1 1 2 3 4 5 6 *************************************************** 7 8 TEXAS LOTTERY COMMISSION 9 MEETING 10 11 August 11, 2000 12 *************************************************** 13 14 15 16 17 18 BE IT REMEMBERED that the TEXAS LOTTERY 19 COMMISSION meeting was held on the 11TH day of 20 AUGUST, 2000, beginning at 8:34 a.m. and ending at 21 3:41 p.m., before Suzanne T. Lane, RPR, CSR in and 22 for the State of Texas, reported by machine 23 shorthand, at the Offices of the Texas Lottery 24 Commission, 611 East Sixth Street, Austin, Texas, 25 whereupon the following proceedings were had: WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 2 1 APPEARANCES 2 Chairman: 3 Mr. C. Tom Clowe, Jr. 4 Commissioners: Ms. Elizabeth D. Whitaker 5 Mr. Anthony J. Sadberry 6 General Counsel: Ms. Kimberly L. Kiplin 7 Executive Director: 8 Ms. Linda Cloud 9 Charitable Bingo Operations Director: Mr. Billy Atkins 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 3 1 INDEX 2 Appearances................................... 2 3 AGENDA ITEMS 4 Item No. 9.................................... 4 5 Item No. 2.................................... 26 112 6 Item No. 4.................................... 35 Item No. 5.................................... 36 7 Item No. 6.................................... 46 130 8 Item NO. 7.................................... 54 Item No. 12................................... 68 9 Item No. 13................................... 78 Item No. 8.................................... 78 10 84 Item No. 14................................... 82 11 Item No. 15................................... 115 12 Reporter's Certificate........................ 132 13 14 15 16 17 18 19 20 21 22 23 24 25 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 4 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 CHAIRMAN CLOWE: Ridgely Bennet is 2 sitting in for General Counsel. 3 Good morning. We're going to call 4 the meeting to order at 8:34 a.m. This is 5 August the 11th. We are now in session. My name, 6 for the record, is C. Tom Clowe, Jr. 7 All Commissioners are present this 8 morning, and we'd like to begin by moving 9 immediately to Item 9 in regard to possible 10 discussion and/or action on the lottery operator 11 contract. 12 We have two public witnesses who 13 would like to appear and address the Commission, 14 Mr. Patel and Mr. Calabro, with the GTECH 15 Corporation. 16 Gentlemen, would you come forward, 17 please. 18 MR. PATEL: Good morning. 19 MR. CALABRO: Good morning, 20 Mr. Chairman. 21 CHAIRMAN CLOWE: We're happy to have 22 you here this morning. And by way of further 23 introduction, if you would, identify yourself and 24 your position with GTECH Corporation before you 25 make your remarks. But after having done that, WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 5 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 we'd be happy to hear from you. 2 MR. CALABRO: I'm David Calabro. 3 I'm senior vice president of global facilities 4 management with GTECH. 5 MR. PATEL: Good morning. I am 6 Jaymin Patel. I'm senior vice president and chief 7 financial officer of GTECH. 8 CHAIRMAN CLOWE: Very good. Please 9 proceed. 10 MR. PATEL: Thank you very much. 11 Before I proceed this morning, I'd like to just 12 stand up and hand out a number of presentations 13 that I have to take us through this morning's 14 discussion. (Tenders documents.) 15 Good morning, Mr. Chairman and 16 Commissioners. Thank you, first of all, for 17 inviting us to appear in front of you today. We 18 are very happy to be here and to answer any 19 questions that you may have and provide you with 20 some background as to GTECH's financial position 21 and our good financial standing. 22 What I would like to do today, if I 23 may, is first of all introduce myself and very 24 briefly explain my background in the company, and 25 then proceed to review the financial presentation WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 6 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 that I have distributed. And I would be glad to 2 take your questions during the presentation if at 3 any point you would like further clarification. 4 I joined GTECH Corporation in 1994 5 after we won the UK Lottery contract and have spent 6 approximately six and a half years in various 7 financial positions in the company, moving from 8 UK financial controller position to financial 9 director of European operations, and then on to 10 vice president of financial planning at GTECH 11 Corporation. Most recently, in January of 2000, I 12 was appointed senior vice president and chief 13 financial officer. 14 So with that said, I would like to 15 move to this morning's agenda. And the purpose of 16 today's meeting is to provide you with some 17 background as to our financial performance and give 18 you a high degree of comfort that our financial 19 standing is, in fact, very strong, and we have the 20 financial flexibility and capacity to maintain all 21 of our customer and contractual obligations. 22 So please turn to page 1, if you 23 would. Fiscal year 2000 performance -- sorry, 24 page 1 being the agenda here. I will review our 25 fiscal year 2000 full year performance, then move WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 7 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 on to the first quarter performance; then provide 2 some commentary to you on our current year 3 financial outlook, and then end with a summary of 4 our comments today. 5 My first comment is, I would like to 6 start by saying, without reservation, that GTECH is 7 of strong financial standing and has the necessary 8 human, physical, and financial resources to meet 9 all of its ongoing financial obligations. As you 10 can see, for fiscal year 2000, our revenue 11 surpassed $1 billion for the first time. Revenues 12 went from $973 million in fiscal year '99 to 13 $1.011 billion in fiscal year '00, growing by 14 4 percent, year over year. Our lottery business, 15 in fact, grew by 7 percent, year over year, growing 16 by $58 million on a year-to-year basis. 17 On a profit basis, our net income 18 went from $89 million in fiscal year '99 to 19 $94 million in fiscal year 2000. That is a growth 20 of 6 percent, year over year, and exceeds the 21 growth in revenues by two percentage points. 22 Revenues grew 4 percent. Profits grew by 23 6 percent. 24 The increase in profitability versus 25 revenues is driven by two factors: First of all, WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 8 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 we managed to improve the operating efficiencies of 2 our business; and secondly, we were able to effect 3 a tax rate reduction that resulted in a profit 4 increase and a fast rate in revenues. 5 We have approximately $850 million 6 of capital employed in the business. That capital 7 employed enabled us to generate operating cash 8 flows from operations of approximately $231 million 9 in year '00. 10 As you can see, we invested 11 $164 million in the business during fiscal 12 year 2000. Approximately $146 million of the 13 $164 million was invested in our core lottery 14 business, investing in assets to expand and 15 maintain our existing lottery operations. 16 Taking into account the operating 17 cash flows of $231 million and the cash investments 18 of $164 million, that resulted in free cash flows 19 of $66 million. And in terms of our borrowing 20 capacity, we have a revolver of $400 million. At 21 the end of fiscal year 2000, we had undrawn 22 committed borrowing facilities of $351 million. 23 So in terms of fiscal year 2000, the 24 performance was very strong. We ended the year 25 with free cash flows of $66 million, which we were WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 9 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 able to reinvest in the form of share repurchases 2 and paydown debt, and left with 351 to borrow at 3 the end of the year. 4 On page 4, I have a brief summary of 5 our committed debt facilities. 6 CHAIRMAN CLOWE: If I might, for 7 clarification, before we leave this page, your 8 fiscal year begins in February? 9 MR. PATEL: It begins in March, sir. 10 CHAIRMAN CLOWE: It ends in 11 February, begins in March. So today you're in '01? 12 MR. PATEL: Yes, we are. Yes. 13 CHAIRMAN CLOWE: And these figures, 14 then, would be for the fiscal year ending 15 February -- I believe it was the 29th of this year, 16 if I'm correct. I think it was leap year. And we 17 are in a year now beginning March the 1st? 18 MR. PATEL: That's correct. Yes. 19 Our fiscal year actually ended on the 26th of 20 February. We always close our books on the last 21 Saturday of the month of February. 22 CHAIRMAN CLOWE: Very good. 23 February the 26th. 24 MR. PATEL: Yes, sir. 25 CHAIRMAN CLOWE: Thank you. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 10 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 MR. PATEL: On page 4, you can see 2 that we have total borrowing facilities committed 3 to the corporation of $700 million. Those 4 facilities consist of three parts. We have two 5 private placement notes of $150 million each, and 6 we have a revolver made up of ten large financial 7 institutions in America, which have committed 8 $400 million of borrowing capacity to the company. 9 As you can see, at the end of 10 February 2000, 2-26-2000, we had drawn down 11 $349 million in total; thus, $351 million 12 remaining. At the end of our first quarter, which 13 is May 27th of 2000, we had drawn down a total of 14 $362 million, with $338 million remaining. 15 In terms of maturity, the private 16 placement notes both mature in calendar years 2004 17 and 2007, respectively, and our revolver matures in 18 June 2002. At this point in time, I have no reason 19 to believe that the revolver will not be renewed 20 under the current favorable terms and conditions 21 that we have. 22 Moving on to the next page, fiscal 23 year 2001, first quarter performance, very briefly 24 I will review the performance in the first quarter. 25 As you can see, total revenues grew from WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 11 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 $239 million to $242 million in the quarter. That 2 represents an increase of 1.4 percent, quarter over 3 quarter. And this increase was primarily driven by 4 our lottery business. 5 We had growth of $11 million of 6 service revenues from the first quarter of '00 to 7 the first quarter of '01. This growth was driven 8 by two factors: first of all, due to the higher 9 level of jackpot activity in the first quarter of 10 fiscal year '01 versus '00; and secondly, due to 11 the expansion of our international contracts. Net 12 income grew by 6.8 percent over that same period, 13 again, at a faster pace than revenues. And this 14 was driven by improved operating efficiencies, as I 15 mentioned earlier on. 16 In terms of cash flows, we generated 17 $39 million in the first quarter. We invested 18 $49 million of our cash flows in the lottery 19 business in the first quarter, resulting in free 20 cash flows of minus $9 million. As I explained 21 before, our borrowing capacity remains at 22 $338 million. 23 On page 5, the title of the page 24 should say "Fiscal Year 2001." I apologize. It 25 says "2000." WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 12 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 Moving on to the current year 2 outlook, the financial information that I'm about 3 to provide to you is based upon our projections for 4 performance this year, and is based upon public 5 information that we have provided to our 6 shareholders and analysts on Wall Street. 7 What I will say before I proceed is 8 that this information is prior to the effect of any 9 special charges that will be recorded in the second 10 quarter of this year pursuant to the departures of 11 Mr. O'Connor and Mr. Nowick. In addition to that, 12 we are currently undertaking a thorough value 13 assessment of our business to determine whether the 14 non-core activities of GTECH are aligned with our 15 core operations and whether, in fact, they create 16 value for the company. 17 It is my expectation that the 18 severance charges resulting from the departures of 19 Mr. O'Connor and Mr. Nowick, along with the results 20 of the value assessment, will result in a second 21 quarter charge, which at this stage I'm not able to 22 quantify because we are still going through the 23 process. But we will be very glad to provide that 24 to you in due course. 25 With that said, the total revenue WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 13 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 outlook for the year is in the range of 2 1.06 billion to 1.07 billion, which would give us 3 growth, year over year, of 5 to 6 percent. Net 4 income for the year will be between $75 million and 5 $80 million, resulting in operating cash flows of 6 between $235 million and $245 million. 7 We plan to invest between 8 $160 million and $180 million in our core lottery 9 business during this fiscal year, and as we saw 10 earlier on in the first quarter, $49 million of 11 that has already been spent. That will result in 12 free cash flows of between $65 million and 13 $75 million, which we plan to invest in a share 14 repurchase program or in paydown debt. 15 So with that said, I think you can 16 see that the financial standing of the company 17 remains very strong. We have substantial free cash 18 flows, which we were able to effect into a share 19 repurchase or paydown debt. 20 In summary, I would like to make 21 four comments. Based upon the review of our 2000 22 financial performance and the first quarter of 23 2001, I believe that our business fundamentals 24 remain strong. The company is committed, both 25 strategically and financially, to maintaining our WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 14 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 industry leadership position in the lottery 2 business, and we are committed to maintaining a 3 strong level of customer service and ensuring that 4 the level of excellence that our customers have 5 come to enjoy is maintained. 6 We have substantial and flexible 7 financing capability to maintain our business, and 8 I would like to leave you with where I started, by 9 saying that I believe very strongly that GTECH 10 Corporation is in strong financial standing. 11 Thank you very much for your 12 attention, and I would be very pleased to answer 13 your questions. 14 CHAIRMAN CLOWE: Thank you, 15 Mr. Patel. We appreciate, again, your appearance 16 here before us this morning. And I would like to 17 ask the Commissioners now, as you indicated you are 18 willing, if there are any questions. 19 COMMISSIONER WHITAKER: Yes. I have 20 a couple of questions. 21 This year's projected revenues are 22 an increase from the year before. Correct? 23 MR. PATEL: Yes, ma'am. 24 COMMISSIONER WHITAKER: But the net 25 income is anticipated to drop from about 93.6 to, WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 15 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 you say, the 75 million to 80 million range? 2 MR. PATEL: That's correct. 3 COMMISSIONER WHITAKER: To what do 4 you attribute that drop? 5 MR. PATEL: As part of the second 6 corporate announcement that we made recently, there 7 are five factors that have resulted in that decline 8 in expectations. 9 The first one is that we have 10 experienced certain cost overruns in projects in 11 Australia and Israel, which will result in 12 incremental expenses of $7 million to $8 million 13 this fiscal year. 14 The second one is that the State of 15 Rhode Island has effected a rate reduction for 16 video lottery operators in the state, which will 17 affect our service revenues this year in the order 18 of $3 million to $3« million. 19 The third factor is that we had 20 expected to launch Columbia in the second quarter 21 of fiscal year '01, and given the recent political 22 changes that have taken place in Columbia with 23 regard to our contract, we now expect that contract 24 to be launched either much later this year or, 25 indeed, maybe even early next year. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 16 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 The fourth factor is that the trend 2 of service revenues in the second and third quarter 3 is lower than our expectations. The effect of the 4 jackpot rolls in the first quarter has not carried 5 through to the second and third quarters as we 6 first expected, and that will result in a decline 7 in expectations of $10 million to $12 million for 8 the year. 9 And the fifth factor is that we were 10 expecting sudden product sales awards in Asia to be 11 booked in this year's financial statements. We now 12 expect those awards to be given to us later this 13 year or early next year, and that will result in 14 approximately $30 million of product sales shifting 15 from this fiscal year to next fiscal year. 16 So those are the five factors that 17 have resulted in the decline in expected 18 profitability year over year. 19 COMMISSIONER WHITAKER: Do you see 20 the second and fourth ones changing the following 21 year, or remaining problems or issues? 22 MR. PATEL: I expect that those 23 issues are near-term issues, as in, they will 24 affect current year performance but will not affect 25 future year performance. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 17 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 COMMISSIONER WHITAKER: In the 2 special charges, although you cannot give us 3 specifics, can you give us a ballpark? 4 MR. PATEL: At this stage, it would 5 be premature of me to give you a number for the 6 special charges. But working through our value 7 assessment, with regard to the severance payments 8 to Mr. O'Connor and Mr. Nowick, the payments are in 9 accordance with their contracts and are available 10 to view in our proxy statement. 11 COMMISSIONER WHITAKER: Thank you. 12 MR. PATEL: Thank you. 13 COMMISSIONER SADBERRY: With regard 14 to what you just mentioned, that is, the severance 15 payments in these contracts, I won't get into 16 questioning with you as to the rationale behind 17 those provisions. That's kind of history now, 18 obviously. 19 What I do want to know, if you are 20 at liberty to discuss, is whether that is something 21 that is already in place as far as a GTECH type of 22 contract that has such severance provisions; more 23 appropriately, I guess, if that's something you 24 envision continuing, having these types of 25 severance provisions in these executive level type WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 18 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 of contracts. 2 MR. PATEL: Commissioner, what I 3 will say, first of all, is that the severance 4 agreements for Mr. O'Connor and Mr. Nowick have 5 been signed and, as you quite rightly say, are now 6 behind us. I can tell you that executive contracts 7 in the future will not contain the same level of 8 severance arrangements that we have seen in the 9 past. 10 When Mr. Turner will, in fact, 11 appear in front of you, I'm sure that he will 12 provide you with some comments as to the types of 13 arrangements that will be put in place in the 14 future. But I can tell you that the magnitude and 15 nature of the payments will be substantially 16 different in the future, if any. 17 COMMISSIONER SADBERRY: And that's 18 something that we might be advised of, I suppose, 19 by Mr. Turner in due course? 