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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
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010.
COMMISSION FILE NUMBER 33389756
Alion
Science and Technology Corporation
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE (State or Other Jurisdiction of Incorporation of Organization) |
542061691 (I.R.S. Employer Identification No.) |
|
10 West 35th Street Chicago, IL 60616 (312) 567-4000 |
1750 Tysons Boulevard, Suite 1300 McLean, VA 22102 (703) 9184480 |
(Address, including Zip Code and Telephone Number with 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 May 14, 2010 was: Common Stock 5,469,272
ALION SCIENCE AND TECHNOLOGY CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2010
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2010
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Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
ALION SCIENCE AND TECHNOLOGY CORPORATION
Condensed Consolidated Balance Sheets
(unaudited)
As of March 31, 2010 and September 30, 2009
As of March 31, 2010 and September 30, 2009
March 31, | September 30, | |||||||
2010 | 2009 | |||||||
(In thousands, except share | ||||||||
and per share information) | ||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 28,300 | $ | 11,185 | ||||
Accounts receivable, net |
187,847 | 180,157 | ||||||
Prepaid expenses and other current assets |
5,432 | 3,795 | ||||||
Total current assets |
221,579 | 195,137 | ||||||
Property, plant and equipment, net |
12,952 | 14,474 | ||||||
Intangible assets, net |
23,048 | 28,680 | ||||||
Goodwill |
398,921 | 398,921 | ||||||
Other assets |
10,661 | 10,286 | ||||||
Total assets |
$ | 667,161 | $ | 647,498 | ||||
Current liabilities: |
||||||||
Interest payable |
$ | 5,095 | $ | 9,039 | ||||
Current portion, senior term loan payable |
| 2,389 | ||||||
Current portion, subordinated note payable |
| 3,000 | ||||||
Current portion, acquisition obligations |
| 50 | ||||||
Trade accounts payable |
71,127 | 60,707 | ||||||
Accrued liabilities |
54,698 | 45,425 | ||||||
Accrued payroll and related liabilities |
36,435 | 43,033 | ||||||
Billings in excess of revenue earned |
3,783 | 3,661 | ||||||
Total current liabilities |
171,138 | 167,304 | ||||||
Senior term loan payable, excluding current portion |
| 229,221 | ||||||
Senior secured notes |
268,400 | | ||||||
Senior unsecured notes |
245,684 | 245,241 | ||||||
Subordinated note payable |
| 46,932 | ||||||
Accrued compensation, excluding current portion |
5,275 | 5,740 | ||||||
Accrued postretirement benefit obligations |
740 | 717 | ||||||
Non-current portion of lease obligations |
7,921 | 7,286 | ||||||
Deferred income taxes |
33,818 | | ||||||
Commitments and contingencies |
| | ||||||
Redeemable common stock warrants |
| 32,717 | ||||||
Redeemable common stock, $0.01 par value, 8,000,000 shares
authorized, 5,469,272 and 5,424,274 shares issued and outstanding
at March 31, 2010 and September 30, 2009 |
153,140 | 187,137 | ||||||
Common stock warrants |
20,785 | | ||||||
Accumulated other comprehensive loss |
(238 | ) | (238 | ) | ||||
Accumulated deficit |
(239,502 | ) | (274,559 | ) | ||||
Total liabilities, redeemable common stock and accumulated deficit |
$ | 667,161 | $ | 647,498 | ||||
See accompanying notes to condensed consolidated financial statements.
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ALION SCIENCE AND TECHNOLOGY CORPORATION
Condensed Consolidated Statements of Operations
(unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In thousands, except share and per share information) | ||||||||||||||||
Contract revenue |
$ | 203,546 | $ | 195,429 | $ | 409,284 | $ | 384,225 | ||||||||
Direct contract expense |
156,049 | 149,135 | 315,045 | 294,457 | ||||||||||||
Gross profit |
47,497 | 46,294 | 94,239 | 89,768 | ||||||||||||
Operating expenses: |
||||||||||||||||
Indirect contract expense |
9,982 | 9,332 | 19,268 | 18,456 | ||||||||||||
Research and development |
309 | 78 | 570 | 147 | ||||||||||||
General and administrative |
18,466 | 13,426 | 34,473 | 23,599 | ||||||||||||
Rental and occupancy expense |
8,298 | 8,468 | 16,284 | 16,206 | ||||||||||||
Depreciation and amortization |
4,212 | 4,700 | 8,443 | 9,506 | ||||||||||||
Total operating expenses |
41,267 | 36,004 | 79,038 | 67,914 | ||||||||||||
Operating income |
6,230 | 10,290 | 15,201 | 21,854 | ||||||||||||
Other income (expense): |
||||||||||||||||
Interest income |
12 | 25 | 57 | 48 | ||||||||||||
Interest expense |
(14,097 | ) | (10,244 | ) | (30,983 | ) | (24,332 | ) | ||||||||
Other |
87 | (87 | ) | (24 | ) | (122 | ) | |||||||||
Gain on extinguishment of debt |
50,749 | | 50,749 | | ||||||||||||
Total other income (expense) |
36,751 | (10,306 | ) | 19,799 | (24,406 | ) | ||||||||||
Pre-tax income (loss) |
42,981 | (16 | ) | 35,000 | (2,552 | ) | ||||||||||
Income tax (expense) benefit |
(33,816 | ) | 55 | (33,776 | ) | 51 | ||||||||||
Net income (loss) |
$ | 9,165 | $ | 39 | $ | 1,224 | $ | (2,501 | ) | |||||||
Basic and diluted earnings (loss) per share |
1.69 | 0.01 | 0.23 | (0.48 | ) | |||||||||||
Basic and weighted average common shares outstanding |
5,411,342 | 5,227,835 | 5,417,756 | 5,228,787 | ||||||||||||
See accompanying notes to condensed consolidated financial statements.
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ALION SCIENCE AND TECHNOLOGY CORPORATION
Condensed Consolidated
Statements of Cash Flows
(unaudited)
Six Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | 1,224 | $ | (2,501 | ) | |||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation and amortization |
8,443 | 9,506 | ||||||
Bad debt expense |
| 512 | ||||||
Accretion of debt to face value |
| 1,180 | ||||||
Amortization of debt issuance costs |
2,223 | 1,364 | ||||||
Secured Note paid in kind interest |
155 | | ||||||
Change in fair value of redeemable common stock warrants |
(160 | ) | (6,899 | ) | ||||
Stock-based compensation |
(865 | ) | (5,764 | ) | ||||
Incentive compensation |
1,168 | 1,848 | ||||||
Gain on extinguishment of debt |
(50,749 | ) | | |||||
Deferred income taxes |
33,818 | | ||||||
Other gains and losses |
(1 | ) | 18 | |||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
(7,690 | ) | (15,824 | ) | ||||
Other assets |
(754 | ) | (578 | ) | ||||
Trade accounts payable |
10,540 | 2,100 | ||||||
Accrued liabilities |
5,675 | (347 | ) | |||||
Interest payable |
(3,944 | ) | 2,478 | |||||
Other liabilities |
840 | 4,022 | ||||||
Net cash used in operating activities |
(77 | ) | (8,885 | ) | ||||
Cash flows from investing activities: |
||||||||
Cash paid for acquisitions-related obligations |
(50 | ) | (166 | ) | ||||
Capital expenditures |
(1,271 | ) | (1,076 | ) | ||||
Proceeds from sale of assets |
5 | | ||||||
Net cash used in investing activities |
(1,316 | ) | (1,242 | ) | ||||
Cash flows from financing activities: |
||||||||
Change in book overdraft |
| 100 | ||||||
Cash paid for interest rate swap |
| (4,647 | ) | |||||
Sale of Secured Notes |
281,465 | | ||||||
Sale of Common Stock Warrants |
20,785 | |||||||
Payment of debt issue costs |
(16,710 | ) | | |||||
Payment of Term B Loan |
(236,596 | ) | (1,216 | ) | ||||
Repurchase of Subordinated Note and related warrants |
(25,000 | ) | | |||||
Payment of Subordinated Note principal |
| (3,000 | ) | |||||
Revolver borrowings |
84,200 | 227,500 | ||||||
Revolver repayments |
(84,200 | ) | (222,780 | ) | ||||
Loan to ESOP Trust |
(5,323 | ) | (5,936 | ) | ||||
ESOP loan repayment |
5,323 | 5,936 | ||||||
Redeemable common stock purchased from ESOP Trust |
(7,561 | ) | (7,232 | ) | ||||
Redeemable common stock sold to ESOP Trust |
2,128 | 5,115 | ||||||
Net cash provided by (used in) financing activities |
18,511 | (6,160 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
17,115 | (16,287 | ) | |||||
Cash and cash equivalents at beginning of period |
11,185 | 16,287 | ||||||
Cash and cash equivalents at end of period |
$ | 28,300 | $ | | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid for interest |
$ | 32,759 | $ | 23,397 | ||||
Cash received for taxes |
(42 | ) | (51 | ) |
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ALION SCIENCE AND TECHNOLOGY CORPORATION
Condensed Consolidated Statements of Cash Flows (unaudited)
Six Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Non-cash financing activities: |
||||||||
Common stock issued to ESOP Trust in satisfaction
of employer contribution liability |
$ | 5,268 | $ | 5,252 |
See accompanying notes to condensed consolidated financial statements.
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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 was established in October 2001 as a for-profit S-Corporation 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.
On March 22, 2010, the Company became a C-Corporation because it no longer met the Internal
Revenue Code S-corporation requirement that it have only a single class of stock. In connection
with the sale of the Units, Alion issued deep-in-the-money common stock warrants
considered to be a second class of stock. See Note 13.
(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 consisting of normal recurring adjustments and reclassifications
that are necessary for fair presentation of the periods presented. The results for the six months
ended March 31, 2010 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.
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.
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ALION SCIENCE AND TECHNOLOGY CORPORATION
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.
Federal government agency contracts are subject to periodic funding. A customer may fund a
contract in its entirety at inception or ratably throughout its period of performance as services
are provided. If Alion determines contract funding is not probable, it defers revenue recognition
until realization is probable. The federal government can audit Alions contract costs and adjust
amounts through negotiation. The government considers Alion a major contractor; its auditors
maintain an office on site. The government has audited the Companys claimed costs through fiscal
year 2004. The Company negotiated and settled indirect rates through fiscal year 2004 with no
material adverse effect on operating results or cash flows. DCAA is currently auditing the
Companys indirect cost proposals for fiscal 2005 and 2006. The Company submitted its fiscal year
2009, 2008 and 2007 indirect cost proposals in March 2010, 2009 and 2008. Alion has recorded
federal government contract revenue 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.
Alion generates software-related revenue from licensing software and providing services. In
general, professional services are essential to the functionality of the solutions the Company
sells. Alion applies the percentage of completion method in ASC 605 Revenue Recognition to
recognize revenue.
Income Taxes
From its inception until March 22, 2010, Alion was an S-corporation and was not subject to
federal or most state income taxes. As a pass-through entity Alions income and losses were
allocated to its tax-exempt shareholder, the Alion Science and Technology Corporation Employee
Stock Ownership, Savings and Investment Trust (the ESOP Trust). All of Alions subsidiaries were
qualified S-corporation subsidiaries or disregarded entities included in its consolidated federal
tax returns.
On March 22, 2010, Alion issued deep-in-the-money warrants that are deemed to constitute a
second class of stock. Because it was deemed to have two classes of stock, the Company ceased to
qualify as an S-corporation and automatically became a C-corporation subject to federal and state
income taxes. Some Alion subsidiaries also became subject to separate state income tax and
reporting requirements. From its formation, Alion Science and Technology (Canada) Corporation has been subject
to Canadian federal and provincial income taxes.
Alion accounts for income taxes by applying the provisions in currently enacted tax laws. The
Company determines deferred income taxes based on the estimated future tax effects of differences
between the financial statement and tax bases of its assets and liabilities. Deferred income tax
provisions and benefits will change as assets or liabilities change from year-to-year. In providing
for deferred taxes, Alion considers the tax regulations of the jurisdictions where it operates;
estimates of future taxable income; and available tax planning strategies. If tax regulations,
operating results or the ability to implement tax-planning strategies change, the carrying value of
deferred tax assets and liabilities may require adjustment.
Alion has a history of operating losses for both tax and financial statement purposes. The
Company has recorded valuation allowances equal to deferred tax assets based on the likelihood that
it may not be able to realize the value of these assets. Alion recognizes the benefit of a tax
position only after determining that the relevant tax authority would more likely than not
sustain the Companys position following an audit. For tax positions meeting the more likely than
not threshold,
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
the Company recognizes the largest benefit that has a greater than 50 percent
likelihood of being realized upon ultimate settlement with the relevant tax authority.
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.
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.
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
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.
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 March 31, 2010 nor were there any
significant events in the quarter that indicated impairment to goodwill as of March 31, 2010.
Alion amortizes intangible assets as economic benefits are consumed over estimated useful
lives. As of March 31, 2010, the Company had a recorded net intangible asset balance of
approximately $23.0 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 |
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
Redeemable Common Stock
There is no public market for Alions redeemable 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 ESOP
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 March 31, 2010 included
$56.4 million for changes in the Companys share redemption liability. Outstanding redeemable
common stock had an aggregate fair value of approximately $153.1 million as of March 31, 2010.
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. Senior long-term debt
includes the Companys revolving credit agreement, its Secured Notes and its Unsecured Notes.
Senior long-term debt formerly included Alions Term B Senior Credit Facility (revolving credit
facility and term loan) which the Company extinguished on March 22, 2010.
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 the ESOP Trustee; and the share price selected by the ESOP Trustee.
The only market for the Companys subordinated debt consisted of principal to principal
transactions. The Company carried its subordinated notes at amortized cost. On March 22, 2010,
Alion extinguished the Subordinated Note and related
warrants. On the same date, the Company issued new warrants when it issued new senior secured
notes. The new warrants qualify as equity and are not subject to fair value measurement or
reporting.
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
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 (ASU 2009-13) Revenue Recognition Multiple Deliverable
Revenue Arrangements 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 (ASU 2009-14) Certain Revenue Arrangements That Include
Software Elements 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.
(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 April 2010, the Internal Revenue Service
(IRS) issued a determination letter that the ESOP Trust and the Plan, as amended and restated as of
October 1, 2006, and including an amendment to the Plan executed in June 2009, qualify under
Sections 401(a) and 501(a) of the Internal Revenue Code of 1986 as amended (the IRC). 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 and phantom
stock. Even after including required adjustments to the earnings per share numerator, the warrants
and phantom stock are anti-dilutive for all periods presented. The Companys 1,630,437
Subordinated Note warrants were outstanding for all of 2009 and up through March 22, 2010 when they
were extinguished. Also on March 22, 2010, Alion issued 310,000 Units that include the Secured
Notes and warrants to purchase 602,614 shares of Alion common stock The Secured Note warrants
have a penny per share exercise price, are exercisable beginning March 22, 2011 and expire March
15, 2017. The Secured Note warrants are not redeemable and do not have price protection; they are
classified as permanent equity.
(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.
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
Because Alion is now a C-corporation, terminating ESOP participants can choose whether to
receive 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 ($28.00 at March 31, 2010 and
$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 $3.7 million and $3.4 million in compensation expense for the KSOP for the
quarters ended March 31, 2010 and 2009, and $7.0 million and $6.7 million for the six months ended
March 31, 2010 and 2009.
(6) Accounts Receivable
Accounts receivable at March 31, 2010 and September 30, 2009 consisted of the following
March 31, | September 30, | |||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Billed receivables |
$ | 103,166 | $ | 108,566 | ||||
Unbilled receivables: |
||||||||
Amounts currently billable |
37,392 | 22,954 | ||||||
Revenues recorded in excess of milestone billings on fixed price contracts |
3,726 | 3,757 | ||||||
Revenues recorded in excess of estimated contract value or funding |
33,543 | 36,327 | ||||||
Retainages and other amounts billable upon contract completion |
13,877 | 12,972 | ||||||
Allowance for doubtful accounts |
(3,857 | ) | (4,419 | ) | ||||
Total Accounts Receivable |
$ | 187,847 | $ | 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 $88.5
million as of March 31, 2010 and included approximately $33.5 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 $13.9 million at March 31, 2010.
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
(7) Property, Plant and Equipment
March 31, | September 30, | |||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Leasehold improvements |
$ | 10,980 | $ | 10,214 | ||||
Equipment and software |
33,100 | 32,807 | ||||||
Total cost |
44,080 | 43,021 | ||||||
Less: accumulated depreciation and amortization |
(31,128 | ) | (28,547 | ) | ||||
Net Property, Plant and Equipment |
$ | 12,952 | $ | 14,474 | ||||
Depreciation and leasehold amortization expense for fixed assets was approximately $1.4
million and $1.5 million for the quarters ended March 31, 2010 and 2009 and $2.8 million and $2.9
million for the six months ended March 31, 2010 and 2009.
(8) Goodwill and Intangible Assets
As of March 31, 2010, 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 March 31, 2010 and September 30, 2009.
