MAY 12, 2000

CHAIR CLOWE: And now, if everyone is ready, we'll call the meeting to order. It is 8:31 on May the 12th. And commissioners are present -- all commissioners are present. We'll go immediately to Item 3, which I had just mentioned off the record. For the record, my name is C. Tom Clowe Junior. And I'll ask Mr. Rick Johnson to come and address The Commission.

MS. KIPLIN: And the item is the consideration of and possible discussion and/or possible action, including public comment, on proposed amendments to the Lotto Texas on-line game rules, 16 TAC Section 401.305.

CHAIR CLOWE: Thank you, counselor. Good morning, Rick.

MR. JOHNSON: Good morning. Thank you. I am Rick Johnson, president of the Texas Food Industry Association and the Texas Lottery Association. I'd like to speak before you today to clarify some of the issues that we discussed about -- on our survey last time I was here. I've been questioned about the procedures that were used in the survey that TALR initiated. And I would like to explain exactly how the survey was compiled and eliminate any confusion. Nelda Trevino called me after the March commissioners meeting to inform me of the proposed changes in the matrix for the lotto game from 50 to 54 balls. She asked that we help by informing the retailers of the proposed changes. I agreed to assist her and offered to mail a bulletin to our members explaining the changes with an agree or disagree response from the retailers that they could return to us. Nelda then faxed us a copy of the proposed changes and anticipated benefits if the changes were implemented. I turned this information over to our director of communications, Leslie Hunt, to compose the survey. She faxed the survey back to Nelda to ensure accuracy of the fact. Nelda then made a few superficial changes to the document, but nothing significant. Leslie informed me that in no way did the Lottery Commission employees influence the content of the survey. Nelda then called and said GTECH had volunteered their sales force to help distribute the surveys since they were in the stores twice a month. I welcomed their assistance in distributing the surveys so they could reach all retailers selling lottery products. A representative of GTECH came by our office and picked up the survey. GTECH printed the survey and distributed it to their sales force, who in turn distributed the documents to the retailers. About two days before the April commissioner's meeting, Larry King and Ramona Vera brought the surveys to my office with a total count. I added the totals they had given me with the totals we received in our office and found -- and then reported those totals to the commissioners at the April meeting. I did not personally count all the surveys that GTECH brought into our office. They had a tally sheet. And I just added those with those. I just wanted to clarify that, because like I said, I had been questioned about the procedures. Does anybody have any questions?

MS. WHITAKER: Do you have any reason to believe -- do you have any reason to believe that the results or vote by any of the retailers would not reflect their true view?

MR. JOHNSON: No.

MS. WHITAKER: Have you -- you, of course, have read the survey?

MR. JOHNSON: Yes.

MS. WHITAKER: And you're aware of comments about how it characterized the New York lottery. In your opinion, is the statement in the survey about the New York lottery correct or incorrect?

MR. JOHNSON: In my opinion, if we were -- it's correct, because we were using information that was supplied to us. My own personal opinion is that the retailers weren't necessarily voting to change it from 50 to 54 balls. They didn't care whether it goes from 50 to 54 balls or 40 balls. What they were voting on was an opportunity to increase their sales. So how that's accomplished, they really don't care. This was a proposal that was presented to them. Presented by people who are in the business and are experts in the business. And they were -- in my opinion, they were basically voting on their recommendations.

MS. WHITAKER: Is that based on any feedback you've gotten from any retailers?

MR. JOHNSON: Some, yeah. Not a lot. It's more just a gut feeling than anything else.

MS. WHITAKER: Do you have any reason for believing that the mention of the New York lottery in the survey was or was not important to the retailers?

MR. JOHNSON: I really don't know.

MS. WHITAKER: Is it your best judgment that it was or was not important to them?

MR. JOHNSON: I really can't answer that one way or the other.

MS. WHITAKER: Thank you.

CHAIR CLOWE: Commissioner Sadberry, do you have any questions?

MR. SADBERRY: As a follow-up -- thank you for being here again --

MR. JOHNSON: Sure.

MR. SADBERRY: -- and your efforts. As a follow-up to those questions, are you aware of a second communication with the retailers that was generated by the Lottery Commission concerning the survey and concerning the opportunity for the retailers to make additional comments if they preferred to do so? Are you aware of that?

MR. JOHNSON: No, I was not aware of that.

MR. SADBERRY: Perhaps staff at some point in time can answer my question.I did have an opportunity, as the other commissioners, to look at some of the materials. If I understand correctly, there were retailers who expressed favorable opinions concerning these proposed changes and there were retailers who expressed unfavorable opinions. Do you have any concerns -- any concerns at all about the process, procedure, or the substance or the content of the survey?