20 MR. PATEL: Yes, sir. Mr. Turner 21 will address that question. 22 COMMISSIONER SADBERRY: Now, you 23 mentioned that there is some formal assessment 24 being made now, an evaluation as to these -- as you 25 refer to them, "non-core" lottery type of business WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 19 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 activities. 2 Is this part of an overall 3 assessment? And by that, I mean are you also 4 assessing the core lottery business as well, as you 5 look at the trend of the lottery nationwide and, I 6 guess, even throughout the world? Are there any 7 projections of movement, in your perception, away 8 from the core lottery business with GTECH? 9 MR. PATEL: There is absolutely no 10 move afoot to change our position in the lottery 11 business. We are absolutely committed and focused 12 on maintaining our position in the lottery 13 business. And the value assessment will certainly 14 include a review of our full lottery operations to 15 ensure that we're operating efficiently, but it 16 will in no way result in any change in our 17 strategic focus. 18 COMMISSIONER SADBERRY: The lottery 19 is going to be what GTECH essentially -- 20 MR. PATEL: That is our number one 21 business, our number one focus. 22 COMMISSIONER SADBERRY: Now -- and I 23 want to make sure I'm up to date in my reading 24 here, so if I'm not, please correct me, as I'm sure 25 you will. But I thought I read somewhere where the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 20 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 annual shareholders meeting had been pushed back, 2 canceled -- 3 MR. PATEL: Yes. 4 COMMISSIONER SADBERRY: -- delayed. 5 Is that because of the charge-off, or are there 6 multiple factors there? 7 MR. PATEL: The annual meeting has 8 been delayed from August to -- now I think it's 9 October the 24th. And the reason for that is, we 10 would like to be able to announce the results of 11 the special charge in our second quarter earnings 12 prior to that meeting and be in a position to 13 explain to our shareholders and interested parties 14 exactly where we stand at that point in time. 15 COMMISSIONER SADBERRY: Has there 16 been any reaction to that? Is that considered 17 understandable and justifiable, given these -- 18 MR. PATEL: I believe so. I have 19 not heard any negative reaction to that move. 20 COMMISSIONER SADBERRY: Somewhat 21 away again from your letter, as well as the 22 presentation, but I think pertinent to GTECH and 23 its presence in Texas as the operator, what I 24 presume to be part of the process, come the new 25 contract and activities here, it has certainly been WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 21 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 historically of some concern in Texas the degree of 2 the lobbying presence of GTECH, as well as other 3 operators in Texas. 4 Do you have data or do you see a 5 trend with the forthcoming legislative session as 6 to what you anticipate will be GTECH's activity in 7 that regard? 8 MR. PATEL: I might ask my 9 colleague, Mr. Calabro, to answer that question if 10 he can. 11 MR. CALABRO: Commissioner, in 12 Texas, as in all of GTECH's jurisdictions, as you 13 know, we do maintain government relations 14 consultants, principally in the interests of 15 information, as opposed to influence. I know, as 16 we all do, that we're not the only company, nor is 17 this the only industry that maintains that. 18 We have tried very hard in every 19 jurisdiction to ensure that our government 20 relations consultants fully comply with the 21 jurisdictional as well as our own corporate 22 standards for statutory as well as ethical 23 compliance. And we will continue to do that in an 24 ever-increasing, rigorous level of vigilance. 25 COMMISSIONER SADBERRY: Good. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 22 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 CHAIRMAN CLOWE: Mr. Patel, I'd like 2 to clarify some issues that I have in my mind to 3 make certain I'm correct. 4 MR. PATEL: Yes, sir. 5 CHAIRMAN CLOWE: First of all, you 6 have an interesting and broad record with the 7 company, and you are a senior vice president and 8 chief financial officer, and therefore, you are the 9 highest financial executive to appear before us 10 today and assure us of GTECH's financial soundness. 11 Is that correct? 12 MR. PATEL: That is correct, 13 Mr. Chairman. 14 CHAIRMAN CLOWE: And you are not a 15 member of the GTECH board? 16 MR. PATEL: I'm not a member of the 17 GTECH board. I am invited to sit through board 18 meetings, and I'm excused during those board 19 meetings during non-executive sessions. 20 CHAIRMAN CLOWE: That's our 21 understanding of your position. 22 And you're here today as a result of 23 verbal, as well as a written, communication, I 24 think, from our Executive Director to the company, 25 expressing some concerns in light of a number of WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 23 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 occurrences affecting your company. 2 One is the situation in the United 3 Kingdom, which, as I understand it, is being 4 investigated, is being audited, and you're not in a 5 position to comment on that today. 6 MR. PATEL: That is true, 7 Mr. Chairman. 8 CHAIRMAN CLOWE: Additionally, the 9 departure of the two senior executives, the CEO and 10 the COO, from GTECH; the postponement of the annual 11 meeting; and to some extent, the determination that 12 there was somewhat a similar problem in the Texas 13 Lottery in the early years to that which we believe 14 may have occurred in the United Kingdom. Is that 15 correct? 16 MR. PATEL: That is correct. 17 CHAIRMAN CLOWE: And it's my 18 understanding, from the audit that has now been 19 reported out, that there were very few instances of 20 errors occurring in the Texas Lottery compared to 21 that which we understand is under investigation in 22 the United Kingdom. 23 MR. PATEL: That is my 24 understanding. 25 CHAIRMAN CLOWE: Further, all the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 24 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 information that you have given us here today is 2 public information and has come from your annual 3 report or your 10K or your 10Q. 4 MR. PATEL: That is also correct. 5 In addition, it is based upon comments that I have 6 made publicly in shareholder and analyst meetings. 7 CHAIRMAN CLOWE: And I'd like to 8 make, as part of this record, a letter directed to 9 our Executive Director dated August 8, 2000, 10 addressing some of the similar information which 11 you have given us this morning and some additional 12 information. And this letter is signed by you and 13 by W. Bruce Turner, who is the chairman of the 14 board of GTECH. 15 MR. PATEL: Yes, sir. 16 CHAIRMAN CLOWE: And I think the 17 Commissioners have been furnished with a copy of 18 that letter, and I believe there has been wide 19 distribution within the Lottery Commission. 20 MR. PATEL: Very good. 21 CHAIRMAN CLOWE: So then, as a Texan 22 might say it, you're here today to tell us that 23 GTECH is financially sound and to assure us that 24 you are in a position to continue to take care of 25 our business and be financially viable in so far as WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 25 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 the concerns which we, I think, justifiably have, 2 having read the information about what's going on 3 in your company in relation to your contract with 4 this state agency. 5 MR. PATEL: That is correct, and 6 that's exactly my belief. 7 CHAIRMAN CLOWE: So you're here 8 today to publicly state on the record that you're 9 in a positive financial position and we can rely on 10 you for the remainder of this contract. 11 MR. PATEL: Yes, sir, without 12 reservation. 13 CHAIRMAN CLOWE: Very good. 14 Linda, do you have any comments or 15 questions at this time? 16 MS. CLOUD: Not at this time. 17 CHAIRMAN CLOWE: Very good. 18 I want to thank both of you again 19 for your appearance here this morning. I think it 20 was very important that you come to this meeting 21 and give us the information that you have. And we 22 would like to continue to be kept apprised of 23 developments in regard to business that affects us 24 with your company. 25 We follow with interest the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 26 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 appointment of the new leadership within the 2 corporation and the developments of financial 3 information, as the Commissioners have asked, as it 4 is revealed in the remainder of this year and in 5 the future. 6 MR. PATEL: Thank you very much 7 indeed. And if you have any further questions or 8 would like any further information, then I would be 9 glad to provide that to you in due course. 10 CHAIRMAN CLOWE: Thank you again. 11 MR. CALABRO: Thank you, 12 Mr. Chairman. 13 CHAIRMAN CLOWE: We'll now return to 14 the agenda and Item No. 2, the report, possible 15 discussion and/or action on lottery sales and 16 trends. 17 Linda, I think you and Toni are 18 going to handle this for us. 19 MS. SMITH: Good morning, 20 Commissioners. For the record, my name is Toni 21 Smith. I'm the marketing director of the Texas 22 Lottery Commission. 23 To review sales, we'll look at the 24 handout that I have given you for the week ending 25 August 5, 2000. Total fiscal year, 2000 sales to WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 27 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 date, $2,477,898,980.00. This is up 2.36 percent 2 from the fiscal year '99 total sales to date of 3 $2,420,725,298.50. 4 The weekly sales average for fiscal 5 year 2000 to date is $50,569,366.93, which also 6 reflects the increase of a 2.3 percent from fiscal 7 year '99 sales weekly average of $49,402,557.10. 8 This is based on a total of 49 weeks of sales. 9 To look at the year-to-date sales by 10 product, we usually just sort of take a snapshot of 11 the Instant product and Lotto Texas. The Instant 12 product is up 17.94 percent from fiscal year '99. 13 We are at $1,553,132,499.00, and this represents 14 62.68 percent of our current sales. For last year, 15 for fiscal year '99, we were at $1,316,937,616.00. 16 At that time, that represented 54.4 percent of 17 sales. 18 To look at Lotto Texas, Lotto Texas 19 is down, compared to last year, at 19.94 percent. 20 Fiscal year 2000, we're at $542,058,768.00, and it 21 currently represents 21.88 percent of sales. 22 And for fiscal year '99 for Lotto 23 Texas, we were at $677,105,235.00. And for fiscal 24 year '99, it represented 27.97 percent of sales. 25 Then to take a much closer look at WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 28 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 this past week, for the week ending August 5th, the 2 Instant product was up 3.55 percent from 3 $31,520,568.00 to $832,639,880.00. Lotto Texas was 4 down 41.80 percent from the $16,010,925.00 to 5 $9,317,959.00. But I think that change there is 6 strictly correlated to the fact that we had a 7 $40 million jackpot the week before. 8 So from one week to the next, the 9 big difference is in the jackpot itself. We were 10 ahead and then dropped down to four. So this past 11 week represented jackpots of $6 million and 12 $9 million. 13 Are there any questions? 14 CHAIRMAN CLOWE: Toni, I know it's 15 very early -- I've had a conversation with Linda -- 16 And Linda, you may want to enter 17 into helping us understand, as best you can ground 18 us, on what your perception is. 19 (Ms. Kiplin entered the room.) 20 CHAIRMAN CLOWE: And I think at this 21 point in time, it probably is a perception of how 22 it went as the jackpot built to $40 million. We 23 clearly see what happened after that jackpot was 24 hit. 25 Could you give us a read on how you WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 29 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 perceive the players are receiving the 54-ball 2 matrix since the change. 3 MS. CLOUD: Commissioners, we're not 4 going to see a big change in sales until we do have 5 a big jackpot. Right now, what we're seeing is 6 this is a winnable game. Our players are still 7 winning. What we're hearing from the retailers and 8 from our players -- and this is totally something 9 that's very encouraging to me -- is the retailers 10 are having bigger lines; players are playing the 11 game. 12 They're excited about the new game, 13 and they're playing. Some of them are grumbling a 14 little bit about the four balls, but the retailers 15 are saying it doesn't matter, they're still going 16 to play. 17 What I think we need to recognize is 18 that we are only three weeks into this, and we need 19 to give our game time. I think it's going to take 20 us six months to see a change in the sales. We've 21 got to have an opportunity for that jackpot to 22 roll, and it hasn't done that yet. And we know 23 this is a jackpot-driven game, and that's what is 24 going to drive the sales. 25 Toni, do you want to add anything to WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 30 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 that? 2 MS. SMITH: I would just like to add 3 that I think that the fact that we have had two 4 winners since the matrix change went into effect is 5 a positive thing for those players who felt that 6 the game would be more difficult to win. I mean, 7 in that period of time, we've had a winner at 8 $40 million and at $9 million. So it's still a 9 very winnable game. 10 MS. CLOUD: The $40 million jackpot, 11 we were already $21 million into that roll with the 12 old matrix. So we only had two rolls under the new 13 matrix to get to the $40 million. So I'm still 14 very optimistic. It's a matter of time. 15 And I know everyone is impatient to 16 see a change, but we have to wait until that change 17 happens. This is a game that is going to happen 18 based on the numbers that are drawn. And we just 19 have to wait and see how this game is going to 20 work. We haven't given it enough time yet. 21 COMMISSIONER SADBERRY: But can we 22 definitely say, or at least say from what we've 23 seen thus far, that we don't have this big drop-off 24 in players because of the additional balls that 25 some predictions are being -- WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 31 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 MS. CLOUD: No. Absolutely not. 2 What we have seen, Commissioner, is that the draw 3 sales have increased slightly. But we don't want 4 to even brag about it, because it's so slight. But 5 we are not seeing a decline. 6 COMMISSIONER SADBERRY: You haven't 7 been flooded with calls protesting it and 8 wanting -- 9 MS. CLOUD: We still get, through 10 our customer service department, complaints from 11 players that object to the rule change. Not many; 12 it's an average of what we've always received. But 13 we're not getting many letters or complaints like 14 we did. 15 COMMISSIONER SADBERRY: And have we 16 explained to the satisfaction of those who wanted 17 to know how the additional balls got in the draw so 18 quickly? 19 MS. CLOUD: We have responded to all 20 of them. So, hopefully, we've explained it. 21 Whether they have accepted our explanation or not 22 remains to be seen. But we did explain it. 23 CHAIRMAN CLOWE: You're a brave man. 24 I might substitute the word that you 25 used about impatience for the game to develop. I WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 32 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 don't think, on behalf of the Commissioners, we're 2 not impatient. But I want it to be known that 3 we're very interested, and we're going to watch 4 this very carefully. 5 I think your summary is correct. 6 It's too early, and it's going to take some time -- 7 six months, maybe longer, depending on the 8 jackpots -- to see what the player reaction is. 9 I know that you had a very favorable 10 retailer town hall meeting in Abilene, Texas, I 11 believe it is. 12 MS. CLOUD: Yes. 13 CHAIRMAN CLOWE: And the response of 14 the retailers there was very positive. That's a 15 good way to get feedback. 16 But Toni, the Commissioners will be 17 watching the sales with a high level of interest, 18 and so your appearance before us each month will be 19 one where, if you will, you'll give us your 20 perceptions. And we want to watch this very 21 closely as the players deal with these new balls, 22 and see how the game is progressing. 23 MS. SMITH: Okay. I can do that for 24 you. 25 MS. CLOUD: Commissioners, speaking WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 33 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 of the Abilene town hall meeting -- I think I've 2 shared this with you, Commissioner Clowe, but I 3 thought the other two might enjoy this, too. 4 One retailer spoke up and said he 5 was sitting in his office when some players came in 6 to his cashier and asked for -- Lotto Texas had 7 given them the place to play Lotto Texas -- but was 8 complaining about the four balls. And he says he 9 came out of his office, and he said, "Folks, I just 10 want to tell you something. The State gave you 11 four more balls and didn't charge you a dime for 12 it. Now, what are you complaining about?" 13 But I thought that was real cute, 14 and that was the kind of attitude most of the 15 Abilene retailers had. They were very, very 16 positive. 17 CHAIRMAN CLOWE: Very good. 18 The next item, Toni, I think is 19 yours as well; that is, report and possible 20 discussion and/or action on lottery advertising and 21 promotions, including print media criteria. 22 MS. SMITH: Yes, sir. And Keith 23 just asked that we clarify for the record that the 24 town meeting was in the Abilene district but 25 actually took place in Wichita Falls. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 34 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 CHAIRMAN CLOWE: Oh. Thank you very 2 much. 3 MS. SMITH: Regarding our 4 advertising, we continue to air our introduction of 5 the new Lotto balls TV spots through the end of 6 August, and also radio that goes along with that. 7 And then we're still promoting Cash 5 and Pick 3 on 8 radio and a new Lotto spot that the King Group has 9 done, voicing our minority market. 10 So our focus has been on the online 11 for the rest of the fiscal year, and we are 12 currently producing a fourth in the campaign of the 13 scratch coins TV commercials, and they will start 14 airing in September. 15 With regard to promotions, we still 16 try to maintain high visibility in some of the 17 grassroots areas with our promotions that we do at 18 fairs and festivals. And we are gearing up for our 19 three-week-long presence at the State Fair. We 20 have a good turnout, and it's gotten to be a very 21 popular event for players to come by and 22 participate in our game shows. So that's probably 23 our biggest promotion coming up here in the next 24 few months. 