March 31, 2010 | September 30, 2009 | |||||||||||||||||||||||
Accumulated | Accumulated | |||||||||||||||||||||||
Gross | Amortization | Net | Gross | Amortization | Net | |||||||||||||||||||
Purchased contracts |
$ | 111,635 | $ | (88,987 | ) | $ | 22,648 | $ | 111,635 | $ | (83,563 | ) | $ | 28,072 | ||||||||||
Internal use software and
engineering designs |
2,155 | (1,763 | ) | 392 | 2,155 | (1,568 | ) | 587 | ||||||||||||||||
Non-compete agreements |
725 | (717 | ) | 8 | 725 | (704 | ) | 21 | ||||||||||||||||
Total |
$ | 114,515 | $ | (91,467 | ) | $ | 23,048 | $ | 114,515 | $ | (85,835 | ) | $ | 28,680 | ||||||||||
The weighted-average remaining amortization period of intangible assets was approximately five
years at March 31, 2010 and September 30, 2009. Amortization expense was approximately $2.8
million and $3.2 million for the quarters ended March 31, 2010 and 2009 and $5.6 million and $6.6
million for the six months ended March 31, 2010 and 2009. Estimated aggregate amortization expense
for the next five years and thereafter is as follows.
(In thousands) | ||||
For the remaining six months: |
||||
2010 |
$ | 5,353 | ||
For the year ending September 30: |
||||
2011 |
6,843 | |||
2012 |
5,766 | |||
2013 |
3,246 | |||
2014 |
879 | |||
2015 |
737 | |||
Thereafter |
224 | |||
$ | 23,048 | |||
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
(9) Long-Term Debt
Alions current debt structure includes a $25 million revolving credit facility, the Unsecured
Notes and the Secured Notes. On March 22, 2010, the Company retired its Term B Senior Credit
Agreement, its Subordinated Note and the Subordinated Note Warrants.
Credit Agreement
On March 22, 2010, the Company entered into a new Credit Agreement (Credit Agreement), which
consists of a $25.0 million senior revolving credit facility (Revolver), approximately $112
thousand of which was allocated to letters of credit and deemed borrowed, but none of which was
actually drawn as of March 31, 2010.
Under the Credit Agreement, Alion may request up to $10.0 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 Credit Agreement in full no later than August 22, 2014.
The Credit Agreement permits Alion to use the Revolver for working capital, other general
corporate purposes, and to finance permitted acquisitions.
Security.
The Credit Agreement is secured by a first priority security interest in all
current and future tangible and intangible property of Alion and its guarantor subsidiaries, HFA,
IPS, CATI, METI, JJMA, BMH, WCI, WCGS, MA&D and Alion Canada
(US) Corporation. On March 22, 2010,
Alion and the subsidiary guarantors entered into an Intercreditor Agreement with Wilmington Trust
Company and Credit Suisse AG, Cayman Islands Branch (Intercreditor Agreement). Under the
Intercreditor Agreement, lenders under the Credit Agreement have a super priority right of payment
with respect to the underlying collateral, which is superior to the rights of lenders under the
Secured Notes.
Guarantees. The Companys obligations under the Credit Agreement are guaranteed by the
Companys subsidiaries, HFA, IPS, CATI, METI, JJMA, BMH, WCI, WCGS, MA&D and Alion Canada (US)
Corporation. These subsidiaries also guarantee all of the Companys obligations under the Secured
Notes and Unsecured Notes (each described below). Formerly, only HFA, CATI, METI, JJMA, BMH, WCI
and MA&D were guarantors.
Interest and Fees. Under the Credit Agreement, at the Companys election, the Revolver can
bear interest at either of two floating rates based on either a Eurodollar base or an alternative
base rate (ABR). The minimum interest rate on the Revolver is 9.50%. The Eurodollar 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.
Other Fees and Expenses. Each quarter Alion is required to pay a commitment fee equal to 175
basis points per year on the prior quarters daily unused balances of the Revolver. As of March
31, 2010, $112 thousand was allocated to outstanding letters of credit. The Company paid
approximately $12 thousand in commitment fees for the Revolver for the quarter ended March 31,
2010.
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 also required to
pay interest in arrears for all outstanding letters of credit. The interest rate is based on the
Applicable Percentage for Eurodollar loans which was 6.0% as of March 31, 2010. The Credit
Agreement also requires the Company to pay an annual agents fee.
Covenants. The Credit Agreement requires the Company to achieve the following minimum
Consolidated EBITDA targets at the end of each calendar quarter during the time periods indicated
below. There is no Consolidated EBITDA covenant in effect for the twelve months ended March 31,
2010.
Period | Minimum Consolidated EBITDA | |||
June 30, 2010 through March 31, 2011 |
$ | 52,500,000 | ||
April 1, 2011 through September 30, 2011 |
$ | 55,000,000 | ||
October 1, 2011 through September 30, 2012 |
$ | 60,000,000 | ||
October 1, 2012 through September 30, 2013 |
$ | 62,500,000 | ||
Thereafter |
$ | 65,000,000 |
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
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 (now extinguished Subordinate
Note) 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.
Secured Notes
On March 22, 2010, Alion issued and sold $310 million of its private units (Units) to Credit
Suisse, which informed the Company it had resold most of the units to qualified institutional
buyers. Each of the 310,000 Units sold consisted of $1,000 of Alions private 12% senior secured
notes (Secured Notes) and a warrant to purchase 1.9439 shares of Alions common stock.
Security. The Secured Notes are secured by a first priority security interest in all current
and future tangible and intangible property of Alion and its guarantor subsidiaries, HFA, IPS,
CATI, METI, JJMA, BMH, WCI, WCGS, MA&D and Alion Canada (US) Corporation. The Secured Notes are
senior obligations of Alion and rank pari passu in right of payment with existing and future senior
debt, including the Credit Agreement, except to the extent that the Intercreditor
agreement provides Credit Agreement lenders with a super priority right of payment with respect to
the underlying collateral.
Guarantees. The Companys obligations under the Secured Notes are guaranteed by the Companys
subsidiaries, HFA, IPS, CATI, METI, JJMA, BMH, WCI, WCGS, MA&D and Alion Canada (US) Corporation.
Interest and Fees. The Secured Notes bear interest at 12% per year, which is payable 10% in
cash and 2% by increasing the principal amount of the Secured Notes (PIK Interest). Interest is
payable semi-annually in arrears on May 1 and November 1. Alion pays interest to holders of record
as of the immediately preceding April 15 and October 15. The Company must pay interest on overdue
principal or interest at 13% per annum to the extent lawful.
Unsecured Notes
On February 8, 2007, Alion issued and sold $250.0 million of its private 10.25% unsecured
notes due February 1, 2015 (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 Unsecured Notes for publicly tradable Unsecured Notes with the same terms.
Guarantees. The Companys obligations under the Unsecured Notes are guaranteed by the
Companys subsidiaries, HFA, IPS, CATI, METI, JJMA, BMH, WCI, WCGS, MA&D and Alion Canada
(US) Corporation.
Interest and Fees. The 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.
Retired Term B Senior Credit Agreement
In August 2004, Alion entered into the Term B Senior Credit Agreement with a syndicate of
financial institutions. The Company borrowed and re-paid various sums over the life of the loan.
As of March 22, 2010, the Term B Senior Credit Agreement consisted of a $236.0 million senior term
loan, a $25.0 million senior revolving credit facility with no balance actually drawn, and
approximately $4.0 million in accrued interest payable. On March 22, 2010, the Company used
proceeds from the issuance of the Units to redeem and retire all of the loans outstanding under the
Term B Senior Credit Agreement and
14
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
to pay all accrued and unpaid interest on such loans through the
date of redemption. Alion recognized a $6.9 million loss on extinguishing the Term B loans.
As a cost of the consents and waivers the Company obtained from its lenders in September and
December 2009, the annual interest rate on the outstanding Term B loan balances increased by 100
basis points on February 1, 2010 and the Company paid the Term B lenders a 100 basis point penalty
on March 1, 2010. Management had originally expected to close a
re-financing transaction prior to the penalty payment due date and therefore the Company did not
record any penalty-related interest expense prior to the current quarter.
Retired 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. Over the life of the Subordinated Note,
IIT and Alion amended its terms to adjust interest accrual rates, timing and payments and to revise
the loan amortization schedule.
Through December 2008, Subordinated Note interest 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. Beginning December 2008,
interest was payable at 10% for PIK notes and 6% in cash with all notes due August 2013. PIK notes
deferred most Subordinated Note interest until maturity.
On December 21, 2009, IIT agreed to sell Alion the Subordinated Note and warrants for $25
million and to defer Alions January 2010 interest payment to April 2010. On March 22, 2010, the
Company used $25 million of the proceeds from the issuance of the Units to redeem the Subordinated
Note and related warrants held by IIT. Alion recognized a $57.6 million gain on retiring the
Subordinated Note and warrants. The Subordinated Note had an aggregate carrying value of $50.0
million ($60.1 million of principal, PIK and accrued interest net of $10.1 million in unamortized
debt issue and loan modification costs). The warrants had an estimated fair value of $32.6
million. The Company did not make the deferred January interest payment and de-recognized the
related interest expense.
Interest Payable
Interest Payable consisted of the following balances:
March 31, | September 30, | |||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Unsecured Notes |
$ | 4,271 | $ | 4,271 | ||||
Secured Notes |
824 | | ||||||
Senior Term Loan |
| 3,975 | ||||||
Subordinated Note Payable |
| 793 | ||||||
Total |
$ | 5,095 | $ | 9,039 | ||||
As of March 31, 2010, Alion must make the following principal repayments (at face amount
before debt discount) for its outstanding debt.
2010 | 2011 | 2012 | 2013 | 2014 | 2015 | Total | ||||||||||||||||||||||
Secured Notes and PIK Interest(1) |
$ | | $ | | $ | | $ | | $ | | $ | 339,788 | $ | 339,788 | ||||||||||||||
Unsecured Notes(2) |
| | | | | 250,000 | 250,000 | |||||||||||||||||||||
Total Principal Payments |
$ | | $ | | $ | | $ | | $ | | $ | 589,788 | $ | 589,788 | ||||||||||||||
15
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
1. | The Secured Notes due in 2015 include $310 million of debt issued in March 2010 and an estimated $29.8 million in PIK interest added to principal over the life of the notes. As of March 31, 2010, the $276.9 million carrying value on the face of the balance sheet included $310 million in principal, $0.9 million in accrued interest and is net of $34 million in unamortized debt issue costs. Initial debt issue costs consist of $7.7 million in original issue discount, $5.8 million in third-party costs and $20.8 million for the initial fair value of the new Secured Note warrants. | ||
2. | The Unsecured Notes on the face of the balance sheet include $250 million in principal and $4.3 million in unamortized debt issue costs as of March 31, 2010 (initially $7.1 million). |
(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 former Subordinated Note warrants were
classified as Level 3 liabilities. 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 March 22, 2010, Alion measured the fair value of the Secured Note warrants at issuance
based on the $34.50 underlying estimated fair value of a share of Alion common stock as of
September 30, 2009, the then most-recent valuation performed for the ESOP Trustee and approved by
the Board of Directors; a 3.39% risk-free U.S. Treasury interest rate for a comparable seven-year
investment period 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. The Secured Note
warrants are classified as permanent equity and are carried at the historical date-of-issue fair
value. As permanent equity, the value of the Secured Note warrants will not be re-measured at
future reporting dates.
The Company froze the estimated fair value of its to-be retired Subordinated Note Warrants at
their reported value as of December 2009 when IIT agreed to sell the Subordinated Note and Warrants
to Alion. On March 22, 2010, the Company
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
de-recognized its December 2009 Subordinated Note Warrant
liability when it re-purchased the Subordinated Note and related Warrants from IIT.
At March 31, 2010, the Company had no outstanding assets or liabilities required to be
reported at fair value. Valuation techniques utilized in the fair value measurement of assets
and liabilities presented on the Companys balance sheet for each period presented 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 March 2010 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: as of September 30, 2009 |
||||||||||||
Redeemable common stock warrants |
| | (32,717 | ) | ||||||||
Liabilities: as of September 30, 2009 |
$ | | $ | | $ | (32,717 | ) | |||||
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
March 31, 2010 and 2009.
As of March 31, | ||||||||
2010 | 2009 | |||||||
Redeemable Common Stock | ||||||||
Warrants | ||||||||
Balance, beginning of period |
$ | (32,557 | ) | $ | (39,996 | ) | ||
Total realized and unrealized gains and
(losses) |
14,724 | | ||||||
Included in interest expense |
(160 | ) | 1,454 | |||||
Issuances and settlements |
17,993 | | ||||||
Balance, end of period |
$ | | $ | (38,542 | ) | |||
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The Companys 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 to convert
floating rate interest payable on a portion of its Senior Term Loan to a fixed rate, and to adjust
timing of some Senior Term Loan net interest payments. The swap agreement notional principal was
$240 million. The swap expired in November 2008. The Company made its final semi-annual interest
payment November 1, 2008. Alion received quarterly floating rate interest payments in February and
May at 7.32% and in August and November 2008 at 5.49%. Alion paid interest semi-annually in May
and November 2008 at 6.52%. All swap payments were net cash settled.
(12) Redeemable Common Stock Warrants
Alion
used an option pricing model to estimate the fair value of its redeemable common stock warrants.
Management considered 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 reviewed
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
the reasonableness
of the warrant liability Management determined was appropriate for the Company to recognize.
The Audit and Finance Committee considered 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. 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. Both sets of warrants were
exercisable at the current fair value per share of Alion common stock, less the exercise price. On
March 22, 2010, the Company retired the Subordinated Note and the related warrants for the
aggregate price of $25 million and recognized a net gain of $57.6 million.
In accordance with ASC 815 Derivatives, Alion classified the Subordinated Note warrants as
debt instruments indexed to and potentially settled in the Companys own stock and not as equity.
(13) Secured Note Common Stock Warrants
On March 22, 2010, Alion issued 310,000 Units. Each Unit consists of $1,000 of Secured Note
face value and a warrant to purchase 1.9439 shares of Alion common stock. The Secured Note
warrants entitle holders to purchase a total of 602,614 shares of Alion common stock. Each Secured
Note warrant has an exercise price of a penny per share; the Secured Note warrants are not
redeemable for cash.
The Company agreed to register the Secured Notes, but is not required to register the
warrants. The Units separate into Secured Notes and warrants at the earlier of June 22, 2010
and the closing of an exchange offer for the Secured Notes. Each warrant will become exercisable
on March 22, 2011 and expire on March 15, 2017.
The Secured Note warrants had an initial fair value of approximately $20.8 million based on
Alions former share price of $34.50. Alion recognized the value of the warrants as part of the
debt issue costs for the Secured Notes and recorded the corresponding credit to equity. The
Company accounts for the Secured Note warrants as equity and must reassess this classification each
reporting period. The Company identified no required changes in accounting treatment as of March
31, 2010.
(14) Leases
Future minimum lease payments under non-cancelable operating leases for buildings, equipment
and automobiles at March 31, 2010 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 $285 thousand at March 31, 2010. 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.
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
Lease Payments for Fiscal Years Ending | (In thousands) | |||
2010 (for the remainder of fiscal year) |
$ | 14,099 | ||
2011 |
26,296 | |||
2012 |
22,336 | |||
2013 |
20,842 | |||
2014 |
14,408 | |||
2015 |
14,366 | |||
And thereafter |
24,180 | |||
Gross lease payments |
$ | 136,527 | ||
Less: non-cancelable subtenant receipts |
(3,104 | ) | ||
Net lease payments |
$ | 133,423 | ||
Composition of Total Rent Expense
March 31, | ||||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Minimum rentals |
$ | 11,649 | $ | 12,821 | ||||
Less: Sublease rental income |
(958 | ) | (1,484 | ) | ||||
Total rent expense, net |
$ | 10,691 | $ | 11,337 | ||||
(15) 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 $565 thousand in long term incentive
compensation expense for the quarter ended March 31, 2010 and $1.2 million year to date. In 2009,
Alion recognized long term incentive compensation expense of $924 thousand in the second quarter
and $1.8 million year to date.
(16) Stock Appreciation Rights
As of March 31, 2010, Alion had granted 1,240,110 SARs to employees under the 2004 SAR plan.
For the quarters ended March 31, 2010 and 2009, the Company recognized a credit to compensation
expense for the SAR plan of approximately $893 thousand and $1.2 million. For the six months ended
March 31, 2010 and 2009, the Company recognized a credit to compensation expense of approximately
$879 thousand and $1.1 million.
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.
