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					Debbs Potts Oregon State Lottery Commission Building 500 Airport Road SE Salem, OR 97310

OREGON STATE LOTTERY COMMISSION MEETING JUNE 28, 2006 MEETING MINUTES
Commissioners Present: Kerry Tymchuk, Chair Stan Robson, Vice Chair Steven Ungar, Commissioner Pamela Fogg, Commissioner
Dale Penn, Lottery Director Carole Hardy, Assistant Director for Marketing Larry Niswender, Assistant Director for Support Services Cornell Balagot, Video Product Manager Chuck Baumann, Communications Specialist Ken Brenneman, Contract Process Manager Linda DeBlasio, Sr. Executive Assistant for the Commission Detective Phil Dodd, Lottery Security Kier Hartwig, Controller Mark Hohlt, Rules and Policies Manager Brandi Hurtado, Executive Assistant for Marketing Terri Kunz, Compliance Analyst Marlene Meissner, Public Affairs Kathy Ortega, Chief Financial Officer Mike Ryan, Sr. Financial Analyst Gina Taylor, Sr. Executive Assistant for the Director Valerie Wicklund, Chief Internal Auditor

Lottery Staff Present:

Others Present:

Captain Craig Durbin, Oregon State Police Jeff Hampton, Oregon Restaurant Association Will Higlin, GTECH John Powell, GTECH Lobbyist

REGULAR COMMISSION MEETING Chair Tymchuk called the June 28, 2006 Oregon State Lottery Commission Meeting to order. A. MINUTES OF THE PREVIOUS COMMISSION MEETING Presenter: Chair Tymchuk Chair Tymchuk noted that the Lottery Commission had received draft copies of the minutes of the May 24, 2006 Regular Commission Meeting and the minutes of the June 9, 2006 Special Commission Meeting for review, and there were no revisions presented. (Exhibit 1.) Commissioner Ungar moved that the minutes of the May 24, 2006 Regular Lottery Commission Meeting and the minutes of the June 9, 2006 Special Commission Meeting be approved for the record. The minutes of both meetings were approved by a unanimous vote. All members were present for the vote.

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B. GOVERNANCE MATTERS and DIRECTOR’S REPORT Presenter: Chair Tymchuk, Director Penn GOVERNANCE MATTERS Director Penn stated that new Lottery Commissioner Bill Ihle was confirmed by the Senate. Commissioner Ihle was appointed to a vacant unexpired four-year term effective July 1, 2006 to June 30, 2008. Chair Tymchuk stated that he will not be at the July 17, 2006 Commission Meeting, and took a poll of the other Commissioners and confirmed a quorum for the July Meeting. DIRECTOR’S REPORT Director’s Road Trip – Ontario and Baker City This month Director Penn spoke to the Ontario Chamber of Commerce. Director Penn stated that the meeting was very well attended by the community. The Chair of the House Revenue Committee, Ontario’s State Representative, was at the Chamber meeting. Representative Butler was pleased to have Director Penn present in Ontario. Director Penn distributed a copy of a newspaper article on his presentation from the Argus Observer. The following day, Director Penn met with the editorial staff in Baker City for the same informational presentation. Director Penn talked about the Lottery’s contribution to educational funding, as well as the other programs which benefit from Lottery funds. Powerball® and NASPL Directors Meetings Director Penn attended the Powerball® Directors’ Meeting in Canada last week. There was discussion of the increased sales since matrix changes were effected August 2005. There was also discussion of the recently-held Powerball® product promotion - “10X.” The promotion was quite successful and Powerball® will look at offering another promotion in the coming year. Director Penn talked with the directors of both Washington and Idaho lotteries. They agreed on joint meetings in the future between staff in areas such as sales, marketing, and other like-jobs to discuss common topics and share ideas. Following the Powerball® Directors’ Meeting, the North American Association of State and Provincial Lotteries (NASPL) Directors’ Meeting was held. NASPL has been developing national standards for the lottery industry. There was emphasis on the need to use similar system standards to achieve cost-savings for both the lotteries and the industry vendors. Sales and Winner Highlights Director Penn noted Lottery’s record year in the sales of both Traditional and Video products, with over $1 billion dollars in total sales in this fiscal year. Last week there was a $67,000 jackpot winner from Lottery’s newest game, Lucky LinesSM. There was also a MegabucksSM winner last week from Joseph, Oregon.

