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EX-32.1 - EXHIBIT 32.1 - ALION SCIENCE & TECHNOLOGY CORP | c94941exv32w1.htm |
EX-31.2 - EXHIBIT 31.2 - ALION SCIENCE & TECHNOLOGY CORP | c94941exv31w2.htm |
EX-32.2 - EXHIBIT 32.2 - ALION SCIENCE & TECHNOLOGY CORP | c94941exv32w2.htm |
EX-31.1 - EXHIBIT 31.1 - ALION SCIENCE & TECHNOLOGY CORP | c94941exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2009.
COMMISSION
FILE NUMBER 333-89756
Alion Science and Technology Corporation
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE (State or Other Jurisdiction of Incorporation of Organization) |
54-2061691 (I.R.S. Employer Identification No.) |
1750 Tysons Boulevard, Suite 1300
McLean, VA 22102
(703) 918-4480
McLean, VA 22102
(703) 918-4480
(Address, including Zip Code and Telephone Number with
Area Code, of Principal Executive Offices)
Area Code, of Principal Executive Offices)
(Former name, former address and former fiscal year, if changed since last report)
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. o Yes þ 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 (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large Accelerated Filer o | Accelerated Filer o | Non-Accelerated Filer þ | 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). Yes o No þ
The number of shares outstanding of Alion Science and Technology Corporation
Common Stock as of January 26, 2009, was: Common Stock 5,423,529
ALION SCIENCE AND TECHNOLOGY CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2009
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2009
PART I FINANCIAL INFORMATION |
||||||||
3 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
32 | ||||||||
48 | ||||||||
49 | ||||||||
49 | ||||||||
PART II OTHER INFORMATION |
||||||||
50 | ||||||||
50 | ||||||||
50 | ||||||||
50 | ||||||||
50 | ||||||||
50 | ||||||||
51 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
2
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
ALION SCIENCE AND TECHNOLOGY CORPORATION
Condensed Consolidated Balance Sheets (unaudited)
As of December 31, 2009 and September 30, 2009
December 31, | September 30, | |||||||
2009 | 2009 | |||||||
(In thousands, except share | ||||||||
and per share information) | ||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | | $ | 11,185 | ||||
Accounts receivable, net |
185,144 | 180,157 | ||||||
Prepaid expenses and other current assets |
4,616 | 3,795 | ||||||
Total current assets |
189,760 | 195,137 | ||||||
Property, plant and equipment, net |
13,881 | 14,474 | ||||||
Intangible assets, net |
25,864 | 28,680 | ||||||
Goodwill |
398,921 | 398,921 | ||||||
Other assets |
10,620 | 10,286 | ||||||
Total assets |
$ | 639,046 | $ | 647,498 | ||||
Current liabilities: |
||||||||
Book cash overdraft |
$ | 5,074 | $ | | ||||
Interest payable |
15,419 | 9,039 | ||||||
Current portion, senior term loan payable |
2,389 | 2,389 | ||||||
Current portion of subordinated note payable |
6,000 | 3,000 | ||||||
Current portion, acquisition obligations |
| 50 | ||||||
Trade accounts payable |
49,188 | 60,707 | ||||||
Accrued liabilities |
53,066 | 45,425 | ||||||
Accrued payroll and related liabilities |
35,014 | 43,033 | ||||||
Billings in excess of revenue earned |
3,438 | 3,661 | ||||||
Total current liabilities |
169,588 | 167,304 | ||||||
Senior term loan payable, excluding current portion |
226,969 | 229,221 | ||||||
Senior unsecured notes |
245,462 | 245,241 | ||||||
Subordinated note payable |
45,715 | 46,932 | ||||||
Accrued compensation, excluding current portion |
6,058 | 5,740 | ||||||
Accrued postretirement benefit obligations |
729 | 717 | ||||||
Non-current portion of lease obligations |
7,594 | 7,286 | ||||||
Redeemable common stock warrants |
32,557 | 32,717 | ||||||
Commitments and contingencies |
| | ||||||
Redeemable common stock, $0.01 par value, 8,000,000 shares
authorized, 5,423,529 and 5,424,274 shares issued and outstanding at December 31, 2009 and September 30,
2009 |
187,112 | 187,137 | ||||||
Accumulated other comprehensive loss |
(238 | ) | (238 | ) | ||||
Accumulated deficit |
(282,500 | ) | (274,559 | ) | ||||
Total liabilities, redeemable common stock and accumulated deficit |
$ | 639,046 | $ | 647,498 | ||||
See accompanying notes to condensed consolidated financial statements.
3
Table of Contents
ALION SCIENCE AND TECHNOLOGY CORPORATION
Condensed Consolidated Statements of Operations (unaudited)
Quarter Ended December 31, | ||||||||
2009 | 2008 | |||||||
(In thousands, except share | ||||||||
and per share information) | ||||||||
Contract revenue |
$ | 205,738 | $ | 188,796 | ||||
Direct contract expense |
158,996 | 145,322 | ||||||
Gross profit |
46,742 | 43,474 | ||||||
Operating expenses: |
||||||||
Indirect contract expense |
9,286 | 9,124 | ||||||
Research and development |
261 | 69 | ||||||
General and administrative |
16,007 | 10,173 | ||||||
Rental and occupancy expense |
7,986 | 7,738 | ||||||
Depreciation and amortization |
4,231 | 4,806 | ||||||
Total operating expenses |
37,771 | 31,910 | ||||||
Operating income |
8,971 | 11,564 | ||||||
Other income (expense): |
||||||||
Interest income |
45 | 23 | ||||||
Interest expense |
(16,886 | ) | (14,088 | ) | ||||
Other |
(111 | ) | (35 | ) | ||||
Total other expenses |
(16,952 | ) | (14,100 | ) | ||||
Loss before income taxes |
(7,981 | ) | (2,536 | ) | ||||
Income tax benefit (expense) |
40 | (4 | ) | |||||
Net loss |
$ | (7,941 | ) | $ | (2,540 | ) | ||
Basic and diluted loss per share |
(1.46 | ) | (0.49 | ) | ||||
Basic and diluted weighted average common shares outstanding |
5,424,031 | 5,229,523 | ||||||
See accompanying notes to condensed consolidated financial statements.
4
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ALION SCIENCE AND TECHNOLOGY CORPORATION
Condensed Consolidated Statements of Cash Flows (unaudited)
Quarter Ended December 31, | ||||||||
2009 | 2008 | |||||||
(In thousands) | ||||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (7,941 | ) | $ | (2,540 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation and amortization |
4,231 | 4,806 | ||||||
Bad debt expense |
| 253 | ||||||
Loss on disposal of assets |
19 | | ||||||
Accretion of debt to face value |
606 | 590 | ||||||
Amortization of debt issuance costs |
966 | 683 | ||||||
Change in fair value of redeemable common stock warrants |
(160 | ) | (1,454 | ) | ||||
Incentive and stock-based compensation |
605 | (4,603 | ) | |||||
Loss on interest rate hedging agreements |
| 18 | ||||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
(4,988 | ) | (6,319 | ) | ||||
Other assets |
(536 | ) | (188 | ) | ||||
Trade accounts payable |
(11,400 | ) | (5,719 | ) | ||||
Accrued liabilities |
(750 | ) | (1,197 | ) | ||||
Interest payable |
6,381 | 8,162 | ||||||
Other liabilities |
1,333 | 2,219 | ||||||
Net cash used in operating activities |
(11,634 | ) | (5,289 | ) | ||||
Cash flows from investing activities: |
||||||||
Cash paid for acquisitions-related obligations |
(50 | ) | (166 | ) | ||||
Capital expenditures |
(814 | ) | (407 | ) | ||||
Net cash used in investing activities |
(864 | ) | (573 | ) | ||||
Cash flows from financing activities: |
||||||||
Change in book overdraft |
5,074 | | ||||||
Payment of debt issuance costs |
(3,127 | ) | | |||||
Cash paid under interest rate swap |
| (4,647 | ) | |||||
Payment of senior term loan principal |
(608 | ) | (608 | ) | ||||
Payment of subordinated note principal |
| (3,000 | ) | |||||
Revolver borrowings |
15,900 | 97,600 | ||||||
Revolver payments |
(15,900 | ) | (97,600 | ) | ||||
Redeemable common stock purchased from ESOP Trust |
(26 | ) | (9 | ) | ||||
Redeemable common stock sold to ESOP Trust |
| 2,669 | ||||||
Net cash provided (used in) by financing activities |
1,313 | (5,595 | ) | |||||
Net decrease in cash and cash equivalents |
(11,185 | ) | (11,457 | ) | ||||
Cash and cash equivalents at beginning of period |
11,185 | 16,287 | ||||||
Cash and cash equivalents at end of period |
$ | | $ | 4,830 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid for interest |
$ | 7,916 | $ | 4,282 | ||||
Cash (received) paid for taxes |
$ | (40 | ) | $ | 4 |
See accompanying notes to condensed consolidated financial statements.
5
Table of Contents
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
(1) Description and Formation of the Business
Alion Science and Technology Corporation and its subsidiaries (collectively, the Company or
Alion) provide scientific, engineering and information technology expertise to research and develop
technological solutions for problems relating to national defense, homeland security, and energy
and environmental analysis. Alion provides services to departments and agencies of the federal
government and, to a lesser extent, to commercial and international customers.
Alion is a for-profit S-Corporation formed in October 2001 to purchase substantially all of
the assets and certain liabilities of IIT Research Institute (IITRI), a not-for-profit corporation
controlled by Illinois Institute of Technology (IIT). In December 2002, Alion acquired
substantially all of IITRIs assets and liabilities except for its Life Sciences Operation, for
$127.3 million. Prior to that, the Companys activities were organizational in nature.
(2) Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of
Alion Science and Technology Corporation (a Delaware corporation), and its wholly-owned
subsidiaries and have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and note disclosures normally included
in the annual financial statements, prepared in accordance with generally accepted accounting
principles, have been omitted pursuant to those rules and regulations, although the Company
believes that the disclosures made are adequate to make the information presented not misleading.
The statements are prepared on the accrual basis of accounting and include the accounts of Alion
and its wholly-owned subsidiaries from their date of acquisition or formation. All inter-company
accounts have been eliminated in consolidation. There were no changes to Alions subsidiaries in
the current fiscal year.
In the opinion of management, the accompanying unaudited condensed consolidated financial
statements reflect all adjustments and reclassifications that are necessary for fair presentation
of the periods presented. The results for the three months ended December 31, 2009 are not
necessarily indicative of the results to be expected for the full fiscal year. These unaudited
condensed consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and the notes thereto included in the Companys latest annual
report on Form 10-K for the year ended September 30, 2009.
The Company has evaluated material events and transactions that have occurred after the
balance sheet date and concluded that no subsequent events have occurred through January 26, 2010,
that require adjustment to or disclosure in this Form 10-Q.
Fiscal, Quarter and Interim Periods
Alions fiscal year ends on September 30. The Company operates based on a three-month quarter,
four-quarter fiscal year with quarters ending December 31, March 31, June 30, and September 30.
Use of Estimates
Preparing financial statements in conformity with accounting principles generally accepted in
the United States of America requires management to make estimates and assumptions that affect
amounts reported for assets and liabilities, disclosures of contingent assets and liabilities as of
financial statement dates and amounts reported for operating results for each period presented.
Actual results are likely to differ from those estimates, but the Companys management does not
believe such differences will materially affect Alions financial position, results of operations,
or cash flows.
Revenue Recognition
Alion derives its revenue from delivering technology services under a variety of contracts.
Some contracts provide for reimbursement of costs plus fees; others are fixed-price or
time-and-material type contracts. The Company generally recognizes revenue when a contract has been
executed, the contract price is fixed or determinable, delivery of services or products has
occurred and collectibility of the contract price is considered reasonably assured.
6
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
Alion recognizes revenue on cost-reimbursement contracts as it incurs costs and includes
estimated fees earned. The Company recognizes time-and-material contract revenue at negotiated,
fixed, contractually billable rates as it delivers labor hours and incurs other direct expenses.
Alion uses various performance measures under the percentage of completion method to recognize
revenue for fixed-price contracts. Estimating contract costs at completion and recognizing revenue
appropriately involve significant management estimates. Actual costs may differ from estimated
costs and affect estimated profitability and timing of revenue recognition. From time to time,
facts develop that require Alion to revise estimated total costs or expected revenue. Alion records
the cumulative effect of revised estimates in the period in which the facts requiring revised
estimates become known. Alion recognizes the full amount of anticipated losses on any type of
contract in the period in which a loss becomes known. For each of the periods presented, the
cumulative effects of revised estimates were immaterial to the Companys financial performance.
Contracts with agencies of the federal government are subject to periodic funding by the
contracting agency concerned. A contract may be fully funded at its inception or ratably throughout
its period of performance as services are provided. If the Company determines contract funding is
not probable, it defers revenue recognition until realization is probable. Federal government
contract costs are subject to federal government audit and adjustment through negotiations with
government representatives. The government considers Alion a major contractor and maintains an
office on site to perform various audits. The government has audited the Companys claimed costs
through fiscal year 2004. Indirect rates have been negotiated and settled through fiscal year 2004.
Settlement had no material adverse effect on the Companys results of operations or cash flows.
DCAA is currently auditing the Companys indirect cost proposals for fiscal 2005 and 2006. The
Company submitted its fiscal year 2008 and 2007 indirect cost proposals in March 2009 and 2008 and
expects to submit its 2009 proposal in March 2010. The Company has recorded revenue on federal
government contracts in amounts it expects to realize.
Alion recognizes revenue on unpriced change orders as it incurs expenses and only to the
extent it is probable it will recover such costs. The Company recognizes revenue in excess of costs
on unpriced change orders only when management can also estimate beyond a reasonable doubt the
amount of excess and experience provides a sufficient basis for recognition. Alion recognizes
revenue on claims as expenses are incurred only to the extent it is probable that it will recover
such costs and can reliably estimate the amount it will recover.
The Company generates software-related revenue from licensing software and providing services.
In general, professional services are essential to the functionality of the solution sold and the
Company recognizes revenue by applying the percentage of completion method in accordance with ASC
605- Revenue Recognition.
Income Taxes
Alion is an S-corporation under the provisions of the Internal Revenue Code of 1986, as
amended. For federal and certain state income tax purposes, the Company is not subject to tax on
its income. Alions income is allocated to its shareholder, the Alion Science and Technology
Corporation Employee Stock Ownership, Savings and Investment Trust
(the ESOP Trust). Alion may be
subject to state income taxes in those states that do not recognize S corporations. The Company is
subject to franchise and business taxes. All of Alions wholly-owned operating subsidiaries are
qualified subchapter S or disregarded entities which are included in the Companys consolidated
federal income tax returns. Alions Canadian subsidiary is subject to income taxation in Canada at
the federal and provincial level.
Cash and Cash Equivalents
The Company considers cash in banks, and deposits with financial institutions with maturities
of three months or less at time of purchase which it can liquidate without prior notice or penalty,
to be cash and cash equivalents.
Accounts Receivable and Billings in Excess of Revenue Earned
Accounts
receivable include billed accounts receivable, amounts currently
billable and revenue in excess of billings on uncompleted contracts that represent accumulated
project expenses and fees which have not been billed or are not currently billable as of the date
of the consolidated balance sheet. Revenue in excess of billings on
uncompleted contracts is stated at estimated realizable value. Unbilled accounts receivable
include revenue recognized for customer-related work performed by Alion on new and existing
contracts for which the Company had not received contracts or contract modifications. The allowance
for doubtful accounts is Alions best estimate of the amount of probable losses in the Companys
existing billed and unbilled accounts receivable. The Company determines the allowance using
specific identification and historical write-off experience based on age of receivables. Billings
in excess of revenue
and advance collections from customers represent amounts received from or billed to customers in
excess of project revenue recognized to date.
7
Table of Contents
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
Property, Plant and Equipment
Leasehold improvements, software and equipment are recorded at cost. Maintenance and repairs
that do not add significant value or significantly lengthen an assets useful life are charged to
current operations. Software and equipment are depreciated on the straight-line method over their
estimated useful lives (typically 3 years for software and 5 years for equipment). Leasehold
improvements are amortized on the straight-line method over the shorter of the assets estimated
useful life or the life of the lease. Upon sale or retirement of an asset, costs and related
accumulated depreciation are deducted from the accounts, and any gain or loss is recognized in the
consolidated statements of operations.
Goodwill and Intangible Assets
Alion assigns the purchase price it pays to acquire the stock or assets of an entity to the
net assets acquired based on the estimated fair value of the assets acquired. Goodwill is the
purchase price in excess of the estimated fair value of the tangible net assets and separately
identified intangible assets acquired. Purchase price allocations for acquisitions involve
significant estimates and management judgments may be adjusted during the purchase price allocation
period. There are no acquisitions with open measurement periods.
The Company accounts for goodwill and other intangible assets in accordance with the
provisions of ASC 350- Intangibles, Goodwill and Other Assets. Alion is required to review goodwill
at least annually for impairment or, more frequently if events and circumstances indicate goodwill
might be impaired. The Company performs its annual review at the end of each fiscal year. Alion is
required to recognize an impairment loss to the extent that its goodwill carrying amount exceeds
fair value. Evaluating any impairment to goodwill involves significant management estimates. To
date, these annual reviews have resulted in no adjustments.
The Company operates in one segment and tests goodwill at the reporting unit level.
Management has identified three reporting units for the purpose of testing goodwill for impairment.
The reporting units are based on administrative organizational structure and the availability of
discrete financial information. Each reporting unit provides a similar range of scientific,
engineering and analytical services to departments and agencies of the U.S. government and
commercial customers. The Company employs a reasonable, supportable and consistent method to
assign goodwill to reporting units expected to benefit from the synergies arising from
acquisitions. Alion determines reporting unit goodwill in a manner similar to the way it
determines goodwill in a purchase allocation by using fair value to determine reporting unit
purchase price, assets, liabilities and goodwill. Reporting unit residual fair value after this
allocation is the implied fair value of reporting unit goodwill. The Companys reporting units
remained consistent in structure for all periods presented. The Company allocated changes in
goodwill carrying value to reporting units based on acquisitions attributable to each units
current structure.
The Company performs its own independent analysis to determine whether goodwill is potentially
impaired. The Company performs discounted cash flow and market-multiple-based analyses to estimate
the enterprise fair value of Alion and its reporting units and the fair value of reporting unit
goodwill in order to test goodwill for potential impairment. Management independently determines
the rates and assumptions it uses to perform its goodwill impairment analysis and assesses the
probability of future contracts and revenue and to evaluate the recoverability of goodwill.
Alions cash flow analysis depends on several significant management inputs and assumptions.
Management uses observable inputs, rates and assumptions generally consistent with those used by
the independent third party to prepare the valuation report for the ESOP Trustee. Managements cash
flow analysis includes the following significant inputs and assumptions: estimated future revenue
and revenue growth; estimated future operating margins and EBITDA; observable market multiples for
comparable companies; and a discount rate consistent with a market-based weighted average cost of
capital. Management includes EBITDA in its analysis in order to use publicly available valuation
data.
8
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
In the Companys most recent impairment testing, market multiples for trailing twelve month
EBITDA for comparable companies (publicly traded professional services government contractors)
ranged from a low of 9.0 to a high of 12.7, with a median value of 10.4. Market multiples for
trailing twelve month revenue ranged from a low of 0.76 to a high of 1.22, with a median value of
0.99. Management used median market multiples and a weighted average cost of capital rate of 12.5%
derived from market-based inputs, the tax-effected interest cost of Alions outstanding debt and a
hypothetical market participant capital structure. Management estimates future years EBITDA based
on Alions historical adjusted EBITDA as a percentage of revenue. Management estimated future
revenue would grow 7%-10% annually. Prior year market multiples for
trailing twelve month EBITDA for comparable professional services government contractors
ranged from a low of 9.4 to a high of 16.7, with a median value of 12.4. Prior year market
multiples for trailing twelve month revenue ranged from a low of 0.72 to a high of 1.75, with a
median value of 1.02. The prior year weighted average cost of capital rate was 12.0% derived from
market-based inputs, the tax-effected interest cost of Alions outstanding debt and a hypothetical
market participant capital structure. There were no changes to the
methods used in prior periods to evaluate
goodwill. Changes in one or more inputs could materially alter the calculation of
Alions enterprise fair value and thus the Companys determination of whether its goodwill is
potentially impaired. A hypothetical 10% increase or decrease in the weighted average cost of
capital rate at September 30, 2009 would have produced a corresponding approximate 5% decrease or
increase in estimated enterprise value. At September 30, 2009, market-multiple based enterprise
value exceeded discounted cash flow enterprise value by approximately 7%.