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 March
31, 2010 and September 30, 2010. 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
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
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 March 31, 2010
Stock Appreciation Rights
As of March 31, 2010
Shares | ||||||||||||
Granted | ||||||||||||
to | Exercise | Outstanding | ||||||||||
Date of Grant | Employees | Price | at 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
Stock-based Compensation Disclosures per ASC 718
Stock Appreciation Rights
As of March 31, 2010
Stock Appreciation Rights
As of March 31, 2010
Outstanding | Vested at | Exercisable | ||||||||||||||||||||||
Date of Grant | at 03/31/10 | Forfeited | Exercised | Expired | 03/31/10 | at 03/31/10 | ||||||||||||||||||
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 |
167,034 | 412 | 7,838 | | 167,034 | | ||||||||||||||||||
February 2006 |
7,750 | | | | 7,750 | | ||||||||||||||||||
February 2006 |
1,250 | | 1,250 | | 1,250 | | ||||||||||||||||||
May 2006 |
6,000 | | | | 4,500 | | ||||||||||||||||||
July 2006 |
10,000 | | | | 7,500 | | ||||||||||||||||||
October 2006 |
2,500 | | | | 1,875 | | ||||||||||||||||||
December 2006 |
161,930 | 2,830 | 6,740 | | 121,448 | | ||||||||||||||||||
February 2007 |
21,200 | 250 | 250 | | 15,900 | | ||||||||||||||||||
May 2007 |
2,000 | | | | 1,000 | | ||||||||||||||||||
September 2007 |
2,000 | | | | 1,000 | | ||||||||||||||||||
December 2007 |
178,040 | 5,313 | 4,387 | | 89,020 | | ||||||||||||||||||
April 2008 |
2,000 | | | | 500 | | ||||||||||||||||||
September 2008 |
2,000 | | | | 500 | | ||||||||||||||||||
December 2008 |
178,475 | 9,275 | 2,125 | | 44,619 | | ||||||||||||||||||
April 2009 |
1,000 | | | | | | ||||||||||||||||||
Total |
836,329 | 18,080 | 22,590 | | 557,046 | | ||||||||||||||||||
Weighted Average Exercise Price |
$ | 36.98 | $ | 39.25 | $ | 38.52 | $ | | $ | 35.78 | |
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
Stock-based Compensation Disclosures per ASC 718
Stock Appreciation Rights
As of March 31, 2010
Stock Appreciation Rights
As of March 31, 2010
Remaining Life | ||||||||||||||||||||||||
Date of Grant | Risk Free Interest Rate | Volatility | Expected 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 | | |||||||||||||||
February 2006 |
4.20 | % | | 4.20 | % | 40 | % | 4 yrs | | |||||||||||||||
May 2006 |
4.82 | % | | 4.83 | % | 35 | % | 4 yrs | 1.6 | |||||||||||||||
July 2006 |
4.82 | % | | 4.83 | % | 35 | % | 4 yrs | 3.0 | |||||||||||||||
October 2006 |
4.82 | % | | 4.83 | % | 35 | % | 4 yrs | 6.8 | |||||||||||||||
December 2006 |
4.54 | % | | 4.58 | % | 35 | % | 4 yrs | 8.7 | |||||||||||||||
February 2007 |
4.54 | % | | 4.58 | % | 35 | % | 4 yrs | 10.8 | |||||||||||||||
May 2007 |
4.54 | % | | 4.58 | % | 35 | % | 4 yrs | 13.6 | |||||||||||||||
September 2007 |
4.54 | % | | 4.54 | % | 35 | % | 4 yrs | 17.1 | |||||||||||||||
December 2007 |
4.23 | % | | 4.23 | % | 35 | % | 4 yrs | 20.8 | |||||||||||||||
April 2008 |
4.23 | % | | 4.23 | % | 35 | % | 4 yrs | 24.9 | |||||||||||||||
September 2008 |
4.23 | % | | 4.23 | % | 35 | % | 4 yrs | 29.5 | |||||||||||||||
December 2008 |
4.23 | % | | 4.23 | % | 35 | % | 4 yrs | 32.8 | |||||||||||||||
April 2009 |
4.23 | % | | 4.23 | % | 35 | % | 4 yrs | 36.4 | |||||||||||||||
Weighted Average Remaining Life (months) |
13.7 |
(17) Phantom Stock Plans
As of March 31, 2010, Alion had granted 20,779 shares of phantom stock under its Director
Phantom Stock Plan. In December 2009, all shares granted but not yet payable under the Initial and
Second Phantom Stock Plans were forfeited. The Company recognized approximately $26 thousand and
$69 thousand in phantom stock plan compensation expense for the quarters ended March 31, 2010 and
2009. Compensation expense was $8 thousand for the six months ended March 31, 2010. For the six
months ended March 31, 2009, the Company recognized a $4.6 million credit to compensation expense
for phantom stock forfeitures.
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.
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 March 31, 2010 and September 30, 2009.
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
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
Director Phantom Stock Plan
as of March 31, 2010
Director Phantom Stock Plan
as of March 31, 2010
Total Shares | Grant Date | Outstanding at | ||||||||||||||
Date of Grant | Shares Granted | 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
Director Phantom Stock Plan
as of March 31, 2010
Director Phantom Stock Plan
as of March 31, 2010
Outstanding at | Vested at | Exercisable at | ||||||||||||||||||||||
Date of Grant | 03/31/10 | Forfeited | Exercised | Expired | 3/31/10 | 03/31/10 | ||||||||||||||||||
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 |
$ | 40.48 | $ | | $ | | $ | | $ | 40.60 | $ | 40.60 |
Stock-based Compensation Disclosure per ASC 718
Director Phantom Stock Plan
as of March 31, 2010
Director Phantom Stock Plan
as of March 31, 2010
Expected | Remaining Life | |||||||||||||||
Date of Grant | Risk Free Interest Rate | Volatility | Life | (months) | ||||||||||||
November 2006 |
4.54% 4.58 | % | 35 | % | 3 yrs | | ||||||||||
November 2007 |
4.23% 4.23 | % | 35 | % | 3 yrs | 7.4 | ||||||||||
Weighted Average Remaining Life |
4.1 |
(18) 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
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
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 $185.2
million, or 97.0%, and $179.7 million, or 97.4%, of accounts receivable as of March 31, 2010 and
September 30, 2009. Contract revenue from departments and agencies of the federal government
represented approximately 97.2% and 96.3%, of total contract revenue for the six months ended March
31, 2010 and 2009.
(19) Income Taxes
Effective March 22, 2010, the Company automatically ceased to qualify as an S-corporation and
became a C-corporation subject to income taxation at the federal and state level. The Companys
subsidiaries also terminated their qualified Subchapter S status and will be subject to separate
taxation in states that do not follow IRC consolidated tax return guidelines. In connection with
issuing its Units, Alion issued deep-in-the-money warrants considered to constitute a
second class of stock in contravention of IRC requirements that an S-corporation have only a single
class of stock.
Alions new C-corporation status should allow the Company to use anticipated net operating
losses (NOL) to offset taxes that may become due in the future if the Company is able to generate
future taxable income. The Companys ability to utilize NOL tax benefits will depend upon the
amount of its future taxable income and may be limited under certain circumstances. All of the
Companys prior income tax gains and losses were allocated to its sole shareholder, the tax-exempt
ESOP Trust. Notwithstanding the provisions of the recently enacted Worker, Home Ownership and
Business Assistance Act of 2009, the Company does not have any net operating loss tax benefits it
is permitted to carry back to prior years.
As a result of its tax status change, Alion recorded a deferred tax liability of $33.8
million, a deferred tax asset of $35.4 million and an offsetting valuation allowance of $35.4
million. The net effect of this was to recognize a $33.8 million charge to current earnings for
deferred tax expense. The Companys history of losses gives rise to a presumption that it might
not be able to realize the full benefit of any deferred tax assets it is required to recognize.
Therefore, the Company established a valuation allowance equal to the deferred tax assets it was
required to recognize on becoming a C-corporation. Alion does not expect it will actually have to
pay income taxes for several years.
Alion had previously adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes now codified as ASC 740, Income Taxes. ASC 740 prescribes a recognition threshold and a
measurement attribute for financial statement recognition and measurement of tax positions taken or
expected to be taken in a tax return. The Company may recognize a benefit for that amount which it
has a more than 50% chance of realizing. If the Companys position involves uncertainty, then in
order to recognize a benefit, a given tax position must be more-likely-than-not to be sustained
upon examination by taxing authorities. Alion will continue its existing practice of recognizing
tax-related interest and penalties separately from income tax expense.
IRC Section 108(i), allows the Company to elect to defer recognizing until fiscal year 2015,
the gain on extinguishing its Subordinated Note. The gain on extinguishing the related warrants is
not subject to income taxes. Management is currently evaluating whether an election to defer the
extinguishment gain for tax purposes will be beneficial to the Company. Although the Company
offers post-retirement prescription drug coverage to a limited number of retirees and
beneficiaries, Alion has not claimed any federal tax credit in prior years. The recently enacted
health care reform legislation has reduced the value of the federal subsidy for retiree drug
coverage. Alions tax provision is unaffected by this legislative change. Management will decide
whether to seek a subsidy in the future based on its anticipated value and the cost associated with
seeking the subsidy.
As a result of Alions change in tax status, the Company will file two short-year returns for
the current fiscal year. Alion will allocate approximately half of current year results to its
period as an S-corporation and approximately half to its period as a C-corporation.
Alion may become subject to federal or state income tax examination for tax years ending
September 2006 through 2008. The Companys former status as a pass-through entity owned by a
tax-exempt trust makes an examination unlikely and the possibility of an adverse determination
remote. Prior to its change in status, the Company was at all times a validly electing S
corporation.
24
Table of Contents
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
The provision for income taxes for the six month period ended March 31, 2010 is as follows:
March 31, 2010 | ||||
Current: |
||||
Federal |
$ | | ||
State |
(2 | ) | ||
Foreign |
(40 | ) | ||
Total current provision |
(42 | ) | ||
Deferred: |
||||
Federal |
27,833 | |||
State |
5,985 | |||
Foreign |
| |||
Total deferred provision/(benefit) |
33,818 | |||
Total provision for income taxes |
$ | 33,776 | ||
Alions tax provision at March 31, 2010 includes the effects of state income taxes, debt
extinguishment, converting form an S-corporation to a C-corporation and establishing a valuation
allowance. The provision for taxes for the six months ended March 31, 2010 differs from the amount
computed by applying the statutory U.S. Federal income tax rate to income before taxes as a result
of the following:
March 31, 2010 | March 31, 2010 | |||||||
Expected fed income tax (benefit) |
35.0 | % | $ | 12,250 | ||||
State taxes (net of federal benefit) |
11.1 | % | 3,891 | |||||
Nondeductible expenses |
0.4 | % | 150 | |||||
Provision to return true-ups (permanent
items) |
0.0 | % | (2 | ) | ||||
Tax credits |
-0.1 | % | (40 | ) | ||||
Deferred tax assets at conversion |
101.0 | % | 35,359 | |||||
Valuation allowance |
-101.0 | % | (35,359 | ) | ||||
Deferred tax liabilities at conversion |
96.6 | % | 33,818 | |||||
Debt extinguishment and tax status change |
-46.5 | % | (16,291 | ) | ||||
Income tax expense (benefit) |
96.5 | % | $ | 33,776 | ||||
At March 31, 2010 the components of deferred tax assets and deferred tax liabilities were as
follows:
March 31, 2010 | ||||
Deferred tax assets: |
||||
Accrued expenses and reserves |
$ | 9,511 | ||
Intangible amortization |
12,657 | |||
Deferred rent |
2,556 | |||
Deferred wages |
4,857 | |||
Depreciation and leases |
2,784 | |||
Carryforwards and tax credits |
2,968 | |||
Other |
25 | |||
Gross deferred tax assets |
$ | 35,359 | ||
Less Valuation |
35,359 | |||
Net Deferred Tax Assets |
$ | | ||
Deferred tax liabilities: |
||||
Goodwill |
(33,818 | ) | ||
Net deferred tax asset/(liability) |
$ | (33,818 | ) | |
25
Table of Contents
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
(20) Debt Extinguishment
On March 22, 2010, Alion sold $310 million in Secured Note Units and used $240 million of the
proceeds to pay outstanding interest and principal on the Term B Senior Credit Agreement and $25
million to retire the Subordinated Note and related warrants at a discount. The Company recognized
a net gain of $50.7 million on extinguishing its debt. Alion expensed $16.9 million in unamortized
debt issue costs; recognized a $53.1 million gain on retiring the Subordinated Note; and recognized
a $14.5 million gain on retiring the warrants.
(21) Commitments and Contingencies
Secured Notes registration rights agreement
Alion entered into a registration rights agreement in connection with the sale of the Units
which requires the Company to file a registration statement with the SEC in order to conduct an
exchange offer to exchange the private Secured Notes for public Secured Notes. If Alion were to
default under the registration rights agreement, the interest rate on the Secured Notes would
increase by 50 basis points for each ninety day period such default were to continue uncured. The
maximum additional annual interest rate could increase by up to 200 basis points.
Earn-Out and Hold-Back Commitments
The Company has a $500 thousand maximum earn-out commitment through July 2011 for its
LogConGroup 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 the Companys federal government contract indirect costs have been audited
and indirect rates settled through 2004. The Company has recorded federal government contract
revenue in amounts it expects to realize on final settlement.
(22) Guarantor/Non-guarantor Condensed Consolidated Financial Information
Alions Secured Notes and Unsecured Notes are general obligations of the Company. Certain of
Alions 100% owned domestic subsidiaries have jointly, severally, fully and unconditionally
guaranteed both the Secured Notes and the Unsecured Notes. In March 2010, the Unsecured Note
Indenture was amended to include as Unsecured Note guarantors all subsidiaries serving as Secured
Note guarantors. The financial information set out below includes the effects of adding additional
entities as guarantors of the Unsecured Notes and therefore differs from information the Company
previously presented as of September 30, 2009 and for the three months and six months ended March
31, 2009.
The following information presents condensed consolidating balance sheets as of March 31, 2010
and September 30, 2009, condensed consolidating statements of operations for the quarters and six
months ended March 31, 2010 and 2009; and condensed consolidating statements of cash flows for the
six months ended March 31, 2010 and 2009 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.
