Bally Technologies (BYI)

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Bally Technologies 10-Q 2011

Documents found in this filing:

Table of Contents

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 December 31, 2010

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). x 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 February 3, 2011, was 53,570,000 which do not include 6,382,000 shares held in treasury.

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TABLE OF CONTENTS

		Page
PART I.	FINANCIAL INFORMATION	3

Item 1.	Financial Statements	3

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

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

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

	Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 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	22

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32

Item 4.	Controls and Procedures	32

PART II.	OTHER INFORMATION	33

Item 1.	Legal Proceedings	33

Item 1A.	Risk Factors	33

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33

Item 6.	Exhibits	33

SIGNATURES		34

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PART I

ITEM 1. FINANCIAL STATEMENTS

BALLY TECHNOLOGIES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

	December 31, 2010			June 30, 2010
	(in 000s, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	119,575		$	145,089
Restricted cash	8,236			8,303
Accounts and notes receivable, net of allowances for doubtful accounts of $9,186 and $9,974	210,112			207,365
Inventories	50,882			42,806
Prepaid and refundable income tax	11,761			7,783
Deferred income tax assets	34,878			35,973
Deferred cost of revenue	12,888			14,568
Prepaid assets	13,283			11,172
Other current assets	5,781			3,350
Total current assets	467,396			476,409
Restricted long-term investments	11,795			13,075
Long-term accounts and notes receivables, net of allowances for doubtful accounts of $5,667 and $5,169	38,443			30,163
Property, plant and equipment, net of accumulated depreciation of $51,212 and $47,714	32,113			32,094
Leased gaming equipment, net of accumulated depreciation of $168,975 and $153,780	89,723			82,357
Goodwill	161,611			161,153
Intangible assets, net	36,907			34,048
Deferred income tax assets	23,515			29,980
Income tax receivable	8,515			8,688
Long-term deferred cost of revenue	27,021			30,958
Other assets, net	15,557			14,251
Total assets	$	912,596		$	913,176
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	27,102		$	23,775
Accrued and other liabilities	41,680			45,662
Customer deposits	10,115			10,185
Jackpot liabilities	11,954			11,531
Deferred revenue	29,502			33,875
Income tax payable	1,899			6,982
Current maturities of long-term debt	45,154			42,543
Total current liabilities	167,406			174,553
Long-term debt, net of current maturities	128,630			131,250
Long-term deferred revenue	36,071			40,236
Other income tax liability	8,948			13,646
Other liabilities	8,614			9,299
Total liabilities	349,669			368,984
Commitments and contingencies (Note 9)
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; 59,863,000 and 59,495,000 shares issued and 53,573,000 and 54,392,000 outstanding	5,975			5,943
Treasury stock at cost, 6,290,000 and 5,103,000 shares	(199,358		)	(157,053		)
Additional paid-in capital	404,571			392,853
Accumulated other comprehensive loss	(2,124		)	(3,044		)
Retained earnings	352,141			303,100
Total Bally Technologies, Inc. stockholders’ equity	561,217			541,811
Noncontrolling interests	1,710			2,381
Total stockholders’ equity	562,927			544,192
Total liabilities and stockholders’ equity	$	912,596		$	913,176

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 December 31,						Six Months Ended December 31,
	2010			2009			2010			2009
	(in 000s, except per share amounts)
Revenues:
Gaming equipment and systems	$	105,639		$	136,395		$	197,227		$	252,416
Gaming operations	77,087			68,578			156,307			139,887
	182,726			204,973			353,534			392,303
Costs and expenses:
Cost of gaming equipment and systems (1)	43,030			53,803			79,987			104,175
Cost of gaming operations	22,692			20,898			44,914			39,989
Selling, general and administrative	55,185			53,721			106,799			98,917
Research and development costs	21,360			19,571			42,744			39,042
Depreciation and amortization	4,744			4,699			9,371			9,532
	147,011			152,692			283,815			291,655
Operating income	35,715			52,281			69,719			100,648
Other income (expense):
Interest income	1,221			683			2,340			1,325
Interest expense	(2,997		)	(3,252		)	(6,030		)	(6,538		)
Other, net	(323		)	(1,083		)	1,524			(943		)
Income from continuing operations before income taxes	33,616			48,629			67,553			94,492
Income tax expense	(6,347		)	(16,456		)	(18,632		)	(32,711		)
Income from continuing operations	27,269			32,173			48,921			61,781
Discontinued operations:
Income from discontinued operations, net of tax	—			1,430			—			3,179
Loss on disposal of discontinued operations, net of tax	—			—			(403		)	—
Income (loss) from discontinued operations, net of tax	—			1,430			(403		)	3,179
Net income	27,269			33,603			48,518			64,960
Less net income (loss) attributable to noncontrolling interests	17			350			(523		)	1,083

