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 September 30,2009**

 

**OR**

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

 

**For the transition periodfrom              to              **

 

**Commission File Number 001-31558**

 

**BALLY TECHNOLOGIES, INC.**

(Exact name of registrant as specified in itscharter)

 

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

 

**6601S. Bermuda Rd.**

**LasVegas, Nevada  89119**

(Address of principal executive offices)

 

**(702) 584-7700**

(Registrant’s telephone number, includingarea code)

 

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

 

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

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer or asmaller reporting company. See the definitions of “large accelerated filer,” “acceleratedfiler,” 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 ashell company (as defined in Rule 12b-2 of the Exchange Act).  o  Yes    x  No

 

The number of shares of Common Stock, $0.10 parvalue, outstanding as of October 30, 2009, was 54,863,000 which do notinclude 3,380,000 shares held in treasury.

 

 

 

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Table ofContents

 

**TABLE OF CONTENTS**

 
| ** **        | ** **                                                                                                                             | **Page** |
|-------------------|----------------------------------------------------------------------------------------------------------------------------------------|----------|
| **PART I.**  | **FINANCIAL  INFORMATION**                                                                                                             | **3**    |
|              |                                                                                                                                   |     |
| Item 1.           | Financial Statements                                                                                                                   |     |
|              |                                                                                                                                   |     |
|              | Unaudited  Condensed Consolidated Balance Sheets as of September 30, 2009 and  June 30, 2009                                 | 3        |
|              |                                                                                                                                   |     |
|              | Unaudited  Condensed Consolidated Statements of Operations for the Three Months Ended  September 30, 2009 and 2008                | 4        |
|              |                                                                                                                                   |     |
|              | Unaudited  Condensed Consolidated Statements of Stockholders’ Equity for the Three  Months Ended September 30, 2009 and 2008 | 5        |
|              |                                                                                                                                   |     |
|              | Unaudited  Condensed Consolidated Statements of Cash Flows for the Three Months Ended  September 30, 2009 and 2008                | 6        |
|              |                                                                                                                                   |     |
|              | Notes  to Unaudited Condensed Consolidated Financial Statements                                                                        | 8        |
|              |                                                                                                                                   |     |
| Item 2.           | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                                            | 20       |
|              |                                                                                                                                   |     |
| Item  3.          | Quantitative  and Qualitative Disclosures About Market Risk                                                                            | 30       |
|              |                                                                                                                                   |     |
| Item 4.           | Controls and  Procedures                                                                                                               | 31       |
|              |                                                                                                                                   |     |
| **PART II.** | **OTHER INFORMATION**                                                                                                                  | **32**   |
|              |                                                                                                                                   |     |
| Item 1.           | Legal Proceedings                                                                                                                      | 32       |
|              |                                                                                                                                   |     |
| Item 1A.          | Risk Factors                                                                                                                           | 32       |
|              |                                                                                                                                   |     |
| Item 2.           | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                           | 32       |
|              |                                                                                                                                   |     |
| Item 6.           | Exhibits                                                                                                                               | 33       |
|              |                                                                                                                                   |     |
| **SIGNATURES**    |                                                                                                                                   | **34**   |

 

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Table ofContents

 

**PART I**

**BALLY TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**UNAUDITED CONDENSEDCONSOLIDATED BALANCE SHEETS**

** **
| ** **                                                                                                                                       | ** ** | **September 30,********2009**  | ** ** | **June 30,******** 2009** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                                                       | ** ** | **(in 000s, except share amounts)** | ** ** |
| **ASSETS**                                                                                                                                       |       |                                |       |                                |       |
| Current assets:                                                                                                                                  |       |                                |       |                                |       |
| Cash and cash equivalents                                                                                                                        |       | $                                   | 84,867     |                                | $          | 64,598 |   |
| Restricted cash                                                                                                                                  |       | 9,555                               |       | 9,076                               |       |
| Accounts and notes receivable, net of allowances  for doubtful accounts of $8,574 and $8,939                                                     |       | 181,192                             |       | 174,698                             |       |
| Inventories                                                                                                                                      |       | 52,935                              |       | 52,942                              |       |
| Prepaid and refundable income tax                                                                                                                |       | 27,374                              |       | 43,756                              |       |
| Deferred income tax assets                                                                                                                       |       | 37,309                              |       | 36,114                              |       |
| Deferred cost of revenue                                                                                                                         |       | 19,101                              |       | 21,906                              |       |
| Prepaid assets                                                                                                                                   |       | 12,106                              |       | 7,531                               |       |
| Other current assets                                                                                                                             |       | 9,341                               |       | 13,018                              |       |
| Total current assets                                                                                                                             |       | 433,780                             |       | 423,639                             |       |
| Restricted long-term investments                                                                                                                 |       | 12,656                              |       | 12,097                              |       |
| Long-term receivables                                                                                                                            |       | 18,125                              |       | 9,826                               |       |
| Property, plant and equipment, net of accumulated  depreciation of $67,294 and $64,113                                                           |       | 76,158                              |       | 76,889                              |       |
| Leased gaming equipment, net of accumulated  depreciation of $126,938 and $117,638                                                               |       | 89,218                              |       | 95,012                              |       |
| Goodwill                                                                                                                                         |       | 162,198                             |       | 161,960                             |       |
| Intangible assets, net                                                                                                                           |       | 38,668                              |       | 32,198                              |       |
| Deferred income tax assets                                                                                                                       |       | 12,703                              |       | 15,373                              |       |
| Long-term deferred cost of revenue                                                                                                               |       | 39,392                              |       | 41,615                              |       |
| Other assets, net                                                                                                                                |       | 11,394                              |       | 12,273                              |       |
| Total assets                                                                                                                                     |       | $                                   | 894,292    |                                | $          | 880,882 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                   |       |                                |       |                                |       |
| Current liabilities:                                                                                                                             |       |                                |       |                                |       |
| Accounts payable                                                                                                                                 |       | $                                   | 20,496     |                                | $          | 20,574 |   |
| Accrued liabilities                                                                                                                              |       | 43,340                              |       | 47,405                              |       |
| Customer deposits                                                                                                                                |       | 10,715                              |       | 10,375                              |       |
| Jackpot liabilities                                                                                                                              |       | 12,621                              |       | 12,266                              |       |
| Deferred revenue                                                                                                                                 |       | 43,355                              |       | 49,122                              |       |
| Income tax payable                                                                                                                               |       | 3,489                               |       | 2,971                               |       |
| Current maturities of long-term debt                                                                                                             |       | 37,851                              |       | 35,337                              |       |
| Total current liabilities                                                                                                                        |       | 171,867                             |       | 178,050                             |       |
| Long-term debt, net of current maturities                                                                                                        |       | 165,000                             |       | 173,750                             |       |
| Long-term deferred revenue                                                                                                                       |       | 57,300                              |       | 60,464                              |       |
| Other income tax liability                                                                                                                       |       | 19,990                              |       | 22,072                              |       |
| Other liabilities                                                                                                                                |       | 8,468                               |       | 7,797                               |       |
| Total liabilities                                                                                                                                |       | 422,625                             |       | 442,133                             |       |
| 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; 57,885,000 and 57,091,000 shares issued and 54,709,000 and  54,312,000 outstanding |       | 5,782                               |       | 5,703                               |       |
| Treasury stock at cost, 3,176,000 and 2,779,000  shares                                                                                          |       | (80,141                             | )          | (64,727                             | )          |
| Additional paid-in capital                                                                                                                       |       | 348,482                             |       | 330,465                             |       |
| Accumulated other comprehensive loss                                                                                                             |       | (1,150                              | )          | (770                                | )          |
| Retained earnings                                                                                                                                |       | 196,247                             |       | 165,623                             |       |
| Total Bally Technologies, Inc. stockholders’  equity                                                                                   |       | 469,232                             |       | 436,306                             |       |
| Noncontrolling interests                                                                                                                         |       | 2,435                               |       | 2,443                               |       |
| Total stockholders’ equity                                                                                                                  |       | 471,667                             |       | 438,749                             |       |
| Total liabilities and stockholders’ equity                                                                                                  |       | $                                   | 894,292    |                                | $          | 880,882 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

 

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**BALLY TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**UNAUDITED CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                                                | ** ** | **Three Months Ended**                                 | ** ** |
|---------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                                                | ** ** | **September 30,**                                           | ** ** |
| ** **                                                                | ** ** | **2009**                                                         | ** ** | **2008** | ** ** |
| ** **                                                                | ** ** | **(in 000s, except per share amounts)** | ** ** |
| Revenues:                                                                 |       |                                                             |       |   |   |
| Gaming equipment and systems                                              |       | $                                                                | 116,021    |   | $ | 159,574 |   |
| Gaming operations                                                         |       | 71,309                                                           |       | 67,776 |   |
| Casino operations                                                         |       | 9,155                                                            |       | 10,048 |   |
|                                                                      |       | 196,485                                                          |       | 237,398 |   |
| Costs and expenses:                                                       |       |                                                             |       |   |   |
| Cost of gaming equipment and systems (1)                                  |       | 50,372                                                           |       | 76,822 |   |
| Cost of gaming operations                                                 |       | 19,091                                                           |       | 20,560 |   |
| Direct cost of casino operations                                          |       | 3,865                                                            |       | 4,355 |   |
| Selling, general and administrative                                       |       | 46,947                                                           |       | 57,207 |   |
| Research and development                                                  |       | 19,471                                                           |       | 19,871 |   |
| Depreciation and amortization                                             |       | 5,824                                                            |       | 5,106 |   |
|                                                                      |       | 145,570                                                          |       | 183,921 |   |
| Operating income                                                          |       | 50,915                                                           |       | 53,477 |   |
|                                                                      |       |                                                             |       |   |   |
| Other income (expense):                                                   |       |                                                             |       |   |   |
| Interest income                                                           |       | 645                                                              |       | 1,156 |   |
| Interest expense                                                          |       | (3,286                                                           | )          | (5,093 | ) |
| Other, net                                                                |       | 128                                                              |       | (2,566 | ) |
|                                                                      |       |                                                             |       |   |   |
| Income before income taxes                                                |       | 48,402                                                           |       | 46,974 |   |
| Income tax expense                                                        |       | (17,045                                                          | )          | (17,137 | ) |
| Net income                                                                |       | 31,357                                                           |       | 29,837 |   |
| Less net income (loss) attributable to  noncontrolling interests          |       | 733                                                              |       | (467 | ) |
|                                                                      |       |                                                             |       |   |   |
| Net income attributable to Bally  Technologies, Inc.                 |       | $                                                                | 30,624     |   | $ | 30,304 |   |
|                                                                      |       |                                                             |       |   |   |
| Basic and diluted earnings per share:                                     |       |                                                             |       |   |   |
| Basic earnings attributable to Bally  Technologies, Inc. per share   |       | $                                                                | 0.56       |   | $ | 0.55 |   |
| Diluted earnings attributable to Bally  Technologies, Inc. per share |       | $                                                                | 0.53       |   | $ | 0.52 |   |
|                                                                      |       |                                                             |       |   |   |
| Weighted average shares outstanding:                                      |       |                                                             |       |   |   |
| Basic                                                                     |       | 54,268                                                           |       | 55,070 |   |
| Diluted                                                                   |       | 57,685                                                           |       | 58,124 |   |

 

----

(1) Cost of gamingequipment and systems exclude amortization related to certain intangibles,including core technology and license rights, which are included indepreciation and amortization.

 

See accompanying notes to unaudited condensedconsolidated financial statements.