26
Table of Contents
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
Condensed
Consolidating Balance Sheet as of March 31, 2010
Non- | ||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||
Parent | Companies | Companies | Eliminations | Consolidated | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 28,541 | $ | (241 | ) | $ | | $ | | $ | 28,300 | |||||||||
Accounts receivable, net |
181,494 | 6,241 | 112 | | 187,847 | |||||||||||||||
Prepaid expenses and other current assets |
5,300 | 132 | | | 5,432 | |||||||||||||||
Total current assets |
215,335 | 6,132 | 112 | | 221,579 | |||||||||||||||
Property, plant and equipment, net |
12,834 | 118 | | | 12,952 | |||||||||||||||
Intangible assets, net |
23,048 | | | | 23,048 | |||||||||||||||
Goodwill |
398,921 | | | | 398,921 | |||||||||||||||
Investment in subsidiaries |
20,172 | | | (20,172 | ) | | ||||||||||||||
Intercompany receivables |
896 | 18,592 | | (19,488 | ) | | ||||||||||||||
Other assets |
10,645 | 13 | 3 | | 10,661 | |||||||||||||||
Total assets |
$ | 681,851 | $ | 24,855 | $ | 115 | $ | (39,660 | ) | $ | 667,161 | |||||||||
Current liabilities: |
||||||||||||||||||||
Book cash overdraft |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Interest payable |
5,095 | | | | 5,095 | |||||||||||||||
Current portion, senior term loan payable |
| | | | | |||||||||||||||
Current portion of subordinated note
payable |
| | | | | |||||||||||||||
Current portion, acquisition obligations |
| | | | | |||||||||||||||
Trade accounts payable |
70,081 | 1,046 | | | 71,127 | |||||||||||||||
Accrued liabilities |
53,050 | 1,648 | | | 54,698 | |||||||||||||||
Accrued payroll and related liabilities |
35,284 | 1,129 | 22 | | 36,435 | |||||||||||||||
Billings in excess of revenue earned |
3,783 | | | | 3,783 | |||||||||||||||
Total current liabilities |
167,293 | 3,823 | 22 | | 171,138 | |||||||||||||||
Intercompany payables |
18,593 | | 895 | (19,488 | ) | | ||||||||||||||
Senior term loan payable, excluding current portion |
| | | | | |||||||||||||||
Senior secured notes |
268,400 | | | | 268,400 | |||||||||||||||
Senior unsecured notes |
245,684 | | | | 245,684 | |||||||||||||||
Subordinated note payable |
| | | | | |||||||||||||||
Accrued compensation, excluding current portion |
5,275 | | | | 5,275 | |||||||||||||||
Accrued postretirement benefit obligations |
740 | | | 740 | ||||||||||||||||
Non-current portion of lease obligations |
7,863 | 58 | | | 7,921 | |||||||||||||||
Deferred income taxes |
33,818 | | | | 33,818 | |||||||||||||||
Commitments and contingencies |
| | | | | |||||||||||||||
Redeemable common stock warrants |
| | | | | |||||||||||||||
Redeemable common stock |
153,140 | | | | 153,140 | |||||||||||||||
Common stock warrants |
20,785 | | | | 20,785 | |||||||||||||||
Common stock of subsidiaries |
| 2,800 | | (2,800 | ) | | ||||||||||||||
Accumulated other comprehensive loss |
(238 | ) | | | | (238 | ) | |||||||||||||
Accumulated deficit |
(239,502 | ) | 18,174 | (802 | ) | (17,372 | ) | (239,502 | ) | |||||||||||
Total liabilities, redeemable common stock and accumulated deficit |
$ | 681,851 | $ | 24,855 | $ | 115 | $ | (39,660 | ) | $ | 667,161 | |||||||||
27
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
Condensed Consolidating Balance Sheet as of September 30, 2009
(In thousands)
(In thousands)
Non- | ||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||
Parent | Companies | Companies | Eliminations | Consolidated | ||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 11,404 | $ | (215 | ) | $ | (4 | ) | $ | | $ | 11,185 | ||||||||
Accounts receivable, net |
174,458 | 5,661 | 38 | | 180,157 | |||||||||||||||
Prepaid expenses and other current
assets |
3,659 | 133 | 3 | | 3,795 | |||||||||||||||
Total current assets |
189,521 | 5,579 | 37 | | 195,137 | |||||||||||||||
Property, plant and equipment, net |
14,346 | 128 | | | 14,474 | |||||||||||||||
Intangible assets, net |
28,680 | | | | 28,680 | |||||||||||||||
Goodwill |
398,921 | | | | 398,921 | |||||||||||||||
Investment in subsidiaries |
17,132 | | | (17,132 | ) | | ||||||||||||||
Intercompany receivables |
702 | 15,939 | | (16,641 | ) | | ||||||||||||||
Other assets |
10,270 | 13 | 3 | | 10,286 | |||||||||||||||
Total assets |
$ | 659,572 | $ | 21,659 | $ | 40 | $ | (33,773 | ) | $ | 647,498 | |||||||||
Interest payable |
$ | 9,039 | $ | | $ | | $ | | $ | 9,039 | ||||||||||
Current portion, senior term loan
payable |
2,389 | | | | 2,389 | |||||||||||||||
Current portion of subordinated note
payable |
3,000 | | | | 3,000 | |||||||||||||||
Current portion, acquisition obligations |
50 | | | | 50 | |||||||||||||||
Trade accounts payable |
59,742 | 963 | 2 | | 60,707 | |||||||||||||||
Accrued liabilities |
43,985 | 1,440 | | | 45,425 | |||||||||||||||
Accrued payroll and related liabilities |
41,643 | 1,381 | 9 | | 43,033 | |||||||||||||||
Billings in excess of revenue earned |
3,661 | | | | 3,661 | |||||||||||||||
Total current liabilities |
163,509 | 3,784 | 11 | | 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 | 70 | | | 7,286 | |||||||||||||||
Redeemable common stock warrants |
32,717 | | | | 32,717 | |||||||||||||||
Redeemable common stock |
187,137 | | | | 187,137 | |||||||||||||||
Common stock of subsidiaries |
| 2,800 | | (2,800 | ) | | ||||||||||||||
Accumulated other comprehensive loss |
(238 | ) | | | | (238 | ) | |||||||||||||
Accumulated deficit |
(274,559 | ) | 15,005 | (673 | ) | (14,332 | ) | (274,559 | ) | |||||||||||
Total liabilities, redeemable common
stock and accumulated deficit |
$ | 659,572 | $ | 21,659 | $ | 40 | $ | (33,773 | ) | $ | 647,498 | |||||||||
28
Table of Contents
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
Condensed Consolidating Statement of Operations
for the Three Months Ended March 31, 2010
Non- | ||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||
Parent | Companies | Companies | Eliminations | Consolidated | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Contract revenue |
$ | 195,192 | $ | 8,322 | $ | 32 | $ | | $ | 203,546 | ||||||||||
Direct contract expense |
150,349 | 5,680 | 20 | | 156,049 | |||||||||||||||
Gross profit |
44,843 | 2,642 | 12 | | 47,497 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||
Indirect contract expense |
9,023 | 949 | 10 | | 9,982 | |||||||||||||||
Research and development |
309 | | | | 309 | |||||||||||||||
General and administrative |
18,172 | 204 | 90 | | 18,466 | |||||||||||||||
Rental and occupancy expense |
8,138 | 149 | 11 | | 8,298 | |||||||||||||||
Depreciation and amortization |
4,199 | 13 | | | 4,212 | |||||||||||||||
Total operating expenses |
39,841 | 1,315 | 111 | | 41,267 | |||||||||||||||
Operating income |
5,002 | 1,327 | (99 | ) | | 6,230 | ||||||||||||||
Other income (expense): |
||||||||||||||||||||
Interest income |
12 | | | | 12 | |||||||||||||||
Interest expense |
(14,097 | ) | | | | (14,097 | ) | |||||||||||||
Other |
8 | 79 | | | 87 | |||||||||||||||
Gain on extinguishment of debt |
50,749 | | | | 50,749 | |||||||||||||||
Equity in net income of
subsidiaries |
1,309 | | | (1,309 | ) | | ||||||||||||||
Total other expenses |
37,981 | 79 | | (1,309 | ) | 36,751 | ||||||||||||||
Pre-tax income (loss) |
42,983 | 1,406 | (99 | ) | (1,309 | ) | 42,981 | |||||||||||||
Income tax (expense) benefit |
(33,818 | ) | 2 | | | (33,816 | ) | |||||||||||||
Net income (loss) |
$ | 9,165 | $ | 1,408 | $ | (99 | ) | $ | (1,309 | ) | $ | 9,165 | ||||||||
29
Table of Contents
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
Condensed Consolidating Statement of Operations for the Three Months Ended March 31, 2009
Non- | ||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||
Parent | Companies | Companies | Eliminations | Consolidated | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Contract revenue |
$ | 186,153 | 9,274 | 2 | | $ | 195,429 | |||||||||||||
Direct contract expense |
142,650 | 6,485 | | | 149,135 | |||||||||||||||
Gross profit |
43,503 | 2,789 | 2 | | 46,294 | |||||||||||||||
Indirect contract expense |
8,478 | 805 | 49 | | 9,332 | |||||||||||||||
Research and development |
78 | | | | 78 | |||||||||||||||
General and administrative |
13,163 | 261 | 2 | | 13,426 | |||||||||||||||
Rental and occupancy expense |
8,311 | 156 | 1 | | 8,468 | |||||||||||||||
Depreciation and amortization |
4,687 | 13 | | | 4,700 | |||||||||||||||
Total operating expenses |
34,717 | 1,235 | 52 | | 36,004 | |||||||||||||||
Operating income |
8,786 | 1,554 | (50 | ) | | 10,290 | ||||||||||||||
Other income (expense): |
||||||||||||||||||||
Interest income |
9 | 16 | | | 25 | |||||||||||||||
Interest expense |
(10,244 | ) | | | | (10,244 | ) | |||||||||||||
Other |
(173 | ) | 86 | | | (87 | ) | |||||||||||||
Equity in net income of
subsidiaries |
1,606 | (1,606 | ) | | ||||||||||||||||
Total other expenses |
(8,802 | ) | 102 | | (1,606 | ) | (10,306 | ) | ||||||||||||
Pre-tax income (loss) |
(16 | ) | 1,656 | (50 | ) | (1,606 | ) | (16 | ) | |||||||||||
Income tax (expense) benefit |
55 | | | | 55 | |||||||||||||||
Net income (loss) |
$ | 39 | 1,656 | (50 | ) | (1,606 | ) | $ | 39 | |||||||||||
30
Table of Contents
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
Condensed Consolidating Statement of Operations for the Six Months Ended March 31, 2010
Non- | ||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||
Parent | Companies | Companies | Eliminations | Consolidated | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Contract revenue |
$ | 392,466 | $ | 16,748 | $ | 70 | $ | | $ | 409,284 | ||||||||||
Direct contract expense |
303,814 | 11,186 | 45 | | 315,045 | |||||||||||||||
Gross profit |
88,652 | 5,562 | 25 | | 94,239 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||
Indirect contract expense |
17,394 | 1,856 | 18 | | 19,268 | |||||||||||||||
Research and development |
570 | | | | 570 | |||||||||||||||
General and administrative |
33,949 | 369 | 155 | | 34,473 | |||||||||||||||
Rental and occupancy expense |
15,968 | 295 | 21 | | 16,284 | |||||||||||||||
Depreciation and amortization |
8,418 | 25 | | | 8,443 | |||||||||||||||
Total operating expenses |
76,299 | 2,545 | 194 | | 79,038 | |||||||||||||||
Operating income |
12,353 | 3,017 | (169 | ) | | 15,201 | ||||||||||||||
Other income (expense): |
||||||||||||||||||||
Interest income |
57 | | | | 57 | |||||||||||||||
Interest expense |
(30,983 | ) | | | | (30,983 | ) | |||||||||||||
Other |
(174 | ) | 150 | | | (24 | ) | |||||||||||||
Gain on extinguishment of debt |
50,749 | | | 50,749 | ||||||||||||||||
Equity in net income of
subsidiaries |
3,040 | | | (3,040 | ) | | ||||||||||||||
Total other expenses |
22,689 | 150 | | (3,040 | ) | 19,799 | ||||||||||||||
Pre-tax income (loss) |
35,042 | 3,167 | (169 | ) | (3,040 | ) | 35,000 | |||||||||||||
Income tax (expense) benefit |
(33,818 | ) | 2 | 40 | | (33,776 | ) | |||||||||||||
Net income (loss) |
$ | 1,224 | $ | 3,169 | $ | (129 | ) | $ | (3,040 | ) | $ | 1,224 | ||||||||
31
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
Condensed Consolidating Statements of Operations for the Six Months Ended March 31, 2009
Non- | ||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||
Parent | Companies | Companies | Eliminations | Consolidated | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Contract revenue |
$ | 366,117 | $ | 18,106 | $ | 2 | $ | | $ | 384,225 | ||||||||||
Direct contract expense |
281,369 | 13,086 | 2 | | 294,457 | |||||||||||||||
Gross profit |
84,748 | 5,020 | | | 89,768 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||
Indirect contract expense |
16,634 | 1,773 | 49 | | 18,456 | |||||||||||||||
Research and development |
147 | | | | 147 | |||||||||||||||
General and administrative |
23,225 | 372 | 2 | | 23,599 | |||||||||||||||
Rental and occupancy expense |
15,924 | 281 | 1 | | 16,206 | |||||||||||||||
Depreciation and amortization |
9,481 | 25 | | | 9,506 | |||||||||||||||
Total operating expenses |
65,411 | 2,451 | 52 | | 67,914 | |||||||||||||||
Operating income |
19,337 | 2,569 | (52 | ) | | 21,854 | ||||||||||||||
Other income (expense): |
||||||||||||||||||||
Interest income |
32 | 16 | | | 48 | |||||||||||||||
Interest expense |
(24,332 | ) | | | | (24,332 | ) | |||||||||||||
Other |
(267 | ) | 145 | | | (122 | ) | |||||||||||||
Equity in net income of
subsidiaries |
2,678 | | | (2,678 | ) | | ||||||||||||||
Total other expenses |
(21,889 | ) | 161 | | (2,678 | ) | (24,406 | ) | ||||||||||||
Pre-tax income (loss) |
(2,552 | ) | 2,730 | (52 | ) | (2,678 | ) | (2,552 | ) | |||||||||||
Income tax (expense) benefit |
51 | | | | 51 | |||||||||||||||
Net income (loss) |
$ | (2,501 | ) | $ | 2,730 | $ | (52 | ) | $ | (2,678 | ) | $ | (2,501 | ) | ||||||
32
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
Condensed Consolidating Statement of Cash Flows for the Six Months Ended March 31, 2010
Non- | ||||||||||||||||
Guarantor | Guarantor | |||||||||||||||
Parent | Companies | Companies | Consolidated | |||||||||||||
(In thousands) | ||||||||||||||||
Net cash used in operating activities |
$ | (72 | ) | $ | (10 | ) | $ | 3 | $ | (79 | ) | |||||
Cash flows from investing activities: |
||||||||||||||||
Cash paid for acquisitions-related obligations |
(50 | ) | | | (50 | ) | ||||||||||
Capital expenditures |
(1,255 | ) | (16 | ) | | (1,271 | ) | |||||||||
Proceeds from sale of assets |
5 | | | 5 | ||||||||||||
Net cash used in investing activities |
(1,300 | ) | (16 | ) | | (1,316 | ) | |||||||||
Cash flows from financing activities: |
||||||||||||||||
Change in book overdraft |
| | | | ||||||||||||
Cash (paid for) received from interest rate swap |
| | | | ||||||||||||
Sale of Secured Notes |
281,465 | | | 281,465 | ||||||||||||
Sale of Common Stock Warrants |
20,785 | | | 20,785 | ||||||||||||
Payment of debt issue costs |
(16,710 | ) | | | (16,710 | ) | ||||||||||
Payment of Term B Loan |
(236,596 | ) | | | (236,596 | ) | ||||||||||
Repurchase of Subordinated Note and related warrants |
(25,000 | ) | | | (25,000 | ) | ||||||||||
Payment of Subordinated Note |
| | | | ||||||||||||
Revolver borrowings |
84,200 | | | 84,200 | ||||||||||||
Revolver payments |
(84,200 | ) | | | (84,200 | ) | ||||||||||
Loan to ESOP Trust |
(5,323 | ) | | | (5,323 | ) | ||||||||||
ESOP loan repayment |
5,323 | | | 5,323 | ||||||||||||
Redeemable common stock purchased from ESOP Trust |
(7,581 | ) | | | (7,581 | ) | ||||||||||
Redeemable common stock sold to ESOP Trust |
2,148 | | | 2,148 | ||||||||||||
Net cash (used in) provided by financing activities |
18,511 | | | 18,511 | ||||||||||||
Net increase (decrease) in cash and cash equivalents |
17,137 | (25 | ) | 3 | 17,115 | |||||||||||
Cash and cash equivalents at beginning of period |
11,404 | (215 | ) | (4 | ) | 11,185 | ||||||||||
Cash and cash equivalents at end of period |
$ | 28,541 | $ | (240 | ) | $ | (1 | ) | $ | 28,300 | ||||||
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
Condensed Consolidating Statement of Cash Flows for the Six Months Ended March 31, 2009
Non- | ||||||||||||||||
Guarantor | Guarantor | |||||||||||||||
Parent | Companies | Companies | Consolidated | |||||||||||||
(In thousands) | ||||||||||||||||
Net cash used in operating activities |
$ | (8,982 | ) | $ | 97 | $ | | $ | (8,885 | ) | ||||||
Cash paid for acquisitions-related obligations |
(166 | ) | | | (166 | ) | ||||||||||
Capital expenditures |
(1,076 | ) | | | (1,076 | ) | ||||||||||
Net cash used in investing activities |
(1,242 | ) | | | (1,242 | ) | ||||||||||
Change in book overdraft |
100 | | | 100 | ||||||||||||
Cash (paid for) received from interest rate swap |
(4,647 | ) | | | (4,647 | ) | ||||||||||
Payment of senior term loan principal |
(1,216 | ) | | | (1,216 | ) | ||||||||||
Payment of subordinated note principal |
(3,000 | ) | | | (3,000 | ) | ||||||||||
Revolver borrowings |
227,500 | | | 227,500 | ||||||||||||
Revolver payments |
(222,780 | ) | | | (222,780 | ) | ||||||||||
Loan to ESOP Trust |
(5,936 | ) | | | (5,936 | ) | ||||||||||
ESOP loan repayment |
5,936 | | | 5,936 | ||||||||||||
Redeemable common stock purchased from ESOP Trust |
(7,232 | ) | | | (7,232 | ) | ||||||||||
Redeemable common stock sold to ESOP Trust |
5,115 | | | 5,115 | ||||||||||||
Net cash (used in) provided by financing activities |
(6,160 | ) | | | (6,160 | ) | ||||||||||
Net increase (decrease) in cash and cash equivalents |
(16,384 | ) | 97 | | (16,287 | ) | ||||||||||
Cash and cash equivalents at beginning of period |
16,392 | (104 | ) | (1 | ) | 16,287 | ||||||||||
Cash and cash equivalents at end of period |
$ | 8 | $ | (7 | ) | $ | (1 | ) | $ | | ||||||
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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 Six Months Ended March 31, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Revenue by Contract Type | (In thousands) | |||||||||||||||
Cost-reimbursement |
$ | 297,478 | 72.6 | % | $ | 270,217 | 70.4 | % | ||||||||
Fixed-price |
50,565 | 12.4 | % | 40,523 | 10.5 | % | ||||||||||
Time-and-material |
61,241 | 15.0 | % | 73,485 | 19.1 | % | ||||||||||
Total |
$ | 409,284 | 100.0 | % | $ | 384,225 | 100.0 | % | ||||||||
Management expects Alions revenue will continue to come from government contracts, mostly
from contracts with the U.S. Department of Defense (DoD) and other federal agencies with some
revenue from a variety of commercial, state, local and international customers.
