0001 1 2 3 4 5 6 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * 7 Bingo Advisory Committee Meeting 8 9 August 3, 2005 10 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * 11 12 13 14 15 16 17 BE IT REMEMBERED that the Bingo Advisory 18 Committee held a Public Meeting on the 3rd day of August, 19 2005, at 10:00 a.m., before Steffanie L. Decker, CSR in 20 and for the State of Texas, reported by machine shorthand, 21 at the offices of the Texas Lottery Commission, 611 East 22 6th Street, Auditorium, Austin, Texas, 78701, whereupon 23 the following proceedings were had: 24 25 0002 1 APPEARANCES 2 Suzanne Taylor, Chair 3 Billy Atkins, Director Charitable Bingo Operations 4 Division 5 6 Members: Daniel Moore 7 Kimberly Rogers 8 Mario Manio 9 John "Jack" Dougherty 10 Larry Whittington 11 Rosalie Lopez 12 Thomas "Tom" Weekley 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 AGENDA 2 1. The Bingo Advisory Committee will call the meeting to order............... 5 3 4 2. Consideration of and possible discussion and/or action on the minutes of the 5 May 25, 2005 Bingo Advisory Committee meeting................................. 5 6 7 3. Report and possible discussion on rulemaking pertaining to the prohibition 8 of price fixing for bingo equipment and supplies................................ 5 9 10 4. Report and possible discussion and/or action on the proposed amendment to 11 16 TAC 402.102 pertaining to the Bingo Advisory Committee................ 58 12 13 5. Report and possible discussion and/or action on public service announcements.. 59 14 15 6. Report and possible discussion on bingo financial information and statistics, 16 including charitable distributions...... 75 17 18 7. Report and possible discussion on the 79th Legislature............................. 54 19 20 8. Consideration of and possible discussion and/or recommendation to the Texas Lottery 21 Commission on the commercial lessor position on the Bingo Advisory Committee......... 102 22 23 9. Report, possible discussion and/or action relating to the work group 24 assigned to develop recommendations relating to the Bingo Advisory 25 Committee annual report................. 105 0004 1 AGENDA (Continued) 2 10. Report on the activities of the Charitable Bingo Operations Division.... 106 3 4 11. Public Comment.......................... 113 5 6 12. Consideration of and possible action on future Bingo Advisory Committee meeting 7 dates and/or items to be considered for future meetings......................... 116 8 9 13. Adjournment............................. 117 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0005 1 MS. TAYLOR: It's 10:00 o'clock. We do 2 have a quorum so I'd like to call the meeting to 3 order. The first item on the agenda -- second item 4 on the agenda is the "Consideration of and possible 5 discussion and/or action on the minutes of the 6 May 25th, 2005, Bingo Advisory Committee meeting." 7 Is there a motion to approve? 8 MR. DOUGHERTY: I'll make a motion to 9 approve the draft. 10 MR. MANIO: I second the motion. 11 MS. TAYLOR: There's been a motion and a 12 second. All in favor? 13 (All aye.) 14 MS. TAYLOR: Motion is unanimous. 15 Before we go into Item Number 3, I would like to 16 welcome Commissioner Clowe to our meeting. We really 17 appreciate you taking the time to come. We love 18 seeing you here. 19 Item Number 3 is report and possible discussion 20 on rulemaking pertaining to the prohibition of price 21 fixing for bingo equipment and supplies. 22 MS. JOSEPH: Good morning. I'm Sandy 23 Joseph, Assistant General Counsel. Is this on? Can 24 you all hear me? 25 MR. DOUGHERTY: No. 0006 1 MS. JOSEPH: Now? 2 MR. DOUGHERTY: Yes. 3 MS. JOSEPH: I'm Sandy Joseph, Assistant 4 General Counsel. The staff is beginning work on a -- 5 on drafting a rule and looking at a possible rule on 6 price fixing for bingo equipment and supplies. I'm 7 going to be establishing a work group to look at this 8 issue and possible rulemaking and wanted to ask for 9 assistance from the BAC in several ways. First of 10 all, I want to see if you all have any just initial 11 off-the-top-of-your-head thoughts or comments on what 12 might be appropriate to put in such a rule. I don't 13 know if you've had time to think about that. This 14 was in the notebook, so maybe you had time to look at 15 it and think about it. If not, we are going to be 16 spending a lot more time on it, but I wanted to give 17 you a chance today to see if there was anything, and 18 I'll come back to that in a minute. 19 Then I wanted to ask if there was anyone that 20 wanted to volunteer to be on our work group. So 21 we'll take volunteers if there's anybody that feels 22 they have an interest and would like to try to 23 contribute to that effort. 24 And then also the third thing was to see if you 25 all could suggest the name of any non-BAC member who 0007 1 might be helpful or willing to participate in the 2 work group. I did put in your notebook a copy of the 3 statute pertaining to the price fixing rule. And 4 that's in Occupation Code 2001.556 Price Fixing 5 Prohibited. And as you can see, the statute is not a 6 long statute, so the question is going to be is there 7 something that we could or should do through 8 rulemaking to further clarify or enhance the 9 application of that statute. 10 So I guess first I ask you, has anyone as they 11 looked at this, do you have any thoughts as to what 12 might should be included in such a rule, in just 13 general outline? I'm not asking for any specifics, 14 but is there anything you want us to consider right 15 off the bat? Nobody? I know it's -- I mean, it's 16 hard to just come up with something, I know, but I 17 did want to give you that chance. Is there anybody 18 among you all that would like to serve on that group? 19 We'll probably be doing, you know, some work groups 20 as we did on our administrative penalty rules where 21 we'll have people participate in person or by 22 telephone conference if they can't be here. Would 23 anybody like to serve on that work group? 24 MR. MOORE: I'd like to volunteer. 25 MS. JOSEPH: Okay. Thank you. Anybody 0008 1 else? 2 MS. LOPEZ: If this can be done through 3 telephone calls, I'd like to participate as well. 4 MS. JOSEPH: Okay. So we have Danny Moore 5 and Rosalie Lopez volunteering. Anybody else? 6 MR. WHITTINGTON: I will. 7 MS. JOSEPH: Okay. You would like to, 8 Larry? 9 MR. WHITTINGTON: Yes. 10 MS. JOSEPH: Okay. Larry Whittington. You 11 know, if you can't make it to every meeting, that's 12 fine. I mean, even by telephone -- 13 MR. WHITTINGTON: Okay. 14 MS. JOSEPH: -- but we'll always let you 15 know when they're going to be, and as Danny knows, 16 subject to availability can participate based on our 17 last effort. 18 MR. MOORE: Yeah. 19 MS. JOSEPH: Okay. Well, I thank you all 20 for that. Is there anybody that comes to mind that 21 you want to suggest as another possible member that 22 could give some input? And we'll be, you know, 23 searching out people on our own, too, but I wanted to 24 see if there was anyone you thought we should try to 25 include. 0009 1 MR. MOORE: Yeah, Sandy, Jamie McNally is 2 out of town and he wanted to serve on the committee, 3 too. 4 MS. JOSEPH: Okay. 5 MR. MOORE: Jamie McNally. 6 MR. WHITTINGTON: Steve. 7 MS. JOSEPH: Jamie -- pardon? 8 MR. WHITTINGTON: Steve Fenoglio. 9 MS. JOSEPH: Okay, Jamie McNally. All 10 right. Anybody else? 11 MR. WHITTINGTON: Steve Fenoglio. 12 MS. JOSEPH: Steve Fenoglio would like to. 13 Okay. And Steve Bresnen? Steve Fenoglio and Steve 14 Bresnen. 15 MR. WHITTINGTON: And Jane -- Jan Thompson. 16 It's Jane Thompson. 17 MS. JOSEPH: Oh, Jane Thompson? Okay. All 18 right. Anyone else? And I will contact those of you 19 that have volunteered and let you know when we'll 20 have our first meeting. The staff and I will be 21 setting up a meeting before long so we can look at 22 this. And one of the first issues or threshold issue 23 will probably be do we need a rule. That will be 24 something we need to think about, it will be part of 25 it. And then if the answer is yes, then what needs 0010 1 to be in the rule. So we'll be working through that, 2 and I appreciate you all volunteering to help. 3 Madam Chairman, there may be -- I don't -- it 4 seems like usually we take comments from the public 5 on these items and it might be good to go ahead and 6 hear from people now if there are those that would 7 like to comment on this. 8 MS. TAYLOR: Absolutely. Thank you, Sandy. 9 MS. JOSEPH: Uh-huh. 10 MS. TAYLOR: We do have several witness 11 affirmation forms. Steve Fenoglio. 12 MR. FENOGLIO: Good morning, Madam Chair, 13 Members. For the record, my name is Stephen 14 Fenoglio. I filed an appearance slip. You know, we 15 have got, again, I think, the cart before the horse 16 on this issue. We know there's been a lot of 17 discussion about price fixing issues. It's been 18 reported in several newspaper articles. But one of 19 the things -- and I filed an Open Records Request, 20 which is the only way to get meaningful information. 21 And because of a pending complaint case and possible 22 settlement, you can't get any facts. And I think 23 before you go off on writing a rule, you ought to 24 know what the facts are first, because otherwise 25 you're doing it in a vacuum. And I hate to have 0011 1 rulemaking that everyone -- a licensee has to live 2 with when you don't know what the facts are. And I 3 hope as a part of this process that we can have a 4 meaningful discussion of what the facts are. There 5 have been two cases that were tried together several 6 years ago that resulted in a no finding, and then now 7 there's a new allegation that was filed in late '04 8 or early '05 against one manufacturer, but we don't 9 know what the facts are. And until you know what the 10 facts are, you're wasting everyone's time trying to 11 identify a solution when you don't know what the 12 problem is. And so I can't stress that strongly 13 enough. I'd like to participate. I have clients who 14 have been asking me about what they've either read in 15 the newspaper or heard through the grapevine or 16 received information, unsolicited information from 17 certain parties about the issue of price fixing, but, 18 you know -- and we lawyers like to say, well, you 19 tell me what the facts are, I'll go figure out what 20 the law is, and then we'll come up with either a 21 problem or a solution. But until you know what those 22 facts are -- I mean, I think we know what the law is. 23 Sandy did a good job. It's a very simple statute. 24 It's the subject of two or three Attorney General's 25 opinions. And so I think the -- that the legal side 0012 1 is fairly clear, although depending upon what your 2 theory is, you may have to have intensive discussion 3 of what the market is and -- under what antitrust 4 lawyers call market dominance theory. And so we are 5 in a vacuum right now and I hope there's going to be 6 a lot of discussion and providing of those facts, 7 otherwise you're setting yourselves up for a shot in 8 the dark. 9 MS. JOSEPH: Could I comment, Steve? Let 10 me just interject. 11 MR. FENOGLIO: Sure. 12 MS. JOSEPH: Just in response to that, I 13 want to say I totally agree. And that's really what 14 I meant when I said there's a threshold question, do 15 we need a rule, so I agree with that. 16 MR. FENOGLIO: Great. And if you don't 17 know, it was the subject of at least one Legislative 18 committee hearing, although there wasn't a lot of 19 detailed recitation of facts. There are some 20 allegations that are out there. And I assume the 21 staff has access to all those records. 22 Be happy to answer any questions. 23 And one other thing, you know, Sandy was 24 commenting about does anyone have any feedback on 25 what you put in the notebook. And I'm guessing a lot 0013 1 of you, because you didn't say anything, because you 2 don't know what the facts are, so you can't respond. 3 I mean, I'm taking a guess, but my sense is if you 4 don't know what the facts are, it's kind of hard to 5 comment on that issue. 6 Be happy to answer any questions, otherwise go 7 on record as a short presentation, Madam Chair. 8 MS. TAYLOR: Thank you, Steve. 9 Steve Bresnen. 10 MR. BRESNEN: I'm Steve Bresnen on behalf 11 of the Bingo Interest Group. I won't repeat 12 everything Steve said, but I think it's critical 13 and -- I think that you understand the background for 14 this. I suspect that most of you don't really know 15 what's been going on or what the subject of these 16 complaints have been. Am I -- is that a fair 17 assessment? 