is a 20 very good source of entropy for a computer due to the 21 ability of the computer to detect human-initiated 22 events at thousands of a second, much faster than a 23 human is able to control. In fact, there are many 24 games of chance that are dependent upon this element of 25 human control. Shuffling cards, rolling dice, spinning 0079 1 the roulette wheel or a prize wheel are all examples of 2 how gaming and human interaction can depend upon that 3 interaction being unpredictable. All machines that 4 draw lottery numbers basically depend upon two of these 5 sources, the physical process of bouncing balls around 6 in a drum and the human intervention of pressing a 7 button to draw the balls. 8 Is there any questions about what I've 9 said so far with respect to randomness? 10 CHAIRMAN CLOWE: I don't think so. 11 MR. ABLETT: The Megaplier drawings at 12 Texas lottery are currently drawn through the use of 13 draw machines. An ADM is a computerized process that 14 incorporates several features to provide a secure 15 method of conducting fair lottery draws. In every 16 critical way, an ADM tries to simulate ball machines. 17 An ADM also has many additional features that are not 18 possible for ball machines. The ADM has several 19 security features, such as password protection, 20 tamper-resistant cases, limited operating system, 21 dedicated functionality, activity monitoring, intrusion 22 protection, and others. The ADM's also reside in very 23 secure locations with security monitoring, security 24 cameras, restricted access, motion detectors, and other 25 physical security features. 0080 1 The draw process involves a selection of 2 one of the available systems as well, which is 3 basically determined by another random process. In the 4 case of Megaplier in Texas, this is a simple R & G on 5 the ADS system that basically simulates flipping a coin 6 between the two available machines. However, in many 7 cases, it is an actual coin that is tossed that 8 determines the next draw machine. If there is ever any 9 kind of failure with one machine, the alternate machine 10 is almost immediately available. Both machines get 11 used on a regular basis. There are also other machines 12 available to replace any machine that has a failure. 13 An ADM also keeps track of all activity 14 that occurs on an ADM in a log file that can be printed 15 and reviewed at any time. The standard ball machine is 16 not able to do this. The ADM also creates a draw 17 report with the results of the draw and the details of 18 the draw operator and auditor. Additional reports can 19 be printed with details of the draws that have happened 20 in the past. An ADM can also print a report of 21 statistical test results generated over a period of 22 time. This is what Dr. Eubanks used. A reviewer can 23 then analyze whether or not it's performing according 24 to expectations. 25 The ADM is very user friendly, prompting 0081 1 the user through each step of the draw. The operator 2 does not control the number of balls in the draw, but 3 does see information regarding the draw before it takes 4 place. When the Lotto draw is held, the ADM flashes 5 results on the screen at about 100 numbers per second 6 waiting for the operator to press the button. Once the 7 button is pressed, the ADM displays the next generated 8 value and the draw results are recorded internally. 9 Following the draw, the ADM sends the results to the 10 ADES where the rest of the draw preparation occurs. 11 The ADES prepares the animation sequence and it's later 12 broadcast with the winning numbers. This process 13 reduces the potential for human error. 14 Ball machines require a great deal of 15 maintenance. The balls need to be measured and weighed 16 for several properties and maintained to rather strict 17 tolerances or else they need to be replaced. Several 18 sets of balls are prepared for each machine. The ball 19 machines need to be maintained as well to ensure 20 they're operating correctly. ADM's by contrast require 21 very little care and maintenance. It's important to 22 keep user passwords fresh in all machines and the 23 peripherals because monitors and Keyboards, et cetera, 24 occasionally break down, but the advantage of an ADM is 25 that most of these parts are readily available and 0082 1 easily replaced; furthermore, they do not need to be 2 tested on a daily basis. The ADM tests itself before 3 each draw and in seconds can find obvious non-random 4 behavior if it exists. In fact the ADM initialization 5 test is equivalent to conducting over 500,000 6 individual draws from a ball machine. 7 Finally, the ADM provides three separate 8 methods of generating the winning numbers. The choice 9 of method is based on several points of our process as 10 well. Once ready to conduct the draw, the ADM runs a 11 sophisticated system test on the current method of 12 generating numbers. If there's any serious non-random 13 behavior, the ADM stops the draw process. At this 14 point, the operator either tries again on the same ADM 15 or switches to the alternate. That's based on part of 16 your procedures. I'm just not sure which one you've 17 chosen to have this procedure. Either one is fair. 18 The basic highlights of the ADM, the ADM 19 uses a very simple operating system. As was mentioned 20 before, it does not use Windows XP. Furthermore, most 21 of the functionality of that operating system is 22 removed or disabled. All it is able to do is the most 23 basic commands, such as reading and writing files. 24 After loading, the OS automatically runs the ADM 25 software. No other functions can be performed on an 0083 1 ADM under normal use. For further protection, the OS 2 and the ADM software are burned into E prompt chips. 3 These chips cannot be changed while they're inside the 4 ADM. When they are installed in the ADM, the computers 5 are closed and sealed shut. Furthermore, the actual 6 boxes around the computer are built in such a way as to 7 greatly reduce access. Only by breaking the seal or by 8 cutting through the outside of the box can someone gain 9 access to the prompts inside. 10 Perhaps the most confusing part of the 11 ADM are the pseudo random number generators, or PRNG's, 12 which are algorithms that generate what appear to be 13 random sequences of numbers. The problem is that while 14 PRNG's are often used in many forms of gaming, they are 15 not even close to random. Pseudo means fake, and that 16 is exactly what they are, they are fake RNG's. If you 17 know the algorithm being used, the seeds that are used 18 as input into the algorithm, and the details of how the 19 computer applies the formula, you can accurately 20 predict exactly what the next number in the sequence 21 will be. In fact, if this were not the case, there 22 would be some serious concerns about the computer 23 and/or the algorithm. 24 Anyone who uses a PRNG directly to 25 generate winning lottery number is playing with fire; 0084 1 yet, in many forms of gaming, games would be impossible 2 without it. Five minute Keno, for example, requires a 3 draw every five minutes. To have humans running around 4 drawing winning numbers by a ball machine at this 5 frequency would be mind boggling and it's practically 6 impossible. A typical lottery would do in one day 7 almost the same number of physical draws that it holds 8 in a year on standard games. Now consider online 9 gaming or casino game machines where hundreds or even 10 thousands of random results are required every second, 11 but even though they are fake, random number 12 generators, they do have one very useful property. 13 When used correctly, they're an unbiased source of 14 numbers. So even though they are potentially 15 predictable, they do meet at least one of the two 16 requirements of criteria of an ADM. Still, this aspect 17 needs to be confirmed, so before every draw, the ADM 18 runs it's system test just to ensure that the PRMG is 19 performing to the expected parameters. 20 Finally, the step that makes the whole 21 thing come together is the button press. Once the ADM 22 has confirmed that the PRNG is functioning correctly 23 and the draw process begins, the ADM starts generating 24 potential winning numbers as fast as it can. On the 25 Megaplier, again, this is about 100 per second, but on 0085 1 some ADM's, it may be thousands or even tens of 2 thousands per second. After each number is created, 3 the ADM checks to see if the operator has pressed the 4 button. If not, the ADM generates another number and 5 ignores the results. If the button has been pressed, 6 however, the ADM creates one more number from the PRNG 7 sequence and uses it for the winning results. Thus, by 8 using a PRNG to create a list of numbers that could be 9 winning lottery numbers, in that they are unbiassed, 10 and by using a button press to influence which actual 11 value is selected in an unpredictable fashion, both 12 criteria of a computerized version of a ball machine 13 are met. This is an aside, it is possible to generate 14 winning numbers without the use of a PRNG, but PRNG's 15 are basically the lottery's standard. 16 Any questions on that? I know PRNG's 17 have been questioned a bunch. 18 CHAIRMAN CLOWE: I don't believe so. 19 Thank you. 20 MR. ABLETT: No matter what form of 21 generating winning numbers is used, it should always be 22 subjected to stringent certification testing and the 23 occasional statistical review, both of which have been 24 done here. ADM's are designed to keep track of 25 statistical results of all initialization tests as well 0086 1 as when they are used and the actual draw results from 2 each unit, which is a system in the review process. 3 Ultimately, however, it is the total picture of all 4 draws on all machines using all methods that needs to 5 be shown to not be non-random. 6 A very simple test -- and Dr. Eubanks 7 mentioned this a lot as well -- is the Chi square test. 8 This test works by looking at the sum of the squares of 9 the differences between all observed values and all 10 expected values and considering the weight of that 11 difference when compared to what is expected. What 12 this means is that large differences become much more 13 significant than small differences. So while some 14 minor fluctuation is expected, areas of excessive 15 variation result in high Chi square values. The higher 16 the value, the less likely it would be created by a 17 true random sequence. 18 Here is the Chi square calculations for 19 Megaplier results up until the end of April of 2005. 20 What this is saying is that if we have a mathematically 21 pure random number generator and we generated millions 22 of samples from 147 draw results for Megaplier, more 23 than one out of five, about 22.3 percent, would have 24 Chi square statistics greater than what we see in the 25 real game. The dark areas on each of these graphs 0087 1 represents the number of outcomes generated by a 2 mathematically true random number generator that would 3 have tighter Chi squared values than one observed, a 4 percent of all samples thus represented. Any Chi 5 squared value can be generated by an actual random 6 sample. Since the probability of higher Chi squared 7 value gets smaller the larger the value is, the 8 confidence that the value is generated by a random 9 process gets smaller. Nevertheless, if the process is 10 truly random, it has to occasionally generate high Chi 11 squared values. Eight percent is about one in 12, one 12 or two percent is about two in nine. These are not 13 extremely rare events. In fact, if numbers in this 14 range were not being generated from time to time, there 15 would be concern that the process is not random by 16 virtue of the fact that not enough high Chi squared 17 values exist. 18 By comparison, Pick Three has been using 19 ball machines for 12 years. Following are some of the 20 Chi squared results generated by the Pick Three winning 21 numbers. In all these cases, the Chi squared statistic 22 offered less than a .5 percent confidence level in the 23 process being random. In fact, for night draws between 24 August 26th, '95 and September 14th, '95, the Pick 25 Three Chi squared statistic was so high that 99.87 0088 1 percent of all true random samples would have a lower 2 Chi squared value. Does that mean that Pick Three has 3 a problem? Well, absolutely not. Since Pick Three is 4 well over 4,000 draws, there should be about 20 samples 5 that generate Chi squared values in the .5 percent 6 range. 7 And that's basically everything I have. 8 CHAIRMAN CLOWE: Are there any 9 questions? 10 After listening to you and Dr. Eubanks, 11 I feel like we ought to get a mathematics degree after 12 this meeting and give some recognition of the effort 13 that you two have put in for these presentations. 14 Very, very impressive and thorough and knowledgeable. 15 Thank you very much. 16 COMMISSIONER COX: One thing. 17 CHAIRMAN CLOWE: Yes. 18 COMMISSIONER COX: Dr. Eubanks, was 19 there anything he said that you want to elaborate on, 20 agree with, or the like? 21 DR. EUBANK: The answer is no. I agree 22 with everything he said. Particularly the things about 23 the Chi square values, I -- he's basically -- I hate to 24 use this on the record, but he's basically preaching to 25 the choir when he says some of those things. 0089 1 CHAIRMAN CLOWE: That's good to hear. 2 Thank you, Commissioner. 3 Robert. 4 MR. TIRLONI: Mr. Chairman, you had a 5 question about the keys for the ADM, and we have our 6 drawings manger, Conchita Rivers, is in the audience 7 and she's going to come up and answer that question for 8 you. She was involved in the drafting of the policies 9 and procedures for the Mega Millions Megaplier draw, 10 and so she can better answer the question than I would 11 be able to. 12 CHAIRMAN CLOWE: Good. Good morning. 13 MS. RIVERS: Good morning, Mr. Chair and 14 Commissioners. For the record, I'm with Texas Lottery 15 Commission. I'm Conchita Rivers. I'm drawing section 16 manager. Currently, we have two keys to the automated 17 drawing machine and they are kept by an independent 18 accounting firm. One key is kept in the secured vault 19 in the auditor's safe at all times and the other key is 20 kept with the auditors at their location. When you go 21 initially into the ADM cabinet, there is an independent 22 auditor's seal that is on that cabinet and they will 23 check that seal. The two ADM's that are inside the 24 cabinet that you saw on the slide, those have standard 25 independent auditor's seals on those as well. They are 0090 1 never taken off unless Telecom Games actually comes in 2 or Dave Ablett to do maintenance on it, so we check 3 those. Those numbers are imprinted on our checklist 4 and they never change. 5 Any other questions? 6 CHAIRMAN CLOWE: Thank you very much. 7 Any further questions? 8 I believe, then, before we proceed, 9 we'll take another short break and give our reporter a 10 chance to draw a breath. 11 (A short break was taken.) 12 CHAIRMAN CLOWE: We'll come back to 13 order. If everyone will take their seats, please. 14 We're back on the record. 15 And, Robert, I see you've left the 16 table. Have you completed your presentation? 17 MR. TIRLONI: Yes, sir, I have. 18 CHAIRMAN CLOWE: We have a speaker, 19 then, who wishes to speak on the subject. Ms. Donna 20 Nettles. No response. 21 (Agenda Item No. 6) 22 CHAIRMAN CLOWE: All right. Then, we'll 23 go on to the next item: Report, possible discussion 24 and/or action on the lottery advertising and 25 promotions. 0091 1 MS. McCULLOUGH: Mr. Chairman, 2 commissioners, thank you. Again, for the record, my 3 name is Chelsea McCullough. I am the creative 4 coordinator for the Texas Lottery Commission. And 5 joining me today is Ashley Bramlet with DDB Market 6 Advertising Agency and Julia Fuqua with the Ward Group, 7 which DDB's media buying partner, and following my 8 presentation, they will provide more information on the 9 specific questions that were posed during the last 10 commission meeting regarding our advertising. 11 In regards to TV and radio, we're 12 currently running Mustang Money converting the instant 13 ticket that Reagan was mentioning earlier. Both the TV 14 and the radio schedule were running in the general 15 market and the minority market May 9th through May 16 23rd. Our radio live feeds are running 100 percent 17 Lotto Texas and less the Mega Millions jackpot region 18 for 100 million, which include lottery and we'll then 19 switch to Mega Millions. 20 We also have a number of promotions, 21 including lottery races. May 6th was the Georgetown 22 Rodeo Lottery Race. There are a number of baseball 23 races as well: May 12th, the Edinburg Roadrunners; May 24 13th, the Round Rock Express; May the 14th, the Midland 25 Rock Hounds; and May 20th, the Corpus Christi Cooks. A 0092 1 number of events also coming up in May include the 2 Pecan Street Festival in Austin April 30th through May 3 1st. May 14 and 15 will be the Cajun Festival in Grand 4 Prairie. May 21st and 22nd, the Pasadena Strawberry 5 Festival. 6 At this time, I'd like to provide a 7 broad overview of our outdoor advertising, and as I 8 mentioned, Julia with the Ward Group will provide more 9 specific information. Again, for a broad overview, we 10 currently have 137 billboards in the general market. 