Edgar Filing: BALLY TECHNOLOGIES, INC.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2011

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

For the transition period from to

Commission File Number 001-31558

BALLY TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

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

6601 S. Bermuda Rd.

Las Vegas, Nevada 89119

(Address of principal executive offices)

(702) 584-7700

(Registrant’s telephone number, including area code)

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

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

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

Large Accelerated Filer x		Accelerated Filer o

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

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

The number of shares of Common Stock, $0.10 par value, outstanding as of May 3, 2011, was 53,072,000 which do not include 7,215,000 shares held in treasury.

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TABLE OF CONTENTS

		Page

PART I.	FINANCIAL INFORMATION	3

Item 1.	Financial Statements	3

	Unaudited Condensed Consolidated Balance Sheets as of March 31, 2011 and June 30, 2010	3

	Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2011 and 2010	4

	Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Nine Months Ended March 31, 2011 and 2010	5

	Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2011 and 2010	6

	Notes to Unaudited Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37

Item 4.	Controls and Procedures	38

PART II.	OTHER INFORMATION	39

Item 1.	Legal Proceedings	39

Item 1A.	Risk Factors	39

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 6.	Exhibits	40

SIGNATURES		41

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PART I

ITEM 1.

FINANCIAL STATEMENTS

BALLY TECHNOLOGIES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31, 2011			June 30, 2010
	(in 000s, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	77,872		$	145,089
Restricted cash	7,973			8,303
Accounts and notes receivable, net of allowances for doubtful accounts of $9,262 and $9,974	216,344			207,365
Inventories	64,511			42,806
Prepaid and refundable income tax	13,104			7,783
Deferred income tax assets	34,703			35,973
Deferred cost of revenue	13,638			14,568
Prepaid assets	11,616			11,172
Other current assets	6,196			3,350
Total current assets	445,957			476,409
Restricted long-term investments	11,603			13,075
Long-term accounts and notes receivable, net of allowances for doubtful accounts of $5,586 and $5,169	45,448			30,163
Property, plant and equipment, net of accumulated depreciation of $52,475 and $47,714	33,132			32,094
Leased gaming equipment, net of accumulated depreciation of $171,375 and $153,780	90,464			82,357
Goodwill	161,982			161,153
Intangible assets, net	36,361			34,048
Deferred income tax assets	25,464			29,980
Income tax receivable	8,519			8,688
Long-term deferred cost of revenue	25,054			30,958
Other assets, net	17,463			14,251
Total assets	$	901,447		$	913,176
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	32,551		$	23,775
Accrued and other liabilities	44,365			45,662
Customer deposits	5,231			10,185
Jackpot liabilities	11,190			11,531
Deferred revenue	33,255			33,875
Income tax payable	3,783			6,982
Current maturities of long-term debt	45,162			42,543
Total current liabilities	175,537			174,553
Long-term debt, net of current maturities	118,649			131,250
Long-term deferred revenue	33,325			40,236
Other income tax liability	9,252			13,646
Other liabilities	8,572			9,299
Total liabilities	345,335			368,984
Commitments and contingencies (Note 9)
Stockholders’ equity:
Special stock, 10,000,000 shares authorized: Series E, $100 liquidation value; 115 shares issued and outstanding	12			12
Common stock, $.10 par value; 100,000,000 shares authorized; 60,097,000 and 59,495,000 shares issued and 52,883,000 and 54,392,000 outstanding	5,993			5,943
Treasury stock at cost, 7,214,000 and 5,103,000 shares	(235,299		)	(157,053		)
Additional paid-in capital	409,691			392,853
Accumulated other comprehensive loss	(1,879		)	(3,044		)
Retained earnings	375,907			303,100
Total Bally Technologies, Inc. stockholders’ equity	554,425			541,811
Noncontrolling interests	1,687			2,381
Total stockholders’ equity	556,112			544,192
Total liabilities and stockholders’ equity	$	901,447		$	913,176

See accompanying notes to unaudited condensed consolidated financial statements.