18 MR. MANIO: (Nods head.) 19 MR. DOUGHERTY: (Nods head.) 20 MR. BRESNEN: So, you know, without 21 understanding the factual background, it seems to me 22 like it's impossible to go make a rule. I do think 23 as a result of the Legislative hearing, members of 24 the Legislature are expecting the Agency to take some 25 action to flesh out these issues. And I think I've 0014 1 talked to enough people in the industry to know that 2 they'd like some guidance as to what's prohibited and 3 what's not prohibited by the rule. 4 And let me just give you an example of something 5 that I hope will ultimately not be prohibited, 6 because I think it would be contrary to the evil that 7 the rule was -- that the statute is intended to 8 target and it would be hostile to the interest of the 9 charities. If a manufacturer -- I mean a distributor 10 goes to a charity, maybe that charity wants 200 units 11 of something, and that's a substantial sale for that 12 distributor, and the charity says I want to pay X 13 price. The distributor says, well, that's lower than 14 my regular price, and that will mean that I'll have 15 like about a zero margin on that. I can't do 16 business at that level. Now, if the distributor can 17 work with the manufacturer to improve their price 18 from the manufacturer so the charity ends up getting 19 a discount and the distributor can still make a 20 margin that makes it worth being in business, that's 21 in the service of the charity. And we want to make 22 sure that the mere discussion between a manufacturer 23 and a distributor about their relationship and the 24 cost of the product as between them does not get 25 prohibited by this rule or we are going to in effect 0015 1 lock in higher prices over the manufacturer's 2 standard price and the charities won't have an 3 opportunity to achieve a discount. 4 So I think there -- I think this rule needs to 5 be very carefully thought through. And I would 6 suggest that one of the things that ought to be done 7 by way of thinking it through is to get a picture 8 from the staff about what the market has looked like 9 in, say, the last, I don't know, five to ten years. 10 How many distributors -- the complaints are not about 11 paper, they're not about pull tabs, they're about 12 electronics, as I understand it. But I would like to 13 know, and I think it would be a good thing for you 14 all to know is what's the shape of the market been in 15 the last, say, five to ten years. I'm picking ten 16 years because electronics were authorized by the 17 Legislature in '95 and I think first came to the 18 market in about '96. Is that right, Billy? 19 MR. ATKINS: I think that's accurate, yes. 20 MR. BRESNEN: So what I would want to know 21 is, you know, how many manufacturers were present in 22 the marketplace over time, how many different 23 products have been available, has competition existed 24 in the marketplace, what's happened to prices during 25 that time. And then I would want to know how have 0016 1 the manufacturers and the distributors been 2 conducting their business as between themselves and 3 the distributors conducting their business as to the 4 charities. And there may be aspects of that that run 5 afoul of the statute and they're evil and need to be 6 addressed, and there may be others that might at 7 first blush run afoul of the statute but not be the 8 evil that the statute was intended to address. So I 9 think you very, very carefully need to understand 10 what the conditions are in the marketplace. My own 11 understanding is that prices have dropped 12 dramatically in the last four or five years. 13 Danny is a distributor, and Jane, and we have 14 got manufacturers of these products. You all ought 15 to be able to bring that information to the 16 Commission if the Commission doesn't have it. I 17 think there probably is a need for a rule. I think 18 that the first AG opinion, just so you'll know, was 19 requested on my behalf by then Representative Kip 20 Avery (phonetic), and it related to a contract 21 provision in a contract between a manufacturer and a 22 distributor. That opinion is a narrowly drawn 23 opinion that addresses whether a contract provision 24 is -- was legal or not under this existing statute. 25 The second opinion basically flowed from that. It 0017 1 was a -- it was an attempt by someone else to get a 2 clarification of the statute about a particular kind 3 of contracting, revenue sharing. I view those as 4 being pretty fact bound. I think they will provide 5 some guidance going forward, but it's not the whole 6 chalupa here. And I would suggest to you that this 7 is something that needs to be very carefully thought 8 through in light of the market conditions that exist, 9 the prices that are being paid, the business 10 practices of the -- at each step in the distributive 11 chain. I think those need to be ferreted out and 12 understood. 13 This may be the most sophisticated subject 14 matter that you -- that you all are going to be asked 15 to address and the Commission would be asked to 16 address. It involves questions of market power. 17 Steve talked about market dominance theory, antitrust 18 theory. This particular statute is sort of a hybrid, 19 as I understand it, between a straightforward 20 antitrust statute and a direct price fixing statute. 21 And this is not an easy question. This is questions 22 that the telephone companies and the electric 23 companies have been wrestling with all over the 24 country and in this state for a number of years to 25 address monopoly power and competition in the 0018 1 marketplace. And what may at first blush seem like a 2 simple matter is not necessarily a simple matter. 3 I think I've said everything that I wanted to 4 say. I'd be happy to answer any questions. I'm 5 happy to serve on the -- on the work group and help 6 in any way that I can. 7 MR. DOUGHERTY: Madam Chair, I have two 8 questions. And I'm just coming from what I've read 9 in the paper and E-mail and things. My first basic 10 question is what are we talking about in terms of 11 money between one price and another? There seems to 12 be a great gap between what -- what Mr. Hieronymus 13 says and what staff said was a price difference. 14 Seems to be a big difference in that. And the second 15 question would be are we speaking of leasing 16 equipment, electronic equipment or are we speaking of 17 buying equipment? 18 MR. WHITTINGTON: Leasing. 19 MR. DOUGHERTY: So I'd just like to be 20 clarified on those points. 21 MR. BRESNEN: Well, if I could, I think 22 just about any rule you're going to go into is going 23 to probably cover the gamut and not just be focused 24 on leasing or buying, but probably however you might 25 do it. And that will -- I don't want to speak for 0019 1 Sandy, but I think that will include an analysis of 2 the statute -- 3 MR. DOUGHERTY: Either or. 4 MR. BRESNEN: -- and see if it refers to, 5 you know, both kinds of transactions. 6 Billy, I'm assuming that at this point the 7 details of the Game Tech investigation, what the 8 allegations are from the staff's point of view, the 9 staff's allegations, not the original complaint, 10 which I'm aware of but -- and any further 11 investigation are things that you all would not be in 12 a position at this point in time to make public. Is 13 that a fair assumption? 14 MR. ATKINS: Sandy is shaking her head yes. 15 MS. JOSEPH: We don't have posted today any 16 discussion or consideration of that investigation or 17 the current settlement negotiations. 18 MR. BRESNEN: Well, obviously, that's the 19 impetus for why we are here. And it would seem to me 20 not to be out of bounds from a posting point of view 21 to talk about the factual context that brought us to 22 looking at a rule. My question is not whether it's 23 been posted or not, it's whether you all are willing 24 to talk publicly about those things, and the conduct 25 that's been alleged, and kind of where all that -- at 0020 1 this point in time, because it's my understanding the 2 settlement has not been acted on by the Commission 3 and you all have been fairly close to the vest with 4 that information at this point in time. Is that -- 5 MR. ATKINS: That's correct. Now, I 6 would -- when you say the allegations, I would assume 7 the allegations would be included in the -- in the 8 notice of denial letter. And that has been made 9 public. 10 MR. BRESNEN: Okay. And I'm not familiar 11 with that. Is it in sufficient detail as far as the 12 conduct or is it boilerplate -- I've seen a lot of 13 those things that are just boilerplate, you know, you 14 violated Chapter 2001 point something. 15 MS. JOSEPH: I don't believe we have a copy 16 of that here today. And I think we should not try to 17 talk about a document without it being here. 18 MR. BRESNEN: Okay. 19 MS. JOSEPH: So I -- and really the 20 discussion -- 21 MR. BRESNEN: I suspect there's one in the 22 building. I'm not trying to get into it. I'm just 23 asking a simple question. Are you prepared to go 24 into any detail and explain to the BAC what the 25 factual background of this is today or do you need to 0021 1 get your settlement done before you go down that 2 road? 3 MS. JOSEPH: Okay. The answer, I would 4 say, would be, no, we are not ready to go into that 5 today -- 6 MR. BRESNEN: Okay. 7 MS. JOSEPH: -- based on the current 8 status. 9 MR. BRESNEN: Okay. I get it. I can 10 accept the answer. 11 MS. JOSEPH: Thank you. 12 MR. BRESNEN: I just need to know what it 13 is. 14 MR. ATKINS: Today, Steve, is to start the 15 process and to start the process through the 16 formation of this work group. And I think that a lot 17 of the information you suggested putting together we 18 can. I think it would be feasible for us to do that 19 and provide it for the work group as they go forward 20 on, you know -- going back to what, you know, Sandy 21 said the first analysis would be do we need a rule. 22 MR. BRESNEN: Right. Right. Well, and I, 23 you know, spoken to that and why I think you need 24 one. Now, it's my understanding from your testimony 25 at the House committee meeting that there are -- 0022 1 there's an ongoing investigation outside the 2 settlement. And I'm wanting to know, is it -- in 3 some -- I don't mean this pejoratively, but are you 4 going to reach a conclusion to that in a timely 5 fashion so that whatever facts are determined as a 6 result of that can also be made aware to the people 7 who are trying to do this rule writing? Because I 8 think what you're getting down to is how people are 9 doing business together at a level that is not 10 immediately transparent to the general public and to 11 these charities. And I don't think we want to 12 damage -- we don't want to damage legitimate business 13 practices, but I think people have got to know 14 something about that before they can go doing some 15 rule writing. And so I guess my question is, is that 16 going to happen in some sort of a time frame that's 17 consistent with moving forward in trying to write a 18 rule? In other words, where you'll be able to talk 19 about it without it being the subject of an ongoing 20 investigation. 21 MR. ATKINS: And, Steve, I don't know the 22 status of that ongoing investigation at this time. 23 And likewise, I don't know when Sandy's looking at, 24 you know, first getting this group together. 25 MR. BRESNEN: Right. Are the lawyers that 0023 1 are working -- is Sandy, specifically, talking to the 2 lawyers or whoever's doing the investigation so at 3 least somebody that's involved with this rule writing 4 enterprise can be involved with -- can understand 5 what the various conduct is that's -- that's driving 6 the need to do rule writing to begin with? 7 MR. ATKINS: If you have a question for 8 Sandy, I'd -- 9 MR. BRESNEN: Well, I will. All right. 10 MR. ATKINS: I'd ask you pose that to 11 Sandy. 12 MR. BRESNEN: That's fine. 13 MS. JOSEPH: Well, we certainly want to use 14 any knowledge that's appropriate that the Agency has, 15 so I would say I would be in contact, communication 16 with people in the Agency who have knowledge about 17 this, as well -- by "this" I mean the broad subject 18 matter. 19 MR. BRESNEN: Right. 20 MS. JOSEPH: As well as outside the Agency. 21 MR. BRESNEN: Okay. I'm just trying to -- 22 you get my point. I'm just trying to flesh out the 23 point that Steve was making is that there's a basis 24 for all this. We didn't -- this is not something 25 that got generated direct by the staff level or by 0024 1 Sunset, for example, like the penalty matrix. This 2 is something that's -- that involves allegations of 3 things that have been going on in the industry. It's 4 a sophisticated subject matter and at some point in 5 time before you -- I think, personally, before you 6 commit pen to paper, people need to know what the 7 facts are that they're dealing with and what the 8 allegations are and -- and it requires some 9 discussion as to whether that's the evil that the 10 statute was intended to attack. 11 Thanks. I didn't mean to take nearly that much 12 time. 13 MR. ATKINS: Yes, sir. Steve, I was just 14 going to say if you have -- if you think there's any 15 other information or if anybody on the work group 16 does that would help you all in that process, if 17 you'll just let me know. 18 MR. BRESNEN: I'll E-mail you and circulate 19 it to everybody. 20 MR. ATKINS: Great. 21 MR. BRESNEN: Okay. Thanks. 22 MS. TAYLOR: Steven -- third Steven, Steven 23 Hieronymus. 24 MR. HIERONYMUS: Can Trace go next? 25 MS. TAYLOR: Sure. I don't have a form for 0025 1 Trace. 