11 These are large boards that are located along major 12 roadways, such as I-35, and these boards host sunshine 13 boxes, which communicate real time jackpot amounts for 14 our online games and are updated via satellite. These 15 boards were purchased in an effort to achieve a 50 16 showing, which means that the message will reach 17 50 percent of the market's population on any given day. 18 Chairman Clowe, I'd like to directly 19 address your questions from the last commission meeting 20 regarding billboards placement as it relates to 21 specific demographics. The exercise of comparing 22 billboard locations by zip code against the demographic 23 profile is not truly relevant because it already seems 24 the billboard advertising hits travelers or commuters 25 on these major roadways. The demographic profile of 0093 1 the market is more indicative than the profile of the 2 zip code. Now, some residents will see this board, as 3 was your concern; however, this is a minimal percentage 4 when compared to the overall traffic. The result of 5 this analysis, and in conclusion, is that the billboard 6 locations are well suited to reach the intended 7 audience without unduly influencing or targeting any 8 specific ethnic group 9 MR. GRIEF: Chelsea, if you would, could 10 you go back one slide and just give the Commission a 11 chance to look at that. 12 MS. McCULLOUGH: Are there any questions 13 at this time? 14 CHAIRMAN CLOWE: This answers my 15 question in that regard, and I appreciate it. There 16 has been, since our last meeting, some discussion in at 17 least one legislative committee, and maybe more, 18 relative to our advertising, and I'd like to broaden 19 this discussion beyond the billboards to the printed 20 and the media TV and radio advertising. 21 The question has been raised, I think, 22 more than once, you know: Are the players who are 23 identified in the demographic study being targeted that 24 it would be, I think, specific areas of concern, 25 players in the lower economic stratus in the State of 0094 1 Texas and those who are in the lower educational levels 2 in the State of Texas? And in the work that you have 3 done in regard to billboards and other activities, 4 notwithstanding this was directed at an ethnic concern, 5 do you see in any of the Commission's advertising any 6 intent to target any group? And if you do, would you 7 give us that intent? If not, would you give us what 8 the intent is? 9 MS. McCULLOUGH: I do not see any effort 10 to specifically target any specific group or unduly 11 influence. In fact, there's heightened awareness and 12 sensitivity to actually not do that and to reach the 13 markets respectfully and sensitively. And I'd like to 14 defer to DDB and The Ward Group if you have anything to 15 add to that. 16 MS. BRAMLET: Sure, I'd like to add 17 something to that. Our current media buy is against 18 adults 25 to 54 with a household income of $30,000 plus 19 and at least some college education, so I think if you 20 can kind of consider those terms, we definitely try not 21 to unduly influence or unduly target those people with 22 lower incomes or lower educations. In addition to 23 that, I think Julia can probably talk a little bit in 24 terms of the broad reach that we have with the general 25 market advertising buy across the State of Texas. 0095 1 Again, that will tell you that there's not any one 2 group that we are targeting out. 3 CHAIRMAN CLOWE: Could you please 4 identify yourself for the record? 5 MS. BRAMLET: I'm sorry. My name is 6 Ashley Bramlet. I'm with DDB, Texas lottery's general 7 market advertising agency. This is Julia Fuqua with 8 me. She works for The Ward Group. The Ward Group is 9 the HUB vendor that we program with for our media 10 buying. 11 CHAIRMAN CLOWE: And you are from 12 Dallas, Texas? 13 MS. BRAMLET: Correct. 14 CHAIRMAN CLOWE: And you are from? 15 MS. FUQUA: Dallas, also. 16 CHAIRMAN CLOWE: Okay. Why don't you go 17 ahead and identify yourself. 18 MS. FUQUA: For the record, my name is 19 Julia Fuqua. I'm with The Ward Group. I'd like to 20 expand a little bit on what Ashley just said a minute 21 ago. We, from a media perspective, actually take that 22 information and go further, which she just defined the 23 fact that our targets are 25 to 54, we go and look at 24 syndicated research where we can come and say what 25 types of programs do these types of people who are 25 0096 1 to 54 who have a propensity to play, what types of 2 programs do they watch, and so when we go to make a 3 media buy, particularly in television, we use this 4 information so that we are not in any way, shape, and 5 form, unduly targeting somebody who is not a target. 6 Regarding the coverage for the market, 7 when you look at -- we deal more with the region 8 frequency, which I'm sure you're familiar with, when we 9 look at all of our media combined, we're reaching 10 anywhere from about 98 to 99 percent of the community, 11 and that would be for the total population in the State 12 of Texas on the average. It varies a little bit by 13 median, but by and large, we are reaching a very mass 14 audience in the community. 15 Hopefully, that answers your question. 16 CHAIRMAN CLOWE: It does. And I'd like 17 to put as fine a point on this as is possible, in that, 18 we are attempting in our annual expenses -- what, 19 Chelsea, $32 million a year? 20 MS. McCULLOUGH: Thirty three. We use 21 that for our advertising budget. Some of that is used 22 in-house. 23 CHAIRMAN CLOWE: We are attempting in 24 spending that money to receive value for the State of 25 Texas by reaching people who are interested in playing 0097 1 the games of Texas and informing them in a positive and 2 professional way the games that are available, making 3 them interesting and attractive to them with good 4 commonsense. We are not trying to identify any group 5 and seek them out and draw them into playing these 6 games for any reason whatsoever, and as a matter of 7 fact, we're trying to avoid unduly influencing any one 8 group that might be considered identifiable as a result 9 of the demographic study, for example. 10 I see that is a challenging task, 11 because when you're spending $33 million a year of the 12 people's money, the people of the State of Texas, you 13 must get value for that. On the other hand, you must 14 be sensitive to concerns that people have for good 15 reason in a business sense, and then there is an 16 element of concern in this state for people 17 representing different groups and people who are 18 opposed to gaming of any kind. You must be sensitive 19 and respectful of that mindset. 20 MS. BRAMLET: Absolutely. That's 21 something that we keep in mind pretty much on a daily 22 basis in terms of planning everything that we do with 23 the marketing group. At the lottery, that is something 24 that is continuously watched for. 25 CHAIRMAN CLOWE: Well, I want to, as I 0098 1 say, make that point again. I've made it in the past 2 and I want to continue to make it because it is a 3 challenging task. I won't say it's difficult; it's a 4 challenge. And we want -- I think the Commission wants 5 to keep that in front of us constantly. 6 Reagan, do you have anything to add to 7 that? 8 MR. REAGAN: No, sir. You know, my 9 perspective is, I've been questioned on this issue in 10 the legislative hearings that you eluded to. My 11 sensitivity is in the balance, and I think you touched 12 on that eloquently in your remarks. I honestly support 13 everything that you said and reinforce that a lot to 14 Chelsea and our entire advertising and marketing group 15 to be sure that we do have that sensitivity in place as 16 we look at the campaigns that we're currently doing and 17 campaigns in the future. 18 CHAIRMAN CLOWE: In your professional 19 opinion, if the Commission didn't spend any money 20 advertising the games -- and I'm not going to ask you 21 for any statistics or hard evidence to back up what is 22 your professional opinion -- but I would like to hear a 23 comment based on whatever number of years you've been 24 in the business as to what the result would be if this 25 Commission dropped its advertising expenditure totally. 0099 1 MS. BRAMLET: This isn't the first time 2 that the Commission has asked that question of DDB. 3 Doug Walker, a corporate partner of mine -- he is no 4 longer with the agency -- but he had had the question 5 probably about three years ago now and tried to help 6 answer that question. I can't tell you in terms of 7 numbers what would happen. What I can tell you is, 8 we've done a lot of research. We've looked at other 9 lotteries who stopped advertising and we've looked at 10 other companies that have stopped advertising. We've 11 also done metric modeling and statistical analysis that 12 we showed Commissioner Cox to try to understand what 13 the ROR of your short time advertising is. We've 14 Definitely come to some conclusions on that. In terms 15 of long-term, until you stop advertising, I can't tell 16 you what's going to happen. I certainly am very 17 passionate about what I do and my agency is very 18 passionate about advertising and marketing and how it 19 affects the companies that we work with, how it affects 20 their sales and their revenues, and we wouldn't be in 21 this business if it wasn't a positive effect. 22 COMMISSIONER COX: Mr. Chairman, I've 23 talked to Professor Huff and Dr. Charity at the 24 University of Texas and they have done quite a bit of 25 research on this, and I think that if you wanted to 0100 1 have them come and make a presentation to the 2 Commission, they could give you some pretty specific 3 information on what they believe about the effects of 4 advertising in the various jurisdictions. 5 CHAIRMAN CLOWE: Do you feel that would 6 be of value? 7 COMMISSIONER COX: I do. 8 CHAIRMAN CLOWE: Then let's ask Chelsea 9 to contact them and ask them to pick a time that they 10 can be available to do that. 11 COMMISSIONER COX: Additionally, Mr. 12 Chairman, on the point of undue influence, Ms. Kidnap, 13 what does the Lottery Act specifically say in that 14 regard? 15 MS. KIPLIN: It's Government Code 16 Section 466.110. The headline is precluded 17 advertisements. The legislature intends that 18 advertisements or promotions sponsored by the 19 Commission or the division for the lottery not be of a 20 nature that unduly influences any person to purchase a 21 lottery ticket or number. 22 COMMISSIONER COX: Now, Ashley, you just 23 told us that your media buys are directed toward what? 24 MS. BRAMLET: The primary target of the 25 media buy is against adults 25 to 54 with a household 0101 1 income of $30,000 or more a year and have at least some 2 college education. 3 COMMISSIONER COX: Okay. Now, Ms. 4 Kidnap, read that to me again. 5 MS. KIPLIN: The legislature intends 6 that advertisements or promotions sponsored by the 7 Commission or the division for the lottery not be of a 8 nature that unduly influences any person to purchase a 9 lottery ticket or number. 10 COMMISSIONER COX: Okay. Now, you heard 11 what she said, that there may be a bias. Is there a 12 valid criticism possible that we are unduly influencing 13 the people in her group? 14 MS. KIPLIN: Coincidentally, we've been 15 doing a little bit of legal research on that particular 16 issue in response to requests for legal services from a 17 division, and Ms. Wolf, who is with us now, assistant 18 general counsel, might be in a better position to 19 respond more specifically. I don't necessarily think 20 that undue influence equals targeting. I think undue 21 influence, from the perspective that I remember from 22 law school, and it's gone back that far, really has to 23 do with a fiduciary relationship, where one person is 24 disadvantaged and the other person begins to exert some 25 kind of influence to make that other person otherwise 0102 1 decide or take a different course than they would. I 2 don't think that application of law, frankly, is what 3 this sentence means, but there has been no case that 4 has construed that. 5 COMMISSIONER COX: What that says, 6 interpreted as strictly as possible, would make it 7 impossible to target your advertising anyway? 8 MS. KIPLIN: Well, the issue is not 9 influence. The issue is unduly influence. And so what 10 we are focused on is, what is the phrase unduly 11 influencing mean versus influence. And that's why 12 Mrs. Backdrop -- just some of the legal courses that 13 come to mind, where there is a fiduciary relationship, 14 where there is some kind of relationship where somebody 15 can exert pressure in such a way where the other person 16 would make a decision that they might not otherwise 17 make. 18 COMMISSIONER COX: Chairman, I don't 19 want to belabor this, but I would like for counsel to 20 pursue that and give us a report at a later date as to 21 whether there is a safe harbor in this statute. 22 CHAIRMAN CLOWE: Very good. Thank you 23 MS. McCULLOUGH: Mr. Commissioner, if I 24 may that, on that 25 to 54 group that Ashley described, 25 it's really been an effort to use our media dollars as 0103 1 efficiently as possible to reach the most general 2 population in the state. 3 COMMISSIONER COX: Sure. And I've had 4 no criticism whatever of that, but, rather, given the 5 way this is worded, is that within a safe harbor. 6 CHAIRMAN CLOWE: And you have to 7 understand, there has been some criticism and there 8 have been critical remarks, and what Commissioner Cox 9 and Commissioner Olvera and I are seeking is 10 verification and validation that these moneys are, on 11 the one hand, being spent properly and are producing 12 the results that are intended for the State of Texas, 13 but, on the other hand, there is not a justifiable 14 criticism from any of these groups out there that might 15 feel that they represent offended entities. It is a 16 challenging task. 17 MS. McCULLOUGH: Yes, sir. 18 CHAIRMAN CLOWE: Commissioner Cox has 19 gone to the legal aspect of it, which we certainly, I 20 think, do need to have explored. 21 MR. REAGAN: Mr. Chairman, I think it's 22 worth mentioning at this juncture that, interestingly, 23 as we have this conversation, that some of the 24 criticism that we received before some of the 25 committees in the legislature, specifically House 0104 1 Appropriations, was that we were not spending enough 2 money in the minority area, and it reinforces the 3 sensitivity that we have toward that, that we're going 4 to look in our overall budget and be sure that, as we 5 have this discussion of unduly influence, that that is 6 a part of the mix. That was a unique environment that 7 I think is worth mentioning. 8 CHAIRMAN CLOWE: It's a task that is 9 froth with, if not conflicting objectives, certainly 10 those that are pulling against each other relative to 11 that kind of questioning. I think you've also, in the 12 committee's that I've attended, been asked how you 13 could generate more sales without any consideration 14 about where those might come from. 15 MR. REAGAN: Yes, sir, that is true. 16 CHAIRMAN CLOWE: And so it is a 17 challenge in Texas. I just want to make the point 18 thoroughly that this Commission is sensitive and this 19 agency is sensitive to all of those issues and we are 20 going to do the best we can to see that we walk that 21 middle ground. 22 MS. McCULLOUGH: Thank you for your help 23 in that direction. 24 CHAIRMAN CLOWE: Thank you. 25 MS. McCULLOUGH: If there are no other 0105 1 questions, we'll proceed with the issues of 2 advertising. 3 MS. BRAMLET: Mr. Chairman, 4 Commissioners, although I don't have anything exciting 5 to share with you like Chi squares, QQ, and Word Art, 6 we do have a few slides to briefly take you through the 7 top line of the outdoor advertising, which hopefully 8 will be insightful and informative for you. 9 In terms of a brief history, the jackpot 10 outdoor boards -- that's what we call them -- which 11 gives you realtime jackpot information, were installed 12 initially in 1995. By 2003, when Mega Millions 13 launched, there were over 100 jackpot outdoor boards 14 across the state. At the launch of Mega Millions, half 15 of the Lotto boards were converted over to Mega 16 Millions messaging. Today we have a total of 63 Lotto 17 Texas boards, 59 Mega Millions, and 15 Texas Two Step. 18 In terms of contract structure, each one 19 of these outdoor contracts is negotiated on an annual 20 basis coinciding with the lottery's fiscal year. Now, 21 that doesn't mean that we change the location on an 22 annual basis, it just means that we renegotiate the 23 pricing on an annual basis. 24 In terms of purchasing new boards or 25 changing locations, there are several different 0106 1 criteria that we look at when we consider recommending 2 board locations to the Lottery Commission. The first 3 is circulation. When we say circulation that means the 4 number of people 18 plus -- that means 18 years of age 5 or older -- that will have the opportunity to be 6 exposed to a given outdoor board any given day. We 7 also weigh that with cost efficiency, so we look at the 8 cost of an outdoor board as compared to the number of 9 people that are going to see it in a given day. 10 Location also is a large factor. We have some markets 11 where we have better circulation overall than we do in 12 others, so for those that are lower, we're trying to 13 get them to that 50 percent goal, which is our 50 14 showing that Chelsea mentioned earlier. 15 Market distribution is also another 16 thing, but it's slightly different than location. When 17 we talk about market distribution, we are, for example, 18 talking about the idea that, if there is a Lotto Texas 19 board at 35 and Sixth Street and the board right next 20 to it became available, even if it had great cost 21 efficiencies, high circulation, et cetera, we wouldn't 22 recommend it because it would be right on top of an 23 existing board. 