Edgar Filing: BALLY TECHNOLOGIES, INC.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2010

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-31558

BALLY TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

NEVADA		88-0104066
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

6601 S. Bermuda Rd.

Las Vegas, Nevada 89119

(Address of principal executive offices)

(702) 584-7700

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer x		Accelerated Filer o

Non-Accelerated Filer o		Smaller Reporting Company o
(do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No

The number of shares of Common Stock, $0.10 par value, outstanding as of April 27, 2010, was 55,224,000 which do not include 3,915,000 shares held in treasury.

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TABLE OF CONTENTS

		Page
PART I.	FINANCIAL INFORMATION	3

Item 1.	Financial Statements

	Unaudited Condensed Consolidated Balance Sheets as of March 31, 2010 and June 30, 2009	3

	Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2010 and 2009	4

	Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Nine Months Ended March 31, 2010 and 2009	5

	Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2010 and 2009	6

	Notes to Unaudited Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36

Item 4.	Controls and Procedures	37

PART II.	OTHER INFORMATION	38

Item 1.	Legal Proceedings	38

Item 1A.	Risk Factors	38

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38

Item 6.	Exhibits	39

SIGNATURES		40

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PART I

BALLY TECHNOLOGIES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31, 2010			June 30, 2009
	(in 000s, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	75,993		$	55,886
Restricted cash	7,278			9,076
Accounts and notes receivable, net of allowances for doubtful accounts of $10,103 and $8,897	219,143			174,653
Inventories	42,914			52,887
Prepaid and refundable income tax	35,216			43,756
Deferred income tax assets	37,301			35,802
Deferred cost of revenue	17,493			21,906
Prepaid assets	11,672			7,347
Assets held for sale	46,068			51,284
Other current assets	3,689			13,010
Total current assets	496,767			465,607
Restricted long-term investments	12,238			12,097
Long-term receivables, net of allowances for doubtful accounts of $5,169 and $0	30,222			9,826
Property, plant and equipment, net of accumulated depreciation of $49,269 and $43,777	31,147			33,410
Leased gaming equipment, net of accumulated depreciation of $145,775 and $117,638	79,333			95,012
Goodwill	161,700			161,960
Intangible assets, net	36,851			32,198
Deferred income tax assets	22,027			17,276
Long-term deferred cost of revenue	33,707			41,615
Other assets, net	11,202			11,881
Total assets	$	915,194		$	880,882
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	22,364		$	19,864
Accrued liabilities	42,434			45,515
Customer deposits	10,164			10,375
Jackpot liabilities	10,240			12,171
Deferred revenue	42,040			49,122
Income tax payable	784			2,971
Liabilities related to assets held for sale	2,404			2,695
Current maturities of long-term debt	40,034			35,337
Total current liabilities	170,464			178,050
Long-term debt, net of current maturities	142,500			173,750
Long-term deferred revenue	45,501			60,464
Other income tax liability	19,885			22,072
Other liabilities	8,386			7,797
Total liabilities	386,736			442,133
Commitments and contingencies (Note 11)
Stockholders’ equity:
Special stock, 10,000,000 shares authorized: Series E, $100 liquidation value; 115 shares issued and outstanding	12			12
Common stock, $.10 par value; 100,000,000 shares authorized; 59,060,000 and 57,091,000 shares issued and 55,157,000 and 54,312,000 outstanding	5,893			5,703
Treasury stock at cost, 3,903,000 and 2,779,000 shares	(109,470		)	(64,727		)
Additional paid-in capital	378,777			330,465
Accumulated other comprehensive loss	(1,575		)	(770		)
Retained earnings	252,059			165,623
Total Bally Technologies, Inc. stockholders’ equity	525,696			436,306
Noncontrolling interests	2,762			2,443
Total stockholders’ equity	528,458			438,749
Total liabilities and stockholders’ equity	$	915,194		$	880,882

See accompanying notes to unaudited condensed consolidated financial statements.

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BALLY TECHNOLOGIES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended March 31,						Nine Months Ended March 31,
	2010			2009			2010			2009
	(in 000s, except per share amounts)
Revenues:
Gaming equipment and systems	$	120,917		$	126,828		$	373,333		$	443,643
Gaming operations	69,723			69,986			209,610			204,169
	190,640			196,814			582,943			647,812
Costs and expenses:
Cost of gaming equipment and systems (1)	46,590			55,620			150,765			198,152
Cost of gaming operations	19,865			19,349			59,854			60,908
Selling, general and administrative	52,545			50,168			151,462			161,231
Research and development costs	20,279			19,291			59,321			58,493
Impairment charges	11,379			—			11,379			—
Depreciation and amortization	4,910			4,943			14,442			14,014
	155,568			149,371			447,223			492,798
Operating income	35,072			47,443			135,720			155,014
Other income (expense):
Interest income	944			696			2,268			2,779
Interest expense	(3,069		)	(4,181		)	(9,607		)	(15,462		)
Other, net	(955		)	(798		)	(1,897		)	(5,066		)
Income from continuing operations before income taxes	31,992			43,160			126,484			137,265
Income tax expense	(11,262		)	(15,073		)	(43,973		)	(49,178		)
Income from continuing operations	20,730			28,087			82,511			88,087
Discontinued operations:
Income from discontinued operations before income taxes	3,431			3,688			8,050			9,100
Income tax expense	(1,068		)	(1,159		)	(2,508		)	(2,860		)
Income from discontinued operations	2,363			2,529			5,542			6,240
Net income	23,093			30,616			88,053			94,327
Less net income attributable to noncontrolling interests	534			1,365			1,617			1,208

Net income attributable to Bally Technologies, Inc.	$	22,559		$	29,251		$	86,436		$	93,119
Basic earnings per share:
Income from continuing operations attributable to Bally Technologies, Inc.	$	0.37		$	0.50		$	1.50		$	1.61
Discontinued operations attributable to Bally Technologies, Inc.	0.04			0.04			0.09			0.10
Basic earnings attributable to Bally Technologies, Inc. per share	$	0.41		$	0.54		$	1.59		$	1.71

Diluted earnings per share:
Income from continuing operations attributable to Bally Technologies, Inc.	$	0.36		$	0.48		$	1.42		$	1.54
Discontinued operations attributable to Bally Technologies, Inc.	0.03			0.04			0.08			0.09
Diluted earnings attributable to Bally Technologies, Inc. per share	$	0.39		$	0.52		$	1.50		$	1.63

Weighted average shares outstanding:
Basic	54,771			54,204			54,517			54,567
Diluted	57,716			56,446			57,715			57,104
Amounts attributable to Bally Technologies, Inc. common stockholders:
Income from continuing operations, net of tax	$	20,577		$	27,099		$	81,778		$	87,806
Income from discontinued operations, net of tax	1,982			2,152			4,658			5,313
Net income	$	22,559		$	29,251		$	86,436		$	93,119

(1)	Cost of gaming equipment and systems exclude amortization related to certain intangibles, including core technology and license rights, which are included in depreciation and amortization.

