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McCRACKEN, STEMERMAN, BOWEN & HOLSBERRY Joni S. Jacobs (SBN 6355) 1630 S. Commerce Street, Suite A-1 Las Vegas, NV 89102 Tel.: [phone]; Fax: [phone] - and DAVIS, COWELL & BOWE, LLP 1701 K Street NW, Suite 210 Washington, DC 20006 Tel.: [phone]; Fax: [phone] Local Counsel MILBERG WEISS BERSHAD & SCHULMAN LLP Maya Saxena (pro hac vice) Christopher S. Jones (pro hac vice) Joseph E. White, III (pro hac vice) 5200 Town Center Circle, Suite 600 Boca Raton, FL 33486 Tel.: [phone]; Fax: [phone] - and SCHIFFRIN & BARROWAY LLP David Kessler Andrew Zivitz Trevan Borum 280 King of Prussia Road Radnor, PA 19087 Tel: [phone]; Fax: [phone] Co-Lead Counsel for Plaintiffs UNITED STATES DISTRICT COURT DISTRICT OF NEVADA ) In re MIKOHN GAMING ) Master File No. 2:05-CV-01410 CORPORATION SECURITIES ) LITIGATION ) AMENDED COMPLAINT __________________________________ ) This Document Relates to: All Actions ) )
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TABLE OF CONTENTS Page I. II. INTRODUCTION ...................................................................................................1 SECURITIES ACT CLAIMS..................................................................................1 A. B. C. Nature Of The Securities Act Claims ..........................................................1 Jurisdiction And Venue................................................................................4 Parties To The Securities Act Claims ..........................................................4 1. 2. D. III. Lead Plaintiffs..................................................................................4 Securities Act Defendants................................................................5
False And Misleading Statements In The Registration Statement...............6
PGIC'S ACCOUNTING VIOLATIONS ..............................................................11 A. Defendants Violated GAAP.......................................................................11 1. 2. 3. 4. 5. Defendants Violate APB 29...........................................................13 Defendants Ignore The Potential Impact Of FASB 153 On PGIC ..............................................................................................14 PGIC Failed to Disclose The Impact Of FASB 153 ......................15 Violations Of SEC Regulations .....................................................18 Additional Violations Of Fair Financial Reporting .......................19
IV.
SECURITIES ACT COUNTS...............................................................................21
COUNT I: AGAINST THE SECURITIES ACT DEFENDANTS FOR VIOLATIONS OF SECTION 11 OF THE SECURITIES ACT IN CONNECTION WITH THE REGISTRATION STATEMENT......................................................................................21 COUNT II: AGAINST THE SECURITIES ACT DEFENDANTS, FOR VIOLATIONS OF SECTION 12(A)(2) OF THE SECURITIES ACT IN CONNECTION WITH THE REGISTRATION STATEMENT.............................................................................22 COUNT III: AGAINST DEFENDANTS, MCMEEKIN, SICURO AND ROLLO FOR VIOLATIONS OF SECTION 15 OF THE SECURITIES ACT IN CONNECTION WITH THE REGISTRATION STATEMENT ......................................23
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V.
EXCHANGE ACT CLAIMS ................................................................................24 A. B. Jurisdiction And Venue..............................................................................24 Parties To The Exchange Act Claims ........................................................25 1. 2. C. Lead Plaintiffs................................................................................25 Exchange Act Defendants..............................................................25
Defendants' Lies And Omissions ..............................................................26 1. PGIC's Culture Of Improper Revenue Recognition and Accounting Violations ...................................................................26 a. b. c. d. e. f. g. h. 2. Multiple Auditors Reject PGIC's Business .......................28 The Michigan Gaming Control Board Cracks Down On PGIC's Fraud ...............................................................30 McMeekin's Arrival And Willingness To Do "Anything" To Increase PGIC's Stock Price.....................31 Sicuro Comes On Board ....................................................34 Defendant Sicuro Eliminates The Company's Inside Auditor Position .................................................................34 McMeekin And Sicuro Continue PGIC's Pattern Of Improper Revenue Recognition .........................................35 Defendants Used Slot Machines to Improperly Recognize Revenue............................................................35 The Patent Swaps Begin ....................................................36
The VirtGame Acquisition Is The Key to PGIC's Future .............37 a. b. c. d. The "Big Push" Behind the VirtGame Transaction...........39 The Michigan Board Of Gaming Discovers Accounting Irregularities At PGIC ....................................40 Defendants Are Sued For Breaching A License Agreement..........................................................................41 VirtGame Is Acquired........................................................42
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D.
Defendants Had Motive And Opportunity To Misrepresent PGIC's Financial Results........................................................................................42 1. Defendants' Compensation, Bonuses, And Other Incentives Were Highly Dependent On Meeting PGIC's Aggressive Financial Objectives And Estimates ..............................................42 Individual Defendants Had Access To An Enormous Amount Of Detailed Financial Information At Their Fingertips .......................................................................................45 PGIC Utilized Accounting Software .............................................45 Regular Internal Reports Were Given Directly To Management...................................................................................45 Individual Defendants Participated In Regular Management Meetings.........................................................................................46 Defendant Sicuro "Made The Decisions"......................................47 Individual Defendants Would Not Let Honest Employees Get In The Way Of Their Plans .....................................................48
2.
3. 4. 5. 6. 7. E.
Defendants' False and Misleading Statements ..........................................49 1. 2. 3. 4. 5. 6. 7. The Class Period Begins ................................................................49 Reasons For Falsity........................................................................60 Defendants Issue False First Quarter 2005 Results .......................61 Reasons For Falsity........................................................................64 False Statements Continue Into The Second Quarter of 2005................................................................................................65 Reasons For Falsity........................................................................72 The False Statements Continue: Defendants Close The VirtGame Acquisition....................................................................73
F. G.
The Truth Is Revealed................................................................................74 Post Class Period Events............................................................................77 1. 2. PGIC Announces Bad Results .......................................................77 PGIC Announces Delay In Filing 2006 10-K................................78
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3. 4. 5. H. VI. VII. VIII.
The SEC Inquiry At PGIC .............................................................79 PGIC Restates 3Q05 Earnings And Again Delays Filing Its Annual Report................................................................................79 PGIC Announces Additional Losses .............................................79
Defendant's Omissions And Failure To Reveal The Truth .......................81
APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD ON THE MARKET DOCTRINE.................................................................................82 CLASS ACTION ALLEGATIONS ......................................................................84 EXCHANGE ACT COUNTS................................................................................86
COUNT IV: VIOLATION OF SECTION 10(B) OF THE EXCHANGE ACT AND RULE 10B 5 PROMULGATED THEREUNDER AGAINST PGIC AND THE INDIVIDUAL DEFENDANTS.........................................................................................86 COUNT V: FOR VIOLATIONS OF SECTION 20(a) OF THE 1934 ACT AGAINST THE INDIVIDUAL DEFENDANTS................................................................................89 IX. X. REQUEST FOR RELIEF ......................................................................................90 JURY TRIAL DEMANDED.................................................................................90
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I.
INTRODUCTION 1. This is a securities class action on behalf of all persons who purchased or
otherwise acquired any and all securities of Mikohn Gaming Corporation, doing business as Progressive Gaming Corporation ("PGIC" or the "Company") between February 22, 2005 and October 19, 2005 (the "Class Period") under the Securities Act of 1933 ("Securities Act") and the Securities Exchange Act of 1934 ("Exchange Act"). The Securities Act Claims are set forth in sections II-IV. These claims allege that Defendants issued materially false statements in connection with the Company's acquisition of VirtGame Corporation. Under the Securities Act, Defendants are strictly liable for the material misstatements in the Registration Statements for the acquisition, and these claims specifically exclude any allegations of knowledge, scienter or fraud. The Exchange Act claims are set forth in sections III and V-VII and allege that Defendants engaged in a fraudulent scheme and committed accounting and securities fraud. II. SECURITIES ACT CLAIMS A. 2. Nature Of The Securities Act Claims Lead Plaintiffs bring this action pursuant to Sections 11, 12(a)(2), and 15 of the
Securities Act of 1933 (the "Securities Act"), 15 U.S.C. 77k, 77l(a)(2), and 77o, respectively, on their own behalf and on behalf of all other persons or entities who acquired PGIC common stock as part of the merger with VirtGame, pursuant or traceable to the Registration Statement initially filed with the SEC on April 25, 2005 and subsequently amended on June 3, June 28, August 1 and August 8, 2005 (collectively the "Registration Statement"). 3. Lead Plaintiffs' Securities Act Claims are pled separate and apart from the
Exchange Act Claims. The Securities Act Claims do not incorporate by reference, or otherwise rely on any fraud-based allegations pled in support of the Exchange Act claims. Rather, the theories of liability alleged herein are rooted in strict liability and negligence. As such, Lead
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Plaintiffs' non-fraud allegations in support of the Securities Act claims are pled in accordance with and must be assessed under the notice pleading standards of Fed. R. Civ. P. 8(a). See Vess v. Ciba-Giegy Corp. USA, 317 F.3d 1097, 1105 (9th Cir. 2003). 4. The Registration Statement set forth the proposed terms of a stock-for-stock
merger with VirtGame. The terms of the merger called for PGIC to issue up to 2,000,000 shares of common stock to be exchanged for the outstanding shares of VirtGame. Logistically, the Registration Statement provided that Viking Acquisition Sub, Inc., a wholly-owned subsidiary of PGIC, was to merge with and into VirtGame. The resulting company retained the VirtGame name. Immediately following the completion of the Viking Acquisition Sub, Inc./VirtGame merger, VirtGame was to merge with and into Viking Merger Subsidiary, LLC, another whollyowned subsidiary of PGIC. According to the Registration Statement, the Merger Agreement governing the Viking Merger Subsidiary, LLC/VirtGame transaction called for each outstanding share of VirtGame common stock and preferred stock to be converted into shares of PGIC common stock. 5. The 2,000,000 shares of PGIC common stock to be issued pursuant to the
Registration Statement were to include the PGIC shares to be exchanged for outstanding shares of VirtGame common stock and preferred stock, as well as shares that might be issued in the future upon the exercise of VirtGame options and warrants that were assumed by PGIC. 6. In addition to detailing the impending merger, the Registration Statement also
purported to truthfully represent the Company's present and historical financial condition through the incorporation of the Company's reported financial statements from 2000 through the first quarter of 2005, and the Company's accounting policies for that same time period.
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7.
Unbeknownst to VirtGame shareholders and as more fully alleged below, the
statements contained in the Registration Statement concerning the Company's financial condition and accounting polices were materially false and misleading because at all times relevant hereto the Company's revenues and other financial indicators were artificially inflated, and its internal accounting policies and Generally Accepted Accounting Principles ("GAAP") were not followed. 8. Following the issuance of the Registration Statement and as a result of the
materially false and misleading statements contained therein, the VirtGame shareholders approved the merger on September 13, 2005. The merger was ultimately consummated and became effective on October 10, 2005. 9. On October 10, 2005, the Company issued a press release announcing the
completion of the merger as follows: The Company will issue a maximum of 1,758,498 shares of its common stock in connection with the transaction, including shares issued in exchange for outstanding shares of VirtGame common stock and preferred stock, as well as shares that are issuable upon the exercise of VirtGame options and warrants, which were assumed by the Company. Each outstanding share of VirtGame common stock was converted into the right to receive 0.028489 shares of the Company's common stock in the transaction, and each outstanding share of VirtGame Series A Preferred Stock and Series B Preferred Stock was converted into the right to receive 74.971 and 42.677 shares of Progressive common stock, respectively. Each VirtGame stockholder entitled to receive a fractional share of the Company's common stock will instead receive a cash amount based on the Company's price per share of $13.13. Holders of VirtGame common stock, preferred stock, options and warrants will also be entitled to receive a portion of the number of the Company's shares, if any, below the maximum transaction shares, that remain unissued following the expiration of all of the VirtGame options and warrants assumed by the Company (currently expected to occur in September 2010).
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10.
VirtGame shareholders who converted their stock to PGIC shares in the merger
were unaware of the materially false and misleading nature of the Registration Statement, thereby relying upon artificially inflated financial results when approving the merger. Moreover, Plaintiffs were damaged when certain disclosures surfaced partially revealing the true financial condition of PGIC and PGIC's failure to follow GAAP. B. 11. Jurisdiction And Venue This Court has jurisdiction over the subject matter of the Securities Act claims
pursuant to Section 22 of the Securities Act, 15 U.S.C. 77v, and 28 U.S.C. 1331. The Securities Act claims alleged herein arise under Sections 11, 12(a)(2), and 15 of the Securities Act, 15 U.S.C. 77, 77l(a)(2), and 77o. 12. Venue is proper in this Judicial District pursuant to Section 22 of the Securities
Act, 15 U.S.C. 77v, and 28 U.S.C. 1391(b). Much of the negligent conduct alleged herein, including the preparation and dissemination of materially false and misleading information, occurred in substantial part in this District. Additionally, the Company maintains a principal executive office in this District at 920 Pilot Road, Las Vegas, Nevada. 13. In connection with the negligent conduct alleged in this Complaint, the Securities
Act Defendants (defined below), directly or indirectly, used the means and instrumentalities of interstate commerce, including but not limited to, the United States mails, interstate telephone communications and the facilities of the national securities exchange. C. Parties To The Securities Act Claims 1. 14. Lead Plaintiffs
Plaintiffs Daniel Najor, Cindy Dolgin, Janusz Krysinski, Donald L. Gottschalk
and David Ott ("Lead Plaintiffs") were appointed Lead Plaintiffs by Order of the Court on February 17, 2006. Lead Plaintiffs Daniel Najor, Cindy Dolgin and Janusz Krysinski received
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their PGIC shares pursuant to the VirtGame acquisition. Lead Plaintiffs Donald L. Gottschalk and David Ott purchased PGIC common stock during the Class Period. Lead Plaintiffs have all suffered losses for the reasons stated in this Complaint. 2. 15. Securities Act Defendants
Defendant PGIC, headquartered in Las Vegas, Nevada, is a supplier of integrated
casino management systems software and games for the gaming industry worldwide. The Company develops and distributes an expanding array of slot and table games, plus management and progressive jackpot software systems. PGIC's fiscal year runs with the calendar year, January 1 through December 31. 16. Defendant Russell H. McMeekin ("McMeekin") was, at all relevant times, the
Company's Chief Executive Officer. Defendant McMeekin was a signatory to the Registration Statement. 17. Defendant Michael A. Sicuro ("Sicuro") was, at all relevant times, the Company's
Chief Financial Officer. Defendant Sicuro was a signatory to the Registration Statement. 18. Defendant Heather A. Rollo ("Rollo") was, at all relevant times, the Company's
Vice President of Finance and Chief Accounting Officer. Defendant Rollo was a signatory to the Registration Statement. 19. Defendant Peter G. Boynton ("Boynton") was a Director of PGIC at the time of
the merger with VirtGame and as of the effective date of the Registration Statement. 20. Defendant Douglas M. Todoroff ("Todoroff") was a Director of PGIC at the time
of the merger with VirtGame and as of the effective date of the Registration Statement. 21. Defendant Terrance W. Oliver ("Oliver") was a Director of PGIC at the time of
the merger with VirtGame and as of the effective date of the Registration Statement.
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22.
Defendant Rick L. Smith ("Smith") was a Director of PGIC at the time of the
merger with VirtGame and as of the effective date of the Registration Statement. 23. For purposes of the Securities Act Claims only, PGIC, McMeekin, Rollo, Sicuro,
Boynton, Todoroff, Oliver and Smith are collectively referred to herein as the "Securities Act Defendants." D. 24. False And Misleading Statements In The Registration Statement On April 25, 2005, the Company filed the Registration Statement on Form S-4
with the SEC. Four subsequent amendments to the Registration Statement were filed on June 3, June 28, August 1 and August 8, 2005. 25. Prior to the issuance of the Registration Statement, Defendants touted the
VirtGame/PGIC merger as follows: In a Business Wire article dated January 23, 2005 (the "Business Wire article"), Defendant Sicuro stated, "We are creating a new path for the future for our customers and shareholders. We expect this transaction to significantly enhance our systems portfolio by providing multiple forms of gaming revenue for our customers world-wide from a single integrated casino management system. When we integrate these new modules with our existing solutions for slot, table and multi-game progressives, we believe we will have a unique and powerful product offering for gaming operators world-wide. This is a classic buy vs. build decision, with the intent to get a product to market faster and more cost effectively through acquiring developed technology and intellectual property. We expect the deal to be neutral in 2005, $.05 -- $.10 accretive in 2006, with the real potential for growth in revenues and free cash flow occurring in 2007 and beyond. We may realize the benefits sooner, depending on the velocity of the adoption of this leading edge technology." In the Business Wire article, Defendant McMeekin bragged, "The VirtGame technology is expected to be incorporated into our CasinoLink architecture to provide two additional modules, CasinoLink Game Station and CasinoLink Sports Station. We intend to license these modules to our installed base world-wide on a recurring fee basis...The requirements of our extensive customer base were a key factor in the decision to pursue an investment in this technology."
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26.
As noted above, the Registration Statement set forth the terms of the merger
between VirtGame and PGIC. First, Viking Acquisition Sub, Inc., a wholly-owned subsidiary of PGIC, was to merge with and into VirtGame. Immediately following this merger, the emerging company, i.e., VirtGame, was to merge into Viking Merger Subsidiary, LLC, another whollyowned subsidiary of PGIC. 27. As part of the second merger, each outstanding share of VirtGame common stock
and preferred stock were to be converted into no more than 2,000,000 shares of PGIC common stock. 28. The agreement governing the terms and logistics of the merger (the "Merger
Agreement") required the approval of PGIC's Board of Directors. The Board of Directors met on February 14, 2005 and approved, by unanimous vote, the Merger Agreement and the transaction contemplated by the Merger Agreement. 29. The Merger Agreement also required the parties to obtain approval for the merger
from the VirtGame shareholders. Accordingly, the August 8, 2005 Registration Statement provided a notice to all shareholders of VirtGame of a special meeting of stockholders to be held on September 13, 2005. The notice directed the VirtGame shareholders to the Registration Statement for information necessary to assess the pros and cons of the merger and the purported financial health and accounting policies of PGIC. Additionally, the notice provided that based on the Registration Statement, the VirtGame Board of Directors voted for the merger, and encouraged the VirtGame shareholders to read the Registration Statement before voting. Ultimately, a special meeting of stockholders of VirtGame was held on September 13, 2005 and the VirtGame shareholders approved the merger with PGIC.
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30.