24 Quality of read, there are several 25 things that go into that analysis. One being, any kind 0107 1 of obstruction to a board is considered a negative, 2 whether it's a tree or a building or some other kind of 3 obstacle in terms of readership. Another thing that we 4 consider is the height of the board. Some boards are 5 very tall and are able to be seen from far away. Other 6 boards are right on the ground and aren't quite as 7 accessible. Size is another thing. Although the 8 standard size board bulletin is 14 by 48, board size 9 varies. And we have to also consider size in terms of 10 structural stability. Boxes that go on the boards 11 weigh as much as 500 to 1,000 pounds, so we have to 12 make sure that the boards that we purchase are able to 13 withhold the size of that box. 14 And then last, we have to deal with 15 market restrictions. Dallas and Houston are good 16 examples of that. Right now in Dallas and Houston, we 17 cannot go and buy a new outdoor board in those two 18 markets. There are restrictions in terms of mechanical 19 construction on any board in these markets which keeps 20 us from being able to put these boxes up on these 21 boards. The existing boards can stay there because 22 they're grandfathered in, so we don't have to worry 23 about the existing boards. 24 So all of those different items are 25 considered when purchasing a new location. And we 0108 1 really want to think about long term and consider any 2 location that we go in and purchase at a long-term 3 location for the lottery because it is very expensive 4 to move these boards around. 5 And that is all we have to share with 6 you today. Do you have any questions? 7 CHAIRMAN CLOWE: Any questions? 8 COMMISSIONER COX: Yes, sir. Chelsea, 9 you started this with a number 50. That was -- what 10 was that number? 11 MS. McCULLOUGH: That's the number which 12 represent the goal of the communication, which is to 13 reach 50 percent of the market. 14 COMMISSIONER COX: Okay. Now, we seemed 15 to have assumed that. Let's go back a step. Why 50? 16 Why not 75? Why not 100? How did we pick 50? And is 17 it a good number to be going forward with? 18 MS. McCULLOUGH: And that's a good 19 question and Julia is going to respond to that. 20 MS. FUQUA: One of the reasons why we 21 started with 50 as our goal was to bring all the 22 markets at the same level. When you have an average of 23 a 50 showing, 50 percent of the population has an 24 opportunity to see the board each day, over a month's 25 time, you'll reach anywhere from 90 to 95 percent of 0109 1 the population. If we were to increase boards, say, up 2 to a 60, 65, 75 percent showing, that would be really 3 great, but it's not going to increase our reach over 4 the entire month that much. There comes a point of 5 diminishing return. We also are very driven by the 6 responsibility of the dollars and how can we use it the 7 most efficiently, so our first goal is to get everybody 8 up to a common level and then add where we need to. 9 COMMISSIONER COX: So this is a 10 marginally utility analysis, we try to get ourselves as 11 far up as we can without getting on the flat part? 12 MS. FUQUA: Exactly. Yes. Could we add 13 more boards? Absolutely. I think what we really want 14 to look at is the product distribution and making sure 15 that we have all the products supported through the 16 market once we reach that minimum level. 17 CHAIRMAN CLOWE: Any other questions? 18 Thank you all very much. 19 (AGENDA ITEM NO. 7) 20 CHAIRMAN CLOWE: Now we'll move on to 21 Number Seven: Report, possible discussion and/or 22 action on Mega Millions Game, including adoption of 23 Amendments 16 TAC 401.315 relating to Mega Millions 24 online game. Ms. Kiplin. 25 MS. KIPLIN: Commissioners, what you 0110 1 have in your notebooks is a draft of an adopted version 2 of the rule, and, if you will recall, at your 3 March 11th Commission meeting you all did vote to 4 propose amendments to the existing Mega Millions rule 5 for public comment -- publication in the Texas Register 6 for public comment. The proposed text was published in 7 the March 25th issue of that Register for a 30-day 8 public comment period. Commissioners, we did receive 9 public comment both at a public comment hearing that 10 was noticed for April 7th here at lottery headquarters 11 and also in written format, and at this time the Staff 12 does recommend adoption of the rule without changes to 13 the proposed text. 14 Commissioners, if you will entertain 15 that motion because the concept that we want to visit 16 with you about is the affective date of the rule, 17 because these are amendments, we have a live rule with 18 purchases that are occurring and sales that are 19 occurring, and it's my understanding that the staff 20 would like that affective date to be June 22nd, 2005. 21 But I'll stop there and ask if you have 22 any questions. I know each one of you has had an 23 opportunity to review the comment as well as the 24 executive director and the deputy executive director 25 has had an opportunity to review also the transcript of 0111 1 the public comment. 2 CHAIRMAN CLOWE: Before we have 3 questions, Reagan, do you have anything that you'd want 4 to add? 5 MR. REAGAN: No, sir. Well, yes, I do. 6 From my perspective, we did have an opportunity to 7 review, Gary and I, the information that was brought in 8 through the public comment hearing, which I believe 9 there was one citizen who came toward as well as 10 numerous messages through e-mail and other forms of 11 communication with the agency, and I felt that they 12 were addressed adequately and professionally in the 13 rule that is before you, and I also support the idea of 14 moving toward with this Mega Millions change as a 15 benefit to the State of Texas from a revenue 16 perspective as well as excitement of the game. 17 CHAIRMAN CLOWE: Gary, do you have 18 anything to add? 19 MR. GRIEF: No, sir, I do not. 20 CHAIRMAN CLOWE: Commissioners, are 21 there any questions? 22 COMMISSIONER COX: No questions, Mr. 23 Chairman. I've reviewed the comments. I didn't see 24 anything that I thought persuasive that would cause me 25 to not want to adopt this rule. 0112 1 CHAIRMAN CLOWE: I also have reviewed 2 the comments that have come in and the transcript of 3 the public hearing as well. 4 Commissioner Olvera, do you have any 5 comment? 6 COMMISSIONER OLVERA: I would reiterate 7 the same. I reviewed the e-mails and the transcript, 8 and I have nothing to add. 9 CHAIRMAN CLOWE: Thank you, sir. I 10 think we might discuss the proposed effective date 11 before we discuss a motion, counselor. 12 MS. KIPLIN: Yes, sir. This is an 13 existing rule with an existing game, and so the date 14 that the sales begin under this game is fairly critical 15 because sales will necessarily stop under the old game, 16 and it's my understanding in working with staff that 17 it's also challenging because it's 11 states that are 18 undergoing the same or similar -- I guess, probably 19 with the exception of California, but are undergoing 20 changes. 21 It's my understanding that the date for 22 first sales, if in fact the Commission does vote to 23 approve the rule, would be June the 22nd, and so that 24 would be the date that we are looking at as an 25 effective date, but, Commissioners, I'd like for you to 0113 1 entertain another concept, which would be that you 2 would give the staff the ability, should that date 3 slip, to make it a different affective date should we 4 run into software problems, but we are focussed if 5 there is a date certain on June 22nd 6 CHAIRMAN CLOWE: What would the motion 7 be, then, that you're asking for? 8 MS. KIPLIN: The motion that staff would 9 recommend is that the Commission -- or, a commissioner 10 move to adopt the rule without changes from the 11 proposed text as published in the Texas Register for 12 public comment and that the effective date be either 13 June 22nd or the date of first sales. 14 CHAIRMAN CLOWE: I think maybe the 15 Commission would be more comfortable if a range of 16 dates were adopted, so if we didn't have a date 17 certain, we would have a range of dates that the staff 18 would be comfortable working in but not leave it 19 open-ended. Is that possible? 20 MS. KIPLIN: I'm going to defer to 21 Robert Tirloni on a range of dates. And this may be 22 just me wearing belts and suspenders, because I'm 23 asking him several times, are you sure it's going to be 24 June 22nd, and my understanding is that he's pretty 25 confident of that. I'm just trying to anticipate 0114 1 something unforeseen. 2 CHAIRMAN CLOWE: Okay. Robert, how much 3 leeway do you feel like you need on this? I just don't 4 think the Commission ought to be asked to vote and pass 5 a motion that says you can do it whenever you want to. 6 I'm not, for one commissioner, comfortable with that. 7 COMMISSIONER COX: Mr. Chairman, may I 8 ask a question? 9 CHAIRMAN CLOWE: Certainly. 10 COMMISSIONER COX: If we put a time 11 limit on it, let's say June 22nd and, at the staff's 12 discretion, not later than July 22nd, and July 23rd 13 comes around, do we have to start the rule making 14 process over again? 15 CHAIRMAN CLOWE: I think the answer is 16 yes. I think we have to re-vote again. 17 MS. KIPLIN: Well, I guess my response 18 would be, I don't know, because the rule is what you're 19 adopting. What I'm more focussed on is the filing 20 document that I must submit with the Texas Register. 21 I've exchanged voice mails with the division director 22 of the Texas Register regarding whether we could have 23 some kind of contingency date. The filing document 24 doesn't envision the kind of operations that the 25 Commission undertakes. The division is a rule making 0115 1 kind of regulatory environment where there's more 2 precision, and so the filing document will have a date 3 of June 22nd. I'm just asking for another opportunity 4 from the Commission to be able to go back to the 5 Register and say, June 22nd we've had some slippage. I 6 understand the Commission's concern with regard to how 7 unpredictable that might be or the fact there's not a 8 date certain, but the fact is, you are adopting the 9 rule. The issue is, when does the rule become 10 affective. 11 If you do not take a date, then, it 12 defaults to 20 days from the date that this document is 13 filed with the Texas Register, the document being the 14 adopted version. I'm giving you information. I don't 15 know if it's responsive or not. I wanted to make sure 16 that you had that full background. So the rule -- it's 17 not a question of the rule being adopted or not, it 18 goes back to, when is the rule effective. 19 CHAIRMAN CLOWE: And I think it's 20 important that the Commission -- the rule is the 21 commissioner's rule? 22 MS. KIPLIN: Correct. 23 CHAIRMAN CLOWE: And, certainly, the 24 commissioners are going to decide what to do on the 25 rule. The affective date is really another issue, and 0116 1 I think what we're talking about is whether we want to 2 nail that down or whether we want to let it go into 3 effect by rule of law or we want to take some other 4 choice and give a range of dates. I'm open on any of 5 those choices. 6 COMMISSIONER COX: I am, too. 7 CHAIRMAN CLOWE: Judge, where do you 8 come in on this? 9 COMMISSIONER OLVERA: Well, basically, 10 after Kim's explanation right now, I feel comfortable 11 with setting the date at June 22nd, and in the event -- 12 I'm not sure what you mean by slippage, but -- 13 MS. KIPLIN: That was probably a poor 14 choice of words. 15 COMMISSIONER OLVERA: -- but I think 16 Jim's comment of, in no event can they take 30 days 17 post June 22nd would be fine with me. 18 MS. KIPLIN: And I will follow up with 19 Mr. Proctor, Dan Proctor with the Texas Register, and 20 see whether we can, in fact, have a contingent event. 21 If to some extent our business seems to be -- 22 COMMISSIONER OLVERA: Well, what 23 scenario are you concerned with that you would not want 24 it to take effect June 22nd? 25 MS. KIPLIN: The scenario would be that 0117 1 the rule takes effect prior to the software being up 2 and running and being able to receive sales for that 3 game under the new matrix. 4 CHAIRMAN CLOWE: What do you think? Are 5 you comfortable with passing the rule and letting it go 6 into effect by rule of law? 7 COMMISSIONER OLVERA: Well, the rule of 8 law would be 20 days. 9 MS. KIPLIN: From filing. 10 CHAIRMAN CLOWE: That gives you the 11 greatest leeway. 12 MS. KIPLIN: No. Actually, if I -- 13 well, I guess, what it means is that I'm -- 14 CHAIRMAN CLOWE: Let me restate that. 15 That gives you adequate leeway. 16 MS. KIM: If the Commission is 17 comfortable with me holding on filing, because then it 18 would be 20 days from when you actually file the 19 document with the Register. That's the default. An 20 agency can set a different effective date if the agency 21 chooses, but it is a minimum -- from the day that the 22 rule is filed with the Register, it's a minimum of 20 23 days before the rule is effective. 24 COMMISSIONER COX: So are you suggesting 25 that there be no date other than 20 days from filing 0118 1 and that you would make sure that we're in a good place 2 by filing it at an appropriate time? 3 MS. KIPLIN: That is another option. If 4 the Commission's direction is to do that, then we will 5 hold and we will do the countdown. Because you will 6 sign the order adopting the rule. Your only issue is 7 when is it going to be effective. Because of the 8 Register statutes, it becomes effective 20 days from 9 the date the rule is adopted. Now, the only thing that 10 I would want to check would be what amount of 11 implementation we could undertake between the time that 12 the order -- between the time the rule is adopted and 13 it becomes effective. Am I confusing us? 14 CHAIRMAN CLOWE: I think the downside of 15 this -- and we ought to discuss it -- is that this is a 16 Commission's rule and we voted to adopt it. The 17 precedence, I think, we have established in the past is 18 that there's been an effective date certain. I mean, 19 we've known when our rules are going to become 20 effective. I don't want the perception or the 21 appearance to occur that, you know, we're just adopting 22 this and we're saying to the staff, you can do it 23 whenever you want to. I don't like that. 24 This is a serious matter. It's a large 25 issue. We've done a lot of work on this and there's 0119 1 been public hearings and comments. I have no idea how 2 the commissioners feel about it or how they're going to 3 vote, but, if there is approval, I would feel more 4 comfortable with at least a period where we're giving 5 the staff leeway to do whatever the business needs are 6 and accommodate those needs to make a smooth transition 7 from the sale of one set of tickets under one rule to 8 the sale of seven tickets under the new rule, but the 9 commissioners would have voted on that and have it 10 under control. 11 COMMISSIONER OLVERA: And that brings up 12 a point. In the event we set this range, say, June 13 22nd through July 22nd, and worse case scenario occurs, 14 wherein, the software is not up to date by that time, I 15 don't see why we couldn't amend that range, but I don't 16 like the idea of adopting the rule and then you just 17 kind of playing with the default rule in terms of when 18 you're going to file and when not to file it. 19 CHAIRMAN CLOWE: I don't think we've 20 ever agreed to do that in the past. And we can plan 21 another meeting in that period of time. We could give 22 the mandatory ten-day notice and come together, could 23 we not? 24 MS. KIPLIN: You could, but your rule is 25 adopted. I guess the issue would be whether you have 0120 1 the opportunity to change the effective date, and I 2 think, in the past, it might -- I guess my caution in 3 this is that we're dealing with ten other states, but 4 in the past when we've changed from, say, the Lotto 5 Texas over, we've set a date on effective and we've had 6 no problems. I'm just worried because -- and maybe 7 unnecessarily so -- because we've got more operations 8 involved, if you will. 9 COMMISSIONER COX: Well, wouldn't what 10 Commissioner Olvera just said work, we could make it 11 the 22nd and we could meet again before that if that's 12 a problem and then we amend it? 13 CHAIRMAN CLOWE: I'm comfortable with 14 that. And, you know, I don't have any idea of how 15 large this possible problem you've identified is -- 16 MS. KIPLIN: No. That's why I'm raising 17 it. 18 CHAIRMAN CLOWE: -- and I'm not sure 19 that anybody else does either because, up to this 20 point, I've always heard, we want to be ready to go if 21 we get an affirmative vote on the 22nd, so this issue 22 just surfaced in my mind. Robert. 23 MR. TIRLONI: Mr. Chairman, I've been in 24 close contact with G-tech Software and G-tech is the 25 lottery operator in the majority of the existing Mega 0121 1 Million states, including California, and all 2 indications I've had from G-tech Software is that 3 they're going to be up and ready to go with start up 4 sales on Wednesday, June 22nd. 5 Now, if you wanted to give a range of 6 June 22nd through July 22nd -- I've been doing some 7 quick calendaring on my post it in front me -- and the 8 22nd through the 22nd would be a good date range in 9 terms of effective dates because the 22nd of June is a 10 Wednesday and the 22nd of July is a Friday and that 11 fits in with some of the Mega Millions draws, the draw 12 dates, so those would probably be -- that would be a 13 good range if you chose to proceed down that path. 14 COMMISSIONER OLVERA: Well, and now I'm 15 backtracking. If staff is recommending June 22nd and 16 G-tech is making that statement, you know, let's go 17 with June 22nd, and then something occurs in the 18 interim, who would bring that to our attention? I 19 would prefer to set a fixed date. 20 CHAIRMAN CLOWE: Would you care to make 21 a motion? 22 COMMISSIONER OLVERA: I move that we 23 propose the motion proposed by general counsel and set 24 a fixed date of the rule taking effect on June 22nd, 25 2005. 