 

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**BALLYTECHNOLOGIES, INC. AND SUBSIDIARIES**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER’SEQUITY**

**FOR THETHREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008**

 
| ** **                                                                             | ** ** | **Common  Stock** | ** ** | **Series E  Special** | ** ** | **Treasury** | ** ** | **Additional  Paid-In** | ** ** | **Accumulated  Other  Comprehensive  Income (Deficit)** | ** ** | **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                                                                            |       | —            |       | —                     |       | —       |       | —                  |       | —                                                  |       | —                |       | 30,624             |       | 733                           |       | 31,357 |   |
| Foreign  currency translation adjustment                                               |       | —            |       | —                     |       | —       |       | —                  |       | —                                                  |       | 1,258                 |       | —             |       | —                        |       | 1,258 |   |
| Unrealized  loss on derivative financial instruments                                   |       | —            |       | —                     |       | —       |       | —                  |       | —                                                  |       | (1,638                | )          | —             |       | —                        |       | (1,638 | ) |
| Total  comprehensive income                                                            |       | —            |       | —                     |       | —       |       | —                  |       | —                                                  |       | —                |       | —             |       | —                        |       | $ | 30,977 |   |
| Distributions  to noncontrolling interests                                             |       | —            |       | —                     |       | —       |       | —                  |       | —                                                  |       | —                |       | —             |       | (741                          | )          | (741 | ) |
| Restricted  stock issued                                                               |       | 48                |       | 5                          |       | —       |       | —                  |       | (5                                                      | )          | —                |       | —             |       | —                        |       | — |   |
| Receipt  of stock from exercise of stock options and tax liability on restricted stock |       | —            |       | —                     |       | —       |       | (172                    | )          | —                                                  |       | —                |       | —             |       | —                        |       | (172 | ) |
| Purchase  of common stock for treasury                                                 |       | —            |       | —                     |       | —       |       | (15,242                 | )          | —                                                  |       | —                |       | —             |       | —                        |       | (15,242 | ) |
| Shares  issued upon exercise of warrants                                               |       | 11                |       | 1                          |       | —       |       | —                  |       | (1                                                      | )          | —                |       | —             |       | —                        |       | — |   |
| Share-based  compensation                                                              |       |              |       | —                     |       | —       |       | —                  |       | 3,499                                                   |       | —                |       | —             |       | —                        |       | 3,499 |   |
| Shares  issued upon exercise of stock options                                          |       | 722               |       | 72                         |       | —       |       | —                  |       | 9,125                                                   |       | —                |       | —             |       | —                        |       | 9,197 |   |
| Shares  issued under ESPP plan                                                         |       | 13                |       | 1                          |       | —       |       | —                  |       | 449                                                     |       | —                |       | —             |       | —                        |       | 450 |   |
| Tax  benefit of employee stock option exercises                                        |       | —            |       | —                     |       | —       |       | —                  |       | 4,950                                                   |       | —                |       | —             |       | —                        |       | 4,950 |   |
| Balances  at September 30, 2009                                                   |       | 57,885            |       | $                          | 5,782      |         | $          | 12                      |       | $                                                       | (80,141    | )                     | $          | 348,482            |       | $                             | (1,150     | ) | $ | 196,247 |   | $ | 2,435 |   | $ | 471,667 |   |
|                                                                                   |       |              |       |                       |       |         |       |                    |       |                                                    |       |                  |       |               |       |                          |       |   |   |
| Balances  at June 30, 2008                                                        |       | 56,318            |       | $                          | 5,626      |         | $          | 12                      |       | $                                                       | (25,041    | )                     | $          | 302,146            |       | $                             | 1,268      |   | $ | 39,314 |   | $ | 1,782 |   | $ | 325,107 |   |
| Net  income                                                                            |       | —            |       | —                     |       | —       |       | —                  |       | —                                                  |       | —                |       | 30,304             |       | (467                          | )          | 29,837 |   |
| Foreign  currency translation adjustment                                               |       | —            |       | —                     |       | —       |       | —                  |       | —                                                  |       | (972                  | )          | —             |       | —                        |       | (972 | ) |
| Total  comprehensive income                                                            |       | —            |       | —                     |       | —       |       | —                  |       | —                                                  |       | —                |       | —             |       | —                        |       | $ | 28,865 |   |
| Distributions  to noncontrolling interests                                             |       | —            |       | —                     |       | —       |       | —                  |       | —                                                  |       | —                |       | —             |       | (413                          | )          | (413 | ) |
| Restricted  stock issued                                                               |       | 6                 |       | —                     |       | —       |       | —                  |       | —                                                  |       | —                |       | —             |       | —                        |       | — |   |
| Receipt  of stock from exercise of stock options and tax liability on restricted stock |       | —            |       | —                     |       | —       |       | (692                    | )          | —                                                  |       | —                |       | —             |       | —                        |       | (692 | ) |
| Purchase  of common stock for treasury                                                 |       | —            |       | —                     |       | —       |       | (10,983                 | )          | —                                                  |       | —                |       | —             |       | —                        |       | (10,983 | ) |
| Share-based  compensation                                                              |       |              |       | —                     |       | —       |       | —                  |       | 3,558                                                   |       | —                |       | —             |       | —                        |       | 3,558 |   |
| Shares  issued upon exercise of stock options                                          |       | 388               |       | 39                         |       | —       |       | —                  |       | 7,136                                                   |       | —                |       | —             |       | —                        |       | 7,175 |   |
| Shares  issued under ESPP plan                                                         |       | 10                |       | 1                          |       | —       |       | —                  |       | 300                                                     |       | —                |       | —             |       | —                        |       | 301 |   |
| Tax  benefit of employee stock option exercises                                        |       | —            |       | —                     |       | —       |       | —                  |       | 1,554                                                   |       | —                |       | —             |       | —                        |       | 1,554 |   |
| Balances  at September 30, 2008                                                   |       | 56,722            |       | $                          | 5,666      |         | $          | 12                      |       | $                                                       | (36,716    | )                     | $          | 314,694            |       | $                             | 296        |   | $ | 69,618 |   | $ | 902 |   | $ | 354,472 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

 

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**BALLY TECHNOLOGIES, INC. AND SUBSIDIARIES**

**UNAUDITED CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                         | ** ** | **Three Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| ** **                                                                         | ** ** | **(in 000s)**                                   | ** ** |
| Cash flows from operating activities:                                              |       |                                                 |       |   |   |
| Net income                                                                         |       | $                                                    | 31,357     |   | $ | 29,837 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                                 |       |   |   |
| Depreciation and amortization                                                      |       | 19,203                                               |       | 17,649 |   |
| Share-based compensation                                                           |       | 3,499                                                |       | 3,558 |   |
| Deferred debt issuance costs                                                       |       | 703                                                  |       | — |   |
| Excess tax benefit of stock option exercises                                       |       | (273                                                 | )          | (580 | ) |
| Income tax (benefit) expense                                                       |       | (161                                                 | )          | (12 | ) |
| Provision (benefit) for doubtful accounts                                          |       | 189                                                  |       | (800 | ) |
| Write-off of debt issuance costs                                                   |       | —                                               |       | 786 |   |
| Inventory and other asset write-downs                                              |       | 639                                                  |       | 2,841 |   |
| Other                                                                              |       | (182                                                 | )          | 544 |   |
| Changes in operating assets and liabilities:                                       |       |                                                 |       |   |   |
| Accounts and notes receivable                                                      |       | (12,805                                              | )          | 11,463 |   |
| Inventories                                                                        |       | (9,789                                               | )          | 5,656 |   |
| Prepaid and refundable income tax and income tax  payable                          |       | 16,900                                               |       | (3,276 | ) |
| Other current assets                                                               |       | (1,006                                               | )          | 70 |   |
| Accounts payable                                                                   |       | (142                                                 | )          | (13,343 | ) |
| Accrued liabilities, customer deposits and jackpot  liabilities                    |       | (4,301                                               | )          | (26,335 | ) |
| Deferred revenue and deferred cost of revenue                                      |       | (3,903                                               | )          | (2,886 | ) |
| Net cash provided by operating activities                                          |       | 39,928                                               |       | 25,172 |   |
|                                                                               |       |                                                 |       |   |   |
| Cash flows from investing activities:                                              |       |                                                 |       |   |   |
| Capital expenditures                                                               |       | (3,541                                               | )          | (3,968 | ) |
| Restricted cash and investments                                                    |       | (706                                                 | )          | 671 |   |
| Financing arrangement with customer                                                |       | (5,000                                               | )          | — |   |
| Additions to other long-term assets                                                |       | (1,452                                               | )          | (166 | ) |
| Net cash used in investing activities                                              |       | (10,699                                              | )          | (3,463 | ) |
|                                                                               |       |                                                 |       |   |   |
| Cash flows from financing activities:                                              |       |                                                 |       |   |   |
| Capitalized debt issuance costs                                                    |       | —                                               |       | (10,728 | ) |
| Pay-off of debt from refinancing                                                   |       | —                                               |       | (14,553 | ) |
| Reduction of long-term debt and capital leases                                     |       | (6,257                                               | )          | (1,188 | ) |
| Purchase of treasury stock                                                         |       | (15,414                                              | )          | (11,675 | ) |
| Excess tax benefit of stock option exercises                                       |       | 273                                                  |       | 580 |   |
| Proceeds from exercise of stock options and  employee stock purchases              |       | 9,647                                                |       | 7,476 |   |
| Net cash used in financing activities                                              |       | (11,751                                              | )          | (30,088 | ) |
|                                                                               |       |                                                 |       |   |   |
| Effect of exchange rate changes on cash                                            |       | 2,791                                                |       | (875 | ) |
|                                                                               |       |                                                 |       |   |   |
| Cash and cash equivalents:                                                         |       |                                                 |       |   |   |
| Increase (decrease) for period                                                     |       | 20,269                                               |       | (9,254 | ) |
| Balance, beginning of period                                                       |       | 64,598                                               |       | 66,570 |   |
| Balance, end of period                                                             |       | $                                                    | 84,867     |   | $ | 57,316 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

 

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**BALLY TECHNOLOGIES, INC. AND SUBSIDIARIES**

**UNAUDITED CONDENSEDCONSOLIDATED****SUPPLEMENTAL CASH FLOW INFORMATION**

 

Thefollowing supplemental information is related to the unaudited condensedconsolidated statements of cash flows:

 
| ** **                                                 | ** ** | **Three Months Ended  September 30,** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| ** **                                                 | ** ** | **(in 000s)**                                   | ** ** |
| Cash paid for interest                                     |       | $                                                    | 2,944      |   | $ | 9,833 |   |
| Cash paid for income taxes, net of refunds                 |       | (8,278                                               | )          | 18,398 |   |
|                                                       |       |                                                 |       |   |   |
| Non-cash investing and financing transactions:             |       |                                                 |       |   |   |
| Pay-off of debt from refinancing                           |       | $                                                    | —     |   | $ | 275,000 |   |
| Transfer of inventory to leased gaming equipment (1)       |       | 8,067                                                |       | 10,308 |   |
| Reclassify property, plant and equipment to  inventory (1) |       | 1,423                                                |       | 5,009 |   |
| Acquisition of Bally trademark                             |       | 7,500                                                |       | — |   |
| Accrual of capital expenditures                            |       | 314                                                  |       | 577 |   |

 

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(1)                                  As a result ofthe inability to separately identify the cash flows associated with theconstruction of leased gaming equipment, the Company has included all additionsto leased gaming equipment as an increase in inventory under cash used inoperating activities in the unaudited condensed consolidated statement of cashflows. In addition, cash generated from the sale of used gaming equipmentclassified as leased gaming equipment is also included in cash provided byoperating activities in the unaudited condensed consolidated statement of cashflows. The Company has one process to procure raw materials for the assembly ofboth inventory and leased gaming equipment. The materials requisition planningprocess considers the number of devices the Company expects to build for saleand for use in its gaming operations division during a particular period, butit does not separately earmark purchases for leased gaming equipment. Withoutsuch an earmarking process, the Company is unable to determine whether theparts used to construct leased gaming equipment during a particular period camefrom inventory on hand at the beginning of the period or was constructed frominventory procured during the period of deployment, thus requiring theexpenditure of cash.

 

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** **

**BALLY TECHNOLOGIES, INC.AND SUBSIDIARIES**

**NOTES TOUNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.             SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

 

*Principles of presentation and consolidation*

 

Theaccompanying unaudited condensed consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States of America (“U.S. GAAP”) for interim financial information andreflect all adjustments, consisting of normal recurring adjustments, whichmanagement 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 therespective periods presented.  Certaininformation and note disclosures normally included in annual financialstatements prepared in accordance with U.S. GAAP have been condensed or omittedpursuant to those rules and regulations. The results of operations for aninterim period are not necessarily indicative of the results that may beexpected for any other interim period or the year as a whole. The accompanyingunaudited condensed consolidated financial statements should be read inconjunction with the consolidated financial statements and notes thereto in theCompany’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 withinthe FinancialAccounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”).

 

The Company is thegeneral partner of Rainbow Casino Vicksburg Partnership (“RCVP”), whichoperates the Rainbow Casino. The limited partner is entitled to receive 10% ofthe net available cash flows of RCVP after debt service and other items, asdefined in the limited partnership agreement, which increases to 20% of the netavailable cash flows based on the incremental amount of revenues in excess of$35.0 million, payable quarterly through December 31, 2010. The Companyholds the remaining economic interest in the partnership. The Companyconsolidates RCVP and records an adjustment to reflect the portion of theearnings of RCVP attributable to the limited partner as a noncontrollinginterest.

 

Allintercompany accounts and transactions have been eliminated in consolidation.

 

The Company has evaluated the financialstatements for subsequent events occurring between the end of our most recentfiscal quarter and  November 4,2009, the date of filing of this Form 10-Q.

 

*Expense classification*

 

The classification of certain costs within theUnaudited Condensed Consolidated Statement of Operations for the three monthsended September 30, 2008 have been corrected to conform to the currentyear presentation. The reclassification reflects certain costs of servicesassociated with revenue presented in *Cost of gaming equipmentand systems* of $1.2 million for the three months ended September 30,2008 that had previously been presented as a component of *Selling,general and administrative expenses*. This correction was notmaterial to the previously issued financial statements and does not have anyimpact on income from continuing operations, earnings per share, retainedearnings, or cash flows.

 

*Recently adopted accounting pronouncements - revenuerecognition*

 

EffectiveJuly 1, 2009, the Company adopted the provisions of two new AccountingStandards Updates (“ASU”) affecting revenue recognition: ASU No. 2009-13, *Multiple Deliverable Revenue Arrangements*and ASU No. 2009-14,*Certain Revenue Arrangements That Include SoftwareElements.*The Company has elected to adopt these ASUs prior to therequired effective date using the prospective method as permitted under theguidance. Accordingly, this guidance is being applied to all new or materiallymodified revenue arrangements entered into since the start of the Company’sfiscal year of adoption, which is July 1, 2009.

 

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ASUNo. 2009-13 replaces and significantly changes the existing separation criteriafor multiple-deliverable revenue arrangements, by eliminating the criterion forobjective and reliable evidence of fair value for the undelivered products orservices to determine a unit of accounting. Instead, revenue arrangements withmultiple deliverables should be divided into separate units of accounting ifthe deliverables meet both of the following criteria:

 

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

·                  If the arrangement includesa general right of return relative to the delivered items, delivery orperformance of the undelivered items is considered probable and substantiallyin the control of the vendor.