Although the Registration Statement and all amendments thereto announced the
issuance of FASB 153, it assured investors that the accounting change would not have an impact on the Company's financial statements: In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets an amendment of APB Opinion No. 29. SFAS No. 153 amends the guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, which is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged, with certain exceptions. SFAS No. 153 amends APB Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS No. 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not believe the adoption of SFAS No. 153 will impact its financial statements. 1 31. The Registration Statement was effective until and through October 10, 2005, the
date of the merger. 32. As detailed below, the Registration Statement contained false and misleading
statements of material fact and omitted to state material facts necessary to make the statements therein not misleading. 33. With respect to PGIC's purported financial results, page 17 of the Registration
Statement contained results for the full years 2000-2004 and the first quarter of 2005. Specifically, it stated:
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Unless otherwise indicated, emphasis is added.
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Three Months Ended
March 31, Year Ended December 31, ____________________ __________________________________________________ 2005 2004 _____ ______ (Unaudited) Statement of Operations Data: Net Sales Cost of Sales Gross Profit Selling, general and administrative expenses Other expense/asset write-downs Operating income (loss) Interest expense Loss on early retirement of debt Other income, net Income (loss) from continuing operations before income taxes Income tax (provision) benefits 22,908 10,341 12,567 5,991 3,315 3,261 (2,304) _______ 21,129 9,742 11,387 6,389 4,896 102 (2,480) 25 2004 ______ 2003 _____ 2002 ______ 2001 ______ 2000 ______
96,374 42,882 53,492 43,245 564 9,683 (9,684) -195
91,803 46,849 44,954 49,615 5,807 (10,468) (14,324) (9,524) 87
109,371 58,591 50,780 53,247 16,653 (19,210) (15,689) -375
104,740 47,932 56,808 49,125 1,656 6,027 (11,720) (3,135) 1,620
88,441 44,337 44,104 44,108 9,852 (9,856) (10,498) -(62)
957
(2,353)
194 65 259 _______ $ 259
(34,229) 13 (34,216) _______ $ (34,216)
(34,434) (1,480) (35,914) (1,989) $ (37,903)
(7,208) (847) (8,055) (1,645)
(20,416) (574) (20,990) (1,115)
Income (loss) from continuing operations 957 Income (loss) from discounted operations (net of taxes)______ Net income (loss) Balance Sheet Data: Total assets Total debt/obligations Stockholders' (deficit) equity $ 957
(2,353) ________ $ (2,353)
$ (9,700) $ (22,105)
$119,736 $106,523 $ 13,213
$117,520 $107,280 $ 10,240
$117,520 $107,280 $ 10,340
$109,172 $ 82,903 $ 7,389
$141,993 $123,967 $ (6,912)
$175,587 $124,982 $ 28,654
$166,746 $113,488 $ 29,205
34.
Additionally, page 18 of the Registration Statement contained revenue and
income results for fiscal year 2004 and first quarter of 2005. Specifically, it stated: Statement of Operations Data Total Revenues Total cost of revenue Income(loss) from operations Interest income (expense), net Net income (loss) 35. Year Ended 12/31/04 96,787 43,042 6,319 (9,683) (3,3113) Three Months Ended 03/31/05 22,982 10,398 2,069 (2,304) 235
Along with this historical financial data, PGIC stated that the information in the
charts should be read "together with the historical financial statements of [PGIC] incorporated by reference in this [Registration Statement]." Thus the Registration Statement incorporated PGIC's financial statements for fiscal years 2000-2005. It also incorporated by reference all documents that PGIC filed with the SEC between January 24, 2005 and October 9, 2005.
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36.
PGIC's financial results, as set forth in the Registration Statement and the
financial statements incorporated therein, were materially false, misleading and incomplete as its revenues were artificially inflated due to a number of accounting misstatements and failures to follow GAAP. Specifically, the financial results listed in the Registration Statement were false and misleading because, at all times relevant thereto, the Company failed to disclose that: (1) PGIC booked revenues to which it was not entitled, including but not limited to, booking revenue on sales of products for which customers refused delivery and booking sales on products that were not installed; (2) in analyzing accounts receivable and asset values to calculate appropriate reserves and write-offs, PGIC consistently understated its reserves and carried accounts receivable balances and asset values that should have been written off long before they actually were; (3) goods and services for which PGIC over-billed customers and which were returned by customers consistently were not reversed on the Company's financial statements; (4) the Company failed to disclose the impact that FASB 153 would have on its financial results; and (5) the Company recognized revenue on exchanges of patent and other non-monetary assets to which it was not entitled in violation of GAAP, as explained in Section III. 37. Additionally, the Forms 10-K and Forms 10-Q incorporated by reference in the
Registration Statement, including the Form 10-K for the fiscal year ended December 31, 2004 and the Form 10-Q for the fiscal quarter ended March 31, 2005, represented that "[o]ur consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States." 38. These statements were materially false and misleading for the reasons set forth in
36, and because GAAP was not followed by the Company at all relevant times hereto as alleged in Section III.
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39.
The Registration Statement also represented the following from PGIC's Form 10-
K for fiscal year 2004, concerning the write-down of inventory and other obsolete assets: Inventory and Obsolescence We routinely evaluate the realizability of our inventory based on a combination of factors including the following: historical usage rates, forecasted sales or usage, estimated service period, product end of life dates, estimated current and future market values, service inventory requirements and new product introductions, as well as other factors. Purchasing requirements and alternative usage avenues are explored within these processes to mitigate inventory exposure. Raw materials and work in progress and quantities in excess of forecasted usage are reviewed at least quarterly by our engineering and operating personnel for obsolescence. Such raw material and work in progress write-downs are typically caused by engineering change orders or product end of life adjustments. Finished goods are reviewed at least quarterly by product marketing and operating personnel to determine if inventory carrying costs exceed market selling prices. Service inventory is systematically reserved for based on the estimated remaining service life of the inventory. We record reserves for inventory based on the above factors and take into account worldwide quantities and demand in our analysis. In 2004, we reduced our reserves through write-offs of obsolete inventories and adjusted the level of reserves in accordance with our accounting policies. If circumstances related to our inventories change, our estimates of the realizability of inventory could materially change. (Emphasis added). 40. These statements were materially false and misleading for the reasons set forth in
36, and because inventory reserves were understated at all relevant times hereto and were not recorded in compliance with GAAP as alleged in Section III. III. PGIC'S ACCOUNTING VIOLATIONS A. 41. Defendants Violated GAAP At all relevant times during the Class Period, Defendants represented that PGIC's
consolidated financial statements were prepared in accordance with GAAP. GAAP are those principles recognized by the accounting profession and SEC as the uniform rules, conventions, and procedures necessary to define accepted accounting practice at a particular time. However,
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in violation of GAAP and SEC reporting requirements, Defendants failed to disclose the potential impact of SFAS No. 153 ("FASB 153"), Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29 ("APB 29") on its nonmonetary exchanges. Thus, Defendants' class period financial statements were materially false and misleading as they: (1) recognized revenues from non-monetary transactions, and (2) failed to properly and fully disclose the non-monetary transactions into which the Company entered from fiscal year 2000 to the first quarter of 2005 in violation of APB 29. 42. As set forth in Financial Accounting Standards Board ("FASB"), Statement of
Concepts ("Concepts Statement") No.1 (November 1978), one of the fundamental objectives of financial reporting is that it provides accurate and reliable information concerning an entity's financial performance during the period being presented. Concepts Statement No. 1, paragraph 42, states: Financial reporting should provide information about an enterprise's financial performance during a period. Investors and creditors often use information about the past to help in assessing the prospects of an enterprise. Thus, although investment and credit decisions reflect investors' and creditors' expectations about future enterprise performance, those expectations are commonly based at least partly on evaluations of past enterprise performance. 43. SEC Regulation S-X requires that publicly traded companies present their annual
financial statements in accordance with GAAP. [17 C.F.R. 210.4-01(a) (1)]. In addition, Regulation S-X requires that interim financial statements also comply with GAAP. Financial statements filed with the SEC that are not prepared in compliance with GAAP are presumed to be misleading and inaccurate. Management is responsible for preparing financial statements that conform to GAAP. As noted by AICPA professional standards: financial statements are management's responsibility...[M]anagement is responsible for adopting sound accounting policies and for establishing and maintaining internal control that will, among other things, record, 12
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process, summarize and report transactions (as well as events and conditions) consistent with management's assertions embodied in the financial statements. The entity's transactions...are within the direct knowledge and control of management....Thus, the fair presentation of financial statements in conformity with Generally Accepted Accounting Principles is an implicit and integral part of management's responsibility. 44. Defendants' failure to disclose the potential implications of FASB 153 in its
periodic filings with the SEC was a violation of GAAP and SEC reporting requirements and resulted in materially false and misleading financial statements throughout the Class Period. 1. 45. Defendants Violate APB 29
Upon information and belief and at all relevant times hereto, PGIC engaged in
non-monetary transactions, including but not limited to patent swaps and exchanges of software licenses, the financial recording of which was governed by APB 29. APB 29 was the predecessor to FASB 153, and governed the accounting treatment of non-monetary transactions in much the same way as does FASB 153. In particular, like FASB 153, APB 29 precluded the recognition of revenue from non-monetary exchanges and required companies involved in such transactions to fully disclose them in their financial statements. 46. Indeed, APB 29 says nothing of recognizing revenue, but rather provides that
"...the cost of a non-monetary asset acquired in exchange for another non-monetary asset is the fair value of the asset surrendered to obtain it, and a gain or loss should be recognized on the exchange." (APB 29 18). "If neither the fair value of a non-monetary asset transferred nor the fair value of a non-monetary asset received in exchange is determinable within reasonable limits, the recorded amount of the non-monetary asset transferred from the enterprise may be the only available measure of the transaction." (APB 29 26). Accordingly, APB 29 requires exchangers to determine whether a loss or gain was incurred on a subject transaction and record the transaction as a gain or loss on the income statement.
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47.
Furthermore, like FASB 153, APB 29 requires that "[a]n enterprise that engages
in one or more non-monetary transactions during a period should disclose in financial statements for the period the nature of the transactions, the basis of accounting for the assets transferred, and gains or losses recognized on transfers." (APB 29 28). 48. While FASB 153 amends APB 29 to affect the measurement of exchanges of non-
monetary transactions, it did not amend or supersede the foregoing requirements of APB 29 the requirements to recognize a gain or loss on the transaction and to disclose the existence and specifics of non-monetary transactions. 49. As alleged herein, PGIC engaged in non-monetary transactions at all relevant
times hereto, but failed to follow the foregoing mandates of APB 29. Specifically, rather than limiting their financial recording of the non-monetary exchanges to recognizing a gain or loss on the Company's financial statements, the Company improperly recorded revenue from the transactions. Furthermore, PGIC failed to disclose in its financial statements the nature of the non-monetary transactions it had entered into, the basis of its accounting for the exchanges, or the gain or loss recognized on the transactions. Accordingly, the financial indicators contained in the Company's financial statements were recorded in violation of APB 29 and were materially false and misleading. 2. 50. Defendants Ignore The Potential Impact Of FASB 153 On PGIC
Defendants ignored the potential impact of FASB 153, a new accounting
pronouncement issued in December 2004. FASB 153 addresses the measurement of exchanges of non-monetary assets. It eliminates the exception from fair value measurement for nonmonetary exchanges of "similar productive assets" in paragraph 21(b) of APB 29 and replaces it with an exception for exchanges that "do not have commercial substance." FASB 153 goes on to
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explain that a nonmonetary exchange has commercial substance if the future cash flows of a company are expected to change significantly as a result of the exchange. 51. This GAAP pronouncement was significant to PGIC, as PGIC earned 40% of its
revenue from non-recurring licensing of intellectual property, content and technology licensing activities. These licensing transactions often took the form of nonmonetary exchanges. In 2005, PGIC reported revenue of $78.2 million of which up to $31.2 million involved these nonrecurring licensing transactions. Thus, FASB 153 came as no surprise to Defendants, as the standard was issued in December 2004 by the Financial Accounting Standards Board - ten months before Defendants October 20, 2005 announcement. And although Defendants mentioned it in a Form S-4 filed with the SEC on April 25, 2005, they fraudulently failed to disclose it in their 2004 Form 10-K and Form 10-Q's for the first and second quarters of 2005. 3. 52. PGIC Failed to Disclose The Impact Of FASB 153
Defendants failed to assess the pending impact of FASB 153 in its SEC filings
during the Class Period. SEC Staff Accounting Bulletin No. 74 ("SAB 74") Disclosure Of The Impact That Recently Issued Accounting Standards Will Have On The Financial Statements Of The Registrant When Adopted In A Future Period, requires disclosure of the potential financial statement effects of recently promulgated accounting standards. The SEC generally expects registrants to discuss new accounting standards in periodic filings until it is adopted. specifically, the SEC expects the following: The registrant should evaluate each new accounting standard to determine the appropriate disclosure and recognizes that the level of information available to the registrant will differ with respect to various standards and from one registrant to another. The objectives of the disclosure should be to (1) notify the reader of the disclosure documents that a standard has been issued which the registrant will be required to adopt in the future and (2) assist the reader in assessing the significance of the impact that the standard will have on the financial statements of the registrant when adopted.
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A brief description of the new standard, the date that adoption is required and the date that the registrant plans to adopt, if earlier. A discussion of the methods of adoption allowed by the standard and the method expected to be utilized by the registrant, if determined. A discussion of the impact that adoption of the standard is expected to have on the financial statements of the registrant, unless not known or reasonably estimable. In that case, a statement to that effect may be made. Disclosure of the potential impact of other significant matters that the registrant believes might result from the adoption of the standard (such as technical violations of debt covenant agreements, planned or intended changes in business practices, etc.) is encouraged. (Emphasis added). Disclosing the effects of FASB 153 in each periodic filing after it was issued by
53.
the SEC would have allowed investors to assess the impact of the standard on PGIC's financial statements and in particular on two material nonmonetary exchanges in September 2005. The first transaction in September 2005 involved the license of PGIC's legacy slot operating system to a third party for $6 million in exchange for intellectual property content for use in PGIC's wagering growth initiative. This transaction alone represented 8% of PGIC's total revenue for 2005. The second arrangement involved obtaining the right to execute the license from the legacy slot operating system owner in the first transaction for $1.5 million in exchange for PGIC intellectual property. This disclosure was conveniently after the close of the VirtGame Corporation acquisition and the announcement of the secondary offering of common stock. In an October 20, 2005 press release, PGIC reported that rather than report earnings of $.08-$.10 per share for the third quarter 2005, PGIC would report a loss per share of $.09 a share: Prior to the end of the third quarter of 2005, per the Company's regular policies and procedures, the Company reviewed significant transactions to determine the potential accounting treatment. Prior to entering into two complex software licensing transactions and prior to the end of the third quarter, the Company determined that it would be able to recognize approximately $6.0 million in revenue and $1.5 million of related costs. On October 19, 2005, the Company, after reviewing FAS Statement No. 153, Exchange of Non-monetary Assets--an amendment of APB Opinion No. 29, which became effective for transactions for 16
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the Company in the third quarter of 2005, and in consultation with its outside auditors, determined that it would not be able to recognize this revenue or the related costs as was previously determined prior to the end of the third quarter. As a result of this determination, the Company expects its operating results for the third quarter of 2005 to be below its previously issued guidance. Prior to October 19, 2005, the Company expected its operating results for the third quarter of 2005 to be approximately $23.8 million, $5.5 million and $0.09 of revenues, EBITDA and earnings per share, respectively. As a result of the decision not to recognize the revenue and related costs described above, the Company now expects its operating results for the third quarter of 2005 to be approximately $17.8 million, $1.0 million and ($0.09) of revenues, EBITDA and loss per share, respectively. 54. Additionally, on November 11, 2005, PGIC filed its September 30, 2005 Form
10-Q and adopted FASB 153: The Company adopted Statement of Financial Accounting Standards No. 153 "Exchanges of Non-Monetary Assets" (FAS 153) for the quarter ended September 30, 2005. FAS 153 addresses the measurement for the exchange of non-monetary assets. In September 2005, the Company entered into separate transactions involving the licensing of intellectual property and content. The first involved the license of Company's legacy slot operating system of which the Company had previously acquired a portion of the rights to, made significant modifications and enhancements and obtained regulatory approval in numerous jurisdictions. The second transaction involved obtaining the rights to execute such license of this software from the current owner. The third was the acquisition of unique intellectual property content primarily for use in the Company's server-based wagering growth initiative from the service provider that the slot operating system was licensed to. These transactions were accounted for as non-monetary exchanges in accordance with FAS 153 and have been recorded at cost in the accompanying consolidated balance sheets. 55. Although PGIC adopted FASB 153 on the deadline required by the FASB, it
purposely misled investors by failing to disclose the pending impact of the FASB 153 in its December 31, 2004 Form 10-K and the first and second quarters of 2005 Form 10-Q's as required by SAB 74 and GAAP, which Defendants knew or recklessly disregarded.
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4. 56.