Management reviews the Companys internally computed enterprise fair value to confirm the
reasonableness of the Companys analysis and compares the results of its independent analysis with
the results of the independent third party valuation report prepared for the ESOP Trustee.
Management compares each reporting units carrying amount to its estimated fair value. If a
reporting units carrying value exceeds its estimated fair value, the Company compares the
reporting units goodwill carrying amount with the corresponding implied fair value of its
goodwill. If the carrying amount of reporting unit goodwill exceeds its fair value, the Company
recognizes an impairment loss to the extent that the carrying amount of goodwill exceeds implied
fair value.
Alion completed its most recent goodwill impairment analysis in the fourth quarter of fiscal
year 2009 and concluded no goodwill impairment existed as of September 30, 2009. The estimated
fair value of each reporting unit substantially exceeded its September 2009 carrying value. A
hypothetical 10% decrease in fair value would not have resulted in impairment to goodwill for any
reporting unit or triggered the need to perform additional step two analyses for any reporting
unit. There were no changes to goodwill in the quarter ended December 31, 2009 nor were there any
significant events in the quarter that indicated impairment to goodwill as of December 31, 2009.
Alion amortizes intangible assets as economic benefits are consumed over estimated useful
lives. As of December 31, 2009, the Company had a recorded net intangible asset balance of
approximately $25.9 million, composed primarily of purchased contracts from the JJMA and Anteon
contract acquisitions. The Company amortizes intangible assets as it consumes the economic
benefits over the assets estimated useful lives.
Purchased contracts |
1 13 years | |
Internal use software and engineering designs |
2 3 years | |
Non-compete agreements |
3 6 years |
Redeemable Common Stock
There is no public market for Alions common stock and therefore no observable price for its
equity, individually or in the aggregate. The ESOP Trust holds all the Companys outstanding
common stock. Under certain circumstances, ESOP beneficiaries can require the ESOP Trust to
distribute the value of their beneficial interests. The ESOP Trustee can distribute cash or shares
of Alion common stock. The Internal Revenue Code (IRC) and ERISA require the Company to offer ESOP participants who
receive Alion common stock a liquidity put right which requires the Company to purchase distributed
shares at fair market value. Eventual redemption of shares of Alion common stock is outside the
Companys control; therefore, Alion classifies its outstanding shares of redeemable common stock as
a liability.
At each reporting date Alion is required to increase or decrease the reported value of its
outstanding common stock to reflect its estimated redemption value. Management estimates the value
of this liability in part by considering the most recent price at which the Company was able to
sell shares to the ESOP Trust (current share price times total shares issued and outstanding). In
its fiduciary capacity the ESOP Trustee is independent of the Company and its management.
Consistent with its fiduciary responsibilities, the ESOP Trustee retains an independent third party
valuation firm to assist it in determining the fair market value (share price) at which the Trustee
may acquire or dispose of investments in Alion common stock. The Audit and Finance Committee of
Alions Board of Directors reviews the reasonableness of the liability Management has determined is
appropriate for the Company to recognize in its financial statements for outstanding redeemable
common stock. The Audit and Finance Committee considers various factors in its review, including,
in part, the most recent valuation report and the share price selected by the ESOP Trustee.
Alion records changes in the reported value of its outstanding common stock through an
offsetting charge or credit to accumulated deficit. There were no fair value adjustments to
redeemable common stock in the current quarter. The
accumulated deficit at December 31, 2009 included $90.2 million for changes in the Companys
share redemption liability. Outstanding redeemable common stock had an aggregate fair value of
approximately $187.1 million as of December 31, 2009.
9
Table of Contents
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
Concentration of Credit Risk
Alion is subject to credit risk for its cash equivalents and accounts receivable. The Company
believes the high credit quality of its cash equivalent investments limits its credit risk with
respect to such investments. Alion believes its concentration of credit risk with respect to
accounts receivable is limited as the receivables are principally due from the federal government.
Fair Value of Financial Instruments
The Company used the following methods and assumptions to estimate the fair value of each
class of financial instruments for which it is practicable to estimate fair value. For each of the
following items, the fair value is not materially different than the carrying value.
Cash, cash equivalents, accounts payable and accounts receivable. Carrying amounts approximate
fair value because of the short maturity of those instruments.
Senior long-term debt. The carrying amount of the Companys senior debt approximates fair
value, estimated based on current rates offered to the Company for debt of the same remaining
maturities, and reflects amounts Alion is contractually required to pay.
Subordinated notes and redeemable common stock warrants. Alion uses an option pricing model to
estimate the fair value of its redeemable common stock warrants. In estimating the Companys
aggregate redeemable common stock warrant liability, Management considers factors such as risk free
interest rates, share price volatility of comparable publicly traded companies, information in the
valuation report prepared for and the share price selected by the ESOP Trustee. The only market
for the Companys subordinated debt consists of principal to principal transactions. Alion carries
the subordinated notes at amortized cost.
Redeemable Alion common stock. Management estimates the fair value price per share of Alion
common stock by considering in part the most recent price at which the Company was able to sell
shares to the ESOP Trust as well as information contained in the most recent valuation report that
an independent, third-party firm prepares for the ESOP Trustee.
Recently Issued Accounting Pronouncements
Accounting Standards Update 2009-13 Revenue Recognition Multiple Deliverable Revenue
Arrangements (ASU 2009-13) was issued in October 2009 and updates Accounting Standards Codification
(ASC) 605 Revenue Recognition. ASU 2009-13 removes the
objective-and-reliable-evidence-of-fair-value criterion from the separation criteria used to
determine whether an arrangement involving multiple deliverables contains more than one unit of
accounting; replaces references to fair value with selling price to distinguish from the fair
value measurements required under the Fair Value Measurements and Disclosures guidance; provides
a hierarchy that entities must use to estimate the selling price; eliminates the use of the
residual method for allocation; and expands the ongoing disclosure requirements. ASU 2009-13 is
effective for fiscal years beginning on or after June 15, 2010, and can be applied prospectively or
retrospectively. The Company is currently evaluating the effect, if any, that adopting ASU 2009-13
will have on its consolidated financial position and results of operations.
Accounting Standards Update 2009-14 Certain Revenue Arrangements That Include Software
Elements (ASU 2009-14) was issued in October 2009 and updates ASC 985 Software Revenue
Recognition. ASU 2009-14 clarifies which accounting guidance should be used to measure and
allocate revenue for arrangements that contain both tangible products and software, where the
software is more than incidental to the tangible product as a whole. ASU 2009-14 is effective for
fiscal years beginning on or after June 15, 2010 and applies to arrangements entered into or
materially modified on or after that date. The Company is currently evaluating the effect, if any,
that adopting ASU 2009-14 will have on its consolidated financial position and results of
operations.
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
(3) Employee Stock Ownership Plan (ESOP) and ESOP Trust
In December 2001, the Company adopted the Alion Science and Technology Corporation Employee
Ownership, Savings and Investment Plan (the Plan) and the ESOP Trust. The Plan, a tax qualified
retirement plan, includes ESOP and non-ESOP components. In August 2005, the Internal Revenue
Service (IRS) issued a determination letter that the ESOP Trust and the Plan, as amended through
the Plans Ninth Amendment, qualify under Sections 401(a) and 501(a) of the Internal Revenue Code
of 1986 as amended (the IRC). In January 2007, Alion amended and restated the Plan effective as of
October 1, 2006, and filed a determination letter request with the IRS. In July and September
2007, the Company adopted the first and second amendments to the amended and restated Plan. In
August 2008, Alion amended the Trust Agreement between the Company and the ESOP Trust. Alion
believes that the Plan and the ESOP Trust have been designed and are being operated in compliance
with the applicable IRC requirements.
(4) Earnings (Loss) Per Share
Basic and diluted earnings (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding excluding the impact of warrants as this
impact would be anti-dilutive for all periods presented. The Company had 1,630,437 warrants
outstanding for 2010 and 2009.
(5) Redeemable Common Stock Owned by ESOP Trust
The ESOP Trust owns all of the Companys issued and outstanding common stock, for the benefit
of current and former employee participants in the Alion KSOP. Participants and beneficiaries are
entitled to a distribution of the fair value of their vested ESOP account balance upon death,
disability, retirement or termination of employment. The Plan permits distributions to be paid
over a five year period commencing the year after a participants retirement at age 65, death or
disability. Alion can delay distributions to other terminating participants for five years before
commencing payment over a subsequent five year period.
The Company can choose whether to distribute cash or shares of Alion common stock. If Alion
distributes common stock to a participant or beneficiary, the IRC and ERISA require that it provide
a put option to permit a recipient to sell the stock to the Company at the estimated fair value
price per share based on the most recent price at which the Company was able to sell shares to the
ESOP Trust ($34.50 at September 30, 2009). Consistent with its duty of independence from Alion
Management and its fiduciary responsibilities, the ESOP Trustee retains an independent third party
valuation firm to assist it in determining the fair market value (share price) at which the Trustee
may acquire or dispose of investments in Alion common stock. The Audit and Finance Committee of
Alions Board of Directors reviews the reasonableness of the liability for outstanding redeemable
common stock that Management has determined is appropriate for the Company to recognize in its
financial statements. The Audit and Finance Committee considers various factors in its review,
including in part, the valuation report and the share price selected by the ESOP Trustee.
Management considers the share price selected by the ESOP Trustee along with other factors, to
assist in estimating Alions aggregate liability for outstanding redeemable common stock owned by
the ESOP Trust. Certain participants who beneficially acquired shares of Alion common stock on
December 20, 2002, have the right to sell such shares distributed from their accounts at the
greater of the then current estimated fair value per share or the original $10.00 purchase price.
Although the Company and the ESOP retain the right to delay distributions consistent with the
terms of the Plan, and to control the circumstances of future distributions, eventual redemption of
shares of Alion common stock is deemed to be outside the Companys control.
The Company makes 401(k) matching contributions in shares of Alion common stock and
discretionary profit-sharing contributions in a combination of Alion common stock and cash. The
Company matches the first 3% and one-half of the next 2% of eligible employee salary deferrals by
contributing shares of Alion common stock to the ESOP Trust on March 31 and September 30 each year.
The Company also makes a profit sharing contribution of Alion common stock to the ESOP Trust on
the same dates equal to 1% of eligible employee compensation. Each pay period the Company makes a
cash contribution to the non-ESOP component of the KSOP equal to 1.5% of eligible employee
compensation. Alion recognized $3.4 million in compensation expense for the KSOP this quarter and
$3.3 million for the first quarter of 2009.
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
(6) Accounts Receivable
Accounts receivable at December 31, 2009 and September 30, 2009 consisted of the following:
December 31, | September 30, | |||||||
2009 | 2009 | |||||||
(In thousands) | ||||||||
Billed receivables |
$ | 105,043 | $ | 108,566 | ||||
Unbilled receivables: |
||||||||
Amounts currently billable |
35,240 | 22,954 | ||||||
Revenues recorded in excess of milestone billings on fixed price
contracts |
3,380 | 3,757 | ||||||
Revenues recorded in excess of estimated contract value or funding |
32,259 | 36,327 | ||||||
Retainages and other amounts billable upon contract completion |
13,218 | 12,972 | ||||||
Allowance for doubtful accounts |
(3,996 | ) | (4,419 | ) | ||||
Total Accounts Receivable |
$ | 185,144 | $ | 180,157 | ||||
Revenue recorded in excess of milestone billings on fixed price contracts is not yet
contractually billable. Amounts currently billable consist principally of amounts to be billed
within the next year. Any remaining unbilled balance including retainage is billable upon contract
completion or completion of Defense Contract Audit Agency audits. Revenue recorded in excess of
contract value or funding is billable upon receipt of contractual amendments or other
modifications. Contract revenue recognized in excess of billings totaled approximately $84.1
million as of December 31, 2009 and included approximately $32.3 million for customer-requested
work for which the Company had not received contracts or contract modifications. In keeping with
industry practice, Alion classifies all contract-related accounts receivable as current assets
based on contractual operating cycles which frequently exceed one year. Unbilled receivables are
expected to be billed and collected within one year except for $13.2 million at December 31, 2009.
(7) Property, Plant and Equipment
December 31, | September 30, | |||||||
2009 | 2009 | |||||||
(In thousands) | ||||||||
Leasehold improvements |
$ | 10,208 | $ | 10,214 | ||||
Equipment and software |
33,564 | 32,807 | ||||||
Total cost |
43,771 | 43,021 | ||||||
Less: accumulated depreciation and amortization |
(29,890 | ) | (28,547 | ) | ||||
Net Property, Plant and Equipment |
$ | 13,881 | $ | 14,474 | ||||
Depreciation and leasehold amortization expense for fixed assets was approximately $1.4
million for the quarters ended December 31, 2009 and 2008.
(8) Goodwill and Intangible Assets
As of December 31, 2009, Alion had approximately $398.9 million in goodwill. There were no
changes in the goodwill carrying amount during the current quarter.
Intangible assets consist primarily of contracts acquired through the Anteon and JJMA
transactions. The table below shows intangible assets as of December 31, 2009 and September 30,
2009.
December 31, 2009 | September 30, 2009 | |||||||||||||||||||||||
Accumulated | Accumulated | |||||||||||||||||||||||
Gross | Amortization | Net | Gross | Amortization | Net | |||||||||||||||||||
Purchased contracts |
$ | 111,635 | $ | (86,276 | ) | $ | 25,359 | $ | 111,635 | $ | (83,563 | ) | $ | 28,072 | ||||||||||
Internal use software
and engineering
designs |
2,155 | (1,665 | ) | 490 | 2,155 | (1,568 | ) | 587 | ||||||||||||||||
Non-compete agreements |
725 | (710 | ) | 15 | 725 | (704 | ) | 21 | ||||||||||||||||
Total |
$ | 114,515 | $ | (88,651 | ) | $ | 25,864 | $ | 114,515 | $ | (85,835 | ) | $ | 28,680 | ||||||||||
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
The weighted-average remaining amortization period of intangible assets was approximately six
years at December 31, 2009 and September 30, 2009. Amortization expense was approximately $2.8
million and $3.4 million for the quarters
ended December 31, 2009 and 2008. Estimated aggregate amortization expense for the next five
years and thereafter is as follows.
(In thousands) | ||||
For the remaining nine months: |
||||
2010 |
$ | 8,169 | ||
For the year ending September 30: |
||||
2011 |
6,843 | |||
2012 |
5,766 | |||
2013 |
3,246 | |||
2014 |
879 | |||
2015 |
737 | |||
Thereafter |
224 | |||
$ | 25,864 | |||
(9) Long-Term Debt
Term B Senior Credit Agreement
Alion entered into various debt agreements (Senior Credit Agreement, Mezzanine Note, and
Subordinated Note) on December 20, 2002 to fund its acquisition of substantially all of IITRIs
assets. In August 2004, Alion entered into a Term B senior secured credit facility (the Term B
Senior Credit Agreement) with a syndicate of financial institutions for which Credit Suisse serves
as arranger, administrative agent and collateral agent, and for which Bank of America serves as
syndication agent. The following amendments were made to the Term B Senior Credit Agreement since
August 2004.
| In April 2005, the first amendment made certain changes and added $72.0 million in senior term loans to the total Term B Senior Credit Agreement debt. |
| In March 2006, the second amendment made certain changes, increased the senior term loan commitment by $68.0 million (drawn in full) and increased the revolving credit (Revolver) commitment from $30.0 million to $50.0 million. |
| In June 2006, the third amendment made certain changes and added $50.0 million in senior term loans to the total Term B Senior Credit Agreement debt. |
| In January 2007, the fourth increment added $15.0 million in senior term loans to the total Term B Senior Credit Agreement debt. |
| In February 2007, the fourth amendment made certain changes, extended the senior term loan maturity date to February 6, 2013, adjusted the principal repayment schedule to require a balloon principal payment at maturity, and added an incurrence test as an additional condition precedent to Alions ability to borrow additional funds. |
| In July 2007, the fifth increment added $25.0 million in senior term loans to the Term B Senior Credit Agreement. |
| On September 30, 2008, the fifth amendment made certain changes. |
| It increased the interest rate by 350 basis points to a minimum Eurodollar interest rate of 3.50% plus 600 basis points, and a minimum alternate base rate of 4.50% plus 500 basis points. | ||
| If the Company refinances, replaces or extends the maturity of its existing revolving line of credit with an interest rate spread which is more than 50 basis points higher than the then-current senior term loan interest rate spread, Alions interest rate spread will increase by the difference between the higher revolving credit facility interest rate spread and 50 basis points. | ||
| Alion must use any excess annual cash flow to prepay outstanding senior term loans. | ||
| It amended financial covenants to provide Alion flexibility through September 30, 2009. | ||
| It restricts the Companys ability to pay the CEO or COO for previously awarded shares of phantom stock. | ||
| It permits Alion to incur additional second lien debt, subject to certain conditions. |
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
| In July 2009, the sixth amendment extended the Revolver maturity date to September 25, 2009 and reduced the aggregate credit commitments from $50 million to $40 million. |
| In September 2009, the seventh amendment extended the Revolver maturity date to October 9, 2009 and reduced from $40 million to $25 million. |
| In October 2009, the ninth amendment extended the Revolver date to September 30, 2010; added an uncommitted $25 million incremental revolving credit facility; and modified certain negative covenants. |
| Alion must pay in kind an additional 100 basis points in interest if the Company fails to secure an additional $10 million in revolving credit commitments by February 1, 2010. | ||
| The Company must pay in kind a further 100 basis points in interest if its Senior Secured Leverage Ratio exceeds 2.75 to 1.00 as of June 30, 2010. | ||
| The interest rate increases by 50 basis points each quarter if the Company fail to meet the required leverage ratio. | ||
| If the Company fails to meet the June 2010 leverage ratio, the senior lenders may appoint a designee to Alions board of directors. | ||
| Alion is no longer required to maintain its S-corporation status. | ||
| Alion may not make more than $8 million in capital expenditures from June 30, 2009 to September 30, 2010. |
As of December 31, 2009, the Term B Senior Credit Agreement consisted of:
| a senior term loan in the approximate amount of $236.0 million; |
| a $25.0 million senior revolving credit facility only $182 thousand of which was allocated to letters of credit and deemed borrowed, but none of which was actually drawn as of December 31, 2009; and |
| a $110.0 million uncommitted incremental term loan accordion facility for which loans may be permitted subject to satisfying the leverage-based incurrence test. |
The Term B Senior Credit Agreement requires the Company to repay one percent of the principal
balance of the senior term loan during each of the next four fiscal years (December 2009 through
December 2012) in equal quarterly installments and to repay the remaining outstanding balance in
February 2013. Through December 31, 2012, the Company is currently obligated to make quarterly
principal installments of approximately $0.6 million. On February 6, 2013, the senior term loan
maturity date, the Company is obligated to pay approximately $229.3 million.
Under the senior revolving credit facility, the Company may request up to $20.0 million in
letters of credit and may borrow up to $5.0 million in swing line loans for short-term borrowing
needs. The Company must pay all principal obligations under the senior revolving credit facility
in full no later than September 30, 2010.
The
Company may prepay all or any portion of its senior term loan in minimum increments of
$1.0 million, generally without penalty or premium, except for customary breakage costs associated
with pre-payment of Eurodollar-based loans. If the Company issues certain permitted debt, or
sells, transfers or disposes of certain assets, it must use all net proceeds to repay any Term B
loan amounts outstanding. If the Company has excess cash flow (as defined in the Term B Senior
Credit Agreement) for any fiscal year, it must use all net proceeds or excess cash flow to repay
senior term loan principal.