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BALLY TECHNOLOGIES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended March 31,						Nine Months Ended March 31,
	2011			2010			2011			2010
	(in 000s, except per share amounts)
Revenues:
Gaming equipment and systems	$	110,909		$	120,917		$	308,136		$	373,333
Gaming operations	80,032			69,723			236,339			209,610
	190,941			190,640			544,475			582,943
Costs and expenses:
Cost of gaming equipment and systems (1)	47,275			46,590			127,262			150,765
Cost of gaming operations	20,906			19,865			65,820			59,854
Selling, general and administrative	57,562			52,545			164,361			151,462
Research and development costs	22,088			20,279			64,832			59,321
Impairment charges	—			11,379			—			11,379
Depreciation and amortization	5,208			4,910			14,579			14,442
	153,039			155,568			436,854			447,223
Operating income	37,902			35,072			107,621			135,720
Other income (expense):
Interest income	1,276			944			3,616			2,268
Interest expense	(2,855		)	(3,069		)	(8,885		)	(9,607		)
Other, net	1,106			(955		)	2,630			(1,897		)
Income from continuing operations before income taxes	37,429			31,992			104,982			126,484
Income tax expense	(13,651		)	(11,262		)	(32,283		)	(43,973		)
Income from continuing operations	23,778			20,730			72,699			82,511
Discontinued operations:
Income from discontinued operations, net of tax	—			2,363			—			5,542
Loss on disposal of discontinued operations, net of tax	—			—			(403		)	—
Income (loss) from discontinued operations, net of tax	—			2,363			(403		)	5,542
Net income	23,778			23,093			72,296			88,053
Less net income (loss) attributable to noncontrolling interests	12			534			(511		)	1,617
Net income attributable to Bally Technologies, Inc.	$	23,766		$	22,559		$	72,807		$	86,436
Basic earnings per share attributable to Bally Technologies, Inc.:
Income from continuing operations.	$	0.45		$	0.37		$	1.38		$	1.50
Discontinued operations.	—			0.04			—			0.09
Loss on sale of discontinued operations.	—			—			(0.01		)	—
Basic earnings per share	$	0.45		$	0.41		$	1.37		$	1.59

Diluted earnings per share attributable to Bally Technologies, Inc.:
Income from continuing operations	$	0.43		$	0.36		$	1.31		$	1.42
Discontinued operations	—			0.03			—			0.08
Loss on sale of discontinued operations	—			—			(0.01		)	—
Diluted earnings per share	$	0.43		$	0.39		$	1.30		$	1.50
Weighted average shares outstanding:
Basic	52,923			54,771			53,311			54,517
Diluted	55,527			57,716			55,849			57,715
Amounts attributable to Bally Technologies, Inc.:
Income from continuing operations, net of tax	$	23,766		$	20,577		$	73,210		$	81,778
Income from discontinued operations, net of tax	—			1,982			—			4,658
Loss on sale of discontinued operations, net of tax	—			—			(403		)	—
Net income	$	23,766		$	22,559		$	72,807		$	86,436

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

See accompanying notes to unaudited condensed consolidated financial statements.

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BALLY TECHNOLOGIES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED MARCH 31, 2011 AND 2010

	Common Stock			Series E Special		Treasury			Additional Paid-In			Accumulated Other Comprehensive Income (Loss)			Retained			Noncontrolling			Total Stockholders’
	Shares	Dollars		Stock		Stock			Capital			(“OCI”)			Earnings			Interests			Equity
	(in 000s)
Balances at June 30, 2009	57,091	$	5,703	$	12	$	(64,727	)	$	330,465		$	(770	)	$	165,623		$	2,443		$	438,749
Net income from continuing operations, net of tax	—	—		—		—			—			—			81,778			733			82,511
Net income from discontinued operations, net of tax	—	—		—		—			—			—			4,658			884			5,542
Foreign currency translation adjustment	—	—		—		—			—			846			—			—			846
Unrealized loss on derivative financial instruments, net of tax	—	—		—		—			—			(1,651		)	—			—			(1,651		)
Total comprehensive income	—	—		—		—			—			—			—			—			$	87,248
Distributions to noncontrolling interests	—	—		—		—			—			—			—			(1,298		)	(1,298		)
Issuance and receipt of restricted stock, ESPP shares, stock options and related tax and tax benefit	1,930	189		—		(524		)	37,713			—			—			—			37,378
Purchase of common stock for treasury	—	—		—		(44,219		)	—			—			—			—			(44,219		)
Shares issued upon exercise of warrants	39	1		—		—			(1		)	—			—			—			—
Share-based compensation		—		—		—			10,600			—			—			—			10,600
Balances at March 31, 2010	59,060	$	5,893	$	12	$	(109,470	)	$	378,777		$	(1,575	)	$	252,059		$	2,762		$	528,458

Balances at June 30, 2010	59,495	$	5,943	$	12	$	(157,053	)	$	392,853		$	(3,044	)	$	303,100		$	2,381		$	544,192
Net income from continuing operations, net of tax	—	—		—		—			—			—			73,210			(511		)	72,699
Loss on sale of discontinued operations, net of tax	—	—		—		—			—			—			(403		)	—			(403		)
Foreign currency translation adjustment	—	—		—		—			—			843			—			—			843
Unrealized gain on derivative financial instruments, net of tax	—	—		—		—			—			322			—			—			322
Total comprehensive income	—	—		—		—			—			—			—			—			$	73,461
Distributions to noncontrolling interests	—	—		—		—			—			—			—			(183		)	(183		)
Issuance and receipt of restricted stock, ESPP shares, stock options and related tax and tax benefit	602	50		—		(2,534		)	7,238			—			—			—			4,754
Purchase of common stock for treasury	—	—		—		(75,712		)	—			—			—			—			(75,712		)
Share-based compensation	—	—		—		—			9,600			—			—			—			9,600
Balances at March 31, 2011	60,097	$	5,993	$	12	$	(235,299	)	$	409,691		$	(1,879	)	$	375,907		$	1,687		$	556,112

See accompanying notes to unaudited condensed consolidated financial statements.