See accompanying notes to unaudited condensed consolidated financial statements.

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BALLY TECHNOLOGIES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

	Common Stock			Series E Special		Treasury			Additional Paid-In			Accumulated Other Comprehensive Income (Loss)			Retained		Noncontrolling			Total Stockholders’
	Shares	Dollars		Stock		Stock			Capital			(“OCI”)			Earnings		Interests			Equity
	(in 000s)
Balances at June 30, 2008	56,318	$	5,626	$	12	$	(25,041	)	$	302,146		$	1,268		$	39,314	$	1,782		$	325,107
Net income from continuing operations, net of tax	—	—		—		—			—			—			87,806		281			88,087
Net income from discontinued operations, net of tax	—	—		—		—			—			—			5,313		927			6,240
Foreign currency translation adjustment	—	—		—		—			—			(1,750		)	—		—			(1,750		)
Unrealized loss on derivative financial instruments, net of tax	—	—		—		—			—			(1,194		)	—		—			(1,194		)
Total comprehensive income	—	—		—		—			—			—			—		—			$	91,383
Distributions to noncontrolling interests	—	—		—		—			—			—			—		(859		)	(859		)
Restricted stock issued	100	10		—		—			(10		)	—			—		—			—
Receipt of stock from exercise of stock options and tax liability on restricted stock	—	—		—		(1,335		)	—			—			—		—			(1,335		)
Purchase of common stock for treasury	—	—		—		(30,933		)	—			—			—		—			(30,933		)
Share-based compensation		—		—		—			10,907			—			—		—			10,907
Shares issued upon exercise of stock options	442	44		—		—			7,638			—			—		—			7,682
Shares issued under ESPP plan	71	7		—		—			1,258			—			—		—			1,265
Tax benefit of employee stock option exercises	—	—		—		—			1,524			—			—		—			1,524
Balances at March 31, 2009	56,931	$	5,687	$	12	$	(57,309	)	$	323,463		$	(1,676	)	$	132,433	$	2,131		$	404,741

Balances at June 30, 2009	57,091	$	5,703	$	12	$	(64,727	)	$	330,465		$	(770	)	$	165,623	$	2,443		$	438,749
Net income from continuing operations, net of tax	—	—		—		—			—			—			81,778		733			82,511
Net income from discontinued operations, net of tax	—	—		—		—			—			—			4,658		884			5,542
Foreign currency translation adjustment	—	—		—		—			—			846			—		—			846
Unrealized loss on derivative financial instruments, net of tax	—	—		—		—			—			(1,651		)	—		—			(1,651		)
Total comprehensive income	—	—		—		—			—			—			—		—			$	87,248
Distributions to noncontrolling interests	—	—		—		—			—			—			—		(1,298		)	(1,298		)
Restricted stock issued	155	12		—		—			(12		)	—			—		—			—
Receipt of stock from exercise of stock options and tax liability on restricted stock	—	—		—		(524		)	—			—			—		—			(524		)
Purchase of common stock for treasury	—	—		—		(44,219		)	—			—			—		—			(44,219		)
Shares issued upon exercise of warrants	39	1		—		—			(1		)	—			—		—			—
Share-based compensation	—	—		—		—			10,600			—			—		—			10,600
Shares issued upon exercise of stock options	1,734	173		—		—			23,230			—			—		—			23,403
Shares issued under ESPP plan	41	4		—		—			1,419			—			—		—			1,423
Tax benefit of employee stock option exercises	—	—		—		—			13,076			—			—		—			13,076
Balances at March 31, 2010	59,060	$	5,893	$	12	$	(109,470	)	$	378,777		$	(1,575	)	$	252,059	$	2,762		$	528,458

See accompanying notes to unaudited condensed consolidated financial statements.

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BALLY TECHNOLOGIES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Nine Months Ended March 31,
	2010			2009
	(in 000s)
Cash flows from operating activities:
Net income	$	88,053		$	94,327
Adjustments to net income attributable to Bally Technologies, Inc. to net cash provided by operating activities:
Income from discontinued operations, net of tax	(5,542		)	(6,240		)
Depreciation and amortization	55,438			50,463
Impairment charges	11,379			—
Share-based compensation	10,502			10,812
Amortization of deferred debt issuance costs	2,108			1,405
Income tax (benefit) expense	(8,023		)	1,076
Provision for doubtful accounts	2,781			926
Write-off of debt issuance costs	—			786
Inventory and other asset write-downs	1,531			3,667
Excess tax benefit of stock option exercises	(12,400		)	(760		)
Other	2,500			2,018
Changes in operating assets and liabilities:
Accounts and notes receivable	(62,855		)	24,850
Inventories	(22,734		)	5,584
Prepaid and refundable income tax and income tax payable	19,429			(15,327		)
Other current assets	3,000			3,552
Accounts payable	2,323			(25,503		)
Accrued liabilities, customer deposits and jackpot liabilities	(7,909		)	(40,223		)
Deferred revenue and deferred cost of revenue	(9,723		)	(31,647		)
Net cash provided by operating activities	69,858			79,766

Cash flows from investing activities:
Capital expenditures	(6,792		)	(16,220		)
Restricted cash and investments	1,657			(2,679		)
Financing arrangements with customers	(15,750		)	—
Additions to other long-term assets	(4,784		)	(5,080		)
Net cash used in investing activities	(25,669		)	(23,979		)

Cash flows from financing activities:
Proceeds from revolving credit facility	—			25,000
Payments on revolving credit facility	—			(25,000		)
Capitalized debt issuance costs	—			(10,728		)
Pay-off of debt from refinancing	—			(14,553		)
Reduction of long-term debt and capital leases	(26,578		)	(20,125		)
Distributions to noncontrolling interests	(535		)	136
Purchase of treasury stock	(44,743		)	(32,268		)
Excess tax benefit of stock option exercises	12,400			760
Proceeds from exercise of stock options and employee stock purchases	24,826			8,946
Net cash used in financing activities	(34,630		)	(67,832		)

Effect of exchange rate changes on cash	746			(2,683		)

Net cash provided by operating activities of discontinued operations	8,412			8,752
Net cash used in investing activities of discontinued operations	(718		)	(5,444		)
Net cash used in financing activities of discontinued operations	(763		)	(995		)
Decrease (increase) in cash and cash equivalents of discontinued operations	2,871			(1,125		)
	9,802			1,188
Cash and cash equivalents:
Increase (decrease) for period	20,107			(13,540		)
Balance, beginning of period	55,886			59,991
Balance, end of period	$	75,993		$	46,451

See accompanying notes to unaudited condensed consolidated financial statements.