0122 1 MS. KIPLIN: So you're moving adoption 2 of the rule without changes as published in the Texas 3 Register with an effective date of June 22nd? 4 COMMISSIONER OLVERA: Yes. 5 CHAIRMAN CLOWE: And that is the 6 adoption of amendments to 16 TAC 401.315. Is there a 7 second? 8 COMMISSIONER COX: Second. 9 CHAIRMAN CLOWE: All in favor, please 10 say aye. Opposed? No. The vote is three/zero in 11 favor. 12 Commissioners, if you approve, at this 13 point in time, because Commission Olvera must leave 14 later in the day, I would like to make a motion that we 15 go into executive session and handle the remaining 16 items on the agenda at the conclusion of executive 17 session. Is that all right with you, Commissioner 18 Olvera? 19 COMMISSIONER OLVERA: Yes. 20 MS. KIPLIN: Mr. Chairman, before you 21 do, I just wanted to make it clear for the record that 22 I do have an order on your adoption of the amendments 23 Mega Millions rule. 24 CHAIRMAN CLOWE: And we are signing that 25 order right now. 0123 1 At this time, I move the Texas Lottery 2 Commission go into executive session to deliberate the 3 duties and evaluation of the Executive Director and/or 4 Deputy Executive Director, Internal Audit Director, and 5 Charitable Bingo Operations Director pursuant to 6 Section 551.074 of the Texas Government Code; to 7 deliberate the duties of the general counsel pursuant 8 to Section 551.074 of the Texas Government Code; to 9 receive legal advice regarding pending or contemplated 10 litigation and/or to receive legal advice pursuant to 11 Section 551.071 (1)(A) or (B) of the Texas Government 12 Code and/or to receive legal advice pursuant to Section 13 551.071 (2) of the Texas Government Code, including but 14 not limited to: Patsy Henry versus Texas Lottery 15 Commission; Sandy Surber, et al. versus G-tech 16 Corporation; Linda Cloud versus Mike McKinney, et al.; 17 James T. Jongebloed versus Texas Lottery Commission; 18 Russell Vierney versus Carol Keeton Strayhorn, Greg 19 Abbott and Reagan E. Greer, in their individual and 20 official capacities; Employment law, personnel law 21 procurement and contract law, evidentiary and 22 procedural law, and general government law; Post 23 payment audit of the Texas Lottery Commission Mega 24 million game 25 Is there a second? 0124 1 COMMISSIONER OLVERA: Second. 2 CHAIRMAN CLOWE: All in favor, please 3 say aye. Opposed? No. The vote is three/zero. 4 (AGENDA ITEM NO. 14) 5 CHAIRMAN CLOWE: The Texas lottery 6 Commission will go into executive session. The time is 7 11:00 a.m. Today is May 10th, 2005. 8 (Executive session.) 9 (AGENDA ITEM NO. 15) 10 CHAIRMAN CLOWE: The Texas lottery 11 Commission is out of executive session. The time is 12 12:58 p.m. For the record, Commissioner Olvera is now 13 absent. He departed the Commission during the 14 executive session. Commissioner cox is here, so we 15 have a quorum. 16 Is there any action to be taken as a 17 result of the executive session? And if there is, I 18 move to approve the evaluation of the charitable bingo 19 operations director. Is there a second? 20 COMMISSIONER COX: Second. 21 CHAIRMAN CLOWE: All in favor, please 22 say aye. Opposed? No. The vote is two/zero. 23 Is there further action to be taken as a 24 result of the executive session? I would like to move 25 that we increase the annual salary of the charitable 0125 1 bingo operations director to $100,400.28 a year 2 effective April 1st, 2005. Is there a second? 3 COMMISSIONER COX: Second. 4 CHAIRMAN CLOWE: All in favor, please 5 say aye. The vote is two/zero in favor. 6 Is there any further action to be taken 7 as a result of the executive session? 8 (AGENDA ITEM NO. 8) 9 CHAIRMAN CLOWE: If not, then let's move 10 on to the agenda item that we were dealing with 11 following the last one in public session, which is Item 12 Number Eight: Report, possible discussion and/or 13 action on HUB and other minority business 14 participation, including the agency's mentor/protege 15 program. 16 Hi, Joyce. How are you? 17 MS. BERTOLACINI: Good afternoon, 18 Commissioners. For the record, my name is Joyce 19 Bertolacini and I'm the coordinator of TLC's Historic 20 Under Utilized Business Program. Before I start my 21 report, I do want to mention that I do have several 22 visitors here today. One of them is a company that is 23 going to be a protege with one of our prime vendors. 24 And I didn't think that they were going to aspire to 25 being here after the lengthy session this morning, but 0126 1 they stuck it out, so I just wanted to let you know 2 that. 3 CHAIRMAN CLOWE: We're appreciative of 4 that. Are you going to introduce them? 5 MS. BERTOLACINI: I am. I'm going to go 6 through the reports very quickly and then I'll enter 7 the signing of the new agreement. 8 CHAIRMAN CLOWE: Great. 9 MS. BERTOLACINI: Included in your 10 notebooks today is the March monthly HUB minority 11 contacting activity report, which includes all fiscal 12 year 2005 expenditures paid from September 1st, 2004 to 13 March 31st, 2005. Our total qualifying expenditures as 14 of March 31st, 2005 were $90 million and our estimated 15 HUB minority utilization was $22.1 million, which 16 equates to 24.55 percent. 17 Also in your notebooks is a group of 18 summary reports that were produced from the Texas 19 Building and Procurement Commission for fiscal year 20 2005 statewide semiannual HUB report, which was 21 released on April the 15th. The TLC's overall HUB 22 participation for the first six months of fiscal year 23 2005 was 25.2 percent. I did want to mention that the 24 TLC's HUB percentage has experienced a decrease of 25 5.6 percent compared to the same time period last year. 0127 1 However, we still exceeded the professional services 2 goal and we do continue to do well in the other 3 services category. In addition, for the first six 4 months of 2005, fiscal year 2005, the Commission 5 attained the highest overall percentage among the top 6 15 spending agencies. And let me anticipate a 7 potential question here: Why is that 15 and not the 8 top ten? That report by TVPC ranks the agencies by the 9 total expenditures and we were actually ranked number 10 12, so we didn't make it into the top ten spending 11 agencies because of our total expenditures ranking as 12 12, so I went ahead and included the top 15 for that 13 reason. 14 Before I go on to the mentor/protege, do 15 you have any questions regarding the summary reports? 16 I didn't want to go through them point by point with 17 you. 18 CHAIRMAN CLOWE: I believe not. Please 19 proceed. 20 MS. BERTOLACINI: Okay. Regarding our 21 mentor/protege program, I'm proud to announce that we 22 have a new agreement signed here today, for Mr. Greer 23 to sign. The mentor company is DDB Dallas and the 24 protege is Louis Printing Services, Limited. And both 25 Ashley Bramlett from DDB Dallas from Carol Louis from 0128 1 Louis Printing are present here today. Thank goodness 2 carol Louis decided to stay. And I'd like to recognize 3 them for joining us as our newest mentor/protege team. 4 We do have a preliminary meeting scheduled to initiate 5 the process, and I look toward to working with them. 6 And so Mr. Greer has the agreement there to be signed. 7 And I'd be happy to answer any questions that you have. 8 CHAIRMAN CLOWE: This is the first one 9 we've had in sometime and we're very pleased that this 10 relationship is being formed and we wish you all the 11 best of luck. We hope that it's very beneficial to all 12 of you involved. Thank you for being here. 13 COMMISSIONER COX: Thank you and 14 welcome. 15 MS. BERTOLACINI: Thank you. 16 CHAIRMAN CLOWE: That concludes your 17 report? 18 MS. BERTOLACINI: Yes, sir, it does. 19 (AGENDA ITEM NO. 9) 20 CHAIRMAN CLOWE: Next Item Nine: 21 Report, possible discussion and/or action on the 22 agency's contracts. 23 MS. ZGABAY-ZGARBA: Good afternoon, 24 Commissioners. For the record, my name is Angela 25 Zgabay-Zgarba. I am the contract and procurement 0129 1 specialist for the agency. In your notebook under 2 agenda item number nine, there is a report that has 3 been updated for this month's book. If you have any 4 questions, I'd be happy to try to answer those. 5 CHAIRMAN CLOWE: Thank you, Angela. 6 (AGENDA ITEM NO. 10) 7 CHAIRMAN CLOWE: Next Item Ten: Report, 8 possible discussion and/or action on the agency's 9 financial status. 10 MR. DEVINEY: Good afternoon, 11 Commissioners. Again, I'm Lee Deviney, financial 12 administration director. I would like to summarize 13 some of the key figures in the monthly financial 14 report. Total transfers to the state since the 15 inception of the lottery amount now to $12.5 billion. 16 Of that amount, almost $7.3 billion has been 17 transferred to the Foundation School Fund. Looking at 18 fiscal year 2004 compared to 2005 -- and I kind of want 19 to get to that in this item, and there's some -- I'm 20 going to kind of take you down a path -- so far this 21 fiscal year, we've transferred from sales $629 million 22 to the Foundation School Fund. Comparing that back to 23 2004, we were at $605.8 million through the month of 24 April. 25 COMMISSIONER COX: Now, where are you, 0130 1 Lee? I was looking for those numbers in this report 2 and I couldn't find it. 3 MR. DEVINEY: The numbers are not in the 4 report. I just happened to have the numbers. 5 COMMISSIONER COX: Oh, okay. 6 MR. DEVINEY: And that's based -- those 7 are transfers based upon sales only. If you look at 8 the report, we tend to report a lot of things on a cash 9 basis, but in order to make a kind of comparison here, 10 I think we need to look at cash transfers based on 11 sales. Looking at cash transfers to the Foundation 12 School Fund, so far this year, it's $653 million, so 13 compared to last year, we're actually ahead in terms of 14 the dollar value transferred to the Foundation School 15 Fund. It's a little bit down as a percentage basis, 16 but in terms of real dollars, we're actually up over 17 last year. 18 Something else that you should know, in 19 the month of April, we fully funded or appropriation, 20 which was $165.3 million, so you'll find a transfer 21 on -- on the third page in of your report, you'll see 22 that the current month transferred to the Foundation 23 School Fund is $91.7 million, and that compares to 24 where we were last year, which was in the 80's. The 25 reason the number is larger this month, part of it, of 0131 1 course, is a function of sales, but, also, once we 2 fully fund our appropriation, we transfer a greater 3 percentage and a greater number of dollars to the 4 Foundation School Fund because we've already funded up 5 our appropriation, and you'll see that pattern 6 continuing over the next several months. So, as we get 7 later in the fiscal year, we transfer a greater 8 percentage of our sales to the Foundation School Fund 9 and a greater number of dollars to the Foundation 10 School Fund compared to where we are at the beginning 11 of the year. So, you know, going forward through the 12 course of a year, it's not really a straight line 13 functioning comparing from year to year. You could be 14 at the mid point in a year and that's not necessarily 15 an indicator of where you'll end up at the end of the 16 year because things get better as you move towards the 17 end of the year. 18 One other thing, too, last year we had 19 two huge jackpot runs in the month of June, so that was 20 when Lotto Texas went up to 145 and Mega went up to 290 21 at the same time, so that was, if not the largest 22 month, it was one of our large months in the history of 23 the lottery from sales and also transfers to the 24 Foundation School Fund, so, you know, how we compare to 25 last year is going to depend somewhat on what our 0132 1 jackpots look like through the remainder of the year. 2 And that's all I had on transfers. Well, one other 3 item, that is, so far, our unclaimed transfers to the 4 state have amounted to a little over $28 million, and 5 you'll find that, I believe, on the second page of your 6 report. 7 Behind the green divider are the budget 8 reports for both the lottery and the charitable bingo 9 operations division. There is nothing of significance 10 to report. We're staying within our budget both for 11 the lottery and for bingo and we don't anticipate 12 anything changing other than the fact that, since our 13 sales -- you know, we expect to have a high sales year 14 this year -- you will see the budget for the lottery 15 operator contract increase as we go through the year, 16 and, of course, we're funded for that on a dollar for 17 dollar basis. 18 (AGENDA ITEM NO. 11) 19 CHAIRMAN CLOWE: Thank you, Lee. 20 Next Item Eleven: Report, possible discussion and/or 21 action on the 79th Legislature. 22 MS. TREVINO: Good afternoon, 23 Commissioners. For the record, I'm Nelda Trevino, the 24 director of governmental affairs. More than 5800 bills 25 have been filed this legislative session, and we're 0133 1 currently tracking and monitoring 167 bills for 2 possible impact on our agency. We've provided each of 3 you an updated tracking report this morning to replace 4 the one that was in your notebooks. I would like to 5 provide a brief update on several bills of interest. 6 First of all, the agency's Sunset Bill, 7 Senate Bill 405, by Senator Mike Jackson was voted 8 favorably by the Senate Government Organization 9 Committee on April the 12th and has yet to be 10 considered by the full Senate. The House version of 11 the Sunset Bill, House Bill 1434, by Representative 12 Peggy Cameron was considered on May 4th by the House 13 Licensing and Administrative Procedures Committee. 14 Both Reagan and Billy were in attendance to serve as 15 resources to the committee. A substitute was voted 16 favorably by the House Committee on May the 5th and the 17 bill has been reported from the committee as of 18 yesterday. 19 House Bill 1138 by Representative Kino 20 Flores relating to the operation and regulation of 21 charitable bingo was considered and passed by the House 22 of Representatives on April the 19th. The bill has now 23 been referred to the Senate State Affairs Committee and 24 is pending a hearing date. It is our understanding 25 that Senator Ken Armbrister will be carrying the bill 0134 1 on the Senate side. House Bill 2797 by Representative 2 Norma Chavez, which authorizes federally recognized 3 Indian tribes along the Texas/Mexico border to engage 4 in bingo without states licensing, was voted favorably 5 by the House Committee on Licensing and Administrative 6 Procedures. 7 House Bill 3410 by Representative 8 Patrick Rose, which relates to immunity from liability 9 from certain civil pains and civil actions against 10 lottery retailers, this sat on the House calendar for 11 today. House Bill 3224 by Representative Debbie Riddle 12 relates to the creation of the Texas Service Members 13 Memorial Fund, and this bill includes the provisions to 14 reallocate the use of lottery unclaimed prizes, and was 15 voted favorably by the House Defense Affairs and State 16 and Federal Relations Committee. 17 Another bill of interest, House Bill 18 3540, relating to certain fiscal matters affecting 19 governmental agencies, by Representative Jim Pitts, was 20 considered by the full House last week. An amendment 21 by Representative Charlie Howard was added to the bill 22 that states, the agency shall report to the legislature 23 the return on investment for advertising during fiscal 24 years 2003 and 2004. Another floor amendment by 25 Representative Norma Chavez was also adopted, and the 0135 1 provision of this amendment is basically the language 2 in Representative Chavez's Bill, House Bill 2797, that 3 I just mentioned. 4 Several other amendments which have 5 impact on the agency were also considered when House 6 Bill 3540 was being considered by the House which were 7 not adopted, and these included provisions authorizing 8 lottery ticket sales over the Internet and authorizing 9 licensed bingo organizations to conduct charitable 10 poker games. And, again, those two amendments were not 11 adopted by the House. The Appropriations Bill, Senate 12 Bill 1, continues to be considered by the Senate and 13 the House Conference Committee. And while the agency's 14 appropriations for the upcoming has been adopted by the 15 Conference Committee, there are several issues 16 applicable to all state agencies, like the proposed 17 across-the-board employee pay raise, potential 18 reductions in agency's FTE levels are still under 19 consideration by the Conference Committee, and we'll 20 certainly keep you posted on the developments of their 21 actions. 22 And this concludes my report. I'll 23 be happy to answer any questions. And I'm also happy 24 to report that there's, as of today, 20 days left in 25 this legislative session. 0136 1 CHAIRMAN CLOWE: Thank you, ma'am. 2 MS. TREVINO: Thank you. 3 (AGENDA ITEM NO. 12) 4 CHAIRMAN CLOWE: Next Item 12: 5 Consideration of and possible discussion and/or action 6 on external and internal audits and/or reviews relating 7 to the Texas Lottery Commission and/or the Internal 8 Audit Department's activities. 9 MS. MELVIN: Good afternoon. For the 10 record, I am Catherine Melvin, director of the Internal 11 Audit Division. I'd like to provide a very brief 12 update on current internal and external reviews of the 13 agency. Regarding internal reviews, in addition to 14 several special projects, the Internal Audit Division 15 staff are currently working on reporting the audit. 16 That audit has gone very well. The Lottery Commission 17 staff has been very helpful in assisting us through 18 that process. 19 Regarding the external review, the 20 controller's office postpayment audit is still ongoing. 