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BALLY TECHNOLOGIES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Nine Months Ended March 31,
	2011			2010
	(in 000s)
Cash flows from operating activities:
Net income	$	72,296		$	88,053
Adjustments to net income to net cash provided by operating activities:
Income from discontinued operations, net of tax	—			(5,542		)
Loss on sale of discontinued operations, net of tax	403			—
Impairment charges	—			11,379
Depreciation and amortization	55,483			55,438
Share-based compensation	9,600			10,502
Amortization of debt issuance costs	2,931			2,108
Income tax (benefit) expense	1,393			(8,023		)
Provision for doubtful accounts	4,361			2,781
Inventory write-downs	2,224			1,531
Excess tax benefit of stock option exercises	(1,578		)	(12,400		)
Other	(3,197		)	2,500
Changes in operating assets and liabilities:
Accounts and notes receivable	(22,828		)	(62,855		)
Inventories	(76,038		)	(22,734		)
Prepaid and refundable income tax and income tax payable	(7,862		)	19,429
Other current assets	(1,705		)	3,000
Accounts payable	8,576			2,323
Accrued liabilities, customer deposits and jackpot liabilities	(7,072		)	(7,909		)
Deferred revenue and deferred cost of revenue	(698		)	(9,723		)
Net cash provided by operating activities	36,289			69,858

Cash flows from investing activities:
Capital expenditures	(9,528		)	(6,792		)
Restricted cash and investments	1,802			1,657
Financing arrangements with customers	(9,940		)	(15,750		)
Additions to other long-term assets	(5,748		)	(4,784		)
Net cash used in investing activities	(23,414		)	(25,669		)

Cash flows from financing activities:
Proceeds from revolving credit facility	21,149			—
Capitalized debt issuance costs	(158		)	—
Reduction of long-term debt	(31,272		)	(26,578		)
Distributions to noncontrolling interests	(183		)	(535		)
Purchase of treasury stock	(78,246		)	(44,743		)
Excess tax benefit of stock option exercises	1,578			12,400
Proceeds from exercise of stock options and employee stock purchases	5,870			24,826
Net cash used in financing activities	(81,262		)	(34,630		)

Effect of exchange rate changes on cash	1,573			746

Net cash provided by (used in) operating activities of discontinued operations	(403		)	8,412
Net cash used in investing activities of discontinued operations	—			(718		)
Net cash used in financing activities of discontinued operations	—			(763		)
Decrease in cash and cash equivalents of discontinued operations	—			2,871
	(403		)	9,802
Cash and cash equivalents:
Increase (decrease) for period	(67,217		)	20,107
Balance, beginning of period	145,089			55,886
Balance, end of period	$	77,872		$	75,993

See accompanying notes to unaudited condensed consolidated financial statements.

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BALLY TECHNOLOGIES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED SUPPLEMENTAL CASH FLOW INFORMATION

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

	Nine Months Ended March 31,
	2011		2010
	(in 000s)
Cash paid for interest	$	8,879	$	9,226
Cash paid for income taxes, net of refunds	35,531		28,317

Non-cash investing and financing transactions:
Transfer of inventory to leased gaming equipment (1)	$	63,065	$	33,315
Reclassify property, plant and equipment to inventory (1)	12,847		3,947
Acquisition of Bally trademark	—		7,500
Accrual of capital expenditures	372		1,214

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

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BALLY TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Principles of presentation and consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), include all adjustments necessary to fairly present the Company’s consolidated financial position, results of operations and cash flows for each period presented. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to those rules and regulations. The results of operations for an interim period are not necessarily indicative of the results that may be expected for any other interim period or the year as a whole. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2010. References to specific U.S. GAAP within this report cite topics within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”).

All intercompany accounts and transactions have been eliminated in consolidation.

Discontinued Operations

The Company was the general partner of Rainbow Casino Vicksburg Partnership (“RCVP”), which operated the Rainbow Casino, a dockside riverboat casino in Vicksburg, Mississippi. On April 5, 2010, the Company entered into a definitive purchase agreement to sell the Rainbow Casino which closed on June 8, 2010. The Company’s Casino Operations have been classified as discontinued operations in the accompanying financial statements. See Note 3 to unaudited condensed consolidated financial statements, Discontinued Operations.

Use of estimates

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

Fair value of financial instruments

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

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

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

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

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

The Company transacts business in various foreign currencies and has international sales and expenses denominated in foreign currencies, subjecting the Company to foreign currency risk. The Company may enter into foreign currency forward contracts, generally with maturities of twelve months or less, to hedge recognized foreign currency assets and liabilities to reduce the risk that earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. The gains or losses resulting from changes in the fair value of these forward contracts, which are not designated as accounting hedges, are reported in other income (expense) in the unaudited condensed consolidated statements of operations, and generally offset the gains and losses associated with the underlying foreign-currency-denominated balances, which are also reported in other income (expense). As of March 31, 2011, total outstanding contracts were $13.7 million, or the notional equivalent of 10 million in Euro.