25 CHAIRMAN CLOWE: Very good. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 35 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 Anything further? 2 MS. SMITH: No. 3 CHAIRMAN CLOWE: Any questions? 4 MS. SMITH: Thank you, 5 Commissioners. 6 CHAIRMAN CLOWE: Thank you. 7 We can go on to Item No. 4, status 8 report, possible discussion and/or action on the 9 lottery operator audit procurement. 10 MS. CLOUD: Commissioners, I'm going 11 to ask Ridgely to come up. He's working on that 12 procurement. 13 MR. BENNET: Good morning, 14 Commissioners. For the record, my name is Ridgely 15 Bennet. I'm the Deputy General Counsel. Linda is 16 correct. I'm currently working on a draft. We 17 should have that out of my office early next week 18 for staff review, and hopefully, we'll have it out 19 on the street sometime next week. 20 I'll be happy to respond to any 21 questions. 22 CHAIRMAN CLOWE: I believe there are 23 none. 24 And Ridgely, are you going to speak 25 to the next item on the agenda as well? WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 36 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 MR. BENNET: Yes, Commissioners. 2 That would be Item No. 5, status report, possible 3 discussion and/or action on the lottery operator 4 procurement and lottery operator consultant. 5 We're happy to say that we have 6 engaged a consultant to help prepare the requested 7 proposals and advise the Evaluation Committee. The 8 company is Battelle Memorial Institute. And we 9 have with us today Mr. Gary Gassin of Battelle, who 10 is in the audience, if you have questions of him. 11 CHAIRMAN CLOWE: I'd like for him to 12 introduce himself and to comment on his company's 13 qualifications, if he would. 14 MR. GASSIN: Thank you very much. 15 My name is Gary Gassin. I'm the project manager 16 with Battelle Memorial Institute. 17 To answer your question about 18 Battelle's experience, we've been involved in the 19 lottery business since 1984. I specifically have 20 worked on approximately 35 procurement processes 21 that we have been employed for various 22 jurisdictions around the U.S. and also throughout 23 some international markets. 24 We have dealt with 25 of the U.S. 25 jurisdictions and approximately 5 of the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 37 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 international jurisdictions, so this is an area of 2 specialization that Battelle has developed a 3 specific practice for. And we're very pleased to 4 be back with the Texas Lottery to assist them with 5 the upcoming work. 6 COMMISSIONER SADBERRY: You may have 7 answered a question I was going to ask. 8 You say you are back with us. I was 9 going to ask you, have you worked with us before? 10 If I missed it, I'm sorry. 11 MR. GASSIN: Yes. 12 COMMISSIONER SADBERRY: You have 13 been -- 14 MR. GASSIN: Yes. We were 15 originally employed with the Texas Lottery during 16 the original start-up phases of the lottery, and 17 also approximately three years ago during the last 18 procurement cycle. 19 COMMISSIONER SADBERRY: And I'll 20 kick this maybe back to Ridgely. I just have a 21 direct question to you, Ridgely. 22 Are we on course, timewise, to do 23 this? 24 MR. BENNET: We are on course, yes, 25 sir. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 38 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 COMMISSIONER WHITAKER: What is the 2 nature of the advice that you seek to give? 3 MR. GASSIN: Battelle has developed 4 a method and process that we like to present to 5 different lottery jurisdictions to help them get 6 through the process. Unfortunately, this 7 particular business with the limited number of 8 vendors and providers of lottery systems gets to be 9 very litigious in some aspects. 10 And we try to promote a method and 11 process that will keep that possibility to a 12 minimum. It can never be completely wiped out 13 because disgruntled vendors will always come up 14 with reasons to protest and go forth and pursue 15 their own course of action. 16 But we've developed -- in addition 17 to the methods and processes, we have very in-depth 18 technical experience with the systems that are 19 being provided today, the types of software and 20 hardware and networks that the vendors are 21 providing. And we understand the operations of the 22 lottery jurisdictions, which I think helps put 23 together an RFP that can be open for bidding by 24 multiple suppliers and to keep it as an open 25 competition. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 39 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 COMMISSIONER WHITAKER: How does 2 your company deal with the changing technology and 3 in forecasting what is likely to be the technology, 4 three, five, ten years out? 5 MR. GASSIN: Well, that's one of the 6 things that's interesting about the lottery 7 business. That's why I and my partners back at the 8 office are very interested in this market, is the 9 lottery business tends to keep up on the 10 technologies. It is a lot more current than a lot 11 of other industries are. 12 So with the procurement cycles that 13 we have going on with the computer systems, 14 typically, we'll see a system operating eight to 15 ten years, on the norm, and then be replaced with 16 the newest technology that is available. 17 The technology since 1984, 1985, 18 when Battelle first started in this business, was 19 very specific. You needed very specialized 20 computer systems back then just because of the 21 quick response times that were required to produce 22 these transactions. 23 Over the past ten to fifteen years, 24 the technology has come to the stage where 25 off-the-shelf-type computer systems are now WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 40 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 available to operate the speed and the transaction 2 processing requirements that are required. And so 3 you don't have to have very technically-oriented 4 hardware. You can basically take your standard 5 hardware off the shelf. 6 So in terms of the technology, some 7 of the limiting factors that we have seen, though, 8 are the acceptability of some of the technologies: 9 Can a jurisdiction use a cellular phone to place 10 wagers and play by phone, and all those other types 11 of things. The technology is available to do 12 almost anything jurisdiction would want to do 13 today. It's just a question of whether it's 14 acceptable for each jurisdiction to employ some of 15 those new technologies. 16 COMMISSIONER WHITAKER: And you see 17 that as an expertise of your company, is advising 18 us on that? 19 MR. GASSIN: On which area? 20 COMMISSIONER WHITAKER: Technology 21 and changing technology and what's available and 22 what would be applicable. 23 MR. GASSIN: Yes, uh-huh. 24 COMMISSIONER WHITAKER: Okay. And 25 do you also advise on length of contract or WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 41 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 advisable contract terms? 2 MR. GASSIN: That is part of the 3 process for putting together the RFP. We will go 4 through discussions to see what would be the best 5 length of term for each individual jurisdiction's 6 engagement of a new vendor. 7 COMMISSIONER WHITAKER: And then you 8 would deal with who else at your company? 9 MR. GASSIN: We have a core team. 10 It's basically myself and Mike Huffinberger. Then 11 we have additional resources back at the office: 12 Mark Trimmel, Jay Elks, our network and our 13 evaluation expertise back at the office, along with 14 other additional resources, depending on what areas 15 we get into. 16 Battelle is a contract research and 17 development firm. We have a lot of areas of 18 expertise available to us that we can draw from, 19 depending on what might come to light. So we do 20 approximately $1 billion in sales each year, and we 21 have approximately 7,000 employees, a lot of PhDs, 22 a lot of technicians that we can pull from if 23 required for any particular project. 24 COMMISSIONER WHITAKER: Okay. Thank 25 you. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 42 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 COMMISSIONER SADBERRY: If I may 2 follow up on that. Is it Pattelle? I can't read 3 your tag real well. 4 MR. GASSIN: It's Battelle. It's 5 B-a-t-t-e-l-l-e. 6 COMMISSIONER SADBERRY: Ridgely, 7 I'll ask you, just for the record, the engagement 8 of this consulting service, is that done pursuant 9 to any type of a procurement process in and of 10 itself, or is that a sole source of what -- 11 MR. BENNET: It's done through a 12 competitive procurement. In this case, the 13 Commission issued a Request for Proposals, and 14 Battelle was the successful proposer. 15 COMMISSIONER SADBERRY: All right. 16 Now, do you anticipate, at this 17 stage of the game, whether you will find it 18 appropriate or necessary to engage any additional 19 services, professional services, such as, 20 specifically, attorneys or accountants, as was done 21 I think the previous time when -- in the middle of 22 contracting and you had some procurement 23 activities? 24 MR. BENNET: I think we're in 25 discussions about whether or not we need to do WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 43 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 that. At this time, no final decision has been 2 made. Of course, for attorneys and things of that 3 nature, we'd have to go through the Attorney 4 General's Office. 5 COMMISSIONER SADBERRY: So whatever 6 the process is for that, you will follow that and 7 you will have at your disposal the type of process 8 that is required to do that. 9 MR. BENNET: I certainly will. 10 COMMISSIONER SADBERRY: Kim, am I 11 correct that at one of the legislative sessions, 12 there was some question raised as to the process by 13 which the procurement of the law firm involved was 14 made? 15 MS. KIPLIN: Yeah. 16 COMMISSIONER SADBERRY: We'll 17 address those -- 18 MS. KIPLIN: Yes. And at that time, 19 the -- as you know, the Attorney General's Office 20 must approve any sort of outside counsel contract 21 that an agency enters into. In that particular 22 situation, it was an emergency procurement. It was 23 approved by the Attorney General's Office. We did 24 receive proposals from more than one law firm, but 25 it was ultimately approved by the Attorney WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 44 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 General's Office. 2 COMMISSIONER SADBERRY: Okay. 3 Now, following on, if I may -- at 4 least two things, I know, have occurred since your 5 engagement in the first time at bat here, and that 6 is, the concept and the concern for Texas receiving 7 an appropriate share of profits and revenues that 8 were generated from this contract, which I am sure 9 you historically have an awareness of that, as well 10 as a rule that it will be in place this time around 11 on a determination being made of what's in the best 12 interests of Texas, taking all appropriate factors 13 into account. 14 Are these things matters which your 15 company will be giving attention to in assisting 16 this agency in that process? 17 MR. GASSIN: Yes, we will. It will 18 be an area of -- just the ongoing process that we 19 will work with the Lottery to review those 20 different areas to make sure we're getting the best 21 solution for the State of Texas. 22 COMMISSIONER SADBERRY: And I guess 23 finally, from my standpoint, as far as the 24 Evaluation Committee and the composition of the 25 team for the RFP proposal, as well as the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 45 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 evaluation of the proposals, will this agency have 2 in place an account for the necessary participation 3 to assure all types of considerations, such as 4 costs, such as quality, and such as HUB 5 participation? 6 MR. GASSIN: Yes. 7 CHAIRMAN CLOWE: Where is the 8 headquarters of the company? 9 MR. GASSIN: Battelle's corporate 10 headquarters is in Columbus, Ohio. We have offices 11 throughout the world, but our main headquarters is 12 in Columbus, Ohio. 13 CHAIRMAN CLOWE: And you are going 14 to be team leader or the individual who is the 15 primary contact with our Commission. Is that 16 correct? 17 MR. GASSIN: Correct. Uh-huh. 18 CHAIRMAN CLOWE: I'd ask you, if you 19 would, as a matter of housekeeping, to fill out an 20 appearance form for us so we'll have that on the 21 record. 22 MR. GASSIN: I can do that. 23 CHAIRMAN CLOWE: And then I'd just 24 like to remind you, because it probably needs to be 25 said, that Texans think they are special; not WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 46 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 unique, but special. And having worked with us 2 before and been in this state, you understand that. 3 And you have broad experience, and 4 obviously, you're very competent. We'd like for 5 you to give us your special attention and make 6 certain that your product for us is the best you 7 have to offer. 8 MR. GASSIN: We do that for all of 9 our clients. 10 CHAIRMAN CLOWE: Well, I knew you'd 11 say that. But again, just remember, we think we're 12 special. 13 MR. GASSIN: I agree. 14 CHAIRMAN CLOWE: Okay. 15 That's what you wanted me to tell 16 him, wasn't it, Linda? 17 MS. CLOUD: Yes, sir. 18 CHAIRMAN CLOWE: Okay. 19 Thank you very much. 20 MR. GASSIN: Thank you very much. 21 CHAIRMAN CLOWE: Thank you both. 22 MR. BENNET: Thank you. 23 CHAIRMAN CLOWE: The next item on 24 the agenda is No. 6, consideration of and possible 25 discussion and/or action on the state audit report WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 47 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 relating to the Texas Lottery Commission. 2 Debra McLeod. Good morning. 3 MS. MCLEOD: Good morning, 4 Commissioners. For the record, my name is Debra 5 McLeod. I'm the Internal Audit Director. Before 6 you I've prepared a memo. I've got two audits that 7 I wanted to apprise you of, one that was performed 8 almost a year ago, now on procurement; and one of 9 the findings we have left deals with our print 10 media vendor. The State Auditor's Office had made 11 a recommendation to obtain the verification of our 12 subcontractor's publication circulation rates. 13 And I wanted to apprise you that we 14 have put out -- I believe Ridgely called it an IFB, 15 through Leslie Delvige in our purchasing section. 16 We're looking at a ceiling amount of a 25,000 -- to 17 bring in a professional consultant -- fee. This 18 would be somebody that would help management 19 understand -- the print industry is such a unique 20 area, and the print vendors are required to perform 21 or have audits performed on their business. 22 And we wanted to make sure that we 23 understand the caliber of these audits, because 24 these are not done by CPA firms, which have strict 25 auditing standards; they're an industry audit. So WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 48 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 we don't have that expertise on board here in the 2 Lottery, so we need to understand what is being 3 done by these audits and what recommendation can 4 they make to management; how do we go forward to 5 make sure that we're getting the best rates for 6 what we're paying; and are they complying with all 7 the requirements they are supposed to in their 8 audits. Because there seems to be some great 9 variation between the different types of audits 10 that are being performed. 11 We expect to receive proposals by 12 August 25th of this month on this, so that we 13 should be going forward after that point quite 14 expeditiously after that point. At that point, 15 once we get a vendor on board, then I can give you 16 a better date as to when we can expect to wrap this 17 up and complete this audit finding. 18 CHAIRMAN CLOWE: Questions? 19 COMMISSIONER WHITAKER: No. 20 COMMISSIONER SADBERRY: I guess -- I 21 think you've already addressed this in a previous 22 presentation. I just want to make sure. This is 23 probably an indication of you having addressed it; 24 that is, that whatever decision was made within 25 this agency not -- to not fully follow through on WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 49 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 the requirement of this type of verification 2 process, that has been addressed internally, and we 3 don't have any continuing or lingering issues 4 there. 5 MS. MCLEOD: If I understand you 6 correctly, you're asking me that based on what the 7 State Auditor has recommended, we're trying to now 8 monitor -- 9 COMMISSIONER SADBERRY: Right. 10 MS. MCLEOD: -- what the rates are. 11 I believe Toni can speak to that 12 better than I can, but my understanding is that, 13 yes, she's working quite closely with both of the 14 advertising firms because we're relying on a 15 primary contractor to do this work with a 16 subcontractor, and they have built processes and 17 set up kind of new procedures with these new 18 contracts to do a better job of just that. 19 The issue we have is, we came 20 into -- as you know, several speakers before the 21 Commission felt that the Lottery is not in the 22 business of auditing print media vendors, the 23 subcontractors. So we're trying to establish what 24 is the best process that we can monitor and we can 25 be assured that we can rely on the audits that are WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 50 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 being done by these print media audit firms. 2 Does that address your -- 3 COMMISSIONER SADBERRY: Yes, I think 4 you understood my question, and I think I 5 understand your answer. And we don't have a reason 6 or basis not to believe we will have problems. All 7 we know now was brought to our attention because of 8 our failures to follow through on audit 9 requirements. 10 MS. CLOUD: Commissioner, I think 11 we're doing over and above what we're required to 12 do to try to get to the bottom of the issue of 13 being able to monitor the subcontractors that are 14 out there and what they're doing with our money. 15 The purpose of this audit 16 procurement that we're doing for this is to seek 17 out someone with the expertise in this area that 18 can audit the auditors to tell us whether the 19 auditor -- we know for a fact that some of these 20 auditors are not legitimate. 21 And we have to be able to have 22 someone who has more expertise in this area than we 23 do to verify that for us and then also help us with 24 a reasonable criteria for the print media so that 25 we're not overburdening them with our requirements, WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 51 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 but yet we're able to monitor that they are giving 2 us the services we are paying for. 3 COMMISSIONER SADBERRY: That's what 4 I wanted to hear. But it does seem to me that we 5 are pursuing this thing appropriately, and yet 6 we're not swinging the pendulum too far in either 7 direction. We're not being lax; we're not being 8 overly zealous. And it seems like we're on course. 