2 MR. GRAY: It's Roy, my real name. 3 MS. TAYLOR: Roy Gray. 4 MR. GRAY: For the record, I'm Roy Gray. I 5 go by Trace. I'm with -- a managing partner, Austin 6 Capital Group. I'm a distributor here in Texas. I 7 second pretty much what the two previous Steves have 8 said. It's kind of difficult to talk about something 9 when we don't have some factual information in 10 regards to what's been happening. We also haven't 11 had any discussion what is price fixing. We are 12 talking about writing a rule, but what exactly is 13 price fixing? And I'd like to spend a couple of 14 minutes kind of talking about what that may be. I've 15 got a document here, and I've got copies for 16 everybody if I can hand those out. It kind of sums 17 up what we are talking about here. And it does give 18 a little context to what the issues on the table are. 19 Luckily, I made enough copies. This is some 20 information, this is an internal document from Game 21 Tech, dates back to 2000. So I think we can get a 22 little context as to how long some of this activity 23 we're talking about may have been going on. I've 24 highlighted some areas in there. There seems to be a 25 different opinion exactly what price fixing is and 0026 1 what is allowed. The statute seems to be pretty 2 straightforward and simple. The company that's been 3 alleged to price fix, Game Tech, seems to have a 4 different opinion. I just want to spend a quick 5 minute on this document and then read some of their 6 comments in regards to what they think is price 7 fixing or not price fixing. 8 MS. JOSEPH: Could I interrupt just a 9 second? 10 MR. GRAY: Sure. 11 MS. JOSEPH: And I -- I don't have a 12 problem if the committee would like to hear this, but 13 I believe we are starting to go into the work that we 14 want our work group to do. And, you know, we have 15 specific volunteers from this group that are going to 16 be on a work group with us. And I don't know -- I 17 mean, I want to hear what you have to say. I want 18 that to be part of our work group. I'm not sure that 19 we need to go into the specific facts right now. And 20 I just throw that out for your consideration. The 21 purpose of the rulemaking, also, is not going to be 22 to address a specific situation; although, yes, I 23 would say that this -- the reason this rule has -- 24 you know, is being considered is because of recent 25 events. However, it's not going to be designed, as 0027 1 far as I know, to resolve any current issue in 2 particular. 3 MR. GRAY: And my comments to that are, 4 this has nothing -- I'm not wanting to get into the 5 facts of the issue. I'm wanting to get into what's 6 price fixing. I mean, you're talking about rules and 7 what's going on, but what is price fixing? 8 MR. CLOWE: And let me identify myself and 9 make a comment. I'm Tom Clowe, Chairman of the 10 Commission. You're getting into an area now that 11 touches on an issue that's going to come before the 12 Commission on their August the 15th meeting, so with 13 your permission, Madam Chair, I'm going to excuse 14 myself while this issue is discussed so that I will 15 not be biased in any way by the discussion. And I'll 16 ask somebody to come and get me when Mr. Heith's 17 agenda comes up, his item comes up. 18 MS. TAYLOR: Thank you, sir. 19 MR. CLOWE: So, Madam Recorder, if you'll 20 see that I'm noted as leaving now, I'd appreciate it. 21 (Commissioner Clowe exits the 22 (room. 23 MR. GRAY: So can I proceed? Can we talk 24 about that a little bit? 25 MS. TAYLOR: Yes. 0028 1 MR. GRAY: Just some of the highlighted 2 areas, just to highlight, it says, "In order to 3 protect Game" -- and actually, I think the price 4 fixing statute is in place to protect the charities 5 in regards to not creating an environment in which 6 they are detrimentally affected by business practices 7 between manufacturers and distributors. I think 8 that's the purpose of the act. I could be wrong, but 9 I think that's the purpose. 10 In looking at what that looks like and what is 11 detrimental to them, I think anything that would 12 affect the price and keep it higher than in an open 13 marketplace would be something that would -- I think, 14 would be considered price fixing or certainly 15 detrimental to the nonprofit organizations. This 16 document, the top line says, "In order to protect 17 Game Tech's top line it appears the consensus that we 18 retain the current non-Trend distributors at their 19 existing level of end user pricing." Just using 20 that, it looks like a manufacturer is trying to 21 attempt to affect the end user pricing, and I think 22 that's a distributor function, not a manufacturer 23 function. 24 Down here it says, "Required distributors to 25 have Game Tech management approval on all 0029 1 renegotiated contracts." Okay. Again, that would be 2 a manufacturer affecting a distributor's business and 3 how they price to their charities. It said, 4 "Providing the distributors with absolute bottom line 5 pricing will expedite the further erosion of the top 6 line. We need to control this." Okay. I think 7 that's pretty self-explanatory. Distributors are not 8 being given the bottom line pricing or allowed to go 9 out with bottom line pricing because that affects a 10 manufacturer's top line. 11 Second page, you look at this it says, "Game 12 Tech management would determine how each individual 13 market could bear and hold price." Again, that 14 appears to be a function of a distributor, not a 15 manufacturer. And we get into a -- they start 16 proposing guidelines, "15 percent rate to the end 17 user with appropriate floor for a given region 18 determined by Game Tech management." It talks about 19 how they must prevent battles among their own 20 distributors and guidelines must be observed. 21 15 percent rate again is talked about. 22 And in summary on Page 3, Number 2 it says, 23 "Game Tech control pricing floors will assist Game 24 Tech in maintaining as much return per unit per week 25 as is rational given its market and direction." 0030 1 Again, they're controlling the retail price. I think 2 that is something we are talking about may be price 3 fixing. And then you can see under there it says, 4 "Need to address, what to tell Trend: New hall 5 pricing must be approved by GTI." That doesn't sound 6 like an arm's-length transaction if a manufacturer is 7 requiring approval and telling their distributors 8 what they're supposed to price. 9 Now, in regards to what -- what's in the 10 marketplace, what is considered and what do people 11 consider to be price fixing? Well, one of the Dallas 12 Morning News articles has some information in here, 13 it says, "In a letter sent to the Commission in 14 March, Game Tech's attorney said the company could 15 not be held liable for price fixing because State law 16 does not forbid pricing agreements between 17 manufacturers and distributors. Only forbidding 18 activity, the lawyers wrote, in pricing agreements 19 between two or more manufacturers or between two or 20 more distributors." Well, I think that's kind of 21 nonsensical. If you take a look at the situation, 22 what is the difference between two distributors 23 sitting in a room and saying, "We are going to take 24 this new product out and we're going to charge $3.25 25 per use, okay? You do that too, right?" 0031 1 "Yeah, we'll do that together." 2 Okay. That would be price fixing and that's not 3 an open market competitive situation. It's no 4 different than the manufacturer going to Distributor 5 A and saying, "You're going to put that product out 6 for $3.25. Distributor B, you're going to put that 7 product out for $3.25. And Distributor C, you're 8 going to put that product out for $3.25." The end 9 result is exactly the same thing. It is not an open 10 market. The price is being controlled and the 11 charities are being detrimentally affected. So it's 12 a nonsensical argument, in my opinion, to say a 13 manufacturer to manufacture can't agree but a 14 manufacturer to distributor can agree. Your end 15 result is exactly the same information. And just to 16 get a perspective on what we are talking about there, 17 in some testimony that we have had before several 18 different venues, I'm looking here at some 19 information -- some quotes from the Chairman of the 20 Board of Game Tech. He was asked some questions that 21 said -- reading from a document, it says, "New hall 22 pricing must be approved by GTI. Did I read that 23 correctly?" This is Richard Fedor, Chairman of the 24 Board, says, "Yes." 25 "Did you have any discussions with 0032 1 Mr. Hieronymus about Game Tech requiring approval of 2 new hall pricing from Trend?" 3 Mr. Fedor's answer, "Any pricing had to be 4 approved by Game Tech." 5 And it goes on to say, "Isn't it true that once 6 Trend understood what Game Tech's minimum return was 7 that Trend was free to price to its customers however 8 it saw fit?" 9 Mr. Fedor's answer, "No." 10 So here we are having the Chairman of the Board 11 of Game Tech saying, hey, even though my distributor 12 knows what my minimum return is, they have to price 13 the way we tell them to price. In my opinion, that's 14 price fixing. And that's exactly what a rule needs 15 to be written in trying to prevent, but that's going 16 to be difficult. 17 It goes on to say, "It's your belief Game Tech 18 had the right to require Trend to come to Game Tech 19 to get Game Tech's approval for whatever pricing 20 Trend priced to its charities?" 21 "Correct," that's Mr. Fedor. 22 Question: "You just testified a moment ago 23 there's a price fixing law in effect in Texas, 24 correct?" 25 He says, "Correct." 0033 1 "And you understand that that price fixing law 2 says in essence Game Tech can't be involved in 3 controlling the price Trend charges to Trend's 4 charities, correct?" 5 The very intelligent man who is the Chairman of 6 the Board of Game Tech says, "Correct." 7 Seems a little contradictory to his previous 8 comments. But I think that kind of outlines, you 9 know, what is price fixing. That's one decision that 10 needs to be made. Is a manufacturer telling a 11 distributor, you must price this product this way, is 12 that price fixing? I would say yes, it is. 13 In addition to that, here's some information 14 from the senior vice-president of Game Tech, Graham 15 Leonard. It says, "Okay. You know that if we were 16 to discuss the three-month period from June to August 17 of 2002" -- again, that puts a time context on how 18 long this has been going on -- "when Game Tech 19 terminated Trend's distribution agreement that on 20 average for every one of the types of equipment the 21 unauthorized price was generating more revenue to 22 Game Tech than other pricing, correct?" 23 "I don't know that," is Mr. Leonard's answer. 24 "You don't know that?" 25 "No." 0034 1 "Okay. We'll explore that later. Would it be 2 significant for you to know that?" 3 "No, it's irrelevant." 4 "Tell me why it's irrelevant that the amount of 5 money that Trend was earning for Game Tech under the 6 unauthorized pricing was more than the amount of 7 money that Trend was earning for Game Tech under the 8 2001 pricing schedule. Why is that irrelevant?" 9 Mr. Leonard's answer was, "Two reasons. One, it 10 was under a pricing scenario that was not agreed to 11 by the parties." 12 You know, I submit to you that's price fixing. 13 And those are the kind of activities that need to be 14 stopped or at least curtailed. Again, Game Tech 15 doesn't agree that that is price fixing, at least 16 according to this quote in the Dallas Morning News. 17 There's probably only a couple of ways you can 18 stop price fixing in the State of Texas. One is you 19 have to have some distributors that have the 20 integrity to say, "I'm not going to unfairly prey on 21 nonprofit organizations." They have to have enough 22 backbone to stand up and say, "I will not do the 23 bidding of the manufacturer." But we did have one 24 distributor that did that in the State of Texas and 25 his business was blown to bits. So having that 0035 1 happen again is probably a stretch. I'm not certain 2 that a distributor would be willing to risk their 3 entire business again in that aspect. So what do you 4 do from there? Well, when you find out that that 5 activity has occurred, you have to have some 6 enforcement with some teeth. Okay? And if that 7 activity has occurred, what does that look like? We 8 are not supposed to go into the facts of what's been 9 done with the settlement, et cetera, et cetera, but I 10 will submit to you that the current settlement that 11 is on the table does not have teeth. No one is held 12 accountable. Nobody is admitting guilt. All they're 13 doing is paying pennies on the dollar. I think the 14 number was 11 percent of what was considered 15 overcharges, which, by the way, the Lottery 16 Commission determined was millions and millions of 17 dollars. And I can address the question that you 18 rose, why the difference in the Lottery Commission's 19 numbers and Mr. Hieronymus' numbers. The number 20 difference is that I think the Lottery Commission 21 testified at the oversight committee that it was a 22 limited scope of the investigation. They didn't go 23 completely market-wide. They only went with the 24 information that they had, and that's all they could 25 do. And that number was, you know, in the millions. 0036 1 Mr. Hieronymus' is exponentially higher than that 2 because he has broadened it into the entire 3 marketplace. So that would -- I think that is the 4 answer to your question of why those numbers are 5 different. 6 But anyway, like I say, I've got -- I think the 7 charities in the State have been slapped on one hand 8 with exorbitant prices. And Lottery Commission has 9 even determined it's in the millions of dollars. But 10 at the same time, if you don't do an enforcement with 11 teeth, they're getting slapped again, in my opinion, 12 by the Lottery Commission by saying, we didn't 13 determine this was important enough to get these 14 people out of this business. And I think that it's 15 very important that that enforcement does have teeth. 