The Company may use interest rate derivatives to manage the interest expense generated by variable rate debt. The Company’s cash flow hedge related to a variable debt instrument and outstanding foreign currency derivatives used to hedge foreign currency balances are measured at fair value on a recurring basis, and the balances as of March 31, 2011 and June 30, 2010 (which is included in accrued and other liabilities in the unaudited condensed consolidated balance sheets) were as follows:

	Fair Value Measurements Using Input Type
	Level 1		Level 2		Level 3
	(in 000s)
As of March 31, 2011:
Liability:
Foreign currency derivative financing instrument	$	—	$	277	$	—
Interest rate derivative financial instrument	$	—	$	2,203	$	—

As of June 30, 2010:
Liability:
Interest rate derivative financial instrument	$	—	$	2,698	$	—

The valuation techniques used to measure the fair value of the derivative financial instruments above in which the counterparties have high credit ratings, were derived from pricing models, such as discounted cash flow techniques, with all significant inputs derived from or corroborated by observable market data. The Company’s discounted cash flow techniques use observable market inputs, such as LIBOR-based yield curves and foreign currency forward rates. See Note 5 to unaudited condensed consolidated financial statements, Long-Term Debt.

Accounting for Derivative Instruments and Hedging Activity

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

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The impact of the cash flow hedge and non-designated foreign currency derivatives on the consolidated financial statements is depicted below:

	Amount of Loss Recognized in OCI on Derivative (Effective Portion)							Amount of Loss Reclassified from Accumulated OCI into Income (Effective Portion)
	Three Months Ended			Nine Months Ended			Location of Loss Reclassified from Accumulated	Three Months Ended			Nine Months Ended
Derivative in Cash Flow Hedging Relationship	March 31, 2011			March 31, 2011			OCI into Income (Effective Portion)	March 31, 2011			March 31, 2011
	(in 000s)

Interest rate swap agreement	$	(152	)	$	(1,392	)	Interest expense	$	(610	)	$	(1,887	)

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

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

	Amount of Loss Recognized in Other Income (Expense)
	Three Months Ended			Nine Months Ended			Three Months Ended		Nine Months Ended
Non-Designated Derivative	March 31, 2011			March 31, 2011			March 31, 2010		March 31, 2010

Foreign Currency Forward Contract	$	(277	)	$	(277	)	$	—	$	—

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

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

Trade receivables with contract terms greater than one year relate to the sale of gaming equipment and, to a lesser extent, systems transactions that include software as a major component of the sale, and are generally collateralized by the related equipment sold, although the value of such equipment, if repossessed, may be less than the receivable balance outstanding. Sales-type leasing arrangements relate to gaming equipment and include options to purchase the equipment at the end of the lease term at established prices. These customers typically have a long-standing credit history with the Company. Revenue from these lease arrangements is less than 2% of total year-to-date revenue for the Company.

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

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

The Company has one portfolio segment, the casino industry customer, and four classes of receivables including its trade receivables with a contract term less than one year, trade receivables with a contract term greater than one year, sales-type leasing arrangements, or lease receivables, and notes receivable, which are primarily for developmental financing loans. As of March 31, 2011, the Company’s accounts and notes receivable and related allowances were as follows:

	Accounts and Notes Receivable as of March 31, 2011
	Ending Balance		Ending Balance Individually Evaluated for Impairment	Ending Balance Collectively Evaluated for Impairment
	(in 000s)
Contract term less than one year:
Trade receivables, current	$	143,032	1,481	141,551

Contract term greater than one year:
Trade receivables, current	70,068		2,955	67,113
Trade receivables, noncurrent	18,446		—	18,446
	88,514		2,955	85,559

Lease receivables, current	9,339		9,339	—
Lease receivables, noncurrent	13,735		13,735	—
	23,074		23,074	—

Notes receivable, current	3,167		3,167	—
Notes receivable, noncurrent	18,853		18,853	—
	22,020		22,020	—

Total current	225,606		16,942	208,664
Total noncurrent	51,034		32,588	18,446
Total	$	276,640	49,530	227,110

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	Allowance for Doubtful Accounts
	Beginning Balance as of December 31, 2010			Charge- offs		Recoveries		Provision			Ending Balance as of March 31, 2011			Ending Balance Individually Evaluated for Impairment			Ending Balance Collectively Evaluated for Impairment
	(in 000s)
Contract term less than one year:
Trade receivables, current	$	(5,857	)	$	1,448	$	145	$	(877	)	$	(5,141	)	$	(1,481	)	$	(3,660	)

Contract term greater than one year:
Trade receivables, current	(3,329		)	945		53		(1,790		)	(4,121		)	(2,955		)	(1,166		)
Trade receivables, noncurrent	(498		)	81		—		—			(417		)	—			(417		)
	(3,827		)	1,026		53		(1,790		)	(4,538		)	(2,955		)	(1,583		)

Lease receivables, current	—			—		—		—			—			—			—
Lease receivables, noncurrent	—			—		—		—			—			—			—
	—			—		—		—			—			—			—

