| PROGRESSIVE GAMING INTERNATIONAL CORP Item 1A Risk Factors You should consider carefully the following risk factors, together with all of the other information included in this Annual Report on Form 10-K Each of these risk factors could adversely affect our business, operating results and financial condition, as well as adversely affect the value of an investment in our common stock |
| Risks Relating to Our Business If we are unable to develop or introduce innovative products and technologies that gain market acceptance and satisfy consumer preferences, our current and future revenues will be adversely affected |
| Our current and future performance is dependent upon the continued popularity of our existing products and technologies and our ability to develop and introduce new products and technologies that gain market acceptance and satisfy consumer preferences |
| The popularity of any of our gaming products and technologies may decline over time as consumer preferences change or as new, competing products or new technologies are introduced by our competitors |
| If we are unable to develop or market innovative products or technologies in the future, or if our current products or technologies become obsolete or otherwise noncompetitive, our ability to sustain current revenues from our existing customers or to generate additional revenues from existing or new customers would be adversely affected, which, in turn, could materially reduce our profitability and growth potential |
| In addition, the introduction of new and innovative products and technologies by our competitors that are successful in meeting consumer preferences also could materially reduce our competitiveness and adversely affect our revenues and our business |
| The development of new products and technologies requires a significant investment by us prior to any of the products or technologies becoming available for the market |
| New products, such as new games and refresher versions of our existing games, may not gain popularity with gaming patrons, or may not maintain any popularity achieved |
| In the event any new products or technologies fail to gain market acceptance or appeal to consumer preferences, we may be unable to recover the cost of developing these products or technologies |
| If we are unable to rapidly develop new technologies, our products and technologies may become obsolete or noncompetitive |
| The gaming sector is characterized by the rapid development of new technologies and continuous introduction of new products |
| In - 15 - _________________________________________________________________ [49]Table of Contents addition to requiring a strong pipeline of proprietary games, our success is dependent upon new product development and technological advancements, including the continued development of cashless technology, table player tracking technologies, central server-based products and technologies, progressive jackpot systems and integrated management systems |
| The markets in which we compete are subject to frequent technological changes, and one or more of our competitors may develop alternative technologies or products for bonusing, progressive jackpots, slot accounting, cashless technology, player tracking or game promotions, or a superior game platform which may not be made available to us |
| While we expend a significant amount of resources on research and development and product enhancement, we may not be able to continue to improve and market our existing products or technologies or develop and market new products at a rapid enough pace |
| Further technological developments may cause our products or technologies to become obsolete or noncompetitive |
| If our current or proposed products or technologies do not receive regulatory approval, our revenue and business prospects will be adversely affected |
| Our products and technologies are in various stages of development |
| Our development efforts are dependent on factors such as obtaining requisite governmental approvals |
| Each of these products and technologies requires separate regulatory approval in each market in which we do business, and this regulatory approval may either not be granted at all or not be granted in a timely manner, for reasons primarily outside of our control |
| In addition, we cannot predict with any accuracy which jurisdictions or markets, if any, will accept and which authorities will approve the operation of our gaming products and technologies, or the timing of any such approvals |
| A lack of regulatory approval for our new games or other products and technologies, or refresher versions of our existing games or other products and technologies, or delays in obtaining necessary regulatory approvals, will adversely affect our revenues and business prospects |
| For example, RFID (radio frequency identification), CJS (Casino Jackpot Station) and central server-based gaming represent three of our key strategic initiatives over the next several years |
| While we are moving forward with the regulators in various jurisdictions to obtain required approvals, we are at various stages in the approval and development process for each initiative |
| We cannot assure you that we will receive the necessary approvals in all of the jurisdictions we have sought approval nor can we assure you that there will not be any production delays in developing and distributing these products and technologies |
| Any delay in production or in the regulatory process, or a denial of regulatory approval altogether, for any one of these initiatives will adversely impact our revenues and business |
| If our products or technologies currently in development do not achieve commercial success, our revenue and business prospects will be adversely affected |
| While we are pursuing and will continue to pursue product and technological development opportunities, there can be no assurance that such products or technologies will come to fruition or become successful |
| Furthermore, while a number of those products and technologies are being tested, we cannot provide any definite date by which they will be commercially viable and available, if at all |
| We may experience operational problems with such products after commercial introduction that could delay or prevent us from generating revenue or operating profits |