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Terminal Stickers – “1-877” Problem Gambling No. Lottery is in the design phase of stickers that will be placed on Lottery terminals displaying the 877# for Problem Gambling. Recently, a very positive newspaper article appeared about the stickers. Lottery is taking this proactive step in response to increased play on video terminals. Commissioner Robson asked whether there are statistics to show an increase in problem gambling since line games were introduced. Director Penn referred to information reported in the most recent Prevalence Study completed just before the onset of line games. Data points did not show a growth in the percentage of problem gambling, however, the next Prevalence Study will provide more specific comparison data points for line games. [End of GOVERNANCE MATTERS and DIRECTOR’S REPORT.] C. RULES AND POLICIES Presenters: Mark Hohlt, Rules and Policies Manager, Director Penn Mr. Hohlt updated the Commission on pending administrative rule projects.  Video LotterySM Game Rule. As mentioned by Director Penn at the last meeting, the Lottery has now filed a temporary rule, effective June 26, which allows for Video LotterySM games with credits greater than .25¢ each.

The Lottery also has three administrative rules currently under review at the Attorney General’s Office.  Disclosure Requirements. This administrative rule would amend the disclosure requirements for Lottery retailers in accordance with Senate Bill 363 which amended the definition of “key person,” by changing the percentages for stock ownership. Personal Criteria. This administrative rule would clarify the section that deals with personal criteria such as character or personal background, and criminal and financial history, which may be grounds for denial of a retailer contract or a key person. Attorney General’s Model Rules. This administrative rule adopts the newest version of the Attorney General’s model rules in the areas of rulemaking, declaratory rulings, and collaborative dispute resolution.

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Mr. Hohlt provided an update on pending ballot initiatives. (Exhibit 2.)  Video Retailer Commissions: There has been no new activity on the two proposed ballot initiatives that seek to cap video retailer commissions at 18%. The initiatives are dead for this election, although they can be refiled for the 2008 election. Veteran’s Services: There has been no news regarding the progress of signature gathering on either of the two ballot initiatives seeking to dedicate 2% of Lottery revenues to veteran’s services. Private Casinos: All seven ballot titles were approved by the Oregon Supreme Court. The Court denied oral argument and issued its final judgment certifying the ballot titles on June 19. This was one month and two days after the appeal had been filed with the Court on those titles. The sponsors then announced that there was not adequate time to gather the necessary

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signatures to meet the July 7 deadline, for the November 7 ballot, and that the Measures would be withdrawn. The sponsors announced that they would refile similar Measures in time for the 2008 election. Mr. Hohlt will continue to update the Commission on these initiatives. Director Penn stated that a report, prepared by Quantec, will soon be completed on the potential impact of a casino at the Wood Village location to local Lottery retailers, the Lottery, and to the State of Oregon. The impact study will be a valuable tool in the case of the casino initiatives being refiled, and also, in the case of a new casino being approved to be built across the river in Washington. There were no questions or comments from the Commission. [End of RULES and POLICIES.] D. RETAIL OPERATIONS and MARKETING Presenters: Carole Hardy, Assistant Director for Marketing; and, Cornell Balagot, Video LotterySM Product Manager Ms. Hardy presented the Sales Report for Retail Operations, which compares current year-to-date sales with year-to-date sales from the previous year. (Exhibit 3.) Ms. Hardy presented the Marketing update on Traditional Products. Mr. Balagot reported the Marketing update on Video LotterySM products. SALES REPORT and MARKETING UPDATE – Traditional Products  Scratch-itsSM Sales – Current year-to-date sales of $127,093,783 are -4.48 percent compared to last year’s sales. As noted in the FY06/07 Business Plan, Scratch-itSM tickets will be an area of focus in developing new game ideas, and increasing support. Following are the four Scratch-itSM tickets that will be introduced in July.
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Scratch-itsSM Tickets – New Next Month o o o o “14 Karat Cash” is a $1.00 ticket with a top prize of $1,400. “Sea Treasures” is a $2.00 ticket with a top prize of $20,000. “Lucky Stars Crossword” is a $2.00 ticket with a top prize of $15,000. “Triple Tripler” is a $5.00 ticket with a top prize of $33,333.