16 And whatever rule is written it needs to have teeth. 17 But it's going to be difficult. I mean, you know, 18 you try to restrict revenue share agreements, maybe. 19 Well, that's difficult because that allows the 20 distributor to be flexible, it allows the 21 manufacturer to be flexible in how they do some 22 pricing. 23 In addition, it's very simple for a 24 manufacturer, as we looked in this document, that 25 they go into a certain marketplace and go, we think 0037 1 you can get $4 a use in this market, therefore in 2 this market it's going to be $4 a use, regardless of 3 revenue share or not revenue share. There's ways to 4 get around it if you said you cannot do revenue share 5 agreements. If you get in a situation where you 6 write a rule that the manufacturer must provide the 7 distributor the units for a fixed cost, now the short 8 session halls that may only play six or seven 9 sessions are stuck with the pricing that the 10 distributor is not being able to be flexible on 11 because there's a rule in place that had mandated 12 that the price has to be the same to the distributor 13 no matter where they put the product out. And I 14 don't think that's something that's fair and 15 equitable to the nonprofits out there. 16 Anyway, I hope that gives a little bit of 17 context. There's a lot of other information I think 18 the Lottery can provide to you all to understand 19 exactly what we're talking about as far as the 20 activities in the marketplace and what's been going 21 on. But it's been going on for a very long time and 22 these people need to be held accountable. And one of 23 the ways to do that is to write a little bit tougher 24 rule, but it's really about enforcement and they 25 really need to have some tough enforcement. And I 0038 1 would just suggest that the BAC, if it's within their 2 parameters to be able to do it, would suggest to the 3 Lottery, hey, there needs to be a public hearing of 4 the facts on this and there needs to be some teeth to 5 the enforcement. Because, in my opinion, if there's 6 no teeth, not only is it not a deterrent, it's an 7 invitation. Well, you can come and you can -- our 8 findings are you've stolen millions and millions of 9 dollars or overcharged charities millions and 10 millions of dollars, but all you have to do is give 11 us, you know, 11 cents on the dollar back and it's 12 okay. To me, that's an invitation to do the activity 13 again. 14 Anyway, I'm available for questions, if you have 15 any. 16 MS. TAYLOR: Trace, you've got a lot of 17 specific information that you've been providing to 18 the committee. And I know a lot of us aren't really 19 all that aware of what's been going on. With the 20 specific information, are you -- would you -- I mean, 21 I'm looking at the work group. Are you wanting to 22 also be on the work group? 23 MR. GRAY: You know, I would entertain that 24 again if it's something that -- I do not live in 25 Austin, so if it's something that's done 0039 1 telephonically, sure, I would be willing to 2 participate in that. 3 MS. TAYLOR: Okay. Is there any problem 4 with that? 5 MR. ATKINS: (Shakes head.) 6 MS. TAYLOR: Okay. Then, Trace, I'd like 7 to go ahead and put you on the work group. There's a 8 lot of information, and I don't think this is a place 9 where we are able to act on it, and certainly not act 10 in any way today. 11 MR. GRAY: Certainly. 12 MS. TAYLOR: I mean, it needs to be 13 something that the work group spends, you know, many, 14 many hours on because there's so much education that 15 they're all going to need to be able to make any kind 16 of intelligent decision on it. 17 MR. GRAY: Absolutely. 18 MS. TAYLOR: I just -- today is not a day 19 we're going to be able to do that, but I would love 20 to invite you to be on that work group so that you 21 can spend all those hours and come forward with some 22 very thoughtful rules that will put in place what we 23 all feel needs to be put into place. 24 MR. GRAY: Absolutely. And the purpose of 25 my comments today was to give a little context to 0040 1 what we are talking about here. You guys are kind of 2 in a bit of a vacuum in regards to trying to write a 3 rule about something that you don't even know what 4 the conduct has been in the marketplace. It's a 5 little difficult to write a rule to stop conduct 6 that's detrimental to charities if you don't know 7 what that conduct is. And that's certainly something 8 that needs to be looked at. And, again, if -- if in 9 the enforcement side of things this was done in an 10 open way in which all of the hearings of the facts 11 were available to the public, which they are not 12 right now, then we would be able to get a little bit 13 better context on what we're talking about. But 14 that's not the way things have proceeded so far. 15 MS. TAYLOR: Okay. The other thing that I 16 need to remind this work group is that years ago -- I 17 mean, this is going to have to be a rule that's going 18 to have to be very, very carefully thought out, 19 because it could have some impacts and some 20 implications that the other two Steves were both 21 talking about. I remember years ago when we had a 22 meeting in Corpus. We were having a problem with 23 pricing with the $2 books and stuff that when the 24 Commission -- and the Lottery Commission came to 25 Corpus, one of the things they said is that actually 0041 1 the charities in a hall agreeing to the price of 2 their books was price fixing. So this is something 3 that needs to be very, very careful or we could do 4 some things that we don't want to do. 5 MR. GRAY: Absolutely. I think Mr. Bresnen 6 was right on target about you have to look carefully 7 at how you limit business practice if in the end it's 8 going to affect the nonprofits. I mean, they're the 9 ones that in the end are affected by all of this. So 10 we have to be very careful in how we frame things so 11 that they're not put in a situation to where we 12 restrict certain business practices that may be 13 beneficial to them. 14 MS. TAYLOR: Absolutely. Are there any 15 other questions? 16 MR. WHITTINGTON: I've got a comment. What 17 I wanted to say -- I know it's going to be some -- 18 it's going to be a price, a fixed price somewhere 19 from the distributor/manufacturer. Okay? But what 20 gets me is when a charity is going out of business 21 and they are paying 25,000 in computer costs and they 22 need 10,000 to pay their taxes. That bothers me a 23 lot. 24 MR. GRAY: Absolutely. I understand. 25 MR. WHITTINGTON: I think there should be 0042 1 some type of guideline where a distributor can talk 2 to the charity and work something out if the hall is 3 about to go under and having a bad time and have some 4 kind of flexibility to go down on that fixed cost. 5 MR. GRAY: Absolutely. 6 MR. WHITTINGTON: Because I know it's going 7 to be a fixed cost in pricing, got to be. You can't 8 say I'm going to charge $3, I'm going to charge two, 9 it's got to be 2.50 or something fixed. But there's 10 got to be some flexibility somewhere where they can 11 keep these charities in existence. 12 MR. GRAY: Absolutely. And a distributor 13 needs to be able to make that decision that, hey, I 14 can be flexible as opposed to being dictated to them 15 about what their flexibility is by the manufacturer. 16 MS. LOPEZ: And I agree with Larry because 17 I believe that charities do have, you know, to wear 18 sometimes three hats. We have to have a partnership 19 that allows us to do business with our distributor 20 and we have to, of course, follow all the rules and 21 regulations that the Lottery Commission has upon us. 22 And, you know, we have to work through all of those 23 different partnerships just to be able to raise 24 monies for our organizations. So I think that all 25 the components again that all the people working 0043 1 together is what really needs to happen here. We 2 have to all pull together and see what's going to be 3 most beneficial for everyone involved. 4 MR. GRAY: And I think it's really 5 important to note again that we are not talking about 6 $10,000 here. We are not talking about 50,000. We 7 are not even talking about a million. We are talking 8 about millions and millions and millions of dollars 9 that these nonprofits may have been detrimentally 10 overcharged. Okay? So this is a huge important 11 issue, not just for this one instance, but going into 12 the future and putting some kind of barriers in place 13 to stop that type of behavior. There has to be some 14 deterrent, and there currently with what's 15 progressing the way it is, there's not a deterrent. 16 MR. WHITTINGTON: I understand that, too, 17 but still again, business is business and they drive 18 the price too low, they can't exist and we won't have 19 no computers. 20 MR. GRAY: You're absolutely correct. 21 MR. WHITTINGTON: In today's time -- 22 innovations, it's just -- it's all about computers 23 now. And everybody got to eat. 24 MR. GRAY: Absolutely. 25 MR. WHITTINGTON: The manufacturer and the 0044 1 distributor. So they can't go too low, but there's 2 got to be some type of flexibility where we can talk 3 out and work things out to keep each other in 4 business. 5 MR. GRAY: Absolutely. 6 MR. MOORE: I'd like to make a point with 7 Larry and Rosie. I mean, I don't think a week goes 8 by that I'm not negotiating with some hall in this 9 state on a better price. It's an ongoing thing. 10 It's been going on for ten years and will probably go 11 on for another ten years. 12 MR. WHITTINGTON: I know you have done that 13 with us on several occasions when we came to you and 14 asked. 15 MR. MOORE: Absolutely. 16 MS. LOPEZ: And I think the way the market 17 and the economy is changing not only in the state of 18 Texas but all over throughout each different 19 community that that also has to be -- as mentioned 20 before by both Steves, you know, the market analysis, 21 because I think that's really crucial that that be a 22 part of this work group consideration because of the 23 fact that each city in Texas is totally different. 24 West Texas is totally different from East Texas, 25 South Texas, I mean -- 0045 1 MR. GRAY: Absolutely. Again, it goes 2 back, the distributor needs to be able to have that 3 flexibility to do what they need to do. 4 MR. DOUGHERTY: From an engineering 5 construction standpoint where I came from, why can't 6 there be competitive bidding on these items per 7 locale? I mean, Houston and Austin and Dallas may 8 all have different social situations where their -- 9 their price could be lower or higher than the others. 10 And why can't that be a sealed competitive bid and 11 not just fixed the way -- where I'm coming from. 12 MR. GRAY: As a distributor, I will say 13 that does happen. When an organization is looking 14 for electronics, they go out and they look in a 15 couple of different places to get product. I think 16 what we are talking about here is specific products 17 being fixed at a price from the 18 manufacturer/distributor. Even though the 19 manufacturer may say, hey, I need $20 a week for this 20 product, the distributor should be able to go out and 21 say, okay, I can do with this what I want, but that's 22 not what's been happening or apparently that's not 23 what's been happening. What's been happening is I 24 get 20 bucks, but I'm not going to let you sell it 25 for less than 40 bucks. 0046 1 MR. MOORE: I'd like to reply to that, 2 Jack. There's other distributors in the State that 3 handle other products other than Game Tech products. 4 And in fact, Trace and I bid on the same charities 5 before. And he offers another product that's 6 competitive to ours, and the charity -- it's up to 7 the charity to choose the product they want to use. 8 MR. GRAY: That's correct. Absolutely. So 9 the bid process is in place, more or less. 10 Absolutely. It is in place. But this isn't talking 11 about that level. This is talking about between the 12 distributor and the manufacturer. Artificially 13 inflating that price that the distributor takes to 14 the charity. 15 MR. DOUGHERTY: Thank you. 16 MS. TAYLOR: And Steve Hieronymus. 17 MR. HIERONYMUS: Hi, I'm Steven Hieronymus. 18 I thought we needed a break between three Steves in a 19 row, might be just a little bit much, so I thought we 20 needed a break there. I'll try to be real brief. 21 This issue came back down, and unfortunately, I've 22 seen -- I'm the center of the storm to some extent 23 because I was the distributor back in 2002 that said 24 no to the control issue, and that's what precipitated 25 -- I filed the original complaint that has brought 0047 1 this all to a head. And I was -- I was required by 2 Game Tech, which controls the majority of the Texas 3 market, far and away there is a great deal of market 4 control. And I was told to rescind or amend my 5 pricing to my customers to a price that they 6 dictated. And, you know, they wanted to raise the 7 price. And, you know, I refused and my contract was 8 terminated. I've been involved in a multiple year 9 legal fight. And last November I won a multimillion 10 dollar judgment against Game Tech as a result of it, 11 but it's been an awful, awful fight. And they -- 12 they are very aggressive litigators, but that's what 13 prompted all of this and investigations that have 14 happened that have concluded and some that are still 15 ongoing. 