Violations Of SEC Regulations
It was material for investors and the market to know the source of PGIC's revenue
and earnings. It was material for investors to know that PGIC was exposing itself to risks by not timely assessing the impact of FASB 153 on its activities. 57. It is precisely because such "qualitative" information is important to investors that
the SEC requires corporations to discuss their businesses and interpret their results. As the Securities Act Release No. 6711 states: The Commission has long recognized the need for a narrative explanation of the financial statements, because a numerical presentation and brief accompanying footnotes alone may be insufficient for an investor to judge the quality of earnings and the likelihood that past performance is indicative of future performance. MD&A [Management Discussion and Analysis] is intended to give the investor an opportunity to look at the company through the eyes of management by providing both a short and long-term analysis of the business of the company. . . 58. According to Securities Act Release No. 6349:
[i]t is the responsibility of management to identify and address those key variables and other qualitative and quantitative factors which are peculiar to and necessary for an understanding and evaluation of the individual company. 59. In addition, the SEC in its May 1989 Interpretive Release No. 34-26831, has
indicated that registrants should employ the following two step analysis in determining when a known trend or uncertainty is required to be included in the MD&A disclosure pursuant to Item 303 of Regulation S-K: A disclosure duty exists where a trend, demand, event or uncertainty is both presently known to management and is reasonably likely to have a material effect on the registrant's financial condition or results of operations. 60. Moreover, Item 7 of Form 10-K and item 2 of Form 10-Q, Management
discussions and Analysis of Financial Condition and Results of Operations ("MD&A") require
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the issuer to furnish information required by Item 303 of Regulation S-K [17.C.F.R.229.303]. In discussing results of operations, Item 303 of Regulation S-K requires the registrant to: [d]escribe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations. 61. Defendants' failure to identify to investors the impact of FASB 153 to PGIC's
revenue and earnings acted as an implicit, and false, representation that revenue from the nonmonetary transactions was sustainable. 5. 62. Additional Violations Of Fair Financial Reporting
In addition to the accounting improprieties stated above, PGIC presented its
financial statements during the Class Period in a manner which also violated at least the following basic concepts underlying fair financial reporting: (a) The concept that financial reporting should provide information that is
useful to present and potential investors and creditors and other users in making rational investment, credit and similar decisions (Concepts Statement No.1, 34); (b) The concept that financial reporting should provide information about the
economic resources of an enterprise, the claims to those resources, and the effects of transactions, events and circumstances that change resources and claims to those resources (Concepts Statement No.1, 40); (c) The concept that financial reporting should provide information about how
management of an enterprise has discharged its stewardship responsibility to owners (stockholders) for the use of enterprise resources entrusted to it. To the extent that management offers securities of the enterprise to the public, it voluntarily accepts wider responsibilities for accountability to prospective investors and to the public in general (Concepts Statement No.1, 50); 19
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(d)
The concept that financial reporting should provide information about an
enterprise's financial performance during a period. Investors and creditors often use information about the past to help in assessing the prospects of an enterprise. Thus, although investment and credit decisions reflect investors' expectations about future enterprise performance, those expectations are commonly based at least partly on evaluations of past enterprise performance (Concepts Statement No.1, 42); (e) The concept that financial reporting should be reliable in that it represents
what it purports to represent. That information should be reliable as well as relevant is a notion that is central to accounting (Concepts Statement No.2, 58-59); (f) The concept of completeness, which means that nothing is left out of the
information that may be necessary to ensure that it validly represents underlying events and conditions (Concepts Statement No.2, 79); and 63. The concept that conservatism be used as a prudent reaction to uncertainty to try
to ensure that uncertainties and risks inherent in business situations are adequately considered. The best way to avoid injury to investors is to try to ensure that what is reported represents what it purports to represent (Concepts Statement No.2, 95, 97). 64. The foregoing accounting errors caused the financial results contained in the
Registration Statement to be materially false, misleading and incomplete and masked adverse conditions that the Company was experiencing at the time of the Registration Statement all to the detriment of unsuspecting investors.
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IV.
SECURITIES ACT COUNTS COUNT I AGAINST THE SECURITIES ACT DEFENDANTS FOR VIOLATIONS OF SECTION 11 OF THE SECURITIES ACT IN CONNECTION WITH THE REGISTRATION STATEMENT 65. Lead Plaintiffs repeat and reallege each and every allegation set forth above in the
Securities Act Claims, as if fully set forth herein. 66. This Count is brought pursuant to Section 11 of the Securities Act, 15 U.S.C.
77k, on behalf of all persons or entities who acquired any and all PGIC securities pursuant or traceable to the Registration Statement. At the time they acquired PGIC securities, Lead Plaintiffs and the other members of the Securities Act Class were without knowledge of the facts concerning the materially false and misleading statements in the Registration Statement. Lead Plaintiffs assert that the defendants named in this Count are liable for their conduct under strict or negligent liability standards. 67. The Registration Statement, as set forth above, was false and misleading,
contained untrue statements of material facts, and omitted to state other facts necessary to make the statements contained therein not misleading. In particular, as set forth above, the Registration Statement was false and misleading in that it failed to accurately reflect PGIC's financial results. These misstatements rendered the Company's financial results stated therein materially false and misleading. 68. PGIC, as the issuer of the Registration Statement, is strictly liable for the false and
misleading statements therein. 69. Defendants McMeekin, Sicuro and Rollo signed the false and misleading
Registration Statement. Therefore, McMeekin, Sicuro and Rollo are each strictly liable to Lead
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Plaintiffs and the other members of the Securities Act Class who acquired any and all PGIC securities pursuant or traceable to the Registration Statement. 70. As Directors of PGIC, Defendants Boynton, Todoroff, Oliver and Smith are each
strictly liable to Lead Plaintiffs and the other members of the Securities Act Class who acquired any and all PGIC securities pursuant to the Registration Statement. 71. Less than one year has elapsed from discovery of the violations and facts upon
which this Complaint is based to the time of the filing of this action. 72. By reason of the conduct alleged herein, each defendant named in this Count
violated Section 11 of the Securities Act. As a direct and proximate result of the materially false and misleading statements in the Registration Statement, Lead Plaintiffs and the other members of the Securities Act Class have sustained substantial damage in connection with their purchase or acquisition of any and all PGIC securities pursuant or traceable to the Registration Statement. COUNT II AGAINST THE SECURITIES ACT DEFENDANTS, FOR VIOLATIONS OF SECTION 12(A)(2) OF THE SECURITIES ACT IN CONNECTION WITH THE REGISTRATION STATEMENT 73. Lead Plaintiffs repeat and reallege each and every allegation set forth above in the
Securities Act Claims, as if fully set forth herein. 74. This Count is brought pursuant to Section 12(a)(2) of the Securities Act, on behalf
of all persons or entities who acquired any and all PGIC securities pursuant to the Registration Statement. At the time they acquired PGIC securities, Lead Plaintiffs and the other members of the Securities Act Class were without knowledge of the facts concerning the materially false and misleading statements in the Registration Statement. Lead Plaintiffs assert that the defendants named in this Count are liable for their conduct under strict or negligent liability standards.
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75.
Each of the defendants named in this Count was an offeror, seller and/or solicitor
of a security, as defined in the Securities Act. Specifically, PGIC and the other Securities Act Defendants offered, sold and solicited the sale of PGIC securities in the VirtGame acquisition to Plaintiffs and the other members of the Securities Act Class by virtue of the Securities Act Defendants' signing, preparation, solicitation and/or dissemination of the Registration Statement. 76. The PGIC securities offered in the VirtGame acquisition by the defendants named
in this Count was transferred through the use of interstate communications, the use of interstate commerce, and the use of the mails. 77. The PGIC common stock offered in the VirtGame acquisition through the use of
the Registration Statement, as set forth above, contained false statements of material fact or omitted to state material facts necessary in order to make other statements made therein not misleading. 78. By reason of the conduct alleged herein, each defendant named in this Count
violated Section 12(a)(2) of the Securities Act. As a direct and proximate result of the materially false and misleading statements in the Registration Statement, Lead Plaintiffs and the other members of the Securities Act Class have sustained substantial damage in connection with their acquisition of PGIC securities pursuant or traceable to the Registration Statement. 79. Less than one year has elapsed from discovery of the violations and facts upon
which this Complaint is based to the time of filing of this action. COUNT III AGAINST DEFENDANTS, MCMEEKIN, SICURO AND ROLLO FOR VIOLATIONS OF SECTION 15 OF THE SECURITIES ACT IN CONNECTION WITH THE REGISTRATION STATEMENT 80. Lead Plaintiffs repeat and reallege each and every allegation set forth above in the
Securities Act Claims, as if fully set forth herein. 23
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81.
This Count is brought pursuant to Section 15 of the Securities Act, on behalf of all
persons or entities who acquired any and all PGIC securities pursuant or traceable to the Registration Statement. At the time they acquired PGIC securities, Lead Plaintiffs and the other members of the Securities Act Class were without knowledge of the facts concerning the materially false and misleading statements in the Registration Statement. In this Count, Lead Plaintiffs assert that the above Defendants are liable for their conduct under strict or negligent liability standards. 82. Defendants McMeekin, Sicuro, and Rollo were each control persons of PGIC by
virtue of their executive and/or directorial positions at the Company. These Defendants had the power, and exercised the same, to cause PGIC to engage in negligent conduct that caused violations of law complained of herein and were able to and did control the contents of the Registration Statement. 83. By reason of their senior executive positions at PGIC and their actual control over
the Company's day-to-day operations, financial statements, public filings and their intimate involvement and control over the Registration Statement, McMeekin, Sicuro, and Rollo are each jointly and severally liable to Lead Plaintiffs and the other members of the Securities Act Class as a result of the wrongful conduct alleged herein. V. EXCHANGE ACT CLAIMS A. 84. Jurisdiction And Venue This Court has jurisdiction over the subject matter of this action pursuant to 27
of the Exchange Act (15 U.S.C. 78aa), 28 U.S.C. 1331 AND Section 22 of the Securities Act. The claims asserted herein arise under Sections 10(b) and 20(a) of the Exchange Act, 15 U.S.C. 78j(b) and 78t(a), and the rules and regulations promulgated thereunder by the SEC, including
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Rule 10b-5 (17 C.F.R. 240.10b-5), and under Sections 11, 12(a)(2) and 15 of the Securities Act, 15 U.S.C. 77, 77l(a)(2), and 77o. 85. Venue is proper in this district pursuant to Section 27 of the Exchange Act (28
U.S.C. 1391(b)). Many of the acts and transactions giving rise to the violations of law complained of herein, including the preparation and dissemination to the investing public of false and misleading information, occurred in this district. In addition, PGIC maintains its principal executive offices in this district. 86. In connection with the acts, conduct and other wrongs complained of herein,
Defendants used the means and instrumentalities of interstate commerce, including the mails, telephone and the facilities of national securities exchanges. B. Parties To The Exchange Act Claims 1. 87. Lead Plaintiffs
Plaintiffs Daniel Najor, Cindy Dolgin, Janusz Krysinski, Donald L. Gottschalk
and David Ott ("Lead Plaintiffs") were appointed Lead Plaintiffs by Order of the Court on February 17, 2006. Lead Plaintiffs Daniel Najor, Cindy Dolgin and Janusz Krysinski received their PGIC shares pursuant to the VirtGame acquisition. Lead Plaintiffs Donald L. Gottschalk and David Ott purchased PGIC common stock during the Class Period. Lead Plaintiffs have all suffered losses for the reasons stated in this Complaint. 2. 88. Exchange Act Defendants
Defendant PGIC, headquartered in Las Vegas, Nevada, is a supplier of integrated
casino management systems software and games for the gaming industry worldwide. The Company develops and distributes an expanding array of slot and table games, plus management and progressive jackpot software systems. PGIC's fiscal year runs with the calendar year, January 1 through December 31.
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89.
Defendant Russell H. McMeekin served as Chief Executive Officer (principal
executive officer) for all times relevant to this action. 90. Defendant Michael A. Sicuro served as Chief Financial Officer for all times
relevant to this action. 91. For purposes of the Exchange Act claims only, Defendants McMeekin and Sicuro
are collectively referred to as "Individual Defendants." In these capacities, the Individual Defendants received substantial compensation. C. Defendants' Lies And Omissions 1. 92. PGIC's Culture Of Improper Revenue Recognition and Accounting Violations
PGIC posits itself to be a leading, diversified supplier of gaming equipment and
systems to the international gaming industry. However, despite Defendants' affirmations in the Company's Code of Conduct that they are "required to maintain accurate books and records and implement a system of internal controls," former PGIC insiders have revealed that PGIC has a long history of improper accounting and fraudulent practices. 93. Many of these practices were confirmed by no less than the Former PGIC Chief
Financial Officer. When he arrived at the Company in July 2001, the Former PGIC CFO discovered that "the books and reporting were pretty bad," and he quickly learned that "they were only really focused on meeting quarterly numbers." 2 In fact, he revealed that the Company would have been "out of cash" had it not been for a bond offering launched by the Company in August 2001, which "saved the Company" from going under.
All confidential witnesses are referred to in the masculine gender in order to protect their identity.
2
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94.
The Former PGIC CFO also revealed that, in November 2001, as the Company's
third quarter 2001 numbers were coming out, he became aware that the Company had overstated revenues by approximately $450,000. These overstated revenues came from what he termed "slot routes." 3 The Former PGIC CFO explained that, often times, casino customers do not pay slot fees on time. To cure this, PGIC would improperly estimate revenues based on the number of days not yet paid. He stated that the overall setting of the Company was that "our guys were being told to be very aggressive." 95. The Former PGIC CFO described another incident from the same time frame in
which the Company overstated revenue. The Company had shipped a $600,000 to $800,000 order from the Company's Hurricane, Utah manufacturing facility to a customer called BC Lottery. The order was not shipped until October 1, 2001, but the date on the invoice had been crossed out and replaced with September 30, 2001. The Former PGIC CFO "sat down with the auditors" and looked at the original bill of lading from the trucking company, which showed the order was not shipped until October 1, 2001. He immediately went to the Company's management and instructed them that the Company had overstated revenues. 96. These problems continued during the fourth quarter of 2001. At this time, the
Former PGIC CFO disclosed that he had to instruct management that the Company needed to write off at least $10 million in inventory and fixed assets. Despite this, the then-CEO, David Thompson, told the Former PGIC CFO that the Company "had to break even." Afterwards, the Former PGIC CFO revealed that Arthur Andersen's auditor manager wrote the Company up for "material control weaknesses." Then, in March 2002, the Former PGIC CFO explained that the
Slot route operations involve the installation and operation of slot machines on a revenue share basis with a casino operator in strategic, high traffic locations within various hotels.
3
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Company received a letter from the SEC, questioning why the Company took such a large write off in the fourth quarter of 2001. a. 97. Multiple Auditors Reject PGIC's Business
Andersen had been PGIC's independent auditor since June 13, 2000. However,
on April 29, 2002, PGIC announced that it had dismissed Andersen as the Company's auditor. According to the Former PGIC CFO, the dismissal was due to the Enron scandal. Once Andersen was dismissed, the Company solicited audit oversight from Ernst & Young, KPMG and Deloitte and Touche. However, the Former PGIC CFO revealed that "none of them wanted the job." In fact, even though Deloitte and Touche's audit partner was a good friend of thenCEO Thompson, Deloitte would still not take the job. In the words of the Former PGIC CFO, "we simply could not find an auditor." 98. The Company then solicited Grant & Thornton as auditors, who also refused the
engagement. According to the Former PGIC CFO, the reason for the rejections from all of the auditors was that Andersen had previously forced the Company to file a "dirty 8-K," meaning that Andersen had "material disagreements" with the Company's accounting. This Form 8-K, filed with the SEC on April 29, 2002, explains the material disagreements: During the audit of its financial statements for the year ended December 31, 2001, the Company had a disagreement with Andersen regarding the timing of revenue recognition for a sales transaction which occurred near the end of the Company's third fiscal quarter ended September 30, 2001. The Company had initially recorded the revenue in its third fiscal quarter ended September 30, 2001. Andersen informed the Company of its concerns that the revenue should have been recognized in the Company's fourth fiscal quarter ended December 31, 2001. Upon further review and analysis by the Company, and continuing discussions with Andersen, the Company restated its 10-Q filing for the period ended September 30, 2001, to the satisfaction of Andersen, which issued its report on the Company's financial statements for the year ended December 31, 2001, and
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During the audit of its financial statements for the year ended December 31, 2001, the Company had a disagreement with Andersen regarding the capitalization and valuation of certain rights obtained during the year and fourth fiscal quarter ended December 31, 2001. Andersen informed the Company of its concerns and belief that the amount should be included as an item of income/loss during the year ended December 31, 2001. Upon further review and analysis by the Company, and continuing discussions with Andersen, the amount was expensed to the satisfaction of Andersen, which issued its report on the Company's financial statements for the year ended December 31, 2001. 99. The Company also discussed the material control weaknesses previously
identified by Andersen, stating: "Andersen informed the Company in letters dated April 10, 2002 and April 3, 2001 that certain material weaknesses in internal control existed during the fiscal years ended December 31, 2001 and 2000." The Form 8-K went on to discuss the material weaknesses: Although Andersen reported to the Audit Committee during 2001 that the institution of certain processes noted below appeared to have been implemented, Andersen noted that it was apparent that the processes have not been fully implemented or are not functioning adequately. Specifically, the Company and its Audit Committee were admonished to improve or institute: (1) the process for timely and regular detail analysis of all balance sheet accounts, (2) the process for the review of the balance sheet analyses and accounts by a competent professional to identify valuation and U.S. GAAP issues with resolution on an objective and neutral basis, (3) the process for a competent professional to review significant or unusual business transactions and agreements to identify U.S. GAAP issues, (4) the process of regular financial statement internal auditing, targeting those areas where the greatest risk of financial statement misstatement exists, and (5) the review of underlying detail with more objectivity and a critical review in all major revenue recognition areas.
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100.