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BALLY TECHNOLOGIES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED SUPPLEMENTAL CASH FLOW INFORMATION

The following supplemental information is related to the unaudited condensed consolidated statements of cash flows:

	Nine Months Ended March 31,
	2010		2009
	(in 000s)
Cash paid for interest	$	9,226	$	20,294
Cash paid for income taxes, net of refunds	28,317		63,776

Non-cash investing and financing transactions:
Pay-off of debt from refinancing	$	—	$	275,000
Transfer of inventory to leased gaming equipment (1)	33,315		34,233
Reclassify leased gaming equipment to inventory (1)	3,947		8,619
Acquisition of Bally trademark	7,500		—
Accrual of capital expenditures	1,214		968

(1) As a result of the inability to separately identify the cash flows associated with the construction of leased gaming equipment, the Company has included all additions to leased gaming equipment as an increase in inventory under cash used in operating activities in the unaudited condensed consolidated statement of cash flows. In addition, cash generated from the sale of used gaming equipment classified as leased gaming equipment is also included in cash provided by operating activities in the unaudited condensed consolidated statement of cash flows. The Company has one process to procure raw materials for the assembly of both inventory and leased gaming equipment. The materials requisition planning process considers the number of devices the Company expects to build for sale and for use in its gaming operations division during a particular period, but it does not separately earmark purchases for leased gaming equipment. Without such an earmarking process, the Company is unable to determine whether the parts used to construct leased gaming equipment during a particular period came from inventory on hand at the beginning of the period or was constructed from inventory procured during the period of deployment, thus requiring the expenditure of cash.

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BALLY TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and reflect all adjustments, consisting of normal recurring adjustments, which management believes are necessary to fairly present the financial position, results of operations and cash flows of Bally Technologies, Inc. (“Bally” or the “Company”), a Nevada corporation, and its subsidiaries for the respective periods presented. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to those rules and regulations. The results of operations for an interim period are not necessarily indicative of the results that may be expected for any other interim period or the year as a whole. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2009. References to specific U.S. GAAP within this report cite topics within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”).

The Company is the general partner of Rainbow Casino Vicksburg Partnership (“RCVP”), which operates the Rainbow Casino. During the third quarter, the Company committed to a plan of disposition of the Rainbow Casino, and on April 5, 2010, the Company entered into a definitive purchase agreement with Isle of Capri Casinos, Inc. (“Isle”) to sell the Rainbow Casino pending regulatory approval. Under the terms of the agreement, Isle will pay the Company approximately $80.0 million in an all-cash transaction. The expected closing date is June 30, 2010. The Company’s Casino Operations have been classified as discontinued operations in the accompanying financial statements. See Note 3 to unaudited condensed consolidated financial statements, Assets Held For Sale and Discontinued Operations.

The limited partner is entitled to receive 10% of the net available cash flows of RCVP after debt service and other items, as defined in the limited partnership agreement, which increases to 20% of the net available cash flows based on the incremental amount of revenues in excess of $35.0 million through December 31, 2010 (the “Limited Partner Interest”). A projection of the Limited Partner Interest is payable on the closing date with a true up of the actual amount incurred as soon as practicable after December 31, 2010. The Company holds the remaining economic interest in the partnership. The Company consolidates RCVP and records an adjustment to reflect the portion of the earnings of RCVP attributable to the limited partner as a noncontrolling interest.

All intercompany accounts and transactions have been eliminated in consolidation.

Expense classification

The classification of certain costs within the Unaudited Condensed Consolidated Statement of Operations for the three and nine months ended March 31, 2009 has been corrected to conform to the current year presentation. The reclassification reflects certain costs of services associated with revenue presented in Cost of gaming equipment and systems of $1.0 million and $3.7 million for the three and nine months ended March 31, 2009, respectively, that had previously been presented as a component of Selling, general and administrative expenses. This correction was not material to the previously issued financial statements and did not have any impact on income from continuing operations, earnings per share, retained earnings, or cash flows.

Recently adopted accounting pronouncements - revenue recognition

Effective July 1, 2009, the Company adopted the provisions of two new Accounting Standards Updates (“ASU”) affecting revenue recognition: ASU No. 2009-13, Multiple Deliverable Revenue Arrangements and ASU No. 2009-14, Certain Revenue Arrangements That Include Software Elements. The Company has elected to adopt these ASUs prior to the required effective date using the prospective method as permitted under the guidance. Accordingly, this guidance is being applied to all new or materially modified revenue arrangements entered into since the start of the Company’s fiscal year of adoption, which is July 1, 2009.

ASU No. 2009-13 replaces and significantly changes the existing separation criteria for multiple-deliverable revenue arrangements by eliminating the criterion for objective and reliable evidence of fair value for the undelivered products or services to determine a unit of accounting. Instead, revenue arrangements with multiple deliverables should be divided into separate units of accounting if the deliverables meet both of the following criteria:

· The delivered items have value to the customer on a standalone basis. The item or items have value on a standalone basis if they are sold separately by any vendor or the customer could resell the delivered item(s) on a standalone basis; and

· If the arrangement includes a general right of return relative to the delivered items, delivery or performance of the undelivered items is considered probable and substantially in the control of the vendor.

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ASU No 2009-13 also eliminates the use of the residual method of allocation and requires, instead, that arrangement consideration be allocated, at the inception of the arrangement, to all deliverables based on their relative selling price (i.e., the relative selling price method). When applying the relative selling price method, a hierarchy is used for estimating the selling price based first on vendor-specific objective evidence (“VSOE”), then third-party evidence (“TPE”) and finally management’s estimate of the selling price (“ESP”).

ASU No 2009-14 amends the scope of software revenue recognition to exclude all tangible products containing both software and nonsoftware components that function together to deliver the product’s essential functionality. As a result, certain products that were previously accounted for under the scope of software revenue recognition guidance are no longer accounted for as software. Prior to July 1, 2009, the Company determined its gaming devices included software that was “more than incidental” to the product as a whole; accordingly, the sales of gaming devices was accounted for under the scope of software revenue recognition guidance. Application of the new guidance resulted in the Company determining that gaming devices no longer fall under the scope of software revenue recognition guidance. Under the new guidance, which applies to new or modified arrangements since July 1, 2009, revenue related to systems arrangements that contain software and nonsoftware deliverables require an allocation of the arrangement fee to the separate deliverables using the relative selling price method. Revenue for the software deliverables continue to be recognized under the software revenue recognition guidance, while revenue for the nonsoftware deliverables, such as gaming devices and other hardware, are no longer accounted for under the software revenue recognition guidance.