 

ASUNo 2009-13 also eliminates the use of the residual method of allocation andrequires, instead, that arrangement consideration be allocated, at theinception of the arrangement, to all deliverables based on their relativeselling price (i.e., the relative selling price method). When applying therelative selling price method, a hierarchy is used for estimating the sellingprice based first on vendor-specific objective evidence (“VSOE”), thenthird-party evidence (“TPE”) and finally management’s estimate of the sellingprice (“ESP”).

 

ASUNo 2009-14 amends the scope of software revenue recognition to exclude alltangible products containing both software and nonsoftware components thatfunction together to deliver the product’s essential functionality. As a result,certain products that were previously accounted for under the scope of softwarerevenue recognition guidance will no longer be accounted for as software. Priorto July 1, 2009, the Company determined its gaming devices includedsoftware that was “more than incidental” to the product as a whole;accordingly,  the sale of gaming deviceswere accounted for  under the scope ofsoftware revenue recognition guidance. Application of the new guidance resultedin the Company determining that gaming devices no longer fall under the scopeof software revenue recognition guidance. Under the new guidance, which appliesto new or modified arrangements, revenue related to systems arrangements thatcontain software and nonsoftware deliverables, will require an allocation ofthe arrangement fee to the separate deliverables using the relative sellingprice method.  Revenue for the softwaredeliverables will continue to be recognized under the software revenuerecognition guidance, while revenue for the nonsoftware deliverables will nolonger be accounted for under the software revenue recognition guidance.

 

Theimpact of applying the new accounting guidance to new or materially modifiedarrangements entered into since July 1, 2009, did not have a materialeffect on revenue recognized for the three months ended September 30,2009. The impact on future periods is dependent upon the prevalence of multipledeliverable arrangements whereby a combination of gaming devices, hardware,software, maintenance and product support fees and consulting services are soldunder one arrangement and the software license is time-based. Under sucharrangements, all revenue was previously recognized ratably over the term ofthe time-based license as the Company was unable to establish VSOE of fairvalue for the software maintenance and product support, which runscontemporaneously with the license period. Under the new guidance, revenue fromnon-software elements delivered under such multiple deliverable arrangementswill no longer be deferred if VSOE of fair value does not exist for anundelivered element. Rather, the revenue allocated to the non-software elementsusing the relative selling price method would be recognized upon delivery andcustomer acceptance, and only the revenue allocated to the software elementswill be deferred and recognized over the term of the time-based license.

 

Inallocating the arrangement fees to separate deliverables under the newaccounting guidance, the Company used VSOE of selling price for gaming devices,maintenance and professional services; a combination of TPE and ESP forhardware, and ESP for system software deliverables.  ESP for system software was determined basedupon the Company’s normal pricing and discounting practices.

 

*Other recently adopted accounting pronouncements*

 

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

 

OnJuly 1, 2009, the Company adopted new accounting guidance related tobusiness combinations which clarifies the accounting for certain separatelyidentifiable intangible assets which an acquirer does not intend to activelyuse. This guidance requires an acquirer in a business combination to account fora defensive intangible asset as a separate unit of accounting which should beamortized to expense over the period the asset diminishes in value. Futureeffects will be dependent upon acquisitions of defensive intangible assets, ifany, at that time. In addition, there is new guidance for determining theuseful life of a recognized intangible asset. This guidance is appliedprospectively to intangible assets acquired after the effective date. However,the disclosure requirements are applied prospectively to all intangible assetsrecognized in financial statements. In addition, the new guidance requires thatan acquiring entity recognize all of the assets acquired and liabilitiesassumed in a transaction at the acquisition-date fair value with limited exceptions,requires the expense of acquisition costs, and also includes a substantialnumber of new disclosure requirements. The Company’s adoption of this guidancedid not have a significant impact on the disclosures or the consolidatedresults of operations, financial position and cash flows for the three monthsended September 30, 2009.

 

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OnJuly 1, 2009, the Company adopted new accounting and reporting standardsfor the noncontrolling interest in a subsidiary and for the deconsolidation ofa subsidiary. Specifically, this guidance requires the recognition of anoncontrolling interest (minority interest) as equity in the consolidatedfinancial statements and separate from the parent’s equity. The amount of netincome attributable to the noncontrolling interest will be included inconsolidated net income on the face of the income statement. This guidance alsoclarifies that changes in a parent’s ownership interest in a subsidiary that donot result in deconsolidation are equity transactions if the parent retains itscontrolling financial interest and requires that a parent recognize a gain orloss in net income when a subsidiary is deconsolidated. Such gain or loss willbe measured using the fair value of the noncontrolling equity investment on thedeconsolidation date. The guidance also includes expanded disclosurerequirements regarding the interests of the parent and its noncontrollinginterest. The adoption of this statement did not have a material impact on theconsolidated results of operations, financial position and cash flows, but didaffect presentation and disclosure. As a result of the adoption, the Company reclassifiednoncontrolling interests in the amount of $2.4 million from minority interestto equity in the June 30, 2009 Unaudited Condensed Consolidated BalanceSheets and Statements of Stockholders’ Equity. Certain reclassifications to theUnaudited Condensed Consolidated Statements of Operations have been made toprior period amounts to conform to the presentation of the current period.Recorded amounts for prior periods previously presented as Net income which arenow presented as Net income attributable to Bally Technologies Incorporated,have not changed as a result of the adoption of this guidance.

 

OnJuly 1, 2009, the Company adopted new accounting guidance requiringadditional disclosures about fair value of financial instruments in interim andannual financial statements. The Company’s adoption of this guidance resultedin the disclosure of information about the fair value of financial instrumentsconsistent with the disclosures in the Company’s most recent annual financialstatements.

 

*Fair value of financial instruments*

 

Thefair value of a financial instrument is the amount at which the instrumentcould be exchanged in a current transaction between willing parties, other thanin a forced sale or liquidation. The carrying amounts reflected in the accompanyingunaudited condensed consolidated balance sheets for cash equivalents, accountsand notes receivable, investment to fund jackpot liabilities, accounts payable,jackpot liabilities and variable rate long-term debt approximate theirrespective fair values.

 

Allfinancial assets and liabilities are recognized or disclosed at fair valueusing a fair value hierarchy that maximizes the use of observable inputs andminimizes the use of unobservable inputs when measuring fair value. A financialinstrument’s categorization within the fair value hierarchy is based upon thelowest level of input that is significant to the fair value measurement. Thereare three levels of inputs that may be used to measure fair value:

 

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

 

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

 

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

 

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TheCompany’s only significant financial asset or liability measured at fair valueon a recurring basis, excluding accrued interest components, consisted of acash flow hedge related to a variable rate debt instrument as of September 30,2009 (which is included in accrued liabilities in the unaudited condensedconsolidated balance sheets) as follows:

 

| ** **                      | ** ** | **Fair  Value Measurements  Using Input Type** | ** ** |
|---------------------------------|------------|------------------------------------------------|------------|
| ** **                      | ** ** | **Level 1**                               | ** ** | **Level 2** | ** ** | **Total** | ** ** |
| ** **                      | ** ** | **(in  000s)**                                 | ** ** |
| Liability:                      |       |                                           |       |   |   |   |   |
| Derivative financial instrument |       | $                                              | —     |   | $ | 1,294 |   | $ | — |   |
|                                 |            |                                                |            |  |  |  |  |  |  |  |

 

AtJune 30, 2009, the derivative financial instrument was an asset valued at$255,000. The valuation techniques used to measure the fair value of thederivative financial instrument above in which the counterparties have highcredit ratings, were derived from pricing models, such as discounted cash flowtechniques, with all significant inputs derived from or corroborated byobservable market data. The Company’s discounted cash flow techniques useobservable market inputs, such as LIBOR-based yield curves. See Note 4 to unauditedcondensed consolidated financial statements, *Long-TermDebt*.

 

*Accounting for Derivative Instruments and HedgingActivity*

 

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

 

Theimpact of the cash flow hedge on the unaudited condensed consolidated financialstatements is depicted below:

 
| ** **                         | ** ** | **Amount of Gain  (Loss) Recognized in  OCI on  Derivative (Effective  Portion)** | ** ** | **Location of Gain (Loss)  Reclassified from Accumulated** | ** **       | **Amount of Gain  (Loss) Reclassified  from Accumulated  OCI into Income  (Effective Portion)** | ** ** |
|------------------------------------|------------|-----------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------------|-------------------------------------------------------------------------------------------------|------------|
| **Cash Flow Hedging Relationship** | ** ** | **Three  Months Ended  September 30, 2009**                                  | ** ** | **OCI  into Income (Effective  Portion)**                  | ** **       | **Three  Months Ended  September 30, 2009**                                                | ** ** |
| ** **                         | ** ** | **(in  000s)**                                                                    | ** ** |
| Interest rate swap agreement       |       | $                                                                                 | (2,230     | )                                                          | Interest expense |                                                                                            | $          | (681 | ) |
|                                    |            |                                                                                   |            |                                                            |                  |                                                                                                 |            |  |  |

 

*Inventories*

 

Inventoriesare stated at the lower of cost, determined on a first in, first out basis, ormarket. Cost elements included in work-in-process and finished goods includeraw materials, direct labor and manufacturing overhead. Inventories consist ofthe following:

 

| ** **      | ** ** | **September 30,  2009** | ** ** | **June 30,  2009** | ** ** |
|-----------------|------------|------------------------------|------------|-------------------------|------------|
| ** **      | ** ** | **(in 000s)**           | ** ** |
| Raw materials   |       | $                            | 39,933     |                    | $          | 40,662 |   |
| Work-in-process |       | 1,121                        |       | 1,432                   |       |
| Finished goods  |       | 11,881                       |       | 10,848                  |       |
| Total           |       | $                            | 52,935     |                    | $          | 52,942 |   |

 

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**2.             EARNINGS PER SHARE**

 

Basic earnings per shareare computed by dividing reported earnings by the weighted average number ofshares of common stock outstanding during the period. Diluted earnings pershare reflect the additional dilution from all potentially dilutive securities.

 

The following is thecomputation of basic and diluted earnings per share applicable to the Company’scommon stock:

 
| ** **                                                                    | ** ** | **Three Months Ended   September 30,**       | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| **** ****                                                                | ** ** | **2009**                                                         | ** ** | **2008** | ** ** |
| ** **                                                                    | ** ** | **(in 000s, except per share amounts)** | ** ** |
| Net income attributable to Bally  Technologies, Inc.                     |       | $                                                                | 30,624     |   | $ | 30,304 |   |
| After tax interest expense on convertible debt                                |       | 14                                                               |       | 69 |   |
| Diluted earnings attributable to Bally  Technologies, Inc.               |       | $                                                                | 30,638     |   | $ | 30,373 |   |
|                                                                          |       |                                                             |       |   |   |
| Weighted average common shares outstanding                                    |       | 54,268                                                           |       | 55,070 |   |
| Dilutive effect of:                                                           |       |                                                             |       |   |   |
| Stock options, Restricted Stock Units (“RSU”) and  restricted stock |       | 3,307                                                            |       | 2,835 |   |
| Warrants                                                                      |       | 23                                                               |       | 21 |   |
| Convertible debt (1)                                                          |       | 87                                                               |       | 198 |   |
| Weighted average diluted shares outstanding                                   |       | 57,685                                                           |       | 58,124 |   |
|                                                                          |       |                                                             |       |   |   |
| Basic earnings attributable to Bally  Technologies, Inc. per share       |       | $                                                                | 0.56       |   | $ | 0.55 |   |
| Diluted earnings attributable to Bally  Technologies, Inc. per share     |       | $                                                                | 0.53       |   | $ | 0.52 |   |

 

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(1)          The Company has certain related partydebt outstanding which is convertible into common stock at the Company’sdiscretion. See Note 5 to unaudited condensed consolidated financialstatements, *Related Party Transactions*.

 

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

 
| ** **                              | ** ** | **Three Months Ended  September 30,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|
| ** **                              | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| ** **                              | ** ** | **(in 000s)**                                   | ** ** |
| Stock options, RSU and restricted stock |       | 550                                                  |       | 632 |   |

 

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**3.             GOODWILL ANDINTANGIBLE ASSETS**

 

Intangible assets consistof the following:

 
| ** **                           | ** ** | ** **                      | ** ** | **September 30, 2009** | ** ** | **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                 |       | $                                | 33,472     |                          | $          | (24,794 | ) | $ | 8,678 |   | $ | 27,488 |   | $ | (19,083 | ) | $ | 8,405 |   |
| License rights                       |       | 3 - 5                 |       | 2,149                            |       | (1,908                        | )          | 241 |   | 2,117 |   | (1,814 | ) | 303 |   |
| Trademarks                           |       | 5                               |       | 2,203                            |       | (1,758                        | )          | 445 |   | 2,203 |   | (1,693 | ) | 510 |   |
| Core technology                      |       | 5 - 8                 |       | 22,763                           |       | (7,525                        | )          | 15,238 |   | 22,763 |   | (6,585 | ) | 16,178 |   |
| Contracts                            |       | 10                              |       | 10,043                           |       | (5,615                        | )          | 4,428 |   | 10,043 |   | (5,364 | ) | 4,679 |   |
| Other intangibles                    |       | 3 - 7                 |       | 3,089                            |       | (951                          | )          | 2,138 |   | 7,627 |   | (5,504 | ) | 2,123 |   |
| Total finite lived intangible assets |       |                            |       | 73,719                           |       | $                             | (42,551    | ) | $ | 31,168 |   | $ | 72,241 |   | $ | (40,043 | ) | $ | 32,198 |   |
| Trade mark                           |       | indefinite                      |       | 7,500                            |       | —                        |       | 7,500 |   | — |   | — |   | — |   |
| Total                                |       |                            |       | $                                | 81,219     |                          | $          | (42,551 | ) | $ | 38,668 |   | $ | 72,241 |   | $ | (40,043 | ) | $ | 32,198 |   |

 

InSeptember 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 theCompany’s business. Consideration for this intangible asset includedapproximately $5.0 million related to the delivery of gaming devices and $2.5million in forgiveness of certain customer receivable balances.  Previously, a royalty fee was paid andexpensed based upon the number of units produced and sold using the trademark.