21 As you are aware, this audit is purchasing, travel, and 22 payroll transactions. The internal audit continues to 23 serve as a liaison for the reviewer's, and the lead 24 auditor has indicated that the draft audit report is 25 anticipated sometime in June. 0137 1 And that concludes my report. If you 2 have any questions? 3 CHAIRMAN CLOWE: Thank you, ma'am. 4 COMMISSIONER COX: I've got an 5 observation, if this is the appropriate time. 6 CHAIRMAN CLOWE: Yes. 7 COMMISSIONER COX: Catherine, you were 8 here for the discussion and presentation by the 9 statisticians today? 10 MS. MELVIN: Yes. 11 COMMISSIONER COX: And they talked about 12 those automatic draw machines and the like. 13 MS. MELVIN: Yes. 14 COMMISSIONER COX: And they talked about 15 E prompts being certified and delivered in the field 16 and that nobody had access to them and the like, and I 17 guess I got two things: One, was that process subject 18 to the security audit that Jefferson Wells did for us? 19 MS. MELVIN: I don't want to speak for 20 the auditors, but included in their review was to look 21 at the security of the games of the commission, so that 22 was included. Now, to what depth or to what extent 23 they reviewed his procedures, I can't speak for them, 24 but I know that that was included. 25 COMMISSIONER COX: The scope, whether 0138 1 they sampled and to what extent, you don't know? 2 MS. MELVIN: I don't know, but it was 3 definitely within the scope. 4 COMMISSIONER COX: There is a book out 5 there and I have a copy of it, but I don't know where 6 it is, because I gave it Ms. Kiplin and she gave it to 7 somebody else and I think somebody gave it to the 8 Chairman. At any rate, the name of this book is 9 License to Steal, and it is a number of cases from 10 Nevada relating to regulatory violations, and one of 11 them has to do with reprogramming E prompts such that a 12 slot machines could be manipulated, and as a result of 13 having read that, I know that there is that possibility 14 under certain circumstances, not that there is under 15 our circumstance, so what I would like for you to do is 16 to find that book and -- 17 CHAIRMAN CLOWE: I think Billy has it. 18 MR. ATKINS: Mr. Cox, we purchased a 19 copy of the book and we will be happy to share it with 20 you. 21 COMMISSIONER COX: Okay. Good. 22 CHAIRMAN CLOWE: Because he lost yours. 23 COMMISSIONER COX: Read that chapter on 24 E prompts, and not necessarily to follow what would 25 have happened over there to see that it isn't happening 0139 1 here, but with heightened sensitivity after having read 2 that article, auditing as you think appropriate to be 3 sure that that E prompts is safe. 4 MS. MELVIN: I will follow up on that. 5 COMMISSIONER COX: They've talked today 6 about it's opened up when the vendors come in. Well, 7 tell me about that. Has it been sent and recertified 8 after the vendors come in to do work on it or what? So 9 please satisfy yourself on that and give us a report on 10 that. 11 MS. MELVIN: I can tell you, I went and 12 pulled my notes on the ADM, and when it was first 13 installed back in November, my notes say November 2003, 14 that I was there and walked through the security 15 features over that machine, and then more recently, and 16 my notes say about July 2004, Ms. Trevino and Catrina 17 Rivers may have prepared a presentation regarding some 18 of the security features in August or July 2004, and I 19 also sat down with them, so I walked through and looked 20 at the security features regarding the ADM, but I am 21 very interested in the book that you're mentioning and 22 I will get back to you. 23 COMMISSIONER COX: Thank you. 24 CHAIRMAN CLOWE: Thank you, Catherine. 25 Thank you, Commissioner. 0140 1 (AGENDA ITEM NO. 13) 2 CHAIRMAN CLOWE: Next we'll take up Item 3 13: Consideration of and possible discussion and/or 4 action on the broadcast studio and production services 5 procurement. 6 MR. MARKER: Good afternoon, 7 Commissioners. My name is Andy Marker. I'm deputy 8 general counsel for the Commission. I'm here to 9 provide an update on the Broadcast Studio and 10 Production Services. Last month, the Commission issued 11 a request for proposals. These proposal conferences 12 were held last week and a proposal will be June 16th. 13 I'd be glad to answer any questions you may have. 14 CHAIRMAN CLOWE: Thank you, Mr. Marker. 15 Next item, I'd like to return to Item 16 Number Five on our agenda. 17 Ms. Nettles, you had filled out a 18 witness affirmation form, I think, regarding that item, 19 and I called on you at that time and you were not here, 20 so I'd like to call on you now, if you're ready, 21 please. 22 MS. NETTLES: Thank you. It never 23 fails, every time I step outside, y'all get right where 24 I don't want you to be. For the record, My name is 25 Donna Nettles, I put a lottery report out of Dallas. 0141 1 As I was listening to you all talk earlier, 2 specifically Commissioner Clowe -- or, I don't remember 3 who it was -- you said something about the Commission 4 had been using a random generator since the inception 5 of the Quick Picks, and as soon as you said that, my 6 mind just went off because I remembered something that 7 I've been tracking for awhile. I know that several of 8 you all know that a couple of years ago I had printed, 9 in my Lotto report as well as on my web site, that I 10 don't recommend people to purchase quick picks, and 11 I've never fully explained why I made that statement, 12 other than I simply stated it's because they're not 13 random. 14 And when you said that, I realized that, 15 of all your reports that I've seen, and I mentioned 16 I've never seen anything from Dr. Eubanks with regard 17 to the Quick Pick process and any analysis that he has 18 done, so I actually had an opportunity today to ask him 19 if he had ever done that, and I asked him if he had 20 evaluated the pretest results and he said yes, he had. 21 And I asked him at that time if he had ever evaluated 22 the Quick Pick process, and he said no. So at that 23 time, I did tell him that he really ought to do that 24 because he's going to find that they're not random at 25 all. I picked up on something two years ago and I 0142 1 followed it, and I would be real curious to see if he 2 comes out with the same conclusion that I did in my 3 findings on it. I did have some additional help from 4 statisticians from across Texas that reviewed this with 5 me, but I was unable to get some of the documents that 6 I needed out of the Commission to fully, completely 7 evaluate the whole thing. So, with relations to the 8 Quick Picks, I simply want to say that I hope that you 9 all will really evaluate G-Tech's Quick Pick selection, 10 and you're going to find that they're really semi 11 random, and I would like to see that done away with 12 playing. 13 Last month, if y'all will recall, the 14 bingo folks were here and you had people from 15 everywhere in here, and I seized on the opportunity, 16 knowing that the issue of animated draws was 17 forthcoming, so I took it upon myself to do a little 18 research with those bingo people last month, and I 19 asked those people outside what their players would do 20 if their hall decided to take away the balls and the 21 machines, universally, every one of them here died 22 laughing and said, we'll we'd lose all of our 23 customers. And I said, you mean you think your 24 customers would object to not being able to see those 25 balls coming out of the machines? And they said, oh, 0143 1 absolutely, they would object. And we got to discuss 2 the computerized draws with those people that were here 3 last month, and they said that they would definitely 4 lose all their business. So Billy has a perfect 5 opportunity to ask people and to get their input about 6 what they see. 7 I did used to play bingo many, many 8 years ago, and I can assure you that, as a bingo 9 player, I want to see that number coming out of the 10 ball, and that goes for Lotto or the online games as 11 well, so I really hope that before you really do 12 consider switching over to just animated draws that you 13 really take into consideration that the people really 14 want to see the balls come down. 15 CHAIRMAN CLOWE: Let me ask you a 16 question in that regard: I'm failing to get an 17 accurate picture of the comparison you're attempting to 18 draw there. In a bingo hall, people are there 19 physically and they see the drawing, the act of the 20 drawing. One of the problems I'm having about our 21 broadcasting of the lottery draws is that I think it 22 gives people comfort that the balls are drawn, but very 23 few people are seeing it, and when you say that you 24 feel that the lottery customer wants to see the balls 25 drop, if that's a correct term, what do you mean by 0144 1 that? What -- You just want to -- are you saying they 2 just want to know that they're dropped? They're not 3 seeing them. 4 MS. NETTLES: Yeah, you're exactly 5 right. 6 CHAIRMAN CLOWE: Help me understand your 7 position. 8 MS. NETTLES: Okay. My position is -- 9 and I've been saying this for a long time -- the Texas 10 Lottery needs television coverage and they need to see 11 those draws. I can assure you that that is a big 12 problem, besides the odds issue, which you know how I 13 feel about. Besides the odds issue, you're losing a 14 lot of business because people cannot see those 15 drawings on television. They used to be aired. And I 16 have already told the television stations -- I did that 17 about a year ago, and I got -- I don't know -- probably 18 30 different stations across Texas, or maybe even 50, 19 on why they were not showing the drawings, and it 20 really doesn't have anything to with to time -- well, 21 it did have something to do with the time because it 22 was too many draws was the bottom line, but somehow or 23 another if this Commission really wants to improve 24 their sales, they really need to find a way to get 25 those drawings -- at least Lotto Texas on Wednesday and 0145 1 Saturday night and Mega Millions. They need to get 2 those draws on TV and those people need to see the real 3 balls. 4 I know you all know about New York. New 5 York has -- from what I've observed just an Mega 6 Millions, they have tremendous sales. New York 7 wouldn't even consider animating their draws because 8 their TV stations air them. You did know that, didn't 9 you, that New York has tremendous television coverage 10 on their draws? 11 CHAIRMAN CLOWE: I'm not aware of their 12 television coverage. 13 MS. NETTLES: Oh, they -- every TV 14 station in New York -- or, every major area in New 15 York, they have coverage. 16 CHAIRMAN CLOWE: And do you have 17 personal knowledge of that? 18 MS. NETTLES: Yes, sir. 19 CHAIRMAN CLOWE: How do you have 20 personal knowledge? 21 MS. NETTLES: Actually, I got it from 22 the Commission in an e-mail discussing this issue here 23 about computerized draws, and then I confirmed it. 24 CHAIRMAN CLOWE: And do you have that 25 document with you? Could I see that? 0146 1 MS. NETTLES: I don't have it on me, 2 sir. I can find it. I know exactly where it is. I 3 know the stack that it's in. And, absolutely, it's in 4 an e-mail, I believe, from -- I can't remember who did 5 the research. I guess it was Robert Tirloni doing the 6 research, and it was a report sent to Gary, I believe. 7 But, Commissioner Clowe, I could be wrong, but, yes, 8 sir, I do have it. 9 CHAIRMAN CLOWE: Well, you know, we've 10 been down this road so many times just talking about 11 television coverage. We have done so many things in 12 this agency to increase the attractiveness of those 13 drawings and talk about changing the times, you know, 14 to make it more attractive, and we have that up link, 15 and the coverage is not at all, in my opinion, drawing. 16 My sense is, the majority of the players get it -- 17 rather than live, they may get it after the numbers are 18 drawn and they're just flashed up on the television set 19 very briefly, but the majority of them either get it 20 out of the newspaper the next day or online at the or 21 convenience store on a purchase point at a grocery 22 store, HEB or Albertsons or wherever it may be, by 23 taking their tickets there. So you're telling me that 24 you think television coverage is extremely important? 25 MS. NETTLES: It's every important. And 0147 1 I actually can tell you why you lost you're television 2 coverage. I know because I did the research at the 3 time and I actually told the Commission at the time 4 that this was why. You got to go back to a number of 5 years ago when Texas started -- introduced the game 6 Texas Million, like when they had the 100 balls and 7 draw four or whatever, at that time they changed the 8 drawing studio and they had that -- conducted that 9 drawing first and then they proceeded on to the Cash 10 Five and the Pick Three and whatever. I forget which 11 days it was on television. The television stations 12 reported back to the Texas Lottery Commission and told 13 them, we do not have time. If you read -- get your 14 format back, look at it. 15 CHAIRMAN CLOWE: When was that? 16 MS. NETTLES: I don't remember when 17 Texas Million started. '95, '97, '98. 18 CHAIRMAN CLOWE: And do you have 19 personal knowledge that the television stations -- 20 MS. NETTLES: Absolutely. In fact, I 21 took it up to Linda Cloud because it was Linda who -- 22 CHAIRMAN CLOWE: What do you have that 23 you can show me about that? 24 MS. NETTLES: I don't know what I have 25 that I can show you about it, but I've commented on it 0148 1 up here. 2 CHAIRMAN CLOWE: When you say that, help 3 me understand how you come to that conclusion. What 4 documentation do you have? 5 MS. NETTLES: I contacted television 6 stations myself and spoke to the producers. 7 CHAIRMAN CLOWE: And have you got a 8 record of that, who you talked to? 9 MS. NETTLES: Well, yes, sir, but -- 10 CHAIRMAN CLOWE: See, we've started 11 doing the same thing. We've gone back and talked to 12 the television stations and we don't get that answer 13 that you're getting. We get -- 14 MS. NETTLES: You'll have to go back to 15 Keith Elkins or Linda Cloud, and I can assure you that 16 that's what they discovered back at the time, because 17 that's what I discovered and I discussed it with them 18 at length. 19 CHAIRMAN CLOWE: Well, the problem I'm 20 having is that, you know, we've done it more recently 21 than that period and we're not getting those answers 22 today. 23 MS. NETTLES: Well, that's -- that was 24 the initial upset at the television stations as to the 25 Texas Lottery, because the opinion was -- and, 0149 1 actually, I'm just remembering one in particular, and 2 he very emphatically told me, he says, we tried to tell 3 them and they wouldn't listen, so we were pissed. 4 CHAIRMAN CLOWE: Who was that? 5 MS. NETTLES: That's what he didn't want 6 known, but it was a major TV station in Dallas, but I 7 don't honestly don't even remember his name. I would 8 have to go find my notes. Sir, I have so many notes 9 from all these years. 10 CHAIRMAN CLOWE: Well, I'm trying to 11 understand. 12 MS. NETTLES: I'm telling you the truth 13 and I -- 14 CHAIRMAN CLOWE: I don't doubt that at 15 all, but I just -- 16 MS. NETTLES: That's where the trouble 17 started, and you can go back and almost pinpoint it 18 when it stopped being aired because that's when the 19 Texas Lottery lost their drawings because there was 20 only so much time in that one minute. That's when the 21 drawings were on at 9:59, and that tape had been 22 edited. They did not have enough time for the drawing 23 of the Texas Million. I can't even remember what time 24 Texas Million was drawn. Was that Tuesdays and 25 Fridays? I don't even remember, but I know that that 0150 1 was the start of the problem. 2 And I do know for sure -- and I know 3 this because the players told me -- they can't see the 4 drawings so they don't want to play it. If they can't 5 watch those drawings on TV, they don't really want to 6 play because that's taking away the fun. I would 7 get -- if the Commission wants to start picking up, 8 they really need to see that those draws are seen on 9 TV. And I -- the animation I'm not in favor of and I 10 don't believe that it's the time that it takes, and I 11 know the people want to see the real thing. And I 12 really think it would help your sales if you could -- 13 maybe it would help your sales. But, anyway, about New 14 York, I will try when I got back to Dallas tomorrow to 15 find the very specific e-mails that describe New 16 York's. I can see. I can visualize. 17 CHAIRMAN CLOWE: I'd appreciate that. 18 MS. NETTLES: To show you that New 19 York -- and, anyway, they can tell you, I'm sure. 20 CHAIRMAN CLOWE: Reagan, you're familiar 21 with the director at the New York Lottery and I'd 22 appreciate it if you would gather what information you 23 can on the subject as well. 24 MR. REAGAN: I'll be happy to get that 25 information. 0151 1 MS. NETTLES: Okay. And this doesn't 2 have anything to do with this other, but as the 3 advertising people were talking, they also struck a 4 note with me, too. I've never really looked at the 5 lottery's advertising. I've never really studied any 6 of it, where y'all advertise, besides what I see on TV 7 or billboards. And you all know I'm an ad agency, but 8 I don't do your kind of business, so I'm not going to 9 try to solicit your business. 10 CHAIRMAN CLOWE: You're an ad agency? 11 MS. NETTLES: Yes, sir, that's what I've 12 been. 13 CHAIRMAN CLOWE: I thought you were a 14 publisher. 15 MS. NETTLES: I am. I started out as an 16 ad agency, and that's where I got my first start, in 17 publishing, but -- 18 CHAIRMAN CLOWE: I didn't know that. 19 MS. NETTLES: Oh, yes. I've assisted a 20 lot, mostly in the home building industry in the Dallas 21 area. I've assisted a great many builders to try to 22 get their sales up or their inventory sold. But at any 23 rate, my point is that -- do y'all do print advertising 24 in magazines and such? 25 CHAIRMAN CLOWE: Yes. 0152 1 MS. NETTLES: You are in magazines? 