The impact of applying the new accounting guidance to new or materially modified arrangements entered into since July 1, 2009, is as follows:

	Three Months Ended March 31, 2010				Nine Months Ended March 31, 2010
	As Reported		Pro Forma Basis as if the Previous Accounting Guidance Were in Effect		As Reported		Pro Forma Basis as if the Previous Accounting Guidance Were in Effect
	(in 000s)
Revenues:
Gaming Equipment	$	69,393	$	61,212	$	210,187	$	194,861
Systems	51,524		51,992		163,146		162,764
Gaming equipment and systems	$	120,917	$	113,204	$	373,333	$	357,625

The impact on future periods is dependent upon the prevalence of multiple deliverable arrangements whereby a combination of gaming devices, hardware, software, maintenance and product support fees and consulting services are sold under one arrangement and the software license is time-based. Under such arrangements, all revenue was previously recognized ratably over the term of the time-based license as the Company was unable to establish VSOE of fair value for the software maintenance and product support, which runs contemporaneously with the license period. Under the new guidance, revenue from non-software elements delivered under such multiple deliverable arrangements will no longer be deferred if VSOE of fair value does not exist for an undelivered element. Rather, the revenue allocated to the non-software elements using the relative selling price method would be recognized upon delivery and customer acceptance, and only the revenue allocated to the software elements will be deferred and recognized over the term of the time-based license.

The impact on current and future periods is also dependent upon the prevalence of extended payment term arrangements. Under the new guidance, revenue from non-software elements is no longer accounted for under software revenue recognition guidance; accordingly, the existence of extended payment terms to customers with appropriate credit does not impact the recognition of revenue. Under the previous guidance extended payment terms in excess of 24 months would be deferred as the arrangements were not considered to have fixed and determinable fees. Accordingly, revenue was previously recorded in accordance with the terms of sale for contracts with payment terms of 24 months or less, or as cash was received for contracts with payment terms in excess of 24 months. Under the new guidance, revenue from non-software elements will no longer be deferred based on the existence of extended payment terms provided sufficient evidence exists to determine collectability is probable.

In allocating the arrangement fees to separate deliverables under the new accounting guidance, the Company used VSOE of selling price for gaming devices, maintenance and professional services; a combination of TPE and ESP for hardware, and ESP for system software deliverables. ESP for system software was determined based upon the Company’s normal pricing and discounting practices.

Other recently adopted accounting pronouncements

On July 1, 2009, the Company adopted the new FASB ASC which establishes two levels of U.S. GAAP: authoritative and nonauthoritative. The ASC is now the single source of authoritative nongovernmental U.S. GAAP. All other literature is considered non-authoritative. The Company’s adoption of this statement had no impact on the consolidated results of operations, financial position and cash flows, but rather changes the reference used to cite specific FASB accounting literature.

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On July 1, 2009, the Company adopted new accounting guidance related to business combinations which clarifies the accounting for certain separately identifiable intangible assets which an acquirer does not intend to actively use. This guidance requires an acquirer in a business combination to account for a defensive intangible asset as a separate unit of accounting which should be amortized to expense over the period the asset diminishes in value. Future effects will be dependent upon acquisitions of defensive intangible assets, if any, at that time. In addition, there is new guidance for determining the useful life of a recognized intangible asset. This guidance is applied prospectively to intangible assets acquired after the effective date. However, the disclosure requirements are applied prospectively to all intangible assets recognized in financial statements. In addition, the new guidance requires that an acquiring entity recognize all of the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions, requires the expense of acquisition costs, and also includes a substantial number of new disclosure requirements. The Company’s adoption of this guidance did not have a significant impact on the disclosures or the consolidated results of operations, financial position and cash flows for the three and nine months ended March 31, 2010.

On July 1, 2009, the Company adopted new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this guidance requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. This guidance also clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest and requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. The guidance also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. The adoption of this statement did not have a material impact on the consolidated results of operations, financial position and cash flows, but did affect presentation and disclosure. As a result of the adoption, the Company reclassified noncontrolling interests in the amount of $2.4 million from minority interest to equity in the June 30, 2009 Unaudited Condensed Consolidated Balance Sheets and Statements of Stockholders’ Equity. Certain reclassifications to the Unaudited Condensed Consolidated Statements of Operations and Unaudited Condensed Consolidated Statements of Cash Flows have been made to prior period amounts to conform to the presentation of the current period. Recorded amounts for prior periods previously presented as Net income which are now presented as Net income attributable to Bally Technologies, Inc., have not changed as a result of the adoption of this guidance.

On July 1, 2009, the Company adopted new accounting guidance requiring additional disclosures about fair value of financial instruments in interim and annual financial statements. The Company’s adoption of this guidance resulted in the disclosure of information about the fair value of financial instruments consistent with the disclosures in the Company’s most recent annual financial statements.

Fair value of financial instruments

The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. The carrying amounts reflected in the accompanying unaudited condensed consolidated balance sheets for cash equivalents, accounts and notes receivable, investment to fund jackpot liabilities, accounts payable, jackpot liabilities and long-term debt approximate their respective fair values.

All financial assets and liabilities are recognized or disclosed at fair value using a fair value hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. There are three levels of inputs that may be used to measure fair value:

· Level 1: quoted prices in active markets for identical assets or liabilities;

· Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or

· Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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The Company’s only significant financial asset or liability measured at fair value on a recurring basis, excluding accrued interest components, consisted of a cash flow hedge related to a variable rate debt instrument as of March 31, 2010 (which is included in accrued liabilities in the unaudited condensed consolidated balance sheets) as follows:

	Fair Value Measurements Using Input Type
	Level 1		Level 2		Total
	(in 000s)
Liability:
Derivative financial instrument	$	—	$	2,148	$	—

At June 30, 2009, the derivative financial instrument was a level 2 asset valued at $255,000. The valuation techniques used to measure the fair value of the derivative financial instrument above in which the counterparties have high credit ratings, were derived from pricing models, such as discounted cash flow techniques, with all significant inputs derived from or corroborated by observable market data. The Company’s discounted cash flow techniques use observable market inputs, such as LIBOR-based yield curves. See Note 6 to unaudited condensed consolidated financial statements, Long-Term Debt.