If the Company enters into an additional term loan, or incremental term loan, and certain
terms in that loan are more favorable to the new lenders than existing Senior Credit Facility
terms, the applicable interest rate spread on the senior term loans could increase. As a result,
additional term loans could increase the Companys interest expense under its existing term loans.
Most of the Companys domestic subsidiaries (HFA, CATI, METI, JJMA, BMH, WCI, WCGS and MA&D) have
guaranteed the Companys obligations under the Companys Term B Senior Credit Agreement.
Use of Proceeds. In March 2006, the Company borrowed $32.0 million, used approximately $16.5
million to pay part of the WCI acquisition price, and paid approximately $13.6 million to redeem
mezzanine warrants held by IIT and the Companys Chief Executive Officer. In May 2006, the Company
borrowed $15.0 million to pay for part of the MA&D acquisition. On June 30, 2006, the Company
borrowed $71.0 million to pay part of the Anteon Contracts acquisition price. In January 2008, the
Company borrowed $15.0 million and in July 2008, another $25.0 million to
pay down part of the Revolver balance.
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
The
Term B Senior Credit Agreement permits the Company to use the
Revolver for working capital, general corporate purposes, and permitted acquisitions; and to use
proceeds from the uncommitted incremental term loan facility for permitted acquisitions and any
other purpose permitted by any future incremental term loan.
Security. The Term B Senior Credit Agreement is secured by a security interest in all the
current and future tangible and intangible property of Alion and many of its subsidiaries.
Interest and Fees. Under the Term B Senior Credit Agreement, the senior term loan and the
Revolver can each bear interest at either of two floating rates.
Senior Term Loan. The Company is entitled to elect to pay interest on the senior term loan at
an annual rate equal to either: 1) the sum of: (a) the greater of 450 basis points or the
applicable alternate base interest rate charged by Credit Suisse; plus (b) a 500 basis point spread
or 2) the sum of: (a) the greater of 350 basis points or the Eurodollar rate; plus a 600 basis
point spread.
Revolver.
The Company is also entitled to elect that the Revolver bear interest at an annual rate dependent on whether the Company made a
Eurodollar or an alternate base borrowing at the same rates as for senior term loans. As of
September 30, 2009, the minimum interest rate on Alions
term loan and Revolver is
9.50%.
On April 1, 2005, the Company chose to have the senior term loan bear interest at the
Eurodollar rate and the Revolver bear interest at the ABR rate based on
Credit Suisses prime rate. Since September 30, 2009, the Eurodollar and alternate base rates have
been 9.5%, including applicable spreads.
Other Fees and Expenses. Each quarter, Alion is required to pay a commitment fee of 50 basis
points per year on the prior quarters daily, unused revolving credit facility and senior term loan
commitment. As of December 31, 2009, only the $182 thousand allocated to letters of credit was
outstanding on the Revolver; the senior term loan was fully utilized. The Company
paid $32 thousand and $53 thousand in commitment fees for the quarters
ended December 31, 2009 and 2008.
Alion
is required to pay issuance and administrative fees plus a fronting fee not to exceed 25
basis points for each letter of credit issued. Each quarter
Alion is required to pay interest in arrears at the Revolver rate for all
outstanding letter of credit. The Term B Senior Credit Agreement also requires the Company to pay
an annual agents fee.
Financial Covenants and Waiver Agreement. The Term B Senior Credit Agreement covenants
require the Company to achieve certain senior secured leverage and interest coverage ratios which
compare Alions senior secured debt and interest expense to Consolidated EBITDA, and require the
Company to maintain certain minimum thresholds. In December 2009, Alion discovered it had not
calculated Consolidated EBITDA in accordance with the definition in the Term B Senior Credit
Agreement. The Term B Senior Credit Agreement requires Alion to deduct from Consolidated EBITDA
cash payments made in a current accounting period on account of reserves, restructuring charges and
other non-cash charges that the Company had added to its Consolidated EBITDA in a prior accounting
period as permitted by the definition. Alion failed to reduce Consolidated
EBITDA by cash payments made on account of non-cash charges added back in prior periods for SAR and phantom stock plans. As a result of this error, the Company failed to meet required
senior secured leverage and interest coverage ratios throughout fiscal 2009 and consequently
breached a number of Term B Senior Credit Agreement affirmative and negative covenants.
On December 14, 2009, the requisite lenders waived Alions financial, affirmative and negative
covenant defaults and its breach of certain related representations and warranties for all affected
periods including the fiscal year and quarter ended September 30, 2009 (the Waiver). The Company
paid a 25 basis point fee to each lender granting the Waiver and an additional arrangement fee to
the Administrative Agent. The Waiver does not change any of the terms or definitions of the Term
B Senior Credit Agreement.
Alion has also promised to pay on March 1, 2010 each lender granting the waiver a future fee
equal to 1.0% of the aggregate principal amount of the term loans and revolving credit commitments
of such lender outstanding on March 1, 2010 unless such lender shall have assigned all or a portion
of such lenders holdings, in which case such lenders assignee (unless otherwise agreed) shall be
entitled to the future and supplemental 1.0% fee payable by Alion.
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
As of December 31, 2009, Alion was in compliance with the Term B Senior Credit Agreement
financial covenants. The Company expects to be able to meet its existing financial and other debt
covenants for at least the next 12 months.
Senior Unsecured Notes
On February 8, 2008, the Company issued and sold $250.0 million of private 10.25% senior
unsecured notes due February 1, 2015 (Senior Unsecured Notes) to Credit Suisse, which informed
Alion that it resold most of the notes to qualified institutional buyers. On June 20, 2008, Alion
exchanged the private Senior Unsecured Notes for publicly tradable Senior Unsecured Notes with the
same terms.
Use of Proceeds. The proceeds of the Senior Unsecured Notes were used to pay off all
outstanding amounts under the Bridge Loan Agreement and approximately $72.0 million of the amounts
outstanding under the Term B Senior Credit Agreement.
Security. The Senior Unsecured Notes are currently guaranteed by HFA, CATI, METI, JJMA, BMH,
WCI and MA&D and will be guaranteed by certain of the Companys future subsidiaries.
Ranking. The Senior Unsecured Notes are senior unsecured obligations of the Company and rank
the same in right of payment with all existing and future senior indebtedness of the Company
including future indebtedness under the Term B Senior Credit Agreement. However, all of the
Companys secured debt and other obligations in effect from time to time, including the amounts
outstanding under the Term B Senior Credit Agreement, are effectively senior to the Senior
Unsecured Notes to the extent of the value of the assets securing such debt or other obligations.
The Senior Unsecured Notes rank senior in right of payment to all existing and future subordinated
indebtedness, including the Subordinated Notes.
Interest and Fees. The Senior Unsecured Notes bear interest at 10.25% per year, payable
semi-annually in arrears on February 1 and August 1, starting on August 1, 2007. The Company pays
interest to holders of record as of the immediately preceding January 15 and July 15. The Company
must pay interest on overdue principal at 11.25% per annum and, to the extent lawful, will pay
interest on overdue semi-annual interest installments at 11.25% per annum.
Optional Redemption. Prior to February 1, 2010, subject to certain conditions, the Company
may use the proceeds of a qualified equity offering to redeem up to $87.5 million of Senior
Unsecured Notes for 110.25% of the principal of the notes actually redeemed, plus unpaid interest
accrued to the redemption date.
Prior to February 1, 2011, the Company may redeem all, but not less than all, of the Senior
Unsecured Notes for 100% of the principal, all unpaid interest accrued to the redemption date, plus
an applicable make-whole premium as of the redemption date. From
February 1, 2011 through January
31, 2012, the Company may redeem all or a portion of the Senior Unsecured Notes at 105.125% of the
principal amount on the redemption date, plus unpaid interest accrued to the redemption date. From
February 1, 2012 through January 31, 2013, the redemption price declines to 102.563% of the
principal redeemed, plus unpaid interest accrued to the redemption date. There is no redemption
premium after January 31, 2013.
Covenants. The Indenture governing the Senior Unsecured Notes contains covenants that, among
other things, limit the Companys ability and the ability of certain of its subsidiaries to incur
additional indebtedness and to make certain types of payments.
Exchange Offer; Registration Rights. The Company filed a registration statement with the SEC
offering to exchange the Senior Unsecured Notes for publicly registered notes. The registration
statement was declared effective May 10, 2008; the exchange offer closed June 20, 2008; all
outstanding notes were exchanged for publicly registered notes.
Interest Payable
Interest Payable consisted of the following balances:
December 31, | September 30, | |||||||
2009 | 2009 | |||||||
(In thousands) | ||||||||
Senior Unsecured Notes |
$ | 10,677 | $ | 4,271 | ||||
Term B Senior Credit Agreement Note Payable |
3,950 | 3,975 | ||||||
Subordinated Note Payable |
793 | 793 | ||||||
Total |
$ | 15,419 | $ | 9,039 | ||||
16
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
Subordinated Note
In December 2002, Alion issued a $39.9 million Subordinated Note to IITRI as part of the
purchase price for substantially all of IITRIs assets. In July 2004, IIT acquired the
Subordinated Note and related warrant agreement from IITRI. In June 2006, the Company and IIT
agreed to increase the interest rate on the Subordinated Note for two years from December 2006
through December 2008. In August 2008, the Company and IIT amended the Subordinated Note to:
extend the maturity date of the Subordinated Note to August 2013; require Alion to re-pay $3.0
million in principal in November 2008, 2009 and 2010, and $2.0 million in November 2011; and
require Alion to pay cash interest at 6% rather than 16%, along with 10% in non-cash interest to be
added to principal. The amended Subordinated Note agreement prohibits Alion from redeeming vested
phantom stock held by the Chief Executive Officer and Chief Operating Officer unless the Company
timely makes its scheduled principal payment each year. The Company paid IIT a $0.5 million
amendment fee.
Up to and including December 2008, interest on the Subordinated Note was payable quarterly in
arrears by issuing paid-in-kind (PIK) notes maturing at the same time as the Subordinated Note.
The interest rate was 6.0% from December 2002 through December 2006; approximately 6.4% from
December 2006 to December 2007; and approximately 6.7% from December 2007 to December 2008. After
December 2008, interest is still payable quarterly in arrears, 6% to be paid in cash and 10% to be
paid in PIK notes due August 2013. Existing and future PIK notes defer related cash interest
expense on the Subordinated Note. Over the term of the Subordinated Note, Alion will be required
to issue approximately $41.4 million in PIK notes. In addition to the principal payments required
each November from 2008 through 2011, Alion is required to pay a total of $70.3 million in
principal and PIK notes in August 2013.
On December 21, 2009, the Company and IIT modified the terms of the Subordinated Note to defer
payment of interest due in January 2010 to April 2010. Subject to certain future events and
conditions, IIT agreed to sell its warrants and Subordinated Note to Alion for $25 million. The
Company expects to be able to either retire the Subordinated Note prior to April 2010 or amend it
to defer cash interest payments until after the Term B Senior Credit Agreement expires.
As of December 31, 2009, the remaining fiscal year principal repayments (at face amount before
debt discount) for outstanding indebtedness are as follows:
2010 | 2011 | 2012 | 2013 | 2014 | 2015 | Total | ||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Senior Secured
Term B Loan(1) |
$ | 1,825 | $ | 2,433 | $ | 2,433 | $ | 229,297 | $ | | $ | $ | 235,988 | |||||||||||||||
Senior Unsecured Notes(2) |
| | | | | 250,000 | 250,000 | |||||||||||||||||||||
Subordinated Seller
Note(3) |
3,000 | 3,000 | 2,000 | 70,311 | | 78,311 | ||||||||||||||||||||||
Total Principal Payments |
$ | 4,825 | $ | 5,433 | $ | 4,433 | $ | 299,608 | $ | | $ | 250,000 | $ | 564,299 | ||||||||||||||
1. | The table does not include any Term B Senior Credit Agreement principal pre-payments. The timing and amount of such payments is uncertain. The total on the face of the balance sheet for the Term B senior term loan includes approximately $236.0 million in principal and $6.6 million in unamortized debt issue costs as of December 31, 2009. Debt issue costs for the original loan and subsequent modifications totaled $12.5 million through December 2009. The Company estimates it will need to refinance the Term B Senior Credit Agreement before it matures. | |
2. | The Senior Unsecured Notes on the face of the balance sheet include $250 million in principal and $4.5 million in unamortized debt issue costs as of December 31, 2009 (originally $7.1 million). | |
3. | The Subordinated Note on the face of the balance sheet includes approximately $9.6 million of unamortized original issue discount for the fair value of the detachable warrants Alion issued in December 2002 and the warrants Alion issued for the August 2008 amendment. The first set of Subordinated Note warrants had an initial fair value of approximately $7.1 million The amendment to the first set of warrants had an initial fair value of $1.3 million and the additional warrants had an initial fair value of approximately $9.0 million. The Company recognized original issue discount for the fair value of the warrants. The amounts presented do not reflect the anticipated effect of the Companys agreement with IIT to retire the Subordinated Note and related Warrants for $25 million prior to April 2010. |
17
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
(10) Fair Value Measurement
The Company adopted ASC 805 Fair Value Disclosures in fiscal year 2009 for all financial
assets and liabilities recognized or disclosed at fair value in the financial statements. The
Company adopted the provisions of ASC 805 for nonfinancial assets and liabilities recognized or
disclosed at fair value in the financial statements on a recurring basis; no such assets or
liabilities exist at the balance sheet date. The Company implemented ASC 805 this year for all
nonfinancial assets and liabilities recognized or disclosed at fair value in the financial
statements on a nonrecurring basis. Adopting ASC 805 for items such as goodwill and long lived
assets measured at fair value if impaired, did not materially affect the Companys consolidated
financial statements or results of operations.
ASC 805 defines fair value as the price that would be received to sell an asset or paid to
transfer a liability (an exit price) in an orderly transaction between market participants at the
measurement date. It establishes a fair value hierarchy and a framework which requires categorizing
assets and liabilities into one of three levels based on the assumptions (inputs) used in valuing
the asset or liability. Level 1 provides the most reliable measure of fair value, while Level 3
generally requires significant management judgment. Level 1 inputs are unadjusted, quoted market
prices in active markets for identical assets or liabilities. Level 2 inputs are observable inputs
other than quoted prices included in Level 1, such as quoted prices for similar assets or
liabilities in active markets or quoted prices for identical assets or liabilities in inactive
markets. Level 3 inputs include unobservable inputs that are supported by little, infrequent, or no
market activity and reflect managements own assumptions about inputs used in pricing the asset or
liability. The Company uses the following valuation techniques to measure fair value.
Level 1 primarily consists of financial instruments, such as overnight bank re-purchase
agreements or money market mutual funds whose value is based on quoted market prices published by a
financial institution, an exchange fund, exchange-traded instruments and listed equities.
Level 2 assets include U.S. Government and agency securities whose valuations are based on
market prices from a variety of industry-standard data providers or pricing that considers various
assumptions, including time value, yield curve, volatility factors, credit spreads, default rates,
loss severity, current market and contractual prices for the underlying instruments, and broker and
dealer quotes. All are observable in the market or can be derived principally from or corroborated
by observable market data for which the Company can obtain independent external valuation
information.
Level 3 consists of unobservable inputs. The Companys warrants are classified as a Level 3
liability. Assets and liabilities are considered Level 3 when their fair value inputs are
unobservable or not available, including situations involving limited market activity, where
determination of fair value requires significant judgment or estimation. At December 31, 2009, the
Company measured outstanding warrants at fair value based on the underlying estimated fair value of
a share of Alion common stock as of September 30, 2009, the valuation most recently performed for
the ESOP Trustee and approved by the Board of Directors ($34.50 per share), a risk-free U.S.
Treasury interest rate for a comparable investment period (2.04% and 1.85% at December 31 and
September 30, 2009) and a 36% equity volatility factor based on the historical volatility of the
common stock of publicly-traded companies considered to be comparable to Alion. Valuation
techniques utilized in the fair value measurement of assets and liabilities presented on the
Companys balance sheet were unchanged from previous practice during the reporting period.
Assets
and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents information about the Companys financial assets and financial
liabilities that are measured at fair value on a recurring basis as of December and September 2009,
and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair
value.
Level 1 | Level 2 | Level 3 | ||||||||||
Liabilities: Redeemable common stock warrants |
||||||||||||
As of
December 31, 2009 |
$ | | $ | | $ | (32,557 | ) | |||||
As of September 30, 2009 |
$ | (32,717 | ) | |||||||||
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
The table below provides a summary of the changes in fair value of all financial
liabilities measured at fair value on a recurring basis using significant unobservable inputs
(Level 3) for December 31, 2009 and December 31, 2008.
Quarter Ended | ||||||||
December 31, 2009 and 2008 | ||||||||
Redeemable Common Stock Warrants | ||||||||
Balance, beginning of period |
$ | (32,717 | ) | $ | (39,996 | ) | ||
Total realized and unrealized gains and (losses) |
||||||||
Included in interest expense |
160 | 1,454 | ||||||
Issuances and settlements |
| | ||||||
Balance, end of period |
$ | (32,557 | ) | $ | (38,542 | ) | ||
Assets
and Liabilities Measured at Fair Value on a Nonrecurring Basis
The Companys cost-method investment in VectorCommand is tested annually for impairment and is
not adjusted to market value at the end of each reporting period. Fair value would only be
determined on a nonrecurring basis if this investment were deemed to be other-than-temporarily
impaired. The Company has not recorded any other-than-temporary impairments to its VectorCommand
investment during the reporting period.
(11) Interest Rate Swap
In January 2008, Alion executed an interest rate swap with one of its lenders affiliates to
convert floating rate interest payable on a portion of its Term B senior term loan to a fixed rate,
and to effectively shift timing of some Term B senior term loan net interest payments. The swap
agreement had a notional amount of $240 million and expired in November 2008. The Company made its
final semi-annual interest payment of $4.6 million on November 1, 2008. Under the swap Alion
received quarterly floating rate interest payments on February 1, May 1, August 1 and November 1,
2008, at the London Interbank Offering Rate plus 250 basis points. The floating rate was 7.32% for
the six months ended May 1, 2008 and 5.49% for the six months ended November 1, 2008. Alion paid
interest at 6.52%. All swap payments were net cash settled. Alion was exposed to credit risk for
net settlements under the swap agreement, but not for the notional amount.
(12) Redeemable Common Stock Warrants
Alion uses an option pricing model to estimate the fair value of its redeemable common stock
warrants. Management considers the share price selected by the ESOP Trustee along with other
factors, to assist in estimating the Companys aggregate liability for outstanding redeemable
common stock warrants. The Audit and Finance Committee of Alions Board of Directors reviews the
reasonableness of the redeemable common stock warrant liability Management has determined is
appropriate for the Company to recognize. The Audit and Finance Committee considers various
factors in its review, including risk free interest rates, volatility of the common stock of
comparable publicly traded companies, and in part, the valuation report prepared for and the share
price selected by the ESOP Trustee.
In December 2002, the Company issued 1,080,437 detachable, redeemable common stock warrants at
an exercise price of $10.00 per share. Alion issued the warrants to IITRI in connection with the
Subordinated Note. The Company recognized approximately $7.1 million for the initial fair value of
the warrants as original issue debt discount to the $39.9 million face value of the Subordinated
Note. The Subordinated Note warrants were originally exercisable until December 2010. In June
2004, IITRI transferred the warrants to IIT.
In August 2008, Alion issued an additional 550,000 redeemable common stock warrants at an
exercise price of $36.95 per share. The Company issued the second set of warrants to IIT in
connection with the Subordinated Note amendment. Both sets of warrants are exercisable at the
current fair value per share of Alion common stock, less the exercise price. The Company
recognized approximately $10.3 million in debt issue costs for the fair value of the August 2008
warrants and the amendment to the December 2002 warrants.
In
accordance with ASC 815 Derivatives, Alion has classified the warrants as debt
instruments indexed to and potentially settled in the Companys own stock and not as equity. The
Company recognizes interest expense for changes in the fair value of the warrants which had an
aggregate estimated fair value of $32.6 million as of December 31, 2009.