9 I just wanted to make sure that that's what you see 10 and that's what our Internal Auditor sees as far as 11 where we are right now. 12 MS. CLOUD: That's what we're trying 13 to accomplish with this, and that's what I see that 14 we're doing. 15 MS. MCLEOD: The only thing I want 16 to add to that, Linda, is that what we've done in 17 preparation to bring on this print media consult is 18 gone back and looked at every single invoice that 19 has come through this agency with our primary 20 vendor and developed a huge database for this 21 analyst to come in and evaluate, in a very easy 22 form, what are we paying in different areas of 23 Texas, which vendors are HUB certified, and which 24 vendors are complying with the audit terms. 25 We've had some discussions WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 52 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 internally and with our audit firms as to whether 2 when you perform an audit in one year, is that good 3 for the next two years. We need to clarify with 4 these print media vendors what our policy will be 5 and then stick with it. 6 And we feel that by bringing in some 7 additional expertise, they can help us just very 8 quickly come to that solution. So that's why we 9 feel that with a small dollar amount, we can do 10 that because we've already done extensively the 11 analysis for them. It's just basically getting 12 their industry expertise in this area. 13 So I think if any vendor has been 14 very scrutinized, it's been these subcontractors 15 with this print media. We've done a full database 16 in preparation for this, so we've done as much as 17 we can, waiting for this expertise to come on 18 board. 19 CHAIRMAN CLOWE: Very good. 20 MS. MCLEOD: The other audit I'd 21 like to speak about is we went through performance 22 measure certification, and I wanted to clarify with 23 the Commissioners, you've received what the state 24 auditors call a management letter. This is not 25 their formal, open report yet. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 53 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 State auditors are also performing 2 performance measures audits on several other state 3 agencies. And at that point, once they complete 4 all of those audits, which we expect by the end of 5 next month, they will then come forth with the 6 report, which you will see in a different format. 7 But some of the pages you have 8 received attached to your management letter should 9 look exactly the same as what you've received in 10 that packet. So I just wanted to be very clear. 11 And we're in communication, both 12 Patsy and I, with the State Auditor's Office as to 13 what has been complied with and what further 14 action, if anything, they have to do to be in 15 compliance with issues that they've raised. 16 So that's where we are right now. 17 And to the best of my knowledge, I don't anticipate 18 any other state audits. I know we are currently 19 doing -- we've contracted with the State Auditor's 20 Office, under their management advisory services, 21 to have an internal assessment realignment done at 22 management's decision. 23 So that's the only other issue that 24 I'm aware of that we're doing with the State 25 Auditor's Office at this point. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 54 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 CHAIRMAN CLOWE: Thank you, Debra. 2 Any other questions? 3 Thank you. 4 MS. MCLEOD: Thank you. 5 CHAIRMAN CLOWE: The next item on 6 the agenda is No. 7, consideration of and possible 7 discussion and/or action on the agency's 8 Legislative Appropriations Request. 9 Patsy Henry. 10 And Bart, you're going to help out 11 in this? 12 MR. SANCHEZ: If I need to. 13 CHAIRMAN CLOWE: Nelda, are you 14 going to join in? 15 MS. TREVINO: Ask them. 16 MS. HENRY: Good morning, 17 Mr. Chairman, Commissioners. My name is Patsy 18 Henry. I'm Deputy Executive Director of the 19 Lottery Commission. 20 MR. SANCHEZ: Good morning, 21 Commissioners. For the record, my name is Bart 22 Sanchez. I'm the Financial Administration 23 Director. 24 MS. HENRY: We have had individual 25 conversations with each of you, and so we hope that WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 55 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 a lot of the background for this report is clear 2 for you. I just want to go over the high points, 3 the critical areas, in review. 4 The first area would be in the 5 Summary of Requests, and that would be the third 6 section in your draft notebook. The agency is 7 required to request no more than has been expended 8 for the 2000-2001 biennium. And our request 9 reflects that limitation. 10 For the years 2002 and 2003, we are 11 requesting a total of $198.8 million for our 12 budget. That incorporates both the special fund as 13 a method of finance of $196.02 million, and also 14 general revenue for the bingo goal of $2.78 million 15 for each year of the biennium. 16 The other area I would like to 17 highlight would be the riders. We have four riders 18 that are of critical importance to us as we enter 19 into the review and consideration of new contracts 20 for operating the lottery in the coming biennium. 21 The riders that we have placed in 22 your notebooks for your consideration and approval 23 would allow the agency some latitude with regard to 24 increasing the total percentage of funds that are 25 authorized for administration of the lottery, WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 56 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 including both the internal administration of the 2 agency and contractual obligations that we will 3 enter into. 4 Some of the requests will require a 5 general statutory amendment, and we are laying 6 those issues out on the table in our request as 7 well. We have eliminated two riders, No. 4 and 8 No. 5. And we have modified rider No. 2 and 9 created a new rider, designated No. 701, which 10 would replace and enhance the provisions that are 11 being eliminated. 12 We hope this will be a beginning 13 avenue for the budget offices and for the 14 legislative leadership in the Governor's Office to 15 help us work our way through this important issue 16 and the task that we have at hand in the next 17 biennium. Perhaps they will come up with some 18 alternatives to what we are suggesting, and we're 19 going to be open to those suggestions as well. But 20 we felt it incumbent upon us to lay out the issues 21 so that everyone would be aware of them as early as 22 possible so that we could come to a comfort level 23 with how to resolve it. 24 There are numerous other support 25 schedules that are required in our Legislative WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 57 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 Appropriations Request that deal with our Bingo 2 Advisory Committee. Our HUB supporting schedules 3 are included, estimated contract workforce and 4 direct administration costs. 5 But those really are the main issues 6 that I wanted to lay out before you, the bottom 7 line limitation that we're going to be requesting 8 in terms of dollars and the major rider provisions 9 that we're going to be asking for changes on. 10 If you have any questions about the 11 details of the LAR, we'll be glad to discuss them 12 with you and try to answer your questions before 13 asking for approval. 14 CHAIRMAN CLOWE: Patsy, in order to 15 clarify perhaps even further at this early stage 16 the financial riders and what you're setting out 17 there for consideration, I'd like to have you go 18 into a little more detail on that in the interest 19 of the fullest possible explanation and what the 20 need is, as perceived there, that you're dealing 21 with. 22 MS. HENRY: Okay. Rider No. 2, 23 under the section of your packet that reads "Rider 24 Revisions and Additions Requested," is current 25 Rider No. 2, appropriation to operate the lottery. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 58 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 It currently identifies the 2 limitation of 12 percent for the agency not to 3 exceed, in its administration of the lottery. And 4 that's 12 percent of gross revenue from the sale of 5 lottery tickets. 6 In previous biennia, that limitation 7 was at 15 percent, and the agency did return a 8 substantial amount of money to the state treasury 9 at the end of the biennium that approximated 10 3 percent -- a little bit more, actually. 11 What we're asking for in the 12 expanded language for Rider 2 is that that 13 3 percent be allocated back to us so that we might, 14 for this biennium, take care of the contractual 15 amounts that we don't know about yet that will be 16 coming our way in the form of proposals to operate 17 the lottery. 18 But the language that we've put in 19 here really speaks to that as an exception. And so 20 the only funds of that 3 percent that would not go 21 back to the treasury would be those that would be 22 needed for those contractual amounts that exceed 23 what we are currently paying. 24 Our concerns are explained in the 25 documents in the LAR. I don't know that you want WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 59 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 me necessarily to go into that on this particular 2 item. This will require both a general statutory 3 change, as well as the revisions to the rider. 4 So what we're asking for is 5 significant, and we realize that there are members 6 of the Legislature who will be very concerned about 7 this. And we want to make them aware of what we 8 feel is a compelling need as early as possible, and 9 want to make sure that they understand all the 10 issues that we have at hand to deal with. 11 The next rider that is affected is 12 Rider 4. It currently is a rider that deals with 13 appropriation of increased revenue and is in place 14 this biennium in anticipation of sales exceeding 15 the original estimate upon which our appropriation 16 for this biennium was estimated. 17 The rider is specific to the 18 percentages of contractual amounts and the estimate 19 threshold that would need to be exceeded before 20 those additional funds would kick in for those 21 contractual amounts. And because it is specific in 22 that way, it doesn't really meet the need that we 23 have for the coming biennium. So we're 24 recommending that that rider be deleted and would 25 be replaced with new language, which I'll talk a WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 60 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 little bit about here in a minute. 2 The second rider that is eliminated 3 would be Rider 5. It is adjustments to 4 appropriated amounts. This rider was the result of 5 a state auditor's recommendation that we take a 6 look at the activities, functions, and programs 7 that are operated for the lottery under contract, 8 and consider whether or not it would be more cost 9 effective to bring those in-house. 10 And there is a significant review 11 process associated with making that kind of change 12 to our operations. The rider actually adds an 13 additional review process, which is not in place 14 for other agencies and which we feel would be a 15 further hindrance to the time frames that would be 16 required for contracting for new services. 17 It would be too much of a delay, and 18 so the new language, we hope, will replace the 19 intent and achieve the intent of this rider through 20 the Request for Proposal and evaluation process to 21 look at all of our operations and see how they can 22 best and most cost effectively be operated. 23 The new rider is at the back of this 24 section. It is designated Rider 701, as required 25 by the LAR instructions. This rider proposes to WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 61 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 achieve the level of flexibility that we think they 2 will need in terms of additional amounts of money 3 to cover any increased costs of contracting for 4 operating the lottery, as well as to identify the 5 specific limitations that would go along with those 6 dollar amounts, in order to achieve a greater level 7 of assurance with the Legislature that we would be 8 very closely accounting for these funds and they 9 would have the highest accountability. 10 The rider is written so that it 11 authorizes these amounts only for the amounts that 12 exceed current contractual amounts. And so we're 13 being very focused in that, as well as specifying 14 that under no circumstances will the total 15 appropriated funds exceed the revenue estimates as 16 determined by the controller of public accounts. 17 So we don't want to add any costs to the 18 Appropriations Act, and that part of the rider 19 would assure that. 20 So in crafting this rider, we've 21 tried to use, as a template, other riders of a 22 similar nature that are already in existence and 23 have been used by the Legislature to allow 24 flexibility with accountability and to anticipate, 25 through specificity and assurance, that it would WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 62 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 not exceed available revenues as determined by the 2 controller. We think we've crafted it in a 3 reasonable way, and it's a starting point for 4 discussions, and it lays the issues out for 5 everyone to become aware. 6 And basically, that's the approach 7 we've taken on the rider revisions in order to 8 allow ourselves the needed flexibility for our 9 proposal evaluation process, which we'll be dealing 10 with over the next year. 11 CHAIRMAN CLOWE: Any questions on 12 those financial riders? 13 COMMISSIONER WHITAKER: Not the ones 14 you discussed, but on the first one, which is about 15 capital budgets, the major items of expense are the 16 broadcast studio facility, the drawings 17 equipment -- and what was the third one? 18 MS. HENRY: The replacement of the 19 accounting system. 20 COMMISSIONER WHITAKER: And could 21 you just describe why those were included and how 22 you believe this overall request for capital funds 23 lines up with what you'd expect an agency of this 24 size to be requesting. 25 MS. HENRY: Yes, ma'am. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 63 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 The capital budget rider is a 2 mechanism for identifying a major piece of what 3 every agency spends in its appropriation. The 4 Lottery Commission had its first capital budget 5 rider during the current biennium, 2000-2001. 6 So that was our first attempt to 7 really explain what your capital needs were. I 8 think we placed upon ourselves certain restrictions 9 in asking for those funds. We were somewhat timid, 10 I believe, in the amounts that we asked for, and 11 that created some limitations for us during this 12 biennium. But we are growing more accustomed to 13 how to actually show what our needs are in this 14 rider mechanism. 15 The other reason I think we had 16 limitations were that we knew there were going to 17 be some restrictions placed on us, just out of the 18 sheer reality of where sales were going. And so we 19 had a more conservative approach with the numbers 20 we put in there. 21 The increase that you see here in 22 the capital budget request tries to anticipate all 23 of the capital projects that we think will be 24 coming our way that are new for this coming 25 biennium, but also some that were deferred from the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 64 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 current biennium because of the limitations in our 2 funding. 3 We did not want to go over budget, 4 and so we put some of them off and we've added them 5 into this. So we have sort of an accumulation of 6 deferrals added to the new projects that are being 7 identified, and the accounting package is one of 8 those deferrals. 9 Another one, which is the production 10 studio, is one that we're estimating an amount for, 11 but we are not real sure what the bids are going to 12 come in at. And so we will probably fine tune that 13 number as we go through the appropriations process 14 and we know more about what that cost is going to 15 be. But it may be a little bit on the high side 16 just to make sure that we've covered ourselves at 17 this point in time. 18 COMMISSIONER WHITAKER: As I 19 understand it, the broadcast studio facility is an 20 effort to bring in-house what is currently costing 21 the Lottery Commission 1.8? 22 MS. CLOUD: Yes. 23 COMMISSIONER WHITAKER: So what is 24 requested is 1.2, and that could actually turn out 25 to be a lower number. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 65 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 MS. CLOUD: Yes. 2 COMMISSIONER WHITAKER: And the 3 drawing equipment, could you explain that. 4 MS. CLOUD: We have to replace our 5 draw machines occasionally. We have just replaced 6 three Lotto machines. Those particular items are 7 based on the assumption that if we have a new game 8 to replace Texas Million and it requires a 9 different machine than what we now have in-house, 10 that those machines would have to be purchased. 11 And right now, at this point, because we're looking 12 at various different recommendations and going to 13 do some testing, we don't know which direction 14 we'll be going. So it's better to have it in the 15 budget than not have it. 16 The ball sets, we do always have to 17 replace after -- and that is on the request usually 18 of our statistician. So the ball sets are always 19 kept in the budget because we never know exactly 20 when they will need to be replaced. 21 COMMISSIONER WHITAKER: Okay. Thank 22 you. 23 CHAIRMAN CLOWE: Any other comments 24 on any other riders, Patsy? 25 MS. HENRY: I think Mr. Atkins WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 66 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 probably has some interest in the petty cash rider. 2 They have some audit costs that are currently not 3 real easy for them to cover. That's significant 4 for the bingo activity. 5 Other than that, I think everything 6 is pretty much an update for codification reasons 7 or clarification. Those four that I mentioned 8 earlier are the primary ones. 9 CHAIRMAN CLOWE: Very good. 10 Mr. Welch is here from 11 Representative Heflin's office. I'd like to invite 12 any comments that he might have. 13 MR. WELCH: I'm just an innocent 14 bystander. 15 CHAIRMAN CLOWE: I'm in that 16 category, too. 17 Thank you for being here. We 18 appreciate your attendance. 19 MR. WELCH: Well, I appreciate the 20 Commission inviting us. 21 CHAIRMAN CLOWE: Patsy, I believe 22 you want a motion of approval from the Commission. 23 Is that correct? 