Accounting for Derivative Instruments and Hedging Activity

The Company assesses, both at the inception of each hedge and on an on-going basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of the hedged items. Such highly effective derivatives are granted hedge accounting treatment. The derivative financial instrument meets these requirements and is accounted for as a cash flow hedge.

The impact of the cash flow hedge on the unaudited condensed consolidated financial statements is depicted below:

Fiscal 2010:

	Amount of Loss Recognized in OCI on Derivative (Effective Portion)						Location of Loss	Amount of Loss Reclassified from Accumulated OCI into Income (Effective Portion)
Derivative in Cash Flow Hedging	Three Months Ended			Nine Months Ended			Reclassified from Accumulated OCI into Income (Effective	Three Months Ended			Nine Months Ended
Relationship	March 31, 2010			March 31, 2010			Portion)	March 31, 2010			March 31, 2010
	(in 000s)

Interest rate swap agreement	$	(1,892	)	$	(4,690	)	Interest expense	$	(784	)	$	(2,287	)

Fiscal 2009:

	Amount of Loss Recognized in OCI on Derivative (Effective Portion)						Location of Loss	Amount of Loss Reclassified from Accumulated OCI into Income (Effective Portion)
Derivative in Cash Flow Hedging	Three Months Ended			Nine Months Ended			Reclassified from Accumulated OCI into Income (Effective	Three Months Ended			Nine Months Ended
Relationship	March 31, 2009			March 31, 2009			Portion)	March 31, 2009			March 31, 2009
	(in 000s)

Interest rate swap agreement	$	(750	)	$	(1,430	)	Interest expense	$	(236	)	$	(236	)

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Recently issued accounting pronouncements not yet adopted

In April 2010, the FASB issued ASU No. 2010-16, Accruals for Casino Jackpot Liabilities. Specifically, the guidance clarifies that an entity should not accrue jackpot liabilities, or portions thereof, before a jackpot is won if the entity can avoid paying the jackpot. Jackpots should be accrued and charged to revenue when an entity has the obligation to pay the jackpot. The guidance applies to both base and progressive jackpots. The new guidance is effective for fiscal years beginning on or after December 15, 2010. The new guidance will be applied by recording a cumulative-effect adjustment to opening retained earnings in the period of adoption. The Company expects to adopt the guidance in fiscal year 2012 and is currently in the process of evaluating the impact the guidance will have on its consolidated results of operations, financial position and cash flows.

Inventories

Inventories are stated at the lower of cost, determined on a first in, first out basis, or market. Cost elements included in work-in-process and finished goods include raw materials, direct labor and manufacturing overhead. Inventories consist of the following:

	March 31, 2010		June 30, 2009
	(in 000s)
Raw materials	$	35,601	$	40,662
Work-in-process	1,572		1,432
Finished goods	5,741		10,793
Total	$	42,914	$	52,887

The finished goods inventory at the Rainbow Casino of $61,000 and $55,000 was classified as held for sale as of March 31, 2010 and June 30, 2009, respectively. See note 3 to unaudited condensed consolidated financial statements, Assets Held For Sale and Discontinued Operations.

Accounts and notes receivable and allowance for doubtful accounts

Accounts and notes receivable are stated at face value less an allowance for doubtful accounts. The Company evaluates its receivables and establishes an allowance for doubtful accounts based on a combination of factors including, but not limited to, historical customer collection experience, economic conditions, and customers’ financial condition.

The Company grants customers credit terms for periods of 120 days or less or may grant extended credit terms to some customers for periods up to 36 months, with interest at prevailing rates, which are generally collateralized by the related equipment sold, although the value of such equipment, if repossessed, may be less than the receivable balance outstanding.

The Company also provides development financing loans to select customers to assist in funding new or expanding gaming opportunities, generally under terms of three to five years with interest recognized at prevailing rates. Certain agreements may also include provisions for the facility to reserve a percentage of its total gaming footprint for the placement of the Company’s gaming devices.

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2. EARNINGS PER SHARE

Basic earnings per share are computed by dividing earnings by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share reflect the additional dilution from all potentially dilutive securities.

The following computation of basic and diluted earnings per share applicable to the Company’s common stock is as follows:

	Three Months Ended March 31,				Nine Months Ended March 31,
	2010		2009		2010		2009
	(in 000s, except per share amounts)
Income from continuing operations attributable to Bally Technologies, Inc.	$	20,577	$	27,099	$	81,778	$	87,806
Income from discontinued operations attributable to Bally Technologies, Inc.	1,982		2,152		4,658		5,313
Net income attributable to Bally Technologies, Inc.	$	22,559	$	29,251	$	86,436	$	93,119
After tax interest expense on convertible debt	—		14		14		145
Diluted earnings attributable to Bally Technologies, Inc.	$	22,559	$	29,265	$	86,450	$	93,264

Weighted average common shares outstanding	54,771		54,204		54,517		54,567
Dilutive effect of:
Stock options, Restricted Stock Units (“RSU”) and restricted stock	2,942		2,120		3,152		2,332
Warrants	3		—		17		7
Convertible debt (1)	—		122		29		198
Weighted average diluted shares outstanding	57,716		56,446		57,715		57,104

Basic earnings per share:
Income from continuing operations attributable to Bally Technologies, Inc.	$	0.37	$	0.50	$	1.50	$	1.61
Income from discontinued operations attributable to Bally Technologies, Inc.	0.04		0.04		0.09		0.10
Basic earnings attributable to Bally Technologies, Inc. per share	$	0.41	$	0.54	$	1.59	$	1.71

Diluted earnings per share:
Income from continuing operations attributable to Bally Technologies, Inc.	$	0.36	$	0.48	$	1.42	$	1.54
Income from discontinued operations attributable to Bally Technologies, Inc.	0.03		0.04		0.08		0.09
Diluted earnings attributable to Bally Technologies, Inc. per share	$	0.39	$	0.52	$	1.50	$	1.63

(1) The Company had certain related party debt outstanding which was convertible into common stock at the Company’s discretion. The related party debt was paid in full in December 2009. See Note 7 to unaudited condensed consolidated financial statements, Related Party Transactions.

Certain securities were excluded from the diluted per share calculation because their inclusion would be anti-dilutive. Such securities consist of the following:

	Three Months Ended March 31,		Nine Months Ended March 31,
	2010	2009	2010	2009
	(in 000s)
Stock options, RSU and restricted stock	426	2,589	349	2,061
Warrants	—	100	—	—
	426	2,689	349	2,061

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3. ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

During the third quarter, the Company committed to a plan of disposition of the Rainbow Casino. On April 5, 2010, the Company finalized a definitive purchase agreement with Isle to sell the Rainbow Casino pending regulatory approval. Under the terms of the agreement, Isle will pay the Company $80.0 million in an all-cash transaction. The expected closing date is June 30, 2010.