16 I believe from the testimony at the Capitol the 17 other day that the investigation into a couple of the 18 distributors that are involved was supposed to wrap 19 up at the end of July, so I'm not sure where that 20 process is. I know they have to refer it to the 21 enforcement attorneys. They have to review it, make 22 a recommendation and ultimately it will end up at 23 Billy's desk to decide whether it's -- you know, how 24 to proceed. The next step would be the 504 notice of 25 opportunity to show compliance letter. Game Tech has 0048 1 already received one, and that matter has been in 2 front of the Commission now for the last two months. 3 And I believe -- is it August 15th, Billy, is that 4 for sure yet? 5 MR. ATKINS: (Nods head.) 6 MR. HIERONYMUS: Okay. I checked this 7 morning and it wasn't posted. But -- and a decision 8 is supposed to be made on a proffered or a tendered 9 settlement on the part of Game Tech for these 10 violations. The testimony is that -- that's in the 11 public record right now is that the Commission 12 determined that there was at least two and a half 13 million dollars worth of overcharges to the charities 14 as a result of the violations. And Game Tech, 15 without acknowledging guilt, evidently, has proffered 16 a $250,000 settlement to the issue. And I have been 17 very active in asking the Commission to reject that 18 settlement. I think it's insufficient. I think it 19 was not well received by either the Legislature or 20 some of the initial comments from the Commissioners 21 was kind of a cost benefit analysis. You know, if it 22 only cost you -- if your penalty is 11 percent versus 23 the gain you got, that's a problem. 24 My concern is maybe a little bit more detailed 25 than that as I think that, you know, charities all 0049 1 the day -- you know, they get license revoked for, 2 you know, a small violation, a $500 mispayment, they 3 get a revocation. The difference is they can't hire 4 four or five major law firms. You know, you wouldn't 5 believe the legal -- the other day I think I was 6 calculating, it was about $3,000 an hour worth of 7 attorneys here representing Game Tech. And they've 8 hired Kent Hance and, you know, all the top, you 9 know, people in the State to come cut this deal to 10 buy them out of the trouble. And what I have 11 suggested is what needs to happen is everybody needs 12 to slow down, let the administrative process work. 13 We shouldn't be cutting a deal that's secret, we 14 aren't allowed to know the terms of this. What has 15 sort of come out is obviously they're not accepting 16 guilt because of what they've said. And let me take 17 one step back. The definition of the law is actually 18 fairly well established. I think one of the Steves 19 alluded to there's been multiple AG opinions, there's 20 been an interpretation at the Administrative Law 21 Judge and there's also a federal court that has made 22 an opinion that if a manufacturer in any way tries to 23 influence or affect the price that a distributor 24 charges a charity, that is price fixing under Texas 25 law. That is a federal court decision on that 0050 1 matter. And so for -- and Game Tech has acknowledged 2 that, as Mr. Gray testified, they've even 3 acknowledged that so I was kind of surprised when I 4 saw their quote in the paper now saying, oh, the law 5 doesn't apply. The law does apply, the law is very 6 good. You need to be very careful in the rulemaking. 7 What I have encouraged is that the sole process 8 reform, that the Commission reject that, allow the 9 sole process to go forward. That would also generate 10 information for you and other members of the public 11 to weigh into this to better analyze what the problem 12 is and how best to address it. It also gives the 13 charities a better opportunity to recover because, 14 you know, at some point Game Tech may decide, you 15 know, our license is at risk. We may ought -- we may 16 want to proffer a different settlement. Maybe we'll 17 pay the State a quarter million dollars, but I'll 18 tell you what, we may decide that we could offer two, 19 three, $4 million as a rebate to the charities if we 20 want to keep our license. The State can't offer 21 that. The State can't levy that as a fine, but 22 Game -- they could sure as heck accept that as part 23 of a settlement. And that would be the quickest way 24 for -- and then any charity who's used their 25 equipment over the time frame, it could be a very 0051 1 easy process, they could put that in a trust and 2 charities could apply to get that money back. That 3 would be a good way to do it. If the Commission 4 accepts this settlement, the other way is, of course, 5 civil litigation which I've seen some of the stuff 6 and, you know, there are people that are offering to 7 sue Game Tech and their distributors. There's an 8 expense associated with that because they're going to 9 take, you know, 40 percent or whatever. But if 10 that's the only way, that may be the way to do it. 11 But if Game Tech gets the settlement, it's going to 12 hurt. I guarantee you Game Tech will use that and, 13 oh, look, the lottery settled with us. It's almost 14 like a double slap. We have let them off the hook 15 and we're not getting them to acknowledge the guilt. 16 Mr. Hance was challenged, I think it was at his 17 last thing, saying you're -- we're -- flat out, we 18 are not acknowledging guilt, yet Billy was addressed 19 by the Commission saying, you don't agree with that, 20 there was violation, and Billy acknowledged that 21 there was violation. So it's a real issue and I want 22 you to understand this is what's prompting all this. 23 It's been something that's gone on -- you know, 24 probably for all concerned, if I had just gone along 25 with it back in 2002, we probably -- you know, would 0052 1 have been a heck of a lot better for me financially, 2 I know that. And just -- you know, I don't recommend 3 litigation to anybody. It's not been fun. But, you 4 know, and I -- probably, you know, I could have gone 5 along and life would be good, but it's not right, and 6 it's something that does need to be addressed, 7 particularly when you've got a manufacturer as strong 8 and powerful as Game Tech. I don't think -- you 9 know, at one point, I know they had over 80 percent 10 market share of electronics in this State, and so 11 they had a great deal of control. And they had three 12 distributors, Trend Gaming Systems, More Bingo 13 Supply, Thompson's Allstate. Trend refused to 14 participate. And you need -- you know, so you need 15 to know what's going on. And the rule writing is -- 16 you know, I have some trepidation about it, but you 17 need to know that the law is well understood, it's 18 been well interpreted, and, you know, maybe some 19 additional clarification could be done, but you need 20 more information and you need more facts. I also 21 hope you guys will come to the August 15th meeting, 22 too. I think it would be good for the Commissioners 23 to hear that. Thank you. 24 MS. TAYLOR: Thank you. Does anybody have 25 any questions? 0053 1 MR. WEEKLEY: Yes, I have one. It would be 2 for the work study group. When they consider the 3 rule and all, there's such a thing as price fixing on 4 the high side, but there's also price fixing on the 5 low side. A dominant manufacturer or distributor 6 could utilize predatory pricing to run competition 7 out of business, so I think they ought to consider 8 that as well. 9 MS. TAYLOR: Any other discussion on this? 10 When would the work group like to -- Sandy, do you 11 want the work group to set up a meeting now or are 12 you going to call and you'll set it up with them at a 13 different time? 14 MS. JOSEPH: I'll be setting up the 15 meeting. I will notify everyone. I believe I have 16 contact information for everyone. 17 MS. LOPEZ: The August 15th meeting, what 18 time is it and is it obviously here at this location? 19 MR. ATKINS: It will start at 8:00. 20 MS. LOPEZ: 8:00 o'clock. 21 MR. DOUGHERTY: I have a question just for 22 information on Mr. Rose's memo that we received. I 23 know what Game Tech's industry is. What does K&B 24 stand for? They refer to it here but -- 25 MS. TAYLOR: Good Time Bingo. Are you 0054 1 familiar with Good Time Bingo? 2 MR. GRAY: That's another name for Good 3 Time Bingo. They're a distributor here in Texas. 4 MR. DOUGHERTY: What name? 5 MR. GRAY: Good Time Bingo. 6 MR. DOUGHERTY: Good Time Bingo? 7 MR. GRAY: Well, now it's Good Time Action 8 Games. I think they changed their name again, so 9 that's just one of their DBAs. 10 MR. DOUGHERTY: Okay. Thank you. 11 MS. TAYLOR: Okay. If there's no other 12 discussion, we are going to at this time, unless 13 anybody has a problem with it, skip down to Item 14 Number 7, "Report and possible discussion on the 79th 15 Legislature." And we would like to welcome 16 Commissioner Clowe back. We missed him greatly. 17 (Commissioner Clowe returns.) 18 MS. TREVINO: Good morning, Madam Chair and 19 Members, the Committee. Thank you for taking this 20 item out of order. I appreciate that. 21 For the record, I'm Nelda Trevino, the 22 Governmental Affairs Director for the Agency. And I 23 appreciate having the opportunity to provide you 24 report on the 79th Legislature. Included in your 25 meeting notebook are three Legislative tracking 0055 1 reports. The first report includes bills the Agency 2 was tracking and monitoring during the regular 3 Legislative session. And these bills are bills that 4 have been enacted. The second report includes bills 5 the Agency was monitoring from the first called 6 special session, and the last report includes bills 7 from the second called session. And at this time I'd 8 like to provide a brief summary on each of these 9 Legislative sessions. 10 As you were aware there was no Legislative -- no 11 legislation enacted from the regular session that 12 directly impacts the operation or administration of 13 charitable bingo. Additionally, the Agency's Sunset 14 Bill did not pass; however, there was a provision 15 contained in House Bill 1116 that extends the 16 Agency's Sunset date and continues the Lottery 17 Commission until 2011. 18 Also there were three bills related to 19 charitable raffles that were enacted, and they are 20 House Bill 541, House Bill 659 and Senate Bill 766. 21 And it's my understanding that the upcoming issue of 22 the Bingo Bulletin will have a summary of legislation 23 considered during the regular session related to 24 charitable bingo and charitable raffles and it would 25 include a brief description of each of those bills 0056 1 and the status at the end of the session for each one 2 of those bills. 3 The first called special session convened on 4 June 21st and ended on July the 20th. And you will 5 note on the tracking report for the first called 6 session that we were tracking and monitoring about 19 7 bills. While the following bills were not enacted, I 8 do want to mention some legislation that was filed 9 during the first called session that is of interest, 10 I think, to each of you. First of all, House Bill 58 11 by Representative Keno Flores authorizing the 12 operation of video lottery games on behalf of the 13 State and the creation of the Gaming and Boxing 14 Commission. House Bill 80 by Representative Keno 15 Flores amending the Lottery Commission Sunset date 16 from the year 2011 to 2007. House Bill 101 by 17 Representative Tony Goolsby authorizing the Agency's 18 Commissioners to be full-time compensated positions, 19 rather than unpaid volunteer positions. Senate Bill 20 38 by Senator Ken Armbruster authorizing electronic 21 pull tab bingo. Senate Bill 46 by Senator Ken 22 Armbruster authorizing the operation of video lottery 23 at race tracks and on Indian tribes. And Senate Bill 24 76 by Senator Shapley authorizing certain nonprofit 25 organizations organized by recognized Indian tribes 0057 1 to conduct bingo games. And again, I just wanted to 2 mention these bills. None of these bills passed 3 during the first session and none were enacted. 4 The last report in your notebooks for the 5 second -- is from the second called session and this 6 session convened, as you well know, on July 21st. 7 And there are a few bills that have been filed this 8 session that I'd also like to point out. First is 9 House Bill 37 by Representative Goolsby. And this 10 bill is identical to the bill that I just mentioned 11 that was filed during the first session authorizing 12 the Agency's Commissioners to be full-time 13 compensated positions rather than unpaid volunteer 14 positions. And the other bill is Senate Bill 34, and 15 that is not noted on your tracking report, and that's 16 a result of when we provided the notebook material 17 that bill had not been filed yet, but the bill is 18 similar to a bill that's been filed in the past and 19 it authorizes the operation of video lottery at race 20 tracks and on Indian tribes. 21 And that concludes my report, and I'll be happy 22 to answer any questions that you may have. 23 No questions? 24 MS. TAYLOR: No questions. Thanks, Nelda. 