Net income attributable to Bally Technologies, Inc.	$	27,252		$	33,253		$	49,041		$	63,877
Basic earnings per share attributable to Bally Technologies, Inc.:
Income from continuing operations	$	0.51		$	0.59		$	0.93		$	1.12
Discontinued operations	—			0.02			—			0.05
Loss on sale of discontinued operations	—			—			(0.01		)	—
Basic earnings per share	$	0.51		$	0.61		$	0.92		$	1.17

Diluted earnings per share attributable to Bally Technologies, Inc.:
Income from continuing operations	$	0.49		$	0.56		$	0.89		$	1.06
Discontinued operations	—			0.02			—			0.05
Loss on sale of discontinued operations	—			—			(0.01		)	—
Diluted earnings per share	$	0.49		$	0.58		$	0.88		$	1.11

Weighted average shares outstanding:
Basic	53,291			54,518			53,485			54,393
Diluted	55,943			57,750			55,990			57,718
Amounts attributable to Bally Technologies, Inc.:
Income from continuing operations, net of tax	$	27,252		$	32,044		$	49,444		$	61,201
Income from discontinued operations, net of tax	—			1,209			—			2,676
Loss on sale of discontinued operations, net of tax	—			—			(403		)	—
Net income	$	27,252		$	33,253		$	49,041		$	63,877

(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

FOR THE SIX MONTHS ENDED DECEMBER 31, 2010 AND 2009

	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, 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	—	—		—		—			—			—			61,201			580			61,781
Net income from discontinued operations, net of tax	—	—		—		—			—			—			2,676			503			3,179
Foreign currency translation adjustment	—	—		—		—			—			1,231			—			—			1,231
Unrealized loss on derivative financial instruments, net of tax	—	—		—		—			—			(931		)	—			—			(931		)
Total comprehensive income	—	—		—		—			—			—			—			—			$	65,260
Distributions to noncontrolling interests	—	—		—		—			—			—			—			(925		)	(925		)
Issuance and receipt of restricted stock, ESPP shares, stock options and related tax and tax benefit	1,501	149		—		(360		)	28,885			—			—			—			28,674
Purchase of common stock for treasury	—	—		—		(31,061		)	—			—			—			—			(31,061		)
Shares issued upon exercise of warrants	14	2		—		—			(2		)	—			—			—			—
Share-based compensation		—		—		—			7,131			—			—			—			7,131
Balances at December 31, 2009	58,606	$	5,854	$	12	$	(96,148	)	$	366,479		$	(470	)	$	229,500		$	2,601		$	507,828

Balances at June 30, 2010	59,495	$	5,943	$	12	$	(157,053	)	$	392,853		$	(3,044	)	$	303,100		$	2,381		$	544,192
Net income from continuing operations, net of tax	—	—		—		—			—			—			49,444			(523		)	48,921
Loss on sale of discontinued operations, net of tax	—	—		—		—			—			—			(403		)	—			(403		)
Foreign currency translation adjustment	—	—		—		—			—			895			—			—			895
Unrealized gain on derivative financial instruments, net of tax	—	—		—		—			—			25			—			—			25
Total comprehensive income	—	—		—		—			—			—			—			—			$	49,438
Distributions to noncontrolling interests	—	—		—		—			—			—			—			(148		)	(148		)
Issuance and receipt of restricted stock, ESPP shares, stock options and related tax and tax benefit	368	32		—		(1,721		)	5,072			—			—			—			3,383
Purchase of common stock for treasury	—	—		—		(40,584		)	—			—			—			—			(40,584		)
Share-based compensation	—	—		—		—			6,646			—			—			—			6,646
Balances at December 31, 2010	59,863	$	5,975	$	12	$	(199,358	)	$	404,571		$	(2,124	)	$	352,141		$	1,710		$	562,927