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Other Traditional Products - Sales o Breakopen Tickets – Current year-to-date sales of $1,717,200 are -22.29 percent compared to last year’s sales. This product is being phased out. Marketing is currently looking at different options to replace this revenue in FY06/07. MegabucksSM – Current year-to-date sales of $38,722,780 are -21.61 percent compared to last year’s sales. This game is performing very well against the DAS Forecast, however, sales are tracking against this time last year when the MegabucksSM jackpot was $30 million.

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Ms. Hardy displayed a print ad to promote Lottery winners. The photo is of the $8.8 million dollar MegabucksSM winner standing between a Lucky LinesSM winner of $67,000, and the winner of a Mustang Convertible from a $3.00 Scratch-itSM ticket. The headline reads, “The Lottery Win-Quirer: Lottery winners talk about fast cars, big bucks and fun times.” o o o Powerball® – Current year-to-date sales of $58,866,733 are 68.31 percent above last year. Pick 4SM – Current year-to-date sales of $1,402,171 are 1.50 percent over last year’s sales. Sports ActionSM – The season ended with record sales of $12,106,286, a 7.20 percent increase over the previous year. The next and final season for Sports ActionSM will kick off this summer. ScoreboardSM – The season is ended with sales down from the previous year. The next and final season for ScoreboardSM will kick off this summer. Keno – Current year-to-date sales of $116,966,989 are -3.67 percent compared to last year’s sales. Keno sales have risen in recent months except at retailer locations that also offer line games. At those locations, the decline may be due to some play shifting from Keno to line games. Win For LifeSM – Current year-to-date sales of $5,910,658 are 5.67 percent over last year’s sales. Win For LifeTM launched about six years ago and this year’s sales will be very close to our second highest year. Lucky LinesSM – This game was launched in recent weeks, so is new to the market. Current sales of $1,144,466 per week exceed the DAS Forecast of $72,000 per week.

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Total Traditional Sales – Total year-to-date sales of $364,585,213 are 1.16 percent over last year’s total sales. Record sales this year are attributed, in great part, to Powerball®. Video LotterySM Sales Report – Current year-to-date sales of $728,802,093 are 26.38 percent over last year’s sales. Total Lottery Sales – Total year-to-date sales of $1,093,387,306 are 16.68 percent over last year’s total sales.

MARKETING UPDATE – Video LotterySM Mr. Balagot presented a Video LotterySM product update.  VLC 8828 – This terminal is experiencing poor sales performance in the field. Marketing is currently looking at replacing the terminal. The Statement of Qualification process from a previous terminal acquisition will be continued as Lottery considers the next purchase. Current terminal vendors have been notified of the Lottery’s intent to replace the VLC 8828. Other terminal vendors, new to the Lottery, will also be notified. VLT Quantitative Study – This study will be distributed in final form at the July Meeting, however, Mr. Balagot shared some of the top-level findings. The study was conducted in the Portland/Tri-County area with a total of 2,100 participants. The results of the study show that Lottery has a solid player base in this area, with 55 percent of play
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in video poker, and 39 percent in line games. Approximately 84 percent of Lottery customers play at least once a month. Since the introduction of line games, 12.5 percent of Video LotterySM players are new. A new player is defined as a customer who has played Video LotterySM only since line games began. According to the study group, the primary reason for playing line games and video poker is for fun and entertainment. The study showed the top reasons that most customers visit Video LotterySM retailers is: to socialize (38%); for the beverages offered (23%); and, to play Video LotterySM (20%).  Video LotterySM Game Graphics – Mr. Balagot presented, on screen, some of the terminal graphics for a number of new Video LotterySM games that will be installed in July on the Trimline and Spielo terminals.