MR. JOHNSON: No, I don't.

MR. SADBERRY: Do you feel comfortable that your position is representative of your organization that enables you to make such an expression?

MR. JOHNSON: Yeah. I feel like, you know, that the survey -- what I basically did was report the results of the survey. And that's the majority opinion of the retailers. And here again, I would like to stress that I really think they were voting for the concept of something that would change the games to increase the sales.

MR. SADBERRY: Are you comfortable in your representative capacity for your organization with the participation that GTECH had in this process of the survey?

MR. JOHNSON: Yes.

MR. SADBERRY: Are you comfortable in your representative capacity for your organization with the participation that members of the staff of the Lottery Commission had regarding the survey?

MR. JOHNSON: Yes, sir.

MS. WHITAKER: Mr. Johnson, one more question. Did you have a chance to review this presentation by GTECH?

MR. JOHNSON: I have not. I got a copy of that late yesterday afternoon. I really have not had a chance to look at it.

MS. WHITAKER: Did anybody with your association have a chance to review it?

MR. JOHNSON: No.

MS. WHITAKER: Thank you.

CHAIR CLOWE: Commissioner Sadberry, did you want a comment from staff in regard to the survey?

MR. SADBERRY: I would appreciate that. I had presumed Mr. Johnson was aware of it. But since he is not, I'd like the staff -- your position on it, to speak to that issue.

MS. KIPLIN: Sure. In an effort to ensure that the retailers were aware of the proposed amendments, The Commission had already been in the process of working on a letter that was going to go to all retailers on the changes that would affect the retailers. The Commission included a paragraph that indicated that The Commission was involved in the proposed rule making and wanted to ensure that the retailers knew the different ways that they could comment on the proposed amendments. There was a reference to the website so that retailers could go and read the proposed amendments for themselves and make what they thought of those amendments, and then offer whatever comments they wished to make on that That was -- that letter was mailed out, I believe it was late April.

MR. SADBERRY: That would have been after the survey?

MS. KIPLIN: Yes.

MR. SADBERRY: And after the most -- next most recent meeting of The Commission?

MS. KIPLIN: Yes. I believe it was -- it was for sure after the April 13th Commission meeting. And it was after the April 19th public comment hearing.

MR. SADBERRY: And --

MS. KIPLIN: Although the letter was already in draft form. And there had been discussions before the April 19th public comment hearing about it, including this particular language referenced in the proposed changes, to ensure that retailers knew about the proposed amendments and could go to the website and look at it for themselves.

MR. SADBERRY: And you, of course, are aware that the commissioners have reviewed materials, public comment materials, as well as the survey materials. Would any responses that were received to that letter have been included among those materials?

MS. KIPLIN: Yes. Let me just say that each commissioner has individually come in and reviewed the comments. And any comment that would have been received by e-mail, by letter, would have been in that room amongst those documents unless they were subsequent to the time that the commissioner had come in and reviewed them. But you-all's individual review was very recent.

MR. SADBERRY: This week.

MS. KIPLIN: It was this week.

MR. SADBERRY: Thank you, Mr. Chairman.

CHAIR CLOWE: Thank you, sir. Any other questions for Mr. Rick Johnson? Thank you, sir.

MR. JOHNSON: Thank you.

CHAIR CLOWE: The next appearance form I have is for Mrs. Dawn Nettles. This is the last appearance form I have, by the way, in case anyone else wants to appear. Good morning, Dawn.

MS. NETTLES: Good morning, Commissioner Clowe.

CHAIR CLOWE: How are you this morning?

(My testimony was very long - in fact, too long. I did present the Commissioners with copies of the forensic reports. (They are posted on my site.) Also, the Commissioners heard from Mr. Daly, who testified that it was his expert opinion that the Commission would be doing the right thing by adopting the new rule. Then, they took a 5 minute recess and when they came back, Mr. Larry King from GTech testified. Next is his testimony. To read the forensic reports and see the handwriting samples, click here. Remember - these reports were given to the Commissioners.

(RECESS)

CHAIR CLOWE: If we may come back out of recess now. I would remind you that we have now concluded the public commentary on this proposed action. I think it would be appropriate to ask the commissioners at this point if they have any questions or comments that they'd like to enter into at this time. Yes, ma'am.

MS. WHITAKER: Go ahead.

MR. SADBERRY: Mr. Chairman?

CHAIR CLOWE: Sir.