For the Six Months Ended March 31, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Revenue by Customer Type | (In thousands) | |||||||||||||||
U.S. Department of Defense (DoD) |
$ | 376,861 | 92.1 | % | $ | 351,542 | 91.9 | % | ||||||||
Other Federal Civilian Agencies |
21,036 | 5.1 | % | 18,378 | 4.4 | % | ||||||||||
Commercial / State / Local and International |
11,387 | 2.8 | % | 14,305 | 3.7 | % | ||||||||||
Total |
$ | 409,284 | 100.0 | % | $ | 384,225 | 100.0 | % | ||||||||
In its 2011 budget the Obama Administration requested more resources for national security
than had been projected just six months ago. The base DoD budget is expected to increase by 3.4%
next year and 3% per year thereafter with double digit increases for foreign assistance, slight
increases in homeland security and flat or reduced civilian agency spending. The DoD budget is
nonetheless under huge pressure. Spending for overseas contingency operations is slated to drop by
two-thirds by 2012. Base re-alignments and closures, military heath care costs and major
acquisition programs all carry enormous costs. Debate remains over how and where to invest.
DoD Agencies are expected to receive about half the estimated nearly $80 billion 2011
information technology budget. Major emphasis will include cyber security, information sharing and
cloud computing initiatives. The services market that has experienced steady and strong annual
growth in the past will likely continue through next years budget. While changing priorities and
in-sourcing efforts could adversely affect future information technology budgets, Management does
not expect such a change would materially affect Alions business.
To support the Obama Administrations goal of expanding research, the Office of Management and
Budget advised DoD to increase basic and applied research funding by $249 million next year (a 7%
increase) and by $29 million the following year (zero growth). Early prospects to receive this
increase includedeployable force protection, cyber security research, advanced focal plane array
night vision technology, and high energy laser advanced technology. Management does not expect
increased research funding in these areas will materially affect Alions business.
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The Quadrennial Defense Review (QDR) and the 2010 budget drove several major shipbuilding
program decisions affecting DoD budgets from 2011 through 2016. The DDG-51 with ballistic missile
defense capability became the basis for the Navys large surface combatant force; CG(X) technology
work will shift to DDG efforts. Virginia Class submarines will continue to maintain their original
two-year construction profile. The Navy is scheduled to build out 11 LPD-17 Class ships; three
amphibious mobile landing sea-basing platforms based on commercial tanker designs; and 23 joint
high-speed vessel platforms. Alion has several service support contracts with various NAVSEA
program managers covering these platforms. This points to steady NAVSEA maintenance work
requirements and Alion contract opportunities throughout the life of these programs.
The 2011 budget is consistent with QDR recommendations to support critical systems that meet
both conventional and irregular warfare requirements. Areas such as C4ISR (command, control,
communications, computers, intelligence, surveillance and reconnaissance), unmanned systems and
force mobility initiatives are likely to produce stable growth for platforms embedded with C4ISR
mission packages and C4ISR upgrades to existing platforms to provide modernized, quick reaction
capabilities.
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 government changes, such as increased
in-sourcing, aimed at reducing reliance on government contractors in general, will not materially
adversely affect operations. Although DoD seeks to buy back as many as 11,000 contractor
positions through 2015 by in-sourcing lower-end support services, Management believes Alions
higher end technical expertise will still be in demand.
DoD began acquisition reform initiatives in 2009 targeted at major programs that had
significant cost and schedule overruns such as the Joint Strike Fighter and the Armys Future
Combat System. Alion was not affected by these program changes. If the government ultimately
shifts contracting activity away from the cost-reimbursement arena to either 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 gross domestic product.
For the Six Months Ended March 31, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Core Business Area | (In thousands) | |||||||||||||||
Naval Architecture and Marine Engineering |
$ | 178,599 | 43.7 | % | $ | 174,381 | 45.4 | % | ||||||||
Defense Operations |
100,865 | 24.6 | % | 68,806 | 17.9 | % | ||||||||||
Modeling and Simulation |
70,810 | 17.3 | % | 41,218 | 10.7 | % | ||||||||||
Technology Integration |
23,622 | 5.8 | % | 59,133 | 15.4 | % | ||||||||||
Energy and Environmental Sciences |
19,303 | 4.7 | % | 27,478 | 7.2 | % | ||||||||||
Information Technology and Wireless
Communications |
16,085 | 3.9 | % | 13,209 | 3.4 | % | ||||||||||
Total |
$ | 409,284 | 100.0 | % | $ | 384,225 | 100.0 | % | ||||||||
Backlog. Contract backlog represents an estimate, as of a specific date, of the future revenue
Alion expects from existing contracts. At March 31, 2010, backlog on existing contracts and
executed delivery orders totaled $2,906 million, of which $380.0 million was funded. The Company
estimates it has an additional $2,526 million of unfunded contract ceiling value for an aggregate
total backlog of $6,616 million.
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Results of Operations
Quarter Ended March 31, 2010 Compared to Quarter Ended March 31, 2009
Consolidated Operations of Alion | ||||||||||||||||
Quarter Ended March 31, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||
% | % | |||||||||||||||
Selected Financial Information | revenue | revenue | ||||||||||||||
Total contract revenue |
$ | 203,546 | $ | 195,429 | ||||||||||||
Total direct contract costs |
156,049 | 76.7 | % | 149,135 | 76.3 | % | ||||||||||
Direct labor costs |
68,976 | 33.9 | % | 67,758 | 34.7 | % | ||||||||||
Material and subcontract costs |
82,424 | 40.5 | % | 75,385 | 38.6 | % | ||||||||||
Other direct costs |
4,649 | 2.3 | % | 5,992 | 3.1 | % | ||||||||||
Gross profit |
47,497 | 23.3 | % | 46,294 | 23.7 | % | ||||||||||
Total operating expense |
41,267 | 20.3 | % | 36,004 | 18.4 | % | ||||||||||
Major components of operating expense: |
||||||||||||||||
Indirect expenses including facilities costs |
18,280 | 9.0 | % | 17,801 | 9.1 | % | ||||||||||
General and administrative (excluding stock-based compensation) |
19,323 | 9.5 | % | 14,587 | 7.5 | % | ||||||||||
Stock-based compensation |
(857 | ) | -0.4 | % | (1,161 | ) | -0.6 | % | ||||||||
Depreciation and amortization |
4,212 | 2.1 | % | 4,700 | 2.4 | % | ||||||||||
Income from operations |
$ | 6,230 | 3.1 | % | $ | 10,290 | 5.3 | % |
Revenue. Fiscal 2010 second quarter revenue of $203.5 million was $8.1 million more than the
comparable period last year. This 4.2% increase was attributable to increased cost-reimbursement
and fixed price contract revenue offset in part by an $8.7 million decline in time and material
contract revenue. DOD revenue grew by $8.2 million (4.5%); a modest $1.2 million up tick in
civilian agency revenue offset a comparable $1.3 million decline in commercial revenue. Overall
government contract revenue grew by 5% compared to the similar quarter last year.
Modeling and Simulation revenue jumped over 59% to $35.2 million for the quarter, a $13.1
million hike over second quarter 2009 performance. Most of this work came through Alions M&S
Information Analysis Center contract with the Defense Information Systems Agency. Growth came from
expanded support to the U.S. Army Tank Automotive Research, Development and Engineering Center.
Work for the Air Force, principally on Alions SAFTAS contract, grew by $14.2 million this quarter,
up almost 28% over the similar period last year. Alion delivered increased program management
effort for SAFTAS technology upgrades. Naval architecture and marine engineering was essentially
flat despite a $2.6 million decline in work for the U.S. Navy (off 2.6% compared to second quarter
2009 performance). Environmental remediation work was flat as well. Information Technology,
Wireless Communications and Technology Integration declined by $4.2 million (17.8%) to $19.3
million this quarter. Alion has yet to see its customers for these technology services recover
from the lingering effects of the global recession.
Revenue from prime contracts continues to increase with sales up $16.2 million (10.5%)
compared to last year. Alions revenue from work as a subcontractor to other prime contractors
declined $8.1 million to $34.1 million, down 19.1%. Each of these trends is consistent with
Alions expanded capabilities that enable it to operate as a prime contractor on a greater number
of key government programs. Margins on prime contracts improved slightly by $1.2 million to 6.5%
overall and offset a decline in subcontract margins.
Direct Contract Expense and Gross Profit. Direct contract expenses increased $6.9 million
(4.6%) to 76.7% of quarterly revenue compared to 76.3% of revenue for the comparable period last
year. Material and subcontract costs on Alions prime contracts increased $7.0 million (9.3%) to
40.5% of quarterly revenue. Direct labor increased by $1.2 million but declined modestly as a
percentage of quarterly revenue while other direct costs also declined in total dollars and as a
percentage of revenue. Alions prime contract work continues to depend on business partners
serving as subcontractors. This can lead to higher levels of subcontract activity compared to
Alion staff effort. Management continues to focus effort on
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improving labor productivity to
increase higher margin, internally-derived revenue. Gross profit for the current quarter at
$47.5 million increased by $1.2 million. In 2009, Alion faced second quarter write offs on several
fixed price contracts that depressed last years performance. This year, gross margin did not keep
up with revenue growth and was only 23.3% of revenue. This is consistent with increased
third-party contract costs for which Alion typically earns a lower margin.
Operating Expenses. Second quarter operating expenses climbed by $5.3 million overall
compared to the same period last year, adversely affecting operating profit. Advisory services
associated with several re-financing and capital structuring initiatives during the quarter
accounted for 38% of increased operating expenses ($2.0 million). Spending on information
technology for collaborative technologies, project management and control, and expanded reporting
and analytical capabilities increased costs by $1.3 million this quarter compared to 2009 second
quarter performance. Decreased charges for amortizing intangibles (purchased contracts) offset
increased facility and indirect staff costs. Company sponsored research and development costs
increased modestly. Changes in Alions share price produced a slightly lesser credit to
compensation expense this quarter than occurred in the second quarter last year.
Income from Operations. Operating income for the quarter ended March 31, 2010 decreased 39%
to $6.2 million and dropped from 5.3% to 3.1% of quarterly revenue. The Companys additional gross
margin dollars were insufficient to offset increased structural costs for information technology
efforts and costs from unsuccessful capital structuring efforts prior to the Companys successful
sale of $310 million in Secured Note Units. Management does not expect to incur any further
financing or re-structuring costs in the immediate future now that new loans are in
place.
Other Expense. Interest income, interest expense and other expense in the aggregate for the
quarter ended March 31, 2010 changed materially compared to the second quarter of 2009; several
components of interest expense fluctuated significantly. Although cash management efforts reduced
revolver borrowings and related interest expense, difficulties in meeting some of the debt
covenants in Alions former Term B Senior Credit Facility cost the Company more than $2.6 million
in fees and interest expense this quarter. In the second quarter of 2010, the Company reversed the
Subordinated Note interest expense (both cash and non-cash elements) it previously recognized in
the first quarter as Alion was not required to pay accrued cash interest when it redeemed the
Subordinated Note on March 22, 2010. Interest payable on the newly issued Secured Notes offset this
expense reduction.
Fiscal 2010 second quarter debt issue cost amortization decreased $0.6 million compared to the
second quarter last year. The Secured Notes debt issue cost amortization is less than previous
charges for recently extinguished debt instruments. Last year Alion recognized a $5.4 million
second quarter benefit for reduction in Subordinated Note warrant value due to declines in the risk
free interest rate and the underlying share price of Alion common stock used to estimate the fair
value of the Subordinated Note warrants. This year, Alion also recognized a $1.2 million second
quarter benefit for reversing first quarter deferred non-cash interest accruals. For the
comparable period last year, the Company was required to recognize a $1.1 million in deferred
non-cash interest expense.
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Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Cash Pay Interest |
||||||||
Revolver |
$ | 94 | $ | 390 | ||||
Senior Term Loan |
5,308 | 5,662 | ||||||
Secured Notes |
775 | | ||||||
Unsecured Notes |
6,406 | 6,406 | ||||||
Subordinated Note |
(793 | ) | 776 | |||||
Other cash pay interest and fees |
2,679 | 116 | ||||||
Sub-total cash pay interest |
14,469 | 13,350 | ||||||
Deferred and Non-cash Interest
Secured Notes PIK interest |
155 | | ||||||
Debt issue costs and other non-cash items |
650 | 1,272 | ||||||
Subordinated Note interest |
(1,177 | ) | 1,066 | |||||
Subordinated Note warrants |
| (5,444 | ) | |||||
Sub-total non-cash interest |
(372 | ) | (3,106 | ) | ||||
Total interest expense |
$ | 14,097 | $ | 10,244 | ||||
Debt Extinguishment.
On March 22, 2010, Alion used proceeds from issuing $310 million of
Units to retire its then-outstanding Term B Senior Credit Facility loans, the
Subordinated Note and related warrants, and to pay debt issue costs. The Company paid
approximately $240 million to retire its Term B debt at par plus accrued interest and recognized a
$6.7 million loss on extinguishing this debt by writing off the balance of unamortized Term
B-related debt issue costs.
Alion paid $25 million to retire the Subordinated Note and related warrants at a steep
discount to both carrying and estimated fair values. The Company recognized a $67.7 million gain
on extinguishing these liabilities which was offset in part by writing off $10.3 million in
unamortized debt issue and debt modification costs. Alion recognized a one-time $50.7 million net
benefit from its re-financing and debt extinguishment transactions.
Income Tax Expense. Until March 2010, Alion had no material income tax expense as the Company
and its subsidiaries were a consolidated pass-through entity whose income was attributable to its
sole shareholder, the tax-exempt ESOP Trust. Some states did not recognize Alions S corporation
status and required the Company and its subsidiaries to file separate state tax returns. Alions
Canadian subsidiary has always been a taxable entity required to accrue a Canadian tax liability as
necessary.
On
March 22, 2010, Alion issued 310,000 Units each of which consists of
$1,000 in Secured Note face value and a warrant to purchase 1.9439 shares of Alion common stock.
The warrants entitle the holders to purchase a total of 602,614 shares of common stock at a penny
per share. The fair value of each warrant on the date of issue was approximately $67.05. The
warrants are considered to constitute a second class of stock under the IRC. S-corporations are
only permitted to have a single class of stock. By issuing the Secured Note warrants, Alions
S-corporation status automatically terminated and the Company ceased to be a pass-through entity
exempt from income taxes. Alion was required to recognize current income tax expense for the
effect of its change in reporting status.
Alion recognized approximately $35.4 million of deferred tax assets related to timing
differences for expenses previously recorded that are estimated to generate deductions on future
income tax returns. The Company also recognized a $33.8 million deferred tax liability related to
tax-deductible goodwill arising from prior year acquisitions. Prior to establishing a valuation
allowance, the Company had a $1.5 million net deferred tax asset arising from its conversion to a
C-corporation. However, Alions history of losses makes it unlikely that it will reasonably be
able to realize the full benefit of its deferred tax assets. The Company was required to establish
a full valuation allowance for its deferred tax assets and recognize $33.8 million in deferred tax
expense this quarter.
Net Income. As a result of the $50.7 million gain on its debt extinguishments, and despite a
$33.8 million charge for income taxes, Alion generated $9.2 million in net income this quarter.
Without the gain on extinguishment, the required tax
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provision and the $2.6 million in debt covenant waiver fees, the Company would have had a $5.1
million loss for the quarter compared to $39 thousand in net income for the comparable period last
year.
Six Months Ended March 31, 2010 Compared to Six Months Ended March 31, 2009
Consolidated Operations of Alion | ||||||||||||||||
Six Months Ended March 31, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||
% | % | |||||||||||||||
Selected Financial Information | revenue | revenue | ||||||||||||||
Total contract revenue |
$ | 409,284 | $ | 384,225 | ||||||||||||
Total direct contract costs |
315,045 | 77.0 | % | 294,457 | 76.6 | % | ||||||||||
Direct labor costs |
136,103 | 33.3 | % | 134,588 | 35.0 | % | ||||||||||
Material and subcontract costs |
170,567 | 41.7 | % | 147,849 | 38.5 | % | ||||||||||
Other direct costs |
8,375 | 2.0 | % | 12,020 | 3.1 | % | ||||||||||
Gross profit |
94,239 | 23.0 | % | 89,768 | 23.4 | % | ||||||||||
Total operating expense |
79,038 | 19.3 | % | 67,914 | 17.7 | % | ||||||||||
Major components of operating expense: |
||||||||||||||||
Indirect expenses including facilities costs |
35,552 | 8.7 | % | 34,563 | 9.0 | % | ||||||||||
General and administrative (excluding
stock-based compensation) |
35,328 | 8.6 | % | 29,363 | 7.6 | % | ||||||||||
Stock-based compensation |
(855 | ) | -0.21 | % | (5,764 | ) | -1.5 | % | ||||||||
Depreciation and amortization |
8,443 | 2.1 | % | 9,506 | 2.5 | % | ||||||||||
Income from operations |
$ | 15,201 | 3.7 | % | $ | 21,854 | 5.7 | % |
Revenue. March 2010 year to date revenue of $409.3 million was $25.1 million more than the
comparable period last year. This 6.5% increase was attributable to $27.3 million more in
cost-reimbursement contract revenue and $10.0 million more in fixed price contract sales offset by
a $12.2 million drop in time and material contract activity. DoD revenue was up $25.3 million and
civilian agency revenue was up $2.7 million while non-federal revenue declined $2.9 million.