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

	Six Months Ended December 31,
	2010			2009
	(in 000s)
Cash flows from operating activities:
Net income	$	48,518		$	64,960
Adjustments to net income to net cash provided by operating activities:
Income from discontinued operations, net of tax	—			(3,179		)
Loss on sale of discontinued operations, net of tax	403			—
Depreciation and amortization	36,605			37,138
Share-based compensation	6,646			7,082
Amortization of debt issuance costs	1,947			1,405
Income tax (benefit) expense	2,723			(4,541		)
Provision for doubtful accounts	1,694			870
Inventory write-downs	1,498			1,216
Excess tax benefit of stock option exercises	(1,268		)	(9,047		)
Other	(211		)	786
Changes in operating assets and liabilities:
Accounts and notes receivable	(6,287		)	(44,329		)
Inventories	(46,817		)	(12,545		)
Prepaid and refundable income tax and income tax payable	(8,641		)	21,052
Other current assets	(3,225		)	2,272
Accounts payable	3,290			1,118
Accrued liabilities, customer deposits and jackpot liabilities	(4,916		)	(12,718		)
Deferred revenue and deferred cost of revenue	(2,921		)	(6,619		)
Net cash provided by operating activities	29,038			44,921

Cash flows from investing activities:
Capital expenditures	(5,222		)	(6,034		)
Restricted cash and investments	1,347			1,282
Financing arrangements with customers	(9,940		)	(15,750		)
Additions to other long-term assets	(4,360		)	(2,006		)
Net cash used in investing activities	(18,175		)	(22,508		)

Cash flows from financing activities:
Proceeds from revolving credit facility	19,880			—
Capitalized debt issuance costs	(158		)	—
Reduction of long-term debt	(20,016		)	(17,813		)
Distributions to noncontrolling interests	(148		)	(383		)
Purchase of treasury stock	(42,305		)	(31,421		)
Excess tax benefit of stock option exercises	1,268			9,047
Proceeds from exercise of stock options and employee stock purchases	4,077			19,356
Net cash used in financing activities	(37,402		)	(21,214		)

Effect of exchange rate changes on cash	1,428			1,008

Net cash provided by (used in) operating activities of discontinued operations	(403		)	5,509
Net cash used in investing activities of discontinued operations	—			(457		)
Net cash used in financing activities of discontinued operations	—			(542		)
Decrease in cash and cash equivalents of discontinued operations	—			2,687
	(403		)	7,197
Cash and cash equivalents:
Increase (decrease) for period	(25,514		)	9,404
Balance, beginning of period	145,089			55,886
Balance, end of period	$	119,575		$	65,290

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:

	Six Months Ended December 31,
	2010		2009
	(in 000s)
Cash paid for interest	$	6,030	$	6,118
Cash paid for income taxes, net of refunds	22,673		11,960

Non-cash investing and financing transactions:
Transfer of inventory to leased gaming equipment (1)	$	43,897	$	21,019
Reclassify property, plant and equipment to inventory (1)	8,138		2,451
Acquisition of Bally trademark	—		7,500
Accrual of capital expenditures	939		393

(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 inventories under cash used in operating activities in the 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 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. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Bally Technologies, Inc. (“Bally” or the “Company”), a Nevada corporation, is a diversified, worldwide gaming company that innovates, designs, manufactures, operates and distributes advanced technology-based gaming devices, systems and server-based solutions. As a global gaming-systems provider, the Company offers technology solutions which provide gaming operators with a wide range of marketing, data management and analysis, accounting, player tracking, security and other software applications and tools to more effectively manage their operations. The Company’s primary hardware technologies include spinning-reel and video gaming devices, specialty gaming devices and wide-area progressive systems for traditional land-based, riverboat and Native American casinos, video lottery and central determination markets and specialized system-based hardware products. In addition to selling its gaming devices, the Company also offers its customers a wide range of rental options.

Principles of presentation and consolidation

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, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), include all adjustments necessary to fairly present the Company’s consolidated financial position, results of operations and cash flows for each period 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, 2010. References to specific U.S. GAAP within this report cite topics within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”).

All intercompany accounts and transactions have been eliminated in consolidation.