MR. SADBERRY: If I may. First, I want to go back just a page or two and join the Chair in expressing comments regarding our staff. I certainly want to concur with the Chair in expressing appreciation, and as well acknowledging the objective evaluation of our staff that this Commission -- the commissioners here make of our staff's efforts. I have been privileged to be around for a while. And a number of our members of our staff have also been here for a while. And I -- you know, we would strive for standards of perfection. That's certainly my standard, professionally speaking. That's always our objective. We understand the constraints and the situations that our staff is faced with in carrying out their duties. And we objectively and carefully and diligently, very strictly, I might add, evaluate our staff. Our Chair, as an example, has moved us even to a higher level of documented evaluation from our staff, and all conduct gets considered in that regard. I think it would be appropriate, though, that I share the Chair's comments now in expressing appreciation for the work of our staff and their dedication to the work of this agency.

CHAIR CLOWE: Thank you, Commissioner Sadberry, for that emphasis. It's well done.

MS. WHITAKER: Mr. Chairman, I would like to call Mr. King to respond to certain comments, if possible.

CHAIR CLOWE: Mr. King, are you available?

MR. KING: Yes, I am.

CHAIR CLOWE: Would you -- would you fill out an appearance form for the record, please, sir?

MR. KING: Absolutely. Do you want me to do it before or after?

CHAIR CLOWE: I think if you'll just do it, and at the conclusion of your appearance make certain that I have it, that would be adequate. Do you, then, have a comment to make to The Commission, or are you open to questions from The Commission?

MR. KING: I'd say both. I would, for the record --

CHAIR CLOWE: Identify yourself.

MR. KING: My name is Larry King. I'm the account general manager for GTECH Texas. I would first like to maybe clarify for the record that we were involved with the survey. And I will hopefully shed some light as how that -- to how that came about. I was at a meeting at the Lottery and did run into Nelda. And Nelda informed me that the TFIA was, in fact, doing a survey. And at the time, I did volunteer our sales force, as we are in stores twice monthly as required by the contract, to deliver the survey and receive the survey and bring it back Nelda informed me that it's not up to the Lottery. She would have to talk to Rick Johnson, the president of the TFIA. In fact, we met with Rick Johnson. And that was the only offer that GTECH made, was to hand-deliver and to receive the survey and deliver it back to Rick Johnson. Had I known that this survey would have so much scrutiny, I'm not sure I would have volunteered our services so freely. We had nothing to do with the content of the survey. We did not write the survey. We did not influence the retailers that filled out the survey. What we did was, on our weekly visits to retailers, we dropped it off. We asked them to read it. And if they so chose not to read it or disregard it, we didn't force it upon them. At the conclusion, they were either for or against it. And we brought those surveys back. There were instances, and I -- after following up after sort of gauging the level of scrutiny the survey got, we went back to some of the corporates. And in fact, Kidd Jones -- we ran into a district manager -- filled out 18 of them because they had 18 stores or -- I'm not sure because I didn't go through every single one. Maybe Easy Serve filled out 25, the same person. We also found, unfortunately, that one of our sales reps disregarded the order. One of our sales reps in the Austin district polled his retailers, asked the question, filled it out, and in fact, put the store number down on the survey. That sales rep informed us that if you go back to the 30 or so retailers, that is, in fact, their opinion, whether it was for or against. I regret to inform you we terminated the employment of this sales rep for not following the orders. So I think the other comment I would make is that we did not poll all 16,500 retailers. We were halfway through one of our cycles, which is a ten-day cycle. So we only got to about half the retailers, which we thought was a pretty good gauge to see whether they were for or against. Our numbers came pretty close to what Rick Johnson -- he mailed to his group and received back. I think his was in the high 70s, and ours was in the 80s. It would have been fairly simple had we wanted to go to the Diamond Shamrocks and the corporates since 50 percent of our retail base are corporates. We probably could have contacted 25 people and got 8,000 names. But we didn't do that. We wanted to get a good gauge to see if this is the right thing, you know, for the State of Texas. So that is -- that's all the comments I have to make. And I'd be happy to answer any questions.

MS. WHITAKER: Have you read the survey?

MR. KING: Yes, I have.

MS. WHITAKER: You've seen the statement about the New York Lottery?

MR. KING: Yes, I have.

MS. WHITAKER: Do you consider that to be accurate or inaccurate, or how would you characterize it?

MR. KING: I would -- I would characterize it -- and I would -- I would -- maybe I'll answer it by going back to our presentation on 25 March the 14th. And I think we talked about the New York Lottery in fairly good detail. We did not recommend the change that New York made for Texas. We would also say that sales are down in New York for the Lotto game. Now, if you take a step back and look at all the changes New York made at the same time last year, they changed their matrix at the same time. They went from two plays to a -- for a dollar to one play for a dollar. In other words, they doubled their odds. Yes, in fact, they did lower the balls by two balls, from 53 to 51. But it's one play for a dollar now. So that's never been brought out.