24 MS. HENRY: I do, sir. Thank you. 25 CHAIRMAN CLOWE: Before I ask for WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 67 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 that, I want to thank you for your efforts on this 2 project. Your expertise and knowledge is of great 3 value to the Commission, and I think we're going to 4 rely on you heavily as we go forward in this 5 process. 6 Bart, you as well, and your people, 7 have done a marvelous job in the development of 8 this document and the planning that's gone into 9 this. I know that each of the Commissioners has 10 been briefed in detail, and I think I can speak for 11 each of us in saying that we are appreciative and 12 admiring of the work that has been done on this. 13 My understanding is that if the 14 Commission approves this, we are to submit this on 15 September the 11th. 16 MS. HENRY: August 25th is our 17 designated submission date. 18 CHAIRMAN CLOWE: Excuse me. I got 19 the wrong date. August the 25th. 20 MS. HENRY: The 11th is our budget 21 hearing. 22 CHAIRMAN CLOWE: That's right. 23 That's right. The submission is August 25th, but 24 the appearance is September 11th. And it's my 25 understanding that all three Commissioners will be WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 68 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 in attendance at that meeting to support this 2 document. 3 Is there a motion for approval? 4 COMMISSIONER WHITAKER: I so vote. 5 COMMISSIONER SADBERRY: I would 6 second. 7 And if I may, in so doing, adopt 8 entirely, Mr. Chairman, your comments concerning 9 the briefings and the work of the staff and the 10 support of this particular document. 11 CHAIRMAN CLOWE: Thank you, 12 Commissioner Sadberry. 13 All in favor, say aye. All opposed, 14 no. 15 The vote is 3-0 for approval. 16 Thank you all very much. 17 MS. HENRY: Thank you, Mr. Chairman. 18 CHAIRMAN CLOWE: I'd like to go now 19 to Item No. 12, staying with the public agenda, and 20 go to consideration of status and possible entry of 21 orders. 22 We have, at five minutes to 10:00, 23 time to go forward, I think, with these other items 24 prior to going into Executive Session. 25 Kim, will you help us with this. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 69 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 MS. KIPLIN: Yes, I'd be glad to. 2 Commissioners, you have four 3 contested case proceedings before you. The first 4 one, Westside Drive Beer Depot, is a lottery case. 5 Staff does recommend that you sign the order, and 6 that order will be to revoke the license. And the 7 basis for that is insufficient funds. Funds were 8 not there in accordance and as required by law. 9 The other remaining three are bingo 10 cases. Staff does recommend that you sign the 11 order on Terra Genesis of Austin, the application 12 order. And that is an order denying the 13 application for license for the reasons that are 14 set out in the Proposal for Decision. 15 That leaves us with two dockets, and 16 both of those have to do with the licensee Red Men 17 Council No. 4. Mr. Steven Fenoglio is attorney of 18 record for the docket on -- I believe it's 19 362-00-0404.B. That is the Proposal for Decision 20 having to do with -- pardon me. I think I've got 21 them wrong. I juxtaposed on that. 22 The one that is the matter that was 23 for revocation was 362-99-1278.B. Mr. Fenoglio is 24 the attorney of record on that matter. This is a 25 matter that has gone to the State Office of WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 70 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 Administration Hearings. 2 Exceptions and replies were filed to 3 the original Proposals for Decision. There was an 4 amended Proposal for Decision before you, amending 5 some of the findings and conclusions but not 6 changing the nature of the proposal order, which 7 was not to revoke. 8 Mr. Fenoglio has asked that the 9 staff pass that matter, and I'll be glad to ask him 10 if I'm representing his interests the way I should. 11 And he is not attorney of record on the application 12 denial which, in fact, the ALJ -- once again, it 13 was before the State Office of Administrative 14 Hearings, and the Administrative Law Judge's 15 recommendation is to deny that application and the 16 renewal application. He's not the attorney of 17 record on that. 18 Staff does want to go forward on 19 that matter, but in light of the conversations 20 we've had with Mr. Fenoglio, the staff does not 21 oppose the passing of the matter that's before you, 22 the consideration of the revocation or not 23 revocation. 24 I will say, to make it crystal 25 clear, if the Commission does enter the order on WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 71 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 the application denial of the renewal license, and 2 that matter becomes the final order, then the 3 matter that Mr. Fenoglio has asked to pass will 4 become potentially moot. And -- 5 COMMISSIONER WHITAKER: This is 6 getting too complicated. 7 CHAIRMAN CLOWE: Yes. 8 MS. KIPLIN: So with that -- 9 CHAIRMAN CLOWE: Thank you, 10 Commissioner. 11 MS. KIPLIN: -- let me just 12 summarize. 13 The staff is recommending moot -- if 14 you will eliminate the contested case proceeding in 15 which Mr. Fenoglio is counsel of record, the staff 16 recommends that you sign all the proposal -- 17 proposed orders that were presented by the 18 Administrative Law Judge. 19 In light of the conversations we had 20 with Mr. Fenoglio and based on the totality of the 21 issues as presented, the staff does not oppose the 22 passing of the matter in which Mr. Fenoglio is 23 counsel of record. 24 MR. FENOGLIO: And that is a correct 25 statement, Commissioners. I have -- WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 72 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 CHAIRMAN CLOWE: Well, why don't you 2 identify yourself, please, and then talk to us. 3 MR. FENOGLIO: My name is Stephen 4 Fenoglio. I'm an attorney in Austin, Texas, and I 5 represent the Red Men organization in the Docket 6 No. 362-99-1278.B. 7 I did file a -- by way of 8 information, the other Red Men docket, I did file 9 one pleading in that proceeding. The judge 10 overruled it, and the case went to hearing, 11 essentially on a default hearing. 12 I have represented the Red Men 13 organization and their chapters across the state 14 for several years, but the only issue that I'm here 15 today on is the 1278. And the reason I'm here 16 today is staff had filed, on Wednesday afternoon of 17 this week, a pleading, if you will, taking to task 18 certain issues that the ALJ had found in the PFD, 19 the Proposal for Decision. 20 I have not had a chance to 21 communicate with my client about that issue, and 22 I'm reluctant -- I appreciate the staff's agreement 23 to withdraw that or recommend that the 24 Commissioners withdraw that docket from this 25 hearing until I've had an opportunity -- I don't WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 73 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 know if my client is on vacation or what. But we 2 faxed the pleading to them, but we've not had any 3 communication. I've left three messages for them. 4 COMMISSIONER SADBERRY: Let me see 5 if I can get it clear. The letter that came to us 6 by fax on August 9, 2000 is in that docket? 7 MS. KIPLIN: In the docket in which 8 Mr. Fenoglio is counsel of record. 9 COMMISSIONER SADBERRY: Which he 10 wants to pass. 11 MS. KIPLIN: Yes. 12 COMMISSIONER SADBERRY: So this is a 13 decision to pass made after this fax came through? 14 MS. KIPLIN: Yes. 15 COMMISSIONER SADBERRY: Okay. 16 Is that right? 17 MR. FENOGLIO: Yes, Your Honor. 18 And it may seem odd that I'm in the 19 position I am, but I do not represent the Red Men 20 Council in the first docket, the 0404 docket. I 21 believe they are going to take their medicine on 22 that docket. They did not file any exceptions. 23 But I do represent them in the other 24 docket, and I'd like to have the opportunity to 25 communicate with my client before the issue is WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 74 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 resolved with the Commission in that docket. If 2 you adopt the ALJ's recommendation in the first Red 3 Men docket, it effectively makes the second docket 4 moot. 5 COMMISSIONER SADBERRY: So that's 6 some findings issue, I guess is what you're talking 7 about. 8 MR. FENOGLIO: Yes. There are some 9 legal issues that we quarreled with at the hearing 10 in the second Red Men docket. The recommendation 11 was favorable to the Red Men organization, and then 12 this -- the first docket, 0404, came after that, 13 and that would dissolve their license. Their 14 license would be terminated upon operation of law 15 on the first one. But there are some -- I guess 16 there are still some legal issues that -- 17 CHAIRMAN CLOWE: As the only 18 non-lawyer on this -- 19 COMMISSIONER WHITAKER: We 20 understand it now. 21 CHAIRMAN CLOWE: -- if we adopt 22 0404.B, then we cut his legs off on the next item, 23 which is his. 24 MS. KIPLIN: Yes. And staff 25 recommends that you do that. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 75 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 CHAIRMAN CLOWE: That's what I 2 understand. And yet you've agreed to pass the 3 issue that he is retained and active in, which is 4 1278.B. 5 MS. KIPLIN: Yes. And should the 6 order in the other matter that you just -- the one 7 before that you referenced, the application denial, 8 become a final order, that moots out the matter in 9 which Mr. Fenoglio is counsel of record. 10 MR. FENOGLIO: I know it sounds odd, 11 Commissioner, but that's exactly what I'm asking 12 for. 13 COMMISSIONER WHITAKER: And you're 14 asking because you haven't been able to contact 15 your client? 16 MR. FENOGLIO: Exactly. 17 COMMISSIONER WHITAKER: Okay. 18 MS. KIPLIN: And staff recommends 19 that you enter the orders as they were presented to 20 you by the State Office of Administrative Hearings. 21 COMMISSIONER WHITAKER: And what 22 you're recommending is assist -- 23 MS. KIPLIN: The staff will not 24 oppose his request to pass. 25 COMMISSIONER WHITAKER: Okay. And WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 76 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 that's part of your recommendation? 2 MS. KIPLIN: Yes. 3 COMMISSIONER WHITAKER: Okay. 4 CHAIRMAN CLOWE: And you're not in a 5 position to ask for passing the 0404.B? 6 MR. FENOGLIO: No. And it is my 7 understanding that the Red Men organization has 8 tendered the white flag in that regard after that 9 proceeding came up. 10 MS. KIPLIN: And if the 11 Commissioners desire to pass that matter, then the 12 staff would want both matters brought up, and we 13 would withdraw our non-opposing the passing of the 14 first one. 15 COMMISSIONER SADBERRY: Which nobody 16 is asking for, as I understand here. 17 MS. KIPLIN: That's correct. 18 CHAIRMAN CLOWE: Billy, do you have 19 any comment? 20 MR. ATKINS: I concur. 21 COMMISSIONER SADBERRY: We won't see 22 this again, is what you're saying, if we go 23 according to -- 24 MS. KIPLIN: I can't guarantee that. 25 COMMISSIONER SADBERRY: Well, that's WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 77 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 the question I have, is will we see this again. 2 MS. KIPLIN: It's not a final order 3 until 20 days from the date the parties receive 4 notice. It passes without a final motion for a 5 rehearing. 6 COMMISSIONER WHITAKER: I will move 7 to adopt the recommendation of staff. 8 COMMISSIONER SADBERRY: Second. 9 CHAIRMAN CLOWE: The motion is to 10 adopt recommendation of staff, which is to approve 11 the first three recommendations and to pass on the 12 fourth. 13 Is that your motion? 14 COMMISSIONER WHITAKER: Correct. 15 MS. KIPLIN: Correct. 16 CHAIRMAN CLOWE: All in favor, say 17 aye. Opposed, no. 18 The vote is 3-0 in favor. 19 Thank you, Mr. Fenoglio. 20 MR. FENOGLIO: Thank you, 21 Commissioners, for the opportunity to confuse 22 myself. 23 CHAIRMAN CLOWE: I think, thank you, 24 I guess I should say. 25 COMMISSIONER SADBERRY: We'll see. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 78 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 MS. KIPLIN: And if we could take a 2 pause while you-all sign those orders. 3 CHAIRMAN CLOWE: Yes. 4 (OFF THE RECORD.) 5 CHAIRMAN CLOWE: Item 13 on the 6 agenda, the report by the Executive Director and/or 7 possible discussion and/or action on the agency's 8 financial and operational status, HUB and/or 9 minority status, FTE status, lottery conferences, 10 and retailer forums. 11 Linda? 12 MS. CLOUD: Commissioners, I can 13 give my executive statement, but we did skip 14 Item 8. 15 CHAIRMAN CLOWE: I noticed that. 16 We'll go back to that. That's Nelda. 17 MS. CLOUD: Right. 18 Do you want me to go forward with 19 the executive report? 20 CHAIRMAN CLOWE: Please. 21 MS. CLOUD: Okay. 22 Commissioners, we transferred, in 23 July of 2000, $66,229,507.00 to the foundation's 24 school fund. The total transfers to date, since 25 startup, is $7,082,337,668.00. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 79 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 Our HUB report is the same that 2 you've had in your binder, and I'll skip over that 3 one. 4 Our FTE totals, we have presently 5 299 active FTEs; we have 29 vacant positions, 9 of 6 which are in the acceptance selection process; 11 7 in the recruiting, screening, and interviewing; 4 8 positions are presently being posted; and we have 9 5 positions that are vacant at this time, with no 10 HR activity. 11 CHAIRMAN CLOWE: I believe you had a 12 new employee, starting next Monday, in the 13 audience. But I think he has left now. 14 MS. CLOUD: We did have Robert Hall, 15 our new Minority Director. He is going to be 16 coming on board Monday. And when he comes back, we 17 will individually introduce him to each one of you. 18 Patsy, did Robert leave? 19 MS. HENRY: He just did. He's here 20 somewhere if you want him. 21 CHAIRMAN CLOWE: I'd like him to be 22 introduced in the meeting. I think the 23 Commissioners have met him individually. 24 COMMISSIONER SADBERRY: I think he's 25 still here. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 80 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 MS. CLOUD: Commissioners, it's not 2 in your packet, and I don't know the exact date, 3 but at the end of this month, we have a town hall 4 meeting in Laredo. It will be the first time that 5 we have visited Laredo with our town hall meetings, 6 and we're looking forward to that. And that -- did 7 we get him in the room? 8 Robert, we want to introduce you on 9 record here. 10 Patsy, do you want to do the honors? 11 MS. HENRY: Yes. 12 Mr. Hall has come to us today, off 13 of his vacation for just a few hours. He's taking 14 a few well deserved days before he joins us on 15 Monday. Robert Hall will be our new Director of 16 Minority Development Services. He comes to us from 17 the General Services Commission, where he was 18 manager of the statewide HUB program, so we're 19 getting lots of good experience with him. 20 And he's a little bit out of breath 21 because he's been moving some boxes in ahead of 22 time. 23 So I commend him to you, and we're 24 glad to have him. 25 CHAIRMAN CLOWE: Robert, I know WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 81 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 you're extremely well qualified, and you are the 2 best candidate for this position from a number of 3 applicants. And we are very delighted to have you 4 and your experience and knowledge joining us here 5 at the Commission. 6 You're in an extremely important 7 area for all of us, and we look forward to you, as 8 Patsy Henry has, bringing us knowledge and 9 experience and producing excellent results for this 10 Commission. 11 And Commissioners, I met Robert 12 earlier this morning and patted him on the back and 13 felt the strength in his arms and his chest. And I 14 announced that when the fight starts, I'm on his 15 side. I want you to know that. So I'm ahead of 16 you on that score. 17 Any comments? 18 COMMISSIONER SADBERRY: I just want 19 to say welcome and pleased to have you, and I look 20 forward to working with you. Thanks for bringing 21 to us your experience and your commitment to what 22 we are all about here. And we'll get to deal more 23 directly with you as time goes on, I'm sure. 24 COMMISSIONER WHITAKER: I also want 25 to say welcome. I think you'll enjoy your stay WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 82 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 here. 2 MR. HALL: Well, if I may, good 3 morning, Commissioners. I'm excited about being 4 here and well pleased with the opportunity to serve 5 as your Director of Minority Development Services. 6 I look forward to that. I think this is going to 7 be an exciting opportunity. 8 I would like to also add that your 9 staff, in hiring me for this position, I have been 10 most pleased with the reception, as well as the 11 politeness and just totally, the kindness and the 12 family atmosphere they have already presented to 13 me. And I look forward to working within that and 14 look forward to working with you as well. 15 CHAIRMAN CLOWE: Thank you again. 16 COMMISSIONER SADBERRY: Thank you. 17 COMMISSIONER WHITAKER: Thank you 18 for those words. 19 CHAIRMAN CLOWE: Thank you for being 20 here today. 21 Now we'll go to Item 14, report by 22 the Charitable Bingo Operations Director and 23 possible discussion and/or action on the Charitable 24 Bingo Operations Division's activities. 25 Billy? WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 83 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 MR. ATKINS: Commissioners, the only 2 thing I have to add in addition to what's already 3 in your notebook, we currently have scheduled for 4 August the 22nd through the 24th, the division's 5 annual conference. That's where we bring in all of 6 our field auditors and get them together with all 7 of the staffing at headquarters. And I would like 8 to invite any of you that are available to stop by 9 and say hello at that time. 10 We have a series of training 11 programs scheduled throughout those days for the 12 staff, as well as presentations by staff themselves 13 to other members of the division. 14 COMMISSIONER WHITAKER: When is 15 that, Billy? 16 MR. ATKINS: It is scheduled for the 17 22nd through the 24th. And we're going to have all 18 of the regional managers in on Monday the 21st, and 19 that will serve as our strategic planning session, 20 where we'll get the managers together. And part of 21 what we'll go over during that conference is what 22 was discussed in that session. 23 The one other thing, I want to give 24 you a real quick update on the training program, 25 the operator training program. Since the first WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 84 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 class was held March 1st of this year, there have 2 been a total of 21 classes held throughout the 3 state since August 2nd. We've had over 1100 4 operators attend that training, representing 5 53 percent of our total licensee base. 6 We have four more classes scheduled 7 for the remainder of this fiscal year. And 8 starting with the next fiscal year, we'll hold 9 additional classes elsewhere throughout the state. 