2 CHAIRMAN CLOWE: Yes. And the 3 newspaper. 4 MS. NETTLES: One suggestion I might 5 have for the agency -- the Texas Lottery Commission is, 6 some ad agencies -- well, all print media gives a 7 commission for selling advertising in their magazines. 8 Some agencies give that commission back to their 9 customer. In the case of the Texas Lottery, I don't 10 know if your agency is giving you that commission back 11 for you to have additional funds or if they're keeping 12 it, and, you know, a lot of agencies keep it. In fact, 13 most keep the money and the customer never even know 14 that there is such a discount, but when an agency plays 15 media, they get a commission for it and a discounted 16 rate. You pay the agency and the agency pays the -- 17 well, so you might ought to -- that might be a way to 18 save on the $32 million a year budget. 19 CHAIRMAN CLOWE: Of course, those 20 contracts are bids, you know. 21 MS. NETTLES: Those contracts -- 22 MS. KIPLIN: Mr. Chairman, I think 23 we're -- 24 CHAIRMAN CLOWE: I'm getting ready to go 25 to the item that we're in now, and I knew that you were 0153 1 going to say something about it. I think this is 2 covered, isn't it, counselor? Let me find the item on 3 the agenda, because I know we must stay on the agenda. 4 Would that be either under item five or -- 5 MS. KIPLIN: Item six? 6 CHAIRMAN CLOWE: Item six, yes. 7 MS. NETTLES: It's about your 8 advertising. Which one would that be when they were 9 talking -- 10 CHAIRMAN CLOWE: Would we be okay under 11 six? 12 MS. KIPLIN: Yes, we would be. I just 13 wanted to make sure for the record. 14 CHAIRMAN CLOWE: And I knew you were 15 going to call me on that, so I wanted to get either on 16 five or six. I would refer you to the contracts the 17 Commission has if you'd like to see those. 18 MS. NETTLES: No, sir. I'm just 19 offering you a piece of friendly advice. That's all I 20 was doing, nothing more than that. 21 CHAIRMAN CLOWE: Okay. Very good. 22 MS. NETTLES: That would be an avenue 23 that y'all might check into when you do your bids, are 24 they giving you the discount price or are they giving 25 you the retail price? That's it. 0154 1 CHAIRMAN CLOWE: Sure. 2 MS. NETTLES: So that's all I had to say 3 today is, I basically wanted to just comment on the 4 Quick Pick selection and the random draws that you were 5 referring to earlier. That's what prompted my entire 6 comment. I hope that y'all will talk to the bingo 7 folks and ask them to confirm what I'm telling you 8 about the players seeing those balls. 9 CHAIRMAN CLOWE: Well, I just would, 10 then -- since you brought that up again, I would just 11 have to tell you that I see those two examples as being 12 very different. I see folks being in a bingo hall 13 playing bingo and watching the balls and marking their 14 cards, the cardboard, or having electronic card 15 minders. I see them engaged in an activity that is 16 very different, at least in my mind, from a person who 17 purchases a ticket, an online ticket, and the 18 drawing -- the activity that designates a winner is 19 conducted at a remote location and at a different time 20 than that's purchased. 21 I understand what you're pointing out as 22 a similarity in your mind, and I just want to respond 23 to you that I see it as a social event in a bingo hall, 24 having visited the number of halls that I have, where 25 people are engaged in something of a social activity 0155 1 and the purchase of an online ticket where a person 2 could carry that in their pocket or their purse and 3 then seeing the balls fall and that choosing of the 4 winner. I don't associate that in the same way as I do 5 what goes on in a bingo hall. 6 MS. NETTLES: I would venture to say 7 that probably 50 percent of the people that play your 8 lottery are bingo players. 9 CHAIRMAN CLOWE: That's an interesting 10 question. I think -- I think Billy wishes a lot more 11 of them were bingo players. 12 MS. NETTLES: Well, no, I'm saying he 13 lost bingo players. I'm telling you, I used to play 14 bingo twice a week, and have since I was 18 years old, 15 until the lottery. 16 CHAIRMAN CLOWE: They have migrated from 17 being bingo players to lottery? 18 MS. NETTLES: From bingo players to 19 lottery, yes, they have moved. And those bingo 20 players, they want to see those balls, they want to see 21 those machines. You take those balls and machines away 22 from them and they're not going to have any trust, and 23 that's what those bingo people told me. I said, you 24 know if they're computerized draws, you know that 25 computer can generally send those computers that they 0156 1 play bingo on there. And they said, oh, we know 2 exactly what numbers are in those computers, and if we 3 did have computerized draws, we could know who could 4 win and we could control that. 5 CHAIRMAN CLOWE: You know, that's an 6 interesting view. We had a presentation here. Where 7 are we? Are we okay? 8 MS. KIPLIN: Back on Item Five. 9 CHAIRMAN CLOWE: We had a presentation 10 here where the bingo industry came in and they want to 11 go with a random number generator, or fairness number 12 of generators, I think they were. They want to get 13 away from the balls, and it's interesting that they -- 14 where these are authorized and were they are legal, and 15 if I remember correctly, it is enhancing the 16 playership, and what they do, Ms. Nettles, is they 17 can -- it's like if you've been where this type of 18 gambling is legal, they can multiply and make choices 19 and it adds complexity. It's not just hitting five 20 numbers. You know, this is a very interesting subject. 21 MS. NETTLES: I know. Well, you see, 22 bingo lost its pazzazz. I really didn't follow the 23 Texas Lottery and the bingo and all of that and how 24 y'all come to play, but I remember being in the hall 25 and hearing how this Texas law was affecting them and 0157 1 all of this, affecting their licenses, and I remember 2 hearing all of the complaints from the bingo owners, 3 and I distinctly remember the bigger halls taking over. 4 You see, I played with the VFW. We had a crowd of 100, 5 200 people there twice a week and we had good jackpots, 6 you know, $200 or $300 a night, and, of course, your 7 big ones, and the bigger halls were not -- I hate to 8 say this, but they weren't as honest as your little 9 ones, and sometimes those people were always saying the 10 owners of those big halls are cheating. I remember 11 some newspaper stories. In fact, I even remember a 12 builder or a developer who owned a bingo hall and he 13 got caught and he got in a lot of trouble. 14 CHAIRMAN CLOWE: We're out of bounds. 15 MS. NETTLES: I'm just talking. I'm 16 just telling you that bingo players -- Billy lost his 17 people to the Texas Lottery and they want to see balls 18 and machines. 19 CHAIRMAN CLOWE: Thank you. Thank you 20 very much. 21 (AGENDA ITEM NO. 16) 22 CHAIRMAN CLOWE: Next item 16: 23 Consideration of the status and possible entry of 24 orders in dockets designated by the letters A through 25 M. Mr. White. 0158 1 MS. KIPLIN: Commissioners, I want to 2 make you aware that we do have a motion for rehearing, 3 and that is in the Texas -- it's been filed, Texas 4 Lottery Commission versus the B'Nai B'Rith Lodge 3283. 5 It's my understanding that there is a person that is in 6 the audience. I don't know if that gentleman wishes to 7 address the Commission or not. 8 CHAIRMAN CLOWE: Let's take that item up 9 separately. And, first, Mr. White, if you will deal 10 with the docket the counselor has just designated under 11 letter L, Docket No. 362-05-0864B. And if there is a 12 person wishing to give comments, is it properly noticed 13 for that and is it Commission's ability to hear it? 14 MS. KIPLIN: Well, I think it's properly 15 noticed. I guess the admonition I would give you all 16 is that this is an outcome of a contested case 17 proceeding, Procedurally, you've already entered the 18 order, and if the gentleman would like to come forward 19 and address the Commission, he must contain his remarks 20 with the record that was developed at the State Office 21 of Administrative Hearings. There has been a motion 22 for rehearing filed and the agency has filed a reply. 23 Those documents are in your notebook. 24 CHAIRMAN CLOWE: The order has been 25 signed? 0159 1 MS. KIPLIN: Yes, sir. And it is timely 2 for you to take up the motion today and listen to what 3 I would say couches oral argument. No, this is not the 4 appropriate forum to begin to take in new or additional 5 evidence or hear things -- 6 CHAIRMAN CLOWE: We'd have to stay 7 within the record. 8 MS. KIPLIN: Yes, sir. 9 CHAIRMAN CLOWE: Is it your pleasure to 10 hear comments? 11 COMMISSIONER COX: It is. 12 CHAIRMAN CLOWE: Is there anybody in the 13 audience regarding this matter? 14 MR. ROTHENBERG: Yes, sir. 15 CHAIRMAN CLOWE: Are you representing 16 B'Nai B'Rith Lodge? 17 MR. ROTHENBERG: Yes, sir. 18 CHAIRMAN CLOWE: Do you have counsel? 19 MR. ROTHENBERG: No, sir. 20 CHAIRMAN CLOWE: Okay. Sit down and 21 prepare yourself. We'll take a short recess, and when 22 we come back, Mr. White, we'll give you the first 23 opportunity to present. 24 And then may I have your name, sir. 25 MR. ROTHENBERG: Arthur Rothenberg. 0160 1 CHAIRMAN CLOWE: Mr. Rothenberg, we'll 2 call on you following Mr. White. 3 MS. KIPLIN: While we take a break, I'd 4 like to visit with Mr. Rothenberg and give him some 5 idea of how this process works. 6 CHAIRMAN CLOWE: That would be very 7 helpful. Prepare him for what he wants to do. 8 (A short break was taken.) 9 CHAIRMAN CLOWE: Let's come back on the 10 record, please. 11 Counselor, where are we? 12 MS. KIPLIN: Commissioners, what you 13 have in front of you on the B'Nai B'Rith Lodge 3283 14 matter is procedurally -- and let me go ahead and 15 refresh your recollection. At an earlier Commission 16 meeting, you all considered the proposal for a decision 17 in the recommended order by the State Office of 18 Administrative Hearings in this matter, and their 19 matter, it's my understanding -- I can't recall it all. 20 I'll, I guess, defer to Mr. White on whether it was a 21 denial of a rule application or a revocation of an 22 existing license. This matter did go before the State 23 Office of Administrative Hearings. It came before you. 24 You all did enter an order, I believe, denying the 25 renewal application. 0161 1 Mr. Rothenberg -- and I apologize if I'm 2 mispronouncing your name -- is here today to represent 3 B'Nai B'Rith Lodge No. 3283 in connection with a motion 4 for rehearing that has been filed in this matter. The 5 staff has filed a reply to the motion for rehearing. 6 While we were taking a brief break, I did discuss with 7 Mr. Rothenberg the constraints that the Commission is 8 under, and I'll remind you that you all do not take 9 evidence in these matters. The State Office of 10 Administrative Hearings is the entity that listens to 11 the evidence in whatever format, that is, whether it's 12 oral or it's written, and then they enter findings of 13 facts and conclusions of law in connection with the 14 findings of fact, and so that is set out in a proposal 15 for a decision, which you, by your order, did adopt 16 those findings and those conclusions. 17 Mr. White has filed a reply to the 18 motion for rehearing. It's Mr. Rothenberg's motion. I 19 have cautioned him that there has been a record that 20 has been developed, an evidentiary record, at the State 21 Office of Administrative Hearings and this is not the 22 appropriate forum or proceeding in which you all will 23 now listen to new evidence. It's really up to 24 Mr. White and Mr. Rothenberg to -- of course, 25 Mr. Rothenberg is disadvantaged because it's my 0162 1 understanding that he did not appear at the evidentiary 2 proceeding at the State Office of Administrative 3 Hearings, so I guess it really does fall on Mr. White's 4 shoulders and responsibility to make a proper objection 5 that the comments that Mr. Rothenberg is making fall 6 outside the record. 7 I will say to you that you have several 8 different options, as you do in any motion for 9 rehearing, that is, that you can overrule a motion for 10 rehearing by written order; you can allow the motion to 11 be overruled by virtue of just allowing time to go by; 12 or you can grant a motion for rehearing, and in that 13 case it will depend on what you want to do in 14 connection with granting that motion for rehearing, and 15 I will wait until that part develops. 16 CHAIRMAN CLOWE: Okay. Let us ask you 17 some procedural questions at this point. If the 18 Commission wants to give Mr. Rothenberg whatever 19 opportunity he can take advantage of at this point in 20 time, wouldn't we be sending him back to the 21 administrative judge that heard this case? 22 MS. KIPLIN: No. I mean, I think 23 that it -- it doesn't necessarily connect that if 24 somebody files a motion for rehearing, you 25 automatically send them back to the State Office of 0163 1 Administrative Hearings. It's up to that person to 2 tell you in the motion for rehearing -- and there is a 3 legal sufficiency element in a motion for hearing -- 4 how the Commission errored in connection with the order 5 with a legal sufficiency. 6 CHAIRMAN CLOWE: So we can hear him 7 today, but he's got to stay within the record? 8 MS. KIPLIN: He's got to stay within the 9 record. And I will -- and I don't want to put words in 10 either one of the party's mouth; I think they're 11 capable of doing that themselves, but my sense is that 12 his issue focuses on an alleged lack of notice on a 13 continued hearing, and so that's -- you know, I'll just 14 forecast -- 15 CHAIRMAN CLOWE: And that's not in the 16 record? 17 MS. KIPLIN: There are documents that 18 have been made part of the record. For example, the 19 original notice of hearing, the order continuing the 20 hearing with a date certain is part of the 21 administrative record. The proposal for a decision 22 that was circulated to the parties is definitely a part 23 of the administrative record. So, there are documents 24 that are part of the administrative record. To go 25 behind those documents, especially in connection with 0164 1 alleged -- the allegations, and then, of course, the 2 findings becomes problematic. If it turns on, you 3 know, a notice issue, then I think, you know, that's a 4 different issue, and I'll leave it to those parties to 5 make that oral argument. 6 CHAIRMAN CLOWE: Mr. White, is there any 7 sense on your part from your conversation, while we 8 were off the record, with Mr. Rothenberg of any 9 compromise that can be reached between parties insofar 10 as your opinion? 11 MR. WHITE: No, sir, I do not believe 12 there is. This is a very serious violation, conducting 13 bingo outside a licensed time, basically conducting an 14 illegal bingo occasion. The notice was properly 15 served. The judge made such a finding, and I think the 16 staff's position is, the order is final and a motion 17 for rehearing should not be granted. 18 CHAIRMAN CLOWE: Okay. Mr. Rothenberg, 19 you indicated you're not an attorney and you don't have 20 counsel? 21 MR. ROTHENBERG: No, sir. 22 CHAIRMAN CLOWE: You're a citizen who 23 represents the lodge and you're here to speak on behalf 24 of the lodge? 25 MR. ROTHENBERG: Yes, sir. 0165 1 CHAIRMAN CLOWE: And do you understand 2 what the lawyers say when they have said that you can 3 only talk about what's in the record, you have to stay 4 within the record? 5 MR. ROTHENBERG: Yes, sir, I believe I 6 do. 7 CHAIRMAN CLOWE: You do? 8 MR. ROTHENBERG: If not please, correct 9 me. 10 CHAIRMAN CLOWE: You think you do, okay. 11 MR. ROTHENBERG: Well -- 12 CHAIRMAN CLOWE: Commissioner, I'd be 13 happy to hear from parties if that's all right with 14 you? 15 COMMISSIONER COX: Of course. 16 CHAIRMAN CLOWE: Okay. Mr. White, we'll 17 give you the first comments. 18 MR. WHITE: Thank you. My name is 19 Steven White. I'm chief enforcement legal services 20 division. This case involves a conduct organization, 21 B'Nai B'Righ Lodge 3283. There was a hearing conducted 22 in which it was found that the organization conducted 23 bingo outside its licensed times, which is a criminal 24 offense; basically, it's conducting a bingo occasion 25 without a license. 0166 1 The primary concern of Mr. Rothenberg, 2 who is representing the organization, is that he was 3 not provided adequate notice of the hearing, and I'm 4 only getting this verbally within the last couple of 5 minutes, and in that regard, I would first like to note 6 that, from a legal concern, he filed a motion for 7 hearing but he stated no basis for the motion for 8 rehearing. In my brief in which I responded, the law 9 is very clear that the motion for rehearing must state 10 very specifically what specific finding of fact or 11 conclusion of law issued by the administrative law 12 judge was an error and why it was an error. In his 13 motion for hearing, he did not cite to a single finding 14 of fact or to a single conclusion of law or to serve as 15 any kind of error. Basically, up until a few minutes 16 ago, I was left guessing what was the basis for his 17 request for this new rehearing. For that reason alone, 18 his motion for rehearing was inadequate and it should 19 be denied. 20 In substance, the administrative law 21 judge did consider the issue of proper notice and 22 there's a very specific finding in the proposal for a 23 decision that it was properly served on the respondent. 