Discontinued Operations

The Company was the general partner of Rainbow Casino Vicksburg Partnership (“RCVP”), which operated the Rainbow Casino, a dockside riverboat casino in Vicksburg, Mississippi. On April 5, 2010, the Company entered into a definitive purchase agreement to sell the Rainbow Casino which closed on June 8, 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, Discontinued Operations.

Use of estimates

The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

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 securities 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;

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· 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.

The Company’s cash flow hedge related to a variable debt instrument is measured at fair value on a recurring basis, and its balance as of December 31, 2010 and June 30, 2010 (which is included in accrued and other liabilities in the unaudited condensed consolidated balance sheets) was as follows:

	Fair Value Measurements Using Input Type
	Level 1		Level 2		Level 3
	(in 000s)
As of December 31, 2010:
Liability:
Derivative financial instrument	$	—	$	2,660	$	—
As of June 30, 2010:
Liability:
Derivative financial instrument	$	—	$	2,698	$	—

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 5 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 consolidated financial statements is depicted below:

Fiscal 2011:

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

Interest rate swap agreement	$	9	$	(1,240	)	Interest expense	$	(675	)	$	(1,277	)

Fiscal 2010:

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

Interest rate swap agreement	$	(568	)	$	(2,798	)	Interest expense	$	(822	)	$	(1,503	)

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Accounts and Notes Receivable, Allowance for Doubtful Accounts and Credit Quality of Financing Receivables

Accounts and notes receivable are stated at face value less an allowance for doubtful accounts. The Company generally grants customers credit terms for periods of 30 to 120 days, but it may also grant extended payment terms to some customers for periods up to three years, with interest at prevailing rates.

Trade receivables with contract terms greater than one year relate to the sale of gaming equipment and, to a lesser extent, systems transactions that include software as a major component of the sale, and are generally collateralized by the related equipment sold, although the value of such equipment, if repossessed, may be less than the receivable balance outstanding. Sales-type leasing arrangements relate to gaming equipment and include options to purchase the equipment at the end of the lease term at established prices. These customers typically have a long-standing credit history with the Company. Revenue from these lease arrangements is less than 1% of total revenue for the Company.

We perform a review of contracts with extended payment terms to determine if there is sufficient evidence to conclude that we have a history of collecting under the original payment terms. We have concluded that sufficient history exists to determine collectability is probable for contracts with extended payment terms because sufficient prior collection history and customer creditworthiness exists and the arrangement fee is fixed and determinable.

The Company has also provided development financing to certain customers in the form of notes receivable with repayment terms of three to ten years. These notes may also include accelerated payment terms based upon a percentage of net-win from gaming devices sold or leased to these customers. The Company monitors credit quality and impairment based upon a review of customer payment history and financial condition.

The Company evaluates the credit quality of its receivables and establishes an allowance for doubtful accounts based primarily upon collection history, based on a combination of factors including, but not limited to, customer collection experience, economic conditions, and the customer’s financial condition. In addition to specific account identification, the Company utilizes historic collection experience for the most recent twelve month period, where applicable, to establish an allowance for doubtful accounts receivable. Receivables are written off only after the Company has exhausted all of its collection efforts.

The Company has one portfolio segment, the casino industry customer, and four classes of receivables including its trade receivables with a contract term less than one year, trade receivables with a contract term greater than one year, sales-type leasing arrangements, or lease receivables, and notes receivables, which are primarily for developmental financing loans. As of December 31, 2010, the Company’s accounts and notes receivable and related allowances were as follows:

	Accounts and Notes Receivable as of December 31, 2010
	Ending Balance		Ending Balance Individually Evaluated for Impairment		Ending Balance Collectively Evaluated for Impairment
			(in 000s)
Contract term less than one year:
Trade receivables, current	$	144,604	$	2,714	$	141,890

Contract term greater than one year:
Trade receivables, current	63,437		1,671		61,766
Trade receivables, noncurrent	18,478		33		18,445
	81,915		1,704		80,211

Lease receivables, current	7,038		7,038		—
Lease receivables, noncurrent	8,926		8,926		—
	15,964		15,964		—

Note receivables, current	4,219		4,219		—
Note receivables, noncurrent	16,706		16,706		—
	20,925		20,925		—

Total current	219,298		15,642		203,656
Total noncurrent	44,110		25,665		18,445
Total	$	263,408	$	41,307	$	222,101