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
(13) Leases
Future minimum lease payments under non-cancelable operating leases for buildings, equipment
and automobiles at December 31, 2009 are set out below. Under these operating leases, Alion
subleased some excess capacity to subtenants under non-cancelable operating leases. In connection
with certain acquisitions, Alion assumed operating leases at above-market rates; recorded loss
accruals of approximately $4.9 million based on the estimated fair value of the lease liabilities
assumed; and is amortizing these amounts over the lease terms. The remaining unamortized loss
related to these acquisitions was $339 thousand at December 31, 2009. Alion also acquired a related
sublease pursuant to which it receives above-market rates. Based on the estimated fair value of the
sublease, Alion recognized an asset of $586 thousand and fully amortized it over the lease term.
Lease Payments for Fiscal Years Ending | (In thousands) | |||
2010 (for the remainder of fiscal year) |
$ | 21,210 | ||
2011 |
25,984 | |||
2012 |
22,198 | |||
2013 |
20,634 | |||
2014 |
14,231 | |||
2015 |
14,253 | |||
And thereafter |
24,180 | |||
Gross lease payments |
$ | 142,690 | ||
Less: non-cancelable subtenant receipts |
(2,529 | ) | ||
Net lease payments |
$ | 140,161 | ||
Composition of Total Rent Expense
December 31, | ||||||||
2009 | 2008 | |||||||
(In thousands) | ||||||||
Minimum rentals |
$ | 5,956 | $ | 6,183 | ||||
Less: Sublease rental income |
(467 | ) | (743 | ) | ||||
Total rent expense, net |
$ | 5,489 | $ | 5,440 | ||||
(14) Long Term Incentive Compensation Plan
In December 2008, Alion adopted a long-term incentive compensation plan to provide cash
compensation to certain executives. Grants under the plan to individuals contain specific
financial and other performance goals and vest over varying time periods. Some grants are for a
fixed amount; others contain provisions that provide for a range of compensation from a minimum of
50% to a maximum of 150% of an initial grant amount. The Company periodically evaluates the
probability of individuals meeting the financial and other performance goals in grant agreements.
Management estimates long term incentive compensation expense based on the stated amounts of
outstanding grants, estimated probability of achieving stated performance goals and estimated
probable future grant value. The Company recognized $603 thousand and $924 thousand in long term
incentive compensation expense for the quarters ended December 31, 2009 and 2008.
(15) Stock Appreciation Rights (SAR)
As
of December 31, 2009, Alion had granted 1,240,110 SARs to
employees under the 2004 SAR plan. Compensation expense for the SAR plan was $14 thousand and $84 thousand for the quarters
ended December 31, 2009 and 2008.
The ESOP Trustee, consistent with its duty of independence from Alion management and its
fiduciary responsibilities, retains an independent third party valuation firm to assist it in
determining the fair market value (share price) at which the Trustee may acquire or dispose of
investments in Alion common stock. Management considers the share price selected by the ESOP
Trustee along with other factors such as risk free interest rates and volatility, to assist in
estimating Alions aggregate liability for outstanding stock appreciation rights. The Audit and
Finance Committee of Alions Board of Directors reviews the reasonableness of the liability for
outstanding stock appreciation rights that Management has determined is appropriate for the Company
to recognize in its financial statements. The Audit and Finance Committee considers risk free
interest rates, volatility and various other factors in its review, including in part, the most
recent valuation report and the related share price selected by the ESOP Trustee.
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
The table below sets out the disclosures required by ASC 718 Stock Compensation and the
assumptions used to value a share of Alion common stock and the Companys SAR grants as of December
31, 2009. Alion uses a Black-Scholes-Merton option pricing model to recognize compensation
expense. Alion uses the fair market value of a share of its common stock to recognize expense for
all grants. There is no established public trading market for Alions common stock. The ESOP Trust
is the only holder of our common stock. Alion does not expect to pay any dividends on its common
stock and intends to retain future earnings, if any, for use in the operation of its business.
Stock-based Compensation Disclosure per ASC 718
Stock Appreciation Rights
As of December 31, 2009
Stock Appreciation Rights
As of December 31, 2009
Shares | ||||||||||||
Granted to | Exercise | Outstanding at | ||||||||||
Date of Grant | Employees | Price | 9/30/09 | |||||||||
February 2005 |
165,000 | $ | 19.94 | 71,150 | ||||||||
March 2005 |
2,000 | $ | 19.94 | 2,000 | ||||||||
April 2005 |
33,000 | $ | 29.81 | 18,000 | ||||||||
June 2005 |
2,000 | $ | 29.81 | 2,000 | ||||||||
December 2005 |
276,675 | $ | 35.89 | 175,284 | ||||||||
February 2006 |
13,000 | $ | 35.89 | 7,750 | ||||||||
February 2006 |
7,500 | $ | 35.89 | 2,500 | ||||||||
May 2006 |
7,000 | $ | 37.06 | 6,000 | ||||||||
July 2006 |
15,000 | $ | 37.06 | 10,000 | ||||||||
October 2006 |
2,500 | $ | 41.02 | 2,500 | ||||||||
December 2006 |
238,350 | $ | 41.02 | 171,500 | ||||||||
February 2007 |
33,450 | $ | 41.02 | 21,700 | ||||||||
May 2007 |
2,000 | $ | 43.37 | 2,000 | ||||||||
September 2007 |
2,000 | $ | 43.37 | 2,000 | ||||||||
December 2007 |
232,385 | $ | 40.05 | 187,740 | ||||||||
April 2008 |
2,000 | $ | 41.00 | 2,000 | ||||||||
September 2008 |
2,000 | $ | 41.00 | 2,000 | ||||||||
December 2008 |
203,250 | $ | 38.35 | 189,875 | ||||||||
April 2009 |
1,000 | $ | 34.30 | 1,000 | ||||||||
Total |
1,240,110 | 876,999 | ||||||||||
Weighted Average Exercise Price |
$ | 35.95 | $ | 37.07 |
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
Stock-based Compensation Disclosure per ASC 718
Stock Appreciation Rights
As of December 31, 2009
Stock Appreciation Rights
As of December 31, 2009
Outstanding | Vested at | Exercisable | ||||||||||||||||||||||
Date of Grant | at 12/31/09 | Forfeited | Exercised | Expired | 12/31/09 | at 12/31/09 | ||||||||||||||||||
February 2005 |
71,150 | | | | 71,150 | | ||||||||||||||||||
March 2005 |
2,000 | | | | 2,000 | | ||||||||||||||||||
April 2005 |
18,000 | | | | 18,000 | | ||||||||||||||||||
June 2005 |
2,000 | | | | 2,000 | | ||||||||||||||||||
December 2005 |
170,134 | 412 | 4,738 | | 170,134 | | ||||||||||||||||||
February 2006 |
7,750 | | | | 5,813 | | ||||||||||||||||||
February 2006 |
2,500 | | | | 1,875 | | ||||||||||||||||||
May 2006 |
6,000 | | | | 4,500 | | ||||||||||||||||||
July 2006 |
10,000 | | | | 7,500 | | ||||||||||||||||||
October 2006 |
2,500 | | | | 1,875 | | ||||||||||||||||||
December 2006 |
165,250 | 2,000 | 4,250 | | 123,938 | | ||||||||||||||||||
February 2007 |
21,200 | 250 | 250 | | 10,600 | | ||||||||||||||||||
May 2007 |
2,000 | | | | 1,000 | | ||||||||||||||||||
September 2007 |
2,000 | | | | 1,000 | | ||||||||||||||||||
December 2007 |
182,890 | 2,888 | 1,962 | | 91,445 | | ||||||||||||||||||
April 2008 |
2,000 | | | | 500 | | ||||||||||||||||||
September 2008 |
2,000 | | | | 500 | | ||||||||||||||||||
December 2008 |
183,475 | 5,525 | 875 | | 45,869 | | ||||||||||||||||||
April 2009 |
1,000 | | | |||||||||||||||||||||
Total |
853,849 | 11,075 | 12,075 | | 559,698 | | ||||||||||||||||||
Weighted Average
Exercise Price |
$ | 37.02 | $ | 39.24 | $ | 38.66 | $ | | $ | 35.78 | $ | |
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
Stock-based Compensation Disclosures per ASC 718
Stock Appreciation Rights
As of December 31, 2009
Stock Appreciation Rights
As of December 31, 2009
Risk Free Interest | Expected | Remaining Life | ||||||||||
Date of Grant | Rate | Volatility | Life | (months) | ||||||||
February 2005 |
3.10% 3.60% | 45 | % | 4 yrs | | |||||||
March 2005 |
3.10% 3.60% | 45 | % | 4 yrs | | |||||||
April 2005 |
4.10% 4.20% | 45 | % | 4 yrs | | |||||||
June 2005 |
4.10% 4.20% | 45 | % | 4 yrs | | |||||||
December 2005 |
4.20% 4.20% | 40 | % | 4 yrs | | |||||||
February 2006 |
4.20% 4.20% | 40 | % | 4 yrs | 1.3 | |||||||
February 2006 |
4.20% 4.20% | 40 | % | 4 yrs | 1.8 | |||||||
May 2006 |
4.82% 4.83% | 35 | % | 4 yrs | 4.6 | |||||||
July 2006 |
4.82% 4.83% | 35 | % | 4 yrs | 6.0 | |||||||
October 2006 |
4.82% 4.83% | 35 | % | 4 yrs | 9.8 | |||||||
December 2006 |
4.54% 4.58% | 35 | % | 4 yrs | 11.7 | |||||||
February 2007 |
4.54% 4.58% | 35 | % | 4 yrs | 13.7 | |||||||
May 2007 |
4.54% 4.58% | 35 | % | 4 yrs | 16.6 | |||||||
September 2007 |
4.54% 4.54% | 35 | % | 4 yrs | 20.1 | |||||||
December 2007 |
4.23% 4.23% | 35 | % | 4 yrs | 23.7 | |||||||
April 2008 |
4.23% 4.23% | 35 | % | 4 yrs | 27.9 | |||||||
September 2008 |
4.23% 4.23% | 35 | % | 4 yrs | 32.5 | |||||||
December 2008 |
4.23% 4.23% | 35 | % | 4 yrs | 35.7 | |||||||
April 2009 |
4.23% 4.23% | 35 | % | 4 yrs | 39.4 | |||||||
Weighted Average Remaining Life (months) |
15.8 |
(16)
Phantom Stock Plans
As of December 31, 2009, Alion had granted 223,685 shares of phantom stock under the Initial
Phantom Stock Plan. Under the Second Phantom Stock Plan, Alion had granted 340,312 shares of
retention phantom stock and 213,215 shares of performance phantom stock. Under the Director Phantom
Stock Plan, Alion had granted 20,779 shares of phantom stock. The Company recognized a $12
thousand credit to compensation expense for director phantom stock this quarter. As a result of
executives forfeiting their outstanding phantom stock grants last year, the Company recognized a
$4.7 million credit to compensation expense for the quarter ended December 31, 2008.
The ESOP Trustee, consistent with its duty of independence from Alion management and its
fiduciary responsibilities, retains an independent third party valuation firm to assist it in
determining the fair market value (share price) at which the Trustee may acquire or dispose of
investments in Alion common stock. Management independently estimates the value of a share of
common stock by considering, in part, the most recent price at which the Company was able to sell
shares to the ESOP Trust. In addition to the share price selected by the ESOP Trustee, Management
considers other factors such as risk free interest rates and volatility, to assist in estimating
Alions aggregate liability for outstanding phantom stock grants that remain subject to share price
fluctuations. Certain vested grants have fixed values based on the share price in effect on the
date on which such grants became fully vested. Only phantom stock grants to non-employee members
of Alions Board of Directors remain outstanding. No grants to executives remain outstanding.
The Audit and Finance Committee of Alions Board of Directors reviews the reasonableness of
the liability for outstanding phantom stock grants rights that Management has determined is
appropriate for the Company to recognize in its financial statements. The Audit and Finance
Committee considers various factors in its review, including in part, the most recent valuation
report and the related share price selected by the ESOP Trustee.
23
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
The table below sets out the disclosures required by ASC 718 Stock Compensation and the
assumptions used to value a share of Alion common stock and the Companys phantom stock grants as
of December 31, 2009 and September 30, 2009. The Company uses intrinsic value to recognize phantom
stock plan compensation expense for grants prior to October 2006. For all subsequent grants, Alion
uses a Black Scholes Merton option pricing model to recognize compensation expense. Alion uses the
fair market value of a share of its common stock to recognize expense for all grants; therefore no
additional disclosures are required for these grants. There is no established public trading
market for Alions common stock. The ESOP
Trust is the only holder of our common stock. Alion does not expect to pay any dividends on its
common stock and intends to retain future earnings, if any, for use in the operation of its
business.
Stock-based Compensation Disclosure per ASC 718
Phantom Stock
as of December 31, 2009
Phantom Stock
as of December 31, 2009
Shares Granted | Shares Granted | Total Shares | Grant Date | Outstanding at | ||||||||||||||||
Date of Grant | to Employees | to Directors | Granted | Share Price | 9/30/09 | |||||||||||||||
November 2006 |
| 5,978 | 5,978 | $ | 41.02 | 4,839 | ||||||||||||||
November 2007 |
| 6,993 | 6,993 | $ | 40.05 | 5,994 | ||||||||||||||
Total |
| 12,971 | 12,971 | 10,833 | ||||||||||||||||
Weighted Average
Grant Date Fair
Value Price Per Share |
$ | | $ | 40.50 | $ | 40.50 | $ | 40.48 |
Stock-based Compensation Disclosure per ASC 718
Phantom Stock
as of December 31, 2009
Phantom Stock
as of December 31, 2009
Outstanding at | Vested at | Exercisable | ||||||||||||||||||||||
Date of Grant | 12/31/09 | Forfeited | Exercised | Expired | 12/31/09 | at 12/31/09 | ||||||||||||||||||
November 2006 |
4,839 | | | | 4,839 | 4,839 | ||||||||||||||||||
November 2007 |
5,994 | | | | 3,663 | 3,663 | ||||||||||||||||||
Total |
10,833 | | | 8,502 | 8,502 | |||||||||||||||||||
Weighted Average
Grant Date Fair Value
Price Per Share |
$ | 40.48 | $ | | $ | | $ | | $ | 40.60 | $ | 40.60 |
Stock-based Compensation Disclosures per ASC 718
Phantom Stock
as of December 31, 2009
Phantom Stock
as of December 31, 2009
Risk Free Interest | Expected | Remaining Life | ||||||||||
Date of Grant | Rate | Volatility | Life | (months) | ||||||||
November 2006 |
4.54% 4.58% | 35 | % | 3 yrs | | |||||||
November 2007 |
4.23% 4.23% | 35 | % | 3 yrs | 10.4 | |||||||
Weighted Average
Remaining Life |
5.8 |
(17)
Segment Information and Customer Concentration
The Company operates in one segment, delivering a broad array of scientific, engineering and
information technology expertise to research and develop technological solutions for problems
relating to national defense, homeland security, and energy and environmental analysis. Alion
provides services to departments and agencies of the federal government and, to a lesser extent, to
commercial and international customers. The Companys federal government customers typically
exercise independent contracting authority. Offices or divisions within an agency or department
may directly, or through a prime contractor, use the Companys services as a separate customer so
long as that customer has independent decision-making and contracting authority within its
organization.
Contract receivables from agencies of the federal government represented approximately $184.7
million, or 97.9%, and $179.7 million, or 97.4%, of accounts receivable for December 31, 2009 and
September 30, 2009. Contract revenue from departments and agencies of the federal government
represented approximately 97.0% and 95.5%, of total contract revenue for the quarters ended
December 31, 2009 and 2008.
24
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
(18) Guarantor/Non-guarantor Condensed Consolidated Financial Information
Alions Senior Unsecured Notes are unsecured general obligations of the Company. Certain of
Alions 100% owned domestic subsidiaries have jointly, severally, fully and unconditionally
guaranteed the Senior Unsecured Notes. The following information presents condensed consolidating
balance sheets as of December 31, 2009 and September 30, 2009, condensed consolidating statements
of operations for the quarters ended December 31, 2009 and 2008; and condensed consolidating
statements of cash flows for the three months ended December 31, 2009 and 2008 of the parent
company issuer, the guarantor subsidiaries and the non-guarantor subsidiaries. Investments include
investments in subsidiaries held by the parent company issuer presented using the equity method of
accounting.