The material control weaknesses cited by Andersen are evidenced in disclosures
made by the Former PGIC Director of Gaming, who left PGIC in June of 2004. This former employee revealed that the Company consistently understated its reserves and carried balances that should have been written off long before they actually were. The Company's schedules regularly maintained balances that were overbilled or represented goods that had been returned by the buyer. However, the overbilled/returned amounts were not reversed on the Company's books. Instead, the receivable amounts were eventually written off. This treatment avoided reversing or reducing revenue. The Former PGIC Director of Gaming went on to divulge that, faced with a consistent shortfall of revenues, he was regularly advised to "make it work" so that the Company could obtain its projected revenue numbers. In numerous quarters, this resulted in booking sales that should not have been booked. The Former PGIC Director of Gaming explained his participation by revealing that: "these transactions were processed due to fact that I felt that my career was in jeopardy. I also felt threatened by the executive once again in fear of losing my job." b. 101. The Michigan Gaming Control Board Cracks Down On PGIC's Fraud
PGIC's fraudulent accounting practices did not go unnoticed. The Former PGIC
CFO revealed that, in June 2002, the Michigan Gaming Control Board ("Control Board") arrived at PGIC, and by July 2002, had started a formal investigation. During the investigation, the Control Board focused upon a number of restatements of financial reports submitted by PGIC to the SEC, and the Company's subsequent write-off of approximately $40,000,000 from its financial statements between February of 2001 and April of 2002. 102. After multiple interviews by the Control Board, and after refusing to cooperate on
multiple occasions, PGIC eventually admitted that it lied and engaged in financial and
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accounting indiscretions. As a result, the Control Board issued heavy fines and sanctions against PGIC, and on April 13, 2004, PGIC signed an Acknowledgement of Violation, under which: a. It was forced to pay a $75,000 fine for not cooperating with the Control
Board during their investigation; b. It had to admit that it did not contest the Control Board Staff's
determination that the reported facts established a violation; c. It could not pay any bonuses to its senior management for 2003 that were
calculated or based in any way on the Company's earnings; d. This bonus penalty was to continue into 2004 and 2005, unless certain
stringent conditions were met; e. f. It was required to amend its Code of Conduct; and It was forced to pay for the costs of the investigation. c. 103. McMeekin's Arrival And Willingness To Do "Anything" To Increase PGIC's Stock Price
The Company's troubles with revenue recognition continued when Defendant
McMeekin joined the Company in June 2002. 104. According to the Former PGIC Director of Finance, Defendant McMeekin "was
very involved in revenue recognition, and he was pushing it." For instance, the Former PGIC Director of Finance revealed that "if a product was sitting on the back of a truck, we could recognize [the revenue.]" He recalled that during the last two weeks of a quarter, McMeekin got "very worked up." Specifically McMeekin would yell at Vice President of Marketing Robert Parente to "get it out of here," referring to product. 105. According to the Former PGIC Director of Finance, who worked at PGIC from
2001 through March 2004, "McMeekin only cared about the stock price." This was confirmed
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by the Former PGIC CFO, who revealed that Defendant McMeekin was so caught up in satisfying Wall Street, he actually had a green street sign in his office reading "Wall Street." 106. Defendant McMeekin's obsession with PGIC's stock price is also confirmed by
several emails written by Defendant McMeekin to the Former PGIC CFO. In one, dated October 15, 2002, Defendant McMeekin states "I do not intend to take any charges for these loans [from PGIC to an officer and a director]. I will not miss our forward guidance for anything incl[uding] these loans." Another email written on April 3, 2003 declares "we cannot f*ck up Q2!" A third email emphasizes Defendant McMeekin's willingness to artificially boost stock prices through guidance. In this email, dated December 17, 2002, Defendant McMeekin states "we will need to put out a pre announcement for earning in mid January to try to get the stock back over 3$ [sic]." 107. Defendant McMeekin's fixation with the stock price was again demonstrated in
the fourth quarter of 2002. During this time, Defendant McMeekin told the Former PGIC CFO "we need two to three cents profit [per share] this quarter." When the Former PGIC CFO asked why, McMeekin responded "because I told people we would." McMeekin added, "we better get there, and I'm going to need your help." The pressure that McMeekin exerted on the Former PGIC CFO to meet quarterly numbers is exemplified by an instance where McMeekin once screamed at the Former PGIC CFO because he "was not going to fudge the numbers." In his words, "it was a big issue with Russ [McMeekin] that I would not fudge the numbers." 108. Defendant McMeekin would even "play games" related to the Company stock
price. The Former PGIC CFO recalled the case of former Company HR employee Yvette Moore, whom he told McMeekin needed to be terminated. McMeekin instructed the Former PGIC CFO, "if you get me to a penny per share, I will fire her." Following the close of fourth quarter of 2002, the Former PGIC CFO informed McMeekin the Company would not get a
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penny per share profit. In response, on March 12, 2003, McMeekin sent the Former PGIC CFO an email with the simple heading: "Sounds like Yvette will be around for a while!" 109. McMeekin's quest to drive up the stock price was further evidenced in August
2003 when he was working directly with the investment banking firms of Jefferies & Co. and Roth Capital Partners on a deal to sell Company equities. According to the Former PGIC CFO, the goal of the equity sale was to buy down the Company's high yield debt. At that time, the Former PGIC CFO remembers getting a call from Jefferies & Co. analyst Larry Klatzkin about a report he was doing on the Company and requesting the Former PGIC CFO review the report. The Former PGIC CFO told Klatzkin that Klatzkin "was out in left field on our revenues." In response, Klatzkin told the Former PGIC CFO, "Russ gave me the numbers. You and Russ better get together." To the Former PGIC CFO, it was clear at this point that McMeekin "was trying to drive the stock price up." Despite the Former PGIC CFO's protestations, Klatzkin published a report in August 2003 with revenue numbers the Former PGIC CFO knew the Company could not hit for the third quarter of 2003. 110. Around August 2003, the Former PGIC CFO recalls that Defendant McMeekin
went on a road show to sell Company equities. At that time, the Former PGIC CFO told McMeekin that the Company "will not hit the numbers that Jefferies has out there," since he was concerned about the Company selling securities based on inflated projections. As a result, McMeekin decided not to take the Former PGIC CFO on the road show with him. Then, the Former PGIC CFO received a call from McMeekin on September 8, 2003 during the Monday Night Football game. McMeekin was "drunk," and started cussing and yelling at the Former PGIC CFO stating, "you're f***ing ruining this Company." The Former PGIC CFO told McMeekin he was not comfortable with the Company selling securities with inflated projections
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"floating around." In the end, McMeekin's drive to improperly recognize revenue conflicted with the Former PGIC CFO, who "was forced out [in January 2004] because he wouldn't play the game." d. 111. Sicuro Comes On Board
Defendant Sicuro joined the Company in January 2004 as the new CFO.
According to the Former PGIC Human Resources Administrator, who worked at PGIC from August 2000 to April 11, 2005. Sicuro was "not very well-liked. He was very volatile and would go ballistic." Likewise, the Former PGIC Controller, who worked at PGIC from April 1996 to February 2005, described Sicuro as a "mean SOB that always made you feel like an idiot." According to this Former PGIC Controller, Sicuro is a "very hands on guy," and there "is no mistake that Mike [Sicuro] is the boss." "Everyone knew Mike ran the Company." He revealed that Sicuro "doesn't want to hear about bad news." e. 112. Defendant Sicuro Eliminates The Company's Inside Auditor Position
Al Bingham, PGIC's Internal Auditor, was responsible for reviewing
documentation of all invoices over $100,000 to verify that all accounting requirements for revenue recognition had been complied with. According to the Former PGIC Assistant Controller, who worked at PGIC from 2002 to April 2005, Al Bingham was in charge of the internal revenue recognition process, and he "made sure all requirements of revenue recognition were met." 113. Despite this, the Former PGIC Human Resources Administrator, whose
responsibilities included employee evaluations, employee analysis, and other human resources tasks, disclosed that Defendant Sicuro switched Al Bingham from the position of PGIC Internal Auditor to the Company Collections Department in mid-2004. Essentially, Defendant Sicuro
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eliminated the inside auditor position. Defendant Sicuro told the Former PGIC Human Resources Administrator that he would not hire another internal auditor, but instead, would just "outsource" the position. The Former PGIC Human Resources Administrator thought it was strange that a Company could "outsource" an internal auditor. f. 114. McMeekin And Sicuro Continue PGIC's Pattern Of Improper Revenue Recognition
As a direct result of Defendant McMeekin's and Sicuro's attitude and
instructions, the improper revenue recognition practices also continued to run rampant under their tenure. For example, according to the Former PGIC Controller, accounting revenue recognition policy for product sales requires contracts to be actually installed before any revenue could be recorded. Despite this, in June of 2004, PGIC recorded several sales for products that were not installed. As a result, the Former PGIC Controller explained that revenue for June was actually overstated by $2,078,350 and net income was actually overstated by $1,043,579. g. 115. Defendants Used Slot Machines to Improperly Recognize Revenue
Multiple PGIC former employees attested to the fact that PGIC was having
financial problems as a result of declining slot machine revenue. According to the Former PGIC Assistant Controller, who left the Company in 2005, slot revenues had "been deteriorating for two to three years." The Former PGIC Assistant Controller recalled PGIC simply "couldn't get the games out" and that the Company "couldn't keep up with the hot games." The Company had some success with Yahtzee and Battleship, but games such as Garfield, Clue and Trivial Pursuit "just had no pizzaz." As a result, PGIC "just kept losing floor space" to competitors' slot machines. 116. This was confirmed by the Former PGIC Director of Finance who agreed that
"the games were coming off the floor faster than we could write them off." He stated that "there 35
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were a bunch of slots sitting in a warehouse," which was "right behind corporate headquarters." He later estimated the number of slots in the warehouse to be between 500 to 1000, compared to the 1000 to 1500 slots "on the floor [of casinos]." 117. According to the Former PGIC Controller, Sicuro "played a lot of [accounting]
games with refurbished machines." He stated that PGIC would spend between $1500 and $2000 to find a machine, and "Sicuro would capitalize it." "As of 2005, there were hundreds of machines in the warehouse." This was corroborated by the PGIC Director of Finance, who said that Sicuro began capitalizing maintenance costs for the slot machines. He had "heard Sicuro is putting maintenance costs [of slot machines] into inventory, so the Company does not have to take an asset write down." In the end, according to the Former PGIC Assistant Controller, due to the declining revenues from slots, the Company "had to go somewhere else for revenues." h. 118. The Patent Swaps Begin
Increasingly desperate to satisfy Wall Street, the Former PGIC Director of
Gaming described several transactions in which PGIC would improperly book revenue in order to "make the quarter." One such transaction was the ITS licensing agreement, where PGIC granted a license to ITS in exchange for royalty payments by ITS. The Former PGIC Director of Gaming revealed that, during this transaction, $400,000 was booked to revenue, but that no payment was ever received. He believed that the intent was to ensure that corporate executives received bonuses. The Company ultimately wrote off the receivable. 119. The Former PGIC Assistant Controller also discussed these licensing transactions,
referring to them as "patent swaps." He described these swaps, or patent sale contracts, as "extremely complicated" and "involved." The first "patent swap" transaction that the Former PGIC Assistant Controller could recall occurred in late 2004 and involved the Company's Garfield slot machine. More specifically, the "spinning wheel on the top" of the slot machine 36
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infringed on a IGT patent. The Former PGIC Assistant Controller believes IGT "let [PGIC] use the spinning wheel secondary jackpot in exchange for IGT getting the right to use [PGIC's] mystery jackpot." He disclosed that there "were other caveats" involved in the transaction, such as an IGT "down payment for future transactions" and a future purchase commitment, and suggested there "was some cash involved." 120. The Former PGIC Assistant Controller knew the Company has been selling
patents to companies/competitors such as IGT, WMS, Shufflemaster and Aristocrat. Although the Company's Legal Department "put together the contracts," the Former PGIC Assistant Controller revealed that "Sicuro was always involved in large transactions," and that Defendant Sicuro certainly would play a part in any PGIC patent sale. Defendant McMeekin was also very involved in the transactions. 2. 121. The VirtGame Acquisition Is The Key to PGIC's Future
Faced with numerous financial and business difficulties, such as deteriorating
revenues, trouble keeping up with newer gaming technology, and a history of accounting manipulations, PGIC was facing a crisis, and VirtGame was the only way out. VirtGame, a provider of open architecture gaming software, provided central server-based slot games and centrally managed sports betting. The Former PGIC Project Coordinator who worked at PGIC from November 2001 to September 2005 and whose responsibilities included tracking hours for projects, developing and maintaining timelines and overseeing project deliverables, explained that VirtGame "dealt with the accounting and systems side of the business." In other words, VirtGame developed software for "casinos to keep track of the money going into the machines and player tracking." ThinkEquity Partners analysts described VirtGame as a "strategic acquisition that provided [PGIC] with a principally non-commercialized open architecture,
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central . . . server technology applicable to slot games . . ., direct and remote sports wagering . . ., and Internet gaming." 122. On January 23, 2005, PGIC announced that it entered into an exclusive agreement
to negotiate to acquire VirtGame in a stock swap valued at approximately $20 million. Acquiring VirtGame was vital to PGIC's survival, and even Defendant Sicuro pushed the transaction in the January 23, 2005 press release: "we expect [the VirtGame] transaction to significantly enhance our systems portfolio by providing multiple forms of gaming revenue for our customers world-wide from a single integrated casino management system. When we integrate these new modules with our existing solutions for slot, table and multi-game progressives, we believe we will have a unique and powerful product offering for gaming operators world-wide." 123. Analysts agreed. On August 3, 2005, Jeffries & Co. published a report wherein
they declared "[PGIC's] VirtGame acquisition closes in 3Q05 and we will see innovations on its central served based technology, game content, poker tournaments and sports betting options." The analysts went on to explain: "VirtGame will help [PGIC's] efforts to advance casino operation technology into the world of central server-based and downloadable games and centrally managed sports betting. These games allow a casino operator to buy one slot box and have the ability to download an entire library of games on that box with the push of a button." 124. These analysts realized the potential revenue that VirtGame would bring to PGIC.
In a later report published on September 8, 2005, Jeffries & Co. explained that "we see much upside as . . . [PGIC's] VirtGame acquisition closes this month. . . . We believe the development of the company's cutting-edge technology is finally coming to fruition, which gives the company a definite revenue stream in 2006 from . . . server-based gaming."
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125.
Other analysts felt the same way. Roth Capital Partners analysts announced on
September 7, 2005 that "[t]he VirtGame acquisition . . . paves the way for PGIC's central server and wireless sports betting initiatives." The analysts went on to state "[t]he closing of the VirtGame acquisition and regulatory approvals of associated products provides [a] catalyst" for share appreciation. a. 126. The "Big Push" Behind the VirtGame Transaction
Former Company insiders explained Individual Defendants' enthusiasm to
complete the VirtGame transaction. The Former PGIC Assistant Controller said the purpose of the "big push" behind the acquisition was to move more toward a server-based slot machine system. This is corroborated by the Former PGIC Director of Compliance who worked at PGIC from May 1994 to August 19, 2005, and "made sure license information was filed timely." He said that the purpose of the VirtGame acquisition was to acquire the VirtGame slot operating system a server-based system. 127. Hedge fund managers Bob Bradley and Jeff Morfit, executives with the
Lighthouse Financial Group, a VirtGame shareholder, said that PGIC would be "dead in the water" without the VirtGame acquisition. The Former PGIC Director of Compliance confirmed that it "was real important that we get [the VirtGame transaction] done." Company executives, and in particular Defendant McMeekin, "thought the acquisition was real important because of the server-based technology." According to the Former PGIC Director of Compliance, McMeekin felt the technology would be "revolutionary" in the gaming industry, and "thought it was a great product." 128. And although the Company's General Counsel, Mike Dreitzer, would normally
lead Company negotiations, the Former PGIC Director of Compliance recalls that Defendant McMeekin worked harder on VirtGame. The fact that McMeekin led the negotiations to acquire 39
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VirtGame came as no surprise to the Former PGIC Director of Compliance because McMeekin and then-VirtGame CEO Mark Newberg were "good friends." This was corroborated by the Former PGIC Controller, who stated that the CEO of VirtGame was a "buddy of Russ [McMeekin]." "Russ was really pushing VirtGame" and, according to the Former PGIC Director of Compliance, he was the person most responsible for the negotiations to acquire the Company. b. 129. The Michigan Board Of Gaming Discovers Accounting Irregularities At PGIC
In the meantime, PGIC's troubles worsened around February 2005 when,
according to the Former PGIC Controller, the Michigan Board of Gaming wrote a letter to the Company's auditors, BDO Seidman, explaining that the Gaming Board has information and that in essence "we know the Company is cooking the books." The auditors sent the letter to Sicuro. According to the Former PGIC CFO, the Michigan Gaming Board also alerted the Public Company Accounting Oversight Board ("PCAOB"), which was created by Congress in the wake of the recent accounting scandals at Enron and Worldcom, of accounting irregularities within PGIC. 130. Subsequently, the Former PGIC Director of Compliance recalled that the
Company auditors, BDO Seidman, were "there all the time in June and July [2005]." He remembered that the auditors were particularly interested in documents relating to licensing transactions. Further, the auditors requested the minutes for meetings of the Board of Directors. The Former PGIC Director of Compliance had been responsible for maintaining the Board meeting minutes, and thought it was peculiar that the auditors were so involved in Company affairs in the June/July time frame, because the Company's fiscal year ends on December 31st.
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131.
The Former PGIC CFO believed that the PCAOB review of the BDO Seidman
engagement of PGIC is what prompted the Company to reclassify the previously recognized revenue during the Company's third quarter of 2005. The Former PGIC CFO questioned the PCAOB's visit to the LA office of BDO Seidman and their decision to look at the PGIC engagement. He suggested the PCAOB review of the PGIC engagement was "not random." c. 132. Defendants Are Sued For Breaching A License Agreement
Defendant's improper accounting and fraudulent schemes led to even more
trouble for PGIC. On March 7, 2005, Hasbro, Inc. ("Hasbro"), a company who engaged in many licensing agreements with PGIC, including licenses for "Yahtzee," "Battleship," "Clue," "Monopoly" and "Trivial Pursuit," filed suit against PGIC for breach of contract, unjust enrichment, fraud and misrepresentation. Hasbro, Inc. et al. v. Mikohn Gaming Corp., Case No. 1:05-cv-00106-S (Dist. R.I. 2005). In an amended complaint filed by Hasbro on February 16, 2006, Hasbro alleged that PGIC miscalculated the royalty payments owed to it by knowingly utilizing an incorrect formula not set forth in any licensing agreements governing royalty payments. Hasbro alleged that PGIC was unjustly enriched by more than $6 million. 133. In a desperate attempt to prevent more of this type of devastating information
from the litigation from being released to the public, and lowering the Company's stock price, Individual Defendants tried to have certain key testimony designated as confidential, including testimony that would shed an unflattering light upon the Company's internal accounting practices. Hasbro has opposed this, filing a Motion to Strike the "Confidential" Designation of Certain Information. 134. It has now been revealed that the Company's fraud against Hasbro seriously
affected their business. The Former PGIC Director of Gaming revealed that, due to the litigation, the Company has lost several licenses from Hasbro, and will continue to lose more. 41
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135.
So, with the Hasbro litigation pending, their revenue and sales declining, and a
recent and ongoing history of improper revenue recognition, patent swaps, and other accounting violations, it is easy to see why Individual Defendants were so desperate to complete the acquisition, and why they hid their fraudulent schemes from PGIC investors. If the fraud were discovered before the acquisition closed, it could force PGIC to give a far greater amount of its stock in order to acquire Virtgame -- or worse -- it could lead to a collapse of the entire acquisition, which could spell complete disaster and exposure of the entire fraudulent scheme. d. 136. VirtGame Is Acquired
So, with the fraud fully concealed, on October 10, 2005 PGIC completed the
VirtGame acquisition. Specifically, the Company issued 1,758,498 shares of PGIC common stock in exchange for outstanding shares of VirtGame common stock and preferred stock. Virtgame shareholders received this PGIC stock, which on that day was valued at $13.39. D. Defendants Had Motive And Opportunity To Misrepresent PGIC's Financial Results 1. Defendants' Compensation, Bonuses, And Other Incentives Were Highly Dependent On Meeting PGIC's Aggressive Financial Objectives And Estimates
137.