25 MS. TREVINO: Thank you very much. 0058 1 MS. TAYLOR: We'll go back to Item 2 Number 4, "Report and possible discussion and/or 3 action on the proposed amendments to 16 TAC 402.102 4 pertaining to the Bingo Advisory Committee." 5 MS. JOSEPH: Again, for the record, my name 6 is Sandy Joseph, Assistant General Counsel. On 7 July 11, 2005, the Commission voted to initiate 8 rulemaking proceedings to amend Commission 9 Rule 402.102 Paragraph J pertaining to the Bingo 10 Advisory Committee. The proposed amendment would 11 change the date for automatic abolishment of the BAC 12 from August 31st, 2005 to August 31st, 2006. The 13 rule was published in the Texas Register on 14 July 29th, 2005, and it is displayed on the 15 Commission's web site. Comments will be accepted on 16 this proposed rule for a period of 30 days. That 17 means that the comment period will end on 18 August 28th, 2005. Written comments on the proposed 19 rule will be accepted until that time and they may be 20 submitted via the Internet or in writing or by fax. 21 I wanted to bring this to your attention so that you 22 can consider whether or not you may wish to submit 23 comments. Are there any questions? 24 MR. WHITTINGTON: Yes. I just wanted to 25 say as being a part of the BAC, these people are here 0059 1 voluntarily to support bingo in Texas. I feel as 2 long as there's bingo in Texas, there should be a 3 Bingo Advisory Committee, because I don't feel bingo 4 should be ran in an office in Austin, Texas, without 5 somebody being involved in bingo out in the public to 6 bring back to those people and talk to them and tell 7 them what bingo is all about. And they come together 8 like we are now and come up with some type of 9 conclusion on everything to make bingo work in Texas. 10 So that's just my beef when it comes to the BAC. 11 These people are here voluntarily. They're here for 12 a reason, to support bingo and help bingo in Texas 13 along with the staff. I think it should always be 14 there. 15 MS. LOPEZ: I agree with Larry. 16 MS. TAYLOR: Any other comments or 17 questions? 18 Thanks, Sandy. 19 MS. JOSEPH: All right. Thank you. 20 MS. TAYLOR: Any public comment on this 21 subject? 22 If not, we'll go on to Item Number 5, "Report 23 and possible discussion and/or action on public 24 service announcements." 25 MR. ATKINS: Madam Chair, Members, if I can 0060 1 provide some brief background information. This was 2 an item, the concept of public service announcements 3 was something that was discussed briefly at the end 4 of your last commission meeting. And based on that 5 discussion, I went back and met with Bobby Heith who 6 is the director of media relations for the Texas 7 Lottery Commission. And Bobby and his staff very 8 enthusiastically responded to the idea. Just so you 9 know, the media relations division is -- they're kind 10 of the public face of the Lottery Commission. 11 They're the media's first contact. They write and 12 distribute the press releases for the Lottery, as 13 well as charitable bingo. Media relations has in the 14 past put together a number of what are referred to as 15 video news releases, VNRs. They've done several on 16 charitable bingo. And so, again, Bobby and his 17 staff, that includes both the written, as well as the 18 video portion, were very receptive to the idea. And 19 Bobby agreed to come today and discuss with you in 20 general public service announcements, some different 21 ideas and solicit some ideas from the BAC and 22 hopefully also maybe get some volunteers to work with 23 his staff as they move forward on this process. 24 Bobby has been at the Agency, a couple of years? 25 MR. HEITH: Two years. 0061 1 MR. ATKINS: And comes to us from the 2 Railroad Commission, so he has extensive experience 3 in this area and I will at this point turn it over to 4 him. 5 MR. HEITH: I guess all I need to ask is if 6 there are any questions after all that. 7 MR. ATKINS: I'm sorry. 8 MR. HEITH: That's okay. Good morning, 9 Madam Chair, Members. As Billy said, I'm here today 10 to just give you a real brief summary about public 11 service announcements. And it's relate -- again, 12 it's regarding conversations Billy and I have had. 13 And I will give you a little bit of information this 14 morning about the process, how it works, what you can 15 maybe expect from the distribution of public service 16 announcements or video news releases, as we refer to 17 them from time to time. And also, in your notebook, 18 I just put a little -- this is a report that we get 19 daily. It is available to us daily, and it's news 20 stories that have run in the previous 24 hours from 21 electronic media sources. And that's how we can tell 22 if it did indeed run. 23 But as I -- if you have any questions, I'll -- 24 just stop me at any time. Also, we have four 25 examples of what we can do as far as producing these 0062 1 video news releases or public service announcements. 2 In my area I have two extremely talented individuals 3 that we can get a real quick turnaround on these. 4 And I'm going to ask you all for input either to me 5 directly if you have any ideas on how we can -- what 6 you all would like to see in a public service 7 announcement or video news release that you think 8 might be helpful in your communities, so just stop me 9 at any time for questions. It's going to be very 10 brief and then we'll look at this, and then if you 11 have any questions then, please feel free to ask me. 12 MR. DOUGHERTY: Let me start right now 13 before you start. 14 MR. HEITH: Okay. 15 MR. DOUGHERTY: Because I'm sure that's 16 going to be good. This information that was 17 furnished to us with all these announcements was all 18 95 percent lottery numbers. I didn't see anything 19 referring -- 20 MR. HEITH: Right. 21 MR. DOUGHERTY: -- to bingo, and a little 22 gambling in there at the end, so that was my comment 23 that -- where does the bingo PSA come into on these, 24 Billy? 25 MR. HEITH: That report was just an 0063 1 example. 2 MR. DOUGHERTY: Just an example? 3 MR. HEITH: Just as example -- 4 MR. DOUGHERTY: Okay. 5 MR. HEITH: -- as to how we track these 6 things, so we will know if they run or not, whether 7 it be at 6:00 o'clock in the morning or 2:30 at 8 night. 9 MR. DOUGHERTY: That was more to the point. 10 All right. Thank you. 11 MR. HEITH: And to be upfront about it, 12 more than likely, public service announcements are 13 going to run in the middle of the night. And this 14 gets back to the way we have to -- we put them out 15 there for information. And in this particular case 16 how the charities affect the local communities is one 17 way we can present these things. And -- because we 18 are really asking them to run something for free. 19 And when we produce these things we really have to be 20 careful that it does not come across as an ad, 21 meaning are we promoting a product, are we promoting 22 charitable bingo. We have to be very careful, 23 because sometimes if they think we are trying to get 24 free advertising, they definitely won't run it. But 25 if they think it's for information purposes for the 0064 1 public and they feel strongly about what we're -- our 2 message we want to get out, they'll run it. We have 3 had some good luck -- again, you don't -- you don't 4 see them during prime time, but they will run them. 5 And that report will reflect that and we can track it 6 to know if they actually did run the video news 7 release or public service announcement. 8 I'll give you a little bit of information about 9 how we do this. We buy blocks of satellite time six 10 nights a week to broadcast our drawings. For every 11 night, with the exception of Tuesday and Friday 12 nights, we have an extra drawing, that's when Mega 13 Millions is drawn, we have some dead air space, 14 meaning there's some time there, we have to buy it in 15 15-minute blocks, and most of that is just dead air, 16 because it doesn't take very long to hear those -- 17 those drawings. That's when if we want to put up a 18 public service announcement or if we've had a winner 19 come in and we think that the local stations might be 20 interested in seeing that, we'll tape it. We'll send 21 out a media advisory, and we can do this 22 geographically or we can -- by city, by area, or we 23 can do it statewide and say, at this time we are 24 going to put up the following public service 25 announcement and then give them a brief summary, how 0065 1 long it is, and then the satellite coordinates where 2 they can go and actually pull it down and use it. 3 They can tape it and then use it. So that's briefly 4 what we can do as far -- that's how we notify the 5 stations and make sure that they know when it's going 6 to be up. And then the next day, of course, the 7 report comes out and we can tell if they actually ran 8 it or not. We have got four examples here. And if 9 Phil will run that, I'll let you all look at these. 10 And then again, any questions, but I'd also encourage 11 you that if you have any thoughts about what you all 12 would like to see that might benefit your 13 organizations to contact me. 14 MR. WHITTINGTON: (Indicating.) 15 MR. HEITH: Yes, sir. 16 MR. WHITTINGTON: I'd just -- like I've 17 always said for three or four years now just 18 something that says, support your local charities, 19 play bingo. I mean, just something -- that's -- 20 that's short, that's sweet. I think it would help 21 Texas, period. 22 MR. HEITH: And I think you'll see that we 23 can do a lot with just that one idea. 24 MR. WHITTINGTON: Yeah. 25 MR. HEITH: And do it in a way that will 0066 1 not only make it entertaining but informative and 2 maybe encourage them to get out and play bingo. 3 MR. WHITTINGTON: The main thing is people 4 don't know bingo is charity. That's the main thing. 5 They don't know. They just don't know that one 6 issue. That one thing I think will increase bingo 7 attendance a lot, just by people knowing it's for 8 charity. 9 MR. HEITH: Okay. 10 MS. LOPEZ: Being that I come from a media 11 background, I'm very well aware of how advertisement 12 and public service announcements work. You mentioned 13 that this is something that you're doing at the 14 statewide level, you know, putting in your PSAs to 15 where they are actually generated to different 16 communities. Has it ever been considered that maybe 17 this needs to be done on a regional basis or on a 18 county basis to where these type of PSAs are given to 19 that local, you know, organization in that community 20 where, you know, being that we have such a wonderful 21 rapport with our local media that it is a lot easier 22 for us as an organization to go in and take it to our 23 local television station and they won't say no to us 24 to run -- 25 MR. HEITH: And we can do that. We can 0067 1 make it available to you and you can take the 2 responsibility to deliver it. 3 MS. LOPEZ: Because I think that sometimes 4 when they look at something coming at the statewide 5 level, you're right, they probably may not run it 6 because it's a PSA, but if I go in, you know, from 7 locally and go into my local television station, 8 because of the fact that they do give back to our 9 community, they're more apt to run it, the PSAs. 10 MR. HEITH: I think that's a very good 11 idea. I think that's a very good idea. 12 MS. LOPEZ: Okay. I just didn't know if 13 that was available. 14 MR. HEITH: Oh, yes. We can do that. 15 MS. LOPEZ: Thank you. 16 (Video runs.) 17 (Video completed.) 18 MR. HEITH: That last one was a radio PSA, 19 obviously. It wasn't a video news release. Any 20 questions? Comments? 21 MR. WHITTINGTON: Sounds good. 22 MS. TAYLOR: This is something you all were 23 deciding that you were going to make available to the 24 organizations? It's something -- is this just a 25 thought or is it something that's actually available 0068 1 at this time? 2 MR. HEITH: Well, this is something that 3 Billy brought to me and -- we have a biweekly meeting 4 and we discuss this. And, you know, we have got the 5 resources. The one, the get out to vote that was in 6 Spanish is something we reached out to the Governor's 7 office for, the Secretary of State's Office, too, 8 because we do have such great resources here to do 9 things like that. I think you can see the quality of 10 those is very good. 11 MR. WHITTINGTON: Yes. 12 MR. HEITH: And the talent, but also the 13 physical resources to do things. And we really need 14 to utilize them. And if we can utilize them in such 15 a way to not only help you all but to help other 16 State agencies. So, yeah, this is something we -- 17 MS. TAYLOR: Is there going to be a cost to 18 an individual organization or Rosalie wants to go and 19 ask for one to take to her station, is there going to 20 be a cost for that? 21 MR. HEITH: I don't know if we have to 22 charge for that or not. That's something I would 23 have to talk to legal about it. 24 MS. JOSEPH: We'll have to look into it. 25 MS. LOPEZ: I have another question. I 0069 1 mean, is that the only -- the only -- are there 2 several others to choose from for just charitable 3 bingo or is -- 4 MR. HEITH: Anything that you all think 5 would benefit your organizations, I think we can do 6 as long as it falls under charitable bingo -- 7 MS. LOPEZ: So you would design another PSA 8 if we, you know, came together with ideas? 