 

Total amortizationexpense related to finite lived intangible assets was $2.5 million and$2.2 million for the three months ended September 30, 2009 and 2008,respectively, which included computer software amortization expense of$1.1 million and $1.0 million for the three months ended September 30,2009 and 2008, respectively. Future amortization of finite lived intangible assets is scheduled asfollows:

 

| **Year Ended June 30,**      | ** ** | **(in 000s)** | ** ** |
|---------------------------------------------|------------|--------------------|------------|
| 2010 (remaining nine months of fiscal year) |       | $                  | 7,354      |   |
| 2011                                        |       | 8,033              |       |
| 2012                                        |       | 5,863              |       |
| 2013                                        |       | 4,802              |       |
| 2014                                        |       | 1,179              |       |
| Thereafter                                  |       | 3,937              |       |
| Total                                       |       | $                  | 31,168     |   |

 

All goodwill isassociated with the Gaming Equipment and Systems segment. The changes inthe carrying amount of goodwill for the three months ended September 30,2009, are as follows:

 

| ** **                              | ** ** | **(in 000s)** | ** ** |
|-----------------------------------------|------------|--------------------|------------|
| Balance at June 30, 2009           |       | $                  | 161,960    |   |
| Foreign currency translation adjustment |       | 238                |       |
| Balance at September 30, 2009      |       | $                  | 162,198    |   |

 

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**4.****                                     ****LONG-TERMDEBT**

 

Long-termdebt consists of the following:

 

| ** **                                | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|-------------------------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                                | ** ** | **2009**               | ** ** | **2009**          | ** ** |
| ** **                                | ** ** | **(in 000s)**     | ** ** |
| Term loan facility                        |       | $                      | 200,000    |              | $          | 206,250 |   |
| Related party debt (see Note 5)      |       | 2,800                  |       | 2,800             |       |
| Other, generally unsecured                |       | 51                     |       | 37                |       |
| Long-term debt                            |       | 202,851                |       | 209,087           |       |
| Less current maturities                   |       | (37,851                | )          | (35,337           | )          |
| Long-term debt, net of current maturities |       | $                      | 165,000    |              | $          | 173,750 |   |

 

OnSeptember 29, 2008, the Company entered into a $225.0 million termloan and a $75.0 million revolving credit facility (collectively, the “CreditFacility”). The Credit Facility matures in September 2012. The Company hasthe option to request an increase in the size of the term loan and/or revolvingcredit facility by up to $50.0 million in the aggregate provided thatcertain conditions are met. The proceeds from the Credit Facility andcash-on-hand of $14.6 million were used to repay the then existing bankterm loans totaling $289.6 million. The Company also used cash-on-hand topay for transaction fees and expenses totaling $10.7 million, which arebeing amortized to interest expense over the term of the Credit Facility.

 

Asof September 30, 2009, there was approximately $75.0 million ofundrawn availability under the revolving credit facility. Availability underthe revolving credit facility is reduced to the extent of outstanding lettersof credit.

 

Theinterest rate on the Credit Facility is subject to a leverage-based pricinggrid. If the Company’s leverage ratio, as defined under the Credit Facility, isgreater than 1.5, the interest rate will be LIBOR plus a margin of 3.25%; ifthe leverage ratio is between 1.0 and 1.5, the interest rate will be LIBOR plusa margin of 3.00%; and if the leverage ratio is below 1.0, the interest ratewill be LIBOR plus a margin of 2.75%. In December 2008, the Companyentered into a floating-to-fixed interest rate swap, as discussed below, fixingthe interest rate of the term loan at 1.89% plus the applicable margin (2.75%at September 30, 2009) for the remaining term.

 

Theterm loan requires quarterly principal reductions of $6.25 million duringthe first year, $8.75 million during the second year and$11.25 million during each of the third and fourth years of the agreement,with a balloon payment due at maturity in September 2012. The CreditFacility is collateralized by substantially all of the Company’s domesticproperty and is guaranteed by each of the Company’s domestic subsidiaries, excludingany noncontrolling interests, and is secured by a pledge agreement. 

 

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

 

Thefinancial covenants under the Credit Facility consist of a leverage ratio and afixed charges coverage ratio. The leverage ratio is computed as total debtoutstanding at the end of the quarter divided by the trailing twelve monthsEarnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”),excluding certain cash and non-cash charges. The fixed charges coverage ratiois computed as EBITDA, adjusted for both the trailing twelve months capitalexpenditures and cash taxes paid, divided by the trailing twelve monthsinterest charges plus all payments of principal made during the previous twelvemonths.

 

Abreach of any of the covenants or the inability to comply with the requiredfinancial ratios could result in a default under the Credit Facility. In theevent of any such default, the lenders could elect to declare all borrowingsoutstanding under the Credit Facility, together with any accrued interest andother fees, to be due and payable. If the Company were unable to repay theindebtedness upon its acceleration, the lenders could proceed against theunderlying collateral.

 

TheCompany was in compliance with all of the Credit Facility covenants as of September 30,2009.

 

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The Company’s relatedparty debt, which totaled approximately $2.8 million as of September 30,2009 and June 30, 2009, consists primarily of the debt owed to the formerprincipals of Sierra Design Group (“SDG”). See Note 5, *Related Party Transactions*.

 

*Interest Rate Swap Agreement*

 

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

 

TheCompany has documented and designated this interest rate swap as a cash flowhedge. Based on the assessment of effectiveness using statistical regression,the Company determined that the interest rate swap is effective. Effectivenesstesting of the hedge relationship and measurement to quantify ineffectivenessis performed each fiscal quarter using the hypothetical derivative method. Asthe interest rate swap qualifies as a cash flow hedge, the Company adjusts thecash flow hedge on a quarterly basis to its fair value with a correspondingoffset to accumulated OCI. The interest rate swap has been and is expected toremain highly effective for the life of the hedge. Effective amounts arereclassified to interest expense as the related hedged expense is incurred. Anyineffectiveness is reclassified from accumulated other comprehensive income toother income (expense). As of September 30, 2009, the Company had noineffectiveness on its cash flow hedge. Amounts related to the swap expected tobe reclassified from other comprehensive income to interest expense in the nexttwelve months total $2.5 million.

 

Additionalinformation 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—$200.0 million LIBOR based  debt |       | Accrued Liabilities        |       | $                         | 1,294      |                               | Accumulated  other comprehensive income (loss) |   |
|                                                            |            |                            |            |                           |            |                                    |                                                |  |

 

**5.             RELATED PARTY TRANSACTIONS**

 

Inconnection with the previous acquisition of SDG, the consideration paidincluded subordinated debt issued to the former principals of SDG. Certain ofthe former principals are now employees of the Company. The subordinated debttotaled $2.8 million, all of which was included in current maturities, at both September 30,2009 and June 30, 2009.

 

Thenotes payable to the former principals of SDG are payable in annualinstallments plus interest at LIBOR plus 2% through calendar year 2009 (3.12% as of September 30, 2009). At theCompany’s discretion, the principal and accrued interest thereon can be paid incash, or can be converted into shares of the Company’s common stock using theaverage stock price for the 20 business days prior to the delivery of suchshares.

 

TheCompany leases a warehouse and office facility from an entity owned by a formerofficer of the Company. Rental payments totaled $120,000 for both the threemonths ended September 30, 2009 and 2008.

 

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**6.            ****SHARE****-BASEDCOMPENSATION**

 

*Employee Stock Purchase Plan*

 

InFebruary 2008, the Company’s stockholders approved the 2008 Employee StockPurchase Plan (the “2008 ESPP Plan”). The 2008 ESPP Plan provides that eligibleemployees are able to contribute up to 10% of their eligible earnings towardsthe quarterly purchase of the Company’s common stock. The employee’s purchaseprice is equal to 85% of the fair market value. During the three months ended September 30,2009 and 2008, employees purchased 13,114 shares and 10,314 shares of commonstock for approximately $0.5 million and $0.3 million, respectively, underthe 2008 ESPP Plan.

 

*Share-BasedAward Plans*

 

Stock option activity as ofand for the three months ended September 30, 2009 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                                           |       | 98                 |       | 34.73                     |       |                             |       |   |   |
| Exercised                                         |       | (722               | )          | 12.73                     |       |                             |       |   |   |
| Forfeited or expired                              |       | (14                | )          | 31.12                     |       |                             |       |   |   |
| Balance outstanding as of September 30, 2009 |       | 6,265              |       | $                         | 18.79      |                             | 5.32       |   | $ | 123,226 |   |
| Exercisable as of September 30, 2009         |       | 4,848              |       | $                         | 17.32      |                             | 5.06       |   | $ | 102,413 |   |

 

Restricted stock and RSUactivity as of and for the three months ended September 30, 2009 issummarized below:

 
| ** **                                        | ** ** | **Restricted  Stock** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** | **RSUs**    | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|-----------------------------------------------|------------|-------------|------------|-----------------------------------------------|------------|
| ** **                                        | ** ** | **(in 000s)**    | ** ** | **(per share)**                          | ** ** | **(years)** | ** ** | **(in 000s)**                            | ** ** |
| Balance outstanding as of June 30, 2009      |       | 310                   |       | $                                             | 30.42      |        | 623        |                                          | $          | 17.71 |   |
| Granted                                           |       | 48                    |       | 34.85                                         |       | 42          |       | 38.98                                         |       |
| Vested                                            |       | (15                   | )          | 17.65                                         |       | —      |       | —                                        |       |
| Forfeited or expired                              |       | —                |       | —                                        |       | —      |       | —                                        |       |
| Balance outstanding as of September 30, 2009 |       | 343                   |       | $                                             | 31.61      |        | 665        |                                          | $          | 19.06 |   |
| Vested as of September 30, 2009              |       |                  |       |                                          |       | 545         |       | $                                             | 16.57      |   |

 

*Share-BasedCompensation*

 

The following table presentsshare-based compensation expense included in the Company’s unaudited condensedconsolidated statements of operations:

 

| ** **                                           | ** ** | **Three Months Ended  September 30,** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                           | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| ** **                                           | ** ** | **(in 000s)**                                   | ** ** |
| Selling, general and administrative                  |       | $                                                    | 2,641      |   | $ | 2,895 |   |
| Research and development                             |       | 819                                                  |       | 626 |   |
| Cost of gaming equipment and systems and  operations |       | 39                                                   |       | 37 |   |
| Share-based compensation expense before tax          |       | 3,499                                                |       | 3,558 |   |
| Income tax benefit                                   |       | 1,225                                                |       | 1,245 |   |
| Net share-based compensation expense                 |       | $                                                    | 2,274      |   | $ | 2,313 |   |

 

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As of September 30,2009, there was $12.4 million of total unrecognized compensation expenserelated to the unvested portion of stock options which will be recognized overthe subsequent 1.78 years. In addition, as of September 30, 2009, therewas $9.5 million of total unrecognized compensation expense related to theunvested portion of restricted stock and RSUs which will be recognized over thesubsequent 1.66 years.

 

**7****.             STOCKHOLDERS’ EQUITY, WARRANTS AND RIGHTS**

 

*Warrants*

 

TheCompany issued 100,000 stock purchase warrants in February 2004 inconnection with an acquisition. The strike price of the warrant is $24.69 witha term of seven years. During the three months ended September 30, 2009,30,269 stock purchase warrants were exercised for the first time and convertedinto 11,753 shares of the Company’s common stock. The exercises were cashlessand net shares were issued for the difference between the strike price of thewarrant and the market value of the Company’s common stock upon exercise.

 

*Share Repurchase Plan*

 

OnJanuary 28, 1999, the Company’s Board of Directors approved a sharerepurchase plan under which, subject to price and market conditions, purchasesof shares can be made from time to time in the open market or in privatelynegotiated transactions using available cash. The Company’s share repurchaselimit set on August 12, 2008 under its existing share repurchase plan was$100 million.

 

During the three monthsended September 30, 2009 and 2008, the Company repurchased 392,151 sharesand 326,000 shares of common stock for $15.2 million and $11.0 million,respectively, under the share repurchase plan. As of September 30, 2009,$46.5 million is available to be repurchased under the share repurchaseplan in future periods.

 

*Special Stock*

 

TheCompany’s Articles of Incorporation authorize the issuance of up to 10,000,000shares of special stock (“Special Stock”). The Special Stock may be issued fromtime to time in one or more series, each having such designations, preferencesand relative, participating, optional or other special rights, qualifications,limitations or restrictions as shall be stated and expressed in the resolutionproviding for the issuance of Special Stock or any series thereof adopted bythe Board of Directors. Special Stock consists of non-voting stock where noholder of the Special Stock shall be entitled to vote at any meeting ofstockholders or otherwise, except as may be specifically provided by law or asapproved by the Board of Directors in certain limited circumstances at the timeof the stock issuance.