According to PGIC's most recent Proxy Statement, PGIC executive compensation
is comprised of three elements: annual base salary, annual incentive compensation and long term incentive compensation. "The last category [long term incentive compensation] is particularly important for executive officers who are not large stockholders." As stated in the Proxy, PGIC adopted an Incentive Compensation Plan for its executives which directly tied their compensation to the performance of PGIC stock. For instance, in 2004, PGIC adopted an Incentive Compensation Plan for its executive officers. The Company stated that "the Incentive Compensation Plan adopted for 2005 provides similar target levels for revenue, EBITDA and
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earnings per share, as well as related potential cash bonus payments, option grants and restricted stock awards." 138. For Defendants McMeekin and Sicuro, if they reached the target levels for
revenue, EBITDA and earnings per share, they would receive bonus awards, specific stock option grants and restricted stock awards. More specifically, Defendant McMeekin would receive a cash bonus award of 60% to 125% of his base salary and Defendant Sicuro would receive a cash bonus award of 60% to 100% of his base salary. The Proxy further stated that "[a]fter the end of the year, the Committee evaluates the degree to which the Company and individual performance objectives have been satisfied, and awards incentive compensation based on each participant's performance against those objectives. Awards are paid in cash, and distributions are made following the performance year." 139. In addition to these annual incentives, PGIC also provided long term incentives
for its executives. These long term incentives were similarly based on Company revenues and earnings per share, thus providing executives with an inducement to meet analysts' estimates and keep revenues high at any cost. As the Proxy stated, "the Company objectives consist of operating, strategic and financial goals that are considered to be critical to the Company's fundamental long-term goal -- building stockholder value." Accordingly, the 2004 Incentive Compensation Plan set three year cumulative targets for the Defendants McMeekin and Sicuro. If they reached these targets for revenue, EBITDA and earnings per share, they would receive one-time bonus awards. Defendant McMeekin would receive 100% or 150% of his base salary and Defendant Sicuro would receive 80% or 125% of his base salary, along with additional grants of stock options and restricted stock.
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140.
In addition, the Proxy also describes the equity grants for executive officers which
are part of the Company's long-term incentive program. "Through option grants, executives receive significant equity incentives to build long-term stockholder value. Grants are made at 100% of fair market value on the date of grant. Executives receive value from these grants only if the Company's common stock appreciates over the long-term." The Proxy statement goes onto state that the Employee Stock Incentive Plan also utilizes vesting periods (three years together with stock price appreciation criteria) to encourage key employees to continue in the employ of the Company. A vesting does not occur unless there is significant appreciation in the stock from the date of grant, these restricted stock awards are another manner in which executives receive significant equity incentives to build long-term stockholder value. The size of option and/or restricted stock grants are determined based on competitive practices at leading companies in the gaming and/or technology industry and the Company's philosophy of significantly linking executive compensation with stockholder interests. (1) 141. Defendant McMeekin According to PGIC's 2005 Proxy Statement, during fiscal year 2004, Defendant
McMeekin's received a salary of $426, 923, with a bonus of $264,000, an award of 100,000 in stock options and 100,000 in restricted stock. Additionally in 2004, Defendant McMeekin received $336,441, in other annual compensation which includes employer contributions to his 401(k) plan, vested restricted stock, personal benefits and matching contributions under the Employment Investment Plan. The Proxy stated that as of January 1, 2005, Defendant McMeekin would receive a base annual salary of $440,000 with an increase of $20,000 on August 15th of each year. (2) 142. Defendant Sicuro According to PGIC's 2005 Proxy Statement, during fiscal year 2004, Defendant
Sicuro received a salary of $254,903, a bonus of $173,400, with 250,000 in stock options and a 44
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restricted stock award of 100,000. Defendant Sicuro also received additional compensation in the form of personal benefits and matching contributions under the Employee Investment Plan totaling $191,054. 2. 143. Individual Defendants Had Access To An Enormous Amount Of Detailed Financial Information At Their Fingertips
A wide array of detailed accounting and financial information was constantly
available to the Individual Defendants. With the availability and use of these systems, reports and meetings, each of the Individual Defendants were privy to current, updated, and detailed accounting and financial information at all times. 3. 144. PGIC Utilized Accounting Software
According to the Former PGIC Systems Audit Coordinater, who worked for PGIC
from July 1992 to February 2004 and from January 2005 May to 2005, the Company employed a MAS 200 accounting software, which had been previously upgraded from MAS 90. MAS 90/MAS 200 is manufactured by Sage Software, and among its various functions, provides core accounting, business intelligence tools, and financial reporting software. According to the Former PGIC Director of Finance, Defendant McMeekin had "access to the system [specifically the Mas 90 and later Mas 200 systems]." 4. 145. Regular Internal Reports Were Given Directly To Management
According to the Former PGIC Director of Finance, Defendant McMeekin had
access to reports such as the Opens Sales Order Reports, which were created by the Former PGIC Systems Audit Coordinator. The Former PGIC Systems Audit Coordinator, whose responsibilities included reviewing engineering change orders and maintaining the Company's MaxExact ERP system, explained that these Open Sales Order Reports were essentially orders for equipment that remain "open" until the equipment is shipped or invoiced. He further
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clarified that the purpose of the Open Order Report was to project or forecast revenue and compare projected revenue against budgeted revenue. According to this Former PGIC Systems Audit Coordinator, "the report was used to project revenue for the whole company." The automated version of the report "grouped sales by individual sales order and month," and also "showed sales by category or division." According to the Former PGIC Director of Finance, Defendant McMeekin would go through the Open Sales Order Reports and ask "when is it going to ship." 146. In addition, the Former PGIC Assistant Controller distributed the Monthly
Financial Statement to "upper management," including Defendants McMeekin and Sicuro, in both hard and soft copy (the latter via email). He specifically gathered the information for the Monthly Financial Report from the Company MAS 200 accounting software. This Monthly Financial Report was a "basic P&L" including sales and cost of sales information, and was distributed "within a few days" of the close of the prior month. 147. According to the Former PGIC Controller, Defendant Sicuro also received reports
from the current Controller, Zach Vella, on a weekly basis and a Monthly Report on the third day of the month. This Monthly Report provided a snapshot of the business operations for the previous month. In addition, the Former PGIC Controller stated that Defendant Sicuro received a "Windshield Report" that "tracked every machine in the field" every day in both soft and hard copy. The Windshield Report displayed what each machine "was producing per day in revenues." 5. 148. Individual Defendants Participated In Regular Management Meetings
According to the Former PGIC Director of Compliance, PGIC's Global
Leadership Team ("GLT"), which consisted of top Company executives, including Defendants McMeekin and Sicuro, Former PGIC General Counsel Mike Dreitzer, Vice President of Sales 46
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Robert Parente and European officers (who participated by conference call) met at least once a month, and sometimes more often. For the most part, the GLT met in the Company Board Room, which is located on the second floor of the Company headquarters. According to the Former PGIC Director of Compliance, this Board Room is adjacent to Defendant McMeekin's office on one side, and Dreitzer's office on the other, and both offices had a door that led directly to the Company Board Room. 149. During GLT meetings, the executives reviewed the Company sales and
operations. The Former PGIC Director of Compliance recalled that the GLT also met "off site" for certain meetings in locations such as San Francisco, San Jose and Los Angeles. Specifically, he recalled that the GLT met in the Spring of 2005 in a banquet room in the Green Valley Ranch. Generally, the Director of Corporate Communications organized the GLT meetings, but other times Defendant McMeekin's secretary would arrange the meetings. These meetings were also confirmed by the Former PGIC Assistant Controller. He referred to these meetings as "management meetings" and described the meetings as being held "routinely" and "somewhat regularly." 150. In addition to GLT meetings, Defendant Sicuro held "end of the quarter"
meetings in which the Former PGIC Assistant Controller and a Financial Analyst participated. The purpose of these meetings was to "put together the press release" and prepare for the financial results conference call. The meetings were held in the conference room adjacent to Defendant Sicuro's office, which the Former PGIC Assistant Controller referred to as "Mike's conference room." 6. 151. Defendant Sicuro "Made The Decisions"
Numerous confidential witnesses confirmed that Defendants Sicuro was very
involved in the day to day operations of PGIC. For instance, the Former PGIC Human 47
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Resources Administrator described Defendant Sicuro as being a "very hands on" manager. This was corroborated by the Former PGIC Director of Compliance who further stated that for most Company transactions Defendant Sicuro "made the decisions." He also observed that Defendant Sicuro "thinks he is everything, and that he can do everyone's job." 152. Defendant Sicuro's "hands on" management style is evident in that, according to
the Former PGIC Director of Compliance, Defendant Sicuro "would have to be involved in the transaction. Every large transaction, he was very involved in." Even though Mike Dreitzer, the Company's former General Counsel, was responsible for negotiating the terms of the contract and would draft a licensing contract, Dreitzer and Sicuro would meet in the Company Board Room on the second floor after the drafting of the contract "and they would go over the contract." As a result, it was apparent to the Former PGIC Controller, that "for a transaction that size, there is no doubt Sicuro was directly involved." With regards to the revenue recognition for FASB 153, he said Defendant Sicuro "absolutely knew what was going on." 7. 153. Individual Defendants Would Not Let Honest Employees Get In The Way Of Their Plans
Many confidential informants recounted Defendants' improper behavior and
retaliation towards employees who were "too honest" and who advocated cautious accounting practices. For instance, in mid-July 2003, the Former PGIC CFO told the Company Board of Directors that the Company needs to "increase controls" and that the Board of Directors needs to instruct Defendant McMeekin "to stop manipulating the numbers." This same Former CFO had earlier been commended by the Company's audit committee chairman for "doing the right thing." Despite this, within a week of the Former CFO's conversation with the Company's Board, Mike Dreitzer, whom the Former CFO referred to as McMeekin's "yes man," told him "we need to work out a severance for you." It didn't stop there. The Former PGIC Director of
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Finance was then also fired for being too closely aligned with the Former CFO, who the Former Director of Finance described as "too honest." 154. In another instance, the Former PGIC Human Resources Administrator revealed
that a PGIC employee, Greg Andrews, was purportedly in line to receive a promotion to Vice President of Operations, but "refused to do something requested by Sicuro" that was "not on the up and up." According to the Former PGIC Human Resources Administrator, because Andrews refused to do the task, he was not given the promotion to Vice President of Operations. 155. Additionally, the Former PGIC Director of Compliance, who had been with PGIC
for 11 years, was fired in August 2005 because he "wouldn't dance to [Defendant] Sicuro's music." The Former Director of Compliance insisted that Defendant Sicuro only wanted "yes men" around. E. Defendants' False and Misleading Statements 1. 156. The Class Period Begins
On February 21, 2005, PGIC issued a press release announcing financial results
for fiscal 2004. 4 The Company specifically announced that "it reported net earnings of $.3 million, or $.01 per share, for the twelve months ended December 31, 2004, as compared to a net loss of $34.2 million, or $2.33 per share, in the same period a year ago," making "the best annual performance by the Company in four years." The results were also "consistent with the analysts' consensus." In addition, the Company "reported free cash flow of $3.6 million for fiscal 2004 (after debt service of $7.7 million) compared to negative cash flow of $7.6 million (after debt service of $12.4 million) in the same period a year ago."
Although the press release was issued on Monday February 21, 2005, the market was closed on that day due to the President's Day holiday. As such, February 22, 2005 is the first day of Lead Plaintiffs' Class Period.
4
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157.
The press release went on to state the Company's results for the three months
ending December 31, 2004, painting a very positive picture: For the three months ended December 31, 2004, the Company reported net income of $2.0 million, or $.08 per share compared to a net loss of $22.5 million, or $1.14 per share for the same period a year ago. This is the highest quarterly performance in over three years and was consistent with the analysts' consensus. The Company's free cash flow was slightly positive during the fourth quarter of fiscal 2004, after its semi-annual debt service of $3.8 million, compared to negative cash flow of $5.3 million in the same period a year ago. Debt service in the fourth quarter of fiscal 2003 was $6.1 million. Revenues in the fourth quarter of fiscal 2004 increased 31.5 percent to $26.3 million from $20.0 million in the same period a year ago supported by increases in all product lines across the board. Slot and table game revenues increased during the three months ended December 31, 2004 as compared to the same period in 2003 primarily due to an increase in the installed base of slot contracts under periodic license fee arrangements, partially offset by a decrease in the slot contracts under daily fee arrangements. There was a modest decrease in the fee per day for slot contracts under daily license fee arrangements in the fourth quarter of 2004 as compared to the same period in 2003. In addition, there was no material shift in the installed base or fee per day of outstanding table game contracts in the fourth quarter of 2004 as compared to the same period in 2003. The Company also reported in the fourth quarter of 2004 the highest level of quarterly revenues since inception for its casino management systems business - a healthy increase of 19 percent as compared to the same period a year ago. Earnings before interest, taxes, depreciation and amortization (EBITDA) were $5.9 million for the fourth quarter of fiscal 2004 as compared to a loss of $2.1 million for the same period in 2003 (excluding other expenses/asset write-downs in 2003). Revenues for the twelve months ended December 31, 2004 increased to $96.4 million from $91.8 million in the same period a year ago primarily due to an increase in sales of CasinoLink, TableLink, and product sales. Earnings before interest, taxes, depreciation and amortization (EBITDA) for fiscal 2004 were $18.6 million as compared to $9.7 million for the same period a year ago (excluding other expenses/asset write-downs in 2003). 158. Defendant McMeekin commented on the positive results, stating:
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"Our management team is very pleased to have delivered a net profit in 2004 to our shareholders who have been patiently awaiting this historic event. Additionally, this is the third consecutive quarter of sequential revenue growth and our fourth consecutive quarter of either meeting or exceeding external estimates. However, the most important operating achievement of the year was clearly generating free cash flow after debt service vs. operating in a negative cash flow position in previous years. We believe we have turned the corner financially and are now poised to be able to invest in R&D, acquisitions and other strategic partnerships to increase the velocity of our revenue growth, and ultimately our free cash flow." 159. In providing guidance estimates, Defendant Sicuro stated:
"We expect our revenues, EBITDA and earnings per share in the first quarter of fiscal 2005 to be $24 - $25 million, $5.0 - $5.5 million and $.03 - $.05, respectively. Free cash flow for the first quarter of fiscal 2005 is expected to be between $2 - $3 million, excluding corporate development activities. In comparison to the fourth quarter of 2004, these estimates reflect a seasonal decline in systems revenues during the first quarter, consistent with historical results. We expect double digit growth in our systems revenues in 2005 as compared to 2004." 160. Defendant Sicuro also painted a rosy picture for maintaining the Company's fiscal
year 2005 guidance estimates: "Our operating performance in 2004, coupled with our management team's focus on high margin, high growth revenues, is the foundation for our confidence to maintain our 2005 estimates for EBITDA, earnings per share and free cash flow of $20 - $25 million, $.20 - $.32 and $5 - $10 million, respectively (excluding the effect of the exercise of any outstanding warrants)." 161. Analysts responded positively to this announcement, maintaining the Buy rating
and raising the price target of the stock. Jeff Martin and Todd Eilers, analysts with Roth Capital Partners, discussed the Company's 4Q04 results, stating that they "were driven by strength across all three lines of business including revenue growth and margin gains for each." 162. On February 22, 2005, Defendants touted the pending acquisition of VirtGame,
issuing a press release entitled "Driving towards the Next Generation of Integrated Casino Management Systems." The press release stated:
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Progressive Gaming International Corporation (the Company) (NASDAQ: PGIC), a leading supplier of integrated casino management systems and games for the gaming industry world-wide, announced today that it has entered into a definitive agreement to acquire VirtGame Corp. (OTC Bulletin Board: VGTI) in a stock swap valued at approximately $20 million. VirtGame is a provider of open architecture gaming software primarily focused on the delivery of central server-based slot games and centrally managed sports betting. 163. The press release went on to describe the specifics of the acquisition:
The Company will exchange 2.0 million shares of its common stock for all of the outstanding common and preferred stock, and all outstanding warrants and options of VirtGame, subject to potential adjustments for working capital deficiencies and a bridge financing arrangement provided to VirtGame by the Company. The Company will be filing an S-4 registration statement in conjunction with the transaction, and VirtGame will be filing a proxy statement seeking shareholder approval for the deal. In addition, the transaction will require approval from the appropriate gaming regulatory agencies. The transaction is expected to close in the second quarter of fiscal 2005. 164. Analysts reacted favorably to PGIC's announcement regarding the VirtGame
acquisition. Lawrence Klatzkin, an analyst with Jeffries & Co., maintained the Buy rating and raised the price target of the stock, stating that "[w]e believe the development of the company's cutting edge technology is finally coming to fruition and this is a great time to buy Progressive Gaming. We are therefore raising our price target." In discussing the VirtGame Acquisition, Klatzkin further commented that "[t]his acquisition puts Progressive on the fast track." 165. On March 15, 2005, Defendants filed PGIC's Annual Report on Form 10-K for
the year ended December 31, 2004 ("2004 10-K"). The 2004 10-K was signed by Defendants McMeekin and Sicuro. The Company again explained the VirtGame acquisition: The Company also signed a definitive agreement in February 2005 to acquire VirtGame Corp. (VirtGame), a provider of open architecture gaming software primarily focused on the delivery of a central-server based slot games and centrally managed sports betting. The Company will issue 2.0 million shares of its common stock for all of the outstanding common stock, preferred stock, warrants and options of VirtGame, subject
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to certain adjustments as defined in the definitive agreement. The Company has also provided VirtGame with a secured credit facility of $2.5 million to bridge their operations until the acquisition is complete. During 2004, the Company advanced $0.3 million to VirtGame under this credit facility. 166. The 2004 10-K explained the Company's slot and table games segment:
Our slot and table games segment develops, acquires, licenses and distributes proprietary branded and non-branded slot games for use throughout the gaming industry. These slot games are placed in casinos in exchange for either fixed rental payments or revenue participation in the game's operating results. In support of this segment, we own or license the rights to several branded games. Historically, we have also manufactured table games and gaming devices that we placed in casinos in exchange for a recurring fee. License fees earned in this fashion provide us with recurring revenues and significant profit margin potential Slot Games. In 2003, we ceased all manufacturing operations regarding game hardware and shifted much of the focus of this portion of the slot and table games segment to the development and licensing of game content to be deployed to our markets through outsourcing partnerships with third party manufacturers and distributors of slot machines. Accordingly, the slot and table games segment receives revenue not only from the existing fixed rental payments or revenue participation income received for gaming devices that we place in casinos, but also from license fees for game content provided to multiple third parties for use on their game hardware. In conjunction with these licensing transactions, we typically do not provide any hardware and/or ongoing maintenance. As such, we expect to have a lower capital expenditure requirement for this segment in 2005 than in prior periods. ... In August 2004, the Company signed a five-year strategic partnership agreement with International Game Technology ("IGT") to license segments of its patent portfolio of technology and to develop video slot games based on our content. The new games will be developed on IGT's game platform and distributed by us. IGT also licensed aspects of its intellectual property to the Company for its games as well as for certain joint development. Under this agreement, the Company is committed to purchase from IGT a minimum of 600 slot machines with our game content over the life of the agreement. 167. The Company also touted its intellectual property portfolio:
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We own or have license rights to over 40 patents in the area of RFID technology and related table games system management. This intellectual property portfolio is expected to continue to evolve as we looks towards the next generation of RFID technology's use within table games system management. This portfolio took over 5 years to develop and is expected to be a main focus of our research and development resources in 2005 and beyond. We believe that such products and patents serve as a significant barrier to entry for potential competitors. 168. Defendants: Failure to complete the VirtGame acquisition could negatively affect our stock prices and future business and operations. If the acquisition transaction with VirtGame is not completed for any reason, the price of our common stock may decline to the extent that the current market price of our common stock reflects a positive market assumption that the transaction will be completed. In addition, if the merger agreement is terminated, we may be unable to find a third party willing to engage in a similar transaction on terms as favorable as those set forth in the merger agreement, or at all. This could limit our ability to pursue our strategic goals in an atmosphere of increased uncertainty. 169. With respect to accounting policies, the 2004 10-K stated: Critical Accounting Policies Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States. ... We have identified the following policies as critical to our business operations and the understanding of our results of operations: revenue recognition, receivables and allowance for doubtful accounts, inventories and obsolescence, and long-lived asset impairment. To provide an understanding of the methodology we apply these and other significant accounting policies discussed below and where appropriate in the notes to our consolidated financial statements. 170. The 2004 10-K also purported to include a disclosure of "Recently Issued The importance to PGIC of completing the VirtGame acquisition was admitted by
Accounting Standards," noting two recently issued statements of Financial Accounting Standards
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and adding that neither pronouncement was expected to have a material impact on PGIC's results. In November 2004, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 151, "Inventory Costs - an amendment of ARB No. 43, Chapter 4." The amendment clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for our fiscal year beginning on January 1, 2006. We believe that the adoption of this amendment will not have a material impact to our overall results of operations or financial position. In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment", that focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. Beginning with our quarterly period that begins July 1, 2005, we will be required to expense the fair value of employee stock options and similar awards. As a public company, we are allowed to select from two alternative transition methods, each having different reporting implications. While we have not yet completed our evaluation of this statement, we expect that the adoption of this statement will have a material impact to our results of operations. Because the recording of non-cash stock option expense involves equity-based compensation transactions, the adoption of this statement will have no effect on our financial position. 171. However, the 2004 Form 10-K (which was filed with the SEC on March 15,
2005) made no mention of FASB 153 which was issued in December 2004 - and contained no discussion of the impact that adoption of FASB 153 was expected to have on the financial statements of the Company. 172. With respect to Revenue Recognition, the 2004 10K stated:
Revenue Recognition: The Company recognizes revenue depending on the line of business as follows: Slot and table games revenues consist of: (i) lease fees, route income and royalties we receive from casinos who install our proprietary games, (ii) license fees we receive from third party manufacturers and distributors who incorporate our proprietary games and technology into their products.