9 MR. ATKINS: I think that's specifically 10 what Bobby wanted to do today is see if there were 11 individuals that would be interested in working with 12 his staff on the development of the PSA. 13 MS. LOPEZ: Okay. 14 MR. ATKINS: And your comment, I think, 15 Rosie, earlier is very meaningful, because one of the 16 discussions that Bobby and I had is that it could be 17 done in such a way that the PSA -- I'm not sure how 18 to say this -- could be individualized. There would 19 be a space -- for example, if you were going to run 20 one in Odessa or, you know, if you took the broader 21 Permian Basin market, you could have space on the ad 22 where they could insert some kind of graphic that 23 shows the amount of charitable distributions in that 24 area resulting from charitable bingo. 25 MS. LOPEZ: Or even a testimonial, you 0070 1 know, from an organization, you know, saying, you 2 know, with this money we were able to do this project 3 or whatever. Something to that effect. 4 MR. WEEKLEY: That would be -- 5 MR. HEITH: The cost is very minimal. I 6 mean, it really is, the supplies and manhours, if we 7 indeed consent to charge for that. The turnaround on 8 this can be very short, too. I mean, it's -- it 9 doesn't take long unless we have to travel to shoot 10 the footage or something like that. 11 MS. LOPEZ: Sure. 12 MR. HEITH: But a lot of it, we have a vast 13 amount of -- good size library of footage that we 14 pull from, too. I think one of the key things in 15 this might be to actually film charities and what 16 they do with the money that they receive within the 17 community. 18 MR. WHITTINGTON: Just like the last PSA I 19 saw, just the vocal part about charitable bingo. If 20 we have some kind of visual beyond that would be very 21 nice. Of course, you can go shoot a bingo hall -- 22 MR. HEITH: Right. 23 MR. WHITTINGTON: -- shoot people playing, 24 but don't shoot the name of that bingo hall, just 25 shoot the people inside of it so everybody can use 0071 1 it. 2 MR. HEITH: And that discussion has already 3 taken place with Billy and I and with staff about 4 getting something set up with charitable bingo to be 5 able to go into a bingo hall and actually shoot some 6 fresh footage. We do have some, but to do something 7 more up to date. 8 MS. ROGERS: One of our charities helps 9 children with glasses in a school. So along the same 10 line that the lottery shot, within the school, you 11 know, because I've had charities come and talk to me 12 that they have a hard time getting the parents to 13 know that they can help their children get glasses, 14 ones who are lower income. And that would be a 15 great -- you know, with this money, when you play 16 bingo, these children were helped with glasses so 17 they could go to school and read. 18 MR. HEITH: That would be good. These are 19 the kind of ideas we need to hear. 20 MS. TAYLOR: And I'm all for it's for 21 charity and people need to know that, but on a lower 22 level, I just don't think people go play the lottery 23 because they're financing their children's school. 24 And I think most people don't come and play bingo 25 because it's for charity. They want to know what 0072 1 they can win. 2 MS. ROGERS: Yeah. 3 MS. LOPEZ: You're right. 4 MS. TAYLOR: I mean, that's the only thing 5 I saw wrong with the PSA there. It didn't tell them 6 they could win -- I mean, they need to know they can 7 win cash prizes up to 750 in a game. That's what's 8 going to unfortunately draw them in, not as much as 9 it's for charity. I think they might spend more once 10 they know where it's going, but people don't play the 11 lottery because they want their children to go have a 12 better education. 13 MS. LOPEZ: No, that's right. 14 MS. ROGERS: That's right. 15 MS. LOPEZ: Exactly. 16 MS. TAYLOR: They want a chance to win 17 money. That's the bottom line. That's why they go 18 to Louisiana and the all the other states. They want 19 to win money. 20 MR. WHITTINGTON: So how much do you think 21 is given away through bingo in Texas every day? 22 MS. TAYLOR: I don't know. I realize that 23 needs to be part of it, but I think we can get 24 carried away talking about charity and bingo is good 25 for charity. 0073 1 MS. ROGERS: I agree. 2 MR. HEITH: I'm open to any ideas and you 3 all can contact me directly. 4 MS. ROGERS: Are we talking about forming a 5 work group to assist? 6 MS. TAYLOR: That was my next question. Is 7 that something we can do -- 8 MR. ATKINS: Yeah. I don't know if it 9 needs to be a work group, but if there are just 10 people that, you know, want to -- of course, you 11 know, we don't want a quorum, but if there are people 12 that want to -- you know, that Bobby can call on and 13 that will supply him with their comments and ideas. 14 MR. WHITTINGTON: I will. 15 MS. TAYLOR: I think probably any of the 16 members of the committee would be willing to be 17 available for your phone calls -- 18 MS. LOPEZ: Yes. 19 MS. TAYLOR: -- if we're not doing a work 20 group. I think we would all love to have some input 21 on -- 22 MR. HEITH: And I think as we develop this, 23 you know, we could bring it before the committee and 24 also let you all look at it before the -- 25 MS. TAYLOR: Great. 0074 1 MR. HEITH: And as you all were talking 2 earlier, we can produce these things where they have 3 definite edit lines where you can go in and change 4 them to fit that area. 5 MR. WHITTINGTON: Oh, great, great, great. 6 MS. LOPEZ: Also, in the Spanish version, I 7 think it's real important anything that's done, it 8 has to be done in Spanish, as well. 9 MR. HEITH: The voice you heard on the last 10 one was Leticia Vasquez who works in our area who is 11 our Spanish language specialist and she's very good 12 at that. She does most of our, well, if not all of 13 our Spanish language within the agencies. 14 MS. TAYLOR: Great. Well, we'd love it, 15 I'm sure. 16 MS. ROGERS: Thank you. 17 MR. WHITTINGTON: Thank you. 18 MR. HEITH: Thank y'all. 19 MS. TAYLOR: Thank you very much. We 20 appreciate it. 21 Any other public comment on this subject? 22 MR. DOUGHERTY: Suzanne? 23 MS. TAYLOR: Yes, sir. 24 MR. DOUGHERTY: Your statement about the 25 $750 limit, it can be changed. They split in half 0075 1 now and you can have two parts of a pull tab now and 2 you can win a thousand dollars and that might be 3 brought out. 4 MS. ROGERS: We do it where we can only win 5 475 twice. 6 MR. DOUGHERTY: And I've done it. I did it 7 last week. 8 MS. ROGERS: Not a thousand, only 475 9 twice. 10 MR. DOUGHERTY: Two parts. 11 MS. TAYLOR: Right. But they are actually 12 winning two prizes, two prizes of 500 each. Let's 13 not blur the line here. It's still by law 750 in a 14 single game. 15 MR. DOUGHERTY: Okay. You're still limited 16 to 750. 17 MS. TAYLOR: I think we should go on to 18 Item Number 6, "Report and possible discussion on 19 bingo financial information and statistics including 20 charitable distributions." 21 MS. MALUSCHKA: Hello. For the record, I'm 22 Janet Maluschka. I'm a financial analyst with the 23 Administration Division. And working with me is 24 Susan Beasley. She is a program specialist also with 25 the Administration Division. And we would like to 0076 1 show our latest PowerPoint presentation we did a 2 while back. This presentation will cover gross 3 receipts and attendance. 4 Our previous findings, just to summarize what we 5 covered in our first presentation to you, gross 6 receipts, you know, have been increasing since 2002 7 due to the introduction of the new style of instant 8 pull tabs. Prices have been increasing faster than 9 gross receipts due to the increasing prize payout 10 percentages. Net revenue has been declining as a 11 result of the increased prize payout percentages, but 12 were increasing in 2004. Total expenses have been 13 remaining fairly constant over this five-year period. 14 And reported charitable distributions have been 15 following the decline in the net revenue and leveling 16 off in 2004 but have consistently greatly exceeded 17 the required charitable distributions. 18 Moving on, we started looking at quarterly and 19 annual trends for gross receipts as well as 20 attendance and occasions and conductors. First of 21 all, let's look at gross receipts. For this 22 five-year period these gross receipts have been 23 highest in the first quarter of each year and overall 24 they increased in 2003 and again in 2004 to the 25 highest level during this five-year period. 0077 1 Moving on to the average amount spent by 2 players, the average amount spent has remained fairly 3 constant throughout each year. However, there was an 4 increase in the fourth quarters of 2002, 3 and 4. 5 Overall this amount has risen each year since 2000, 6 so you can see a line represents each year with the 7 quarters going across and each year's level is higher 8 than the previous. 9 Moving on to attendance, like gross receipts, 10 attendance is higher in the first quarter of each 11 year. However, attendance has been decreasing 12 annually during this five-year period. You can see 13 that each year is moving below the previous year. 14 When we move on to the average number of players per 15 occasion, again like the gross receipts in 16 attendance, this number is highest in the first 17 quarter of each year and overall has been decreasing 18 annually since 2000. We only went back to 2000 for 19 this analysis just to cover a whole five-year period. 20 Now, for the number of occasions, it has remained 21 relatively constant in the first three quarters of 22 each year, however fewer occasions were held during 23 the fourth quarters, possibly due to the holidays. 24 And overall the number of occasions has been 25 decreasing annually. 0078 1 For the average number of occasions per 2 conductor, this has consistently ranged between 23 3 and 26 over the five-year period, so there's been 4 very little fluctuation in this average number of 5 occasions that each conductor reports. Now for the 6 number of conductors reporting it tends to increase 7 throughout the year, but overall it has decreased 8 each year, except for this temporary rise you can see 9 during the fourth and third quarters of 2003. You 10 see that purple line goes over the 2002 lines in 11 those last two quarters. 12 Now, to summarize all of these and kind of pull 13 them together for you, first of all, we have the 14 gross receipts decreasing in 2001 and 2 and then 15 increasing in 2003 and 4, thanks to the new instant 16 style of pull tabs. And then we move on to the 17 average amount spent by players increasing in 2003 18 and 4, but more than the attendance decrease. And 19 you'll notice in that -- the difference columns 20 between 2002 and 3 and 3 and 4, you can see that the 21 percentage increase and the average amount spent per 22 player is greater than the change in the attendance 23 going between the years. For example, in 2002 and 3, 24 it increased 7.68 percent for the average amount 25 spent by player but the attendance went down only 0079 1 4 percent, thus contributing to the increasing gross 2 receipts. And for the average number of players per 3 occasion, that has been declining slightly each year. 4 There have been fewer occasions in total reported for 5 each year. And last but not least, our average 6 number of conductors is decreasing over these five 7 years. You know, you've got the average -- the 8 conductors, you know, having occasions and 9 contributing to the number of occasions, contributing 10 to the attendance. It kind of -- they all kind of 11 feed off of each other. So when you have fewer 12 conductors conducting the same number of occasions 13 then you have fewer occasions in total as well. 14 And then we have a graph to kind of pull our 15 main findings together. We have attendance, which 16 has been decreasing due to a declining number of 17 conductors which have been holding the same number of 18 occasions with fewer players attending each occasion. 19 And on top of that we've shown you the gross receipts 20 which have been increasing resulting from the new 21 style of instant pull tabs. So it's kind of 22 interesting to see why, yes, gross receipts are -- 23 are doing well, attendance is not, because we have 24 got -- we simply have fewer conductors out there 25 reporting activities. 0080 1 And that concludes our portion of this 2 presentation. We will continue to look into details, 3 you know, by region, by organization type, however, 4 so far these trends have been showing us pretty much 5 the same thing that the total picture is showing us. 6 If you have any thoughts or, you know, have any 7 insight as to why there's fewer conductors out there 8 conducting bingo, we'd appreciate your insight. 9 MS. LOPEZ: I'd like to comment on that. I 10 look at this very well put together report, and I see 11 the lack of attendance at charitable bingo. And my 12 personal opinion is that there's several factors. I 13 think, number one, is here throughout the state I 14 know that every city has to deal with businesses 15 dealing with eight-liners. I think that that's a big 16 part where we are losing a large customer base going 17 to those type of establishments. What can we do 18 about that? I know that it's up to each county to 19 address that. But as charities, we have a difficult 20 time in going forth and addressing this particular 21 issue. 