Modeling and Simulation revenue, on the Companys Information Analysis Center contracts and other
contracts grew $27.8 million a 64.5% jump compared to last year. Revenue grew from providing the
U.S. military new capabilities to repair equipment in the field and from offering innovative
responses to changing threats to war fighters. Alion is performing research and development to
reduce or eliminate the effects of improvised explosive devices used against U.S. and Coalition
Forces in Iraq and Afghanistan. The Company also supports the U.S. Navys Warfare Development
Command.
Naval architecture and marine engineering increased $5.3 million (3.1%) because of increased
support to several acquisition programs. Revenue from Information Technology and Wireless
Communications declined $6.2 million (27.8%). Alion has yet to see its customers for these
technology services recover from the lingering effects of the global recession. Revenue from
Alions other core business areas saw modest, immaterial fluctuations on a year over year basis.
Alion saw significant revenue growth from its Air Force customers up $31.6 million compared to last
year. Air Force revenue grew largely because of expanded SAFTAS program support for technology
upgrades. Increases were offset in part by a 2.5% decline in revenue from other DoD customers
($6.2 million).
Alions prime contract revenue was up $35.6 million (11.7%) over last year while revenue from
Alions subcontracts with other prime contractors was down $10.5 million or 13.3%. Each of these
trends is consistent with Alions expanded capabilities that enable it to operate as a prime
contractor on a greater number of key government programs. Alion continues to realize a
significant portion of its revenue from contract vehicles on which the Company has to compete for
task orders. Over 60% of year to date revenue came from ID/IQ contracts compared to 58.6% last
year. Although the percentage increase was modest, ID/IQ revenue grew overall by $22.5 million, up
10% from last year.
Direct Contract Expense and Gross Profit. Direct contract expenses increased by $20.6 million
to 77.0% of year to date revenue compared to 76.6% of revenue for the comparable period last year.
Increasing prime contract activity includes work that Alion shares with its teammates and led to
higher subcontract cost both in total dollars ($22.7 million) and as a
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percentage of revenue (up 3.2% to 41.7% of revenue). Direct labor only increased by 1.1% ($1.5
million) while other direct costs declined $3.6 million to 2% of revenue. Year to date gross profit
at $94.2 million grew $4.4 million (4.9%) compared to $89.8 million for the first six months of
2009. Alion did not face significant fixed price contract overruns in 2010. In 2009 gross profit
was adversely affected by $1.2 million in fixed price contract overruns. In 2010, gross margin as
a percentage of revenue declined as the Company saw cost reimbursement revenue increase to almost
73% of revenue. Cost reimbursement contracts typically have lower profit percentages which offset
a portion of performance risk.
Operating Expenses. Year to date operating expenses through March 31, 2010 climbed by $11.1
million overall compared to the same period last year, significantly eroding operating profit. The
comparative hike in operating expenses comes, in part, from the absence of a $5.8 million credit to
stock-based compensation expense recorded last year for phantom stock forfeitures and declines in
Alions share price. In 2010, the credit for changes in Alions share price was less than $0.9
million. Facilities and indirect expenses were up 2.6% over last year ($0.9 million) consistent
with salary increases and ordinary building operating expense pass-throughs. Depreciation and
amortization declined by $1.1 million principally due to scheduled declines in amortization charges
for acquired contracts. G&A expense exclusive of stock-based and long-term incentive compensation
charges grew by almost $6.0 million. The Company spent almost $2.6 million in its effort to
re-structure and/or re-finance its former debt. Expanded information technology services for
collaborative technologies, project management and control, and expanded reporting and analytical
capabilities increased costs $2.2 million compared to 2009 year to date results. Alion saw
increased G&A expenses for additional staffing and efforts devoted to business development, cash
management and strategic planning.
Income from Operations. Operating income for the six months ended March 31, 2010 dropped by
$6.7 million to $15.2 million compared with $21.9 million for the six months ended March 31, 2009.
This 30.4% decline was the result of higher operating expenses, as described above.
Other Expense. Interest income, interest expense and other expense in the aggregate for the
six months ended March 31, 2010 increased by $6.5 million compared to the similar period last year.
Higher average investment balances, $24 million in excess cash from the March 2010 re-financing,
and a reduced demand on the revolver led to lower interest expense ($0.4 million) and marginally
higher interest income ($9 thousand). Despite lower outstanding principal on the Senior Term Loan
this year cash pay interest expense was adversely affected by a 100 basis point interest rate
increase for February and March. The biggest hike in cash interest expense was from fees and
penalties associated with the September and December 2009 covenant waivers for which Alion
ultimately paid more than $3.9 million. Management had expected to close a re-financing
transaction prior to March 1, 2010. The new Secured Notes were not issued until March 22, 2010.
As a result, Alion was required to pay a $2.6 million fee (100 basis points) to the Term B Lenders
on March 1, 2010. Cash interest on the Secured Notes was offset by the absence of Subordinated
Note cash interest expense this year. In 2010, non-cash interest expense was $3.7 million higher
than it was in 2009. Last year, Alion recognized a $6.9 million benefit for the decline in value
of the Subordinated Note warrants offset by $2.8 million in deferred non-cash interest charges. In
2010, the Company only recognized a $160 thousand benefit for a decline in the value of the
now-extinguished Subordinated Note warrants and no year-to-date deferred non-cash Subordinated Note
interest.
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Six Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Cash Pay Interest |
||||||||
Revolver |
$ | 98 | $ | 522 | ||||
Senior Term Loan |
11,047 | 11,455 | ||||||
Secured Notes |
775 | | ||||||
Unsecured Notes |
12,813 | 12,813 | ||||||
Subordinated Note |
| 870 | ||||||
Other cash pay interest and fees |
4,032 | 214 | ||||||
Sub-total cash pay interest |
28,765 | 25,874 | ||||||
Deferred and Non-cash Interest |
||||||||
Secured Notes PIK interest |
155 | | ||||||
Debt issue costs and other non-cash items |
2,223 | 2,544 | ||||||
Subordinated Note interest |
| 2,812 | ||||||
Subordinated Note warrants |
(160 | ) | (6,898 | ) | ||||
Sub-total non-cash interest |
2,218 | (1,542 | ) | |||||
Total interest expense |
$ | 30,983 | $ | 24,332 | ||||
Debt Extinguishment.
On March 22, 2010, Alion used proceeds from issuing $310 million of
Units to retire its then-outstanding Term B Credit Facility loans, the Subordinated
Note and related warrants, and to pay debt issue costs. The Company paid approximately $240
million to retire its Term B debt at par plus accrued interest and recognized a $6.7 million loss
on extinguishing this debt by writing off the balance of unamortized Term B-related debt issue
costs.
Alion paid $25 million to retire the Subordinated Note and related warrants at a steep
discount to both carrying and estimated fair values. The Company recognized a $67.7 million gain
on extinguishing these liabilities which was offset in part by writing off $10.2 million in
unamortized debt issue and debt modification costs. Alion recognized a one-time $50.7 million net
benefit from its re-financing and debt extinguishment transactions.
Income Tax Expense. Until March 22, 2010, Alion had no material income tax expense as the
Company and its subsidiaries were a consolidated pass-through entity whose income was attributable
to its sole shareholder, the tax-exempt ESOP Trust. Some states did not recognize Alions S
corporation status and required the Company and its subsidiaries to file separate state tax
returns. Alions Canadian subsidiary has always been a taxable entity required to accrue a
Canadian tax liability as necessary.
On March 22, 2010, Alion issued 310,000 Secured Note Units each of which consists of $1,000 in
Secured Note face value and a warrant to purchase 1.9439 shares of Alion common stock. The
warrants entitle the holders to purchase a total of 602,614 shares of common stock at a penny per
share. The fair value of each warrant on the date of issue was approximately $67.05. The warrants
are considered to constitute a second class of stock under the IRC. S-corporations are only
permitted to have a single class of stock. By issuing the Secured Note warrants, Alions
S-corporation status automatically terminated and the Company ceased to be a pass-through entity
exempt from income taxes. Alion was required to recognize current income tax expense for the
effect of its change in reporting status.
Alion recognized approximately $35.4 million of deferred tax assets related to timing
differences for expenses previously recorded that are estimated to generate deductions on future
income tax returns. The Company also recognized a $33.8 million deferred tax liability related to
tax-deductible goodwill arising from prior year acquisitions. Prior to establishing a valuation
allowance, the Company had a $1.5 million net deferred tax asset arising from its conversion to a
C-corporation. However, Alions history of losses makes it unlikely that it will reasonably be
able to realize the full benefit of its deferred tax assets. The Company was required to establish
a full valuation allowance for its deferred tax assets and recognize $33.8 million in deferred tax
expense this quarter.
Net Income. As a result of the $50.7 million gain on its debt extinguishments, and despite
the $33.8 million charge for income taxes, Alion had $1.2 million in year-to-date net income.
Without the gain on extinguishment, the required tax provision and the $2.6 million in debt
covenant waiver fees and penalties Alion paid in the second quarter, the Company would
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have lost $13.0 million year to date compared to a $2.5 million loss for the similar six month
period last year. The higher loss is the result of increased operating expenses and higher
interest charges.
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 business grows or when customers delay contract funding
actions. The Company is funding its current business with cash from operating activities and the
net proceeds from issuing the Secured Notes. It intends to fund future operations in a similar
fashion. The Company also has access to a $25 million revolving credit facility. Management does
not currently estimate Alion will need to use its revolving credit facility to any significant
extent.
Cash Flows
Alions operations were almost break even year-to-date on a cash flow basis. Although debt
extinguishment net of tax provisions contributed $15.2 million to net income, these were non-cash
transactions from an operations perspective. The Company only used $79 thousand to fund operations
compared to $8.9 million for the similar period in 2009. Non-cash expenses for depreciation,
compensation and debt-related expenses were $11.0 million this year versus $1.7 million for the
similar period last year. The largest difference came from last years larger fair value credits
to expense and phantom stock forfeiture credits. Increased accruals for subcontractor work for
which Alion had yet to receive invoices helped offset the growth in receivables and generated $8.6
million in net cash flow. For the comparable period last year, receivables and payables consumed
$10.6 million in net cash flow. Alions re-financing transactions materially affected operating
cash flow as the Company paid off a $3.9 million Term B interest obligation and $3.9 million in
covenant waiver-related fees included in cash paid for interest. This contrasts sharply with the
$2.5 million cash flow benefit last year from interest accruals.
Alion collected $407.9 million in receivables during the first six months this year, slightly
less than the $409.2 million in revenue it recognized. This quarter days sales outstanding (DSO)
increased from 82.5 to 82.8 days as of March 31, 2010 based on trailing twelve month revenue.
Increasing revenue helped DSO to decline somewhat, offsetting a $2.7 million increase in net
receivables this quarter. Unbilled receivables grew this quarter by more than $4.4
million offsetting the effects of improved invoice collections. Unbilled receivables continue to
rise despite Alions progress in obtaining previously delayed contract funding. Increased balances
from growth in revenue represent currently billable amounts for which the Company intends to
issue invoices next quarter and collect payment within typical time frames. Management continues
to expect DSO to track at current levels.
Capital expenditures this year increased 6% over the same period last year consistent with
overall revenue growth. ESOP loans were $613 thousand less this year than last year and more than
offset a $329 thousand increase in ESOP share redemptions. Sales to the ESOP Trust remained at
comparable levels year over year. The higher 2009 cash inflow was the result of receiving 2008
share sale proceeds at the beginning of 2009 rather than in 2008.
Cash management efforts reduced total year-to-date revolver borrowing activity to $84.2
million, 63% less than the $227.5 million of year-to-date borrowings for the similar period in
2009. Notwithstanding this improvement, Alions re-financing transactions were the most significant
non-operating activities this year. On March 22, 2010, Alion issued 310,000 Secured Note Units for
gross proceeds of $302.3 million. The Company allocated $20.8 million in proceeds to the warrants
issued along with the Secured Notes and paid $13.2 million in third-party debt issue costs at
closing. Alion used $240 million to retire its Term B Loan and pay off accrued interest. Last
year Alion paid $3.0 million in Subordinated Note principal. This year, pursuant to the December
2009 agreement with IIT, Alion paid $25 million to re-purchase the entire Subordinated Note and
related warrants at a significant discount to carrying value. Alion had approximately $24 million
of additional cash on hand after issuing the Secured Notes and retiring the Term B Loan, the
Subordinated Note and the related warrants.
Alion has a long-term revolver commitment through August 2014 and additional available cash
from its re-financing activities. Management expects that for the next several years, the Company
will be able to meet existing debt covenants which are less stringent and restrictive than previous
Term B Loan covenants were. This will allow Alion to maintain access to the revolving credit
facility, even though Management does not foresee needing to draw on the revolver in any material
amount or for any extended period. Management believes Alion will have sufficient cash on
hand, cash flow from operations and cash available from its $25 million revolving credit facility
to continue to meet its obligations as they come due notwithstanding an overall increase in
interest payments associated with the Secured Notes. 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 prior debt covenants. The Secured Note Indenture also limits the Companys ability to
offer and fund certain types of discretionary diversification options that create demands on
Alions cash flows.
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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. Restrictions in current debt agreements will limit the ability of
the Company to offer discretionary diversification options to ESOP participants which should reduce
future cash flow demands. 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.
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 all 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. The Secured Notes Warrants have a one penny per share exercise price and are
in-the-money. Future changes in Alions share price will determine the extent to which Alion
recognizes interest expense related to these warrants; other factors are expected to have no material effect
on the Secured Notes Warrants value in the near future.
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 ends in September 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 Alions current debt structure which includes a $25 million
revolving credit facility, the Unsecured Notes and the Secured Notes. On March 22, 2010, the
Company retired its Term B Senior Credit Agreement, its Subordinated Note and the Subordinated Note
Warrants.
Credit Agreement
On March 22, 2010, the Company entered into a new Credit Agreement (Credit Agreement), which
consists of a $25.0 million senior revolving credit facility (Revolver), approximately $112
thousand of which was allocated to letters of credit and deemed borrowed, but none of which was
actually drawn as of March 31, 2010.
Under the Credit Agreement, Alion may request up to $10.0 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 Credit Agreement in full no later than August 22, 2014.
The Credit Agreement permits Alion to use the Revolver for working capital, other general
corporate purposes, and to finance permitted acquisitions.
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Security. The Credit Agreement is secured by a first priority security interest in all
current and future tangible and intangible property of Alion and its guarantor subsidiaries, HFA,
IPS, CATI, METI, JJMA, BMH, WCI, WCGS, MA&D and Alion Canada (US) Corporation. On March 22, 2010
Alion and the subsidiary guarantors entered into an Intercreditor Agreement with Wilmington Trust
Company and Credit Suisse AG, Cayman Islands Branch (Intercreditor Agreement). Under the
Intercreditor Agreement, lenders under the Credit Agreement have a super priority right of payment
with respect to the underlying collateral, which is superior to the rights of lenders under the
Secured Notes.
Guarantees. The Companys obligations under the Credit Agreement are guaranteed by the
Companys subsidiaries, HFA, IPS, CATI, METI, JJMA, BMH, WCI, WCGS, MA&D and Alion Canada (US)
Corporation. These subsidiaries also guarantee all of the Companys obligations under the Secured
Notes and Unsecured Notes (each described below).
Interest and Fees. Under the Credit Agreement, at the Companys election, the Revolver can
bear interest at either of two floating rates based on either a Eurodollar base or an alternative
base rate (ABR). The minimum interest rate on the Revolver is 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.
Other Fees and Expenses. Each quarter Alion is required to pay a commitment fee equal to 175
basis points per year on the prior quarters daily unused balances of the Revolver. As of March
31, 2010, $112 thousand was allocated to outstanding letters of credit. The Company paid
approximately $12 thousand in commitment fees for the Revolver for the quarter ended March 31,
2010.
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 also required to
pay interest in arrears for all outstanding letters of credit. The interest rate is based on the
Applicable Percentage for Eurodollar loans which was 6.0% as of March 31, 2010. The Credit
Agreement also requires the Company to pay an annual agents fee.