Notes receivable, current	—			—		—		—			—			—			—
Notes receivable, noncurrent	(5,169		)	—		—		—			(5,169		)	(5,169		)	—
	(5,169		)	—		—		—			(5,169		)	(5,169		)	—

Total current	(9,186		)	2,393		198		(2,667		)	(9,262		)	(4,436		)	(4,826		)
Total noncurrent	(5,667		)	81		—		—			(5,586		)	(5,169		)	(417		)
Total	$	(14,853	)	$	2,474	$	198	$	(2,667	)	$	(14,848	)	$	(9,605	)	$	(5,243	)

The Company accrues interest, if applicable, on its receivables per the terms of the agreement. Interest is not accrued on delinquent accounts that the Company has determined and specifically identified as not collectible. The Company’s recorded investment in receivables on nonaccrual status as of March 31, 2011, excluding trade accounts receivable with a contract term less than one year, is as follows:

	Total

Trade receivables	$	2,955
Lease receivables	—
Notes receivables	5,169
Total	$	8,124

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

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The following summarizes the aging of past due receivables, excluding trade accounts receivable with a contract term less than one year, as of March 31, 2011:

	1 to 90 Days Past Due		91 to 180 Days Past Due		181 + Days Past Due		Total Past Due		Current		Total Receivable		Recorded Investment 90 Days and Accruing

Trade receivables	$	9,559	$	3,523	$	4,043	$	17,125	$	71,389	$	88,514	$	—
Lease receivables	—		—		—		—		23,074		23,074		—
Notes receivable	380		371		1,081		1,832		20,188		22,020		—
Total	$	9,939	$	3,894	$	5,124	$	18,957	$	114,651	$	133,608	$	—

The Company’s notes receivable are reviewed quarterly, at a minimum, for impairment. The customer’s solvency, collection experience, legal and regulatory environment and other financial information may indicate that the loan is impaired. As of March 31, 2011, the only Company loan that was impaired was to a customer in Alabama. In fiscal 2010, the legality of the charitable bingo market in Alabama was questioned and several operators in the region closed and the Company recognized an impairment charge on the notes receivable. No further interest is accrued once a loan is impaired. The Company’s only impaired loan as of March 31, 2011 relates to one note with an allowance recorded, as follows:

	Impaired Loans as of March 31, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance			Average Recorded Investment		Interest Income Recognized
Note Receivable	$	5,169	$	5,000	$	(5,169	)	$	5,169	$	169

Inventories

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

	March 31, 2011		June 30, 2010
	(in 000s)
Raw materials	$	48,298	$	34,221
Work-in-process	2,191		1,101
Finished goods	14,022		7,484
Total	$	64,511	$	42,806

Revenue recognition

Our revenue recognition policy is to record revenue when all of the following criteria have been satisfied:

· Persuasive evidence of an arrangement exists;

· The price or fee to the customer is fixed or determinable;

· Collectability is reasonably assured;

· Delivery has occurred; and

· No significant contractual obligations remain.

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Revenues are reported net of incentive rebates, discounts, sales taxes, and other taxes of a similar nature. For products sold under arrangements with extended payment terms the probability of collection is evaluated based on a review of the customer’s credit worthiness and a review of historic collection experience on contracts with extended payment terms. As a result of such review, the Company recognizes revenue on extended payment term arrangements as the Company has determined that collectability is reasonably assured and the fees are fixed and determinable.

Games placed with customers on a trial basis are not recognized as revenue until the trial period ends, the customer accepts the games and all other relevant criteria have been met. Amounts billed to customers prior to completing the earnings process are deferred until the revenue recognition criteria are met.

Effective July 1, 2009, the Company adopted new accounting guidance related to revenue recognition for multiple deliverable arrangements and certain revenue arrangements that include software elements. The Company elected to adopt this guidance prior to the required effective date using the prospective method. Accordingly, this guidance was applied to all new or materially modified revenue arrangements entered into since the start of the Company’s fiscal year of adoption, which was July 1, 2009.

Prior to the adoption of the new revenue recognition guidance, gaming equipment and systems revenue was recognized in accordance with software revenue recognition guidance. The new guidance amended the scope of software revenue recognition to exclude all tangible products containing both software and nonsoftware components that function together to deliver the product’s essential functionality. As a result of applying the new guidance, certain products that were previously accounted for under the scope of software revenue recognition guidance are no longer accounted for as software.

Gaming Operations Revenue. Gaming operations revenue consists of the operation of linked progressive systems and the rental of gaming devices, game content and the related systems placed with customers. Fees under these arrangements are earned and recognized based on a share of money wagered, a share of the net winnings, or on a fixed daily rate. The daily fee entitles the customer to full use of the gaming device and includes maintenance, licensing of the game content software and connection to a linked progressive system, where applicable. In certain markets, the Company also charges a daily system connection fee for the customer to connect to a central determination system and/or back-office system. The Company does not consider these arrangements to have multiple revenue-generating activities as the services offered are a comprehensive solution in exchange for a daily fee and all of the products and services are delivered contemporaneously. Gaming operations revenue is recognized under general revenue recognition guidance as the deliverables provide the customer with rights to use tangible gaming devices and software that is essential to the functionality of the gaming device.