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Slot and table game sales are executed by a signed contract or a customer purchase order. Revenue is recognized when the completed product is delivered. If the agreement calls for Mikohn to perform an installation after delivery, revenue related to the installation is recognized when the installation has been completed and accepted by the customer. License fees for slot and table game titles are recognized in accordance with Statement of Position 97-2 - Software Revenue Recognition ("SOP 97-2"). ... Royalty and license fee arrangements are evidenced by a signed contract and are recognized over the term of the arrangement, as royalties are earned or in a manner consistent with the earnings process. Systems revenues are primarily comprised of software, hardware and support services. Sales consist of a suite of products (some of which are sold separately) that enable gaming entities to track customer gaming activity, account for slot machine and table game activity and operate progressive jackpot systems. There are proprietary hardware and software components to the systems. The Company accounts for system sales in accordance with SOP 97-2. System sales are considered multiple element arrangements because they include hardware, software, installation, training and post-sale customer support. System sales are evidenced by a signed contract or purchase order. Follow-up spare parts and hardwareonly sales are evidenced by a purchase order. Revenue for system sales is recognized when: (i) there is a signed contract with a fixed determinable price; (ii) collectibility of the sale is probable; and (iii) the hardware and software have been delivered, installed, training has been completed and acceptance has occurred. Not all systems contracts require installation or training. Examples include sales of hardware only to (i) previous customers that are expanding their systems, (ii) customers that have multiple locations and perform the installation themselves and require an additional software license and hardware and (iii) customers purchasing spare parts. Maintenance and support are sold under agreements with established vendor-specific objective evidence of price. These contracts are generally for a period of 12 months and revenue is recognized ratably over the contract service period. Further training is also sold under agreements with established vendor-specific objective evidence of price, which is based on daily rates and is recognized upon delivery. ... Product sales are executed by a signed contract or customer purchase order. Revenue is recognized when the completed product is delivered. If the agreement calls for Mikohn to perform an installation after delivery,
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revenue related to the installation is recognized when the installation has been completed and accepted by the customer. System sales consist of a suite of products (some of which are sold separately) that enable gaming entities to track customer gaming activity, account for slot machine activity and operate progressive jackpot systems. There are proprietary hardware and software components to the systems. The Company accounts for system sales in accordance with Statement of Position 97- 2 - Software Revenue Recognition ("SOP 97-2"). System sales are considered multiple element arrangements because they include hardware, software, installation, training and post-sale customer support. System sales are evidenced by a signed contract. Follow-up spare parts and hardware-only sales are evidenced by a purchase order. Revenue for system sales is recognized when: (i) there is a signed contract with a fixed determinable price; (ii) collectibility of the sale is probable; and (iii) the hardware and software have been delivered, installed, training has been completed and acceptance has occurred. Not all systems contracts require installation. Examples include sales of hardware only to (i) previous customers that are expanding their systems, (ii) customers that have multiple locations and do the installation themselves and require an additional software license and hardware and (iii) customers purchasing spare parts. 173. The 2004 10-K included the following certification of Defendants McMeekin and
Sicuro pursuant to Section 302 of the Sarbanes-Oxley Act: I, [], certify that: 1. I have reviewed this annual report on Form 10-K of Mikohn Gaming Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
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control over financial reporting (as defined in exchange act rules 13a15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Each of the Forms 10-Q filed by PGIC during the Class Period repeats this certification by Defendants McMeekin and Sicuro.
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174.
The 2004 10-K also included the following certification, pursuant to Section 906
of the Sarbanes-Oxley Act, by Defendants McMeekin and Sicuro: I, [], do hereby certify in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: 1. The Annual Report on Form 10-K of the Registrant, to which this certification is attached as an exhibit (the "Report"), fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Each of the Forms 10-Q filed by PGIC during the Class Period repeats this certification by Defendants McMeekin and Sicuro. 175. On April 25, 2005, the Company issued a press release announcing that it had
filed a registration statement on Form S-4 with the SEC for its VirtGame acquisition, consisting of the issuance of up to 2.0 million shares of PGIC common stock. As the press release stated: The S-4 registration statement includes a preliminary proxy statement related to the approval VirtGame intends to seek from its shareholders for the deal. The Company intends to exchange up to 2.0 million shares of its common stock for all of the outstanding common and preferred stock, and all outstanding warrants and options of VirtGame, subject to potential adjustments for working capital deficiencies and a bridge financing arrangement provided to VirtGame by the Company. 176. Although the Form S-4 filed on April 25, 2005 with the SEC announced the
issuance of FASB 153 (which was public information), it falsely informed investors and the public that Defendants believed that the accounting change would not have an impact on the Company's financial statements: In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets an amendment of APB Opinion No. 29. SFAS No.
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153 amends the guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, which is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged, with certain exceptions. SFAS No. 153 amends APB Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS No. 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not believe the adoption of SFAS No. 153 will impact its financial statements. 2. 177. Reasons For Falsity
The statements contained in 156-176 above were materially false and
misleading because Defendants: a. recognized revenue on exchanges of patents and other non-monetary
assets to which it was not entitled in violation of GAAP, as explained in section III; b. failed to disclose that the issuance of FASB 153 would have a materially
adverse impact on the Company's financial results for at least the third quarter of 2005, as explained in section III; c. issued false financial projections to the market, assuring investors that the
Company was on track to generate between $.08 - $.10 earnings per share in the third quarter of 2005; d. knew at the time they issued their projections that they were based on
revenue that could only be derived from illegal patent swaps and improper accounting; e. falsely claimed that the statements were issued in accordance with GAAP,
which includes SAB 74, as explained in section III, requiring the disclosure of the potential financial statement effects of recently promulgated accounting standards; and
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f.
certified under the Sarbanes-Oxley Act of 2002 that financial statements
were correct when they were not. 3. 178. Defendants Issue False First Quarter 2005 Results
On May 4, 2005, the Company announced first quarter 2005 results in a press
release which stated, in relevant part: LAS VEGAS May 4, 2005 Progressive Gaming International Corporation (NASDAQ: PGIC) ("the Company"), a leading provider of diversified technology and content products and services used in the gaming industry worldwide, announced today that it reported net earnings of $1.0 million, or $.04 per share, for the three months ended March 31, 2005, as compared to a net loss of $2.4 million, or $.11 per share, in the same period a year ago. Revenues increased over 8 percent in the three months ended March 31, 2005 to $22.9 million from $21.1 million in the same period a year ago primarily due to strong performance in the Company's systems business. Systems revenues increased over 49 percent in the first quarter of fiscal 2005 as compared to the same period in 2004 due primarily to the demand for the Company's table management system, TableLinkTM. Earnings before interest, taxes, depreciation and amortization (EBITDA) increased approximately 82 percent to $4.8 million in the first quarter of fiscal 2005 from $2.6 million in the same period in 2004 due primarily to stronger gross margins and lower overall operating expenses. In addition, the Company expects to receive net cash proceeds of approximately $11.0 million from the sale of the interior signage business. 179. Defendant McMeekin commented on the Company's positive results:
"This is the third consecutive quarter our team has delivered net income, and the fifth consecutive quarter of either meeting or exceeding expectations on the bottom line. These results reflect the benefits of the repositioning of the business that commenced over two years ago, and are supported by a healthy and growing pipeline of contracts for our table management solution, TableLinkTM, and our newest proprietary table game, Texas Hold `Em Bonus PokerTM. . . ." "We are now consistently delivering bottom line results. This provides us with confidence in our future as evidenced by the increase in our corporate development activities, which we expect to continue as we
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balance growth between revenues generated from this channel and contracts obtained organically." 180. Defendant Sicuro provided guidance for the second quarter of 2005:
"We expect our revenues, EBITDA and earnings per share in the second quarter of fiscal 2005 to be $19.0 $21.0 million, $5.2 - $5.7 million and $.05 - $.07, respectively, excluding the nonrecurring gain on the disposition of the sign business. The revenue estimate for the second quarter of 2005 reflects the sale of the interior sign division. Comparable revenues and EBITDA for the second quarter of 2004 excluding the interior signage business, was $17.5 million and $2.7 million, respectively. Free cash flow for the second quarter of fiscal 2005 is expected to be between $5.0 - $6.0 million, including corporate development activities and debt service. We expect systems revenues to increase sequentially in the second quarter of 2005, with an acceleration of this growth anticipated in the second half of the current fiscal year, consistent with historical patterns. 181. financials: "During the first quarter, we enjoyed one of the highest levels of bookings in recent history lead by our systems products. Our pipeline in this category continues to gain momentum, especially as the technology marches on with advances such as the introduction of the new high speed RFID micro chip. The pipeline of new contracts for Texas Hold `Em Bonus PokerTM also continues to grow due to the strong performance of this game." 182. Defendant Sicuro continued to paint a promising picture for 2005: Defendant Sicuro also commented on the Company's strong first quarter
"We are now estimating earnings per share to be $.25 - $.32 for 2005 (excluding the effect of the exercise of any outstanding warrants and excluding the nonrecurring gain on the disposition of the sign business). There is no change to our estimates for EBITDA or free cash flow for 2005 of $20 - $25 million and $5 - $10 million, respectively. We expect revenues for fiscal 2005 to be $85 - $92 million, reflecting a change from previous estimates solely as a result of the divestiture of the interior sign division." 183. On May 10, 2005, the Company filed with the SEC its Form 10-Q for the first
quarter of 2005 ("First Quarter 10-Q") containing the information released to the market in the May 4, 2005 press release. The First Quarter 10-Q was signed by both Individual Defendants,
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and was certified by both Individual Defendants pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act, just as in the 2004 10-K. See 173-174. 184. With respect to the acquisition of VirtGame, the 10-Q repeated the summary of
the acquisition previously explained in the 2004 10-K, adding that "[a]s of March 31, 2005, the Company advanced $1.4 million to VirtGame under this credit facility." See 165. 185. 186. The Company also explained its policies for revenue recognition. See 172. The First Quarter 10-Q, like the 2004 10-K, contained a section which purported The
to evidence PGIC's compliance with the disclosure requirements of SAB 74. pronouncement, which varied slightly from the one in the 2004 10-k, stated: In November 2004, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 151, "Inventory Costs - an amendment of ARB No. 43, Chapter 4." The amendment clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for our fiscal year beginning on January 1, 2006. The adoption of this amendment is not expected to have a material impact to our overall results of operations or financial position. In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment", that focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. Beginning with our quarterly period that begins January 1, 2006, we will be required to expense the fair value of employee stock options and similar awards. As a public company, we are allowed to select from two alternative transition methods, each having different reporting implications. While we have not yet completed our evaluation of this statement, we expect that the adoption of this statement will have a material impact to our results of operations. Because the recording of non-cash stock option expense involves equity-based compensation transactions, the adoption of this statement will have no effect on our financial position." 187. Although Defendants revisited the "recently issued accounting standards" and
made certain changes to the SAB 74 disclosures which appeared in the 2004 Form 10-K, they
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once again failed to make any mention of the issuance of FASB 123 or the impact which it was expected to have on the financial statements of the Company. 188. On June 3, 2005 and June 28, 2005, although the Company filed a S-4/A
(amended registration statement) with the SEC announcing the issuance of FASB 153 (which was public information), it falsely informed investors and the public that Defendants believed that the accounting change would not have an impact on the Company's financial statements: In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets an amendment of APB Opinion No. 29. SFAS No. 153 amends the guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, which is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged, with certain exceptions. SFAS No. 153 amends APB Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS No. 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not believe the adoption of SFAS No. 153 will impact its financial statements. 4. 189. Reasons For Falsity
The statements contained in 178-188 above were materially false and
misleading because Defendants: a. recognized revenue on exchanges of patents and other non-monetary
assets to which it was not entitled in violation of GAAP, as explained in section III; b. failed to disclose that the issuance of FASB 153 would have a materially
adverse impact on the Company's financial results for at least the third quarter of 2005, as explained in section III;
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c.
issued false financial projections to the market, assuring investors that the
Company was on track to generate between $.08 - $.10 earnings per share in the third quarter of 2005; d. knew at the time they issued their projections that they were based on
revenue that could only be derived from illegal patent swaps and improper accounting; e. falsely claimed that the statements were issued in accordance with GAAP,
which includes SAB 74, as explained in section III, requiring the disclosure of the potential financial statement effects of recently promulgated accounting standards; and f. certified under the Sarbanes-Oxley Act of 2002 that financial statements
were correct when they were not. 5. 190. False Statements Continue Into The Second Quarter of 2005
On August 1, 2005, Defendants issued a press release announcing financial results
for the second quarter of 2005, and actually raised projections for the remainder of 2005. The press release stated: LAS VEGAS--(BUSINESS WIRE)--Aug. 1, 2005--Progressive Gaming International Corporation (NASDAQ: PGIC) ("the Company"), a leading provider of diversified technology and content products and services used in the gaming industry worldwide, announced today that it reported net income of $1.9 million, or $.07 per share, for the three months ended June 30, 2005, as compared to a net loss of $.9 million, or a loss of $.04 per share in the same period in 2004. Earnings before interest, taxes, depreciation and amortization (EBITDA) increased approximately 23 percent to $5.1 million in the second quarter of fiscal 2005 from $4.1 million in the same period in 2004. The Company recorded a net gain of $2.5 million on the disposition of non core assets related to the interior sign division and slot hardware, which was offset by one-time costs of a similar amount related to the transformation to a technology and content focused organization. Such costs were related to legal and compliance, human resources and corporate development activities, and were included in cost of revenues, selling, general, administrative, research and development expenses.
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Revenues increased over 7 percent in the three months ended June 30, 2005 to $18.6 million from $17.3 million in the same period in 2004, on a comparable basis excluding revenues generated by the interior sign division. During the second quarter of fiscal 2005, the Company recorded the highest level of systems revenues since inception driven by strong demand for the Company's slot and table management solutions, CasinoLink and TableLink. Systems revenues during the second quarter of fiscal 2005 increased over 59 percent as compared to the March 2005 quarter and over 34 percent as compared to the second quarter of fiscal 2004. Excluding the sign division, gross margins increased 780 basis points to 63.9 percent in the second quarter of fiscal 2005 from 56.1 percent in the same period in 2004, mainly due to the sale of this division and the increase in systems revenues. Net income for the six months ended June 30, 2005 increased to $2.8 million or $.11 per share from a net loss of $3.3 million or a loss of $.15 per share in the same period in 2004. Comparable results excluding the interior sign division was a net loss of $5.1 million and a loss per share of $.24 during the first six months of fiscal 2004. There was no material impact to net income or earnings per share as a result of excluding the operating results of the interior sign division for the six months ended June 30, 2005. Earnings before interest, taxes, depreciation and amortization (EBITDA) increased approximately 46 percent to $9.9 million for the first six months of fiscal 2005 from $6.8 million in the same period in 2004. Comparable EBITDA in 2004 excluding the interior sign division was $4.7 million. There was no material impact to EBITDA in the six months ended June 30, 2005 as a result of excluding the operating results of the interior sign division. 191. Defendant McMeekin commented on the quarterly results:
"For the first time in the Company's history, we delivered net income for four consecutive quarters. In addition, we have either met or exceeded bottom line expectations for six consecutive quarters. Our management team continues to execute on numerous strategic initiatives that focus on higher margin technology and content solutions while eliminating lower margin businesses, in parallel with growing our pipeline and backlog of contracts for our integrated casino management solutions and our newest table game, Texas Hold 'Em Bonus Poker(TM). Our installed base for this new table game is accelerating virtually every month and continues to have strong performance." 192. McMeekin touted what he described as a "solid platform for growth:"
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"We have a solid platform for growth as evidenced by the 9 percent increase in our core revenues during the first half of this fiscal year. This is the real foundation that will provide our team with the operating capital to invest strategically in the future of our business. At this year's upcoming Global Gaming Expo in September, we expect to provide the largest and most exciting showcase of new products in the Company's history, featuring central server based slot games and thin client wagering applications from our pending acquisition of VirtGame, and our new high speed bet recognition technology for our table management system acquired through our partnership with Magellan. In addition, we expect to highlight the next generation table management system currently being developed with our new partners. These new products are key drivers of our future revenue streams, which we expect to augment with additional sources of revenues through corporate development activities." 193. Defendant Sicuro provided guidance for the third quarter 2005 and the remainder
of fiscal year 2005: "We expect our revenues, EBITDA and earnings per share in the third quarter of fiscal 2005 to be $20.0 - $21.0 million, $5.5- $6.2 million and $.08 - $.10, respectively. Comparable EBITDA and earnings per share for the third quarter of 2004 excluding the interior sign business, was $4.9 million and $.03 per share, respectively. We expect our cash balance at the end of the third quarter of fiscal 2005 to remain consistent with the June 30, 2005 balance as we deploy our operating cash flow to further enhance our intellectual property portfolio through additional investments including our minority investment in Magellan, to complete the acquisition of VirtGame, and other potential corporate development opportunities." 194. Defendant Sicuro went on to tout the Company's incoming contracts, and
projected increased earnings per share for fiscal year 2005: "Our operating results are beginning to reflect the graceful exit of lower margin businesses providing our team the ability to focus solely on developing and distributing higher margin products. Our pipeline of contracts for table games and integrated casino management systems continues to be solid. We are now estimating earnings per share to be $.27 - $.32 for fiscal 2005. There is no change to our estimates for EBITDA or free cash flow for 2005 of $20 - $25 million and $5 - $10 million, respectively. We continue to expect revenues for fiscal 2005 to be $85 - $92 million, reflecting the sale of the interior sign division."