MARKETING UPDATE - Other Promotions Ms. Hardy distributed an events calendar listing the Oregon events where Marketing promotions will be held this summer. Ms. Hardy described everything that is offered in the promotion activities, including an audience participation piece. Pictures were displayed of an event held outside PGE Park where a booth was set up to promote Lottery products, including “World Poker Tour” and “Orange County Chopper™” Scratch-itSM tickets. At this first event, the promotions booth had nonstop traffic. Prevalence Study by Problem Gambling Foundation Ms. Hardy provided pertinent facts from the third Prevalence Study, in response to Commissioner Robson’s earlier question about whether there are statistics to show an increase in problem gambling since line games were introduced. The first study, in 1999, showed a 3.3 percent prevalence rate; the second study, in 2001, showed a 2.3 prevalence rate; and, the third study, in 2005, showed a rate of almost 2.7. According to the Problem Gambling Foundation, this is not statistically-significant from the previous study. A trend line would show a decreasing trend in the prevalence of problem gambling. It is important to note that the third, recent study was fielded when line games were prevalent in the market. The Problem Gambling Foundation suggested a fourth study in about three years to allow the play of line games in the marketplace for a sufficient a period of time for player’s to become engaged with the product. Moderation Messages on Terminals Ms. Hardy reported that moderation messages are being designed for placement on the terminals. Lottery is working with Jeff Marotta, Ph.D., Problem Gambling Services, to develop these messages. Dr. Marotta suggested a new acronym be used in the toll free number on the stickers. The current no. is 1-877-2STOPNOW. The new Lottery message more accurately would reflect the importance of a player managing their play. This coincides with the Lottery’s responsible gaming campaign that suggests setting time limits and budget limits. Dr. Marotta’s suggestion was that a lot more people may respond to a phone no. that does not tell them to stop playing. The new toll free no. is 1-877-MY-LIMIT, and connects to the same service as the current number. The message reads, “Gambling too much? 1-877-MY-LIMIT. Call for free help 24/7.” The goal is to attract attention to it being a number to call if they have an issue. The stickers will be ready in the fall.

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There were no comments or questions from the Commission. Chair Tymchuk asked that Director Penn and Ms. Hardy extend congratulations from the Commission to staff for a record year, resulting in a 17 percent increase in sales. [End of MARKETING UPDATE.] E. FINANCIAL REPORTS Presenters: Larry Niswender, Assistant Director for Support Services, Kathy Ortega, Chief Financial Officer  FINANCIAL STATEMENT FOR MONTH ENDED MAY 31, 2006 (Exhibit 4.) Ms. Ortega presented the May 2006 Financial Statement in brief. Operating Statement Net Revenue – is $75.029 million actual, on a budget of $74.453 million, for a positive variance of $576,490 million above forecast. Net Profit – is $52.844 million actual, on a budget of $50.252 million, for a positive variance of $2.591 million. Variances – all expenses are positive with the exception of Advertising, which is due to timing differences. No over-expenses are anticipated by year-end. Year-to-Date Net Revenue – is $786.3 million actual on a budget of $783.150 million, for a positive variance of $3.241 million. Year-to-Date Net Profit – is $523.9 million on a budget of $513.5 million, for a positive variance of $10.453 million. Services and Supplies Expenses Year-to-Date – is $6.962 million on a budget of 9.478 million, for a positive variance of $2.516 million. Variances o o Fleet Expenses has a negative variance due largely to higher fuel costs. Office Expenses has a negative variance for May; no over-expenses are anticipated by year-end.