Gaming Equipment Revenue. Gaming Equipment revenue is generated from the sale of gaming devices and licensing rights to game content software that is installed in the gaming device, parts, and other ancillary equipment. Arrangements may also include sales of game content conversion kits which enable customers to replace game content without purchasing a new gaming device. Gaming equipment arrangements do not include maintenance and product support fees beyond a standard warranty period. The recognition of revenue from the sale of gaming devices occurs as title and risk of loss have passed to the customer and all other criteria have been satisfied.

As the combination of game content software and the tangible gaming device function together to deliver the product’s essential functionality, revenue from the sale of gaming devices is recognized under general revenue recognition guidance. Prior to July 1, 2009, gaming devices were recognized under software revenue recognition guidance. Game content conversion kits are considered software deliverables and are recognized in accordance with software revenue recognition guidance.

Systems Revenue. Systems revenue arrangements generally include a combination of systems software licenses, systems-based hardware products, maintenance and product support fees and professional services. The primary function of systems software licensed by the Company is to aid customers to more effectively run their business with marketing, data management and analysis, accounting, player tracking and security features.

Revenue for systems software and maintenance and product support fees is recognized under software revenue recognition guidance. Although the systems software and certain systems-based hardware function together, the primary functionality of the systems software is derived from the software and the systems software is not essential to the functionality of the systems-based hardware.

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The Company licenses systems software on a perpetual basis or under time-based licenses. Revenue from perpetual license software is recognized at the inception of the license term if all revenue recognition criteria have been met. The Company’s time-based licenses are generally for twelve month terms and are bundled with software maintenance and product support fees. Revenue from time-based software licenses is recognized over the term of the license.

Systems-based hardware includes embedded software that is essential to the functionality of the hardware. Accordingly, revenue related to all systems-based hardware sales and related maintenance and product support fees are recognized under general revenue recognition guidance. Prior to July 1, 2009, systems-based hardware was recognized under software revenue recognition guidance. Revenue from the sale of systems-based hardware is generally recognized upon delivery when title and risk of loss have passed to the customer and all other revenue recognition criteria are met. However, in the case of arrangements involving a systems installation, revenue on the systems-based hardware is generally not recognized until the system has been installed and the customer has accepted the system.

Software maintenance and product support provides customers with rights to unspecified software product upgrades, maintenance and patches released during the term of the support period. Software maintenance and product support is recognized on a straight-line basis over the term of the support period.

Multiple Element Arrangements. The Company enters into revenue arrangements that may consist of multiple deliverables of its products and services. Customers may enter into arrangements with the Company for the implementation of systems software and the sale of gaming devices. Arrangements for the implementation of systems software will generally include a combination of systems software licenses, systems-based hardware products, maintenance and product support fees, and professional services. Certain gaming equipment arrangements may also include the sale of gaming devices and game conversion kits. Revenue arrangements with multiple deliverables are allocated to separate units of accounting if the deliverables meet both of the following criteria:

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

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

At the inception of a multiple element arrangement, fees under the arrangement are allocated to all units of accounting based on their relative selling price. When applying the relative selling price method, a hierarchy is used for estimating the selling price based first on vendor-specific objective evidence (“VSOE”), then third-party evidence (“TPE”) and finally management’s estimate of the selling price (“ESP”). Revenue for each unit of accounting is recognized when the relevant recognition criteria for each respective element has been met.

The establishment of VSOE requires judgment as to whether there is a sufficient quantity of items sold on a stand-alone basis and whether the prices demonstrate an appropriate level of concentration to conclude that VSOE exists. In determining ESP, management considers a variety of information including historic pricing and discounting practices, competitive market activity, internal costs, and the pricing and discounting practices of products sold in bundled arrangements.

In allocating arrangement fees to separate units of accounting, the Company uses VSOE for all products which have been sold on a stand-alone basis. As TPE is generally not available, the Company uses ESP for products that are not sold on a stand-alone basis and for recently introduced products that are sold on a stand-alone basis but for which a history of stand-alone sales has not yet been developed. Following these guidelines, the Company uses either VSOE or ESP for gaming devices, system-based hardware products, maintenance and product support fees associated with perpetual licenses and professional services; and ESP for perpetual and time-based software licenses and maintenance and product support fees associated with time-based licenses.

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Other recently adopted accounting pronouncements

In July 2010, the FASB issued new accounting guidance to address concerns about the credit quality of financing receivables and the related allowance for credit losses. The guidance is intended to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. The new disclosures included information at disaggregated levels, including the nature of the credit risk and how it is analyzed in arriving at the allowance for credit losses, a roll-forward schedule of and reasons for changes in the allowance, credit quality indicators, aging of past due accounts, the nature and extent of modifications, and significant purchases or sales. The Company adopted the new guidance as of December 31, 2010.