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
Condensed Consolidating Balance Sheet Information at December 31, 2009
(In thousands)
(In thousands)
Non- | ||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||
Parent | Companies | Companies | Eliminations | Consolidated | ||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 93 | $ | (47 | ) | $ | (46 | ) | $ | | $ | | ||||||||
Accounts receivable |
178,569 | 3,491 | 3,084 | | 185,144 | |||||||||||||||
Prepaid expenses and other current assets |
4,526 | 67 | 23 | | 4,616 | |||||||||||||||
Total current assets |
183,188 | 3,511 | 3,061 | | 189,760 | |||||||||||||||
Property, plant and equipment, net |
13,751 | 77 | 53 | 13,881 | ||||||||||||||||
Intangible assets, net |
25,864 | 25,864 | ||||||||||||||||||
Goodwill |
398,921 | 398,921 | ||||||||||||||||||
Investment in subsidiaries |
18,863 | (18,863 | ) | | ||||||||||||||||
Intercompany receivables |
774 | 13,401 | 3,193 | (17,368 | ) | | ||||||||||||||
Other assets |
10,604 | 13 | 3 | 10,620 | ||||||||||||||||
Total assets |
$ | 651,965 | $ | 17,002 | $ | 6,310 | $ | (36,321 | ) | $ | 639,046 | |||||||||
Current liabilities: |
||||||||||||||||||||
Book cash overdraft |
$ | 5,074 | $ | | $ | | $ | | $ | 5,074 | ||||||||||
Interest payable |
15,419 | | | | 15,419 | |||||||||||||||
Current portion, senior term loan payable |
2,389 | | | | 2,389 | |||||||||||||||
Current portion, subordinated note payable |
6,000 | | | | 6,000 | |||||||||||||||
Trade accounts payable |
48,407 | 277 | 504 | | 49,188 | |||||||||||||||
Accrued liabilities |
51,495 | 1,072 | 499 | | 53,066 | |||||||||||||||
Accrued payroll and related liabilities |
33,753 | 786 | 475 | | 35,014 | |||||||||||||||
Billings in excess of costs revenue earned |
3,438 | | | | 3,438 | |||||||||||||||
Total current liabilities |
165,975 | 2,135 | 1,478 | | 169,588 | |||||||||||||||
Intercompany payables |
16,594 | | 774 | (17,368 | ) | | ||||||||||||||
Senior term loan payable, excluding current portion |
226,969 | | | | 226,969 | |||||||||||||||
Senior unsecured notes |
245,462 | | | | 245,462 | |||||||||||||||
Subordinated note payable |
45,715 | | | | 45,715 | |||||||||||||||
Accrued compensation, excluding current
portion |
6,058 | | | | 6,058 | |||||||||||||||
Accrued postretirement benefit obligations |
729 | | | | 729 | |||||||||||||||
Non-current portion of lease obligations |
7,530 | 45 | 19 | | 7,594 | |||||||||||||||
Redeemable common stock warrants |
32,557 | | | | 32,557 | |||||||||||||||
Common stock of subsidiaries |
| 2,799 | 1 | (2,800 | ) | |||||||||||||||
Redeemable common stock |
187,112 | | | | 187,112 | |||||||||||||||
Accumulated other comprehensive loss |
(238 | ) | | | | (238 | ) | |||||||||||||
Accumulated surplus (deficit) |
(282,500 | ) | 12,023 | 4,040 | (16,063 | ) | (282,500 | ) | ||||||||||||
Total liabilities, redeemable
common stock and accumulated
deficit |
$ | 651,963 | $ | 17,002 | $ | 6,312 | $ | (36,231 | ) | $ | 639,046 | |||||||||
26
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
Condensed Consolidating Balance Sheet
as of September 30, 2009
as of September 30, 2009
Non- | ||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||
Parent | Companies | Companies | Eliminations | Consolidated | ||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 11,404 | $ | (143 | ) | $ | (76 | ) | $ | | $ | 11,185 | ||||||||
Accounts receivable, net |
174,456 | 3,421 | 2,280 | | 180,157 | |||||||||||||||
Prepaid expenses and other
current assets |
3,659 | 107 | 29 | | 3,795 | |||||||||||||||
Total current assets |
189,519 | 3,385 | 2,233 | | 195,137 | |||||||||||||||
Property, plant and equipment, net |
14,346 | 68 | 60 | | 14,474 | |||||||||||||||
Intangible assets, net |
28,680 | | | | 28,680 | |||||||||||||||
Goodwill |
398,921 | | | | 398,921 | |||||||||||||||
Investment in subsidiaries |
17,132 | | | (17,132 | ) | | ||||||||||||||
Intercompany receivables |
702 | 12,534 | 3,405 | (16,641 | ) | | ||||||||||||||
Other assets |
10,270 | 13 | 3 | | 10,286 | |||||||||||||||
Total assets |
$ | 659,570 | $ | 16,000 | $ | 5,701 | $ | (33,773 | ) | $ | 647,498 | |||||||||
Current liabilities: |
||||||||||||||||||||
Interest payable |
9,039 | $ | | | $ | | 9,039 | |||||||||||||
Current portion, senior term loan
payable |
2,389 | | | | 2,389 | |||||||||||||||
Current portion, subordinated note
payable |
3,000 | | | | 3,000 | |||||||||||||||
Current portion, acquisition
obligations |
50 | | | | 50 | |||||||||||||||
Trade accounts payable |
59,742 | 300 | 665 | | 60,707 | |||||||||||||||
Accrued liabilities |
43,984 | 1,135 | 306 | | 45,425 | |||||||||||||||
Accrued payroll and related liabilities |
41,642 | 832 | 559 | | 43,033 | |||||||||||||||
Billings in excess of revenue
earned |
3,661 | | | | 3,661 | |||||||||||||||
Total current liabilities |
163,507 | 2,267 | 1,530 | | 167,304 | |||||||||||||||
Intercompany payables |
15,939 | | 702 | (16,641 | ) | | ||||||||||||||
Senior term loan payable, excluding current portion |
229,221 | | | | 229,221 | |||||||||||||||
Senior unsecured notes |
245,241 | | | | 245,241 | |||||||||||||||
Subordinated note payable |
46,932 | | | | 46,932 | |||||||||||||||
Accrued compensation, excluding
current portion |
5,740 | | | | 5,740 | |||||||||||||||
Accrued postretirement benefit
obligations |
717 | | | | 717 | |||||||||||||||
Non-current portion of lease obligations |
7,216 | 51 | 19 | | 7,286 | |||||||||||||||
Redeemable common stock warrants |
32,717 | | | | 32,717 | |||||||||||||||
Common stock of subsidiaries |
| 2,799 | 1 | (2,800 | ) | | ||||||||||||||
Redeemable common stock |
187,137 | | | | 187,137 | |||||||||||||||
Accumulated other comprehensive loss |
(238 | ) | | | | (238 | ) | |||||||||||||
Accumulated surplus (deficit) |
(274,559 | ) | 10,883 | 3,449 | (14,332 | ) | (274,559 | ) | ||||||||||||
Total liabilities, redeemable
common stock and accumulated
deficit |
$ | 659,570 | $ | 16,000 | $ | 5,701 | $ | (33,773 | ) | $ | 647,498 | |||||||||
27
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
Condensed Consolidating Statement of Operations
for the Three Months Ended December 31, 2009
(In thousands)
for the Three Months Ended December 31, 2009
(In thousands)
Non- | ||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||
Parent | Companies | Companies | Eliminations | Consolidated | ||||||||||||||||
Contract revenue |
$ | 197,275 | $ | 5,087 | $ | 3,377 | $ | | $ | 205,738 | ||||||||||
Direct contract expense |
153,466 | 2,998 | 2,532 | | 158,996 | |||||||||||||||
Gross profit |
43,808 | 2,089 | 845 | | 46,742 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||
Indirect contract expense |
8,371 | 780 | 135 | | 9,286 | |||||||||||||||
Research and development |
261 | 261 | ||||||||||||||||||
General and administrative |
15,777 | 162 | 68 | | 16,007 | |||||||||||||||
Rental and occupancy expense |
7,830 | 76 | 80 | 7,986 | ||||||||||||||||
Depreciation and amortization |
4,219 | 5 | 7 | | 4,231 | |||||||||||||||
Total operating expenses |
36,458 | 1,023 | 290 | | 37,771 | |||||||||||||||
Operating income |
7,350 | 1,066 | 555 | | 8,971 | |||||||||||||||
Other income (expense): |
||||||||||||||||||||
Interest income |
45 | | | | 45 | |||||||||||||||
Interest expense |
(16,886 | ) | | | | (16,886 | ) | |||||||||||||
Other |
(182 | ) | 74 | (3 | ) | | (111 | ) | ||||||||||||
Gain on sale of non-operating assets |
| |||||||||||||||||||
Equity in net income (loss) of
subsidiaries |
1,731 | | | (1,731 | ) | | ||||||||||||||
Total other income (expense) |
(15,292 | ) | 74 | (3 | ) | (1,731 | ) | (16,952 | ) | |||||||||||
Income (loss) before income
taxes |
(7,942 | ) | 1,140 | 552 | (1,731 | ) | (7,981 | ) | ||||||||||||
Income tax benefit |
| | 40 | | 40 | |||||||||||||||
Net income (loss) |
$ | (7,942 | ) | $ | 1,140 | $ | 592 | $ | (1,731 | ) | $ | (7,941 | ) | |||||||
28
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
Condensed Consolidating Statement of Operations
for the Three Months Ended December 31, 2008
(In thousands)
for the Three Months Ended December 31, 2008
(In thousands)
Non- | ||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||
Parent | Companies | Companies | Eliminations | Consolidated | ||||||||||||||||
Contract revenue |
$ | 179,964 | $ | 5,650 | $ | 3,182 | $ | | $ | 188,796 | ||||||||||
Direct contract expense |
138,720 | 4,168 | 2,434 | | 145,322 | |||||||||||||||
Gross profit |
41,244 | 1,482 | 748 | | 43,474 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||
Indirect contract expense |
8,154 | 842 | 128 | | 9,124 | |||||||||||||||
Research and development |
69 | | | | 69 | |||||||||||||||
General and administrative |
10,062 | 111 | | | 10,173 | |||||||||||||||
Rental and occupancy expense |
7, 613 | 64 | 61 | | 7,738 | |||||||||||||||
Depreciation and amortization |
4,794 | 5 | 7 | | 4,806 | |||||||||||||||
Total operating expenses |
30,692 | 1,022 | 196 | | 31,910 | |||||||||||||||
Operating income |
10,552 | 460 | 552 | | 11,564 | |||||||||||||||
Other income (expense): |
||||||||||||||||||||
Interest income |
23 | | | | 23 | |||||||||||||||
Interest expense |
(14,088 | ) | | | | (14,088 | ) | |||||||||||||
Other |
(94 | ) | 61 | (2 | ) | | (35 | ) | ||||||||||||
Equity in net income (loss) of
subsidiaries |
1,071 | | | (1,071 | ) | | ||||||||||||||
Income (loss) before income
Taxes |
(2,536 | ) | 521 | 550 | (1,071 | ) | (2,536 | ) | ||||||||||||
Income tax expense |
(4 | ) | | | | (4 | ) | |||||||||||||
Net income (loss) |
$ | (2,540 | ) | $ | 521 | $ | 550 | $ | (1,071 | ) | $ | (2,540 | ) | |||||||
29
Table of Contents
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
Condensed Consolidating Statement of Cash Flows
for the Three Months Ended December 31, 2009
(In thousands)
for the Three Months Ended December 31, 2009
(In thousands)
Non- | ||||||||||||||||
Guarantor | Guarantor | |||||||||||||||
Parent | Companies | Companies | Consolidated | |||||||||||||
Net cash (used in) provided by operating activities |
$ | (11,774 | ) | $ | 110 | $ | 30 | $ | (11,634 | ) | ||||||
Cash flows from investing activities: |
||||||||||||||||
Cash paid for acquisitions |
(50 | ) | | | (50 | ) | ||||||||||
Capital expenditures |
(799 | ) | (15 | ) | | (814 | ) | |||||||||
Net cash used in investing activities |
(849 | ) | (15 | ) | | (864 | ) | |||||||||
Cash flows from financing activities: |
||||||||||||||||
Change in book overdraft |
5,074 | | | 5,074 | ||||||||||||
Payment of debt issuance costs |
(3,127 | ) | | | (3,127 | ) | ||||||||||
Payment of senior term loan payable |
(608 | ) | | | (608 | ) | ||||||||||
Revolver borrowings |
15,900 | | | 15,900 | ||||||||||||
Revolver payments |
(15,900 | ) | | | (15,900 | ) | ||||||||||
Purchase of common stock from ESOP Trust |
(26 | ) | | | (26 | ) | ||||||||||
Net cash provided by financing activities |
1,313 | | | 1,313 | ||||||||||||
Net increase (decrease) in cash and cash equivalents |
(11,310 | ) | 95 | 30 | (11,185 | ) | ||||||||||
Cash and cash equivalents at beginning of period |
11,404 | (143 | ) | (76 | ) | 11,185 | ||||||||||
Cash and cash equivalents at end of period |
$ | 94 | $ | (48 | ) | $ | (46 | ) | $ | | ||||||
30
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
Condensed Consolidating Statement of Cash Flows
for the Three Months Ended December 31, 2008
(In thousands)
for the Three Months Ended December 31, 2008
(In thousands)
Non- | ||||||||||||||||
Guarantor | Guarantor | |||||||||||||||
Parent | Companies | Companies | Consolidated | |||||||||||||
Net cash (used in) provided by operating activities |
$ | (5,288 | ) | $ | (39 | ) | $ | 38 | $ | (5,289 | ) | |||||
Cash flows from investing activities: |
||||||||||||||||
Cash paid for acquisitions |
(166 | ) | | | (166 | ) | ||||||||||
Capital expenditures |
(431 | ) | 24 | | (407 | ) | ||||||||||
Net cash (used in) provided by investing activities |
(597 | ) | 24 | | (573 | ) | ||||||||||
Cash flows from financing activities: |
||||||||||||||||
Net cash paid from interest rate swap |
(4,647 | ) | | | (4,647 | ) | ||||||||||
Payment of senior term loan payable |
(608 | ) | | | (608 | ) | ||||||||||
Payment of subordinated note payable |
(3,000 | ) | | | (3,000 | ) | ||||||||||
Revolver borrowings |
97,600 | | | 97,600 | ||||||||||||
Revolver payments |
(97,600 | ) | | | (97,600 | ) | ||||||||||
Purchase of common stock from ESOP Trust |
(9 | ) | | | (9 | ) | ||||||||||
Cash received from sale of common stock
to ESOP Trust |
2,669 | | | 2,669 | ||||||||||||
Net cash used in financing activities |
(5,595 | ) | | | (5,595 | ) | ||||||||||
Net increase (decrease) in cash and cash equivalents |
(11,480 | ) | (15 | ) | 38 | (11,457 | ) | |||||||||
Cash and cash equivalents at beginning of period |
16,392 | (62 | ) | (43 | ) | 16,287 | ||||||||||
Cash and cash equivalents at end of period |
$ | 4,912 | $ | (77 | ) | $ | (5 | ) | $ | 4,830 | ||||||
(19) Commitments and Contingencies
Earn-Out and Hold-Back Commitments
The
Company has a $600 thousand maximum earn-out commitment through July 2011 for its
LogCon Group acquisition.
Legal Proceedings
The Company is involved in various claims and legal actions arising in the ordinary course of
business. In the opinion of management, the ultimate disposition of these matters will not have a
material adverse effect upon the Companys business, financial position, operating results or
ability to meet its financial obligations.
Government Audits
The amount of federal government contract revenue and expense reflected in the consolidated
financial statements attributable to cost reimbursement contracts is subject to audit and possible
adjustment by the Defense Contract Audit Agency (DCAA). The federal government considers the
Company to be a major contractor and DCAA maintains an office on site to perform its various audits
throughout the year. All of the Companys federal government contract indirect costs have been
audited through 2004. Indirect rates have been negotiated through fiscal year 2004. Contract
revenue on federal government contracts has been recorded in amounts that are expected to be
realized upon final settlement.
31
Table of Contents
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of Alions financial condition and results of operations should be
read together with the condensed consolidated financial statements (unaudited) and the notes to
those statements. This updates the information contained in the Companys Annual Report on Form
10-K for the year ended September 30, 2009, and presumes that readers have access to, and will have
read, Managements Discussion and Analysis of Financial Condition and Results of Operations
contained in that report.
Overview
Alion provides scientific, engineering and information technology expertise to research and
develop technological solutions for problems relating to national defense, homeland security and
energy and environmental analysis, principally to federal departments and agencies and, to a lesser
extent, to commercial and international customers.
The following table summarizes revenue attributable to each contract type for the periods
indicated.
For the Three Months Ended December 31, | ||||||||||||||||
Revenue by Contract Type | 2009 | 2008 | ||||||||||||||
(In thousands) | ||||||||||||||||
Cost-reimbursement |
$ | 150,500 | 73.2 | % | $ | 134,164 | 71.1 | % | ||||||||
Fixed-price |
22,938 | 11.1 | % | 18,752 | 9.9 | % | ||||||||||
Time-and-material |
32,300 | 15.7 | % | 35,879 | 19.0 | % | ||||||||||
Total |
$ | 205,738 | 100.0 | % | $ | 188,796 | 100.0 | % | ||||||||
Management expects most of Alions revenue will continue to come from government contracts,
mostly from contracts with the U.S. Department of Defense (DoD) and other federal agencies and the
balance continuing to come from a variety of commercial, state, local and foreign government
customers.
For the Three Months Ended December 31, | ||||||||||||||||
Revenue by Customer Type | 2009 | 2008 | ||||||||||||||
(In thousands) | ||||||||||||||||
U.S. Department of Defense (DoD) |
$ | 189,560 | 92.1 | % | $ | 171,921 | 91.1 | % | ||||||||
Other Federal Civilian Agencies |
10,092 | 4.9 | % | 8,862 | 4.7 | % | ||||||||||
Commercial / State / Local and International |
6,086 | 3.0 | % | 8,012 | 4.2 | % | ||||||||||
Total |
$ | 205,738 | 100.0 | % | $ | 188,796 | 100.0 | % | ||||||||
In 2009, Secretary of Defense Robert Gates proposed changes to some major programs beginning
with the governments fiscal 2010 budget cycle. Alion benefited from the decision to build nine
more DDG-51 ships. This is generating long-term engineering and project management work for Alion
at Bath Iron Works in Maine and at Northrop Grumman Ship Systems on the Mississippi Gulf Coast.
Alion support to the Naval Sea Systems Command (NAVSEA) DDG-1000 destroyer program has led the
Company to continue expanding its program-related production oversight services. Alion is also a
major support contractor for NAVSEAs Littoral Combat Ship program. The decision to increase the
number of littoral combat ships that NAVSEA will ultimately acquire led to increased Alion staffing
for this program and additional related program management work at several shipyards.
While delaying final decisions about CG(X) cruiser capabilities may adversely affect some of
Alions planned engineering design work for this program, other engineering alternative analyses
for CG(X) systems have fueled some of the Companys significant increase in naval architecture and
marine engineering revenue. To date, increases have more than offset any workload reductions. We
plan to continue to grow revenue organically. If opportunities present themselves and sufficient
financial resources are available to us, we intend to pursue strategic acquisitions, capitalizing
on our skilled work force and our sophisticated solutions competencies.
32
Table of Contents
Our mix of contract types (i.e., cost-reimbursement, fixed-price, and time-and-material)
affects our revenue and operating margins. A significant portion of our revenue comes from
services performed on cost-reimbursement contracts under which customers pay us for approved costs,
plus a fee (profit) on the work we perform. We recognize revenue on cost-
reimbursement contracts based on our actual costs plus a pro-rata share of fees earned. We also
have a number of fixed-price government and commercial contracts for which we use the
percentage-of-completion method to recognize revenue. Fixed price contracts involve higher
financial risks, and in some cases higher margins, because we must deliver specified services at a
predetermined price regardless of our actual costs. Failure to anticipate technical problems,
estimate costs accurately or control performance costs on a fixed-price contract may reduce the
contracts overall profit or cause a loss. On time-and-material contracts, customers pay us for
labor and related costs at negotiated, fixed hourly rates. We recognize time-and-material contract
revenue at contractually billable rates as we deliver labor hours and incur direct expenses.
Despite the Presidents stated goal of reducing governments use of cost-reimbursable
contracts, Alions cost-reimbursable revenue continues to increase each year. Because the Company
delivers scientific and engineering research services that are not generally considered to be
inherently governmental functions, Management believes any changes aimed at reducing reliance on
government contractors in general will not materially adversely affect operations. If the
government ultimately shifts contracting activity away from the cost-reimbursement arena to
time-and-material or fixed-price contracting, Management believes Alion would likely benefit. All
other factors being equal, the Companys time-and-material and fixed price type contracts
traditionally generate higher profit margins than cost-reimbursable contracts. Revenue growth this
quarter supports Managements belief that Alion, is benefitting from and is positioned to continue
to benefit from the Presidents announced intention to increase federal spending on sponsored
science and technology to 5% of GDP.
For the Three Months Ended December 31, | ||||||||||||||||
Core Business Area | 2009 | 2008 | ||||||||||||||
(In thousands) | ||||||||||||||||
Naval Architecture and Marine Engineering |
$ | 89,718 | 43.6 | % | $ | 84,467 | 44.7 | % | ||||||||
Defense Operations |
50,295 | 24.4 | % | 50,465 | 26.7 | % | ||||||||||
Modeling and Simulation |
35,559 | 17.3 | % | 20,924 | 11.1 | % | ||||||||||
Technology Integration |
12,463 | 6.1 | % | 11,326 | 6.0 | % | ||||||||||
Energy and Environmental Sciences |
9,731 | 4.7 | % | 10,091 | 5.3 | % | ||||||||||
Information Technology and Wireless
Communications |
7,972 | 3.9 | % | 11,523 | 6.1 | % | ||||||||||
Total |
$ | 205,738 | 100.0 | % | $ | 188,796 | 100.0 | % | ||||||||
Backlog. Contract backlog represents an estimate, as of a specific date, of the future revenue
Alion expects from existing contracts. At December 31, 2009, backlog on existing contracts and
executed delivery orders totaled $2,637 million, of which $309.8 million was funded. The Company
estimates it has an additional $3,649 million of unfunded contract ceiling value for an aggregate
total backlog of $6,286 million.
33
Table of Contents
Results of Operations
Quarter Ended December 31, 2009 Compared to Quarter Ended December 31, 2008
Consolidated Operations of Alion | ||||||||||||||||
Quarter Ended December 31, | ||||||||||||||||
2009 | 2008 | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||
% | % | |||||||||||||||
Selected Financial Information | revenue | revenue | ||||||||||||||
Total contract revenue |
$ | 205,738 | $ | 188,796 | ||||||||||||
Total direct contract costs |
158,996 | 77.3 | % | 145,322 | 77.0 | % | ||||||||||
Direct labor costs |
67,127 | 32.6 | % | 66,829 | 35.4 | % | ||||||||||
Material and subcontract costs |
88,143 | 42.8 | % | 72,464 | 38.4 | % | ||||||||||
Other direct costs |
3,726 | 1.8 | % | 6,029 | 3.2 | % | ||||||||||
Gross profit |
46,742 | 22.7 | % | 43,474 | 23.0 | % | ||||||||||
Total operating expense |
37,771 | 18.4 | % | 31,910 | 16.9 | % | ||||||||||
Major components of operating expense |
||||||||||||||||
Indirect expenses including facilities costs |
17,272 | 8.4 | % | 16,862 | 8.9 | % | ||||||||||
General and administrative (excluding stock-
based compensation) |
16,005 | 7.8 | % | 14,776 | 7.8 | % | ||||||||||
Stock-based compensation |
2 | immaterial | (4,603 | ) | (2.4 | )% | ||||||||||
Depreciation and amortization |
4,231 | 2.1 | % | 4,806 | 2.5 | % | ||||||||||
Income from operations |
$ | 8,971 | 4.4 | % | $ | 11,564 | 6.1 | % |
Revenue. First quarter revenue was $205.7 million, $16.9 million more than the
comparable period last year. Sales increased 9.0% because of a $16.3 million (12.2%) increase in
cost reimbursable contract revenue; a $4.2 million increase (22.3%) in fixed price contract
revenue; and a $3.6 million (10.0%) decline in time and material contract revenue. A $17.6 million
(10.3%) increase in DoD revenue and a $1.2 million (13.9%) increase in civilian agency activity
offset a $1.9 million (24.0%) decline in commercial activity. Revenue under ID/IQ contract
delivery orders showed strong growth (14.1% increase) with sales under these contract vehicles up
$15.7 million over the same period last year. Although commercial activity continues to decline,
the Company has been able to expand its government contract revenue base. Gross profit margin rates
on all contract types increased this quarter compared to last year. Contract margins in total
improved to 7.1% compared to 6.5% last year. Contract fees were $14.5 million this quarter, up
$2.3 million from $12.2 million last year.