| Future operational problems could increase our costs, delay our plans or adversely affect our reputation or our sales of other products which, in turn, could materially adversely affect our success |
| We cannot predict which of the many possible future products or technologies currently in development will meet evolving industry standards and consumer demands |
| We cannot assure you that we will be able to adapt to technological changes or offer products on a timely basis or establish or maintain a competitive position |
| We may not be successful in forming or maintaining strategic alliances with other companies, which could negatively affect our product offerings and sales |
| Our business is becoming increasingly dependent on forming or maintaining strategic alliances with other companies, and we may not be able to form or maintain alliances that are important to ensure that our products and technologies are compatible with third-party products and technologies, to enable us to license our products and technologies to potential new customers and into potential new markets, and to enable us to continue to enter into new agreements with our existing customers |
| There can be no assurance that we will identify the best alliances for our business or that we will be able to maintain existing relationships with other companies or enter into new alliances with other companies on acceptable terms or at all |
| The failure to maintain or establish successful strategic alliances could have a material adverse effect on our business or financial results |
| If we cannot form and maintain significant strategic alliances with other companies as our target markets and technology evolve, the sales opportunities for our products and technologies could deteriorate |
| If any conflicts arise between us and any of our alliance partners, our reputation, revenues and cash position could be significantly harmed |
| Conflicts may arise between us and our alliance partners, such as conflicts concerning licensing and royalty fees, development or distribution obligations, the achievement of milestones or the ownership or protection of intellectual property developed by the alliance or otherwise |
| Any such disagreement between us and an alliance partner could result in one or more of the following, each of which could harm our reputation, result in a loss of revenues and a reduction in our cash position: - 16 - _________________________________________________________________ [50]Table of Contents • unwillingness on the part of an alliance partner to pay us license fees or royalties we believe are due to us under the strategic alliance; • uncertainty regarding ownership of intellectual property rights arising from our strategic alliance activities, which could result in litigation, permit third parties to use certain of our intellectual property or prevent us from utilizing such intellectual property rights and from entering into additional strategic alliances; • unwillingness on the part of an alliance partner to keep us informed regarding the progress of its development and commercialization activities, or to permit public disclosure of the results of those activities; • slowing or cessation of an alliance partner’s development or commercialization efforts with respect to our products or technologies; • delays in the introduction or commercialization of products or technologies; or • termination or non-renewal of the strategic alliance |
| In addition, certain of our current or future alliance partners may have the right to terminate the strategic alliance on short notice |
| Accordingly, in the event of any conflict between the parties, our alliance partners may elect to terminate the agreement or alliance prior to completion of its original term |
| If a strategic alliance is terminated prematurely, we would not realize the anticipated benefits of the strategic alliance, our reputation in the industry and in the investment community may be harmed and our stock price may decline |
| In addition, in certain of our current or future strategic alliances, we may agree not to develop products independently, or with any third party, directly competitive with the subject matter of our strategic alliances |
| Our strategic alliances may have the effect of limiting the areas of research, development and/or commercialization that we may pursue, either alone or with others |
| Under certain circumstances, however, our alliance partners, may research, develop, or commercialize, either alone or with others, products in related fields that are competitive with the products or potential products that are the subject of these strategic alliances |
| For example, as part of our joint development arrangement with IGT and Shuffle Master, we agreed not to manufacture or sell our intelligent shoe products for a three-year period |
| If our remaining license agreements with Hasbro, Inc |
| and other content providers are terminated or are not renewed, or if we breach our obligations under any license agreement, our revenues could be reduced |
| Revenues from our table and slot games segment are derived primarily from the popularity of our branded slot games, including licensed brands such as Clue^®, Ripley’s Believe It or Not! |
| ^® and Trivial Pursuit^® |
| We developed these slot games under multi-year license agreements, which contain options to renew, with Hasbro and Ripley Entertainment and have developed other slot games under agreements with other branded content providers |
| We are also in the process of developing additional games under similar agreements with separate licensors for additional branded content, including an agreement with Paws, Inc |
| Any termination or failure to renew a license agreement with our branded content providers could have a material, adverse effect on our revenues and operations |
| For example, Hasbro declined to renew the Yahtzee and Battleship brands with us as of December 15, 2004 |
| While we believe that we will be able to replace this content with other popular branded slot games, our failure to do so could materially affect our future revenues |
| In addition, we are engaged in litigation with Hasbro related to a claim for past due royalties on slot game titles that we licensed from Hasbro, and we cannot assure you that this litigation will be resolved or that Hasbro will renew other license agreements with us for other Hasbro brands |