10 It's been very well received. I'm very pleased 11 with the response that we've gotten, and all of the 12 licensees seem to be very appreciative of the 13 program. 14 CHAIRMAN CLOWE: Very good. 15 Any questions? 16 We will now return to Item 8. I'm 17 sorry I overlooked this item, consideration of and 18 possible discussion and/or action on the agency's 19 legislative proposals for the 77th Legislature. 20 Nelda, are you going to lead us 21 through this? 22 MS. TREVINO: Yes, sir, I am. 23 CHAIRMAN CLOWE: Good. 24 MS. TREVINO: For the record, I'm 25 Nelda Trevino, the Governmental Affairs Director. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 85 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 Commissioners, what we wanted to do 2 today is try to get some approval and guidance from 3 the Commission regarding just some of the 4 legislative proposals that we've been looking at. 5 And we've laid them out for you in a memo, and I 6 think each one of you has received a revised copy 7 of the memo that was originally in your notebooks. 8 So if it is okay with the board, I'd 9 like to take each proposal up, one by one, and 10 again get your guidance and approval to move 11 forward in drafting some legislation in regards to 12 these different proposals. 13 Starting off with our Security 14 Division, there are two proposals that were 15 submitted by the Security Division. One is a 16 proposal that has been approved and endorsed by the 17 Commission in the past, and that has to do with 18 entitling the agency's commission law enforcement 19 officers to the same retirement benefits as other 20 state-level law enforcement officers. 21 Currently, other Commission officers 22 with the same retirement eligibility benefits 23 include officers from agencies like the Department 24 of Public Safety, the Texas Alcoholic Beverage 25 Commission, Texas Parks and Wildlife, and the State WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 86 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 Board of Pharmacy. 2 Again, this is a concept that the 3 Commission has approved in the past, and I would 4 like to recommend that we pursue this proposal 5 again. 6 CHAIRMAN CLOWE: Do you want 7 comments on these individually, or do you want 8 individual approval? Would you like to go through 9 the list and then ask the Commission for approval? 10 MS. TREVINO: We can go through the 11 entire list and then maybe seek approval as an 12 entire package. 13 CHAIRMAN CLOWE: Okay. I'd like to 14 preempt that to this extent: This is one item that 15 I'm very strongly in favor of. I'm very impressed 16 with the level of expertise and the knowledge and 17 the performance of the individuals in our Security 18 Division. And anything that I can do to help on 19 this, I would hope you'd call on me, and I feel the 20 other Commissioners feel the same. 21 MS. TREVINO: Absolutely. 22 CHAIRMAN CLOWE: I have a question 23 in regard to the proposal here. 24 Would service be bridged if this is 25 adopted for service here at this agency? How would WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 87 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 you deal with that? Many of our officers have come 2 from other agencies that I would assume they would 3 be covered. How is that proposal going to work 4 out? 5 MS. TREVINO: Chairman Clowe, if I 6 could, I'd like to call on Mike Pitcock, our 7 Security Director, who I think is a little more 8 versed in the eligibility requirements. 9 MR. PITCOCK: In the previous 10 agencies -- I'm Mike Pitcock, Director of Security. 11 In the previous agencies that have 12 been adopted into this, they have bridged and 13 brought in their previous law enforcement service 14 and accepted that as peace officer service if it 15 met the credentialing and the other requirements to 16 get into this fund. 17 CHAIRMAN CLOWE: And the time that 18 the officer has worked here, then, would be 19 counted? 20 MR. PITCOCK: Yes, it would. That's 21 my understanding. 22 CHAIRMAN CLOWE: Very good. 23 COMMISSIONER SADBERRY: Since we've 24 paused on that, Mr. Chairman, and I do concur 25 strongly in your comments, I guess the only -- it's WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 88 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 not anything -- it's not a question or a point, 2 necessarily, except I'm asking. 3 This was an item on our legislative 4 agenda for the last session, the previous session? 5 MS. TREVINO: That's correct. 6 COMMISSIONER SADBERRY: So whatever 7 factors that we know of or can surmise that went 8 into the situation that did not result in the 9 adoption of it last term, I suppose, we'll take 10 those into account. 11 MS. TREVINO: Absolutely. 12 CHAIRMAN CLOWE: Thank you, Mike. 13 MS. TREVINO: The second proposal 14 regarding the Security Division has to do with a 15 surveillance vehicle. And currently in the 16 transportation code, it requires that vehicles, 17 State agency vehicles, be identified by what agency 18 that vehicle is owned by. 19 And because we are wanting to use 20 this vehicle for surveillance and enforcement 21 activities related both to the State Lottery Act 22 and the Bingo Enabling Act, there is an exemption 23 in the transportation code that allows certain 24 agencies to be exempt from that requirement. 25 And currently, some of the agencies WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 89 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 that are exempt from this requirement include, 2 again, the Department of Public Safety, the Pardons 3 and Parole Board, the Parks and Wildlife 4 Department, the Texas Alcoholic Beverage 5 Commission, the Railroad Commission, the Texas 6 Natural Resource Conservation Commission, the 7 Banking Department, and several others. 8 So, again, this would be a request 9 to be exempt from the requirement of having the 10 Lottery Commission identified on the surveillance 11 vehicle. 12 Moving on to the next proposal. It 13 relates to the administration of the lottery. And 14 this kind of ties into remarks that were made 15 previously in our Legislative Appropriations 16 Request regarding the percentage that's allowed to 17 administer the lottery. And as Patsy mentioned in 18 the explanation for the change in the rider, we 19 will need statutory changes to allow us to move 20 from that 12 percent to the 15 percent. 21 The next proposal has to do with 22 lottery operations. And this proposal is also a 23 proposal that we had last session, and it ties in 24 to some language that's currently in the Lottery 25 Act that requires us to remove any sort of debts WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 90 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 that are owed to the State from retailer 2 commissions. 3 And we have found difficulty in 4 implementing that piece of the statute, and so 5 rather than have those debts removed from retailer 6 commissions, the proposal is to screen applications 7 as they come in, or renewal applications, and have 8 those liabilities deducted or have the applicant 9 take care of those liabilities before their 10 application is approved. And again, this is a 11 proposal that was endorsed by the Commission last 12 session. 13 The next one also is one that we've 14 discussed in the past, and that has to do with our 15 open meetings requirements. As you are aware, none 16 of the two -- of the three Commissioners can 17 discuss any sort of contractual negotiations 18 regarding our lottery operator contract. And as we 19 move forward this next year with the issuance of 20 the RFP, this becomes a more critical issue for us. 21 And so what we're requesting is that 22 in the Open Meetings Act, that there be an 23 exception allowed to allow the Commissioners to 24 discuss and deliberate negotiations regarding the 25 lottery operator contract. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 91 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 That pretty much takes care of the 2 lottery side of the agency and just some general 3 legislative proposals. And so we'll move on to 4 Bingo proposals, and I'll request that Billy join 5 in on any comments as we go through these 6 proposals. 7 There are 12 Bingo proposals that 8 we've got laid out. And I think a good majority of 9 these we would consider to be cleanup language to 10 better reflect the current climate of the bingo 11 industry, and also to assist our division in their 12 auditing and regulatory duties. 13 The first one is, again, what we 14 would consider a cleanup, and that would be to 15 amend the definition of a fraternal organization. 16 Currently in the statute, it includes national 17 historic district associations as a fraternal 18 organization. And this was added during the 70th 19 Legislature by Senator Chris Harris. 20 And it's -- Billy, correct me if I'm 21 wrong, but it's my understanding that there has not 22 ever been a national historic district association 23 that has ever applied for a license. So it seems 24 to be an unnecessary provision in the statute, and, 25 again, it would just be a cleanup to that WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 92 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 definition. 2 The second Bingo proposal has to do 3 with the current limitation on the use of 4 electronic card-minding devices. As you're aware, 5 there is a 40 percent cap on the allowance of 6 card-minding devices, and the approval of card 7 minders took place during the 1995 legislative 8 session. 9 And I think since that time, we have 10 found that these card-minding devices have become 11 increasingly popular with players in bingo halls 12 throughout the state. And I think we all recognize 13 that with the continuing advancement in technology, 14 and organizations trying to attract more players 15 and younger players into the bingo hall, that it 16 would be beneficial to remove the limitation on the 17 use of card-minding devices. 18 MR. ATKINS: Additionally, 19 Commissioners, I would just add that this provision 20 is and always has been incredibly difficult for the 21 organizations to comply with, as well as for us to 22 enforce. And I think that deletion of this 23 requirement would be consistent, at least with the 24 position this Commission has passed, as allowing 25 the marketplace to set its own preference instead WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 93 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 of setting this -- what I'll call, for lack of a 2 better word, arbitrary limitation at 40 percent. 3 COMMISSIONER SADBERRY: I want to 4 ask a question on that. Billy, your comments were 5 helpful in addressing some of what I wanted to ask. 6 But I did want to know if this one 7 was at variance with the notion of these 8 housekeeping or cleanup matters, because isn't this 9 more of a policy issue that the Legislature really 10 has dealt with? And hasn't this been the subject 11 of some discussion on the Advisory Committee level, 12 at least: the old versus the new, or traditional 13 versus innovative, or whatever you want to say? 14 So I guess my other question is, has 15 this gone through the Advisory Committee level, and 16 do you think it should before we think about this 17 one? 18 MR. ATKINS: The answer to your 19 first question is no. None of these have gone to 20 the Advisory Committee in a formal presentation. 21 I've had informal conversations with several of the 22 members regarding this. It was my desire, 23 Commissioner Sadberry, to at least get the idea of 24 these before the Commission before they went to the 25 Advisory Committee. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 94 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 If the Commission gave a go-ahead to 2 these concepts, then take them before the Advisory 3 Committee and start to work on the specifics with 4 them, with the full understanding that if there was 5 strong opposition or concern from the Advisory 6 Committee, if they offered any information, that 7 that would then come back before the Commission for 8 your consideration. 9 COMMISSIONER SADBERRY: I appreciate 10 that. And the only reason I asked it and raised it 11 is because I do recall a number of meetings where, 12 in this body, very strong positions were taken by 13 members of the Committee and members of the 14 industry in general. And I didn't know if that had 15 gone away or if we had our finger on the pulse on 16 that or where we were on that. 17 MR. ATKINS: I would suspect, 18 Commissioners, that there would be very firm 19 positions by people on both sides. You know, there 20 are some halls that, to this day, remain fully 21 paper; they don't have any electronic. Whereas, 22 what we continually hear from the halls that do 23 utilize the card-minding devices is that this 24 position is very burdensome on them. 25 COMMISSIONER SADBERRY: Well, I just WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 95 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 wanted to raise it. I really don't have a position 2 on it right now, but I thought that it at least 3 should be pointed out as having somewhat of a 4 history here. 5 COMMISSIONER WHITAKER: May I ask a 6 question? 7 CHAIRMAN CLOWE: Yes. 8 COMMISSIONER WHITAKER: Billy, what 9 was the policy behind the original limit of 10 40 percent when the statute was first passed? 11 MR. ATKINS: When the statute was 12 first passed -- by way of some brief history, 13 Commissioner, originally, the Act limited 14 organizations to utilizing card minders that 15 represented no more than 30 percent of gross -- of 16 sales for an occasion. 17 That was even harder to monitor than 18 this is, so this amendment is a subsequent 19 amendment to the original authorization for 20 card-minding devices. I think the purpose for it 21 was to address the concerns that were raised by 22 some organizations in the industry that these 23 devices would come in and, in essence, take over 24 bingo halls. 25 You know, there was also a concern WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 96 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 that if there were halls in a location -- and it's 2 generally larger, commercial halls that utilize 3 these devices -- if there were larger, commercial 4 halls that had access to these devices, it would 5 provide them with an unfair advantage over the 6 smaller halls. And so I think this was an attempt 7 to address that also, to limit the number of 8 card-minding devices so that these smaller halls 9 would have kind of a fighting chance, I guess. 10 And, again, that's always an issue 11 that's raised, really, with any kind of bingo 12 issue, is the protection of the smaller halls 13 against the larger, commercial halls. 14 COMMISSIONER WHITAKER: In other 15 words, the smaller halls that would go with only 16 paper -- 17 MR. ATKINS: That's correct. 18 COMMISSIONER WHITAKER: -- would 19 believe that they would not be perhaps as exciting 20 and therefore would not attract as many players as 21 the halls that had, say, 100 percent of electronic 22 devices. 23 MR. ATKINS: That's exactly correct. 24 There was a perception that they would not be as 25 competitive. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 97 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 COMMISSIONER WHITAKER: To what 2 extent have you looked into the sentiments of that 3 group of people in connection with your current 4 recommendations that try to eliminate this limit? 5 In other words, as I understand it, 6 there are a group of folks out there who, at least 7 originally, did not want to eliminate this 8 40 percent or 30 percent limit. They wanted that 9 limit. 10 Have you talked to those people 11 today to see what their concerns are, whether 12 they'll oppose it, and whether, in light of that, 13 you still think we should go forward with this? 14 MR. ATKINS: I have not talked to 15 them. I would have no reason to believe that their 16 position has changed. The position I'm coming from 17 with this proposal is -- basically, I'm coming at 18 it from a business perspective, in that the 19 proposal as it is, the way the language is written 20 currently in the Act, is, again, very difficult to 21 enforce, and it's very burdensome on the 22 organizations that are required to follow it. 23 So, having said that -- and this is 24 part of the reason I wanted to come to the 25 Commission first -- I would not be opposed to if WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 98 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 the Commission directed, instead of just 2 recommending this language, staff working on better 3 language for the Act that would be more enforceable 4 for us, as well as language that would be easier 5 for the organizations to stay in compliance with. 6 COMMISSIONER WHITAKER: If the 7 problem is the burdensomeness of it, then, yes, I 8 would agree with you. Instead of just sweeping 9 aside the limitation, given the fact that there are 10 competing groups, if we are going to sweep aside 11 the limitation or seek to do so, I would think we 12 would have to enter into dialogue with all sides 13 and determine, based on that policy decision, 14 whether we want to go ahead with this. 15 COMMISSIONER SADBERRY: If I may, I 16 would follow that. I think you've hit it entirely 17 on the head. Because there is actually another 18 aspect, Billy, if I'm correct on this, and that is, 19 the rentals proceeds from the card-minding devices 20 have been interpreted by your division, based upon 21 some legislative input, to not be included -- or to 22 put it another way, to have exemptions from the 23 charitable distribution requirements, even though I 24 believe we understand there may be some issue about 25 whether that's what the language directly states. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 99 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 But I think it's a compatible 2 interpretation, which also creates some 3 administrative requirements on your part to keep up 4 with as well. And I would agree, if you need 5 assistance in the monitoring and enforcement of 6 this to make it meaningful and realistic, I think 7 that's where this is coming from, as opposed to 8 what I know was the subject of a significant amount 9 of debate in the first instance on where we should 10 be as a Commission on this 40 percent. And I'm not 11 sure it wasn't just a compromise or something of 12 that nature, if I recall correctly, some -- 13 MR. ATKINS: Yes, sir. 14 COMMISSIONER SADBERRY: -- point of 15 reaching some accommodation on both sides that 16 before we tinker with it might need to be 17 addressed. 18 But to get you at an administrative 19 level, I think is where you're coming from, and I 20 would agree you need some help on that. 21 MR. ATKINS: So if I'm understanding 22 the Commission correctly, this is something that 23 you'd like -- most definitely you'd like for us to 24 go forward to the Advisory Committee and look at a 25 variety of options besides just the elimination of WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 100 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 the provision. 