Modeling and Simulation revenue was up $14.6 million (70%) to $35.6 million for the quarter as
customers significantly increased funding and work under the Companys Modeling and Simulation
Information Analysis Center contract. Naval architecture and marine engineering sales climbed 6.2%
to $89.7 million, a $5.3 million increase compared to last year. Increased revenue from surface
ship life cycle management services (approximately $5.0 million) was offset by a $1.8 million
decline in littoral combat ship program revenue. Technology Integration revenue was also up 10% to
$12.5 million for the current quarter. Revenue from Defense Operations and Energy and
Environmental Sciences were essentially flat year over year, while Information Technology and
Wireless Communications sales declined over 30% to $8.0 million for the current quarter.
The Companys naval architecture and marine engineering business grew because of expanded
support to the U.S. Navys Surface Ships Program. Increased customer reliance on Alions Modeling
and Simulation Information Analysis Center contract accounted for revenue increases in this core
business area. Despite relatively stable revenue from defense operations, revenue from Alions
contract with the Secretary of the Air Force in this core business area, increased $1.6 million
(9.3%) this quarter compared to last year due to higher funding levels and costs associated with
customer requested relocation.
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Direct Contract Expense and Gross Profit. Although direct contract costs increased $13.7
million this quarter compared to last year, costs as a percentage of revenue remained nearly
constant. Material and subcontract costs were up $15.7 million as more and more of Alions cost
reimbursable activity continues to include significant sharing with other government
contractors who work on Alions prime contracts. Direct labor was relatively unchanged and other
costs declined moderately. Current quarter gross profit of $46.7 million was $3.2 million greater
than the first quarter last year, although this was slightly lower as a percentage of revenue.
Financial performance is consistent with a higher percentage of cost-reimbursable prime contract
revenue and reduced revenue for Alion as a subcontractor to other companies. The Company typically
earns higher margins on work it performs directly and lower margins on work other companies perform
on Alion contracts.
Operating Expenses. First quarter operating expenses increased $5.9 million (over 18%)
compared to last year and led to a decline in operating income. Indirect costs remained
relatively flat and occupancy costs grew by 3.2% consistent with the escalation clauses in many of
the companys leases. Alion increased company-sponsored research by $192 thousand while
amortization of purchased contracts declined $575 thousand as expected, based on the estimated
useful lives of previously acquired contracts. The most significant increase in operating costs
came from general and administrative expenses. Last year the Company benefited from $4.6 million
in credits to compensation expense for executive phantom stock forfeitures. This year, Alion
recognized $600 thousand in expense for executive incentive compensation. In addition, the Company
spent $887 thousand to re-negotiate existing credit agreements and to explore financing
alternatives.
Income from Operations. Operating profit declined by more than 22% to $9.0 million this
quarter compared to $11.6 million last year. Higher general and administrative costs offset
increased gross profit. First quarter operating income declined to 4.4% of revenue compared to
6.1% of first quarter revenue last year.
Other Expense. Interest income, interest expense and other expense in the aggregate for the
quarter ended December 31, 2009 increased by more than $2.8 million compared to last year. Although
interest income was slightly higher due to modest increases in average investment balances, cash
pay interest and fees increased by $1.8 million in the first quarter this year. Alion paid $1.3
million in Term B Senior Credit consent and waiver fees related to prior years financial covenant
breaches. Also, the August 2008 amendment to the Subordinated Note increased the cash payable
portion of interest by $698 thousand compared to last year. Careful cash management and slightly
lower outstanding loan balances allowed the Company to reduce other cash paid interest by $183
thousand.
Fiscal 2010 debt issue cost amortization for the current quarter declined modestly from the
same period last year ($173 thousand) as did deferred Subordinated Note interest ($95 thousand) due
to lower outstanding principal. There was no material change in the fair value of redeemable
common stock warrants this quarter. Last year, declining risk free interest rates produced a $1.3
million greater credit to current quarter interest expense.
Quarter Ended December 31, | ||||||||
2009 | 2008 | |||||||
(In thousands) | ||||||||
Cash Pay Interest |
||||||||
Revolver |
$ | 3 | $ | 132 | ||||
Senior term loan |
5,739 | 5,793 | ||||||
Senior
unsecured notes |
6,406 | 6,406 | ||||||
Subordinated
note |
793 | 95 | ||||||
Other cash pay interest and fees |
1,355 | 98 | ||||||
Sub-total cash pay interest |
14,296 | 12,524 | ||||||
Deferred and Non-cash Interest |
||||||||
Debt issue costs and other non-cash items |
1,573 | 1,272 | ||||||
Subordinated
note interest |
1,177 | 1,746 | ||||||
Redeemable warrants |
(160 | ) | (1,454 | ) | ||||
Sub-total non-cash interest |
2,590 | 1,564 | ||||||
Total interest expense |
16,886 | $ | 14,088 | |||||
Income Tax Expense. Alion recognized a $40 thousand income tax benefit this quarter when the
Company received payment for refundable Canadian software research and engineering tax credits
previously claimed. In the similar period last year, the Company had an immaterial ($4 thousand)
tax expense despite its pass-through entity status. Alion has some modest state income tax expense
because some states do not recognize the S-corporation status of Alion and its consolidated
subsidiaries. All the Companys taxable income or losses are attributable to the ESOP Trust, a
tax exempt entity. Alions Canadian subsidiary is a taxable entity that accrues Canadian federal
and provincial tax liabilities as required.
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Net Income (Loss). Despite higher revenue and gross profit, Alions lower operating profit
and increased interest expense led to a $7.9 million net loss this quarter. This was $5.4 million
greater than the first quarter loss last year due largely to last years credit to compensation
expense for executive phantom stock forfeitures.
Liquidity and Capital Resources
Alion requires liquidity to invest in capital projects, to timely pay its vendors and debt
obligations and to fund operations while awaiting payment from customers. Accounts receivable
require cash when balances increase as our business grows or when customers delay contract funding
actions. We are funding our current business with cash from operating activities and access to our
revolving credit facility. We intend to fund future operations in a similar fashion.
Cash Flows
Alion used more than $11.6 million to fund operations in the first quarter of 2010 which was
$6.3 million more than the Company needed in its first quarter last year. The largest impact came
from having to accelerate a second quarter regular payroll from January 1, 2010 to December 31,
2009. Growth in accounts receivable also consumed more cash this quarter than the comparable
period last year. Increased accruals for subcontractor work for which Alion had yet to receive
invoices helped offset the accounts receivable increase. Although Alions first quarter
performance benefitted from a $6.4 million increase in unpaid interest accruals this was $1.8
million less than the comparable quarter last year. The Company paid $7.9 million in interest this
quarter, $3.6 million more than it did in the first quarter last year. This was in addition to
$3.1 million the Company spent for loan amendments, modifications, consent fees and waivers of loan
covenant breaches.
Alion collected $203.3 million in receivables this quarter slightly less than the $205.7
million in revenue it recognized. Days sales outstanding (DSO) increased from 82.0 to 82.5 days
as of December 31, 2009 based on trailing twelve month revenue. Increasing revenue helped DSO to
decline somewhat, offsetting a $5.0 million increase in net receivables this quarter. Receivables
grew this quarter, particularly unbilled accounts receivable. This occurred despite Alions
progress in obtaining previously delayed contract funding which had increased unbilled receivable
balances. However, increased balances represent currently billable amounts for which the Company
intends to issue invoices next quarter and collect payment within typical time frames. Management
expects that DSO will continue to track at current levels.
Capital expenditures increased $407 thousand this quarter. Alion also spent $26 thousand to
purchase stock from the ESOP Trust for required minimum distributions to plan participants in
December. Overall loan revolver activity was lower this quarter and no balance was outstanding at
the end of the quarter. The Company was temporarily unable to access its revolving credit facility
while it was negotiating covenant waivers and consents.
Last year, Alion received cash for prior year employee stock purchases in the first quarter of
the year. The Company received no such payments this year as it had already received cash for
employee stock purchases in September. Last year, in November, Alion paid $4.6 million in interest
rate swap obligations and $3.0 million in Subordinated Note principal. Although another $3.0
million in Subordinated Note principal was payable this November, the Senior Credit Facility
Agreement prohibited any further cash payments on the Subordinated Note.
Management expects the Company will be able to meet its existing debt covenants as required
over the next year and thus be able to maintain access to its revolving credit facility. Despite
its recently disclosed covenant breaches, improved conditions in the credit markets have allowed
the Company to maintain its access to credit. The Company believes it will have sufficient cash
flow from operations and its $25 million revolving credit
facility to continue to meet its obligations
over the next twelve months as it was able to during the past quarter. Alion retains the ability
to restrict or defer certain types of cash payments that in the past caused the Company to fail to
comply with certain debt covenants. Management intends to review re-financing alternatives if and
as the credit markets allow.
While the Company cannot predict with any degree of accuracy the extent to which re-purchase
and diversification demands will increase in future years, as more employees meet statutory and
Plan-specific age and length of service requirements, potential diversification demands are likely
to increase. These demands can increase further with any increase in the price of a share of Alion
common stock. While a decline in the price of a share of Alion common stock could reduce the value
of each individual Plan participants beneficial interest, such a potential price decline could be
offset by increased diversification demands and thus might not reduce the aggregate value of future
demands on the Companys cash. The Company attempts to monitor future potential impacts through
reliance in part on internal and external financial models that incorporate Plan census data along
with financial inputs intended to simulate changes in Alions share price.
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Cash flow effects and risks associated with equity-related obligations
Changes in the price of a share of Alion common stock affect warrant-related interest expense.
The Company no longer has significant stock-based compensation expense as most SARs are underwater
and only a modest number of phantom shares remain outstanding. Management is unable to forecast
the share price the ESOP Trustee will determine in future valuations. Because future share prices
may differ from the current share price, the Company is unable to reliably forecast its future
warrant-related interest expense. Alion will continue to recognize non-cash interest expense
related to outstanding warrants as the current share price, interest rates, assumed volatility, and
time to time expiration change. This expense will cease if the Company is able to retire the
warrants based on the $25 million redemption agreement recently negotiated with IIT. The carrying
value of the warrants exceeds the current net cash value of in-the-money warrants by approximately
$6.1 million. This difference represents the time value of the underlying options associated with
the underwater warrants issued in August 2008.
Although current financial information includes the effects of the most recent ESOP Trust
transactions, future expenses for stock-based compensation and warrant-related interest are likely
to differ from estimates as the price of a share of Alion common stock changes. The next regularly
scheduled valuation period will end in March 2010. Interest rates, market-based factors and
volatility, as well as the Companys financial results will affect the future value of a share of
Alion common stock.
Certain grantees of SARs and Phantom Stock are permitted to make qualifying elections to
further defer stock-based compensation payments by having funds deposited into a rabbi trust owned
by the Company. These elections will not have a material effect on either Alions planned payments
or its overall anticipated cash outflows.
After each semi-annual valuation period, the ESOP Plan permits former employees and
beneficiaries to request distribution of their vested ESOP account balances. Consistent with the
terms of the Plan and the IRC, the Company intends to pay distribution requests in five annual
installments and to defer initial payments as permitted. The Plan allows the Company to defer
initial installment payments for five years for former employees who are not disabled, deceased or
retired.
Discussion of Debt Structure
The discussion below describes the Term B Senior Credit Agreement, as modified by Amendments
One through Nine and Increments Four and Five; the Subordinated Note as amended through December
2009; and the Senior Unsecured Notes issued and sold by the Company.
Term B Senior Credit Agreement
As of December 31, 2009, the Term B Senior Credit Agreement consisted of:
| a senior term loan in the approximate amount of $236.0 million; |
| a $25.0 million senior revolving credit facility approximately $182 thousand of which was allocated to letters of credit and deemed borrowed, but none of which was actually drawn as of December 31, 2009; and |
| a $110.0 million uncommitted incremental term loan accordion facility which the Company may be able to access in the future subject to satisfying a leverage-based incurrence test. |
In August 2004, Alion entered into the Term B Senior Credit Agreement with a syndicate of
financial institutions for which Credit Suisse serves as arranger, administrative agent and
collateral agent, and for which Bank of America serves as syndication agent.
| In April 2005, the first amendment made certain changes and added $72.0 million in senior term loans to the total Term B Senior Credit Agreement debt. |
| In March 2006, the second amendment made certain changes, increased the senior term loan commitment by $68.0 million (drawn in full) and increased the revolving credit commitment from $30.0 million to $50.0 million. |
| In June 2006, the third amendment made certain changes and added $50.0 million in senior term loans to the total Term B Senior Credit Agreement debt. |
| In January 2007, the fourth increment added $15.0 million in senior term loans to the total Term B Senior Credit Agreement debt. |
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| In February 2007, the fourth amendment made certain changes, extended the senior term loan maturity date to February 6, 2013, adjusted the principal repayment schedule to require a balloon principal payment at maturity, and added an incurrence test as an additional condition precedent to Alions ability to borrow additional funds. |
| In July 2007, the fifth increment added $25.0 million in senior term loans to the Term B Senior Credit Agreement. |
| On September 30, 2008, the fifth amendment made certain changes. |
| It increased the interest rate by 350 basis points to a minimum Eurodollar interest rate of 3.50% plus 600 basis points, and a minimum alternate base rate of 4.50% plus 500 basis points. |
| If the Company refinances, replaces or extends the maturity of its existing revolving line of credit with an interest rate spread which is more than 50 basis points higher than the then-current senior term loan interest rate spread, Alions interest rate spread will increase by the difference between the higher revolving credit facility interest rate spread and 50 basis points. |
| Alion must use any excess annual cash flow to prepay outstanding senior term loans. |
| It amended financial covenants to provide Alion flexibility through September 30, 2009. |
| It restricts the Companys ability to pay the CEO or COO for previously awarded shares of phantom stock. |
| It permits Alion to incur additional second lien debt, subject to certain conditions. |
| In July 2009, the sixth amendment extended the revolving credit facility maturity date to September 25, 2009 and reduced the aggregate amount of the revolving credit commitments from $50 million to $40 million. |
| In September 2009, the seventh amendment extended the revolving credit facility maturity date to October 9, 2009 and reduced revolving credit commitments from $40 million to $25 million. |
| In October 2009, the ninth amendment extended the revolving credit maturity date to September 30, 2010; added an uncommitted $25 million incremental revolving credit facility; and modified certain negative covenants. |
| Alion must pay in kind an additional 100 basis points in interest if the Company fails to secure an additional $10 million in revolving credit commitments by February 1, 2010. |
| The Company must pay in kind a further 100 basis points in interest if its Senior Secured Leverage Ratio exceeds 2.75 to 1.00 as of June 30, 2010. |
| The interest rate increases by 50 basis points each quarter if the Company fail to meet the required leverage ratio. |
| If the Company fails to meet the June 2010 leverage ratio, the senior lenders may appoint a designee to Alions board of directors. |
| Alion is no longer required maintain its S-corporation status. |
| Alion may not make more than $8 million in capital expenditures from June 30, 2009 to September 30, 2010. |
The Term B Senior Credit Agreement requires the Company to repay one percent of the principal
balance of the senior term loan during each of the next four fiscal years in equal quarterly
installments of approximately $0.6 million through December 31, 2012 and to repay the remaining
outstanding balance of approximately $228.7 million on February 6, 2013.
Under the senior revolving credit facility, Alion may request up to $20.0 million in letters
of credit and may borrow up to $5.0 million in swing line loans for short-term borrowing needs. The
Company must pay all principal obligations under the senior revolving credit facility in full no
later than September 30, 2010.
Alion
may prepay all or any portion of its senior term loan in minimum increments of $1
million, generally without penalty or premium, except for customary breakage costs associated with
pre-payment of Eurodollar-based loans. If the Company issues certain permitted debt, or sells,
transfers or disposes of certain assets, it must use all net proceeds
to repay outstanding senior
term loan principal. Alion must use all annual excess cash flow to
prepay senior term loan
principal. The Senior Credit Facility defines Excess Cash Flow for any fiscal year as Consolidated
EBITDA without duplication plus the decrease, if any, in current assets less current liabilities
for that fiscal year over the sum, without duplication, of (i) taxes payable in cash for the
Company and its Subsidiaries, (ii) Consolidated Interest Expense, (iii) capital expenditures made
in cash other than proceeds from indebtedness, equity raises, casualty losses, condemnation and
other proceeds not part of Consolidated EBITDA, (iv) permanent repayments of Indebtedness not
including repayments of the Companys revolving credit facility, (v) the increase, if any, in
current assets less current liabilities for that fiscal year, (vi) cash purchase price paid for a
permitted acquisition as defined in the Senior Credit Facility, (vii) cash contributions to the
ESOP, and (viii)
extraordinary losses, non-recurring expenses and adjustments all to the extent included in
Consolidated EBITDA. The Company had no excess cash flow in either of the fiscal years ended
September 30, 2009 and 2008.
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The Senior Credit Facility permits Alion to use the Revolver for working capital, other
general corporate purposes, and to finance permitted acquisitions. The Senior Credit Facility
permits the Company to use proceeds from the uncommitted incremental term loan facility to finance
permitted acquisitions or for any other purpose permitted by a future incremental term loan.
If the Company enters into an additional term loan or revolving loan, including an incremental
term loan facility or an incremental revolving credit facility, and certain terms of such loan are
more favorable to the new lenders than existing terms under the Term B Senior Credit Agreement, the
applicable interest rate spread on the senior term loans and the
Revolver can
increase. As a result, additional term loans or revolving credit could increase the Companys
interest expense under its existing term loans and the Revolver. Certain of the
Companys subsidiaries (HFA, CATI, METI, JJMA, BMH, WCI, WCGS and MA&D) guaranteed the Companys
obligations under the Companys Term B Senior Credit Agreement.
Use
of Proceeds. In August 2004, the Company borrowed
$50.0 million, used approximately $47.2 million to retire its
existing LaSalle Bank senior term loan and revolving credit facility, and paid approximately
$2.8 million in transaction fees. In October 2004, the Company borrowed approximately $22.0 million
to retire its existing $19.6 million mezzanine note and to pay
approximately $2.4 million in accrued unpaid interest and prepayment premium. In April 2005, the
Company borrowed $72.0 million and used approximately $58.7 million to pay part of the JJMA
acquisition price, and approximately $1.3 million for term loan transaction fees. The Company used
approximately $12.0 million for part of the BMH acquisition price. In March 2006, Amendment Two
made $68.0 million of term loans available to the Company. Alion used approximately $16.5 million
to pay part of the WCI acquisition price, and approximately
$13.6 million to redeem mezzanine warrants held by IIT and the CEO. In May 2006, the Company used
$15.0 million for part of the MA&D acquisition
price. In June 2006, the Company borrowed $21.0 million in Amendment Two incremental term loans and
$50.0 million in Amendment Three incremental term loans to pay part of the Anteon Contracts
acquisition price. In January 2007, Alion paid a $0.3 million fee to borrow $15.0 million under
Increment Four to pay down part of its outstanding senior revolving credit facility balance. In
July 2007, Alion paid a $0.5 million fee to borrow $25.0 million under Increment Five to pay down
part of its outstanding senior revolving credit facility balance.