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	Allowance for Doubtful Accounts as of December 31, 2010
	Ending Balance			Ending Balance Individually Evaluated for Impairment			Ending Balance Collectively Evaluated for Impairment
				(in 000s)
Contract term less than one year:
Trade receivables, current	$	(5,857	)	$	(2,714	)	$	(3,143	)

Contract term greater than one year:
Trade receivables, current	(3,329		)	(1,671		)	(1,658		)
Trade receivables, noncurrent	(498		)	(33		)	(465		)
	(3,827		)	(1,704		)	(2,123		)
Lease receivables, current	—			—			—
Lease receivables, noncurrent	—			—			—
	—			—			—

Note receivables, current	—			—			—
Note receivables, noncurrent	(5,169		)	(5,169		)	—
	(5,169		)	(5,169		)	—

Total current	(9,186		)	(4,385		)	(4,801		)
Total noncurrent	(5,667		)	(5,202		)	(465		)
Total	$	(14,853	)	$	(9,587	)	$	(5,266	)

The Company accrues interest, if applicable, on its receivables per the terms of the agreement. Interest is not accrued on delinquent accounts that the Company has determined and specifically identified as not collectible. The Company’s recorded investment in receivables on nonaccrual status, excluding trade accounts receivable with a contract term less than one year, is as follows:

Receivables on Nonaccrual

as of December 31, 2010

	Total

Trade receivables	$	1,704
Lease receivables	—
Notes receivables	5,169
Total	$	6,873

Gaming is a highly regulated industry requiring customers to obtain a gaming operator’s license and verify with the applicable regulatory agency that they have the financial resources to operate a gaming establishment. Many of the Company’s customers, including new casinos that have opened in recent years, are owned by existing multi-property customers that have established a favorable payment history with the Company. Collection experience is the primary indicator management utilizes to monitor the credit quality of its receivables. The Company does not segregate its accounts and notes receivables by credit quality indicators. The Company monitors the credit quality of receivables based upon past due aging information and historic collection experience. Receivables are classified as past due if a scheduled payment is not received within terms. Past due accounts receivable are monitored closely to expedite payments and to record necessary allowances. The following summarizes the aging of past due receivables, excluding trade accounts receivable with a contract term less than one year:

	Age Analysis of Past Due Receivables as of December 31, 2010
	1 to 90 Days Past Due		91 to 180 Days Past Due		181 + Days Past Due		Total Past Due		Current		Total Receivable		Recorded Investment 90 Days and Accruing

Trade receivables	$	9,219	$	2,745	$	4,254	$	16,218	$	65,697	$	81,915	$	—
Lease receivables	—		—		—		—		15,964		15,964		—
Notes receivables	371		362		719		1,452		19,473		20,925		—
Total	$	9,590	$	3,107	$	4,973	$	17,670	$	101,134	$	118,804	$	—

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The Company’s notes receivable are reviewed quarterly, at a minimum, for impairment. The customer’s solvency, collection experience, legal and regulatory environment and other financial information may indicate that the loan is impaired. As of December 31, 2010, the only Company loan that was impaired was to a customer in Alabama. In fiscal 2010, the legality of the charitable bingo market in Alabama was questioned and several operators in the region closed and the Company recognized an impairment charge on the notes receivable. No further interest is accrued once a loan is impaired. The Company’s only impaired loan as of December 31, 2010 was as follows:

	Impaired Loans as of December 31, 2010
	Recorded Investment		Unpaid Principal Balance		Related Allowance			Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Note Receivable	$	—	$	—	$	—		$	—	$	—

With an allowance recorded:
Note Receivable	$	5,169	$	5,000	$	(5,169	)	$	5,169	$	169

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:

	December 31, 2010		June 30, 2010
	(in 000s)
Raw materials	$	39,786	$	34,221
Work-in-process	1,047		1,101
Finished goods	10,049		7,484
Total	$	50,882	$	42,806

Revenue recognition

The Company derives its revenues from the following:

·	Gaming Equipment	—	Sale of gaming devices and related equipment, parts and conversion kits;
·	Gaming Operations	—	Operation of linked progressive systems, video lottery and centrally determined systems and the rental of gaming devices and content; and
·	Systems	—	Sale and support of specialized systems-based software and hardware products and related recurring hardware and software maintenance revenue.