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195.
Although on August 1, 2005, the Company also filed a S-4/A (amended
registration statement) with the SEC announcing the issuance of FASB 153 (which was public information), it falsely informed investors and the public that Defendants believed that the accounting change would not have an impact on the Company's financial statements: In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets an amendment of APB Opinion No. 29. SFAS No. 153 amends the guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, which is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged, with certain exceptions. SFAS No. 153 amends APB Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS No. 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not believe the adoption of SFAS No. 153 will impact its financial statements. 196. On August 2, 2005, Defendants hosted a second quarter earnings conference call
with analysts. During the call, Defendant Sicuro stated that "In the second half of 2005, we will focus on strengthening the balance sheet, something Michael and I have been talking about for over a year now." He went on to say "[a]dditionally, our year-over-year revenues continue to grow and our systems revenues keep rolling along just as we have expected, increasing almost 60% compared to the March 2005 quarter. And again, as Russ mentioned, this was the highest level of systems revenue we have ever had in any given quarter since our inception. And the even better news is our gross margins keep getting stronger, increasing 480 basis points as compared to the March `05 quarter and 780 basis points as compared to the year ago quarter after excluding the effects of the sign division. When we exclude the sign division's results, EBITDA increased more than 30% sequentially and more than doubled this quarter as compared to the same quarter a year ago." 68
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197.
Defendant Sicuro then discussed the guidance for the third quarter of 2005:
We expect to continue to make the necessary strategic investments in IP and other businesses to grow our topline and ultimately earnings per share and free cash flow. As a result, we believe we can achieve revenues, EBITDA and earnings per share in the third quarter of fiscal 2005 to be 20 to 21 million, 5.5 to 6.2 million, and $0.08 to $0.10, respectively. Comparable EBITDA and earnings per share for the third quarter of '04, excluding the interior sign business, was 4.9 million and $0.03 per share, respectively. We are now estimating earnings per share to be $0.27 to $0.32 for fiscal '05. There is no change to our estimates for EBITDA or free cash flow for '05 of 20 to 25 million and 5 to 10 million, respectively. We continue to expect revenues for fiscal '05 to be 85 to 92 million, reflecting the sale of the interior sign division. 198. Analysts reacted favorably to the Company's second quarter 2005 results and
third quarter 2005 guidance. On August 2, 2005, ThinkEquity Partners published a report wherein analysts stated: "[PGIC's] Q2 results were ... overall favorable and fundamentals remain strong. . . . We believe that its strong positioning and attractive product portfolio of leading-edge technology products should continue to drive earnings power." The analysts
reiterated their Buy rating on PGIC shares based on: "the company's excellent growth prospects across all business segments; improving earnings power and, soon, capital structure; and valuation." 199. On August 8, 2005, although the Company filed a S-4/A (amended registration
statement) with the SEC announcing the issuance of FASB 153 (which was public information), it falsely informed investors and the public that Defendants believed that the accounting change would not have an impact on the Company's financial statements: In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets an amendment of APB Opinion No. 29. SFAS No. 153 amends the guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, which is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged, with certain exceptions. SFAS No. 153 amends APB 69
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Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS No. 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not believe the adoption of SFAS No. 153 will impact its financial statements. 200. On August 9, 2005, Individual Defendants filed a report on Form 10-Q, for the
period ending June 30, 2005. The 10-Q was signed by Defendants Sicuro and McMeekin, who certified its accuracy under the Sarbanes-Oxley Act just as in the 2004 10-K. See 173-174. 201. With respect to the acquisition of VirtGame, the 10-Q stated repeated the
summary of the acquisition previously explained in the 2004 10-K, adding that "[a]s of June 30, 2005, the Company had advanced $2.0 million to VirtGame under this credit facility. The acquisition of VirtGame is expected to be completed in late 2005." See . 202. 203. The Company also explained its policies for revenue recognition. See 172. Despite the fact that FASB 153 had already become effective, the 10-Q omitted
any reference to it or its adverse impact on PGIC's financial results. 204. On August 31, 2005, Defendants issued a press release announcing PGIC's plans
to complete a secondary offering of common stock, for the purpose of retiring all of PGIC's high-yield debt, providing general working capital, general corporate purposes, and to complete strategic acquisitions which Defendants stated "are intended to be accretive." PGIC directors and officers intended to sell 166,422 of their own shares in the offering. 205. On September 6, 2005, Defendants issued a press release announcing an
agreement to acquire EndX Group Ltd. The press release stated: LAS VEGAS, Sep 06, 2005 (BUSINESS WIRE) -- Progressive Gaming International Corporation (NASDAQ: PGIC) (the Company), a leading provider of diversified technology and content products and services used 70
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in the gaming industry worldwide announced today that it has signed a definitive agreement to acquire EndX Group Ltd. (EndX), a global gaming management systems software company headquartered in the United Kingdom for cash of $27.0 million. EndX has been a key strategic partner with the Company for over three years. The EndX Intelligence Product Suite is currently installed in over 175 gaming centers in over 20 countries worldwide, including the three major gaming operators in the U.K. Through this partnership, the EndX product has been integrated as a part of the Company's CasinoLink Enterprise Edition's Slot Management Module. The modules of EndX include cage and cash management, player marketing, table games accounting, and surveillance and alerts monitoring. In addition, EndX and the Company have previously created through joint marketing and development efforts a version of TableLink for the international market. 206. Defendant McMeekin commented on the acquisition:
"We are pleased to welcome our strategic partners at EndX officially into the Progressive Gaming family. Our two organizations have been well connected over the past three years on many fronts and together as one enterprise we expect to maximize the value of their outstanding technology and the world class team they have assembled. Their strong presence in the expanding markets of the United Kingdom and other territories worldwide are expected to accelerate the growth of our international business." 207. Defendant Sicuro provided a financial outlook for 2006, stating:
"The acquisition of EndX is expected to be accretive immediately upon completion, which should occur in the fourth quarter of fiscal 2005, after approval from the appropriate regulatory authorities. With virtually all of the legacy business issues behind us, coupled with the expected retirement of the high yield debt, the focus of our entire management team on our core strategic growth initiatives plus the addition of EndX to our team, we believe we are poised to deliver to our shareholders bottom line growth in excess of 100 percent in fiscal 2006 as compared to 2005. We expect revenues, EBITDA and earnings per share to be $100 - $110 million, $32 - $35 million and $.62 - $.70, respectively." 208. On the same day, Individual Defendants hosted a conference call with investors.
Defendant Sicuro summarized the year's events as follows: Sort of in 2005 since the beginning of the year we've done -- had a number of, and I'll call it the lucky 7 right now, of transactions that we've been
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focused on. The first one we did completed in the first part of the year in January was Pitchback, that deal, the integration is complete. It's exceeding expectations on all fronts. The second transaction, we began to execute and are almost ready to complete is VirtGame, that is very much on track here to close by the end of this month. 209. estimates: Our 2006 estimates are truly best summarized with the following metrics. A, 100% or more EPS growth in 2006 versus 2005. B, 30% plus operating margins and C, which is a real driver, is 20% revenue growth or more plus mostly organic except for EndX, which is the only real revenue via acquisitions. 210. The following day, analysts reacted to the favorable 2006 earnings guidance. Defendant Sicuro also gave predictions for the Company's 2006 earnings
Roth Capital Partners published a report, wherein analysts raised their target on the Company's stock price "following 2006 guidance ahead of our current estimates." They went on to explain that the "higher target centers around the establishment of 2006 guidance above our previous estimates." The positive earnings estimates and analyst report were published just six days before the scheduled September 13, 2005 VirtGame stockholder meeting to approve the VirtGame acquisition. 6. 211. Reasons For Falsity
The statements contained in 190-210 above were materially false and
misleading because Defendants: a. recognized revenue on exchanges of patents and other non-monetary
assets to which it was not entitled in violation of GAAP, as explained in section III; b. failed to disclose that the issuance of FASB 153 would have a materially
adverse impact on the Company's financial results for at least the third quarter of 2005, as explained in section III;
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c.
issued false financial projections to the market, assuring investors that the
Company was on track to generate between $.08 - $.10 earnings per share in the third quarter of 2005; d. knew at the time they issued their projections that they were based on
revenue that could only be derived from illegal patent swaps and improper accounting; e. falsely claimed that the statements were issued in accordance with GAAP,
which includes SAB 74, as explained in section III, requiring the disclosure of the potential financial statement effects of recently promulgated accounting standards; and f. certified under the Sarbanes-Oxley Act of 2002 that financial statements
were correct when they were not. 7. 212. The False Statements Continue: Defendants Close The VirtGame Acquisition
On September 7, 2005, the Company filed a Form 8-K with the SEC, providing
the following update on the VirtGame acquisition: To support what we expect will be an eventual shift from traditional, stand-alone slot games to central server-based and downloadable slot games, we signed a definitive agreement in February 2005 to acquire VirtGame. VirtGame is a provider of open architecture gaming software primarily focused on the delivery of a central-server based slot games and centrally managed sports betting. VirtGame's stockholder meeting to approve the acquisition is scheduled to be held on September 13, 2005, with regulatory review expected shortly thereafter. During the second quarter of 2005, we commenced the process of repositioning our existing slot platform, which includes a focus on developing content through thirdparty developers. Our goal is to leverage our existing installed base and transition from the existing model to slot games delivered in a central server-based environment. 213. On October 10, 2005, PGIC completed its acquisition of VirtGame, issuing
1,758,498 shares of PGIC common stock, in exchange for all of the outstanding shares of VirtGame's common and preferred stock (with each outstanding share of VirtGame common
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stock representing the right to receive 0.028489 shares of PGIC common stock, each outstanding share of VirtGame Series A preferred stock representing the right to receive 74.971 shares of PGIC common stock, and each outstanding share of VirtGame Series B preferred stock representing the right to receive 42.677 shares of PGIC common stock). 214. On the same day, Defendants issued a press release announcing the completion of
the VirtGame acquisition. The press release stated: LAS VEGAS--(BUSINESS WIRE)--Oct. 10, 2005--Progressive Gaming International Corporation (the Company) (NASDAQ: PGIC), a leading provider of diversified technology and content products and services used in the gaming industry worldwide announced today that it has completed its acquisition of VirtGame Corp. (OTC Bulletin Board: VGTI). The Company will issue a maximum of 1,758,498 shares of its common stock in connection with the transaction, including shares issued in exchange for outstanding shares of VirtGame common stock and preferred stock, as well as shares that are issuable upon the exercise of VirtGame options and warrants, which were assumed by the Company. Each outstanding share of VirtGame common stock was converted into the right to receive 0.028489 shares of the Company's common stock in the transaction, and each outstanding share of VirtGame Series A Preferred Stock and Series B Preferred Stock was converted into the right to receive 74.971 and 42.677 shares of Progressive common stock, respectively. Each VirtGame stockholder entitled to receive a fractional share of the Company's common stock will instead receive a cash amount based on the Company's price per share of $13.13. Holders of VirtGame common stock, preferred stock, options and warrants will also be entitled to receive a portion of the number of the Company's shares, if any, below the maximum transaction shares, that remain unissued following the expiration of all of the VirtGame options and warrants assumed by the Company (currently expected to occur in September 2010). F. 215. The Truth Is Revealed On October 20, 2005, just eight business days after the VirtGame acquisition
closed, Defendants shocked the market by revealing that because the Company failed to properly account for two non-monetary transactions in accordance with accounting rules (FASB 153), the
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Company expected to report a loss of $.09 per share, rather than a gain of $.08 - $.10 per share as the Defendants had previously represented. The significant and highly material difference in Defendants' representations is illustrated in the following chart:
Period: 3Q'05 Revenue EBITDA EPS Actual $19.3M $ 1.1M ($0.08) Management Guidance New Old $17.8M $23.80 $ 1.0M $5.5M ($0.09) $ 0.09
216.
According to the Defendants, the accounting treatment of the two non-monetary
transactions had to be changed after the Company's auditor, BDO Seidman, informed the Company that it had to comply with SFAS 153 and could not recognize the revenues in the third quarter 2005 from these two transactions. 217. Over the next day, as a direct result of the public revelations regarding the truth
about PGIC's previously reported financial results and its fraudulent accounting, PGIC's stock price plummeted 29%, on unusually heavy trading volumes of 6,676,4000 shares, far greater than the Company's average daily trading volume during the Class Period of 337,389 shares, falling from $13.03 per share on October 19, 2005 to $9.28 per share on October 20, 2005, a drop of $6.93 per share from its Class Period high in June 2005. This drop resulted in a $91,605,652.50 loss in market capitalization over one day. Moreover, this drop removed the inflation from PGIC's stock price, causing damages and economic loss to Lead Plaintiffs and other members of the Class investors who had purchased the stock during the Class Period, and causing a total loss in market capitalization over the Class Period of $25,839,596.08. 218. The 19% decline in PGIC's stock price between February 22, 2005 and October
20, 2005 was a direct result of the nature and extent of Defendants' fraud finally being revealed to investors and the market. The timing and magnitude of PGIC's stock price declines negate any inference that the loss suffered by Lead Plaintiffs and other Class members was caused by 75
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changed market conditions, macroeconomic or industry factors or Company-specific facts unrelated to the Defendants' fraudulent conduct. The economic loss, i.e., damages, suffered by Lead Plaintiffs and other members of the Class was a direct result of Defendants' fraudulent scheme to artificially inflate PGIC's stock price and the subsequent significant decline in the value of PGIC's stock when Defendants' prior misrepresentations and other fraudulent conduct was revealed and the artificial inflation came out of PGIC's stock. The impact of Defendants' fraud is depicted in the chart below:
219.
In the weeks to come, analysts revealed a great uncertainty hovering around the
Company. On October 21, 2005, Roth Capital Partners released a report stating "[w]e believe management's lack of detail on the software contracts in question will continue to weigh on the stock." The report went on to announce that "investor confidence has been bruised" by the shocking news, "but could mend itself, should management elect to provide additional clarity
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into the situation. Until that happens, however, shares are likely to face a challenge in regaining yesterday's loss." In explaining the lack of information, the analysts stated "PGIC gave very little information detailing the two software contracts that caused the 3Q05 earnings shortfall. . . . The lack of information, in our view, is weighing on the stock and we anticipate a recovery in shares as partially contingent upon the availability of additional information." 220. This additional information came during a conference call that Individual
Defendants hosted with analysts on November 1, 2005. The next day, Roth Capital Partners released a report concluding that PGIC "is in a difficult position with the recent decline in stock and its need for capital to retire debt." G. Post Class Period Events 1. 221. PGIC Announces Bad Results
Defendants acted with scienter in that they knew that the public documents and
statements issued or disseminated by or in the name of the Company were materially false and misleading; knew or recklessly disregarded that such statements or documents would be issued or disseminated to the investing public; and knowingly and substantially participated or acquiesced in the issuance or dissemination of such statements or documents as primary violators of the federal securities laws. Defendants' scienter is illustrated by the nature of events which unraveled after the Class Period. 222. On October 31, 2005, PGIC issued a press release announcing a net loss of $2.0
million and a loss of $.08 per share for the third quarter of 2005. The press release specifically stated: Progressive Gaming International Corporation (NASDAQ: PGIC) ("the Company"), ... announced today that it reported a net loss of $2.0 million, or $.08 per share, for the three months ended September 30, 2005, as compared to a net income of $.8 million, or $.03 per share in the same period in 2004 (on a comparable basis excluding the results of 77
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operations of the interior sign division, which was sold in May 2005)...Revenues for the three months ended September 30, 2005 declined to $19.3 million as compared to $20.8 million in the same period a year ago (on a comparable basis excluding the results of operations of the interior sign division) due to lower revenues primarily from a decrease in the installed base of the Company's legacy slot games, and lower periodic licensing fees." 223. The press release went on to explain the effect of Defendants' mischaracterization
of the licensing transaction: If approximately $6.0 million in license fees and $1.5 million of related costs from the transactions discussed in the Company's 8-K filing on October 20, 2005 were included in the Company's results of operations, revenues, EBITDA and earnings per share for the third quarter of fiscal 2005 would have been $23.8 million, $5.6 million and $.09 per share, respectively. 2. 224. PGIC Announces Delay In Filing 2006 10-K
On March 13, 2006, PGIC announced that the filing of its annual report on Form
10-K for the year ended December 31, 2005 would be delayed beyond the March 16, 2006 deadline. The same press release stated that "[t]he Company continues to review two nonrecurring licensing transactions, and is obtaining additional information as requested by its auditors. The Company will require additional time to review these transactions and related information and to allow its auditors to complete their year end procedures." PGIC then filed a notification of late filing (NT-10K) with the SEC on March 16, 2006, in which it stated the reason for the delay as follows: Mikohn Gaming Corporation, d/b/a Progressive Gaming International Corporation (the "Company" or "PGIC"), is still in the process of assembling information necessary to complete its review of two non recurring licensing transactions entered into during the fourth quarter of 2005. The Company continues to review these transactions, and is obtaining additional information requested by its outside auditors. PGIC requires additional time to complete its review, and to allow its auditors to complete their year end procedures once the Company is complete with its review.
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3. 225.