Balance Sheet Ms. Ortega reported on the contingency reserve and working capital. The $45 million cap on working capital was reached in April. Reserves for the remainder of FY06 and for FY07 have been set aside for capital purchases. Lottery continues to accrue administrative savings. Future profits will be transferred to the State in October, as administrative savings. Chair Tymchuk noted that sales this year are at a record high and Video LotterySM commission rates are at a record low. In 2004, commission rates were at 32 percent, compared to the 25

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percent rate today. Director Penn added that, as a result of this year’s sufficiently-high increase in sales, income to Lottery retailers also increased. There were no further questions or comments on the Financial Statement. Ms. Ortega requested approval of the Financial Statement for month ended May 31, 2006. Chair Tymchuk moved that the Financial Statement for May 2006 be approved for the record as presented today. Commissioner Fogg seconded the motion and the Financial Statement was approved by a unanimous vote of the Commission. All Commissioners were present for the vote. [End of FINANCIAL REPORT.] PROCUREMENT ACTIVITY REPORT Mr. Niswender reported that the Procurement Activity Report reflects a total of 21 items, totaling approximately $5.1 million. Of the 21 items, 14 are pending approval of the FY06/07 budget. The largest items relate to ad campaigns and media costs for television and radio ads. The Marketing expenses are standard, ongoing activities. Mr. Niswender noted that a Request for Proposal for media costs was released this month. There were no questions or comments on the Procurement Activity Report.  BUDGET EXCEPTION – SMART BUY INVOICE (Exhibit 5) Department of Administrative Services (DAS) contracts with “Smart Buy,” a program whereby state agencies combine their purchasing power to negotiate lower costs. The payment from participating agencies to DAS is based on agency savings. This invoice reflects savings to the Lottery for improved pricing in data and video services negotiated in a contract extension with Qwest. Over the two-year contract extension, Lottery expects to save approximately $927,000. Mr. Niswender requested a budget exception in the amount of $537,291 for a one-time payment for this service. Lottery consulted the Department of Justice to confirm its authority to approve payment in advance of receiving the full savings. This is a biennial amount, for which Lottery has received savings for only one of the two years to date. Chair Tymchuk called for the Motion. Commissioner Fogg moved that the Oregon State Lottery Commission approve payment in the amount of $537,291 for the payment of the Department of Administrative Services Smart Buy invoice for the one time cost of negotiating improved pricing for data and video services. Vice Chair Robson seconded the motion. The motion passed by a unanimous vote of the Commission. All Commissioners were present for the vote.  BUDGET EXCEPTION – OUT OF STATE TRAVEL (Exhibit 6) Director Penn stated that in the proposed FY06/07 Lottery budget, funds were included for Lottery Security staff to travel out-of-state to observe the production of lottery products, such as Scratch-itSM tickets at the vendor’s location. These expenses are not however in the current budget. This request is for an exception to the FY05/06 budget for out of state travel to Atlanta, Georgia by a Lottery Security team to observe the production of a unique Lottery Scratch-itSM ticket. In order to meet deadlines, written
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documentation for this exception was provided to the Commission for review and input in advance of the meeting. Chair Tymchuk called for the Motion. Vice Chair Robson moved that the Oregon State Lottery Commission approve a budget exception in the amount of $1,958 for outof-state travel to Scientific Games Inc., in Atlanta, Georgia, where a Lottery Security team will oversee the printing of a unique Oregon LotterySM Scratch-itSM ticket. Commissioner Ungar seconded the motion. The motion passed by a unanimous vote of the Commission. All Commissioners were present for the vote.  FY06/07 BUSINESS PLAN, MARKETING & SALES PLAN, LOTTERY BUDGET (Exhibit 7) Director Penn presented the FY06/07 Lottery budget for approval, as well as the adoption of the Lottery’s FY06/07 Business Plan, and Marketing and Sales Plan. Director Penn highlighted several achievements in the current year. He noted that the diverse and wide range of Lottery games that are offered contributed to the tremendous growth in sales this year. Record sales resulted in the largest transfer to the State in Lottery history. In a public survey, Lottery received more favorable marks than ever, and fewer negative marks than ever. The FY06/07 Lottery Budget and operating Plan(s) provide support and development of the Lottery’s infrastructure and will position the Lottery to surpass record sales and transfers to the State in the coming year. Director Penn stated his appreciation to the Commission for comments and guidance throughout the process, and for supporting Lottery staff in achieving record sales and record transfers. Director Penn recommended the adoption of the FY06/07 Business Plan, as proposed. Chair Tymchuk commented on the increase in advertising dollars. Chair Tymchuk stated that the Commission is supportive of the budget, but encouraged Lottery to ensure that the advertising investment can be demonstrated by tying associated costs to increased sales. Vice Chair Robson reiterated the caveat that advertising expenses be monitored and tracked against sales results. Chair Tymchuk called for the Motion. Commissioner Ungar moved that the Oregon State Lottery Commission approve the Lottery’s Fiscal Year 2006-2007 Budget as proposed today, and, adopt the Business Plan and the Marketing and Sales Plan, that implement this budget, as presented today. Vice Chair Robson seconded the motion. The motion passed by a unanimous vote of the Commission. All Commissioners were present for the vote. [End of FINANCE & ACCOUNTING.]