2 COMMISSIONER WHITAKER: Yes. And I 3 would like a proposal back to us to target 4 specifically the concern of enforcement and if it 5 has to go beyond that and actually get to the 6 underlying policy decisions to identify that for us 7 and then have a full discussion. 8 MR. ATKINS: Okay. 9 CHAIRMAN CLOWE: I think there is a 10 consensus on that, Billy. 11 MR. ATKINS: Good. Thank you. 12 MS. TREVINO: Moving on to Bingo 13 Proposal No. 3. Currently, the Bingo Act requires 14 that transactions be recorded only on a cash 15 register. And in order to permit the recording of 16 transactions that would assist the Bingo Division 17 in verifying that all gross receipts are properly 18 accounted for and reported, and for better 19 accountability, the staff has recommended that the 20 Commission prescribe a means on how to have these 21 transactions reported; again, for better 22 accountability and for tighter controls. 23 MR. ATKINS: And this actually, 24 Commissioners -- this is one I would consider to be 25 a cleanup. We're going to, of course, continue to WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 101 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 require to record the transactions. We're 2 just going to allow for additional means 3 besides a cash register. This is one of those 4 keeping-up-with-technology. 5 MS. TREVINO: The next proposal has 6 to do with the collection of a 5 percent prize fee. 7 And currently, there is the 5 percent prize fee 8 that needs to be collected on all prizes. 9 In order to simplify the process for 10 the organization and also for our auditing staff, 11 we're recommending that the prize fee not be 12 collected on prizes greater than $5. So those 13 prizes under $5, where we begin to nickel-and-dime, 14 I think, some of the bingo players -- and I think, 15 again, it becomes frustrating for the organizations 16 and for the players -- this would ease that burden, 17 both on the organizations and on our auditing 18 staff. 19 COMMISSIONER SADBERRY: And again, 20 just for the record, haven't we been before the 21 Legislature on this before, or have we not? 22 MR. ATKINS: This actually, 23 Commissioner Sadberry, was a recommendation, a 24 variation of a recommendation by the Senate and, I 25 believe, the House Interim Committees -- WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 102 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 MS. TREVINO: That's correct. 2 MR. ATKINS: -- that wasn't 3 ultimately adopted. But we would like to go 4 forward -- 5 COMMISSIONER SADBERRY: Again, for 6 administrative purposes. 7 MR. ATKINS: For administrative 8 purposes. And also, we believe that it would have 9 a positive impact, actually, on pull-tab sales. As 10 it is now, technically, if you're a winner of a 11 $1 pull-tab, you only win 95 cents. So that would 12 prohibit you from going in and exchanging that 13 pull-tab for another pull-tab. 14 Again, we just think it would be 15 easier for the organizations, we think it would be 16 easier for us, and again, may ultimately help 17 stimulate pull-tab sales. 18 COMMISSIONER WHITAKER: I take it 19 the Advisory Committee supports that proposal. 20 MR. ATKINS: I do not believe that 21 they would oppose it. 22 COMMISSIONER WHITAKER: I know when 23 I was visiting the bingo hall with you recently, 24 that that was, in fact, one of the things that the 25 Charitable Representatives specifically pointed out WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 103 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 as a burden, just the administration of the smaller 2 prize amounts. 3 MS. TREVINO: The next proposal has 4 to do with, again, kind of another cleanup in 5 regard to the definition of a bingo occasion. 6 Currently, organizations are to conduct their bingo 7 occasion within a four-hour period. And what we're 8 requesting is that organizations be allowed to have 9 time to open their doors, do the setup, and get 10 players in before the game actually starts. So, 11 again, it would be a clarification of the 12 definition of a bingo occasion. 13 The next proposal, No. 6, would 14 allow charitable organizations to pay the operators 15 of their games. Currently, it's my understanding 16 that many people who conduct bingo become members 17 of the charitable organization strictly for the 18 purpose of conducting the bingo games. 19 And so we're suggesting that a 20 better means might be to create a new type of 21 licensee as a bingo operator that would make them, 22 and not the charity, responsible for the conduct of 23 the game. 24 MR. ATKINS: I think -- actually, I 25 believe where we're intending to go with this WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 104 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 proposal is that currently, the Act does prohibit 2 operators from being paid; however, we have come to 3 realize that there is still an expense to the 4 operator: gas money, et cetera, whatever. So we'd 5 like the organizations to be able to provide 6 reasonable compensation to the members of their 7 organizations that serve as operators. 8 COMMISSIONER SADBERRY: What are you 9 going to do with that on the 35 percent 10 distribution of that cost? 11 MR. ATKINS: It would be included as 12 an eligible expense, which would factor into that 13 calculation. 14 COMMISSIONER WHITAKER: Is there 15 some concern about how that might further lower the 16 payout to the charities? 17 MR. ATKINS: I think any time that 18 you increase the number of allowable expenses, it's 19 going to affect that amount. One of the ways to 20 address that is by setting a cap as to how much 21 that they can be paid. There used to be, through 22 administrative rule, a cap that no one could be 23 paid more than $50. So that's one way to address 24 that. 25 COMMISSIONER SADBERRY: I think WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 105 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 these are certainly valid issues that you raise, 2 and I like the way you set these out. 3 I think we should always keep in 4 mind the Legislature is going to be concerned about 5 the -- and has always been concerned, and I would 6 imagine would even have an increasing concern, 7 about the prize amount. So whenever we do this, we 8 certainly want to have data or answers to address 9 how we're going to keep that issue in perspective. 10 MR. ATKINS: I appreciate that 11 comment, Commissioner Sadberry. And I apologize 12 that I don't have more actual figures here. But in 13 weighing everything, I decided, before assigning 14 the staff time, to start crunching all those 15 numbers and get more of a feel from y'all, and then 16 we can finalize this as we move forward. 17 COMMISSIONER WHITAKER: I think the 18 other concern I would have would be simply that you 19 continue to keep the charity as involved as 20 possible, and the more that they can outsource 21 virtually every function, to some extent, that has 22 policy implications as well. 23 MR. ATKINS: Uh-huh. 24 COMMISSIONER WHITAKER: So I 25 certainly want to do what is necessary for the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 106 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 charities to operate fairly and reasonably and 2 efficiently, from their perspective. I mean, 3 that's a good thing. So I guess I'd like to see 4 your language, but I think we ought to then weigh 5 further the policy implications. And I appreciate 6 your doing that. 7 MR. ATKINS: Yes, ma'am. 8 MS. TREVINO: Moving on to the next 9 proposal, No. 7, the recommendation is to allow 10 groups such as family reunions and company picnics 11 to conduct bingo games not open to the general 12 public, without obtaining a license. We get a 13 variety of requests throughout the year, again, 14 typically for family reunions and picnics. And I 15 think we recently had an instance with senior 16 citizens conducting games at Wal-Mart stores. 17 MR. ATKINS: That's different from 18 this. 19 MS. TREVINO: Okay. I stand 20 corrected. I apologize for that. 21 Again, this would strictly be for 22 family reunions and -- 23 MR. ATKINS: There is actually a 24 concept, Commissioner Clowe, you might be familiar 25 with, called Safety Bingo, that is prominent among WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 107 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 trucking companies. 2 CHAIRMAN CLOWE: Why did you bring 3 that up? 4 MR. ATKINS: To get that bull's eye 5 moved away from me. 6 CHAIRMAN CLOWE: I don't know 7 whether the statute has run on that or not. 8 MR. ATKINS: But that is an example 9 of the type of calls that we get, and we have to 10 inform these organizations that under the current 11 statute, that would be an illegal activity. 12 MS. TREVINO: And these would be 13 strictly for amusement and no raising of funds for 14 any sort of purpose. 15 COMMISSIONER WHITAKER: I think it's 16 going to come down to how tightly you can draft 17 language as to what is open to the general public, 18 as opposed to what is a group that can do it, so I 19 think there's going to be a lot of effort on that. 20 MR. ATKINS: Fortunately, we have a 21 very capable General Counsel. 22 COMMISSIONER SADBERRY: She is 23 shaking her head, let the record reflect. 24 MS. KIPLIN: Yeah. We'll do our 25 dead-level best at whatever the Commission's WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 108 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 direction is. 2 MS. TREVINO: The next proposal, 3 No. 8. This, again, is cleanup language that we're 4 requesting. Currently, organizations are required 5 to submit their application or license to local 6 governmental entities, either a county or the 7 municipality. 8 And we have found counties and local 9 governments don't particularly have any interest in 10 keeping any sort of record of organizations' 11 licenses. So we're just requesting that that 12 particular requirement be eliminated from the Bingo 13 Enabling Act. 14 The next one, Bingo Proposal No. 9, 15 this has to do with current language that exists 16 regarding foreign and nonresident persons as being 17 ineligible to hold a commercial lessor's license. 18 And you may recall that that particular provision 19 was found to be unconstitutional by the United 20 States District Court for the Western District of 21 Texas. So the proposal is basically to eliminate 22 that provision. 23 The next proposal has to do with -- 24 currently, organizations who hold both a commercial 25 lessor's license and a license to conduct bingo, WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 109 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 the only way that you can hold these two type of 2 licenses is that you have to conduct bingo in the 3 premise that you're looking to also lease that 4 location out. 5 And what we're suggesting is that 6 there may be organizations -- for example, a VFW -- 7 who maybe don't have any interest in conducting a 8 bingo game but would be interested in leasing their 9 space to other organizations. And so rather than 10 requiring that organization to hold the two types 11 of licenses, they could strictly hold a lessor's 12 license in order to lease their premises out to 13 other organizations. 14 The next item, Proposal No. 11, 15 would permit the sale of pull-tabs during expanded 16 hours at locations licensed to conduct Charitable 17 Bingo. I think this is a recommendation that's 18 been brought forward to us by people in the 19 industry in order to increase pull-tab sales. 20 There's been a decline in pull-tab sales. 21 And again, in order to see some 22 increases in those sales rather than just strictly 23 allowing the sale of pull-tabs to be done during 24 the conduct of regular bingo, we're looking to 25 expand those hours for pull-tab sales. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 110 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 The last item has to do with some of 2 the items that were discussed in our Legislative 3 Appropriations Request, and that has to do with our 4 bingo operating training program. And as Billy 5 mentioned earlier, that is certainly under way. 6 And when this provision was 7 authorized during the 75th Legislature, it gave us 8 the authority to conduct these training programs, 9 but it did not give us the authority to collect any 10 sort of fee, or we didn't get any appropriation to 11 implement this particular provision. And we have 12 found that it has been a cost to the Bingo 13 Division, so we are recommending that a fee be able 14 to be collected from those organizations for the 15 training program. 16 And that, hopefully, briefly, 17 summarizes the 17 proposals that were laid out in 18 the memo provided to you. 19 CHAIRMAN CLOWE: Nelda, do you want 20 a motion from the Commission on this? 21 MS. TREVINO: Yes, sir. I think it 22 would be helpful. I know you've expressed some 23 concerns on a couple of them. And again, we just 24 wanted to lay out, conceptually, some of the 25 proposals that we were looking at, not having any WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 111 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 sort of specific language drafted. And obviously, 2 we would come back with any sort of specifics to 3 present to you. 4 COMMISSIONER SADBERRY: If I may, 5 Mr. Chairman. 6 I know you mentioned, Billy -- and 7 I'm sure the other Commissioners are aware of the 8 interim studies that have been conducted in the 9 past, some of which was adopted by the Legislature, 10 some was not. But in that process, the issue of 11 the posture that we should take, as a Commission, 12 with regard to legislation has come up. I don't 13 know that that's been brought up recently. 14 So I guess in that regard, you have 15 a feel, Nelda, and your colleagues, for the process 16 of us doing this; that is, drafting legislation 17 they requested be considered by the Legislature or 18 that we get members of the Houses to carry the 19 legislation for us and things of that nature, so 20 that if we were to make a motion and vote, that it 21 is understood that this is in that spirit that we 22 do so; that we feel this would be helpful to the 23 industries that we regulate, and commend that to 24 the State to consider that it would be beneficial 25 to the State, as well, to consider that. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 112 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 MS. TREVINO: Yes, sir. That's 2 correct. We will present these just as he stated, 3 as tools that the agency needs to better administer 4 and better enforce both the State Lottery Act and 5 the Bingo Enabling Act. 6 CHAIRMAN CLOWE: And in that spirit, 7 Commissioner Sadberry, I think you're right on 8 target. I'm wondering if, rather than a motion to 9 approve, in what I really consider to be draft 10 form, quite frankly -- and I'm further a little 11 uneasy about -- I think we've got the cart before 12 the horse. We've got the Advisory Committee, and 13 I'd really like to see Item 2 go to them and then 14 come to us, rather than us approve and then go to 15 them and then come back. 16 And there are some other areas that 17 you indicated you need to do some work on. I 18 wonder if we just couldn't give you a positive 19 response at this point in time. We understand the 20 program, and we think you're on track, but pending 21 final drafting and you coming down where you think 22 we ought to be -- I think you've come to us at the 23 right time, and we want to respond and give you 24 guidance, but I feel that we don't really want to 25 give you a motion of approval at this point in WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 113 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 time, from my comfort level. 2 COMMISSIONER WHITAKER: I would 3 agree with that. I mean, you have our comments, 4 and you can tell from our comments where our areas 5 of concern are likely to be. And I would say that 6 generally, I would feel better if all of these are 7 then passed by the Advisory Committee because they 8 are going to have the expertise about issues that 9 we might have missed. 10 And our particular concern is if 11 there are any policy implications or if it's been 12 through the Legislature before, that those be 13 specifically addressed in the interim; and then 14 when you come back to us, you tell us exactly why 15 you came down where you did. 16 MS. KIPLIN: When you say "all of 17 these," you're referring to the bingo -- 18 COMMISSIONER WHITAKER: Correct. 19 Correct. 20 COMMISSIONER SADBERRY: While we're 21 on that, if I'm recalling correctly, there were 22 some issues -- matters, I should say, maybe not 23 issues -- brought to us in sessions of these 24 Commission meetings by one or more members of the 25 Advisory Committee as to how we interface and how WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 114 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 they interface with legislation that arises in the 2 course of the session that we don't have anything 3 to do with generating or expressing an interest on, 4 but it does affect the industry as to how they get 5 involved, notified, informed, et cetera. 6 So I guess that sort of underscores 7 what my colleagues are saying and I think that I 8 raised as well, of inclusion and the proper order 9 of proceeding. 10 I understand what you're saying, 11 Billy. You want to see -- if we say, absolutely, 12 we just really don't even want to think about that, 13 you might be not advised to attack it a certain 14 way. And I understand you're coming to us in that 15 spirit. But by the same token, I think we have 16 come a long way toward the configuration and 17 effectiveness of our Advisory Committee that we 18 also want to keep that in mind. 19 MR. ATKINS: And, 20 Commissioner Sadberry, you pointed out 21 exactly the position I was coming from; to use, 22 as a recent example, several recommendations the 23 Advisory Committee has made to lower the age of 24 individuals that can work a game. That's what I 25 wanted to try to avoid. I don't hear you at this WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 115 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 time expressing any concern like that. We will 2 move forward to the Advisory Committee with these. 3 We will have additional, detailed background 4 information for them in their consideration. 5 And also, I was remiss in not 6 mentioning earlier to the Commission that the 7 Charity Advisory Committee, Mr. Neinast, has asked 8 that the next meeting for September address not 9 only the agency's legislative proposals, but any 10 proposals that the members of the Committee may 11 have. 12 CHAIRMAN CLOWE: That's great. I 13 think we have a sense of where we are. And thank 14 you for these early presentations and the good work 15 that you've done. 16 MS. TREVINO: Well, it's very 17 helpful as we move through the process. So thank 18 you for your time. 19 CHAIRMAN CLOWE: Very good. Thank 20 you again, Nelda. 