The assets and liabilities of the Rainbow Casino were classified as held for sale as of March 31, 2010 and June 30, 2009 and the results of its operations for the three and nine months ended March 31, 2010 and 2009 were classified as discontinued operations because the Company does not expect to continue to receive significant cash flows from the Rainbow Casino. Inter-segment revenues, eliminated in consolidation, were $0.3 million and $0.1 million and $0.4 million and $1.2 million for the three and nine months ended March 31, 2010 and 2009, respectively. The following table summarizes the assets held for sale and liabilities related to assets held for sale in the accompanying consolidated balance sheets as of March 31, 2010 and June 30, 2009:

	March 31, 2010			June 30, 2009
	(in 000s, except share amounts)

Cash and cash equivalents	$	5,841		$	8,712
Accounts and notes receivable, net of allowances for doubtful accounts of $55 and $42	11			45
Inventories	61			55
Prepaid assets	85			184
Deferred income tax assets	250			312
Other current assets	7			8
Total current assets	6,255			9,316
Property, plant and equipment, net of accumulated depreciation of $20,838 and $20,336	41,324			43,479
Deferred income tax assets(1)	(1,903		)	(1,903		)
Other assets, net	392			392
Total assets	$	46,068		$	51,284

Accounts payable	$	622		$	710
Accrued liabilities	1,674			1,890
Jackpot liabilities	108			95
Total current liabilities	2,404			2,695
Total liabilities	$	2,404		$	2,695

(1) Noncurrent deferred income tax liability of the Rainbow Casino offset against noncurrent deferred income tax assets in consolidation.

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The following table summarizes income from discontinued operations for the three and nine months ended March 31, 2010 and 2009:

	Three Months Ended March 31,						Nine Months Ended March 31,
	2010			2009			2010			2009
	(in 000s, except per share amounts)
Revenues:
Casino operations	$	10,372		$	10,769		$	28,027		$	30,463
Costs and expenses:
Direct cost of casino operations	3,937			4,227			11,426			12,902
Selling, general and administrative	1,773			1,955			5,355			6,126
Depreciation and amortization	928			889			2,873			2,382
	6,638			7,071			19,654			21,410
Operating income	3,734			3,698			8,373			9,053

Other income (expense):
Interest income	1			2			7			22
Other, net	(304		)	(12		)	(330		)	25

Income from discontinued operations before income taxes	3,431			3,688			8,050			9,100
Income tax expense	(1,068		)	(1,159		)	(2,508		)	(2,860		)
Income from discontinued operations	2,363			2,529			5,542			6,240
Less income attributable to noncontrolling interests	381			377			884			927

Income from discontinued operations attributable to Bally Technologies, Inc.	$	1,982		$	2,152		$	4,658		$	5,313

4. IMPAIRMENT CHARGES

The legality of charitable bingo gaming in Alabama is under challenge by the state’s governor. Legislation to put the legality question to a public referendum in Alabama failed to pass the recently concluded legislative session. There are also several lawsuits pending before the State’s Supreme Court which could negatively affect charitable gaming in Alabama. Several of the charitable bingo properties voluntarily ceased operations during the quarter pending resolution of the matter while two others continue to operate. As a result of these recent actions, the Company concluded it is unlikely that gaming will continue in its present form thereby impacting the recoverability of the associated assets. As such, the Company recorded a charge of $11.4 million during the quarter ended March 31, 2010, which included full allowances for notes and accounts receivable of $5.5 million and an impairment of $5.9 million in long-lived assets.

Recoverability of the long-lived assets and notes and accounts receivable were measured by a comparison of the carrying amount of the related asset to future net cash flows expected to be generated by the related asset. The impairment recognized was measured by the amount by which the carrying amount of the assets exceeded the estimated fair value of the assets.

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5. GOODWILL AND INTANGIBLE ASSETS

Intangible assets consist of the following:

		March 31, 2010							June 30, 2009
	Useful Life (Years)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
	(dollars in 000s)
Computer software	3 - 9	$	35,479	$	(27,090	)	$	8,389	$	27,488	$	(19,083	)	$	8,405
License rights	3 - 5	3,703		(2,013		)	1,690		2,117		(1,814		)	303
Trademarks	5	2,203		(1,957		)	246		2,203		(1,693		)	510
Core technology	5 - 8	22,763		(9,406		)	13,357		22,763		(6,585		)	16,178
Contracts	10	10,918		(6,153		)	4,765		10,043		(5,364		)	4,679
Other intangibles	3 - 7	1,898		(994		)	904		7,627		(5,504		)	2,123
Total finite lived intangible assets		76,964		$	(47,613	)	$	29,351	$	72,241	$	(40,043	)	$	32,198
Trademark	indefinite	7,500		—			7,500		—		—			—
Total		$	84,464	$	(47,613	)	$	36,851	$	72,241	$	(40,043	)	$	32,198

In September 2009, the Company recorded an intangible asset of approximately $7.5 million related to one-time consideration given for a perpetual, world-wide license for the use of the Bally trademark in connection with the Company’s business. Consideration for this intangible asset included approximately $5.0 million related to the delivery of gaming devices and $2.5 million in forgiveness of certain customer receivable balances. Previously, a royalty fee was paid and expensed based upon the number of units produced and sold using the trademark.

Total amortization expense related to finite lived intangible assets for the three months ended March 31, 2010 and 2009 was $2.6 million for both periods which included computer software amortization expense of $0.9 million and $1.0 million, respectively. Total amortization expense related to finite lived intangible assets for the nine months ended March 31, 2010 and 2009 was $7.6 million and $7.1 million, respectively, which included computer software amortization expense of $3.2 million and $3.0 million, respectively. Future amortization of finite lived intangible assets is scheduled as follows:

Year Ended June 30,	(in 000s)
2010 (remaining three months of fiscal year)	$	2,741
2011	9,140
2012	6,882
2013	5,641
2014	1,603
Thereafter	3,344
Total	$	29,351

All goodwill is associated with continuing operations. The changes in the carrying amount of goodwill for the nine months ended March 31, 2010, are as follows:

	(in 000s)
Balance at June 30, 2009	$	161,960
Foreign currency translation adjustment	(260		)
Balance at March 31, 2010	$	161,700

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6. LONG-TERM DEBT

Long-term debt consists of the following:

	March 31,			June 30,
	2010			2009
	(in 000s)
Term loan facility	$	182,500		$	206,250
Related party debt (see Note7)	—			2,800
Other, generally unsecured	34			37
Long-term debt	182,534			209,087
Less current maturities	(40,034		)	(35,337		)
Long-term debt, net of current maturities	$	142,500		$	173,750

On September 29, 2008, the Company entered into a $225.0 million term loan and a $75.0 million revolving credit facility (collectively, the “Credit Facility”). The Credit Facility matures in September 2012. The proceeds from the Credit Facility and cash-on-hand of $14.6 million were used to repay the then existing bank term loans totaling $289.6 million. The Company also used cash-on-hand to pay for transaction fees and expenses totaling $10.7 million, which are being amortized to interest expense over the term of the Credit Facility.