22 The other major factor that I see the decline in 23 attendance is a lack of public awareness again about 24 charitable bingo. It all goes back to spreading the 25 word about charitable bingo. I think that's another 0081 1 factor. 2 And conductors, again, you're looking at -- you 3 know, charities are, you know, not renewing their 4 licenses for many different reasons. When charities 5 don't renew their licenses, they affect the lessor, 6 they affect the distributor and the manufacturer. It 7 could be a variety of reasons why charities don't 8 renew their licenses. It could be, you know, that 9 they've had too many regulations that, again, are run 10 by volunteer boards that don't want to deal with that 11 anymore. It could be they've been in, you know, many 12 violations and they decide not to renew, could be 13 that they just run out of money. I mean, there's 14 just a lot of factors. Could be that bingo is dying 15 in their community and they're just not making any 16 more money. So when I look at this attendance, I 17 look at this as a serious problem affecting our 18 business as a whole. I mean, what can we do to make 19 that better? Those are just my opinions. 20 MS. TAYLOR: In addition to what you said, 21 I think the advertising. Charities have had to 22 minimize the -- their expenses. And there's very few 23 things -- they're going to have to pay rent to a hall 24 somewhere in some amount just to keep the electricity 25 paid. They've got to pay the employees. They've got 0082 1 to pay for the paper. They pay for the electronics. 2 So what can they drop? Advertising. And that's 3 really only one of the few additional expenses that 4 charities have that they can or cannot -- that they 5 have the opportunity not to have. You know, they're 6 going to have to pay a bookkeeper. And advertising 7 goes every time. That's the first thing they drop is 8 their advertising budget. 9 MS. LOPEZ: One other comment I would like 10 to make, because we are in Odessa, the West Texas 11 area, the other main factor that has affected our 12 particular area, Hobbs, New Mexico opened up a 13 casino. There you go. People are leaving Texas to 14 go play 80 miles away from Odessa/Midland and they're 15 spending their money in New Mexico. That's why, 16 again, I bring that back to the table that it's so 17 important to get some public service announcements, 18 because if that happens, there will be other casinos 19 popping up around Texas and that money is going to go 20 out to New Mexico or Colorado or wherever it's going 21 to go to and it's not going to stay in our State. 22 MS. TAYLOR: But they don't have to leave 23 Texas. They can go jump on the Texas Treasure, which 24 is about 20 miles from my home. 25 MS. LOPEZ: Eight-liners. 0083 1 MR. WHITTINGTON: When did they open up the 2 casino in New Mexico? 3 MS. LOPEZ: It hasn't even been a year and 4 the last newspaper article that I read, they had 5 already met their goal of making the -- I think it 6 was, I want to say 40 -- and don't quote me wrong, 7 but they had already exceeded the goal of their 8 millions of dollars within like six months of being 9 in business. They had already overexceeded by 10 millions of dollars. 11 MR. WHITTINGTON: In Dallas/Fort Worth, we 12 have been having casinos for eight years. Dealing 13 with that -- we've been dealing with that for eight 14 years. Louisiana and Oklahoma, which is an hour 15 away. That was one of our main pet peeves about not 16 losing our customers was to Oklahoma and Louisiana, 17 but that was eight years ago. So we have been 18 dealing with that for eight years. 19 MS. LOPEZ: And we're losing to New Mexico, 20 too. 21 MR. DOUGHERTY: Rosalie, addressing your 22 first problem, eight-liners, you can do like we did 23 in Austin here last week, they closed them all down. 24 The police just shut them down and confiscated their 25 equipment. And now there's not any of them operating 0084 1 anymore that pay cash. 2 MS. TAYLOR: That you know of. 3 MR. WHITTINGTON: Yes, it is. There is. 4 MR. DOUGHERTY: There may be a few left, 5 but they won't be here very long because it's against 6 the law. So that's what we did. The police did it. 7 MS. LOPEZ: Did the charities or the 8 organizations or anyone go to those police 9 departments to get that assistance? I mean -- 10 MR. WEEKLEY: An aggressive district 11 attorney helps. 12 MS. TAYLOR: Unfortunately, they pop back 13 up as fast as they close down in most locations. 14 MR. DOUGHERTY: They better be careful in 15 Austin. They're not going to pop up, because they're 16 all out of business. 17 MS. TAYLOR: I fight that, too. I'm on the 18 county line so -- right across the county line 19 there's just as many as you want to see and they pay 20 cash. So anyway, we know that, you know, we have 21 those particular problems. We know why attendance is 22 down. I mean, most of us feel -- an aggressive 23 advertising, I think, is -- we can't go and make the 24 county attorneys in other counties close down 25 eight-liners. 0085 1 MS. LOPEZ: That's right. 2 MS. TAYLOR: We can't stop the casinos from 3 opening in any other states. We can't stop them from 4 parking on our bay front and taking people out to 5 gamble, but we could put a stop to the decline if we 6 could get more people interested in bingo. 7 MS. LOPEZ: Exactly. 8 MS. MALUSCHKA: We will continue to look 9 into details and see if we see any other interesting 10 trends that we can bring your attention to help 11 along. 12 MS. TAYLOR: Thank you so much. This was 13 an awesome presentation. It was very easy to read in 14 the book. And I love it being in color, because when 15 it's in black and white it's really hard to follow 16 the lines. And the color made it so easy without 17 even glasses to follow the lines on this chart. It 18 was an awesome presentation. 19 MS. MALUSCHKA: Thank you. 20 MS. TAYLOR: Thank you. 21 Steve Bresnen. 22 MR. BRESNEN: Sorry. You want to go first? 23 MR. SANDERSON: Well, I'd like to finish 24 the presentation first. 25 MS. TAYLOR: Sorry. I'm sorry. I didn't 0086 1 realize you were coming. 2 MR. SANDERSON: Phil Sanderson, Assistant 3 Director of Charitable Bingo Operations Division. 4 I'm providing the commentary for the second part of 5 the presentation on the financial information. If 6 you'll look in your notebook, there's three 7 schedules, three pages in there that indicate the 8 first quarter information that we have received as 9 reported by the organizations. The first page in 10 your notebook deals with a breakdown of each line 11 item category as reported during the first quarter. 12 And this is on the slide presentation, by the way. 13 We hadn't got to that yet. So just going through the 14 information that was reported, if you'll look on 15 there, the gross receipts of 162.5 million, total 16 prizes were 117.4 and total revenue was 45 million, 17 which is 27 percent of the gross receipts. Prize 18 payouts are 72.3 percent. The bottom line adjusted 19 gross receipts which is after prizes and the cost of 20 goods sold is 36.7 million or 22 percent of the 21 gross. And we are looking at the first table that's 22 in your notebook after the previous presentation. 23 The total expenses was 25.5 million as reported. 24 That represents 15.7 percent of the total gross. The 25 two highest categories are rent payments to lessors 0087 1 at 6.2 percent of gross and the callers and cashiers 2 salaries of 5.4 percent. The bottom line charitable 3 distributions, the required distributions to be paid 4 was 2.5 million and the organizations reported paying 5 7.6 million, which is 4.7 percent of the gross 6 receipts. 7 Now we'll go on to the next page, which is 8 comparative figures. It compares the first quarter 9 information with the first quarter of 2004, as well 10 as the previous quarter of -- fourth quarter of 2004. 11 The table shows progressively the differences as the 12 quarters progress. As you can see, the first quarter 13 of 2005, gross receipts of 162.5 million is a 14 9.25 percent increase over the previous quarter of 15 the fourth quarter. Since the first quarter of 2004, 16 it shows a 2.98 percent increase over the first 17 quarter of 2004. Prizes increase 4.7 percent over 18 the first quarter of 2004 and 6.9 percent over the 19 previous quarter. Revenue of 45.1 million is a 20 decrease from the first quarter of 2004 of 21 1.4 percent and -- however, it is an increase over 22 the fourth quarter of 2004, 18.12 percent. Expenses 23 down at the bottom with 25.5 million is an increase 24 over the previous quarter of 1.67 percent, however it 25 is a decrease over the first quarter of 2004 of 0088 1 .69 percent. The bottom line net revenue 2 12.4 million is an increase of 85 percent over the 3 previous quarter, but however it's a 3.75 percent 4 decrease over the first quarter of 2004. 5 The next page gives a breakdown of the first 6 quarter over the past five years. And, of course, we 7 have already gone over the differences -- or the 8 increase and decrease from the first quarter of 2004. 9 The last column will give you where the first quarter 10 of 2005 stands against the first quarter of 2001. 11 And as you can see, gross receipts of 100 -- the 12 162.5 million since the first quarter of 2001 is 13 increased 10 percent. Prizes have increased 14 15.7 percent over the first quarter of 2001. 15 However, your net revenue has decreased 1.3 percent. 16 And primarily that's because the prizes are 17 increasing at a higher rate than gross receipts are 18 increasing. 19 MR. ATKINS: Sorry, Phil. I think you said 20 net revenue. I think you meant total revenue. 21 MR. SANDERSON: Total revenue. I'm sorry, 22 that is correct. Total revenue. The cost of goods 23 sold has decreased 12.8 percent since the first 24 quarter of 2001. And the adjusted gross receipts of 25 36.7 percent -- I mean, 36.7 million has increased 0089 1 1.7 percent over the first quarter of 2001. And then 2 the net revenue of 12.4 million for the first quarter 3 of 2005 is a 2 percent increase over the net revenue 4 of the first quarter of 2001. Charitable 5 distributions, however, of 7.6 million has decreased 6 14 percent over the first quarter of 2001 which was 7 8.9 million. 8 Now I'd like to get into the slide show 9 presentation that gives some graphic information, 10 details information to the first quarter. This first 11 slide represents gross receipts and prizes in 12 millions. It shows you that the regular and 13 electronic gross receipts and the prize payout 14 percentage of 71.5 percent, while the instant pull 15 tabs prize percentage payouts are 73.7 percent of the 16 gross receipts for instant pull tabs. 17 The following slide breaks down the 18 distributions and other disbursements, expenses as a 19 percentage of the gross receipts that was reported. 20 Your rent payments represent 6.2 percent of gross 21 receipts. Salaries for the callers, cashiers and 22 ushers is 5.4 percent. The cost of the goods sold is 23 5.2 percent. Distributions is 4.7 percent. The 24 janitorial is 1.4 percent. Security, legal and 25 accounting is 1.2 percent. And miscellaneous is 1.4. 0090 1 Miscellaneous expenses is a combination of the 2 mortgage payments, advertising, purchase of bingo 3 equipment, repairs, license fees, training, debit 4 cards and other expenses. 5 The last slide shows a breakdown of how each 6 expense item as it relates as a percentage to total 7 expenses. As you can see, of all expenses, lease 8 payments to -- I'm sorry, the rent payments to 9 lessors at 10.1 million is 39.6 percent of all 10 expenses reported. Callers and cashiers is second at 11 34.4 percent, followed by the janitorial services of 12 9.2 million at -- I'm sorry, 2.3 million at 13 9.2 percent. All salaries, which is the janitorial, 14 callers, cashiers, ushers, security, legal and 15 accounting, account for more than 50 percent of total 16 expenses. When you include rent payments of 17 39.6 percent, rent payments and salaries combined 18 account for more than 90 percent of the total 19 expenses the charities see in their bingo operations. 20 We are just now receiving in the second quarter 21 returns. We'll start preparing analysis on those 22 within a couple of weeks and we'll have some 23 information from the second quarter to see how it 24 compares to this first quarter. We are currently now 25 doing some audits and books and records inspections 0091 1 on the first quarter. I've not seen any audit 2 adjustments yet to these numbers. These are as of 3 June the 13th, I believe, of 2004. So hopefully 4 we'll -- we'll see if there may be some adjustments 5 made on auditing. I do know that we have had some 6 amended returns filed by organizations that had 7 inadvertently reported information on the wrong line 8 since it is a new report. We are currently getting 9 some additional information on Schedule A as far as 10 how the distributions break down between the five 11 categories that we have them including those on the 12 reports. 13 And that concludes my report and I'll be glad to 14 answer any questions. 15 MS. TAYLOR: Just a comment. I love seeing 16 how the total expenses breaks down. Adding the 17 additional information to the reports is truly 18 awesome because it's very impressive to see how much 19 is being spent for the rent, how much is being spent 20 for the employees and bookkeeping. It's very 21 interesting seeing that inform