21 Item No. 15, public comment. Is 22 there anyone in the audience that wishes to address 23 the Commission? 24 MR. MOORE: I would like to. 25 CHAIRMAN CLOWE: Yes, sir. Come WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 116 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 forward, please. 2 MR. MOORE: I filled out a form. 3 CHAIRMAN CLOWE: Thank you, sir. 4 Mr. Frank Moore, we're happy to have 5 you. Would you identify yourself for the record 6 and make your comments, please. 7 MR. MOORE: Yes. My name is 8 Frank D. Moore, and I'm a sole practitioner 9 attorney up in East Texas. And before that, I was 10 an engineer. 11 I appeared with Ms. Kipling before 12 you on the hearings in February. And I've been 13 writing letters to the Commissioners, Commissioner 14 Sadberry and some of the members of the Commission, 15 for about three years now, trying to get something 16 done. 17 And I have developed a new concept 18 for lottery games. And I have written to them, and 19 my comments have been told we don't accept 20 unsolicited ideas. And I've been told very nicely 21 for three and half years to go away. But I'm not 22 going to go away. I'm trying to find out if this 23 is a legislative problem, or it's an internal 24 problem, or whether it's advice from GTECH. 25 I was told by one person that the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 117 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 reason they couldn't do it was because of advice of 2 outside counsel. Now, if outside counsel means 3 GTECH, as an attorney, I have a problem with that, 4 because if they're paid by GTECH, is the advice 5 they're giving the Lottery Commission for the 6 benefit of GTECH or for the benefit of the Texas 7 Lottery Commission? 8 And I have -- as a design engineer, 9 I've got about 12 years in research and 10 development. I have one patent to my name. Most 11 people who redesign something start with what's 12 already there and modify it. 13 And I want to commend the 14 Commission, by the way. I've been telling them for 15 four years, or three years, the lottery was 16 failing. And I present letters and letters: It's 17 failing, you've got to do something. 18 And you have done something. You've 19 thrown the 50 balls out. I'm not sure you've 20 corrected the problem, but you've done something. 21 But I have a system that is 22 completely different. It's never been used. I've 23 been on the Internet all over, and that I can find, 24 it's never been used. And I would like to sell it 25 or let y'all use it and get a commission off it, WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 118 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 but I can't get anybody to talk to me about it. 2 I would just like to find out if 3 there is something I can do to get something done, 4 or since the Legislature is going into session, can 5 I try to go through them. 6 CHAIRMAN CLOWE: Good. Thank you 7 for being here. 8 I'm not sure I understand exactly 9 what it is that you have. Could you describe it to 10 an extent that you're comfortable with. 11 MR. MOORE: Well, really -- I really 12 can't describe the process. The only thing I can 13 do is give an example. It's like if somebody 14 brought you a safe in here and said, "There's a 15 hundred million dollars in that safe. If you can 16 get it out, you can have it." 17 We've got the same thing here in 18 Texas. By the same token, if I come in and say, "I 19 can get it out, and I want 2 percent," and you tell 20 me, "Open it first, and then we'll pay you," I have 21 no protection. 22 CHAIRMAN CLOWE: Sure. Sure. All 23 right. 24 MR. MOORE: You have the same 25 problem here in Texas. You have a hundred million WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 119 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 dollars in the billfolds and pocketbooks of the 2 citizens of Texas, and I have followed the Lottery, 3 I have worked with the Lottery. And being a 4 private practice in a small town, I've worked with 5 people all my life. I know how they act. The 6 people are not happy with the new balls. People in 7 my area, a lot of them quit playing. 8 If you look at your statistics, you 9 will find you have not lost as many players, I 10 mean -- as many players -- I think the last thing 11 I've got in the Open Records Act, you had a 12 3 percent drop in the number of people playing, but 13 a 12 percent drop in the number of tickets they 14 bought. There is always going to be somebody 15 buying the tickets, no matter what the odds are. 16 And the lottery now is a driven -- a jackpot-driven 17 thing. 18 By now -- but your jackpots are -- 19 when you first started the lottery, everybody sat 20 around the house on Wednesday and Saturday night to 21 see what it is. Now, if they buy lottery tickets, 22 they're off doing something else and they check it 23 later. The fire has gone. It's dead. And if 24 y'all don't do something, it's going to continue to 25 go dead. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 120 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 I hope this new one works, but I 2 don't think it will, because some information I 3 have says the reason people quit playing the 4 lottery is because the odds are too high and you 5 never win. And this comes out of -- I have -- it 6 came out of something that I got from you. It's an 7 Angus Reed report. And it shows that about 8 50 percent of the people who quit, it's because 9 they don't win enough. 10 And you've upped some of the prizes 11 on some things, but nobody plays the lottery to 12 come in second; everybody plays to win. And I have 13 talked to hundreds of people. I've been working on 14 this for a long time. And I don't think it will 15 work, and what I've got will. But I would like 16 some sort of contract or some sort of an agreement, 17 where if I give it to you, if you use it, I get 18 paid; if you don't use it, I don't get anything. 19 CHAIRMAN CLOWE: And Mr. Moore, the 20 idea or the scheme that you have is applicable to 21 Lotto Texas, is it not? 22 MR. MOORE: It can run on the same 23 machines you're running today. 24 CHAIRMAN CLOWE: Okay. That's what 25 I was trying to get focused on. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 121 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 MR. MOORE: Yeah. Whether it's 50 2 or 54, it doesn't make a -- well, it's a new 3 concept. I can design a dozen games, I can design 4 two dozen games, or I can design one game. 5 CHAIRMAN CLOWE: Okay. And who have 6 you communicated with in the past, again, please. 7 A. Ms. Cloud, Ms. Kiplin. I've written 8 Mr. Sadberry. I sent one to his house, I think, a 9 couple of years ago. My first letter was to John 10 Hill in 1997. 11 CHAIRMAN CLOWE: Okay. Very good. 12 MR. MOORE: And I just -- if nothing 13 else, I'm patient. 14 CHAIRMAN CLOWE: Sure. You are 15 that, indeed. And I'd like to see that you get an 16 answer. 17 Kim, I think I'm going to direct the 18 question to you. How do we respond to Mr. Moore 19 properly? 20 MS. KIPLIN: Sure. I'll be glad to 21 respond. We have responded to Mr. Moore. 22 Mr. Moore, frankly, has tried to solicit business 23 from the Lottery. We have received advice from the 24 Attorney General's Office, from our first 25 intellectual property outside counsel and our WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 122 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 current intellectual property outside counsel that 2 for -- there are intellectual property reasons not 3 to accept unsolicited ideas; as a matter of fact, 4 to return them unopened, because should the 5 Commission then decide to engage in some sort of 6 idea or concept that might be similar, strikingly 7 similar, dissimilar, whatever, it would give an 8 opportunity for someone to claim that the Lottery 9 has appropriated their intellectual property. 10 So that's the reason for not 11 accepting unsolicited ideas. Mr. Moore is not a 12 standalone in that category. We do hear, from time 13 to time, from other people. 14 As you know, the business of the 15 Lottery is generally operated in terms of formal 16 procurements or competitive procurements. What I 17 think Mr. Moore is asking is to enter into a 18 contract without the benefit of a competitive 19 procurement. That goes against the public policy 20 of the State of Texas. 21 I'm glad to visit with him. If I'm 22 not mistaken, in the first letter or the second 23 letter, Mr. Moore, before he wants to visit with 24 us, wants us to enter into some sort of 25 confidentiality agreement or nondisclosure WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 123 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 agreement. That, we cannot do. 2 My advice would be against entering 3 into that kind of an agreement. We have a bunch of 4 different reasons for that. The most important 5 reason that comes to mind is the Open Records Act. 6 The other one is that this is open government, and 7 we do procure our goods and services through 8 competitive procurements. 9 I am thinking in the back of my mind 10 that from time to time, the Lottery offers 11 procurements to bring in ideas for different 12 concepts and certainly enter into a contract or 13 award a person. For example, we've done a contest 14 on scratch ticket ideas. And Mr. Moore, from what 15 I understand, is not interested in scratch ticket 16 ideas. What he is suggesting is something that has 17 to do with a new system, Lotto Texas online. 18 As you know, we are working and will 19 be issuing a procurement document that may very 20 well be of interest to Mr. Moore. And I'm thinking 21 lottery operator in terms of looking at that 22 document, and possibly, if he is not interested in 23 a part of that RFP, hooking up with people that 24 are. 25 So there are opportunities that may WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 124 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 be available, given the government parameters that 2 we have. We have suggested that he do visit with 3 GTECH because they currently are the lottery 4 operator. 5 And I can't recall whether you have 6 or you haven't. 7 MR. MOORE: I have. 8 At her suggestion, I contacted 9 GTECH. And, of course, they told me the same 10 thing: They didn't consider unsolicited ideas. 11 Then at the last legislative 12 session, I contacted Senator Ratliff, who is my 13 district. And his representative did call me, and 14 they sent me a form. And the form says you write 15 down your ideas and we'll give you a year to patent 16 it. 17 That's the same as throwing it away, 18 again. I have no protection. And it would be a 19 dirty shame if I have a solution and we don't have 20 something in place where I can be protected and the 21 State can get the benefit of it. 22 COMMISSIONER SADBERRY: If I may, 23 Mr. Chairman. 24 Mr. Moore, I'm glad to meet you. I 25 was trying to recall -- I always answer my mail. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 125 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 Why don't I recall this? Now I know why I don't 2 recall it. 3 MR. MOORE: You sent it to her. 4 COMMISSIONER SADBERRY: Well, 5 exactly. I might explain that. I know it's come 6 up more than once. We've been here a long time, 7 and early in the game, we had issues like this on 8 how to be fair. 9 The first part of an agency's 10 operation is learning the ropes. And we developed 11 a process where, when it was not obvious the nature 12 of the communication, that I would pass that on, as 13 our General Counsel has stated, unopened -- because 14 as you state, once I've opened it, I've seen it and 15 I can't undo that -- and then be advised as to 16 whether it's something I can see or can get 17 involved in -- or should, more appropriately, see 18 or get involved in. 19 And it has other applications as 20 well, besides this, but this is a good example of 21 the application. So it's good to know the system 22 worked, if, in fact, you did get a response. I was 23 going to be concerned if I didn't answer your 24 letter. 25 MR. MOORE: I got some very nice WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 126 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 responses that all said no. 2 It's been a learning process for me 3 because I've never been involved with the Lottery. 4 And I had just come up with this -- I was coming 5 from -- I had been in an appeals court in 6 Texarkana, and I was listening to the radio and -- 7 I was coming back, and -- I spend a lot of time in 8 my car -- and it said the sales had dropped. And 9 my engineering kicked in, and I thought there ought 10 to be a better way to do that. 11 And that was back about -- almost 12 five years ago. And I tried this and I tried that, 13 and it took about two years before I finally -- and 14 what I came up with is the simplest thing that I've 15 seen. And it will work, and it will draw the 16 people back in, I have no doubt. 17 CHAIRMAN CLOWE: Well, I want to ask 18 you, if you will, to visit with Kim while you're 19 here today. 20 MR. MOORE: Sure. 21 CHAIRMAN CLOWE: And she's laid out 22 the problems procedure. 23 MR. MOORE: That's why I came -- I 24 haven't done anything since last February, because 25 if it's a legislative problem, I'm going to have to WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 127 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 go through the Legislature. I may or may not get 2 it solved, but I really believe that I have a 3 solution. And I just want to find some way that I 4 could sell it to y'all and I could be protected. 5 CHAIRMAN CLOWE: Very good. 6 Well, let me ask you to talk with 7 her. 8 And Kim, would you do the best you 9 can to resolve this in a way that it's done 10 properly, following all the guidelines that are 11 necessary to be observed. 12 MS. KIPLIN: Sure. I'll be glad to. 13 I'll probably get our Deputy General Counsel, 14 Ridgely Bennet, involved -- 15 CHAIRMAN CLOWE: Excellent. That's 16 good. 17 MS. KIPLIN: -- and see where we 18 land on that. Obviously, I would be remiss if I 19 went against the advice of three different bodies 20 of lawyers with regard to unsolicited ideas and the 21 liability exposure that it would -- 22 CHAIRMAN CLOWE: I understand that. 23 I want Mr. Moore to have a response, 24 whether it's no or yes or maybe or whatever it is, 25 one that is clear for him to understand. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 128 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 MS. KIPLIN: I'll be happy to do 2 that. 3 CHAIRMAN CLOWE: Very good. 4 Thank you, Mr. Moore. 5 Is there anyone else who wishes to 6 address the Commission? 7 At this time, I move the Texas 8 Lottery Commission go into Executive Session to 9 deliberate the duties and evaluation of the 10 Executive Director, Internal Auditor, and 11 Charitable Bingo Operations Director, pursuant to 12 Section 551.074 of the Texas Government Code; 13 To deliberate the duties of the 14 General Counsel and the Security Director pursuant 15 to Section 551.074 of the Texas Government Code; 16 To receive legal advice 17 regarding pending or contemplated litigation 18 and/or to receive legal advice pursuant to 19 Section 551.071 (1) (A) or (B) of the Texas 20 Government Code and/or to receive legal advice 21 pursuant to Section 551.071 (2) of the Texas 22 Government Code, including but not limited to 23 T&T Interest, Inc. versus Texas Lottery 24 Commission et al, in the matter involving the 25 Department of Justice pursuit of a complaint WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 129 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 regarding the Americans with Disabilities Act; 2 Matter involving Request for Open 3 Records Decision in Attorney General Open Records 4 file number No. 119718-98 relating to request for 5 information in connection with the lottery 6 operator; matter involving employee complaint; 7 matter involving agency purchases; employment law, 8 personnel law, procurement law, and general 9 government law. 10 Is there a second? 11 COMMISSIONER SADBERRY: Second. 12 CHAIRMAN CLOWE: All in favor, say 13 aye. All opposed, say no. 14 The vote is 3-0 in favor. 15 The Texas Lottery Commission will go 16 into Executive Session. The time is 11:06 a.m. 17 Today is August the 11th, 2000. 18 Thank you all very much. 19 (EXECUTIVE SESSION.) 20 CHAIRMAN CLOWE: The Texas Lottery 21 Commission is out of Executive Session. The time 22 is 3:41 p.m. Is there any action to be taken as a 23 result of the Executive Session? 24 If not, let's move back to the 25 public agenda. And Debra, I believe you wanted to WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 130 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 come back on the record and make a statement, 2 please. 3 MS. MCLEOD: Thank you, 4 Commissioners. Under Agenda Item No. 6, when we 5 were talking about the State Auditor's Report, I 6 had made a reference in my discussion that the IFB 7 was run by the legal department. And I just wanted 8 to clarify that this did not happen -- because of 9 the dollar amount involved, it was only a 10 purchasing procurement document, and that the date 11 that it was posted for bids to be received by this 12 agency was August 21st, not the 25th. That was the 13 only correction I wished to make. 14 CHAIRMAN CLOWE: Very good. Any 15 questions? 16 MS. KIPLIN: The only thing I'd 17 follow up on that is that I think the purchasing 18 department probably felt as though because it was 19 less than 25,000, it was not a formal procurement 20 and should not have been run by legal. It was a 21 formal procurement and it should have been, and 22 we'll go back and see if there are any issues that 23 need to be resolved later on and be reissued or 24 left where it is. 25 CHAIRMAN CLOWE: Very good. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 131 TEXAS LOTTERY COMMISSION MEETING, 8-11-00 1 I want to apologize for the lateness 2 of the hour to the many of you who have been 3 faithful and true and waited for the end of the 4 Executive Session. 5 We have no one else wishing to 6 address the Commission, I presume. 7 Then this meeting is adjourned, and 8 thank you all very much. 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 132 1 REPORTER'S CERTIFICATION 2 3 STATE OF TEXAS ) 4 COUNTY OF TRAVIS ) 5 6 I, SUZANNE T. LANE, Certified Court 7 Reporter for the State of Texas, do hereby certify 8 that the above-captioned matter came on for hearing 9 before the TEXAS LOTTERY COMMISSION as hereinafter 10 set out, that I did, in shorthand, report said 11 proceedings, and that the above and foregoing 12 typewritten pages contain a full, true, and correct 13 computer-aided transcription of my shorthand notes 14 taken on said occasion. 15 16 Witness my hand on this the _______ 17 day of ______________, 2000. 18 19 20 SUZANNE T. LANE 21 Texas CSR No. 6992 Expiration Date: 12/31/01 22 1609 Shoal Creek Boulevard Suite 202 23 Austin, Texas 78701 (512) 474-4363 24 25 JOB NO. 000811STL WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363