Revenue is recognized when all of the following have been satisfied:

· Persuasive evidence of an arrangement exists;

· Delivery has occurred;

· The price or fee is fixed or determinable;

· Collectability is probable; and

· No significant contractual obligations remain.

Games placed with customers on a trial basis are not recognized as revenue until the customer accepts the games and collectability is deemed probable. Amounts billed prior to completing the earnings process are deferred until revenue recognition criteria are met. Revenues are reported net of incentive rebates, discounts, sales taxes, and other taxes of a similar nature.

Gaming operations revenue consists of the operation of linked progressive systems and from gaming devices, software content and the related systems placed in casinos on a daily fee or rental basis. Revenue from these sources is recognized based on the contractual terms of the arrangement and is generally based on a share of money wagered, a share of the net winnings, or on a fixed daily rental rate basis. The daily fee entitles the customer to full use of the gaming device and includes rental and maintenance of the gaming device, licensing of the game content and connection to a linked progressive system, where applicable. In certain markets, the Company also charges a daily system connection fee for the customer to connect to our central determination systems and/or back-office system. The Company does not consider these arrangements to have multiple revenue-generating activities as the services offered are a comprehensive solution in exchange for a daily fee and all of the products and services are delivered contemporaneously.

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Gaming equipment and systems revenue is generated from the sale of gaming devices and licenses of software, conversion kits, systems-based hardware, services, and the licensing of computerized monitoring systems and related software maintenance fees. Revenue from the sale of gaming devices is recognized after customer acceptance occurs and all other revenue recognition criteria are met. The Company licenses its software on a perpetual basis or under time-based licenses. Revenue from perpetual license software is recognized at the inception of the license term if all revenue recognition criteria have been met. The Company’s time-based licenses are generally for twelve month periods, and are bundled with software maintenance and product support fees. Revenue from term license software is recognized on a subscription basis over the term of the license. Software maintenance provides customers with rights to unspecified software product upgrades, maintenance and patches released during the term of the support period. Software maintenance is recognized on a straight-line basis over the term of the support period. The majority of the Company’s customers purchase both software and hardware maintenance and product support when they license software. In addition, substantially all customers renew these maintenance agreements annually.

The probability of collection for gaming equipment sold under extended payment term arrangements is evaluated based on historic collection history for such arrangements, resulting in the recognition of revenue when all other revenue recognition criteria have been satisfied.

The Company sells or licenses its products and services individually or under arrangements in which there are multiple elements, such as a combination of gaming devices, system-based hardware, software license fees, maintenance and product support fees and professional services.

Revenue arrangements with multiple deliverables are allocated and recognized based on 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.

Arrangement consideration is 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”).

Revenue related to systems arrangements that contain both software and non-software deliverables require allocation of the arrangement fee to the separate deliverables using the relative selling price method. Revenue for software deliverables related to systems-based software continues to be recognized under the software revenue recognition guidance, while revenue for the non-software deliverables, such as gaming devices, which include software components that function together with the devices to deliver their essential functionality, and other hardware, are no longer accounted for under software revenue recognition guidance.

In allocating the arrangement fees to separate deliverables in accordance with the relative selling price method, the Company used VSOE of selling price and ESP for gaming devices, maintenance and product support fees for perpetual licenses and professional services; VSOE and ESP for system-based hardware products; and ESP for software products and maintenance and product support fees on time-based licenses. ESP is determined based upon the Company’s normal pricing and discounting practices. VSOE of selling price is measured based on the price for each deliverable when it is sold separately. VSOE of selling price for software maintenance and product support fees sold with perpetual licenses are measured by the contractual renewal rate offered to the customer.

Other recently adopted accounting pronouncements

In July 2010, the FASB issued new accounting guidance to address concerns about the credit quality of financing receivables and the related allowance for credit losses. The guidance is intended to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. Disclosures will require information at disaggregated levels, including the nature of the credit risk and how it is analyzed in arriving at the allowance for credit losses, a roll-forward schedule of and reasons for changes in the allowance, credit quality indicators, and aging of past due accounts, the nature and extent of modifications, and significant purchase or sales. The Company adopted the new guidance as of December 31, 2010, except for the roll-forward schedule of changes in the allowance as the effective date for such information is for periods beginning after December 15, 2010, and certain disclosures about troubled debt restructurings which are not required until interim and annual periods after June 15, 2011.