The SEC Inquiry At PGIC
PGIC now faces inquiries from government agencies. On March 17, 2006 at the
former General Counsel's defamation trial against PGIC, the Former PGIC CFO testified that SEC officials called him recently and asked him if he'd be willing to talk about "current accounting issues and disclosure issues . . . as related to Mikohn today." According to the Former PGIC CFO, the inquiry does not involve the nine years that former General Counsel McCrea worked for the Company before he was fired in 2003. 4. 226. PGIC Restates 3Q05 Earnings And Again Delays Filing Its Annual Report
On March 21, 2006, PGIC announced that it would be restating "its third quarter
earnings." The Company stated that it "expects to reclassify a $2.5 million nonrecurring licensing transaction completed in the third quarter of fiscal 2005 from revenues into the operating expense category on its income statement." The Company also announced it "expects it will be required to amend its quarterly report on Form 10-Q for the three and nine months ended September 30, 2005. The Company expects to record two nonrecurring licensing transactions totaling approximately $4.1 million as deferred revenue in the fourth quarter of fiscal 2005. Additionally, there were several nonrecurring licensing transactions that were delayed from the fourth quarter of 2005 into 2006 totaling approximately $1.5 million." 227. In the same press release, PGIC announced that the Company would require
additional time to file its Annual Report on Form 10-K with the SEC. This time the Company stated it might require until mid-April 2006 to file. 5. 228. PGIC Announces Additional Losses
On March 31, 2006, PGIC announced that it "reported a net loss of $3.9 million,
or $.13 per share, for the three months ended December 31, 2005, as compared to a net income
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of $1.8 million, or $.08 per share in the same period in 2004. Fourth quarter 2005 operating results exclude one-time charges resulting from the early retirement of a portion of the Company's high yield debt of $3.0 million or $.09 per share. 229. The Company justified the decrease as "primarily due to $4.2 million of revenue
from two licensing contracts that were recorded as deferred revenue, higher investments in R&D and SG&A expenses during the 2005 fiscal year compared to 2004, and nonrecurring expenses incurred in the fourth quarter of 2005 of approximately $1.3 million. Additionally, several licensing contracts were delayed and are expected to be completed in 2006 totaling approximately $2.0 million." 230. In addition, Company revenues were down. "Revenues for the three months
ended December 31, 2005 decreased to $19.2 million from $21.7 million in the same period a year ago primarily due to the $4.2 million of revenue from the two licensing contracts that were recorded as deferred revenue." 231. On April, 4th, 2006, PGIC filed its restated Form 10-Q/A filed with the SEC on
April 4th, 2006 describing in further detail Defendants' knowledge of the manipulations in the third quarter 2005: The Company adopted Statement of Financial Accounting Standards No. 153 "Exchanges of Non-Monetary Assets" (FASB 153) for the quarter ended September 30, 2005. FASB 153 addresses the measurement for the exchange of non-monetary assets. FASB 153 requires that exchanges be recorded at fair value provided that fair value is determinable and other qualifying criteria are met as described in the standard. If fair value is not determinable or if the other qualifying criteria are not met, the exchange is recorded at cost. In September 2005, the Company entered into separate transactions involving the licensing of intellectual property and content. The first involved the license of the Company's legacy slot operating system of which the Company had previously acquired a portion of the rights to, made significant modifications and enhancements and obtained regulatory approval in numerous jurisdictions. We also acquired unique intellectual 80
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property content primarily for use in the Company's server-based wagering growth initiative from this party who licensed our operating system. These transactions were accounted for as non-monetary exchanges in accordance with FASB 153 and have been recorded at cost in the accompanying consolidated balance sheets. The second transaction involved obtaining the rights to execute the license of the slot operating system from the current owner. The current owner also purchased core intellectual property from us. These transactions were recorded as non-monetary exchanges in accordance with FASB 153 and recorded at fair value in the accompanying consolidated statement of operations. Subsequent to the issuance of the Company's unaudited condensed consolidated financial statements as of September 30, 2005 and for the three and nine month periods ended September 30, 2005, the Company determined that a transaction related to the licensing of core intellectual property should be reclassified from revenues to a separate line titled "Gain on sale of core intellectual property" included in operating income. H. 232. Defendant's Omissions And Failure To Reveal The Truth In addition to the false and misleading statements described in detail throughout
this Complaint, Defendants also failed to disclose the truth regarding PGIC's financial condition. Specifically, and in addition to the other omissions described in this Complaint, Defendants failed to tell the public: a. that the Company's revenue and future revenue streams were based on
improper accounting and patent swaps; b. c. the impact that FASB 153 would have on the Company's financial results; that they knew PGIC would be unable to generate between $.08 - $.10 per
share during the third quarter of 2005 if the Company followed applicable rules for issuing financial statements; d. that their projections were based on revenue derived from illegal patent
swaps and improper accounting; and
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e.
that they were not in compliance with GAAP, which includes SAB 74,
requiring disclosure of the potential financial statement effects of recently promulgated accounting standards. VI. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD ON THE MARKET DOCTRINE 233. Lead Plaintiffs will rely, in part, upon the presumption of reliance established by
the fraud-on-the-market doctrine in that, among other things: a. Defendants made public misrepresentations or failed to disclose facts
during the Class Period; b. c. d. The omissions and misrepresentations were material; PGIC securities traded in an efficient market; The misrepresentations alleged would tend to induce a reasonable investor
to misjudge the value of the Company's securities; and e. Lead Plaintiffs and the other members of the Class purchased PGIC
securities between the time Defendants misrepresented or failed to disclose material facts and the time the true facts were disclosed, without knowledge of the misrepresented or omitted facts. 234. At all relevant times, the market for PGIC securities was an efficient market for
the following reasons, among others: a. PGIC securities were listed and actively traded during the Class Period on
the NASDAQ exchange, an open, highly efficient and automated market. The average daily volume of the PGIC's common stock during the Class Period was 337,389 shares based on information from the Yahoo Finance website. The total number of shares traded during the Class Period was 56,681,500 shares;
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b.
As a regulated issuer, PGIC regularly made public filings, including its
Forms 10-K, Forms 10-Q and related press releases, with the SEC. c. PGIC was followed by analysts from major brokerages including
ThinkEquity Partners, Roth Capital Partners, Jefferies & Co., Merriman Curhan Ford & Co., CIBC World Markets, Sterne, Agee & Leach, and Matrix USA. The reports of these analysts were redistributed to the brokerages' sales force, their customers, and the public at large; and d. PGIC regularly communicated with public investors via established
market communication mechanisms, including the Company's website, regular disseminations of press releases on the major news wire services, and other wide-ranging public disclosures, such as communications with the financial press and other similar reporting services. 235. As a result, the market for PGIC securities digested current information regarding
the Company from the publicly available sources described above and reflected such information in the prices of PGIC's securities. As would be expected where a security is traded in an efficient market, material news concerning PGIC's business had an immediate effect on the market price of PGIC's securities, as evidenced by the rapid decline in the market price in the immediate aftermath of PGIC's corrective disclosures as described herein. Under these circumstances, all purchasers of PGIC's securities during the Class Period suffered similar injury due to the fact that the price of PGIC securities was artificially inflated throughout the Class Period. At the times they purchased or otherwise acquired PGIC's securities, Lead Plaintiffs and other members of the Class were without knowledge of the facts concerning the wrongful conduct alleged herein and could not reasonably have discovered those facts. As a result, the presumption of reliance applies. Plaintiffs will also rely, in part, upon the presumption of reliance established by a material omission.
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VII.
CLASS ACTION ALLEGATIONS 236. Lead Plaintiffs bring this action as a class action pursuant to Rule 23(a) and (b)(3)
of the Federal Rules of Civil Procedure on behalf of a class (the "Class") consisting of all persons who purchased the common stock of PGIC between February 22, 2005 and October 19, 2005, inclusive (the "Class Period"), including those who purchased PGIC shares pursuant or traceable to the Company's Registration Statement for its October 10, 2005 acquisition of VirtGame and issuance of 1,758,498 shares of common stock at $13.13 per share. Excluded from the Class are the Defendants herein, members of each Individual Defendant's immediate family, any entity in which any Defendant has a controlling interest, and the legal affiliates, representatives, heirs, controlling persons, successors, and predecessors in interest or assigns of any such excluded party. 237. Because PGIC has millions of shares of common stock outstanding, and because
the Company's common stock was actively traded on the NASDAQ National Markets during the Class Period, members of the Class are so numerous that joinder of all members is impracticable. As of March 28, 2006, PGIC had 34,367,416 shares outstanding. While the exact number of Class members can only be determined by appropriate discovery, Lead Plaintiffs believe that Class members number at least in the thousands and that they are geographically dispersed. 238. Lead Plaintiffs' claims are typical of the claims of the members of the Class,
because Lead Plaintiffs and all of the Class members sustained damages arising out of Defendants' wrongful conduct complained of herein. 239. Lead Plaintiffs will fairly and adequately protect the interests of the Class
members and have retained counsel who are experienced and competent in class and securities litigation. Lead Plaintiffs have no interests that are contrary to or in conflict with the members of the Class Plaintiffs seek to represent. 84
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240.
A class action is superior to all other available methods for the fair and efficient
adjudication of this controversy, since joinder of all members is impracticable. Furthermore, as the damages suffered by individual members of the Class may be relatively small, the expense and burden of individual litigation make it impossible for the members of the Class individually to redress the wrongs done to them. There will be no difficulty in the management of this action as a class action. 241. Questions of law and fact common to the members of the Class predominate over
any questions that may affect only individual members, in that Defendants have acted on grounds generally applicable to the entire Class. Among the questions of law and fact common to the Class are: a. alleged herein; b. whether the Registration Statement and Amendments thereto for the whether the federal securities laws were violated by Defendants' acts as
VirtGame acquisition dated October 10, 2005 contained material misstatements or omissions; c. whether the Company's other publicly disseminated releases and
statements during the Class Period omitted and/or misrepresented material facts and whether Defendants breached any duty to convey material facts or to correct material facts previously disseminated; d. whether Defendants participated in and pursued the fraudulent scheme or
course of business complained of; e. whether the Defendants acted willfully, with knowledge or recklessly, in
omitting and/or misrepresenting material facts;
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f.
whether the market prices of PGIC common stock during the Class Period
were artificially inflated due to the material nondisclosures and/or misrepresentations complained of herein; and g. whether the members of the Class have sustained damages and, if so, what
is the appropriate measure of damages. VIII. EXCHANGE ACT COUNTS COUNT IV VIOLATION OF SECTION 10(B) OF THE EXCHANGE ACT AND RULE 10B 5 PROMULGATED THEREUNDER AGAINST PGIC AND THE INDIVIDUAL DEFENDANTS 242. Lead Plaintiffs repeat and reallege the Exchange Act Claims set forth above as
though fully set forth herein. This claim is asserted against PGIC, Defendant McMeekin and Defendant Sicuro. 243. During the Class Period, PGIC and the Individual Defendants carried out a plan,
scheme and course of conduct which was intended to and, throughout the Class Period which did: (a) deceive the investing public, including Lead Plaintiffs and other Class members, as alleged herein; (b) artificially inflate and maintain the market price of PGIC's publicly traded securities; and (c) cause Lead Plaintiffs and other members of the Class to purchase PGIC's publicly traded securities at artificially inflated prices. In furtherance of this unlawful scheme, plan and course of conduct, PGIC and the Individual Defendants took the actions set forth herein. PGIC and the Individual Defendants are sued as primary participants in the wrongful and illegal conduct charged herein. 244. In addition to the duty of full disclosure imposed on PGIC and the Individual
Defendants as a result of their making of affirmative statements and reports, or participation in the making of affirmative statements and reports to the investing public, they each had a duty to
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promptly disseminate truthful information that would be material to investors in compliance with the integrated disclosure provisions of the SEC as embodied in SEC Regulation S-X (17 C.F.R. 210.01 et seq.), S-K (17 C.F.R. 229.10 et seq.) and other SEC regulations, including accurate and truthful information with respect to PGIC's operations, financial condition and performance so that the market prices of the Company's publicly traded securities would be based on truthful, complete and accurate information. 245. PGIC and the Individual Defendants, individually and in concert, directly and
indirectly, by the use, means or instrumentalities of interstate commerce and/or of the mails, engaged and participated in a continuous course of conduct to conceal adverse material information about the business, business practices, performance, operations and future prospects of PGIC as specified herein. 246. These Defendants employed devices, schemes and artifices to defraud, while in
possession of material adverse non-public information and engaged in acts, practices, and a course of conduct as alleged herein in an effort to assure investors of PGIC's value and performance and continued substantial growth, which included the making of, or the participation in the making of, untrue statements of material facts and omitting to state material facts necessary in order to make the statements made about PGIC and its business operations and future prospects in the light of the circumstances under which they were made, not misleading, as set forth more particularly herein, and engaged in transactions, practices and a course of business which operated as a fraud and deceit upon the purchasers of PGIC's securities during the Class Period. 247. As a result of the dissemination of the materially false and misleading information
and failure to disclose material facts, as set forth above, the market prices of PGIC's securities
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were artificially inflated during the Class Period. In ignorance of the fact that market prices of PGIC's publicly traded securities were artificially inflated, and relying directly or indirectly on the false and misleading statements made by PGIC and the Individual Defendants, or upon the integrity of the market in which the securities trade, and/or on the absence of material adverse information that was known to or recklessly disregarded by Defendants but not disclosed in public statements by Defendants during the Class Period, Lead Plaintiffs and the other members of the Class acquired PGIC securities during the Class Period at artificially high prices and were damaged thereby. 248. At the time of said misrepresentations and omissions, Lead Plaintiffs and other
members of the Class were ignorant of their falsity, and believed them to be true. Had Lead Plaintiffs, the other members of the Class and the marketplace known of the true performance, business practices, future prospects and intrinsic value of PGIC stock, which were not disclosed by Defendants, Lead Plaintiffs and other members of the Class would not have purchased or otherwise acquired their PGIC publicly traded securities during the Class Period, or, if they had acquired such securities during the Class Period, they would not have done so at the artificially inflated prices which they paid. 249. By virtue of the foregoing, PGIC and the Individual Defendants have each
violated Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder. 250. As a direct and proximate result of these Defendants' wrongful conduct, Lead
Plaintiffs and the other members of the Class suffered damages in connection with their respective purchases and sales of the Company's securities during the Class Period.
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COUNT V FOR VIOLATIONS OF SECTION 20(a) OF THE 1934 ACT AGAINST THE INDIVIDUAL DEFENDANTS 251. Lead Plaintiffs repeat and reallege the Exchange Act Claims set forth above as if
set forth fully herein. This claim is asserted against Defendant McMeekin and Defendant Sicuro. 252. The Individual Defendants each acted as a controlling person of PGIC within the
meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high level positions with the Company, participation in and/or awareness of the Company's operations and/or intimate knowledge of the Company's actual performance, the Individual Defendants had the power to influence and control and did influence and control, directly or indirectly, the decision making of the Company, including the content and dissemination of the various statements which Lead Plaintiffs contend are false and misleading. Each of these Defendants was provided with or had unlimited access to copies of the Company's reports, press releases, public filings and other statements alleged by Lead Plaintiffs to be misleading prior to and/or shortly after these statements were issued and had the ability to prevent the issuance of the statements or cause the statements to be corrected. 253. In addition, each of these Defendants had direct involvement in the day to day
operations of the Company and/or control over major corporate decision and policy making, and, therefore, is presumed to have had the power to control or influence the particular transactions giving rise to the securities violations as alleged herein, and exercised the same. 254. As set forth above, PGIC and the Individual Defendants each violated Section
10(b) and Rule 10b-5 by their acts and omissions as alleged in this Complaint. By virtue of their controlling positions, the Individual Defendants are liable pursuant to Section 20(a) of the Exchange Act. As a direct and proximate result of the Individual Defendants' wrongful conduct,
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Lead Plaintiffs and other members of the Class suffered damages in connection with their purchases of the Company's securities during the Class Period. 255. By reason of such wrongful conduct, the Individual Defendants are liable
pursuant to Section 20(a) of the Exchange Act. IX. REQUEST FOR RELIEF WHEREFORE, Lead Plaintiffs request a judgment, as follows: a. Determining that this action is a proper class action, and certifying proposed class representatives under Rule 23 of the Federal Rules of Civil Procedure; Awarding compensatory damages in favor of Lead Plaintiffs and the other Class members against all Defendants, jointly and severally, for all damages sustained as a result of Defendants' wrongdoing, in an amount to be proven at trial, including interest thereon; Awarding Lead Plaintiffs and the Class their reasonable costs and expenses incurred in this action, including counsel fees and expert fees; and Such other and further relief as the Court may deem just and proper.
b.
c.
d. X.
JURY TRIAL DEMANDED Lead Plaintiffs hereby demand a trial by jury.
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Dated: April 13, 2006
MILBERG WEISS BERSHAD & SCHULMAN LLP By: s/ Christopher S. Jones Maya Saxena (pro hac vice) Fla. Bar No. 0095494 [e-mail] Christopher S. Jones (pro hac vice) Fla. Bar No. 0306230 [e-mail] Joseph E. White, III (pro hac vice) Fla. Bar No. 0621064 [e-mail] 5200 Town Center Circle Tower One, Suite 600 Boca Raton, FL 33486 Tel: [phone] Fax: [phone] and SCHIFFRIN & BARROWAY LLP Stuart L. Berman Sean Handler Robin Winchester 280 King of Prussia Road Radnor, PA 19087 Tel: [phone] Fax: [phone] Co-Lead Counsel for Plaintiffs McCRACKEN, STEMERMAN, BOWEN & HOLSBERRY Joni S. Jacobs Nevada Bar No. 6355 [e-mail] 1630 S. Commerce Street, Suite A-1 Las Vegas, NV 89102 Tel: [phone] Fax:[phone] and DAVIS, COWELL & BOWE, LLP 1701 K Street NW, Suite 210 Washington, DC 20006 Tel. [phone] Fax [phone] Local Counsel
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CERTIFICATE OF SERVICE I HEREBY CERTIFY that on the 13th day of April, 2006, I presented the foregoing to the Clerk of the Court for filing and uploading to the CM/ECF system. I further certify that on the same date I mailed the foregoing document to counsel of record on the attached Service List. By: s/ Christopher S. Jones
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SERVICE LIST James J. Jimmerson Mario P. Lovato JIMMERSON HANSEN, A Professional Corp. 415 South Sixth Street, Suite 100 Las Vegas, NV 89101 Tel: [phone] Fax: [phone] William S. Freeman Laura R. Smith Jessica Valenzuela Santamaria COOLEY GODWARD LLP Five Palo Alto Square 3000 El Camino Real Palo Alto, CA 94306 Tel: [phone] Fax: [phone] Counsel for Defendants
Counsel for Defendants
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