The Term B Senior Credit Agreement permits the Company to use the remainder of its senior
revolving credit facility for working capital needs, other general corporate purposes, and to
finance permitted acquisitions. The Term B Senior Credit Agreement permits the Company to use any
proceeds from the uncommitted incremental term loan facility to finance permitted acquisitions and
for any other purpose permitted by any future incremental term loan.
Security. The Term B Senior Credit Agreement is secured by a security interest in all of the
Companys current and future tangible and intangible property, as well as all of the current and
future tangible and intangible property of the Companys subsidiaries, HFA, CATI, METI, JJMA, BMH,
WCI, WCGS and MA&D.
Interest and Fees. Under the Term B Senior Credit Agreement, at the Companys election, the
senior term loan and the Revolver can each bear interest at either of two
floating rates based on either a Eurodollar base or an alternative base rate (ABR). Since September
30, 2008, the minimum interest rate on Alions term loan and revolving credit facility has been
9.50%. The Eurodollar rate interest rate is
600 basis points plus a 3.5% minimum interest rate. The alternate base rate is 500 basis points
plus a 4.5% minimum interest rate.
Interest Rate Swap. On January 30, 2008, Alion executed an interest rate swap with one of its
lenders to convert floating rate interest payable on a portion of its Term B senior term loan to a
fixed rate, and to shift the timing of some net interest payments related to its Term B senior term
loan. The swap agreement has a notional principal of $240 million and expired on November 1, 2008.
Alion was required to pay interest semi-annually at 6.52% on May 1 and November 1, 2008. The swap
called for the Company to receive floating rate interest payments quarterly on February 1, May 1,
August 1 and November 1, 2008, at the London Interbank Offering Rate plus 250 basis points. The
floating interest rate was 7.32% for the six months ended
May 1, 2008 and 5.49% for the six
months ended November 1, 2008. All swap payments were net cash settled.
Other Fees and Expenses. Each quarter Alion is required to pay a commitment fee equal to 50
basis points per year on the prior quarters daily unused
balances of the Revolver
and the Senior Term Loan. As of December 31, 2009, $182 thousand was allocated to outstanding
letters of credit; the senior term loan was fully utilized. The Company paid no
senior term loan commitment fee and a fee of $32 and $53 thousand for the revolving credit
facility for the quarters ended December 31, 2009 and 2008.
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In addition to issuance and administrative fees, Alion is required to pay a fronting fee not
to exceed 25 basis points for each letter of credit issued. Each quarter Alion is required to pay
interest in arrears at the revolving credit facility rate for all outstanding letters of credit.
The Term B Senior Credit Agreement also requires the Company to pay an annual agents fee.
Financial Covenants and Waiver Agreement. The Term B Senior Credit Agreement covenants
require the Company to achieve certain senior secured leverage and interest coverage ratios which
compare Alions senior secured debt and interest expense to Consolidated EBITDA, and require the
Company to maintain certain minimum thresholds. In December 2009, Alion discovered it had not
calculated Consolidated EBITDA in accordance with the definition in the Term B Senior Credit
Agreement. The Term B Senior Credit Agreement requires Alion to deduct from Consolidated EBITDA
cash payments made in a current accounting period on account of reserves, restructuring charges and
other non-cash charges that the Company had added to its Consolidated EBITDA in a prior accounting
period as permitted by the definition. Alion discovered that it had failed to reduce Consolidated
EBITDA by cash payments made on account of non-cash charges added back in prior periods for Alions
SAR and phantom stock plans. As a result of this error, the Company failed to meet required senior
secured leverage and interest coverage ratios throughout fiscal 2009 and consequently breached a
number of Term B Senior Credit Agreement affirmative and negative covenants.
On December 14, 2009, the requisite lenders waived Alions financial, affirmative and negative
covenant defaults and its breach of certain related representations and warranties for all affected
period including the fiscal year and quarter ended September 30, 2009 (the Waiver). The Company
paid a 25 basis point fee to each lender granting the waiver and an additional arrangement fee to
the Administrative Agent. The Waiver does not change any of the terms or definitions of the Term
B Senior Credit Agreement.
Alion has also promised to pay on March 1, 2010 each lender granting the waiver a future fee
equal to 1.0% of the aggregate principal amount of the term loans and revolving credit commitments
of such lender outstanding on March 1, 2010 unless such lender shall have assigned all or a portion
of such lenders holdings, in which case such lenders assignee (unless otherwise agreed) shall be
entitled to the future and supplemental 1.0% fee payable by Alion.
As of December 31, 2009, Alion was in compliance with the Term B Senior Credit Agreement
financial covenants. The Company expects to be able to meet its existing financial and other debt
covenants for at least the next 12 months.
Consolidated EBITDA is defined as: (a) net income (or loss), as defined therein; plus (b) the
following items, without duplication, to the extent deducted from net income or included in the net
loss, the sum of: (i) consolidated interest expense; (ii) provision for income taxes; (iii) depreciation and
amortization, including amortization of other intangible assets; (iv) cash contributions to the
ESOP in respect of the repurchase liability of the Company under the ESOP Plan; (v) any non-cash
charges or expenses including (A) non-cash expenses associated with the recognition of the
difference between the fair market value of the Warrants and the exercise price of the Warrants,
(B) non-cash expenses with respect to the stock appreciation rights and phantom stock plans, and
the Warrants and accretion of the Warrants and (C) non-cash contributions to the ESOP; (vi) any
extraordinary losses and (vii) any nonrecurring charges and adjustments by third-party valuation
firm that prepares valuation reports in connection with the ESOP; minus (c) without duplication,
(i) all cash payments made on account of reserves, restructuring charges and other non-cash charges
added to net income (or included in net loss) pursuant to clause (b)(v) above in a previous period
and (ii) to the extent included in net income (or net loss), any extraordinary gains and all
non-cash items of income, in accordance with GAAP.
The Senior Credit Facility requires that the Companys ratio of total secured senior
indebtedness to Consolidated EBITDA not exceed the following ratios for the time periods indicated:
Period | Ratio | |
July 1, 2009 through June 30, 2010 |
4.00 to 1.00 | |
July 1, 2010 through December 31, 2010 |
3.75 to 1.00 | |
Thereafter |
3.00 to 1.00 |
The interest coverage test compares for any given period the Companys Consolidated EBITDA
less capital expenditures to the Companys Consolidated Interest Expense payable in cash for the
period of four consecutive fiscal quarters most recently ended on or prior to such date.
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Consolidated Interest Expense is defined in the Senior Credit Facility for any period as: (a)
interest expense other than imputed interest expense for capital leases and synthetic leases plus
(b) accrued interest which was required to be capitalized all in accordance with GAAP, and is
determined after taking into account net payments made or received from interest rate hedging
agreements. The Senior Credit Facility requires that the Companys Interest Coverage Ratio for any
period of four consecutive fiscal quarters be greater than the following ratios for the time
periods indicated:
Period | Ratio | |
July 1, 2009 through March 31, 2010 |
1.10 to 1.00 | |
April 1, 2010 through June 30, 2010 |
1.15 to 1.00 | |
July 1, 2010 through December 31, 2010 |
1.25 to 1.00 | |
Thereafter |
1.35 to 1.00 |
The Companys Senior Secured Leverage and Interest Coverage Ratios for the twelve-month
periods ended December 31, 2009 and 2008 are included below.
Twelve Months Ended | ||||||||
December 31, | ||||||||
2009 | 2008 | |||||||
Senior Secured Leverage Ratio |
3.86 | 4.49 | ||||||
Interest Coverage Ratio |
1.16 | 1.09 |
The Term B Senior Credit Agreement includes other covenants which, among other things,
restrict the Companys ability to do the following without the prior consent of syndicate bank
members that have extended more than 50 percent of the aggregate amount of all loans then
outstanding under the Term B Senior Credit Agreement:
| incur additional indebtedness other than permitted additional indebtedness after satisfying a senior secured leverage-based incurrence test; |
| consolidate, merge or sell all or substantially all of the Companys assets; |
| make certain loans and investments including acquisitions of businesses, other than permitted acquisitions; |
| pay dividends or distributions other than distributions needed for the ESOP to satisfy its repurchase obligations and certain payments required under the Companys equity based incentive plans; |
| enter into certain transactions with the Companys shareholders and affiliates; |
| enter into certain transactions not permitted under ERISA; |
| grant certain liens and security interests; |
| enter into sale and leaseback transactions; |
| change lines of business; |
| repay subordinated indebtedness before it is due and redeem or repurchase certain equity; |
| pay certain earn-outs in connection with permitted acquisitions; |
| spend more than $8 million on capital expenditures from June 30, 2009 to September 30, 2010; |
| make payments to directors, officers, and employees of the Company or its subsidiaries in connection with warrants, stock appreciation rights, phantom stock plans or similar incentives or equity-based incentives in excess of $20 million in the aggregate; or |
| use the proceeds of the Companys borrowings other than as permitted by the Term B Senior Credit Agreement. |
Events of Default. The Term B Senior Credit Agreement contains customary events of default
including, without limitation:
| payment default; |
| breach of representations and warranties; |
| uncured covenant breaches; |
| default under certain other debt exceeding an agreed amount; |
| bankruptcy and insolvency events; |
| notice of debarment, suspension or termination under a material government contract; |
| certain ERISA violations; |
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| unstayed judgments in excess of an agreed amount; |
| failure of the subordinated note to remain subordinated to the Term B Senior Credit Agreement; |
| failure of any guarantee of the Term B Senior Credit Agreement to be in effect; |
| failure of the security interests to be valid, perfected first priority security interests in the collateral; |
| imposition on the ESOP Trust of certain taxes in excess of an agreed amount; |
| final determination the ESOP is not a qualified plan; |
| incurrence of a civil or criminal liability in excess of $5 million of the Company or any subsidiary arising from a government investigation; |
| actual termination of a material contract due to alleged fraud, willful misconduct, negligence, default or any other wrongdoing; or |
| change of control (as defined below). |
For purposes of the Term B Senior Credit Agreement, a change of control generally occurs when,
before Alion lists its common stock to trade on a national securities exchange and the Company
obtains net proceeds from an underwritten public offering of at least $30.0 million, the ESOP Trust
fails to own at least 51 percent of the Companys outstanding equity interests, or, after the
Company has such a qualified public offering, any person or group other than IIT or the ESOP Trust
owns more than 37.5 percent of the Companys outstanding equity interests. A change of control may
also occur if a majority of the seats (other than vacant seats) on Alions Board of Directors shall
at any time be occupied by persons who were neither nominated by the board nor were appointed by
directors so nominated. A change of control may also occur if a change of control occurs under any
of Alions material indebtedness including the Companys Indenture or under Alions subordinated
note related warrants.
Subordinated Note Redeemable Common Stock Warrants
In December 2002, Alion issued a $39.9 million Subordinated Note to IITRI as part of the
purchase price for substantially all of IITRIs assets. In July 2004, IIT acquired the
Subordinated Note and related warrant agreement from IITRI. In June 2006, the Company and IIT
agreed to increase the interest rate on the Subordinated Note for two years from December 2006
through December 2008. In August 2008, the Company and IIT amended the Subordinated Note to:
extend the maturity date of the Subordinated Note to August 2013; require Alion to re-pay $3.0
million in principal in November 2008, 2009 and 2010, and $2.0 million in November 2011; and
require Alion to pay cash interest at 6% rather than 16%, along with 10% in non-cash interest to be
added to principal. The amended Subordinated Note agreement prohibits Alion from redeeming vested
phantom stock held by the Chief Executive Officer and Chief Operating Officer unless the Company
timely makes its scheduled principal payment each year. The Company paid IIT a $0.5 million
amendment fee.
Up to and including December 2008, interest on the Subordinated Note was payable quarterly in
arrears by issuing paid-in-kind (PIK) notes maturing at the same time as the Subordinated Note.
The interest rate was 6.0% from December 2002 through December 2006; approximately 6.4% from
December 2006 to December 2007; and approximately 6.7% from December 2007 to December 2008. After
December 2008, interest is still payable quarterly in arrears, 6% to be paid in cash and 10% to be
paid in PIK notes due August 2013. Existing and future PIK notes defer related cash interest
expense on the Subordinated Note. Over the term of the Subordinated Note, Alion will issue
approximately $41.4 million in PIK notes. In addition to the principal payments required each
November from 2008 through 2011, Alion is required to pay a total of $70.3 million in principal and
PIK notes in August 2013.
In December 2002, the Company issued 1,080,437 detachable, redeemable common stock warrants at
an exercise price of $10.00 per share. Alion issued the warrants to IITRI in connection with the
Subordinated Note. The Company recognized approximately $7.1 million for the initial fair value of
the warrants as original issue debt discount to the $39.9 million face value of the Subordinated
Note. The Subordinated Note warrants were originally exercisable until December 2010. In June
2004, IITRI transferred the warrants to IIT.
In August 2008, Alion amended and restated the original warrants and issued an additional
550,000 redeemable common stock warrants at an exercise price of $36.95 per share. The Company
issued the second set of warrants to IIT in connection with the amendment of the Subordinated Note.
All the warrants are exercisable to September 2013 at the then-current fair value
per share of Alion common stock, less the exercise price. The Company recognized approximately $10.3 million in debt
issue costs for the fair value of the August 2008 warrants and the amendment to the December 2002
warrants.
Alion has classified the warrants as debt instruments and not equity. The Company recognizes interest expense for changes in the fair value of the warrants
which had an aggregate estimated fair value of $32.7 million as of December 31, 2009. On December
21, 2009, Alion entered into a Subordinated Note and Warrant Redemption Agreement, Fourth Amendment to Seller
Note Securities Purchase Agreement, First Amendment to the Second Amended and Restated Seller Note
and Rights Agreement Termination Agreement (the Redemption Agreement) dated as of December 18,
2009
between Alion and IIT.
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Under the Redemption Agreement, Alion has agreed to redeem and repurchase, and IIT has agreed
to sell to Alion for an aggregate redemption and repurchase price of $25,000,000, (a) Alions
Second Amended and Restated Seller Note issued to and held by IIT with a capitalized aggregate
principal amount as of December 21, 2008 of $51,703,538.40 (the Seller Note), (b) a warrant
issued to and held by IIT to purchase 1,080,436.8 shares of Alion common stock for $10 per share
(Warrant No. 3), and (c) a warrant held by IIT to purchase 550,000 shares of Alion common stock
for $36.95 per share (Warrant No. 4 and with Warrant No. 3, the Seller Warrants).
Alions obligation to redeem and repurchase the Seller Note and the Seller Warrants remains
subject to certain conditions including, among others, Alion having: (a) access to sufficient
capital under the terms of its various debt agreements to pay the redemption and repurchase price;
and (b) permission or the right to pay IIT the redemption and repurchase price under Alions
various debt agreements. Alion and IIT agreed to defer until April 1, 2010, payment of Seller
Note interest originally due January 2, 2010. Upon the closing of the redemption and repurchase of
the Seller Note and the Seller Warrants, (a) the Seller Note Securities Purchase Agreement and the
Rights Agreement each dated as of December 20, 2002 between Alion and IIT (as successor to Illinois
Institute of Technology Research Institute) will terminate, and (b) two current members of Alions
Board of Directors nominated by IIT will resign. IIT has agreed not to exercise the Seller
Warrants prior to March 31, 2010. Either Alion or IIT may terminate the Redemption Agreement if
Alion has not redeemed and repurchased the Seller Note and the Seller Warrants by March 31, 2010.
Senior Unsecured Notes
On February 8, 2007, Alion issued and sold $250.0 million of its private 10.25% senior
unsecured notes due February 1, 2015 (Senior Unsecured Notes) to Credit Suisse, which informed the
Company it had resold most of the notes to qualified institutional buyers. On June 20, 2007, Alion
exchanged its private Senior Unsecured Notes for publicly tradable Senior Unsecured Notes with the
same terms.
Interest and Fees. The Senior Unsecured Notes bear interest at 10.25% per year, payable
semi-annually in arrears on February 1 and August 1. Alion pays interest to holders of record as
of the immediately preceding January 15 and July 15. The Company must pay interest on overdue
principal or interest at 11.25% per annum to the extent lawful.
Covenants. As of December 31, 2009, the Company was in compliance with the covenants set forth
in the Companys Indenture with respect to the Companys 10.25% Senior Unsecured Notes. The
Companys Indenture does not contain any financial covenants.
The Company is subject to a covenant under its Indenture that restricts the Companys ability
to incur additional indebtedness. The Company and its Restricted Subsidiaries are prohibited from
issuing, incurring, assuming, guaranteeing, and otherwise becoming liable for any Indebtedness as
defined under the Indenture unless the Companys ratio of Adjusted EBITDA to Consolidated Interest
Expense (each as defined in the Indenture) exceeds 2.0 to 1.0. Even if the Companys Adjusted
EBITDA to Consolidated Interest Expense does not exceed 2.0 to 1.0, the Company may incur other
permitted indebtedness which includes:
| Indebtedness incurred pursuant to the Senior Credit Facility and certain other contracts up to $360 million less principal repayments made under that indebtedness |
| Permitted inter-company indebtedness |
| The Companys 10.25% notes |
| Indebtedness pre-existing the issuance of the Companys 10.25% notes |
| Permitted Indebtedness of acquired subsidiaries |
| Permitted refinancing Indebtedness |
| Indebtedness under hedging agreements |
| Performance, bid, appeal and surety bonds and completion guarantees |
| Ordinary course insufficient funds coverage |
| Guarantees in connection with permitted refinancing indebtedness |
| Indebtedness of non-U.S. subsidiaries incurred for working capital purposes |
| Indebtedness incurred for capital expenditure purposes and indebtedness for capital and synthetic leases not exceeding in the aggregate $25 million and 2.5% of the Companys Total Assets as defined in the Indenture |
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| Permitted subordinated indebtedness of the Company or any Restricted Subsidiary incurred to finance a permitted acquisition, certain permitted transactions involving the ESOP and refinancing indebtedness of acquired non-U.S. subsidiaries in an amount not exceeding in the aggregate $35 million |
| Reimbursement obligations with regard to letters of credit |
| Certain agreements in connection with the acquisition of a business as long as the liabilities incurred in connection therewith are not reflected on the Companys balance sheet |
| Certain deferred compensation agreements |
| Certain other indebtedness not exceeding $35 million. |
The Company is subject to a covenant under its Indenture that restricts the Companys ability
to declare and pay any cash dividend or other distribution with regard to any equity interest in
the Company, make any repurchase or redemption of any equity interest of the Company, make any
repurchase or redemption of subordinated indebtedness, and make certain investments, except that
the Company may make such payments in limited amounts if the Companys ratio of Adjusted EBITDA to
Consolidated Interest Expense exceeds 2.0 to 1.0 subject to certain limitations. Even if the
Companys Adjusted EBITDA to Consolidated Interest Expense does not exceed 2.0 to 1.0, the Company
may make or pay:
| Restricted Payments out of substantially concurrent contributions of equity to the Company and substantially concurrent incurrences of permitted indebtedness |
| Certain limited and permitted dividends |
| Certain repurchases of the Companys equity securities deemed to occur upon exercise of stock options or warrants |
| Cash payments in lieu of the issuance of fractional shares in connection with the exercise of warrants, options or other securities convertible into or exchangeable for the Companys equity securities |
| The required premium payable on the Senior Unsecured Notes in connection with a change of control of the Company |
| Certain permitted inter-company subordinated obligations |
| Certain repurchases and redemptions of subordination obligations of the Company or a Subsidiary Guarantor from Net Available Cash (as defined in the Indenture) |
| Repurchases of subordinated obligations in connection with an asset sale to the extent required by the Indenture |
| The redemption or repurchase for value of any Company equity securities for former Company employees who were also former Joint Spectrum Center employees after voluntary or involuntary termination of employment with the Company |
| Certain permitted transactions with the ESOP not exceeding $25 million in the aggregate |
| Certain other payments not exceeding $30 million in the aggregate. |
The Indenture restricts the Companys ability to engage in other transactions including
restricting the ability of subsidiaries to make distributions and pay dividends to parents, merging
or selling all or substantially all of the Companys assets, making certain issuances of Subsidiary
equity securities, engaging in certain transactions with affiliates, incurring liens, entering into
sale lease-back transactions and engaging in business unrelated to the Companys business at the
time the Company issued the Senior Unsecured Notes.