24 The initial hearing in this case was set for 25 December 2004. He was served with that notice of 0167 1 hearing. Mr. Rothenberg, on behalf of the 2 organization, he obviously received that notice because 3 he responded by requesting a continuance. The staff 4 agreed to the continuance in an effort to accommodate 5 the organization and Mr. Rothenberg. An order was 6 issued by the administrative law judge continuing the 7 hearing until February 22nd of 2005, and the hearing 8 was held on that date and nobody from the organization 9 appeared. 10 Mr. Rothenberg indicated a few minutes 11 ago that he never received that order issued by the 12 judge. And, again, all I can say for the record is the 13 judge said the notice was adequate. Why he did not 14 actually receive that order, I don't know, but he was 15 obviously aware because he had filed a motion for a 16 continuance. He acknowledged his receipt of the 17 staff's response, which is -- in our response, we said, 18 we'll agree to the continuance, we'd like a hearing, 19 and the date in that response was -- there were two 20 dates, and one of them was February 22nd, 2005. If, in 21 fact, he never received the judge's order setting it 22 for February 22nd, 2005, you would have expected -- it 23 would have been incumbent upon Mr. Rothenberg or other 24 representatives of the organization as it approached 25 that date to contact somebody, particularly the judge 0168 1 of the State Office of Administrative Hearings, and say 2 has this hearing been set for February 22nd, 2005. 3 Apparently he did not do that, and as a result he did 4 not appear at the hearing. That's unfortunate, but I 5 don't think if he would have appeared, it would have 6 made any difference in the outcome. 7 The hearing we had, the auditor who was 8 present during this illegal bingo occasion testified. 9 He testified at the hearing that she appeared at the 10 occasion along with one of our investigators. They 11 approached Mr. Rothenberg. Mr. Rothenberg indicated 12 that he was in charge of the bingo occasion. Our 13 auditor informed Mr. Rothenberg that no -- he was not 14 authorized to conduct bingo at that time and that he 15 needed to cease the bingo. Mr. Rothenberg simply 16 proceeded and continued bingo even after being told by 17 our auditor and by an investigator that it was an 18 illegal bingo occasion. 19 CHAIRMAN CLOWE: Is that in the record? 20 MR. WHITE: Yes, sir, it's in the 21 record. Her testimony is in the record and it's cited 22 in the judge's finding of fact. 23 The bottom line is, one, the motion for 24 rehearing is legally inadequate and should be denied 25 for that reason alone, in that, it states no error 0169 1 whatsoever, let alone referring to a specific finding 2 of fact or conclusion of law that was an error; two, 3 his verbal indication today, or statement today -- if 4 you want to call it an error -- is that lack of notice 5 is, there was no error in that regard for several 6 reasons, one, the judge so states in his proposal for a 7 decision that the notice was properly served; two, once 8 they requested the continuance, the organization, via 9 Mr. Rothenberg, requested this continuance and the 10 continuance was granted. Even if he assumed he did not 11 receive the actual order setting it for February 22nd, 12 he had some responsibility to follow up and ask the 13 judge and call the State Office of Administrative 14 Hearings and say, has this been reset, particularly 15 when the date was set out in the response, which he 16 acknowledges receiving. So, I do not think there's any 17 merit whatsoever, even to his verbal assertion of 18 error, being the lack of notice. 19 MS. KIPLIN: Commissioners, I would 20 direct your attention to Finding of Fact Six, which 21 does say, on December 13, 2004, in response to requests 22 filed by applicant -- that would be the organization -- 23 SOAH issued an order continuing a hearing in this 24 matter until February 22nd 2005. A copy of the order 25 was properly sent out by first class mail and facsimile 0170 1 transmission. 2 CHAIRMAN CLOWE: Okay. I think you've 3 made it clear, Mr. White, what your position is. 4 Mr. Rothenberg, what would you tell us? 5 MR. ROTHENBERG: Well, Mr. White said 6 that until this moment he never heard about the fact 7 that I hadn't received this notice, and I faxed 8 Mr. White on March 17th, as soon as I received the copy 9 of the order, which is the first I knew about it, and 10 indicated to him I hadn't received it along with 11 listing a few other items, and that day -- and I asked 12 him to please call me, and that day he did call me, so 13 this is not the first he's heard of it. 14 There's things here, you know, like he 15 says there was an auditor and investigator there, and 16 that's just not true. I'd like to know who the other 17 person was who was hiding in the rafters or something. 18 Yeah, there was an auditor there that day. 19 CHAIRMAN CLOWE: Did they ask you to 20 stop -- 21 MR. ROTHENBERG: She did not talk to me. 22 She did not talk to me other than when she first came 23 in and when she left. We said no words to each other. 24 MR. WHITE: I'd object to this line. 25 MS. KIPLIN: He's outside the record. 0171 1 CHAIRMAN CLOWE: Are you outside the -- 2 MS. KIPLIN: That's why Mr. White is 3 objecting. He's making a proper objection. 4 CHAIRMAN CLOWE: Well, now, you brought 5 up the fact that the auditor told him to stop. 6 MR. WHITE: Yes, sir. 7 CHAIRMAN CLOWE: And he's responding to 8 that. 9 MS. KIPLIN: He did not -- Mr. Chairman, 10 this is where it gets very sticky, because the 11 information that Mr. White is relying on was evidence 12 that was taken in an administrative record that was 13 developed at the State Office of Administrative 14 hearings and -- 15 CHAIRMAN CLOWE: Yeah, I understand. 16 MS. KIPLIN: -- now Mr. Rothenberg wants 17 to come and rebut evidence by offering testimony that 18 was not accepted at the State Office of Administrative 19 Hearings. 20 CHAIRMAN CLOWE: I understand. It's 21 outside the record. Well, it makes it difficult for me 22 as a commissioner when you can't respond to any of 23 these things that Mr. White has said are on the record 24 to do anything other than to vote denial of the 25 petition. I mean, there's just no grounds, as I see 0172 1 it, upon which I can base a vote to deny or to accept 2 the petition. 3 MS. KIPLIN: And if I could respond to 4 that. You know, there are generally three options that 5 arise in connection with considering a motion for 6 rehearing. I'll go through them. The first is, you 7 just let the motion overrule by operation of law. Most 8 governing bodies don't prefer that. The second is that 9 they listen to the oral argument. And that's really 10 what this is about. There are other agencies that 11 actually require there be a request filed for oral 12 argument, and you listen to that. 13 CHAIRMAN CLOWE: And the problem with 14 that in this case, in my mind, is that Mr. Rothenberg 15 is not an attorney, he doesn't have representation, and 16 it's so easy for him to get outside the record, and we 17 just did it right then, and now we're trying to get 18 back on it, so that's my problem with that one. 19 MS. KIPLIN: And then the other option 20 is that you can grant the motion and you can remand it 21 back to the State Office of Administrative Hearings for 22 the taking of additional evidence or this issue with 23 regard to notice. I would caution you, though, as the 24 general counsel, that there is a statutory body of law 25 in the Administrative Procedure Act that clearly sets 0173 1 out what process is to be followed in these matters, 2 and if a Commission gets into a practice of having 3 somebody appear in front of them who has not afforded 4 themselves of the opportunity before the State Office 5 of Administrative Hearings, then this is going to be -- 6 and in the past, as you'll recall, this is exactly what 7 occurs, where a respondent comes before you and then 8 wants to get another opportunity to develop a different 9 record or now to go and develop a record, and it really 10 is y'all's decision about how you would like to proceed 11 when you have these matters come before you. 12 CHAIRMAN CLOWE: Well, I will tell you, 13 as one commissioner, you know, I want to be responsive 14 to a member of the public who is conducting bingo and 15 not turn a deaf ear to him if it's within the law and 16 good practice and if they have grounds for 17 reconsideration. I, for one, as a commissioner, want 18 to give them that reconsideration, but it is difficult, 19 as I said, for me as a commissioner, if there aren't 20 grounds and if there cannot be anything other than that 21 which was established on the record considered, I have 22 no grounds with which to offer anything other than 23 allowing the order to become operation. 24 MS. KIPLIN: And part of this process is 25 that the parties received a proposal for a decision -- 0174 1 CHAIRMAN CLOWE: I understand. 2 MS. KIPLIN: -- and in that proposal for 3 a decision, they're given an opportunity to file, you 4 know, documents, one is an exception that they take 5 issue. Part of what was in here, which I read to you, 6 was the fact that he received notice and he had an 7 opportunity to object to that. 8 CHAIRMAN CLOWE: So what we're really 9 dealing with here, as I see it, is not now the facts of 10 the situation, but the facts of law, and the Commission 11 really must follow the law. 12 MS. KIPLIN: Yes. I think if you 13 decide, you know, on different cases what law you want 14 to follow and what law you don't want to follow, it 15 certainly creates a flawed process and one may argue, 16 well you -- you know, you went this way and you didn't 17 want to follow the law in a particular proceeding. 18 COMMISSIONER COX: I can't see any way 19 we can do what this gentleman is asking us to do 20 responsibly. Can you see a way that we can responsibly 21 do this? 22 MS. KIPLIN: No, I really don't. And I 23 want to distance myself from the prosecutor, but my 24 worry is that you really are in a position where you're 25 to accept the findings, and one of the findings in this 0175 1 case is that that organization was served with notice 2 of the continued hearing both in certified mail and via 3 facsimile, and that is a finding. Now, if you think 4 that you want to take additional evidence after the 5 trier of the facts, the very person whose office issued 6 the order resetting the hearing, and that judge is 7 indicating that it was sent certified mail and 8 facsimile, I goes you can, but I don't know what that 9 affords you when you have that finding and you really 10 can't go behind the finding. 11 CHAIRMAN CLOWE: Yeah, I know. I've 12 been in his chair. I know what it's like to lose 13 something that has been granted and it's a bitter taste 14 in your mouth. What's his path for the future? To 15 reapply? 16 MS. KIPLIN: To reapply. And I believe 17 that there is a sit-out time, if you will, in the Bingo 18 Enabling Act of a year, and then to apply, file an 19 application for an original license. There are no 20 grandfathered licenses, if you will, like there are 21 with commercial lessors licenses, so that would not be 22 something that, at least in my view, would be a 23 disadvantage. 24 CHAIRMAN CLOWE: Can Billy make any 25 comments at this point? 0176 1 MS. KIPLIN: He must stay within the 2 record, and I would caution him to do the same thing. 3 CHAIRMAN CLOWE: Can you make any 4 comments, Billy, within the record? 5 MR. ATKINS: Mr. Chairman, I think I'd 6 like to confer with counsel. 7 CHAIRMAN CLOWE: Please do. 8 MR. ATKINS: No, sir, not at this time. 9 CHAIRMAN CLOWE: Mr. Rothenberg, I'm 10 going to ask Commissioner Cox what his feelings are, 11 but I have a great amount of empathy for you and I wish 12 I were in a position to help you in some way, but I 13 don't feel it's justified based on the facts that have 14 been set out for us. 15 Commissioner Cox, do you feel 16 differently? 17 COMMISSIONER COX: No, sir, I do not. 18 CHAIRMAN CLOWE: Okay. Then, Mr. White, 19 we'll proceed with this case at this point in time. 20 What is the proper motion, counselor, 21 that the motion for rehearing be denied? 22 MS. KIPLIN: That the motion for 23 rehearing be overruled and all other relief requested 24 is denied. 25 CHAIRMAN CLOWE: So moved. 0177 1 COMMISSIONER COX: Second. 2 CHAIRMAN CLOWE: All in favor, please 3 say aye. Opposed? The vote is two/zero in favor. 4 MS. KIPLIN: Commissioners, there is an 5 order prepared. 6 CHAIRMAN CLOWE: Then, Mr. White, we'll 7 go forward with the other cases represented by letters 8 A through K and the case represented by the letter M. 9 MR. WHITE: Yes, sir. These cases 10 represent -- starting with ten lottery cases, all of 11 them were basically default hearings in which the 12 respondent did not appear in all cases. And I can read 13 them, I guess, for the record: Meyerland Citgo, Shop N 14 Go, Time Saver Food, Three Rivers Junior Mart, Handi 15 Stop No. 66, Shop Rite, Beverage Center, East Aviation 16 Food Mart, Crossroads Convenience Store, Drive N' Go. 17 All ten of these lottery retailers failed to maintain 18 adequate funds in their accounts and they were either 19 three times within one year they had insufficient funds 20 or one or two times, but they have never made good on 21 the insufficient funds. As a result, a hearing was 22 held by the State Office of Administrative Hearings to 23 revoke their licenses. The administrative law judge in 24 all ten cases recommended revoking their license, and 25 the staff recommends that you go along with the ALJ. 0178 1 CHAIRMAN CLOWE: That we approve the 2 recommended order. Correct? 3 MR. WHITE: Yes, sir. 4 CHAIRMAN CLOWE: And that's represented 5 by letters A through J? 6 MR. WHITE: I believe so, sir, yes, A 7 through J. And that leaves two other bingo cases. 8 CHAIRMAN CLOWE: So moved. 9 COMMISSIONER COX: Second. 10 CHAIRMAN CLOWE: All in favor, say aye. 11 Opposed? No. The vote is two/zero in favor. 12 Okay. Then, Docket No. 362-05-3392B. 13 MR. WHITE: Yes, sir. VFW 7109. Again, 14 a hearing was held before the State Office of 15 Administrative Hearings. The allegation in this case 16 was failing to timely submit a quarterly report and pay 17 prize fees three times within a year. My rule mandates 18 that revocation of the license occur when that happens, 19 and that is what the administrative law judge 20 recommended, and, again, the staff would recommend that 21 you adopt the administrative law judge's proposal for a 22 decision and revoke the license of VFW Post 7109. 23 CHAIRMAN CLOWE: And is that similar to 24 Case M, you want to have those both at the same time or 25 separate? American GI Forum Rockport. 0179 1 MR. WHITE: No, sir. That's different. 2 That is also a bingo case, but that's an agreed order. 3 The violation in that case was -- 4 CHAIRMAN CLOWE: Before you get into 5 that, then, I'll make a motion on Docket No. 6 362-05-3392B. I move the adoption of the 7 administrative law judge's proposal for a decision. 8 COMMISSIONER COX: Second. 9 CHAIRMAN CLOWE: All in favor, please 10 eye. Opposed? No. The vote is two/zero in favor. 11 Now to case No. 2005-57. 12 MR. WHITE: Yes, sir. That was another 13 bingo case. This one, the staff and the organization 14 known as GI Forum have entered into an agreed order 15 which the staff is recommending you adopt. The 16 violations in that case were using proceeds other than 17 a charitable purpose and a number of accounting 18 violations. The agreed order calls for basically the 19 organization to comply with the law, send all of its 20 officers to bingo training, and a $1,000 administrative 21 penalty. Again, the staff would recommend that you 22 adopt that agreed order. 23 CHAIRMAN CLOWE: I move we adopt the 24 agreed order. 25 COMMISSIONER COX: Second. 0180 1 CHAIRMAN CLOWE: All in favor, please 2 say eye. Opposed? No. The vote is two/zero in favor. 3 Thank you, Mr. White. 4 (AGENDA ITEM NO. 17) 5 CHAIRMAN CLOWE: Next Item 17: Report 6 by the executive director and/or possible discussion 7 and/or action on the agency's operational status and 8 FTE status. 9 MR. REAGAN: Mr. Chairman and 10 Commissioner, I'm glad to have an opportunity to bring 11 you up to date on a number of things that have gone on 12 in the agency since our last Commission meeting. I 13 wanted to reinforce the fact that we continue to 14 monitor the rolls of Lotto Texas. We're currently at 15 $59 million, and the numbers there are obviously 16 something that we're watching closely in reference to 17 sales as well as the interest rate, and we'll continue 18 to keep you apprised of the rolls on Lotto Texas. Mega 19 Millions is currently at 34, as Mr. Tirloni stated 20 earlier, but I did want to let you know that, if there 21 is no winner tonight, the roll will be $42 million. 22 And also in reference to Mega Million, the winner did 23 come forward from the April 22nd drawing in Michigan. 24 They won a jackpot of $205 million. 25 There has been a focus in the agency 0181 1 recently and we have some new hires and a lot of 2 positive things that are going on in the area of retail 3 sales and retail expansion and there are some accounts 4 that I wanted to make you aware of that I've personally 5 been involved in as we continue to look for ways that 6 we can expand our retailer base. A couple of those 7 worth mentioning is a firm called Nobody But Smokes, 8 and it's scheduled to have installation in 14 different 9 locations in the Lubbock/Abilene area. Another pilot 10 program that we're working on is with Murphy Oil, and 11 they've agreed to pilot nine stores with potential 12 locations of 100 additional stores over time that we're 13 pleased to be working with them on. 14 We did have positive input from an HEB 15 meeting recently, and I wanted to let you know that HEB 16 is going to be rolling out continuing service to their 17 customers in reference to lottery products and 55 new 18 kiosks out in the gas stations out in front of the HEB. 19 We're working with them on that. Brookshire Brothers, 20 which is in the eastern Texas region, has 18 pilot 21 service locations that they're looking at a potential 22 of adding 65 more stores. 