 

Todate, there have been four series of Special Stock authorized for issuance: theInitial 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 ofthe Company’s 71/2% Convertible SubordinatedDebentures (which were retired in 1996) who elected to receive such stock inlieu of receiving common stock. The holders of shares of Series E SpecialStock have no voting rights except as required by law. A total of 115 shares ofSeries E Special Stock remain outstanding. No other shares of SpecialStock remain outstanding.

 

**8.             INCOME TAXES**

 

The provision for income taxes for interim periods is based on thecurrent estimate of the annual effective tax rate expected to be applicable forthe full fiscal year and the impact of discrete items, if any, and is adjustedas necessary for quarterly events. The effective income tax rate wasapproximately 35% and 36% for the three months ended September 30, 2009and 2008, respectively. The lower rate in fiscal 2010 predominantly reflectsthe reinstatement of the research and development tax credit which had not beenin effect for the three months ended September 30, 2008 and which iscurrently set to expire again on December 31, 2009.

 

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TheInternal Revenue Service (“IRS”) commenced examination of the Company’s UnitedStates federal income tax returns for 2003 through 2005 in the fourth quarterof 2006. Throughout the examination, the IRS has proposed, and management hasagreed to, certain adjustments related to the open tax years that have beenrecorded in the income tax provision. In January 2009, the IRS completedits field examination of the open tax years and issued a Revenue Agent’s Report(“RAR”). Also in January 2009, the Company paid $3.4 million in taxand $1.2 million in interest to the IRS to settle certain agreedadjustments. The Company filed a formal protest regarding certain unagreedadjustments and the case was assigned to the IRS Laguna Niguel Appeals Officein August 2009. If successful in defending the Company’s position, itwould result in a reduction to unrecognized tax benefits and a correspondingreduction of income tax provisions of approximately $4.8 million,excluding interest. If the IRS were to prevail in full, it would result inadditional income tax provisions of approximately $5.4 million, plusinterest, for the tax years through 2005. No date has been set for the openingconference with the IRS Appeals Officer as of the date of this filing.

 

Itis reasonably possible that within the next twelve months the Company willresolve some of the matters presently under consideration with the IRS whichmay increase or decrease unrecognized tax benefits for the open tax years.However, an estimate of such increase or decrease cannot reasonably be made.

 

Asof September 30, 2009, the Company has $17.3 million related touncertain tax positions, excluding related accrued interest and penalties,$15.5 million of which, if recognized, would impact the effective taxrate. As of September 30, 2009, the Company has $5.3 million accrued forthe payment of interest and penalties.

 

**9.             COMMITMENTS AND CONTINGENCIES**

 

***Litigation***

 

Liabilitiesfor loss contingencies arising from claims, assessments, litigation, fines andpenalties, or other sources are recorded when it is probable that a liabilityhas been incurred and the amount of the liability can be reasonably estimated.The Company has not recorded any loss accruals for these contingencies unlessotherwise noted below.

 

OnDecember 7, 2004, IGT filed a patent infringement lawsuit against theCompany in the United States District Court for the District of Nevada. Thecomplaint asserted that the Company’s wheel-based games, such as Monte CarloTM,Lucky WheelTM and Cash For LifeTM, its games with a reel in the top box, such asBonus FrenzyTM, and its iVIEWTM products infringed on patents held by IGT, andsought injunctive relief and damages in unspecified amounts. As part of thedefense, the Company asserted counterclaims seeking damages and other reliefagainst IGT, including claims that IGT’s patents were invalid, unenforceableand not infringed, as well as several claims that IGT engaged inanti-competitive conduct in violation of state and federal antitrust laws. In October 2008,the court granted the Company’s motions for summary judgment, ruling that IGT’stwo “wheel” patents and a touch-screen player-tracking patent were invalid;that even if the patents were valid, the Company’s wheel-based games at issuewould not infringe; and that certain of its iVIEW products do not infringe thetwo asserted player-tracking patents. The court also found issues of materialfact regarding IGT’s alleged inequitable conduct before the U.S. Patentand Trademark Office and denied IGT’s motions to dismiss those claims, leavingthem for trial. However, the court postponed the trial until after IGT hasappealed the court’s summary judgments on patent infringement and validility. IGTappealed, and on October 22, 2009, the U.S. Court of Appeals for theFederal Circuit affirmed the District Court’s decision in its entirety.

 

InApril 2006, IGT filed a patent infringement lawsuit against the Company inthe United States District Court for the District of Delaware. The complaintasserted that the Company’s Bally Power BonusingTM products infringe patentsheld by IGT, and sought injunctive relief and damages in unspecified amounts.Of the nine patents and 200 claims originally filed in the case by IGT, all butthree patents and eight claims have been dismissed. On April 28, 2009, theDistrict Court issued an order finding that the Company’s Power Promotions,Power Bank, and SDS/CMP Power Winners products do not infringe IGT’s patents.The court also found that the Company’s ACSC Power Winners and ACSC Power Rewardproducts infringe some patent claims asserted by IGT, but not others. Appealsby both parties are expected. In the meantime, the Company has undertakentechnical changes to ensure non-infringement for the two products partially inquestion. The Company does not believe that potential infringement damages, ifany, would be material to its financial position as the revenues from these twoproducts to date have not been material.

 

InSeptember 2006, the Company filed a patent infringement lawsuit againstIGT in the United States District Court for the District of Nevada. Thecomplaint asserted that certain of IGT’s bonus wheel games infringe a patentheld by the Company, and sought injunctive relief and damages. IGT filed ananswer generally denying the claims and filed a motion for summary judgmentwhich was granted in September 2008 declaring the wheel patent “obvious”and therefore invalid. On October 22, 2009, the Federal Appeals Courtaffirmed the District Court’s decision.

 

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TheCompany is also a party to various lawsuits relating to routine mattersincidental to its business. Management does not believe that the outcome ofsuch litigation, including the matters discussed above, in the aggregate, willhave a material adverse effect on its consolidated financial position, resultsof operations or cash flows.

 

**10.****         ****SEGMENTAND GEOGRAPHICAL INFORMATION**

 

TheCompany operates in two business segments: (i) Bally Gaming Equipment andSystems which designs, manufactures, assembles, distributes and operates gamingdevices and licenses computerized monitoring and bonusing systems for gamingdevices, and (ii) Casino Operations which owns and operates a casino inVicksburg, Mississippi.

 

Certainexpenses related to Company-wide initiatives are managed at the corporate leveland are not allocated to either operating segment. The accounting policies ofthese segments are consistent with the Company’s policies for the unauditedconsolidated condensed financial statements.

 

| ** **                   | ** ** | **Three Months Ended  September 30,** | ** ** |
|------------------------------|------------|------------------------------------------------------|------------|
| ** **                   | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| ** **                   | ** ** | **(in 000s)**                                   | ** ** |
| Revenues:                    |       |                                                 |       |   |   |
| Gaming Equipment and Systems |       |                                                 |       |   |   |
| Gaming Equipment             |       | $                                                    | 62,003     |   | $ | 107,240 |   |
| Gaming Operations            |       | 71,309                                               |       | 67,776 |   |
| Systems                      |       | 54,018                                               |       | 52,334 |   |
|                         |       | 187,330                                              |       | 227,350 |   |
| Casino Operations            |       | 9,155                                                |       | 10,048 |   |
| Total revenues               |       | $                                                    | 196,485    |   | $ | 237,398 |   |
|                         |       |                                                 |       |   |   |
| Gross Margin(1):             |       |                                                 |       |   |   |
| Gaming Equipment and Systems |       |                                                 |       |   |   |
| Gaming Equipment             |       | $                                                    | 29,494     |   | $ | 47,344 |   |
| Gaming Operations            |       | 52,218                                               |       | 47,216 |   |
| Systems                      |       | 36,155                                               |       | 35,408 |   |
|                         |       | 117,867                                              |       | 129,968 |   |
| Casino Operations            |       | 5,290                                                |       | 5,693 |   |
| Total gross margin           |       | $                                                    | 123,157    |   | $ | 135,661 |   |
|                         |       |                                                 |       |   |   |
| Operating income:            |       |                                                 |       |   |   |
| Gaming Equipment and Systems |       | $                                                    | 52,020     |   | $ | 59,105 |   |
| Casino Operations            |       | 2,548                                                |       | 2,887 |   |
| Corporate                    |       | (3,653                                               | )          | (8,515 | ) |
| Total operating income       |       | $                                                    | 50,915     |   | $ | 53,477 |   |

 

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(1)                                  Gross Marginfrom Gaming Equipment and Systems excludes amortization related to certainintangibles including core technology and license rights, which are included indepreciation and amortization.

 

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TheCompany has operations based primarily in the United States as well assignificant sales and distribution offices based in Europe, and other foreignlocations, including South America. The table below presents information as tothe Company’s revenues and operating income by geographic region which isdetermined by country of destination:

 

| ** **               | ** ** | **Three Months Ended  September 30,** | ** ** |
|--------------------------|------------|------------------------------------------------------|------------|
| ** **               | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| ** **               | ** ** | **(in 000s)**                                   | ** ** |
| Revenues:                |       |                                                 |       |   |   |
| United States and Canada |       | $                                                    | 161,006    |   | $ | 203,240 |   |
| International            |       | 35,479                                               |       | 34,158 |   |
| Total revenues           |       | $                                                    | 196,485    |   | $ | 237,398 |   |
|                     |       |                                                 |       |   |   |
| Operating income:        |       |                                                 |       |   |   |
| United States and Canada |       | $                                                    | 41,378     |   | $ | 45,850 |   |
| International            |       | 9,537                                                |       | 7,627 |   |
| Total operating income   |       | $                                                    | 50,915     |   | $ | 53,477 |   |

 
| **ITEM 2.** | ** ** | **MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|-------------|------------|-------------------------------------------------------------------------------------------------|

 

Webegin this section with a summary of our key operating business divisions as ofSeptember 30, 2009. The overview is followed by a detailed analysis of ourresults of operations and our financial condition and liquidity as of and forthe three months ended September 30, 2009 and 2008. References to “we,” “our,”“us,” or the “Company” refer to Bally Technologies, Inc. and itssubsidiaries.

 

**Forward Looking Statements**

 

Certainstatements made or incorporated by reference in this Quarterly Report on Form 10-Q,in our other filings with the Securities and Exchange Commission (“SEC”), inour press releases and in statements made by or with the approval of authorizedpersonnel constitute “forward looking statements” within the meaning of Section 27Aof the Securities Act of 1933, as amended (the “Securities Act”) and Section 21Eof the Securities Exchange Act of 1934, as amended (the “Exchange Act”), andare subject to the safe harbor created thereby. Forward looking statementsreflect intent, belief or current expectations with respect to, among otherthings, future events and financial trends affecting us. Forward lookingstatements are typically identified by words such as “believes,” “estimates,” “expects,”“anticipates,” “plans,” “should,” “would” and similar expressions.

 

Althoughwe believe the expectations reflected in any forward looking statements arereasonable, readers are cautioned that forward looking statements involve knownand unknown risks and uncertainties, are not guarantees of future performanceand that actual results, performance or achievements may differ materiallyfrom any future results, performance or achievements expressed or implied bysuch forward looking statements. These differences can arise as a result of therisks described in Item 1A, Risk Factors included in on our Annual Report on Form 10-Kfor the fiscal year ended June 30, 2009 (the “2009 10-K”), as well asother factors such as the impact of competition, the impact of any prolongeddownturn in the economy or the financial markets, our ability to service debt,product development, foreign operations, dependence on key personnel, theability to integrate future acquisitions, regulation by gaming authorities, theoutcome of pending litigation matters, gaming taxes, market risks and thepotential adverse effects to our financial condition, results of operations orprospects.

 

Forwardlooking statements in this Quarterly Report on Form 10-Q speak only as ofthe date hereof, and forward looking statements in documents incorporated byreference speak only as of the date of those documents. Unless otherwiserequired by law, we undertake no obligation to publicly update or revise theseforward looking statements, whether as a result of new information, futureevents or otherwise. In light of these risks and uncertainties, we cannotassure you that the forward looking statements contained in this QuarterlyReport on Form 10-Q will, in fact, transpire.

 

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**Business Overview**

 

We are a diversified,worldwide gaming company that designs, manufactures, distributes and operatesgaming devices and computerized monitoring and accounting systems for gamingdevices. In addition to selling our gaming devices, we also offer our customersa wide range of rental options. Our primary technologies include gaming devicesfor land-based, riverboat and Native American casinos, video lottery andcentral determination markets and specialized system-based hardware andsoftware products. Our specialized system-based hardware and software productsprovide casinos with a wide range of marketing, data management, accounting,security and other software applications and tools to more effectively managetheir operations. We also own and operate the Rainbow Casino, a docksideriverboat casino in Vicksburg, Mississippi.