F. OTHER BUSINESS
 ASSISTANT DIRECTOR SALARY ADJUSTMENTS Director Penn requested authority to implement a pay freeze mitigation salary adjustment for the Assistant Directors consistent with the 2005/2007 pay package implemented by the State of Oregon, to be effective July 2006.

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Chair Tymchuk asked that the compensation implementation request be adjusted to include the Lottery Director’s position. No further comments were brought forward. Chair Tymchuk recommended approval for the Director to implement the recommended salaries for the Assistant Directors and the Director, effective July 1, 2006. Commissioner Ungar seconded the motion. The motion passed by a unanimous vote of the Commission. All Commissioners were present for the vote.  AMENDMENT TO THE FY05/06 AND FY06/07 LOTTERY BUDGETS Director Penn presented a request to amend the current FY05/06 and approved FY06/07 Lottery budgets to include additional contract dollars to reimburse the Governor’s Office for increased support services supplied to the Lottery. Chair Tymchuk commented regarding the amount of the increase. Chair Tymchuk encouraged the Lottery to ensure that associated expenses can be tied to services provided by the Governor’s Office to the Lottery over the next two years. Commissioner Ungar concurred with Chair Tymchuk. Commissioner Ungar voiced his observance of the substantial legal matters and various other areas of expertise coordinated with the Governor’s Office that the Lottery receives. Chair Tymchuk called for a Motion. Vice Chair Robson moved that the Oregon State Lottery Commission amend the FY05/06 and FY06/07 Lottery budgets to reflect a charge of $74,493 in each fiscal year to reimburse the Governor’s Office, through Department of Administrative Services, for support services supplied to the Oregon State Lottery. Commissioner Fogg seconded the motion. The motion passed by a unanimous vote of the Commission. All Commissioners were present for the vote. ADJOURNMENT Chair Tymchuk noted that the next Commission Meeting is earlier in the month than usual, being held on Monday, July 17, 2006, at 10:00 a.m., at the Lottery Office in Salem. No other business was brought forward. Chair Tymchuk adjourned the June 28, 2006 Oregon State Lottery Commission Meeting. Respectfully submitted,

__________________________________ Linda DeBlasio, Sr. Executive Assistant Oregon State Lottery Director’s Office Approved by:

__________________________________ Commissioner Stan Robson, Vice Chair Oregon State Lottery Commission
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