23 COMMISSIONER COX: Is this Brookshire 24 Brothers in Lufkin or Brookshire Foods in Tyler? 25 MR. REAGAN: Brookshire Brothers in 0182 1 Luftkin. 2 Potential places of 470 locations is 3 something that we're also currently focussed on with 4 the CBS Pharmacy chain, which used to be Eckerds, and 5 CBS bought them out, and they have interest in working 6 with us. Also, we're working with the San Marcus 7 Tanger Outlet Mall; we've go some locations in that 8 facility, so there's a lot going on in the retailer 9 side. I'm pleased to be working with staff on that and 10 we'll keep you apprised as we move forward, but there's 11 a number of pretty exciting opportunities for us in 12 that venue 13 Another exciting thing that happened 14 lately -- and I brought the metal to show you -- is 15 that Governor Perry presented this around the neck of 16 Jan Ratcliff on behalf of -- she was representing the 17 agency on behalf of the Texas Roundup Campaign, which 18 has been something that the governor has been working 19 with, and we received this award on Saturday, 20 April 30th. Governor Perry's wife, Anita, as well as 21 the Dutchess of Windsor, I believe, Fergie, Sarah 22 Ferguson, was there as well, and they all made a big 23 deal about the fact that the lottery stepped up. We 24 were recognized for participation in the second place 25 level for men's, and as I mentioned, Jan did accept 0183 1 that. She took a picture with the governor and we 2 shared that with the staff the other day. That was a 3 great thing that I wanted you to be aware of. 4 We had a State Employee Appreciation Day 5 and we at the agency took advantage of that. Gary and 6 I, along with the division directors, thanked employees 7 for their continued work with the TLC and we had a 8 reception out here in the hall afterwards, it was well 9 received. And I wanted to thank the HR Department, 10 specifically Diane and Jan Ratcliff for their help in 11 that. 12 There is a couple of scams that I wanted 13 to bring you up to speed on. One is the continuing 14 thing that I brought before you before, which is the 15 Latin Lotto Scam, there was one down in the Houston 16 area for $9,800, so we've reinforced awareness on that 17 issue. Then there's another kind of issue that is on 18 our web site this month under the executive director 19 report about an Internet scam that is apparently 20 circulating, and basically we're working with legal on 21 that, but they are sending out -- the Internet scam is 22 sending out a proclamation with Texas Lottery logo as 23 well as saying that they're from the Texas Lottery and 24 sending it to people with the idea that they have won 25 and asking them to respond, so legal is on top of that 0184 1 and we are working on a number of different venues to 2 get the word out to let players know that we don't 3 notify them if they've one via e-mail, that, you know, 4 we go through our normal procedures. 5 Nelda reported on a number of issues 6 that are going on in the legislature. That continues 7 to be a key focus in mind, acting as a resource and 8 continuing to be available to work through the 9 processes. I'm on a number of the bills that she 10 outlined. 11 I put before you a current Amber Alert 12 that is active right now. I'm very proud of the active 13 status that we carry whenever DPS lets us know we're on 14 a ready basis, and we are a part of that Amber Alert. 15 This is for a child from New Mexico by the name of 16 Justin Black. It's a 16-month-old and the suspect is 17 hiding. A lot of the information is on there, but I am 18 pleased that we're part of that and making a positive 19 difference in our state in that way 20 I've been on the speaking circuit a lot 21 lately and have spoken to a number of different groups, 22 primarily over at the Capitol, that are coming here to 23 visit with different representatives, the Lamar Chamber 24 of Commerce, the Texas City Chamber of Commerce, and 25 also a distinguished group from Lamar High School were 0185 1 recently over there and had an opportunity to visit 2 with them about what goes on at the Texas lottery. We 3 also had kind of a rare thing, we had the Alamo 4 Community College District. I brought a group of about 5 75 or 80 students and faculty through the lottery and 6 we gave them a tour. That was on April the 14th. 7 April the 29th, Bobby went up to Raleigh, Texas with me 8 and Phillip also went to cover from the union side. We 9 were happy to present the $1 million dollar bonus check 10 on the Mega Millions drawing on March the 1st, and that 11 was a great event and good press. The jackpot, just to 12 reinforce, as I mentioned earlier, was $104 million, 13 but the retailer getting the million dollar bonus check 14 was a great occurrence and I was glad to be able to go 15 there personally and be able to hand him his check. 16 A couple of follow ups on some surveys 17 that we've done. One was the Organizational Excellence 18 that we did awhile back, where we reward our workers on 19 that. HR is coordinating that. The first meeting was 20 on May the 2nd. We're going to take advantage of those 21 things that we showed up on the screen. It gives us an 22 opportunity to make it a little bit better for the 23 workers, and we will be bringing you a report on that. 24 We're also doing a business impact analysis survey that 25 is primarily oriented around information and IR, which 0186 1 is information resources, that would give us backup in 2 the time of disaster, which is sort of reviewing where 3 we might be in that venue, and Berry Feeley in that IR 4 division is doing a great job helping us coordinate 5 that survey to be more proactive in that area. 6 We had a booth over at the Texas 7 Petroleum Marketers Association Trade Show here at the 8 Convention Center on May the 2nd, and I was able to 9 attend that. I had some good one-on-one business with 10 a number of our large retailers and they were very 11 responsive to a couple of things that we've done, two 12 of which I think are worth mentioning. The stolen 13 ticket policy that we, as a body of commissioners, took 14 action on a while back, and they were very 15 complimentary of that. They were also really excited 16 about some of the things that we are doing in reference 17 to helping them get the word out and being more 18 proactive with the market sales. The material is 19 helping their sales, which is making them happy. 20 I wanted to remind you that May the 29th 21 is the lottery's 13th anniversary, and we do have a $1 22 ticket out right now that signifies that's our 23 anniversary, that that's a significant day in the life 24 of the Texas Lottery, and we'll continue to keep you 25 apprised of the numbers, but they've been very 0187 1 impressive obviously since we've been around, $12.5 2 billion that has come back to the State of Texas and 3 $7.2 billion that has come back to the Foundation 4 School Fund. 5 Lastly, our theme of the month is Soring 6 with Eagles. We got some great opportunities to 7 continue to look at ways that we can do things better, 8 and I wanted you to be aware of what that topic was. 9 And with that, I'll close my report at 10 this time. 11 CHAIRMAN CLOWE: Reagan, I have a couple 12 of questions. When you make these presentations that 13 you indicated to us to the various chambers of 14 commerce, I know that you end that with a question and 15 answer period. 16 MR. REAGAN: I do. 17 CHAIRMAN CLOWE: What kind of questions 18 do you get from those folks when you're there? 19 MR. REAGAN: I think the first thing 20 is -- and I pause throughout and let them ask 21 questions, and they always stop me on the "where the 22 money goes thing" because they, the public, are still 23 under the perception that the lottery money is in 24 question as far as where it goes. They had the idea 25 that it was going there when they voted on it, and it 0188 1 didn't go there, well, now you're saying it did. When 2 did that happen? How did that lay out? So I kind of 3 walk them through that, and I almost have a sense of 4 relief from a lot of them when I hand them that 5 brochure and tell them how much money and what time 6 period. 7 Another thing that none of them I think 8 truly understand is the integrity and the security of 9 the process. When I talk about how a drawing takes 10 place and invite them to come down here -- a lot of 11 times I'm staying over night -- and they do come down 12 and watch the drawing, and how at the 10:10 drawing, it 13 really starts at 7:00 and that there's a series of 14 things -- 15 CHAIRMAN CLOWE: I know all of that. 16 MR. REAGAN: Well, those are the two big 17 questions: Tell me about the drawing. How does it 18 happen? Is it done fair and square? And where does 19 the money go? 20 CHAIRMAN CLOWE: And are you getting any 21 indication from the questions that people look with 22 favor or disfavor on the lottery? I've seen the poll 23 numbers change. 24 MR. REAGAN: My general response to that 25 would be favorable. A lot of those people do play and 0189 1 their friends play. It's more favorable after the talk 2 because I think there are so many questions out there 3 about the lottery. And when you answer their questions 4 and they have a better feeling, and the first thing is 5 knowing that 30 cents, or approximately 30 cents, on 6 the dollar goes to the Foundation School Fund, so 7 that's sort of an awakening that kind of reinforces a 8 favorable opinion. 9 CHAIRMAN CLOWE: Well, that's good. It 10 gives you an opportunity to tell the story and I think 11 you do it very well, so that's a good activity. 12 The second question I have is -- and I 13 had spoken to Billy earlier, I think Commissioner Cox 14 did, too -- about the performance evaluations. Diane 15 is not here today, but are you current in the lottery 16 with performance evaluations for all employees on an 17 annual basis? 18 MR. REAGAN: Yes, sir. Gary is the 19 primary point of contact on that. We work together on 20 those, and there is a system. I had a chance to look 21 at that recently, Mr. Chairman, and I would say we are 22 current with all but a handful, and that handful all 23 have specific circumstances as to why they're not what 24 I consider to be current, and that would be within 30 25 days of the due date, so, yes, sir. 0190 1 CHAIRMAN CLOWE: That's good. I think 2 it's an excellent opportunity to obviously evaluate the 3 employees and to counsel them and to make them a part 4 of that process, so I think it's very important to be 5 current on that activity. 6 MR. GRIEF: We take that process very 7 seriously. 8 (AGENDA ITEM NO. 18) 9 CHAIRMAN CLOWE: Good. Good. Thank 10 you. 11 Next Item 18: Report by the charitable 12 bingo operations director and possible discussion 13 and/or action on the charitable bingo operations 14 division's activities 15 MR. ATKINS: Thank you, Mr. Chairman. 16 We have now an additional vacancy in the Dallas 17 regional office, so we are working with human resources 18 to get those positions filled as quickly as we can. 19 The next regular meeting of the bingo advisory 20 committee is scheduled for May 25th at 10:00 a.m. 21 Also, the quarterly reports for the first quarter of 22 2005 were due April 25th. We are completing the entry 23 of those returns into our system. As you'll recall, 24 these revised forms capture much more detailed 25 information from the licensees, particularly in the 0191 1 area of their expenses as well as their charitable 2 distribution, so we're hoping that in working with 3 financial administration, we'll be able to bring you 4 some more detailed information when we make our 5 regularly scheduled report on the first quarter of 2005 6 figures. 7 We have implemented a number of 8 enhancements to the web site. The first is the 9 development of a headline section on the charitable 10 bingo home page. This provides links to online 11 articles relating to charitable gaming, specifically 12 bingo, as well as just some charitable gaming 13 activities. We did try to pass credit for that along 14 to either me or the Chairman or Commissioner Cox, but 15 that was their suggestion, and it is up on the web site 16 and it's active. 17 We have also worked to redesign our 18 forms page and are in the process of developing many of 19 the forms and the applications that our licensees use 20 in alternative formats. They're currently all out 21 there in a PDF format. We're in the process of 22 converting those to an interactive PDF format, where 23 the licensee can complete the form electronically, 24 print it out, sign it, and mail it into us. There are 25 also a number of other forms that we have in Word and 0192 1 Excel, also. 2 We have produced a graphic that we 3 intend to update on a quarterly basis that tracks 4 charitable distribution. As you recall, last year 5 organizations in total exceeded the three quarters of a 6 billion mark in charitable distribution since the 7 authorization of charitable bingo, so what we're going 8 to begin to do is to track their progress towards $1 9 billion in charitable distributions. We have, with 10 agency staff, created a graphic on the home page. In 11 the right-hand corner of the home page, it just says 12 $1 billion. If you click on that, it will take you to 13 the graphic. It's something that our licensees can 14 print out and post in their hall, share with their 15 organizations or their players, and we'll update that, 16 again, on a quarterly basis as the organizations move 17 towards that million dollar mark. And there's actually 18 a copy of that graphic included in my report for your 19 review. 20 Finally, something that is not on the 21 report, one of the items that we've been working with 22 the bingo advisory committee on was guidelines on how 23 to deal with the media. It's intended to serve as a 24 resource for organizations in order to better publicize 25 their bingo-related activities. That has been reviewed 0193 1 by the legal division and also placed on the web site 2 underneath the publication section, and that's 3 something that we will also, again, share with 4 organizations though our operator training program. 5 We are probably right smack dab in the 6 middle of what I call our extreme makeover. We're 7 working with the facilities division on replacing the 8 carpet in the bingo division and they're going to be 9 steam cleaning the work panels as well as painting the 10 entire division. We're also working to upgrade the 11 meeting rooms in the division to make them more 12 accessible electronically so that we can get more use 13 out of those. 14 And then, finally, as it relates to my 15 report, we have been invited to provide a presentation 16 to the Lulac State Convention, which is scheduled for 17 the first part of June in San Antonio, and we will be 18 providing a program to them on charitable bingo. 19 CHAIRMAN CLOWE: Very good, Billy. Any 20 questions? 21 COMMISSIONER COX: Billy, there was an 22 article in the Austin American Statesman, which you 23 reproduced in our clippings, about younger people 24 playing bingo. Tell us how excited you are about that 25 and how excited the people statewide might be as 0194 1 opposed to, this just an Austin phenomena. 2 MR. ATKINS: Well, I am excited about 3 it, but I think, Commissioner Cox, on closer reading of 4 the article, the article seemed contradictory to me. 5 There were some licensees that the reporter talked to 6 where I think the operators indicated something to the 7 effect, no, we don't really see a lot of younger people 8 in our hall because bingo is pretty boring. You know, 9 I don't know that comments like that will do a lot to 10 draw new people to the game. 11 I do think that a city like Austin is a 12 prime location and probably has one of the better 13 opportunities to introduce this activity to the younger 14 audience given the location of the number of 15 universities in the town. I know there has been 16 discussion in the past with some operators about the 17 possibility of them having what they refer to as a 18 Greek Night, where, you know, they would try and gear 19 their games towards that younger crowd, but I would 20 just say, anecdotally, I don't think that we have heard 21 from licensees around the state that they're seeing 22 younger players. 23 CHAIRMAN CLOWE: Thank you, Commissioner 24 Cox. Thank you, Billy. 25 (AGENDA ITEM NO. 19) 0195 1 CHAIRMAN CLOWE: Next Item 19: Is there 2 anyone wishing to make comment to the Commission at 3 this time? 4 Commissioner Cox, do you have anything 5 further? 6 COMMISSIONER COX: No, sir. 7 (AGENDA ITEM NO. 20) 8 CHAIRMAN CLOWE: We are adjourned at 9 2:40 p.m. Thank you all very much. 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0196 1 REPORTER'S CERTIFICATION 2 3 STATE OF TEXAS ) 4 COUNTY OF TRAVIS ) 5 6 I, KIMBERLYE A. FURR, Certified Shorthand 7 Reporter for the State of Texas, do hereby certify that 8 the above-captioned matter came on for hearing before 9 the TEXAS LOTTERY COMMISSION as hereinafter set out, 10 that I did, in shorthand, report said proceedings, and 11 that the above and foregoing typewritten pages contain 12 a full, true, and correct computer-aided transcription 13 of my shorthand notes taken on said occasion. 14 15 Witness my hand on this the 31st day of May, 16 2005. 17 18 19 _______________________________ KIMBERLYE A. FURR 20 Texas CSR No. 6997 Expiration Date: 12/31/05 21 1801 North Lamar Boulevard Mezzanine Level 22 Austin, Texas 78701 (512) 474-4363 23 24 JOB NO. 050510KAF 25