As of March 31, 2010, there was $75.0 million of undrawn availability under the revolving credit facility. Availability under the revolving credit facility is reduced to the extent of outstanding letters of credit.

Subsequent to March 31, 2010, the Company entered into a new $75.0 million revolving credit facility, which matures in March 2014, and increases the Company’s total undrawn revolver capacity to $150.0 million. The new revolver has the same terms, security, pricing and conditions as the existing Credit Facility. The Company paid approximately $0.9 million in fees and expenses related to the new revolving credit facility which was executed on April 9, 2010.

The interest rate on the term loan is subject to a leverage-based pricing grid. If the Company’s leverage ratio, as defined under the term loan, is greater than 1.5, the interest rate will be LIBOR plus a margin of 3.25%; if the leverage ratio is between 1.0 and 1.5, the interest rate will be LIBOR plus a margin of 3.00%; and if the leverage ratio is below 1.0, the interest rate will be LIBOR plus a margin of 2.75%. In December 2008, the Company entered into a floating-to-fixed interest rate swap, as discussed below, fixing the interest rate of the term loan at 1.89% plus the applicable margin (2.75% at March 31, 2010) for the remaining term.

Subsequent to March 31, 2010, the Company amended the Credit Facility to, among other items, change the leverage-based pricing grid. If the leverage ratio, as defined under the term loan, is greater than 2.5, the interest rate will be LIBOR plus a margin of 3.25%; if the leverage ratio is between 2.0 and 2.5, the interest rate will be LIBOR plus a margin of 3.00%; if the leverage ratio is between 1.5 and 2.0, the interest rate will be LIBOR plus a margin of 2.75%; if the leverage ratio is between 1.0 and 1.5, the interest rate will be LIBOR plus a margin of 2.50%; and if the leverage ratio is below 1.0, the interest rate will be LIBOR plus a margin of 2.25%.

The Company paid approximately $1.85 million in fees and expenses for the amendment which was executed on April 9, 2010. The amendment did not affect the floating-to-fixed interest rate swap.

The term loan is in its second year and requires quarterly principal reductions of $8.75 million through September 30, 2010 and $11.25 million quarterly during each of the third and fourth years of the agreement, with a balloon payment due at maturity in September 2012. The Credit Facility is collateralized by substantially all of the Company’s domestic property and is guaranteed by each of the Company’s domestic subsidiaries, excluding any noncontrolling interests, and is secured by a pledge agreement.

The Credit Facility contains a number of covenants that, among other things, restrict the ability of the Company and certain of its subsidiaries to dispose of assets, incur additional indebtedness or issue preferred stock, pay dividends or make other distributions, enter into certain acquisitions, repurchase equity interests or subordinated indebtedness, issue or sell equity interests of the Company’s subsidiaries, engage in mergers or acquisitions or certain transactions with subsidiaries and affiliates, and that otherwise restrict corporate activities.

The financial covenants under the Credit Facility consist of a leverage ratio and a fixed charges coverage ratio. The leverage ratio is computed as total debt outstanding at the end of the quarter divided by the trailing twelve months Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”), excluding certain cash and non-cash charges. The fixed charges coverage ratio is computed as EBITDA, adjusted for the trailing twelve months capital expenditures, share repurchases and cash taxes paid, divided by the trailing twelve months interest charges plus all payments of principal made during the previous twelve months.

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A breach of any of the covenants or the inability to comply with the required financial ratios could result in a default under the Credit Facility. In the event of any such default, the lenders could elect to declare all borrowings outstanding under the Credit Facility, together with any accrued interest and other fees, to be due and payable. If the Company were unable to repay the indebtedness upon its acceleration, the lenders could proceed against the underlying collateral.

The Company was in compliance with all of the Credit Facility covenants as of March 31, 2010.

The Company’s related party debt, which totaled approximately $2.8 million as of June 30, 2009, was paid in full in December 2009. It consisted of the debt owed to the former principals of Sierra Design Group (“SDG”). See Note 7 to the unaudited condensed consolidated financial statements, Related Party Transactions.

Interest Rate Swap Agreement

In December 2008, the Company entered into a floating-to-fixed interest rate swap agreement with an original notional value of $218.8 million and a maturity date of September 26, 2012. This interest rate swap serves to fix the floating LIBOR based debt under the term loan to fixed rate debt at an interest rate of 1.89% plus the applicable margin to manage the risk exposure to interest rate fluctuations.

The Company has documented and designated this interest rate swap as a cash flow hedge. Based on the assessment of effectiveness using statistical regression, the Company determined that the interest rate swap is effective. Effectiveness testing of the hedge relationship and measurement to quantify ineffectiveness is performed each fiscal quarter using the hypothetical derivative method. As the interest rate swap qualifies as a cash flow hedge, the Company adjusts the cash flow hedge on a quarterly basis to its fair value with a corresponding offset to accumulated OCI. The interest rate swap has been and is expected to remain highly effective for the life of the hedge. Effective amounts are reclassified to interest expense as the related hedged expense is incurred. Any ineffectiveness is reclassified from accumulated other comprehensive income to other income (expense). As of March 31, 2010, the Company had no ineffectiveness on its cash flow hedge. Amounts related to the swap expected to be reclassified from other comprehensive income to interest expense in the next twelve months total $2.3 million.

Additional information on the Company’s interest rate swap is as follows:

Interest Rate Swaps	Balance Sheet Location	Fair Value (in 000s)		Location of Offsetting Balance
Cash flow hedge—$182.5 million LIBOR based debt	Accrued Liabilities	$	2,148	Accumulated other comprehensive loss

7. RELATED PARTY TRANSACTIONS

In connection with the acquisition of SDG, the consideration paid included subordinated debt issued to the former principals of SDG. Certain of the former principals are now employees of the Company. At the Company’s discretion, the principal and accrued interest thereon could have been paid in cash, or converted into shares of the Company’s common stock using the average stock price for the 20 business days prior to the delivery of such shares. As of June 30, 2009, the subordinated debt totaled $2.8 million, all of which was included in current maturities. The subordinated debt was paid in full in December 2009.