Events of Default. The Indenture contains customary events of default, including:
| payment default; |
| uncured covenant breaches; |
| default under an acceleration of certain other debt exceeding $30 million; |
| certain bankruptcy and insolvency events; |
| a judgment for payment in excess of $30 million entered against the Company or any material subsidiary that remains outstanding for a period of 60 days and is not discharged, waived or stayed; and |
| failure of any guarantee of the Senior Unsecured Notes to be in effect or the denial or disaffirmation by any subsidiary guarantor of its guaranty obligations. |
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Change of Control. Upon a change in control, each Senior Unsecured Note holder has the right
to require Alion repurchase its notes in cash for 101% of principal plus accrued and unpaid
interest. Any of the following events constitutes a change in control:
| subject to certain exceptions, a person, other than the ESOP Trust, is or becomes the beneficial owner, directly or indirectly, of more than 35% of the total voting power or voting stock of Alion; |
| individuals who constituted Alions board of directors on the date the Senior Unsecured Notes were issued, cease for any reason to constitute a majority of the Companys board of directors; |
| the adoption of a plan relating to Alions liquidation or dissolution; and |
| subject to certain exceptions, the merger or consolidation of the Company with or into another person or the merger of another person with or into the Company, or the sale of all or substantially all the assets of Alion to another person. |
Optional Redemption. Prior to February 1, 2011, the Company may redeem all, but not less than
all, of the Senior Unsecured Notes at a redemption price equal to 100% of the principal amount of
the Senior Unsecured Notes plus accrued and unpaid interest to the redemption date plus an
applicable make-whole premium as of the redemption date.
In addition, any time prior to February 1, 2010, subject to certain conditions, the Company
may use the proceeds of a qualified equity offering to redeem Senior Unsecured Notes in an
aggregate principal amount not to exceed $87.5 million at a redemption price equal to the sum of
110.25% of the aggregate principal amount of the notes actually redeemed, plus accrued and unpaid
interest to the redemption date.
On or after February 1, 2011, the Company may redeem all or a portion of the Senior Unsecured
Notes at the redemption prices set forth below (expressed in percentages of principal amount on the
redemption date), plus accrued and unpaid interest to the redemption date, if redeemed during the
12-month period commencing on February 1 of the years set forth below:
Period | Redemption Price | |||
2011 |
105.125 | % | ||
2012 |
102.563 | % | ||
2013 and thereafter |
100.000 | % |
Exchange Offer; Registration Rights. The Company filed a registration statement with the SEC
offering to exchange the Senior Unsecured Notes for publicly registered notes. The registration
statement was declared effective May 10, 2007; the exchange offer closed June 20, 2007; all
outstanding notes were exchanged for publicly registered notes.
During the next six fiscal years
the Company expects that at a minimum, it will have to make the estimated interest and principal
payments set forth below.
6-Fiscal Years ($ In thousands) | ||||||||||||||||||||||||
2010 | 2011 | 2012 | 2013 | 2014 | 2015 | |||||||||||||||||||
Bank revolving credit facility |
||||||||||||||||||||||||
- Interest(1) |
$ | 914 | $ | 1,039 | $ | 859 | $ | 692 | $ | 731 | $ | 439 | ||||||||||||
Senior Term Loan |
||||||||||||||||||||||||
- Interest(2) |
16,957 | 22,466 | 22,293 | 7,851 | | | ||||||||||||||||||
- Principal(3) |
1,825 | 2,433 | 2,433 | 229,297 | | | ||||||||||||||||||
Senior Unsecured Notes |
||||||||||||||||||||||||
- Interest |
25,625 | 25,625 | 25,625 | 25,625 | 25,625 | 12,813 | ||||||||||||||||||
- Principal |
| | | | | 250,000 | ||||||||||||||||||
Subordinated Note(4) |
||||||||||||||||||||||||
- Interest |
3,223 | 3,369 | 3,594 | 3,332 | | | ||||||||||||||||||
- Principal |
3,000 | 3,000 | 2,000 | 70,311 | | | ||||||||||||||||||
Total cash pay interest |
46,719 | 52,499 | 53,371 | 37,500 | 26,356 | 13,252 | ||||||||||||||||||
Total cash pay principal |
4,825 | 5,433 | 4,433 | 299,608 | | 250,000 | ||||||||||||||||||
Total |
$ | 51,544 | $ | 57,932 | $ | 56,804 | $ | 337,108 | $ | 26,356 | $ | 263,252 | ||||||||||||
(1) | Alion anticipates it will regularly utilize a $25.0 million revolving credit facility to meet working capital needs. The present revolving credit facility matures in September 2010. The Company expects to replace it with a similar facility at least through 2015. Alion estimates the average utilized revolver balance will be $12.0 million for fiscal year 2010; $10.0 million for fiscal year 2011, $8.0 million for 2012, $6.0 for fiscal years 2013 and 2014, $3 million for fiscal year 2015 and minimal thereafter. Interest expense includes estimated fees for the unused balance of a $25.0 million revolving credit facility. The Company estimates the effective average cash-pay interest rate, excluding fees for the unused balance on the revolver, will be 9.5% for all periods presented. Alion expects it will be able to meet existing Term B Senior Credit Agreement financial covenants for the next 12 months. Therefore, the Company believes it will continue to have access to its $25.0 million revolving credit facility. |
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(2) | Alion forecasts the average annual Term B Senior Credit Agreement senior term loan balance will be: $235.7 million, $233.3 million, $230.8 million, and $81.0 million for fiscal years 2010 through 2013. The senior term loan matures February 2013. The Company expects it will need to refinance the Term B senior term loan before it matures and forecasts interest expense to continue at levels similar to prior years based on a forecast LIBOR rate plus the Credit Suisse Eurodollar spread. If Alion does not meet certain financial covenants by February 2010, interest on the Term B Senior Credit Agreement will increase beyond this rate by 100 basis points retroactive to the beginning of fiscal 2010. If Alion does not meet certain additional financial covenants by June 2010, interest will increase by an additional 100 basis points retroactive to the beginning of fiscal 2010. Each quarter that Alion continues not to meet the June 2010 financial covenants, interest will increase by a further 25 basis points. Alion estimates the effective annual interest rates for the fiscal years 2010 through 2013 will be approximately 9.6%, 9.6%, 9.8%, and 10.1%. Interest expense includes estimated senior term loan commitment fees. Alion expects it will be able to meet existing Term B Senior Credit Agreement financial covenants for the next 12 months and that the senior term loan principal will not be callable prior to maturity. | |
(3) | The Term B Senior Credit Agreement requires Alion to repay approximately 1.0 percent of the principal balance outstanding under the senior term loan annually. On a cumulative basis, Alion will pay approximately 4.3% of the principal through the first quarter of fiscal year 2013. The remaining principal balance is due on February 6, 2013, the senior term loan maturity date. The table reflects the balance drawn of $236.0 million as of December 31, 2009, payments of approximately $1.8 million for the balance of fiscal 2010 and $2.4 million in fiscal years 2011 and 2012, approximately $0.6 million payable the first quarter of fiscal 2013, and payment of the remaining principal (balance of $228.7 million) on February 2013. If Alion generates certain excess cash flow in a given fiscal year, issues or incurs certain debt or sells certain assets, the Term B Senior Credit Agreement requires the Company to prepay a portion of the principal. As of September 30, 2009, no mandatory prepayments are due. | |
(4) | The Term B Senior Credit Agreement prohibits Alion from making cash payments for principal or interest on the Subordinated Note. The Company and IIT modified the Subordinated Note to defer cash interest payments due January 2010 to April 2010. Failure to timely pay Subordinated Note principal is not an event of default; failure to pay Subordinated Note interest is an event of default that can accelerate repayment of the Term B Senior Credit Agreement. The Company expects to be able to either retire the Subordinated Note prior to April 2010 or amend it to defer cash interest payments until after the Term B Senior Credit Agreement expires. |
Contingent Obligations
Earn-outs
The Company has one remaining earn-out commitment arising from its July 2007 LogCon Group
acquisition. The maximum potential earn out is $600 thousand though July 2011; $100 thousand has
already been earned. Management believes any future LogCon Group earn-outs will not materially
affect Alions cash flows, financial position or operating results.
Other Contingent obligations which will impact the Companys cash flow
Other contingent obligations which will impact Alions cash flow include:
| IITs Subordinated Note warrant put rights; |
| Stock-based and long-term incentive compensation plan obligations; and |
| ESOP share repurchase and diversification obligations. |
As
of December 31, 2009, Alion had spent a cumulative total of
$71.6 million to repurchase
shares of its common stock to satisfy ESOP distribution and diversification requests from former
employees and Plan beneficiaries. In 2008, the Company changed its prior practice of immediately
paying out all distribution requests in full. In March 2008, Alion began paying ESOP beneficiaries
over the five-year distribution period permitted by ERISA and the terms of the Plan. Alion intends
to continue this practice for the foreseeable future in part to offset the cash flow effects of
annual employee diversification requests that began in fiscal 2008 and which are expected to
continue for the foreseeable future.
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Number of Shares | Total Value | |||||||||||
Date | Repurchased | Share Price | Purchased | |||||||||
(In thousands) | ||||||||||||
December 2008 |
233 | $ | 38.35 | $ | 9 | |||||||
March 2009 |
189,038 | $ | 38.35 | 7,250 | ||||||||
April 2009 |
122 | $ | 34.30 | 4 | ||||||||
May 2009 |
38 | $ | 34.30 | 1 | ||||||||
July 2009 |
100 | $ | 34.30 | 3 | ||||||||
July 2009 |
127 | $ | 38.35 | 5 | ||||||||
August 2009 |
178 | $ | 34.30 | 6 | ||||||||
September 2009 |
55,282 | $ | 34.30 | 1,896 | ||||||||
December 2009 |
745 | $ | 34.50 | 26 | ||||||||
Total |
245,864 | $ | 9,200 | |||||||||
Alion believes cash flow from operations and cash available under current and anticipated
revolving credit facilities will provide sufficient capital to fulfill current business plans and
fund working capital needs for at least the next 12 months. The Company intends to focus on
organic growth and improving processes and margins.
Although
Alion expects to have positive annual operating cash flow eventually, it will need to generate
significant additional revenue beyond current levels and earn net income in order to pay Senior
Credit Facility principal and interest, the Senior Unsecured Notes, the Subordinated Note and
Warrants, and satisfy ESOP repurchase and diversification obligations. Alion is negotiating with
existing and potential lenders to refinance or replace its existing revolving credit facility prior
to January 26, 2010. The Company does not yet know the terms under which it will be able to
replace or continue its existing revolver. Despite the current state of the credit markets,
Management does not expect that the interest rate on renewal or replacement of the Revolver will
have an effective coupon rate materially greater than the current rate. Therefore, Management does
not believe that renewal or extension of the Revolver will materially affect the Companys cash
flows or results of operations.
The Senior Credit Facility and Indenture allow Alion to make certain permitted acquisitions,
and the Company intends to use its available financing to do so. Alion plans to refinance the
senior term loan and the Subordinated Note before they mature. The Company is uncertain whether,
when and under what terms it will be able to refinance these obligations.
If plans or assumptions change, if assumptions prove inaccurate, if Alion consummates
additional or larger investments in or acquisitions of other companies than are currently planned,
if the Company experiences unexpected costs or competitive pressures, or if existing cash and
projected cash flows from operations prove insufficient, the Company may need to obtain greater
amounts of additional financing and sooner than expected. While Alion intends only to enter into
new financing or refinancing it considers advantageous, given the current state of the credit
markets, the Company cannot be certain sources of financing will be available in the future, or, if
available, that financing terms would be favorable.
Recently Issued Accounting Pronouncements
Accounting Standards Update 2009-13 Revenue Recognition Multiple Deliverable Revenue
Arrangements (ASU 2009-13) was issued in October 2009 and updates Accounting Standards Codification
(ASC) 605 Revenue Recognition. ASU 2009-13 removes the
objective-and-reliable-evidence-of-fair-value criterion from the separation criteria used to
determine whether an arrangement involving multiple deliverables contains more than one unit of
accounting; replaces references to fair value with selling price to distinguish from the fair
value measurements required under the Fair Value Measurements and Disclosures guidance; provides
a hierarchy that entities must use to estimate the selling price; eliminates the use of the
residual method for allocation; and expands the ongoing disclosure requirements. ASU 2009-13 is
effective for fiscal years beginning on or after June 15, 2010, and can be applied prospectively or
retrospectively. The Company is currently evaluating the effect, if any, that adopting ASU 2009-13
will have on its consolidated financial position and results of operations.
Accounting Standards Update 2009-14 Certain Revenue Arrangements That Include Software
Elements (ASU 2009-14) was issued in October 2009 and updates ASC 985 Software Revenue
Recognition. ASU 2009-14 clarifies which accounting guidance should be used to measure and
allocate revenue for arrangements that contain both tangible products and software, where the
software is more than incidental to the tangible product as a whole. ASU 2009-14 is effective for
fiscal years beginning on or after June 15, 2010 and applies to arrangements entered into or
materially modified on or after that date. The Company is currently evaluating the effect, if any,
that adopting ASU 2009-14 will have on its consolidated financial position and results of
operations.
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Forward Looking Statements
Information included and incorporated by reference in this Form 10-Q may contain
forward-looking statements that involve risks and uncertainties. These statements relate to the
Companys future plans, objectives, expectations and intentions and are for illustrative purposes
only. These statements may be identified by the use of words such as believe, expect, intend,
plan, anticipate, likely, will, pro forma, forecast, projections, could,
estimate, may, potential, should, would, and similar expressions.
Factors that could cause actual results to differ materially from anticipated results include,
but are not limited to:
| changes to the ERISA laws related to the KSOP; |
| changes to Alions subchapter S status, or any change in Alions effective tax rate; |
| additional costs to comply with the Sarbanes-Oxley Act of 2002, including any changes in SEC rules, and other corporate governance requirements; |
| failure of government customers to exercise contract options; |
| U.S. government project funding decisions; |
| government contract bid protest and termination risks; |
| competitive factors such as pricing pressures and/or competition to hire and retain employees; |
| results of current and/or future legal proceedings and government agency proceedings which may arise out of Alions operations and attendant risks of fines, liabilities, penalties, suspension and/or debarment; |
| undertaking acquisitions that increase costs or liabilities or are disruptive; |
| taking on additional debt to fund acquisitions; |
| failing to adequately integrate acquired businesses; |
| material changes in laws or regulations affecting Alions businesses; |
| other risk factors discussed in the Companys annual report on Form 10-K for the year ended September 30, 2009 filed with the SEC on December 24, 2009. |
Readers are cautioned not to place undue reliance on these forward-looking statements, which
reflect managements view only as of January 26, 2010. The Company undertakes no obligation to
update any of the forward-looking statements made herein, whether as a result of new information,
future events, changes in expectations or otherwise. This discussion addresses only continuing
operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest rate risk
The Company is exposed to interest rate risk principally for debt incurred to finance its
acquisitions, its periodic borrowings and related debt amendments, and re-financings. The balance
on the $25.0 million Revolver bears interest at variable rates currently based on Credit Suisses
(CS) prime rate (with a minimum of 4.5%) plus a maximum spread
of 500 basis points. The senior term
loan bears interest at variable rates currently tied to the Eurodollar rate (with a minimum of
3.5%) plus 600 basis points. Such variable rates increase the risk that interest charges will
increase materially if market interest rates increase. The approximate impact of a 1% increase in the
interest rate, as applied to principal balances drawn under the Senior Credit Facility would be,
$2.4 million, $2.3 million, $2.3 million, and $1.1 million for the balance of fiscal year 2010 and
fiscal years ending 2011 through 2013.
The Company does not use derivatives for trading purposes. It invests its excess cash in
short-term, investment grade, and interest-bearing securities.
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Foreign currency risk
Expenses and revenues from international contracts are generally denominated in U.S. dollars.
Alion does not believe operations are subject to material risks from currency fluctuations.
Risk associated with value of Alion common stock
Changes in the fair market value of Alions common stock affect the economic basis for the
Companys estimated Subordinated Note warrant liability. The value of the warrant liability would
increase by approximately $4.9 million if the price of the Companys stock were to increase by 10%
and would decrease by approximately $4.8 million if the price of the
Companys stock were to decrease by 10%. Such changes would be reflected in interest expense in
Alions consolidated statements of operations.
Changes in the fair market value of Alions stock also affect the Companys estimated KSOP
share repurchase obligations and its stock-based compensation obligations for stock appreciation
rights. Several factors affect the timing and amount of these obligations, including: the number
of employees who seek to redeem shares of Alion stock following termination of employment, and the
number of employees who exercise stock appreciation rights during any particular time period.
Item 4. Controls and Procedures
Disclosure Controls and Procedures. The Companys management, with the participation of the
Companys Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the
Companys disclosure controls and procedures (as such term is defined in Rule 15d 15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period
covered by this report. Disclosure controls and procedures are designed to ensure that information
required to be disclosed by the Company in the reports it is required to file or submit under the
Exchange Act, is recorded, processed, summarized and reported, within the time periods specified by
the Securities and Exchange Commissions rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required
to be disclosed by the Company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the Companys management, including its Chief Executive and Chief
Financial Officers, as appropriate to allow timely decisions regarding required disclosures. Based
on such evaluation, the Companys Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, the Companys disclosure controls and procedures are
effective and timely.
Changes in Internal Control Over Financial Reporting. There have not been any changes in the
Companys internal control over financial reporting (as such term is defined in Rule 15d 15(f)
under the Exchange Act) during the quarter ended December 31, 2009 that have materially affected,
or are reasonably likely to materially affect, the Companys internal control over financial
reporting.
Item 4T. Controls and Procedures
See disclosure under Item 4.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
See
Note 19 to the Condensed Consolidated Financial Statements. Other than the actions
discussed in the Companys most recent Annual Report on Form 10-K, the Company is not involved in
any legal proceeding other than routine legal proceedings occurring in the ordinary course of
business. Alion believes that these routine legal proceedings, in the aggregate, are not material
to its financial condition and results of operations.
As a government contractor, Alion may be subject from time to time to federal government
inquiries relating to its operations and to DCAA audits. The federal government can suspend or
debar, for a period of time, a contractor that is indicted or found to have violated the False
Claims Act or other federal laws. Such an event could also result in fines or penalties.
Item 1A. Risk Factors
There have been no material changes to the risk factors Alion disclosed in its Annual Report
on Form 10-K for the year ended September 30, 2009.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
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Item 6. Exhibits
Exhibit | ||
No. | Description | |
10.62
|
Amendment No. 9 to the Term B Senior Credit Agreement. (1) | |
10.63
|
Waiver dated as of December 14, 2009, by and among the Company, HFA, METI, CATI, JJMA, BMH, WCI, MA&D, WCGS, CS and the lenders party thereto, related to the Term B Senior Credit Agreement. (2) | |
10.64
|
Note and Warrant Redemption Agreement, Fourth Amendment to Seller Note Securities Purchase Agreement, First Amendment to the Second Amended and Restated Seller Note and Rights Agreement Termination Agreement, dated as of December 18, 2009 between Alion Science and Technology Corporation and Illinois Institute of Technology. (3) | |
31.1
|
Certification of Chief Executive Officer of Alion Science and Technology Corporation pursuant to Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended. | |
31.2
|
Certification of Chief Financial Officer of Alion Science and Technology Corporation pursuant to 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended. | |
32.1
|
Certification of Chief Executive Officer of Alion Science and Technology Corporation, 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 of Alion Science and Technology Corporation, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(1) | Incorporated by reference from the Companys Form 8-K filed with the SEC on October 13, 2009. |
(2) | Incorporated by reference from the Companys Form 8-K filed with the SEC on December 16, 2009. |
(3) | Incorporated by reference from the Companys Form 8-K filed with the SEC on December 24, 2009. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ALION SCIENCE AND TECHNOLOGY CORPORATION |
||||
By: | /s/ Michael J. Alber | |||
Name: | Michael J. Alber | |||
Title: | Principal Financial Officer and Duly Authorized Officer |
Date: January 26, 2010
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