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Recently issued accounting pronouncements not yet adopted

In April 2010, the FASB issued new accounting guidance related to 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 does not expect the guidance to have a significant impact on its consolidated results of operations, financial position and cash flows outside of the cumulative-effect adjustment to the opening retained earnings balance.

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

	Three Months Ended December 31,				Six Months Ended December 31,
	2010		2009		2010			2009
	(in 000s, except per share amounts)
Amounts attributable to Bally Technologies, Inc.:
Income from continuing operations, net of tax	$	27,252	$	32,044	$	49,444		$	61,201
Income from discontinued operations, net of tax	—		1,209		—			2,676
Loss on sale of discontinued operations, net of tax	—		—		(403		)	—
Net income	$	27,252	$	33,253	$	49,041		$	63,877
After tax interest expense on convertible debt	—		—		—			14
Diluted earnings	$	27,252	$	33,253	$	49,041		$	63,891

Weighted average common shares outstanding	53,291		54,518		53,485			54,393
Dilutive effect of:
Stock options, Restricted Stock Units (“RSU”) and restricted stock	2,650		3,206		2,503			3,257
Warrants	2		26		2			24
Convertible debt (1)	—		—		—			44
Weighted average diluted shares outstanding	55,943		57,750		55,990			57,718

Basic earnings per share attributable to Bally Technologies, Inc.
Income from continuing operations	$	0.51	$	0.59	$	0.93		$	1.12
Income from discontinued operations	—		0.02		—			0.05
Loss on sale of discontinued operations	—		—		(0.01		)	—
Basic earnings per share	$	0.51	$	0.61	$	0.92		$	1.17

Diluted earnings per share attributable to Bally Technologies, Inc.
Income from continuing operations	$	0.49	$	0.56	$	0.89		$	1.06
Income from discontinued operations	—		0.02		—			0.05
Loss on sale of discontinued operations	—		—		(0.01		)	—
Diluted earnings per share	$	0.49	$	0.58	$	0.88		$	1.11

(1) The Company has 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.

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 December 31,		Six Months Ended December 31,
	2010	2009	2010	2009
	(in 000s)
Stock options, RSU and restricted stock	644	394	654	323

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3. DISCONTINUED OPERATIONS

The Company owned and operated the Rainbow Casino, a dockside riverboat casino in Vicksburg, Mississippi, which was sold on June 8, 2010.

The following table summarizes income from discontinued operations for the three and six months ended December 31, 2009:

	Three Months Ended December 31,			Six Months Ended December 31,
	2009			2009
	(in 000s)
Revenues:
Casino operations	$	8,500		$	17,655
Costs and expenses:
Direct cost of casino operations	3,624			7,489
Selling, general and administrative	1,831			3,582
Depreciation and amortization	954			1,945
	6,409			13,016
Operating income	2,091			4,639

Other income (expense):
Interest income	2			5
Other, net	(13		)	(25		)

Income from discontinued operations before income taxes	2,080			4,619
Income tax expense	(650		)	(1,440		)
Income from discontinued operations	1,430			3,179
Less income attributable to noncontrolling interests	221			503

Income from discontinued operations attributable to Bally Technologies, Inc.	$	1,209		$	2,676

Per the terms of the sale agreement, the Company had certain post-closing adjustments during the six months ended December 31, 2010 which reduced its gain on the sale of the Rainbow Casino in fiscal 2010 by approximately $0.4 million, net of income taxes.

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4. GOODWILL AND INTANGIBLE ASSETS

Intangible assets consist of the following:

		December 31, 2010							June 30, 2010
	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	$	35,953	$	(30,322	)	$	5,631	$	35,652	$	(28,395	)	$	7,257
License rights	3 - 5	4,339		(2,418		)	1,921		3,624		(2,048		)	1,576
Trademarks	5	2,203		(2,148		)	55		2,203		(2,023		)	180
Core technology	5 - 8	22,763		(12,226		)	10,537		22,763		(10,346		)	12,417
Contracts	10	14,591		(6,999		)	7,592		10,836		(6,421		)	4,415
Other intangibles	3 - 7	4,672		(1,001		)	3,671		1,702		(999		)	703
Total finite lived intangible assets		$	84,521	$	(55,114	)	$	29,407	$	76,780	$	(50,232	)	$	26,548

Bally Technologies (BYI)

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