 

We derive our revenuefrom the following four sources:

 
|   | · | * * | *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; |
|   | · | * * | *Systems*            | — | Sale of computerized  monitoring systems and related recurring hardware and software maintenance  revenue; and                          |
|   | · | * * | *Casino  Operations* | — | Operation of the  Rainbow Casino.                                                                                                       |

 

Wereport our revenue and income in two reportable segments: the Bally GamingEquipment and Systems segment, which includes our Gaming Equipment, GamingOperations and Systems divisions, and our Casino Operations segment. Our totalrevenues were $196.5 million and $237.4 million for the three monthsended September 30, 2009 and 2008, respectively. Revenue from our BallyGaming Equipment and Systems segment represented approximately 95% and 96% ofour total revenues for the three months ended September 30, 2009 and 2008,respectively.

 

Wereview certain financial measures in assessing our financial condition andoperating performance not only in connection with creating our forecasts and inmaking comparisons to financial results from prior periods, but also in makingcomparisons to our competitors’ financial results. We focus on fluctuations inrevenue, cost and gross margin and also pay close attention to improvements inconsolidated operating income, net income, diluted earnings per share, adjustedEBITDA (earnings before interest, taxes, depreciation and amortization,including asset charges and share-based compensation), cash flows fromoperations and free cash flow (cash flows from operating activities lesscapital expenditures) as they are key indicators of our success in growing ourbusiness. We also measure changes in selling, general and administrativeexpenses as a percent of revenue, which indicate management’s ability tocontrol costs, as well as changes in research and development as a percent ofrevenue, which demonstrate investment in our technology assets. The measureslisted above are not a comprehensive list of all factors considered by us inassessing our financial condition and operating performance, and we mayconsider other individual measures as required by trends and discrete eventsarising in a specific period, but they are the key indicators that we generallyweigh most heavily from period to period.

 

Weare currently operating in a challenging economic environment and thecombination of economic uncertainty, lower demand for replacement products andreduced opportunities from new or expanded markets has negatively impacted ourconsolidated results. The gaming sector was negatively impacted by lowerconsumer spending and limited resources available to fund capital projects. Thereplacement cycle for gaming machines in North America continues to besluggish, but we are cautiously optimistic that gaming operators’ replacementgame buying demand will begin to improve in calendar 2010. In fiscal year 2010,we have or will be releasing significantly more games than last year along witha new cabinet and operating system. During the three months ended September 30,2009 and 2008, we sold 2,418 and 5,199 new gaming devices in the United Statesand Canada, respectively. The adverse affects of this sluggish demand for gamesales on our revenues is partially offset by the performance of gamingoperations, our systems business, and our continued expansion intointernational markets during the period. International revenues were$35.5 million and $34.2 million for the three months ended September 30,2009 and 2008, respectively.

 

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Despitethe challenging economic conditions, we have experienced continued strength inGaming Operations and Systems revenues during the period. Gaming Operationsrevenues were $71.3 million and $67.8 million during the three monthsended September 30, 2009 and 2008, respectively. Revenues were higher thanin the prior periods due primarily to the continued performance of existing andnew premium game units and expansion in our centrally determined business.Gaming operations margins improved due to better management of our capital,more strategic placements and supply chain efficiencies. In addition, weexperienced significant growth in the installed base of our centrallydetermined systems which increased by approximately 5,435 units over September 30,2008 due primarily to increased placements, especially in the Class II andcentrally determined markets. We have just released, or will soon release, somenew products including our new spinning-wheel game, Cash WheelTM, our all newDigital Tower Series platform, which includes 55555 JackpotTM, FireballTM,and our Jumbo and DualVisionTM cabinets. We continue to focus our efforts on theintroduction of new and innovative games and cabinets both for our video andstepper platforms.

 

Systemsrevenues were $54.0 million and $52.3 million for the three monthsended September 30, 2009 and 2008, respectively. Maintenance revenueincreased 10% in the three months ended September 30, 2009, when comparedto the same period in the prior year as a result of an increased install baseof customers on our systems. For systems, the new SDS® Version 11, which runs on both Unix andWindows off the same code base, our iVIEW Display ManagerTM, and our PowerBonusing products are generating positive interest. We just released ourVersion 11.0 systems products, and the initial installations have been wellreceived. In October 2009, a large resort and casino in southernCalifornia signed an agreement with the Company to provide up to 5,000 iVIEWDisplay Manager controllers. Over the last few years, we have continued ourfocus on the basics of enterprise software development, delivery, customersupport and services discipline, on improving core products, providing quality upgradeoptions for our customers, and increasing customer satisfaction levels throughbetter service and support which are all serving us well in these difficulteconomic times.

 

Therehave been several recent developments fueled by the economic situation which webelieve will benefit us in the long term. Domestically, we are focused on thenew opportunities including the potential expansion of gaming in Ohio,Illinois, Kansas, Iowa, Maryland, Massachusetts, and New Hampshire. The breadthand timing of such opportunities remains uncertain due to the political processin these jurisdictions as well as the difficult credit environment facing ourcustomers and the risk of continued economic uncertainty. We are also engagedin expanding our position in Mexico as it moves to Class III gaming, aswell as opportunities in the Italian and Australian markets. Further, as wecontinue to grow and become a strong player in Asia, opportunities areanticipated to arise in that region which would enable us to expandinternationally.

 

Netcash provided by operating activities was $39.9 million and$25.2 million during the three months ended September 30, 2009 and2008, respectively. Cash flow from operations increased 59% for the threemonths ended September 30, 2009, when compared to the same period lastyear reflecting improved operating results and cash flow management. Since September 30,2008, we have also reduced our debt by $85.9 million, including payingdown the revolving line of credit to zero.

 

Revenuesfrom the Rainbow Casino decreased in the three months ended September 30,2009 to $9.2 million from $10.0 million in the three months ended September 30,2008. This decrease reflects the impact of competition from a new casino thatopened in late October 2008, other nearby expansions, and the currentchallenging economic environment.

 

Managementcontinuously monitors and reviews its selling, general and administrativeexpenses in comparison to revenues. Selling, general and administrativeexpenses were 23.9% of revenues and declined as a percentage of revenue duringthe three months ended September 30, 2009, when compared to 24.1% duringthe same period in the prior year.

 

**Resultsof Operations**

 

Ourresults of operations are summarized below:

 

| ** **                                                | ** ** | **Overall Consolidated Operating Results  Three Months Ended September 30,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                                                | ** ** | **2009**                                                                          | ** ** | **% Rev** | ** ** | **2008** | ** ** | **% Rev** | ** ** |
| ** **                                                | ** ** | ** **                                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                  |       | $                                                                                 | 196.5      |   | 100 | % | $ | 237.4 |   | 100 | % |
| Selling, general and administrative                       |       | 46.9                                                                              |       | 24 | % | 57.2 |   | 24 | % |
| Research and development costs                            |       | 19.5                                                                              |       | 10 | % | 19.9 |   | 8 | % |
| Depreciation and amortization                             |       | 5.8                                                                               |       | 3 | % | 5.1 |   | 2 | % |
| Operating income                                          |       | 50.9                                                                              |       | 26 | % | 53.5 |   | 23 | % |
| Net income attributable to Bally  Technologies, Inc. |       | $                                                                                 | 30.6       |   | 16 | % | $ | 30.3 |   | 13 | % |

 

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***Bally Gaming Equipment and Systems***

 

Weare one of the leading providers of technology to the gaming industry. TheBally Gaming and Systems segment consists of three primary sub-groups: GamingEquipment, which includes the sale of gaming devices and related equipment,parts and conversion kits; Gaming Operations, which includes the operation ofwide-area progressive, video lottery and centrally determined systems and therental of gaming devices and content; and Systems, which includes the sale andsupport of computerized monitoring systems and related recurring hardware andsoftware maintenance revenue.

 

Thesummary financial results and operating statistics for Bally Gaming Equipmentand Systems are as follows:

 
| ** **                             | ** ** | **Three Months Ended September 30,** | ** ** |
|----------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                             | ** ** | **2009**                                                 | ** ** | **% Rev** | ** ** | **2008** | ** ** | **% Rev** | ** ** |
| ** **                             | ** ** | **(dollars in millions)**                      | ** ** |
| Revenues:                              |       |                                                     |       |   |   |   |   |   |   |
| Gaming Equipment                       |       | $                                                        | 62.0       |   | 33 | % | $ | 107.3 |   | 47 | % |
| Gaming Operations                      |       | 71.3                                                     |       | 38 | % | 67.8 |   | 30 | % |
| Systems                                |       | 54.0                                                     |       | 29 | % | 52.3 |   | 23 | % |
| Total revenues                         |       | $                                                        | 187.3      |   | 100 | % | $ | 227.4 |   | 100 | % |
|                                   |       |                                                     |       |   |   |   |   |   |   |
| Gross Margin:                          |       |                                                     |       |   |   |   |   |   |   |
| Gaming Equipment(1)                    |       | $                                                        | 29.5       |   | 48 | % | $ | 47.4 |   | 44 | % |
| Gaming Operations                      |       | 52.2                                                     |       | 73 | % | 47.2 |   | 70 | % |
| Systems(1)(2)                          |       | 36.2                                                     |       | 67 | % | 35.4 |   | 68 | % |
| Total gross margin                     |       | $                                                        | 117.9      |   | 63 | % | $ | 130.0 |   | 57 | % |
|                                   |       |                                                     |       |   |   |   |   |   |   |
| Selling, general and administrative(2) |       | $                                                        | 41.6       |   | 22 | % | $ | 46.9 |   | 21 | % |
| Research and development costs         |       | 19.5                                                     |       | 10 | % | 19.9 |   | 9 | % |
| Depreciation and amortization          |       | 4.8                                                      |       | 3 | % | 4.1 |   | 2 | % |
| Operating income                       |       | $                                                        | 52.0       |   | 28 | % | $ | 59.1 |   | 26 | % |

 

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(1)          Gross Margin from Gaming Equipment and Systemsexcludes amortization related to certain intangibles including core technologyand license rights, which are included in depreciation and amortization.

(2)          Certain costs of system sales previously included inselling, general and administrative expenses have been reclassified in theprior year to conform to the current year presentation.

 
| ** **                                              | ** ** | **Three Months Ended  September 30,** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                              | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| Operating Statistics                                    |       |                                                 |       |   |   |
| New gaming devices                                      |       | 3,936                                                |       | 6,598 |   |
| Original Equipment Manufacturer (“OEM”) units |       | —                                               |       | 465 |   |
| New unit Average Selling Price (“ASP”)        |       | $                                                    | 14,115     |   | $ | 14,062 |   |
|                                                    |       |                                                 |       |   |   |
| End of period installed base:                           |       |                                                 |       |   |   |
| Gaming monitoring units installed base                  |       | 361,000                                              |       | 314,000 |   |
| Systems managed cashless games                          |       | 311,000                                              |       | 282,000 |   |
|                                                    |       |                                                 |       |   |   |
| Wide-area progressive                                   |       | 1,028                                                |       | 1,001 |   |
| Local-area progressive                                  |       | 33                                                   |       | 248 |   |
| Total linked progressive systems                        |       | 1,061                                                |       | 1,249 |   |
|                                                    |       |                                                 |       |   |   |
| Rental and daily-fee games                              |       | 12,389                                               |       | 13,089 |   |
| Video lottery systems                                   |       | 7,911                                                |       | 8,122 |   |
| Centrally determined systems                            |       | 48,958                                               |       | 43,523 | (1) |
|                                                         |            |                                                      |            |  |  |  |  |

 

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(1)          Daily fee revenue from approximately 7,844 unitsincluded in the centrally determined systems end of period installed base totalas of September 30, 2008 was deferred based upon the completion of certaincontractual commitments necessary to recognize the revenue under our revenuerecognition policy.

 

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**ThreeMonths Ended September 30, 2009 Compared to Three Months Ended September 30,2008**

 

Totalrevenues for our Bally Gaming Equipment and Systems segment decreased $40.1million, or 18%, in the three months ended September 30, 2009, whencompared to the same period last year, as a result of the following:

 

*Gaming Equipment Revenue**.*Gaming Equipment revenue decreased by $45.3 million, or 42%, toapproximately $62.0 million primarily as a result of a 40% decrease in newgaming device sales to 3,936 units in the three months ended September 30,2009, when compared to 6,598 units in the same period last year. In addition,during three months ended September 30, 2008, we sold 465 OEM units. ASPincreased to $14,115 in the three months ended September 30, 2009 comparedto $14,062 in the same period last year. The increase in ASP was driven bysales of premium cabinets.

 

*Gaming Equipment Gross Margin*. GamingEquipment gross margin increased to 48% in the three months ended September 30,2009 from 44%, in the same period last year, primarily as a result of adecrease in inventory write-downs of $2.2 million and a decrease in materialcosts during the sameperiod.

 

*Gaming Operations Revenue**.*Gaming Operations revenue increased $3.5 million, or 5%, toapproximately $71.3 million in the three months ended September 30, 2009,when compared to the same period last year, primarily as a result of anincrease in participation, rental and license revenue. The improvement inparticipation and rental revenue was primarily from our installed base ofdevices connected to our centrally determined systems (Class II, VideoLottery and iVIEW network) that increased 12.5% from 43,523 units as of September 30,2008 to 48,958 units as of September 30, 2009 primarily due to units addedin Alabama as well as the recognition of previously deferred units in Florida.The improvement in license revenue was primarily from Washington.

 

*GamingOperations Gross Margin*. Gross margin increased to 73% in the threemonths ended September 30, 2009 from 70%, in the same period last year,primarily as a result of the increases in participation, rental and licenserevenue which had little associated variable costs. Cost of gaming operationsdecreased $1.5 million, or 7%, in the three months ended September 30,2009, when compared to the same period last year, due primarily to a reductionin rental costs, gaming taxes, parts costs and royalty expense.