Recently issued accounting pronouncements not yet adopted

In April 2010, the FASB issued new accounting guidance related to accruals for casino jackpot liabilities. Specifically, the guidance clarifies that an entity should not accrue jackpot liabilities, or portions thereof, before a jackpot is won if the entity can avoid paying the jackpot. Jackpots should be accrued and charged to revenue when an entity has the obligation to pay the jackpot. The guidance applies to both base and progressive jackpots. The new guidance is effective for fiscal years beginning on or after December 15, 2010. The new guidance will be applied by recording a cumulative-effect adjustment to opening retained earnings in the period of adoption. The Company expects to adopt the guidance in fiscal year 2012 and does not expect the guidance to have a significant impact on its consolidated results of operations, financial position and cash flows. The only expected impact will be on the cumulative-effect adjustment to the opening retained earnings balance.

In April 2011, the FASB issued new accounting guidance related to troubled debt restructuring. The guidance clarifies which loan modifications constitute troubled debt restructurings to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosures of troubled debt restructurings. The new guidance is effective for interim and annual periods beginning on or after June 15, 2011. The Company expects to adopt the guidance in fiscal year 2012 and its initial impact, if any, is expected to only be in its disclosures of troubled debt restructurings.

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2. EARNINGS PER SHARE

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

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

	Three Months Ended March 31,				Nine Months Ended March 31,
	2011		2010		2011			2010
	(in 000s, except per share amounts)
Amounts attributable to Bally Technologies, Inc.:
Income from continuing operations, net of tax	$	23,766	$	20,577	$	73,210		$	81,778
Income from discontinued operations, net of tax	—		1,982		—			4,658
Loss on sale of discontinued operations, net of tax	—		—		(403		)	—
Net income	$	23,766	$	22,559	$	72,807		$	86,436
After tax interest expense on convertible debt	—		—		—			14
Diluted earnings	$	23,766	$	22,559	$	72,807		$	86,450

Weighted average common shares outstanding	52,923		54,771		53,311			54,517
Dilutive effect of:
Stock options, Restricted Stock Units (“RSU”) and restricted stock	2,602		2,942		2,536			3,152
Warrants	2		3		2			17
Convertible debt (1)	—		—		—			29
Weighted average diluted shares outstanding	55,527		57,716		55,849			57,715

Basic earnings per share attributable to Bally Technologies, Inc.
Income from continuing operations	$	0.45	$	0.37	$	1.38		$	1.50
Income from discontinued operations	—		0.04		—			0.09
Loss on sale of discontinued operations	—		—		(0.01		)	—
Basic earnings per share	$	0.45	$	0.41	$	1.37		$	1.59

Diluted earnings per share attributable to Bally Technologies, Inc.
Income from continuing operations	$	0.43	$	0.36	$	1.31		$	1.42
Income from discontinued operations	—		0.03		—			0.08
Loss on sale of discontinued operations	—		—		(0.01		)	—
Diluted earnings per share	$	0.43	$	0.39	$	1.30		$	1.50

(1) The Company has certain related party debt outstanding which was convertible into common stock at the Company’s discretion. The related party debt was paid in full in December 2009.

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

	Three Months Ended March 31,		Nine Months Ended March 31,
	2011	2010	2011	2010
	(in 000s)
Stock options, RSU and restricted stock	624	426	644	349

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3. DISCONTINUED OPERATIONS

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

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

	Three Months Ended March 31,			Nine Months Ended March 31,
	2010			2010
	(in 000s)
Revenues:
Casino operations	$	10,372		$	28,027
Costs and expenses:
Direct cost of casino operations	3,937			11,426
Selling, general and administrative	1,773			5,355
Depreciation and amortization	928			2,873
	6,638			19,654
Operating income	3,734			8,373

Other income (expense):
Interest income	1			7
Other, net	(304		)	(330		)

Income from discontinued operations before income taxes	3.431			8,050
Income tax expense	(1,068		)	(2,508		)
Income from discontinued operations	2,363			5,542
Less income attributable to noncontrolling interests	381			884

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

Per the terms of the sale agreement, the Company had certain post-closing adjustments during the three months ended September 30, 2010 which reduced its gain on the sale of the Rainbow Casino in fiscal 2010 by approximately $0.4 million, net of income taxes.

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4. GOODWILL AND INTANGIBLE ASSETS

Intangible assets consist of the following:

		March 31, 2011							June 30, 2010
	Useful Life (Years)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
	(dollars in 000s)
Computer software	3 - 9	$	36,328	$	(31,150	)	$	5,178	$	35,652	$	(28,395	)	$	7,257
License rights	3 - 5	4,398		(2,644		)	1,754		3,624		(2,048		)	1,576
Trademarks	5	2,203		(2,203		)	—		2,203		(2,023		)	180
Core technology	5 - 8	22,763		(13,167		)	9,596		22,763		(10,346		)	12,417
Contracts	10	15,013		(7,121		)	7,892		10,836		(6,421		)	4,415
Other intangibles	3 - 7	5,460		(1,019		)	4,441		1,702		(999		)	703
Total finite lived intangible assets		$	86,165	$	(57,304	)	$	28,861	$	76,780	$	(50,232	)	$	26,548
Trademark	indefinite	7,500		—			7,500		7,500		—			7,500
Total		$	93,665	$	(57,304	)	$	36,361	$	84,280	$	(50,232	)	$	34,048