8. SHARE-BASED COMPENSATION

Employee Stock Purchase Plan

In February 2008, the Company’s stockholders approved the 2008 Employee Stock Purchase Plan (the “2008 ESPP”). The 2008 ESPP provides that eligible employees are able to contribute up to 10% of their eligible earnings towards the quarterly purchase of the Company’s common stock. The employee’s purchase price is equal to 85% of the fair market value on date of purchase. During the nine months ended March 31, 2010 and 2009, employees purchased 40,671 shares and 71,530 shares of common stock for approximately $1.4 million and $1.3 million, respectively, under the 2008 ESPP.

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Share-Based Award Plans

Stock option activity as of and for the nine months ended March 31, 2010 is summarized below:

			Weighted Average
	Shares		Exercise Price		Remaining Contractual Term	Aggregate Intrinsic Value
	(in 000s)		(per share)		(years)	(in 000s)
Balance outstanding as of June 30, 2009	6,903		$	17.96		$	85,222
Granted	326		40.19
Exercised	(1,734	)	13.49
Forfeited or expired	(38	)	27.45
Balance outstanding as of March 31, 2010	5,457		$	20.64	4.83	$	109,401
Exercisable as of March 31, 2010	4,163		$	18.14	4.49	$	93,553

Restricted stock and RSU activity as of and for the nine months ended March 31, 2010 is summarized below:

	Restricted Stock		Weighted Average Grant Date Fair Value		RSUs		Weighted Average Grant Date Fair Value
	(in 000s)		(per share)		(in 000s)		(per share)
Balance outstanding as of June 30, 2009	310		$	30.42	623		$	17.71
Granted	139		40.10		42		38.98
Released	(72	)	24.61		(16	)	41.60
Forfeited or expired	—		—		—		—
Balance outstanding as of March 31, 2010	377		$	35.10	649		$	18.49
Vested as of March 31, 2010					540		$	16.33

Share-Based Compensation

The following table presents share-based compensation expense from continuing operations included in the Company’s unaudited condensed consolidated statements of operations:

	Three Months Ended March 31,				Nine Months Ended March 31,
	2010		2009		2010		2009
	(in 000s)
Selling, general and administrative	$	2,518	$	2,975	$	7,927	$	8,699
Research and development	856		745		2,452		2,004
Cost of gaming equipment and systems and operations	47		41		123		109
Share-based compensation expense before tax	3,421		3,761		10,502		10,812
Income tax benefit	1,197		1,317		3,676		3,785
Net share-based compensation expense	$	2,224	$	2,444	$	6,826	$	7,027

Share-based compensation expense from discontinued operations before income tax was $48,000 and $50,000 and $98,000 and $95,000 for the three and nine months ended March 31, 2010 and 2009, respectively.

As of March 31, 2010, there was $12.9 million of total unrecognized compensation expense from continuing operations related to the unvested portion of stock options which will be recognized over the subsequent 1.88 years. In addition, as of March 31, 2010, there was $9.8 million of total unrecognized compensation expense from continuing operations related to the unvested portion of restricted stock and RSUs which will be recognized over the subsequent 1.63 years.

Table of Contents

9. STOCKHOLDERS’ EQUITY, WARRANTS AND RIGHTS

Warrants

The Company issued 100,000 stock purchase warrants in February 2004 in connection with an acquisition. The strike price of the warrant is $24.69 with a term of seven years. During the nine months ended March 31, 2010, 91,765 stock purchase warrants were exercised and converted into 38,619 shares of the Company’s common stock. The exercises were cashless and net shares were issued for the difference between the strike price of the warrant and the market value of the Company’s common stock upon exercise.

Share Repurchase Plan

On January 28, 1999, the Company’s Board of Directors approved a share repurchase plan under which, subject to price and market conditions, purchases of shares could be made from time to time in the open market or in privately negotiated transactions using available cash. The Company’s share repurchase limit was set on August 12, 2008 under this share repurchase plan at $100 million. On December 2, 2009, the Board of Directors approved a new share repurchase plan to purchase up to $100 million of common stock effective January 1, 2010. The current plan replaced the Company’s previously existing $100 million share repurchase plan under which Bally had repurchased approximately $69.3 million of common stock from August 12, 2008 through December 31, 2009.

During the nine months ended March 31, 2010 and 2009, the Company repurchased 1,116,451 shares and 1,291,216 shares of common stock for $44.2 million and $30.9 million, respectively, under the share repurchase plans. As of March 31, 2010, $86.8 million was available for repurchases under the share repurchase plan. On April 4, 2010, the Company’s Board of Directors approved a new share repurchase plan to purchase up to $150 million of common stock which replaced the previous plan.

Special Stock

The Company’s Articles of Incorporation authorize the issuance of up to 10,000,000 shares of special stock (“Special Stock”). The Special Stock may be issued from time to time in one or more series, each having such designations, preferences and relative, participating, optional or other special rights, qualifications, limitations or restrictions as shall be stated and expressed in the resolution providing for the issuance of Special Stock or any series thereof adopted by the Board of Directors. Special Stock consists of non-voting stock where no holder of the Special Stock shall be entitled to vote at any meeting of stockholders or otherwise, except as may be specifically provided by law or as approved by the Board of Directors in certain limited circumstances at the time of the stock issuance.

To date, there have been four series of Special Stock authorized for issuance: the Initial Series, the Series B, the Series E and the Series F. In June 1996, the Company issued shares of Series E Special Stock to certain holders of the Company’s 71/2% Convertible Subordinated Debentures (which were retired in 1996) who elected to receive such stock in lieu of receiving common stock. The holders of shares of Series E Special Stock have no voting rights except as required by law. A total of 115 shares of Series E Special Stock remain outstanding. No other shares of Special Stock remain outstanding.

10. INCOME TAXES

The provision for income taxes for interim periods is based on the current estimate of the annual effective tax rate expected to be applicable for the full fiscal year and the impact of discrete items, if any, and is adjusted as necessary for quarterly events. The effective income tax rate was approximately 34.8% and 34.6% for the three months ended March 31, 2010 and 2009, respectively, and 34.5% and 35.6% for the nine months ended March 31, 2010 and 2009, respectively. The lower rate in fiscal 2010 predominantly reflects changes in the forecasted geographical mix of taxable income for the fiscal year.