 

*SystemsRevenue**.*Systems revenue increased$1.7 million, or 3%, to approximately $54.0 million in the three months ended September 30,2009 when compared to the same period last year primarily as a result of highermaintenance and service revenue as well as the continued acceptance of ourproducts, including our iVIEW player-communication network, BusinessIntelligence, SDS for Windows, and suite of bonusing products. Maintenance andservice revenue increased $1.2 and $0.6 million, respectively, in the threemonths ended September 30, 2009, when compared to the same period lastyear, as a result of the increased install base of customers on our systems.

 

*SystemsGross Margin.*Systems gross margin decreased to 67% in the threemonths ended September 30, 2009 from 68%, in the same period last year,primarily as a result of an increase in parts and freight expense associatedwith several large go-lives during the current quarter.

 

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*Selling,General and Administrative Expenses. *Selling, general and administrativeexpenses decreased $5.3 million, or 11%, in the three months ended September 30,2009, when compared to the same period last year, due primarily to decreases insalaries and related expenses, consulting fees and legal fees. The decrease insalaries and related expenses was primarily due to a decrease in commissionsand bonus expense with the reduction in revenue. The decrease in consultingexpense was due to a companywide initiative to reduce the amount of outsideconsulting work and convert individuals to full time positions only wherenecessary. The decrease in legal fees was due to a reduction in litigationduring the same period.

 

*Researchand Development Costs*. Research and development costs decreased$0.4 million, or 2%, in the three months ended September 30, 2009,when compared to the same period last year. The Company remains focused on itstechnology assets due to the competitive landscape that requires a continualinvestment in future generations of gaming products and systems.

 

*Depreciationand Amortization Expense*. Depreciation and amortization expenseincreased $0.7 million, or 17%, in the three months ended September 30,2009, when compared to same period last year, primarily as a result ofadditions of property and equipment and leased gaming equipment year over yearand certain core technology assets acquired late in the first quarter of fiscal2009 amortizing during the current period.

 

***Casino Operations***

 

OurRainbow Casino is one of five casinos currently operating in the Vicksburg,Mississippi market. Our casino draws customers primarily from within a 75-mileradius surrounding Vicksburg which includes Jackson, Mississippi. The summaryof our financial results and operating statistics for our Casino Operations isas follows:

 
| ** **                          | ** ** | **Three Months Ended September 30,** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                          | ** ** | **2009**                                                 | ** ** | **% Rev** | ** ** | **2008** | ** ** | **% Rev** | ** ** |
| ** **                          | ** ** | **(dollars in millions)**                      | ** ** |
| Revenue                             |       | $                                                        | 9.2        |   | 100 | % | $ | 10.0 |   | 100 | % |
|                                |       |                                                     |       |   |   |   |   |   |   |
| Selling, general and administrative |       | $                                                        | 1.8        |   | 20 | % | $ | 2.1 |   | 21 | % |
| Depreciation and amortization       |       | $                                                        | 1.0        |   | 11 | % | $ | 0.7 |   | 7 | % |
| Operating income                    |       | $                                                        | 2.5        |   | 27 | % | $ | 2.9 |   | 29 | % |
|                                |       |                                                     |       |   |   |   |   |   |   |
| Operating statistics:               |       |                                                     |       |   |   |   |   |   |   |
| Average number of gaming devices    |       | 805                                                      |       |   |   | 832 |   |   |   |
| Average number of table games       |       | 6                                                        |       |   |   | 10 |   |   |   |

 

**Three Months Ended September 30, 2009 Compared to Three MonthsEnded September 30, 2008**

 

*CasinoOperations. *Revenuedecreased by 8% for the three months ended September 30, 2009 whencompared to the same period last year due primarily to increased competition from the opening of acompetitor’s expansion project in the fourth quarter of fiscal 2008. Inaddition, a downturn in the economy reduced patronage during the quarter. The MississippiRiver counties reported a 10% decline in gaming revenues during the threemonths ended September 30, 2009, when compared to the same period lastyear. In addition, there was a 3% reduction in the average number of gamingdevices at our property and a 40% reduction in the average number of tablegames during the three months ended September 30, 2009, when compared tothe same period last year. The reduction in gaming devices was primarily due tothe removal of certain unprofitable games. The reduction in table games had aminimal effect on revenue because they were seldom opened due to lack ofdemand.

 

*Selling,General and Administrative Expenses*. Selling, general andadministrative expenses decreased by $0.3 million, or 14%, for the three monthsended September 30, 2009, when compared to the same period last year, dueprimarily to a decrease in advertising and promotional expenditures during theperiod.

 

*Depreciationand Amortization Expense*. Depreciation and amortization expenseincreased by $0.3 million, or 43%, for the three months ended September 30,2009, when compared to the same period last year, as a result of the increasein the number of newer slot machines deployed during the period.

 

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***Parent Company***

 

The summary financialresults of Bally Technologies, Inc., our parent entity, are set forthbelow. These results also include certain other income and expenses that areotherwise not allocated to a specific business segment.

 
| ** **                                                  | ** ** | **Three Months Ended September 30,** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                  | ** ** | **2009**                                                 | ** ** | **2008** | ** ** |
| ** **                                                  | ** ** | **(dollars in millions)**                      | ** ** |
| General and administrative                                  |       | $                                                        | 3.6        |   | $ | 8.2 |   |
| Depreciation and amortization                               |       | 0.0                                                      |       | 0.3 |   |
| Operating loss                                              |       | $                                                        | 3.6        |   | $ | 8.5 |   |
|                                                        |       |                                                     |       |   |   |
| Other income (expense)                                      |       |                                                     |       |   |   |
| Interest income                                             |       | $                                                        | 0.7        |   | $ | 1.2 |   |
| Interest expense                                            |       | (3.3                                                     | )          | (5.1 | ) |
| Other, net                                                  |       | 0.1                                                      |       | (2.6 | ) |
| Total other expense                                         |       | $                                                        | (2.5       | ) | $ | (6.5 | ) |
|                                                        |       |                                                     |       |   |   |
| Income tax expense                                          |       | $                                                        | (17.0      | ) | $ | (17.1 | ) |
| Net income (loss) attributable to noncontrolling  interests |       | $                                                        | 0.7        |   | $ | (0.5 | ) |

 

**ThreeMonths Ended September 30, 2009 Compared to Three Months Ended September 30,2008**

 

*Generaland Administrative Expenses.*General and administrativeexpenses decreased $4.6 million, or 56%, in the three months ended September 30,2009, when compared to the same period last year, primarily as a result of adecrease in accounting fees of $2.8 million and a decrease in legal fees of$1.7 million during the same period.

 

*OtherIncome (Expense).*Otherexpense decreased $4.0 million, or 62%, in the three months ended September 30,2009, when compared to the same period last year. Other expense decreasedprimarily due to the write-off of previously capitalized debt issuance costs of$0.8 million upon the financing of the Company’s new term loan and revolvingcredit facility in the prior year quarter and a decrease in losses incurred onforeign currency transactions as a result of the weakening U.S. dollar.Interest expense decreased $1.8 million primarily due to a reduction in boththe principal balance and the interest rate on the term loan which decreasedfrom 5.80% in three months ended September 30, 2008 to 4.64% in the sameperiod this year.

 

*IncomeTax Expense.*  The effective income tax rate for thethree months ended September 30, 2009 and 2008 was 35% and 36%,respectively. At the end of each interim period, we make our best estimate ofthe effective tax rate expected to be applicable for the full fiscal year andthe impact of discrete items, if any, and adjust the quarterly rate, asnecessary.

 

*Netincome (loss) attributable to noncontrolling interests.*Net income(loss) attributable to noncontrolling interests increased in the three months ended September 30,2009, when compared to the same period last year, due primarily to an increasein net earnings from certain noncontrolling interests.

 

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**FinancialCondition and Liquidity**

 

***Working Capital***

 
| ** **                                         | ** ** | **September 30,** | ** ** | **June 30,** | ** ** | **Increase (decrease)** | ** ** |
|----------------------------------------------------|------------|------------------------|------------|-------------------|------------|------------------------------|------------|
| ** **                                         | ** ** | **2009**               | ** ** | **2009**          | ** ** | **Amount**                   | ** ** | **%** | ** ** |
| ** **                                         | ** ** | **(in 000s)**     | ** ** |
| Cash and cash equivalents                          |       | $                      | 84,867     |              | $          | 64,598                       |       | $ | 20,269 |   | 31 | % |
|                                               |       |                   |       |              |       |                         |       |   |   |
| Total long-term debt, including current maturities |       | $                      | 202,851    |              | $          | 209,087                      |       | $ | (6,236 | ) | (3 | )% |
|                                               |       |                   |       |              |       |                         |       |   |   |
| Total current assets                               |       | $                      | 433,780    |              | $          | 423,639                      |       | $ | 10,141 |   | 2 | % |
| Total current liabilities                          |       | 171,867                |       | 178,050           |       | (6,183                       | )          | (3 | )% |
| Net working capital                                |       | $                      | 261,913    |              | $          | 245,589                      |       | $ | 16,324 |   | 7 | % |

 

As of September 30, 2009 and June 30,2009, we had $84.9 million and $64.6 million, respectively, in consolidatedcash and cash equivalents which included approximately $3.2 million and $3.1million, respectively, of cash utilized in our Casino Operations segment thatis held in vaults, cages or change banks. Pursuant to various state gamingregulations, certain cash accounts are maintained to ensure availability offunds to pay wide-area progressive jackpot awards in installments rather thanin one lump-sum. At September 30, 2009 and June 30, 2009, theseaccounts had an aggregate value of approximately $9.6 million and $9.1 million,respectively, which are classified as restricted cash in our unaudited condensedconsolidated balance sheets.  Inaddition, we purchase U.S. Treasury Strip Securities for the benefit of jackpotwinners who elect to receive winnings in annual or weekly installment payments.These securities are included in restricted long-term investments in theaccompanying unaudited condensed consolidated balance sheets, and totaled $12.7million and $12.1 million as of September 30, 2009 and June 30, 2009,respectively.

 

Ournet working capital increased $16.3 million in the three months ended September 30,2009, when compared to the same period last year, and was primarily affected bya $20.3 million increase in cash and cash equivalents (see *Cash FlowSummary)*and by the following components:

 

·                  A decrease of$16.4 million in prepaid and refundable income tax due to the receipt of arefund and the use of prepayments for the current quarter’s estimated tax; 

 

·                  An increase of$6.5 million in current accounts and notes receivable due primarily to certainnew systems contracts and international sales during the period;

 

·                  A decrease of$5.8 million in current deferred revenue, offset by a $2.8 milliondecrease in current deferred cost of revenue, due to the recognition ofpreviously deferred sales and related costs in accordance with our revenuerecognition policy;

 

·                  A decrease of$4.1 million in accounts payable and accrued liabilities due primarily toreductions in accounting and legal fees and inventory expenditures. Inventoryexpenditures have declined due to improved processes in managing cash,including the implementation of purchasing and inventory controls; and 

 

·                  An increase of$2.5 million in current maturities of long-term debt due primarily to theincrease in quarterly note payments from $6.25 million to $8.75 million beginning in December 2009, offsetby reductions in capital lease obligations which were paid in full in April 2009.

 

OnSeptember 29, 2008, we entered into a $225.0 million term loan and a$75.0 million revolving credit facility (collectively, the “CreditFacility”). We also have the option to request an increase in the size of theterm loan and/or revolving Credit Facility by up to $50.0 million in theaggregate provided that certain conditions are met. The proceeds from theCredit Facility and cash on hand of $14.6 million were used to repay thethen existing bank term loans totaling $289.6 million. The Company usedcash-on-hand to pay for transaction fees and expenses totaling$10.7 million which are being amortized over the term of the CreditFacility.

 

Asof September 30, 2009, there was approximately $75.0 million ofundrawn availability under the revolving credit facility. Availability underthe revolving credit facility is reduced to the extent of outstanding letters ofcredit.

 

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Theinterest rate on the Credit Facility is subject to a leverage based pricinggrid. If our leverage ratio, as defined under the Credit Facility, is greaterthan 1.5, the interest rate will be LIBOR plus a margin of 3.25%; if theleverage ratio is between 1.0 and 1.5, the interest rate will be LIBOR plus amargin of 3.00%; and if the leverage ratio is below 1.0, the interest rate willbe LIBOR plus a margin of 2.75%. In December 2008, we entered into afloating-to-fixed interest rate swap to fix the floating LIBOR based debt underthe term loan to fixed rate debt at an interest rate of 1.89% plus an applicablemargin (2.75%, as of September 30, 2009) for the remaining term.

 

Theterm loan requires quarterly principal reductions of $6.25 million duringthe first year, $8.75 million during the second year and$11.25 million during each of the third and fourth years of the agreement,with a balloon payment due at maturity in September 2012. The CreditFacility matures in September 2012. The Credit Facility is collateralizedby substantially all of our domestic property and is guaranteed by each of ourdomestic subsidiaries, excluding any noncontrolling interests, and is securedby a pledge agreement.

 

TheCredit Facility contains a number of covenants that, among other things,restrict our ability and certain of our subsidiaries to dispose of assets,incur additional indebtedness or issue preferred stock, pay dividends or makeother distributions, enter into certain acquisitions, repurchase equityinterests or subordinated indebtedness, issue or sell equity interests of oursubsidiaries, engage in mergers or acquisitions or certain transactions withsubsidiaries and affiliates, and that otherwise restrict corporate activities.