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

Total amortization expense related to finite lived intangible assets was $2.1 million and $2.6 million for the three months ended March 31, 2011 and 2010, respectively, which included computer software amortization expense of $0.7 million and $0.9 million for the three months ended March 31, 2011 and 2010, respectively. Total amortization expense related to finite lived intangible assets was $7.2 million and $7.6 million for the nine months ended March 31, 2011 and 2010, respectively, which included computer software amortization expense of $2.7 million and $3.2 million for the nine months ended March 31, 2011 and 2010, respectively.

Future amortization of finite lived intangible assets is scheduled as follows:

Year Ended June 30,	(in 000s)
2010 (remaining three months of fiscal year)	$	4,369
2011	10,025
2012	8,889
2013	2,888
2014	679
Thereafter	2,011
Total	$	28,861

All goodwill is associated with continuing operations. The changes in the carrying amount of goodwill for the nine months ended March 31, 2011, are as follows:

	(in 000s)
Balance at June 30, 2010	$	161,153
Foreign currency translation adjustment	829
Balance at March 31, 2011	$	161,982

No impairment charges for goodwill and intangible assets were necessary for the three and nine months ended March 31, 2011 and 2010.

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5. LONG-TERM DEBT

Long-term debt consists of the following:

	March 31,			June 30,
	2011			2010
	(in 000s)
Revolving credit facility	$	21,149		$	—
Term loan facility	142,500			173,750
Other, generally unsecured	162			43
Long-term debt	163,811			173,793
Less current maturities	(45,162		)	(42,543		)
Long-term debt, net of current maturities	$	118,649		$	131,250

As of March 31, 2011, the Company had a $225.0 million term loan and a $150.0 million revolving credit facility, of which $75.0 million matures in September 2012 and $75.0 million matures in March 2014 (collectively, the “Credit Facility”). On April 15, 2011, the Company entered into an amended and restated credit agreement (see Note 11 to the unaudited condensed consolidated financial statements, Subsequent Events).

During the nine months ended March 31, 2011, the Company borrowed $21.1 million (EURO converted into U.S. dollars) under the revolving credit facility. As of March 31, 2011, there was approximately $128.9 million of undrawn availability under the revolving credit facility. Availability under the revolving credit facility is reduced to the extent of borrowings, net of repayments, and outstanding letters of credit.

The interest rate on the Credit Facility is subject to a leverage-based pricing grid. If the leverage ratio, as defined under the Credit Facility, is greater than 2.5, the interest rate will be LIBOR plus a margin of 3.25%; if the leverage ratio is between 2.0 and 2.5, the interest rate will be LIBOR plus a margin of 3.00%; if the leverage ratio is between 1.5 and 2.0, the interest rate will be LIBOR plus a margin of 2.75%; if the leverage ratio is between 1.0 and 1.5, the interest rate will be LIBOR plus a margin of 2.50%; and if the leverage ratio is below 1.0, the interest rate will be LIBOR plus a margin of 2.25%. As of March 31, 2011 and June 30, 2010, the Company’s leverage ratio was below 1.0.

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

The fair value of long-term debt is estimated by discounting expected cash flows using current interest rates at which similar loans would be made to borrowers with similar credit ratings and remaining maturities. As of March 31, 2011 and June 30, 2010, the fair value of long-term debt approximated the carrying value.

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

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

A breach of any of the covenants or the inability to comply with the required financial ratios could result in a default under the Credit Facility. In the event of any such default, the lenders could elect to declare all borrowings outstanding under the Credit Facility, together with any accrued interest and other fees, to be due and payable. If the Company were unable to repay the indebtedness upon its acceleration, the lenders could proceed against the underlying collateral. The Company was in compliance with all of the Credit Facility covenants as of March 31, 2011.

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Interest Rate Swap Agreement

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

The Company has documented and designated this interest rate swap as a cash flow hedge. Based on the assessment of effectiveness using statistical regression, the Company determined that the interest rate swap is effective. Effectiveness testing of the hedge relationship and measurement to quantify ineffectiveness is performed each fiscal quarter using the hypothetical derivative method. As the interest rate swap qualifies as a cash flow hedge, the Company adjusts the cash flow hedge on a quarterly basis to its fair value with a corresponding offset to accumulated OCI. The interest rate swap has been and is expected to remain highly effective for the life of the hedge. Effective amounts are reclassified to interest expense as the related hedged expense is incurred. Any ineffectiveness is reclassified from accumulated other comprehensive income to other income (expense). As of March 31, 2011, the Company had no ineffectiveness on its cash flow hedge. Amounts related to the swap expected to be reclassified from other comprehensive income to interest expense in the next twelve months total $1.9 million.

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