Covenants. The Credit Agreement requires the Company to achieve the following minimum
Consolidated EBITDA targets at the end of each calendar quarter during the time periods indicated:
Period | Minimum Consolidated EBITDA | |||
June 30, 2010 through March 31, 2011 |
$ | 52,500,000 | ||
April 1, 2011 through September 30, 2011 |
$ | 55,000,000 | ||
October 1, 2011 through September 30, 2012 |
$ | 60,000,000 | ||
October 1, 2012 through September 30, 2013 |
$ | 62,500,000 | ||
Thereafter |
$ | 65,000,000 |
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 (now extinguished Subordinated
Note) 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 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
Credit Agreement:
| incur additional indebtedness other than permitted additional indebtedness; |
| grant certain liens and security interests; |
| enter into sale and leaseback transactions; |
| make certain loans and investments including acquisitions of businesses, other than permitted acquisitions; |
| consolidate, merge or sell all or substantially all of the Companys assets; |
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| pay dividends or distributions other than distributions required by the ESOP Plan or by certain legal requirements; |
| enter into certain transactions with the Companys shareholders and affiliates; |
| change lines of business; |
| repay subordinated indebtedness before it is due and redeem or repurchase certain equity; |
| enter into certain transactions not permitted under ERISA; |
| spend more than $8 million on capital expenditures in any fiscal year; |
| pay certain earn-outs in connection with permitted acquisitions; or |
| change its fiscal year. |
Events of Default. The Credit Agreement contains customary events of default including,
without limitation:
| breach of representations and warranties; |
| payment default; |
| uncured covenant breaches; |
| default under certain other debt exceeding an agreed amount; |
| bankruptcy and insolvency events; |
| incurrence of a civil or criminal liability in excess of $5 million of the Company or any subsidiary arising from a government investigation; |
| unstayed judgments in excess of an agreed amount; |
| failure of any guarantee of the Credit Agreement to be in effect; |
| failure of the security interests to be valid, perfected first priority security interests in the collateral; |
| notice of debarment, suspension or termination under a material government contract; |
| actual termination of a material contract due to alleged fraud, willful misconduct, negligence, default or any other wrongdoing; |
| certain ERISA violations; |
| imposition on the ESOP Trust of certain taxes in excess of an agreed amount; |
| final determination the ESOP is not a qualified plan; |
| so long as any Secured Notes remain outstanding, the Intercreditor Agreement shall fail to be effective; or |
| change of control (as defined below). |
For purposes of the 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 $35.0 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 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 Unsecured Note Indenture or the Secured Note Indenture.
Secured Notes
On March 22, 2010, Alion issued and sold $310 million of its private units (Units) to Credit
Suisse, which informed the Company it had resold most of the units to qualified institutional
buyers. Each of the 310,000 Units sold consisted of $1,000 of Alions private senior secured notes
(Secured Notes) and a warrant to purchase 1.9439 shares of Alions common stock.
Security. The Secured Notes are secured by a first priority security interest in all current
and future tangible and intangible property of Alion and its guarantor subsidiaries, HFA, IPS,
CATI, METI, JJMA, BMH, WCI, WCGS and MA&D. The Secured Notes are senior obligations of Alion and
rank parri passu in right of payment with existing and future senior debt, including the Credit
Agreement, except to the extent that the Intercreditor Agreement provides Credit Agreement lenders
with a super priority right of payment with respect to the underlying collateral.
Guarantees. The Companys obligations under the Secured Notes are guaranteed by the Companys
subsidiaries, HFA, IPS, CATI, METI, JJMA, BMH, WCI, WCGS, MA&D and Alion Canada (US) Corporation.
Interest and Fees. The Secured Notes bear interest at 12% per year, which is payable 10% in
cash and 2% by increasing the principal amount of the Secured Notes (PIK Interest). Interest is
payable semi-annually in arrears on May 1 and November 1. Alion pays interest to holders of record
as of the immediately preceding April 15 and October 15. The Company must pay interest on overdue
principal or interest at 13% per annum to the extent lawful.
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Covenants. As of March 31, 2010, the Company was in compliance with the non-financial
covenants set forth in the Companys Indenture with respect to the Secured Notes (Secured Note
Indenture). The Secured Note Indenture does not contain any financial covenants.
The Company is subject to a covenant under the Second Indenture that restricts the Companys
ability to incur additional indebtedness. The Company and its Restricted Subsidiaries (as defined
in the Second Indenture) are prohibited from issuing, incurring, assuming, guaranteeing, and
otherwise becoming liable for any Indebtedness as defined under the Second Indenture unless the
Companys ratio of Adjusted EBITDA to Consolidated Interest Expense (each as defined in the Second
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 certain agreements up to $25 million |
| Permitted inter-company indebtedness |
| The Secured Notes and any public notes exchanged for those notes |
| Indebtedness pre-existing the issuance of the Secured 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 Secured Note Indenture |
| 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 $20 million. |
The Company is subject to a covenant under the Secured Note 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 the Unsecured Notes or other 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:
| Such 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 Secured 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 Secured Note Indenture) |
| Repurchases of subordinated obligations in connection with an asset sale to the extent required by the Secured Note Indenture |
| Certain permitted transactions with the ESOP |
| Payments to directors, officers and employees of the Company in connection with long-term incentive plans, subject to a $3 million annual cap that may increase annually |
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| Any purchase, repurchase, redemption, defeasance or other acquisition or retirement for value of the Unsecured Notes, up to an aggregate amount of $10 million |
| Certain other payments not exceeding $10 million in the aggregate. |
The Secured Note 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 Secured Notes.
Events of Default. The Secured Note 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; |
| failure of any guarantee of the Secured Notes to be in effect or the denial or disaffirmation by any subsidiary guarantor of its guaranty obligations; and |
| failure of any security interest securing the Secured Notes to constitute a valid and perfected lien with its applicable priority after a permitted cure period. |
Change of Control. Upon a change in control, each Secured Note holder has the right to require
Alion to 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 Secured 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 April 1, 2013, not more than once in any twelve month period,
the Company may redeem up to $31 million of Secured Notes at a redemption price of 103% of the
principal amount of the Secured Notes redeemed, plus accrued and unpaid interest to the redemption
date.
Prior to April 1, 2013, the Company may redeem all, but not less than all, of the Secured
Notes at a redemption price equal to 100% of the principal amount of the Secured 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 April 1, 2013, subject to certain conditions, the Company may
use the proceeds of a qualified equity offering to redeem Unsecured Notes in an aggregate principal
amount not to exceed $108.5 million at a redemption price equal to the sum of 112% of the aggregate
principal amount of the notes actually redeemed, plus accrued and unpaid interest to the redemption
date.
On or after April 1, 2013, the Company may redeem all or a portion of the Secured 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 periods set
forth below:
Period | Redemption Price | |||
April 1, 2013 to September 30, 2013 |
105.0 | % | ||
October 1, 2013 to March 31, 2014 |
103.0 | % | ||
April 1, 2014 and thereafter |
100.0 | % |
Exchange Offer; Registration Rights. The Company is required to file a registration statement
with the SEC offering to exchange the Secured Notes for publicly registered notes with the same
terms no later than June 20, 2010.
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Unsecured Notes
On February 8, 2007, Alion issued and sold $250.0 million of its private 10.25% unsecured
notes due February 1, 2015 (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 Unsecured Notes for publicly tradable Unsecured Notes with the same terms.
Guarantees. The Companys obligations under the Unsecured Notes are guaranteed by the
Companys subsidiaries, HFA, IPS, CATI, METI, JJMA, BMH, WCI, WCGS, MA&D and Alion Canada (US)
Corporation.
Interest and Fees. The 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 March 31, 2010, the Company was in compliance with the non-financial
covenants set forth in the Companys indenture with respect to the Unsecured Notes (Unsecured Note
Indenture). The Unsecured Note Indenture does not contain any financial covenants.
The Company is subject to a covenant under the Unsecured Note Indenture that restricts the
Companys ability to incur additional indebtedness. The Company and its Restricted Subsidiaries
(as defined in the Unsecured Note Indenture) are prohibited from issuing, incurring, assuming,
guaranteeing, and otherwise becoming liable for any Indebtedness as defined under the Unsecured
Note Indenture unless the Companys ratio of Adjusted EBITDA to Consolidated Interest Expense (each
as defined in the Unsecured Note 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 Companys now terminated Term B Senior Credit Facility and certain other contracts up to $360 million less principal repayments made under that indebtedness; |
| Permitted inter-company Indebtedness; |
| The Unsecured Notes ; |
| Indebtedness pre-existing the issuance of the Unsecured 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 Unsecured Note Indenture; |
| 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; and |
| Certain other Indebtedness not exceeding $35 million. |
The Company is subject to a covenant under the Unsecured Note 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:
| Such payments out of substantially concurrent contributions of equity to the Company and substantially concurrent incurrences of permitted indebtedness; |
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| 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 Unsecured Notes in connection with a change of control of the Company; |
| Certain permitted inter-company subordinated obligations; and |
| Certain repurchases and redemptions of subordination obligations of the Company or a Subsidiary Guarantor from Net Available Cash (as defined in the Unsecured Note 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; and |
| Certain other payments not exceeding $30 million in the aggregate. |
The Unsecured Note 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 Unsecured Notes.
Events of Default. The Unsecured Note 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 Unsecured Notes to be in effect or the denial or disaffirmation by any subsidiary guarantor of its guaranty obligations. |
Change of Control. Upon a change in control, each Unsecured Note holder has the right to
require Alion to 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 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 Unsecured Notes at a redemption price equal to 100% of the principal amount of the
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 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.
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On or after February 1, 2011, the Company may redeem all or a portion of the 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 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.
Retired Term B Senior Credit Agreement
In August 2004, Alion entered into the Term B Senior Credit Agreement with a syndicate of
financial institutions. On March 22, 2010, the Company used approximately $240 million in proceeds
from the issuance of the Units to redeem and retire all of the loans outstanding under the Term B
Senior Credit Agreement and to pay all accrued and unpaid interest on such loans through the date
of redemption.
Retired 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. On March 22, 2010, the Company used $25
million in proceeds from the issuance of the Units to redeem the Subordinated Note and the related
warrants held by IIT.
During the next six fiscal years the Company expects that at a minimum, it will have to make
the estimated interest and principal payments set forth below.
6-Fiscal Years ($In thousands) | ||||||||||||||||||||||||
2010 | 2011 | 2012 | 2013 | 2014 | 2015 | |||||||||||||||||||
Bank revolving credit facility(1) |
||||||||||||||||||||||||
- Interest |
$ | 233 | $ | 444 | $ | 445 | $ | 444 | $ | 396 | $ | | ||||||||||||
Secured Notes(2) |
||||||||||||||||||||||||
- Interest |
3,358 | 31,223 | 31,850 | 32,490 | 33,144 | 16,821 | ||||||||||||||||||
- Principal and PIK Interest |
| | | | | 339,788 | ||||||||||||||||||
Unsecured Notes(3) |
||||||||||||||||||||||||
- Interest |
12,813 | 25,625 | 25,625 | 25,625 | 25,625 | 12,813 | ||||||||||||||||||
- Principal |
| | | | | 250,000 | ||||||||||||||||||
Total cash pay interest |
16,404 | 57,292 | 57,920 | 58,559 | 59,165 | 29,634 | ||||||||||||||||||
Total cash pay principal and
PIK Interest |
| | | | | 589,788 | ||||||||||||||||||
Total |
$ | 16,404 | $ | 57,292 | $ | 57,920 | $ | 58,559 | $ | 59,165 | $ | 619,422 | ||||||||||||
(1) | Alion expects to occasionally utilize its $25.0 million revolving credit facility to meet working capital needs through 2014. Management expects the average utilized revolver balance will be immaterial and that interest expense will consist of commitment fees for unused balances. The current facility expires August 22, 2014. | |
(2) | The Secured Notes bear interest at 10% in cash and 2% in PIK. Outstanding principal will increase over time for the 2% compounding PIK interest added to the initial $310 million in principal. The Secured Notes including $29.8 million in PIK interest mature November 1, 2014. |
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(3) | The Senior Unsecured Notes bear interest at 10.25% and mature February 1, 2015. |
Contingent Obligations
Secured Notes registration rights agreement
Alion entered into a registration rights agreement in connection with the sale of the Units
which requires the Company to file a registration statement with the SEC in order to conduct an
exchange offer to exchange the private Secured Notes for public Secured Notes. If Alion were to
default under the registration rights agreement, the interest rate on the Secured Notes would
increase by 50 basis points for each ninety day period such default were to continue uncured. The
maximum additional annual interest rate could increase by up to 200 basis points.
Earn-outs
The Company has one remaining earn-out commitment arising from its July 2007 LogCon Group
acquisition. The maximum potential earn out is $500 thousand though July 2011; $100 thousand has
already been earned and paid. 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
Management forecasts that continuing net operating losses for income tax purposes will permit
Alion to avoid significant cash outflows for income taxes. Other contingent obligations which will
impact Alions cash flow include:
| ESOP share repurchase and diversification obligations, and |
| Long-term incentive compensation plan obligations. |
As of March 31, 2010, 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. Restrictions in the Companys debt agreements limit certain discretionary
ESOP diversification demands on the Companys cash flow. The table below lists current and prior
year share re-purchases.
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 |
128 | $ | 38.35 | 5 | ||||||||
August 2009 |
178 | $ | 34.30 | 6 | ||||||||
September 2009 |
55,282 | $ | 34.30 | 1,896 | ||||||||
December 2009 |
745 | $ | 34.50 | 26 | ||||||||
March 2010 |
218,408 | $ | 34.50 | 2,232 | ||||||||
Total |
464,272 | $ | 11,432 | |||||||||
Management believes cash on hand, cash flow from operations and cash available under the
current revolving credit facility will provide sufficient capital to fulfill current business plans
and fund working capital needs for the next two to three years. The Company intends to focus on
organic growth and improving processes and margins.
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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
interest on the Secured and Unsecured Notes and satisfy ESOP repurchase and diversification
obligations.
The Secured and Unsecured Indentures and the existing revolver allow Alion to make certain
permitted acquisitions, and the Company intends to use its available financing to do so. Alion
will ultimately have to refinance the Secured Notes and Unsecured Notes which mature in November
2014 and February 2015 and will require the Company to pay out more than $600 million over a
three-month period. The Company is uncertain whether, when and under what terms it will be able to
refinance these obligations. If Alion is unable to refinance these obligations, the Company will
not have sufficient cash from operations to meet all its 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 additional
financing and sooner than expected. While Alion intends only to enter into new financing or
refinancing it considers advantageous, even with moderately improved conditions in the high-yield
credit market, 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.
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:
| any future inability to maintain adequate internal control over financial reporting; |
| limits on Alions financial and operational flexibility given the Companys substantial debt and debt covenants; |
| changes to the ERISA laws related to the KSOP; |
| tax law changes that could affect Alions tax liabilities or its effective tax rate; |
| 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 with attendant risks of fines, liabilities, penalties, suspension and/or debarment; |
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| undertaking acquisitions that increase costs or liabilities or are disruptive; |
| taking on additional debt to fund acquisitions; |
| failing to adequately integrate acquired businesses; |
| risks from private securities litigation, regulatory proceedings or government enforcement actions relating to Alions prior covenant compliance disclosures; |
| 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 May 14, 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
Alions Secured Notes and Unsecured Notes are fixed-rate debt. The Company only faces
interest rate risk for any amounts outstanding under the new $25 million revolver. Revolver
balances bear interest at a 2.50% minimum Eurodollar rate plus 700 basis points (9.50%). If the
Eurodollar rate were to exceed 2.50%, Alions interest expense would increase. However, the
Company currently does not forecast drawing any material balance on the revolver and therefore any
rate increase is not expected to have a material effect on Alions operating results or cash flows
for any period from now through August 2014 when the revolver matures. The Company does not use
derivatives for trading purposes. It invests its excess cash in short-term, investment grade, and
interest-bearing securities.
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 stock affect the Companys estimated KSOP share
repurchase obligations and its stock-based compensation obligations. 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 March 31, 2010 that have materially affected, or
are reasonably likely to materially affect, the Companys internal control over financial
reporting.
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Item 4T. | Controls and Procedures |
See disclosure under Item 4.
PART II OTHER INFORMATION
Item 1. | Legal Proceedings |
See Note 21 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 |
Except as set forth below, the risk factors included in the Companys Annual Report on Form
10-K for the fiscal year ended September 30, 2009 have not materially changed.
Risks Related to Internal Controls
We discovered errors in our historic calculations of Consolidated EBITDA because of which we failed
to comply with certain covenants in our previously existing Term B Senior Credit Agreement. Our
prior disclosures relating to our compliance with our financial covenants could have material
adverse effects on our business and financial condition.
In late 2009, we discovered that our reporting of Consolidated EBITDA to our lenders did not
conform to the definition of such term in our previously existing Term B Senior Credit Agreement.
Since entering into the Term B Senior Credit Agreement in 2004, we had miscalculated several
components of Consolidated EBITDA over numerous periods of time. For example, from 2004 to 2009 we
had not deducted cash outflows that relate to deferred compensation plans, including the stock
appreciation rights plans, phantom stock plans and the Long-Term Incentive Plan, as well as the
settlement of our match and retirement plan obligations, in our calculations of Consolidated
EBITDA, resulting in calculations of Consolidated EBITDA that were higher by the amount of these
deductions. When these miscalculations were properly taken into account, the adjusted Consolidated
EBITDA calculations indicated the Companys non-compliance with the senior secured leverage ratio
(or predecessor test) and interest coverage ratio covenants in the Term B Senior Credit Agreement
for eleven periods between June 30, 2006 and September 30, 2009. For example, for the four trailing
quarters ended June 30, 2009, our actual senior secured leverage ratio of 4.38 did not comply with
the required ratio of 4.25. For the four trailing quarters ended September 30, 2009, our actual
interest coverage ratio of 1.06 failed to meet the required ratio of 1.10. The non-compliance with
these financial covenants triggered non-compliance with other covenants under the Term B Senior
Credit Agreement.