 

Thefinancial covenants under the Credit Facility consist of a leverage ratio and afixed charges coverage ratio. The leverage ratio is computed as total debtoutstanding at the end of the quarter divided by the trailing twelve monthsEarnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”),excluding certain cash and non-cash charges. The fixed charges coverage ratiois computed as EBITDA, adjusted for both the trailing twelve months capitalexpenditures and cash taxes paid, divided by the trailing twelve monthsinterest charges plus all payments of principal made during the previous twelvemonths. We were in compliance with all of the covenants under the CreditFacility as of September 30, 2009.

 

Management believes thatcash flows from current operating activities will provide us with sufficientcapital resources and liquidity to operate our business for at least the next12 months.

 

At September 30,2009, we had no material commitments for capital expenditures.

 

***Cash Flow Summary***

 

Cashflows from operating activities are derived primarily from our two businesssegments, the Bally Gaming Equipment and Systems segment and the Rainbow Casinooperating segment. The Bally Gaming Equipment and Systems segment consists ofthree primary cash flow sources: Gaming Equipment, which includes the sale ofgaming devices and related equipment, parts and conversion kits; Gaming Operations,which includes the operation of linked progressive systems, video lottery andcentrally determined systems and the rental of gaming devices and content; andSystems, which includes the sale and support of computerized monitoring systemsand related recurring hardware and software maintenance revenue. Cash flowsfrom Casino Operations are derived from the operation of the Rainbow Casino. Weutilize our cash to acquire materials for the manufacture of goods for resale,to pay payroll, interest, taxes and selling, general and administrativeexpenses and to fund research and development activities.

 

Ourprimary sources of liquidity include existing cash and cash equivalents, cashflows from operating activities and the availability of funds under ourrevolving credit facility. Cash flow from operating activities is net incomeadjusted for certain non-cash items and changes in operating assets andliabilities.

 

Cashflows provided by operating activities were $39.9 million in the threemonths ended September 30, 2009 as compared to $25.2 million in thesame period last year, a $14.7 million improvement primarily due to thepositive impact from a $13.6 million net increase in changes in operatingassets and liabilities during the same period. The net increase in changes inoperating assets and liabilities included a reduction in prepaid and refundableincome tax and income tax payable of $20.2 million for an income tax refund andthe use of prepaid taxes for our quarterly tax payment.

 

Cashutilized for investing activities is primarily for additions to property, plantand equipment for purchases of furniture, fixtures, office and gamingequipment, improvements in leaseholds and the manufacture of goods for lease orrental, as well as investments in technology assets. During the three monthsended September 30, 2009, we made capital expenditures of$3.5 million. In addition, we purchased $1.5 million in intangibleassets and advanced $5.0 million to a customer during the same period.

 

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Cashutilized for financing activities is primarily for the payment of capitalizeddebt financing fees and principal payments on our debt, as well as for the purchaseof shares of our common stock. We made payments of $6.3 million on ournotes payable during the three months ended September 30, 2009. We alsopurchased 392,151 shares of our common stock for $15.2 million under ourshare repurchase plan and paid employee payroll taxes of $0.2 million withthe swap of 4,575 shares of common stock during the same period.

 

Cashprovided by financing activities is primarily from proceeds from the exerciseof stock options and purchases of stock by employees under our Employee StockPurchase Plan (“ESPP”). During the three months ended September 30, 2009,employees exercised options for 722,587 shares of common stock for$9.2 million and purchased 13,114 shares of common stock for $0.4 millionunder our ESPP.

 

**Critical Accounting Policies**

 

Adescription of our critical accounting policies can be found in Item 7,Management’s Discussion and Analysis of Financial Condition and Results ofOperations in the 2009 10-K. With exception to revenue recognition which isdiscussed below, there were no material changes to those policies during thethree months ended September 30, 2009.

 

**Recently adopted accounting pronouncements — Revenuerecognition**

 

ASUNo. 2009-13 replaces and significantly changes the existing separation criteriafor multiple-deliverable revenue arrangements, by eliminating the criterion forobjective and reliable evidence of fair value for the undelivered products orservices to determine a unit of accounting. Instead, revenue arrangements withmultiple deliverables should be divided into separate units of accounting ifthe deliverables meet both of the following criteria:

 

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

·                  If the arrangement includesa general right of return relative to the delivered items, delivery orperformance of the undelivered items is considered probable and substantiallyin the control of the vendor.

 

ASUNo 2009-13 also eliminates the use of the residual method of allocation andrequires, instead, that arrangement consideration be allocated, at theinception of the arrangement, to all deliverables based on their relativeselling price (i.e., the relative selling price method). When applying therelative selling price method, a hierarchy is used for estimating the sellingprice based first on vendor-specific objective evidence (“VSOE”), thenthird-party evidence (“TPE”) and finally management’s estimate of the sellingprice (“ESP”).

 

ASUNo. 2009-14 amends the scope of software revenue recognition to exclude alltangible products containing both software and nonsoftware components thatfunction together to deliver the product’s essential funtionality. As a result,certain products that were previously accounted for under the scope of softwarerevenue recognition guidance will no longer be accounted for as software. Priorto July 1, 2009, we determined our gaming devices included software thatwas “more than incidental” to the product as a whole; accordingly, the sale ofgaming devices were accounted for under the scope of software revenuerecognition guidance. Application of the new guidance resulted in ourdetermination that gaming devices no longer fall under the scope of softwarerevenue recognition guidance. Under the new guidance, which applies to new ormodified arrangements, revenue related to systems arrangements that containsoftware and nonsoftware deliverables, will require an allocation of thearrangement fee to the separate deliverables using the relative selling pricemethod.  Revenue for the softwaredeliverables will continue to be recognized under the software revenuerecognition guidance, while revenue for the nonsoftware deliverables will nolonger be accounted for under the software revenue recognition guidance.

 

Theimpact of applying the new accounting guidance to new or materially modifiedarrangements entered into since July 1, 2009, did not have a materialeffect on revenue recognized for the three months ended September 30,2009. The impact on future periods is dependent upon the prevalence of multipledeliverable arrangements whereby a combination of gaming devices, hardware,software, maintenance and product support fees and consulting services are soldunder one arrangement and the software license is time-based. Under sucharrangements, all revenue was previously recognized ratably over the term ofthe time-based license as we were unable to establish VSOE of fair value forthe software maintenance and product support, which runs contemporaneously withthe license period. Under the new guidance, revenue from non-software elementsdelivered under such multiple deliverable arrangements will no longer bedeferred if VSOE of fair value does not exist for an undelivered element.Rather, the revenue allocated to the non-software elements using the relativeselling price method would be recognized upon delivery and customer acceptance,and only the revenue allocated to the software elements will be deferred andrecognized over the term of the time-based license.

 

Inallocating the arrangement fees to separate deliverables under the newaccounting guidance, we used VSOE of selling price for gaming devices,maintenance and professional services; a combination of TPE and ESP forhardware, and ESP for system software deliverables.  ESP for system software was determined basedupon our normal and discounting pricing practices.

 

**Other Recently Issued Accounting Pronouncements**

 

For a description ofother recently issued accounting pronouncements, see Note 1 to the unauditedcondensed consolidated financial statements, Summary of Significant AccountingPolicies.

 

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| **ITEM 3.** | **QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK** |
|-------------|----------------------------------------------------------------|

 

*Interest Rate Risk*

 

As of September 30, 2009, wehad total debt outstanding of approximately $202.9 million, consistingprimarily of $200.0 million outstanding under our term loan, $2.8 million inrelated party debt, and $0.1 million in other debt. See Note 4 to unauditedcondensed consolidated financial statements, *Long-TermDebt*. See “Item 3. Quantitative and Qualitative Disclosures AboutMarket Risk” in the 2009 10-K, to which there were no material changes duringthe period covered by this Quarterly Report on Form 10-Q.

 

*ForeignCurrency Exchange Rate Risk*

 

Ourforeign subsidiaries generally use their domestic currency as their functionalcurrency. A 10% fluctuation in the exchange rates of these currencies againstthe U.S. dollar would result in a corresponding change in earnings reported inthe consolidated group of approximately $0.3 million.

 

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| **ITEM 4.** | **CONTROLS AND PROCEDURES** |
|-------------|-----------------------------|

 

**Evaluation ofDisclosure Controls and Procedures**

 

As required by Rule 13a-15(b) promulgatedunder the Exchange Act, our management, with the participation of our ChiefExecutive Officer and Chief Financial Officer, evaluated the effectiveness ofthe design and operation of our disclosure controls and procedures, as definedin Exchange Act Rule 13a-15(e) and 15d-15(e) as of the end of theperiod covered by this report.

 

Basedon this evaluation our Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures were effective as of September 30,2009.

 

It should be noted that any system of controls,however well designed and operated, can provide only reasonable and notabsolute assurance that the objectives of the system will be met. In addition,the design of any control system is based in part upon certain assumptionsabout the likelihood of future events. Because of the inherent limitations inall control systems, no evaluation of controls can provide absolute assurancethat all control issues and instances of fraud, if any, have been detected orthat judgments in decision-making are not based on faulty input.

 

**Changes in Internal Control Over Financial Reporting duringthe Quarter Ended September 30, 2009**

 

Althoughwe update our internal controls as necessary to accommodate any modificationsto our business processes and accounting procedures as part of our normaloperations, there were no changes in our internal control over financialreporting that occurred in the three months ended September 30, 2009 thathave materially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**PART II**

 
| **ITEM 1.** | **LEGAL  PROCEEDINGS** |
|-------------|------------------------|

# ** **

For a description of ourlegal proceedings, see Note 9 to the unaudited condensed consolidated financialstatements, Commitments and Contingencies, which is incorporated by referencein response to this item.

 
| **ITEM 1A.** | **RISK FACTORS** |
|--------------|------------------|

 

The Company is subject to risks anduncertainties that could cause our actual results to differ materially from theexpectations expressed in the forward looking statements. Factors that couldcause our actual results to differ from expectations are described under “Item1A. Risk Factors” in the 2009 10-K, to which there were no materialchanges during the period covered by this Quarterly Report on Form 10-Q.

 
| **ITEM 2.** | **UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS** |
|-------------|------------------------------------------------------------------|

 

Our Board of Directorsapproved a share repurchase plan under which, subject to price and marketconditions, purchases of shares can be made from time to time in the open marketor in privately negotiated transactions using available cash. On August 12,2008, the Company’s Board of Directors reset the existing share repurchase planto purchase up to $100 million of common stock.  Our quarterly share repurchases under thisplan, excluding treasury shares acquired in non-cash transactions related toforfeited stock awards and shares exchanged for options exercised, were asfollows:

 
| **Period**                                            | ** ** | **Total  Number  of Shares  (or Units)  Purchased** | ** ** | **Average Price  Paid Per  Share  (Per Unit)** | ** ** | **Total Number of  Shares  (or Units) Purchased  as Part of Publicly  Announced  Plans or Programs** | ** ** | **Maximum Number  (or Approximate Dollar  Value)  of Shares (or Units)  That May Be Purchased  Under the Plans or Programs** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| July 1 - July 31, 2009            |       | —                                                        |       | —                                                        |       | —                                                                                                                                            |       | $                                                                                                                                                                                             | 61,724,603 |   |
| August 1 — August 31, 2009   |       | 19,200                                                        |       | 39.91                                                         |       | 19,200                                                                                                                                            |       | $                                                                                                                                                                                             | 60,958,333 |   |
| September 1 - September 30,  2009 |       | 372,951                                                       |       | $                                                             | 38.81      |                                                                                                                                              | 372,951    |                                                                                                                                                                                          | $          | 46,483,028 |   |
| Total                                                 |       | 392,151                                                       |       | $                                                             | 38.87      |                                                                                                                                              | 392,151    |                                                                                                                                                                                          |       |   |

 

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| **ITEM  6.** | **EXHIBITS** |
|--------------|--------------|

 
| **Exhibits** | ** ** | **Description**                                                                                                                                                 |
|--------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |       |                                                                                                                                                            |
| 31.1         |       | Certification  of Chief Executive Officer, pursuant to Rule 13a-14(a) of the  Securities Exchange Act of 1934, as amended.                            |
|         |       |                                                                                                                                                            |
| 31.2         |       | Certification  of Chief Financial Officer, pursuant to Rule 13a-14(a) of the  Securities Exchange Act of 1934, as amended.                            |
|         |       |                                                                                                                                                            |
| 32.1         |       | Certification  of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
|         |       |                                                                                                                                                            |
| 32.2         |       | Certification  of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
| BALLY  TECHNOLOGIES, INC. | Date:  November 4, 2009                                       |
|--------------------------------|--------------------------------------------------------------------|
|                           |                                                               |   |
|                           |                                                               |   |
| By                             | /s/Richard  Haddrill                                               |   |
|                           | Richard  Haddrill                                                  |   |
|                           | President  and Chief Executive Officer                             |   |
|                           | (Principal  Executive Officer)                                     |   |
|                           |                                                               |   |
|                           |                                                               |   |
| By                             | /s/Robert  C. Caller                                               |   |
|                           | Robert  C. Caller                                                  |   |
|                           | Executive  Vice President, Chief Financial Officer and   Treasurer |   |
|                           | (Principal  Financial Officer)                                     |   |

 

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