MS. WHITAKER: So New York reduced balls and their sales went down?

MR. KING: That's correct.

MS. WHITAKER: Florida Lottery increased balls, and their sales went up?

MR. KING: That's also correct.

MS. WHITAKER: Is it correct to say that each lottery's system is somewhat different and needs to be evaluated separately?

MR. KING: Very different, yes. Last year, the New York Lottery also implemented a millennium game for four weeks. At that time, they gave a 100 million dollar prize away. We would -- we would strongly tell you that that cannibalized the Lotto sales. So that is probably one reason why their sales are down. They also implemented a regional Lotto game.

MS. WHITAKER: The recent change the California Lottery is implementing has not yet gone into effect. Is that correct?

MR. KING: No, it has not.

MS. WHITAKER: Is that increasing balls or decreasing balls?

MR. KING: They are -- they are not -- well, I'd like to bring Marty Goldman, if I could. But Marty -- if Marty could come up. Marty presented it, and he knows a lot more about other states.

MS. WHITAKER: I only have a very short question about them, so --

MR. KING: Okay. I can tell you the new matrix. Basically, it's a five of 47, one of 27 matrix. The overall odds for the top prize are going from one in 18 million to one in 41 million. I'll turn it to Marty Goldman.

MS. WHITAKER: I just have one question as to the increased balls.

MR. GOLDMAN: Actually what they -- they went --

CHAIR CLOWE: Would you identify yourself?

MR. GOLDMAN: I'm sorry. Marty

Goldman, director of marketing for gamescape, GTECH marketing. California is changing their style of game. They're going from a Lotto style game, six of 51, closer to the power ball big game. Their new matrix is five of 47, one of 27. But their overall odds, which is really the critical component, is going from 18 million to one for a jackpot winner to 41 million to one, making it harder to win the jackpot, and obviously increasing potential for a large game.

MS. WHITAKER: Thank you. Mr. King, in connection -- you had mentioned that you had done some -- had some feedback from retailers yourself, or that GTECH had?

MR. KING: That's correct.

MS. WHITAKER: Did any of that feedback indicate that any of the retailers were relying on statements in the survey about the New York Lottery in making their decision?

MR. KING: Not to my knowledge. I concur with what Rick Johnson had to say. I think most retailers are in favor of increasing sales. And I'm not sure they specifically care about New York or Florida. But based on the sales projections that were given in that survey, I think that the more commission to the retailers is what got their attention.

MS. WHITAKER: How much feedback did you get from retailers?

MR. KING: Me personally?

MS. WHITAKER: Or GTECH.

MR. KING: Well, I think we talked to about 4,000 retailers, and overwhelmingly it was about 85 to 90 percent positive.

MS. WHITAKER: Did any of them -- or did any of them mention the New York Lottery?

MR. KING: Not to my knowledge, no.Commissioner, if I may back up, too. We also received feedback last October when the proposed matrix change was -- I can't say it was even proposed. Maybe it was discussed, and it was printed in the newspaper. Some retailers, on our visit after it was pulled down, were a little confused that they had no input into the decision-making process and really didn't know what was being proposed. I think they've got a far better understanding this time around, you know, whether they are for or against it. And quite frankly, some were against it.

MS. WHITAKER: I'd like your comments in response to Ms. Nettles' statements about signage being removed from retailers.

MR. KING: I am not aware. In fact, we recently installed about 4500 neon signs that the Lottery purchased. And these are point of sale. And quite frankly, I think there is a huge demand out there. We probably could use a lot more signs. As far as retailers moving their play stations to the back of the stores, that happens on a daily basis. Corporates will make a decision to move things around. I would -- I would probably argue that some have moved them to the front of the store as well.

MS. WHITAKER: Do you agree or disagree with her statement about signage being moved?

MR. KING: I disagree. If that were the case, I think our first recommendation to the Lottery is, don't print any signage because we don't need it. But we are -- we are in constant communication with the marketing department and trying to gear their spending towards what retailers are using.

MS. WHITAKER: Are you familiar with the Racetrack retailers?

MR. KING: I am familiar with the store itself. I am -- I am not -- you know, specifically if they are removing or adding point of sale, I couldn't tell you specifically. But I could find out.

MS. WHITAKER: Do you have any knowledge about their attitude about the rule change?

MR. KING: No.

MS. WHITAKER: Either way?

MR. KING: Either way.

MS. WHITAKER: Can you comment about -- well, you have already made some comments. Do you have any additional comments to make about her statements about signatures on the survey forms?