| For example, in the second quarter of 2006 our Clue^® and Trivial Pursuit^® license arrangements with Hasbro will expire unless they are renewed with the consent of both parties |
| Each license agreement contains provisions that obligate us to perform in a certain manner |
| If we breach these obligations, the licensor may terminate the license agreement following a specified period that varies from immediate termination to thirty days, depending upon the agreement and the type of breach |
| In addition, any breach of our obligations may adversely affect our relationship with the licensor, as well as deter the licensor and other third parties from licensing additional brands to us |
| Our ability to renew our license agreements with Hasbro, Paws or Ripley Entertainment for an additional term is conditioned upon our having paid minimum royalties to the licensor during the applicable initial term |
| If we do not generate sufficient revenues to pay the minimum royalties or otherwise are unable to renew any of our license agreements with the licensor, our future revenues may be materially reduced |
| Our failure to protect, maintain and enforce our existing intellectual property or secure, maintain and enforce such rights for new proprietary technology could adversely affect our future growth and success |
| - 17 - _________________________________________________________________ [51]Table of Contents Our ability to successfully protect our intellectual property is essential to our success |
| We protect our intellectual property through a combination of patent, trademark, copyright and trade secret laws, as well as licensing agreements and third-party nondisclosure and assignment agreements |
| Certain of our existing and proposed products are covered by patents issued in the United States, which may differ from patent protection in foreign jurisdictions, where our intellectual property may not receive the same degree of protection as it would in the United States |
| In addition, in many countries intellectual property rights are conditioned upon obtaining registrations for trademarks, patents and other rights, and we have not obtained such registrations in all relevant jurisdictions |
| Failure to effectively protect our intellectual property could significantly impair our competitive advantage and adversely affect our revenues and the value of our common stock |
| Our future success is also dependent upon our ability to secure our rights in any new proprietary technology that we develop |
| We file trademark, copyright and patent applications to protect intellectual property rights for many of our trademarks, proprietary games, gaming products and improvements to these products |
| For example, we applied for patents for our knowledge-based bonus features and other game enhancements which have been utilized in our Think Big^® game series, which includes our Ripley’s Believe It or Not! |
| ^®, Clue^® and Trivial Pursuit^® games |
| The US Patent and Trademark Office has not acted upon all of these applications and may determine not to issue patents on some or all of our pending patent applications |
| Our failure to obtain federal protection for our patents and trademarks could cause us to become subject to additional competition and could have a material adverse effect on our future revenues and operations |
| In addition, any of the patents that we own, acquire or license may be determined to be invalid or otherwise unenforceable and would, in such case, not provide any protection with respect to the associated intellectual property rights |
| If we are unable to effectively promote our trademarks, our revenues and results of operations may be materially adversely affected |
| We intend to promote the trademarks that we own and license from third parties to differentiate ourselves from our competitors and to build goodwill with our customers |
| These promotion efforts will require certain expenditures on our part |
| However, our efforts may be unsuccessful and these trademarks may not result in the competitive advantage that we anticipate |
| In such event, our revenues and results of operations may be materially adversely affected by the costs and expenses related to the promotion of such trademarks |
| Our competitors may develop non-infringing products or technologies that adversely affect our future growth and revenues |
| It is possible that our competitors will produce proprietary games or gaming products similar to ours without infringing on our intellectual property rights |
| We also rely on unpatented proprietary technologies |
| It is possible that others will independently develop the same or similar technologies or otherwise obtain access to the unpatented technologies upon which we rely for future growth and revenues |
| In addition, to protect our trade secrets and other proprietary information, we generally require employees, consultants, advisors and strategic partners to enter into confidentiality agreements or agreements containing confidentiality provisions |
| We cannot assure you that these agreements will provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information |
| Failure to meaningfully protect our trade secrets, know-how or other proprietary information could adversely affect our future growth and revenues |
| We may incur significant litigation expenses protecting our intellectual property or defending our use of intellectual property, which may have a material adverse effect on our cash flow |
| Significant litigation regarding intellectual property exists in our industry |
| Competitors and other third parties may infringe on our intellectual property rights |
| Alternatively, competitors may allege that we have infringed on their intellectual property rights |
| For example, Interactive Systems Worldwide, Inc |
| sued us for patent infringement on December 14, 2005 |
| Any claims, even those made by third parties which are without merit, could: • be expensive and time consuming to defend resulting in the diversion of management’s attention and resources; • cause one or more of our patents to be ruled or rendered unenforceable or invalid, or require us to cease making, licensing or using products or systems that incorporate the challenged intellectual property; or • require us to spend significant time and money to redesign, reengineer or rebrand our products or systems if feasible |