MR. KING: Well, as I stated, I think you will find that there are some duplicate signatures from -- I think she mentioned a few of the chain accounts. I would say I can't deny that, nor have I seen the surveys themselves. But some individuals, if they had 18 stores, they filled out 18 different forms. That was not at our instruction at all. But -- and I did mention to one sales rep that misunderstood the instructions. And we took action upon that employee.

MS. WHITAKER: Do you know of instances in which the same person would have signed another person's name to the survey?

MR. KING: No, none whatsoever.

MS. WHITAKER: If that occurred, what would be an explanation?

MR. KING: If someone signed another person's name, I wouldn't have an explanation. I would say that would be falsifying a survey.

MS. WHITAKER: Did you have an opportunity to talk with Ms. Nettles about this before today?

MR. KING: I spoke to Ms. Nettles, I believe, on Tuesday for about 90 minutes. I also invited Ms. Nettles over to our building, because basically, I had seen my name and my company's name on her Web page. And it was clear that she did not understand the relationship that we have with the Lottery, nor what we do in the field. So I wanted to hopefully give her a better understanding. And she'd indicated she may take me up on the offer yesterday. But I was there all day, and I didn't see Ms. Nettles.

MS. WHITAKER: Did she indicate to you anything about her analysis of the surveys?

MR. KING: She asked for our involvement, basically what I've told you today. And I told Ms. Nettles exactly the same thing I've told you, what our involvement was.

MS. WHITAKER: But she did not indicate to you anything about forensic examinations?

MR. KING: No.

MS. WHITAKER: I have no more questions.

CHAIR CLOWE: Any other questions for Mr. King?

MR. SADBERRY: I think my colleague has about covered the authenticity question exceptionally well. But bottom line, to put it in a lay person's posture, hopefully, is there any reason or any basis -- you sat here and heard Ms. Nettles' comments. I presume if you would care to, you could look at the report from the forensic experts. Is there a basis for concern as far as you see it concerning authenticity, any other aspect of the survey, based upon what you've heard and seen this morning?

MR. KING: No, sir, I know of none. No concern on my part.

CHAIR CLOWE: Thank you, gentlemen. Thank you very much. Commissioners, are there any other members of audience that you would like to call and ask for comments or statements at this time?

MS. WHITAKER: I would just say that if there are individuals who had heard the comments this morning and believe they have information that's pertinent to it, that we'd appreciate hearing from you. And I see nobody indicating that.

CHAIR CLOWE: Commissioners, do you have any comments that you'd like to make at this time? Hearing none, I am advised by general counsel that this issue is properly before The Commission at this time, and that it is ripe for action if it is the desire of The Commission. Is there a motion?

MR. SADBERRY: Mr. Chairman, I would move the adoption or approval, whichever is correct legal action, of the proposed amendment to the rule, which I understand correctly is 16 TAC Section 20 401.305.

CHAIR CLOWE: Is there a second? I will second the motion. All in favor, say aye.

MR. SADBERRY: Aye.

MS. WHITAKER: Aye.

CHAIR CLOWE: Aye. All opposed, say nay. The vote is three to zero. The motion passes. The rule to be adopted.

MS. KIPLIN: Commissioners, I will -- as you know, I've been working on a draft document, which each of you have that. I've been working on an order in the event that this was the vote of the Commission. Based on the vote and the action taken by The Commission, there -- as I mentioned earlier, there is a bit of comment that you received today that does need to be summarized and need to be responded. And I'm going to ask that that occur, I guess, while we're either taking up other business at the call of the Chair or on a recess, and then bring that order before you and ensure that that order is consistent with your vote today.

CHAIR CLOWE: Very good. Linda Cloud, at this time, with the adoption of the proposed changes, would you give us a schedule as you see it for the changes in this matrix to occur?

MS. CLOUD: Yes, sir. Based on your approval today, there -- after today, there will be a 20-day period of time when -- before the rule is actually enforced. So we will have that 20-day wait after your approval today. And then we have to roll down the multi-draw feature for the present Lotto game, which takes ten draws, five weeks. So looking at that rolldown period and the 20 days, it would be mid-July before the new game would start.

CHAIR CLOWE: Very good. Any questions, Commissioners?

MS. WHITAKER: No questions.

CHAIR CLOWE: Very good. Well, then, having taken the vote and that projection of the time frame from the implementation of the new game, I would like to say we hope the players of Texas like this change and play Lotto Texas and are enthusiastic about the results that are being created here today and they will benefit all.We'll now conclude item three on the agenda and return to item two, which is report, possible discussion and/or action on lottery sales and trends. And that would be Toni Smith and Linda.