On December 14, 2009, we entered into a waiver agreement to the Term B Senior Credit Agreement
under which our lenders agreed to waive, among other things, covenant defaults that resulted from
either the miscalculation of Consolidated EBITDA or the failure to comply with covenants had the
cash outflows relating to the settlement of deferred compensation plans and certain retirement
obligations been deducted from the calculation of Consolidated EBITDA. The waiver applied to these
defaults that existed on or before December 14, 2009 and to any defaults that arose as a result of
properly calculating Consolidated EBITDA for the fiscal year and quarter ended September 30, 2009.
The waiver did not apply to any covenant breach after December 14, 2009 and for any periods after
our fiscal year end 2009. The waiver agreement did not change any of the terms or definitions of
the Term B Senior Credit Agreement. We paid each lender granting the waiver a waiver fee prior to
the agreed time on December 11, 2009, and paid an additional arrangement fee to the administrative
agent in connection with securing the waiver. In addition, on March 1, 2010, we paid each lender
that granted the waiver an additional fee.
We are unable to predict the likelihood of potential outcomes from private securities
litigation, regulatory proceedings or government enforcement actions relating to our prior
disclosures regarding covenant compliance. The resolution of these matters could be time-consuming
and expensive, distract management from other business concerns and harm our reputation
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and our business. Furthermore, if we were subject to adverse findings in litigation, regulatory
proceedings or government enforcement actions, we could be required to pay damages, fines and
penalties and have other remedies imposed, which could harm our reputation and our business and
financial condition.
As a result of the miscalculations of Consolidated EBITDA under our previously existing Term B
Senior Credit Agreement, we identified a material weakness in the operation of our internal control
over financial reporting. Future inability to maintain adequate control over financial reporting
could keep us from reporting our financial results in a timely and accurate matter and from
preventing financial fraud; such inability could also cause us to restate our financial statements.
As a result of the miscalculations of certain financial covenants under the previously
existing Term B Senior Credit Agreement, we identified a material weakness in the operation of our
internal control over financial reporting. A material weakness is a control deficiency, or
combination of deficiencies, that results in more than a remote likelihood that a material
misstatement of our financial statements would not be prevented or detected on a timely basis by
our employees in the normal course of performing their assigned functions. Our above-mentioned
financial, affirmative and negative covenant defaults under the previously existing Term B Senior
Credit Agreement resulted in our Term B senior term loan and revolving loan payable balances being
callable either by the administrative agent or by lenders holding a majority of the value of the
outstanding loans and therefore, as of the issuance of our fiscal year 2008 financial statements
and the financial statements for each of the first three quarters of fiscal year 2008 and 2009,
such balances should have been classified as current liabilities. On December 23, 2009, our audit
and finance committee of our board of directors concluded that our previously issued financial
statements for the year ended September 30, 2008 and the quarters ended December 31, 2007, March
31, 2008, June 30, 2008, December 31, 2008, March 31, 2009 and June 30, 2009, should no longer be
relied upon for the reasons described above.
We remediated the material weakness in fiscal year 2010 by clarifying our understanding of
Consolidated EBITDA as defined in the Term B Senior Credit Agreement. After such clarification, our
covenant calculations were calculated in accordance with the terms of the Term B Senior Credit
Agreement. Nevertheless, if we fail to maintain adequate control over financial reporting, we could
fail to report our financial results in a timely and accurate manner, fail to prevent financial
fraud, and be required to restate our financial statements.
Risks Related to our Debt Structure
We have incurred a significant amount of debt; our debt load may limit our financial and
operational flexibility which could prevent us from fulfilling our obligations under our debt
agreements.
On August 2, 2004, we refinanced the senior debt we incurred to acquire IITRIs assets. Partly
to fund our growth through subsequent acquisitions, we incurred a substantial amount of additional
debt. As of March 31, 2010, we owed approximately $310 million face amount in senior secured notes
and $250 million face amount in unsecured notes. As of March 31, 2010, we had approximately $560
million in senior debt and approximately $560 million in total face amount of debt outstanding. The
total amount of our outstanding senior debt under the secured notes will increase as we pay
payment-in-kind (PIK) interest, and as the amount of PIK payments is capitalized by the aggregate
amount of the PIK payments. We have managed significant amounts of debt since December 2002.
However, we continue to face challenges in functioning as a highly leveraged company in volatile
and unfavorable credit markets.
Our substantial debt has and could continue to:
| make it more difficult for us to satisfy our debt-related obligations; any failure to comply with any of our debt instrument obligations, including restrictive and financial covenants, could result in an event of default under our debt agreements; |
| make it more difficult for us to satisfy our repurchase obligations to ESOP participants; |
| increase our vulnerability to general adverse economic and industry conditions and make it more difficult for us to react to changing conditions; |
| limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions, other business opportunities, new technologies or other general corporate requirements; |
| require a substantial portion of our operating cash flow to pay interest on our debt and reduce our ability to use our cash flow for future business needs; |
| limit our flexibility to plan for, or react to changes in our business and the government contracting industry; and |
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| place us at a competitive disadvantage compared to less leveraged companies. |
Despite our current debt levels, we and our subsidiaries may still be able to incur more debt. This
could further aggravate risks associated with our substantial leverage.
We have the ability to incur additional debt, including the ability to raise up to $10 million
of additional senior secured indebtedness with first-out rights and an additional $10 million of
pari passu senior secured indebtedness, subject to limitations that are imposed by the covenants in
the new revolving credit facility, the indenture governing the 101/4% senior unsecured notes, which
we refer to as the Unsecured Note Indenture, and the indenture governing the 12% senior secured
notes, which we refer to as the Secured Note Indenture. In addition, the payment of PIK interest
on the secured notes will increase our debt by the amount of such PIK payments. The Unsecured Note
Indenture, the new revolving credit facility and the Secured Note Indenture do not completely
prohibit us from incurring additional debt. The more we borrow, the more we, and in turn our
security holders, become exposed to the risks described under We have incurred a significant
amount of debt; our debt load may limit our financial and operational flexibility which could
prevent us from fulfilling our obligations under our debt agreements. See Managements Discussion
and Analysis of Financial Condition and Results of Operation Discussion of Debt Structure for
additional information.
Our Unsecured Note Indenture, the new revolving credit facility and the Secured Note Indenture
restrict our operations.
Our Unsecured Note Indenture, the new revolving credit facility, and the Secured Note
Indenture contain, and our future debt agreements may contain, covenants that may restrict our
ability to engage in activities that may be in our long-term best interest, including financing
future operations or capital needs or engaging in other business activities. Our Unsecured Note
Indenture, the new revolving credit facility and the Secured Note Indenture restrict, among other
things, our ability and the ability of our subsidiaries to:
| incur additional debt other than permitted additional debt; |
| pay dividends or distributions on our capital stock or purchase, redeem or retire capital stock other than to satisfy ESOP repurchase obligations or pay certain amounts required under our equity-based compensation plans; |
| make acquisitions and investments other than permitted acquisitions and permitted investments; |
| issue or sell preferred stock of subsidiaries; |
| create liens on our assets; |
| enter into certain transactions with affiliates; |
| merge or consolidate with another company; or |
| transfer or sell assets outside the ordinary course of business. |
Our new revolving credit facility requires us, and our future debt agreements may require us,
to maintain specified financial levels relating to, among other things, our minimum trailing
four-quarter EBITDA. Our future debt agreements may also impose other minimum financial performance
requirements including, but not limited to, net worth tests. Events beyond our control can affect
our ability to meet these financial performance requirements; we cannot guarantee that we will meet
these tests.
Default under the new revolving credit facility, the Unsecured Note Indenture or the Secured
Note Indenture could allow lenders to declare all amounts outstanding under the new Revolving
Credit Facility, the Unsecured Notes and the Secured Notes to be immediately due and payable. We
have pledged substantially all of our assets to secure the debt under the new revolving credit
facility and the secured notes. If lenders under the new revolving credit facility declare amounts
outstanding under the new revolving credit facility to be due, they could proceed against those
assets. Any event of default could have a material adverse effect on our business, financial
condition and operating results if creditors were to exercise their rights.
From time to time we may require consents or waivers from our lenders to permit actions that
the new revolving credit facility, the Unsecured Note Indenture or the Secured Note Indenture
prohibit. If, in the future, lenders refuse to waive the
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restrictive covenants and/or financial levels under the new revolving credit facility, the
Unsecured Note Indenture and/or the Secured Note Indenture, then we could be in default on the new
revolving credit facility, the Unsecured Note Indenture and/or the Secured Note Indenture. We could
be prohibited from undertaking actions necessary or desirable to maintain or expand our business.
There is no guarantee we will be able to obtain additional consents or waivers from our lenders.
We may not be able to obtain financing in the future, and the terms of any future financings may
limit our ability to manage our business. Difficulties in obtaining financing on favorable terms
would have a negative effect on our ability to execute our business strategy.
We anticipate that we may need to seek additional capital in the future to refinance or
replace existing long-term debt, meet current or future business plans, meet working capital needs
or for other reasons. Based on current market conditions, the availability of financing is, and may
continue to be, limited. There can be no assurance that we will be able to obtain future financings
on acceptable terms, if at all. In addition, the secured notes, the new revolving credit facility
and the unsecured notes will all mature between August 2014 and February 2015, which could further
limit our ability to obtain additional financing on acceptable terms, if at all.
Our corporate family credit ratings at Standard & Poors and Moodys Investors Service were
lowered in fiscal year 2009 to B- and Caa3. A downgrade in such ratings could increase our cost of
capital, or attempt to obtain additional financing in the future. An increase in our cost of
capital would adversely affect our results of operations and our financial position.
If we are unable to obtain alternative or additional financing arrangements in the future, or
if we cannot obtain financing on acceptable terms, we may not be able to execute our business
strategies. Moreover, the terms of any such additional financing may restrict our financial
flexibility, including the debt we may incur in the future, or may restrict our ability to manage
our business as we had intended.
If we breach our financial covenants, we could have to amend the financial covenants of the new
revolving credit facility which could materially impact our ability to finance our future
operations, future acquisitions or capital needs.
In October 2009, we agreed with our then senior lenders to amend the interest coverage ratio
and the maximum senior secured leverage ratio covenants under our previously existing Term B Senior
Credit Agreement effective through the end of our fiscal year 2010 and through the end of our first
quarter of our fiscal year 2011 in order to provide us with more flexibility. On December 14, 2009,
we entered into a waiver agreement to the Term B Senior Credit Agreement under which our lenders
agreed to waive, among other things, covenant defaults that resulted from either the miscalculation
of Consolidated EBITDA or the failure to comply with covenants had the cash outflows relating to
the settlement of deferred compensation plans and certain retirement obligations been deducted from
the calculation of Consolidated EBITDA. The waiver applied to these defaults that existed on or
before December 14, 2009 and to any defaults that arose as a result of properly calculating
Consolidated EBITDA for the fiscal year and quarter ended September 30, 2009. The waiver did not
apply to any covenant breach after December 14, 2009 and for any periods after our fiscal year end
2009.
We expect to be able to meet the financial and other debt covenants under the new revolving
credit facility for at least the next 24 months. However, we may be unable to meet these financial
and other debt covenants in the future, which could require us to amend the new revolving credit
facility on less favorable terms. If we were to default under the new revolving credit facility, we
could pursue an amendment or waiver of the new revolving credit facility with our existing lenders,
but there can be no assurance that the lenders would grant an amendment or waiver. In light of
current credit market conditions, any such amendment or waiver might be on terms, including
additional fees, increased interest rates and other more stringent terms and conditions materially
disadvantageous to us. If we were unable to meet these financial covenants in the future and unable
to obtain future covenant relief or an appropriate senior lenders waiver, we could be in default
under the new revolving credit facility. This could cause all amounts borrowed under it and all
underlying letters of credit to become immediately due and payable, expose our assets to seizure,
cause a potential cross-default under our indentures and possibly require us to invoke insolvency
proceedings including, but not limited to, a voluntary case under the U.S. Bankruptcy Code.
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Risks Related to Our Business and Operations
On March 22, 2010, our S corporation election was terminated and we became a C corporation for U.S.
federal income tax purposes. As a C corporation we are subject to U.S. federal and state income tax
at regular corporate rates. The increase in our effective tax rate will potentially reduce the
amount of cash flow we have available to meet our debt and other financial obligations and to
reinvest in our operations.
At all times during the period from Alions formation through March 22, 2010, we were taxed as
an S corporation for U.S. federal income tax purposes. As an S corporation, we generally were not
subject to U.S. federal income taxation or state income taxation in many U.S. states. Rather, our
income, gains, losses, deductions and credits flowed through to the ESOP Trust. As of March 22,
2010, we became a C-corporation required to pay U.S. federal and state income tax at regular
corporate rates, thereby potentially reducing the amount of cash available to repay debt, reinvest
in our operations or fulfill our other financial obligations.
The Internal Revenue Service (IRS) could successfully challenge the validity of our S corporation
election for tax periods before March 22, 2010. In such an event, we could potentially owe
additional U.S. federal and state income tax.
At all times during the period Alions formation through March 22, 2010, we believe that we
were a valid S corporation for U.S. federal income tax purposes and in those U.S. states in which
we file (or have filed) state income tax returns and which also recognize S corporation status for
state income tax purposes (except for limited periods in certain states during which we filed state
income tax returns as a C corporation). If the IRS or state tax agencies were successfully to
challenge our position, however, we could potentially owe additional U.S. federal and state income
tax, which would reduce the amount of cash available to repay debt, reinvest in our operations or
fulfill our other financial obligations.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Alion employees directed
approximately $2.1 million salary deferrals and rollovers to the ESOP Trust to purchase beneficial
interests in Alion common stock at $28.00 per share. The Company did not use an underwriter and did
not pay underwriter discounts or commissions. Alion offered and sold beneficial interests in the
KSOP to eligible employees pursuant to Rule 701 under the Securities Act of 1933, as amended.
Item 3. | Defaults Upon Senior Securities |
None. |
Item 4. | Removed and Reserved |
Item 5. | Other Information |
See Part 2, Item 2 for disclosure of an unregistered sale of equity securities.
On March 22, 2010, the ESOP Trustee executed a written consent on behalf of the ESOP Trust as
sole shareholder to approve an amendment to the December 20, 2002 Stock Purchase Agreement by and
between the ESOP Trust and the Company. The ESOP Trustee agreed to remove a covenant that required
the Company to maintain its S-corporation status.
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Item 6. | Exhibits |
Exhibit | ||||
No. | Description | |||
3.4 | Amended and Restated By-Laws of Alion Science and Technology Corporation. (1) |
|||
4.18 | Indenture, dated as of March 22, 2010, among the Company, certain subsidiary guarantors of
the Company and Wilmington Trust Company, as trustee. (1) |
|||
4.19 | Form of 12% Senior Secured Notes due 2014. (1) |
|||
4.20 | Form of Warrant. (1) |
|||
4.21 | Form of Unit. (1) |
|||
4.22 | Alion Science and Technology Corporation 2004 Stock Appreciation Rights Plan, as amended and restated effective January 1, 2007. |
|||
4.23 | Alion Science and Technology Performance Shares and Retention Phantom Stock Plan, as amended
and restated effective November 1, 2007. |
|||
4.24 | Alion Science and Technology Director Phantom Stock Plan, as amended and restated effective January 1, 2007. |
|||
4.25 | Alion Executive Deferred Compensation Plan, as amended and restated effective January 1, 2008. |
|||
4.26 | Alion Director Deferred Compensation Plan, as amended and restated effective January 1, 2008. |
|||
4.27 | First Amendment to Alion Science and Technology Corporation 2004 Stock Appreciation Rights
Plan (as amended and restated), dated as of January 22, 2010. |
|||
4.28 | First Amendment to Alion Science and Technology Corporation Director Phantom Stock Plan (as
amended and restated), dated as of January 22, 2010. |
|||
4.29 | First Amendment to Alion Science and Technology Corporation Long-Term Incentive Plan, dated
as of January 22, 2010. |
|||
4.30 | Third Amendment to Amended and Restated Alion Science and Technology Corporation Employee
Ownership, Savings and Investment Plan. |
|||
4.31 | Fourth Amendment to Amended and Restated Alion Science and Technology Corporation Employee
Ownership, Savings and Investment Plan. |
|||
10.91 | Separation Agreement dated as of December 8, 2009 between Alion Science and Technology
Corporation and James C. Fontana. (3) |
|||
10.92 | First Supplemental Indenture, dated as February 26, 2010, between Alion-IPS Corporation,
Washington Consulting Government Services, Inc., Alion Canada (US) Corporation, Alion Science
and Technology Corporation and Wilmington Trust Company, as trustee. (2) |
|||
10.93 | Purchase Agreement dated as of March 11, 2010, by and between the Company and Credit Suisse
Securities (USA) LLC. (1) |
|||
10.94 | Warrant Agreement, dated as of March 22, 2010, by and between the Company and Wilmington
Trust Company, as warrant agent. (1) |
|||
10.95 | Credit Agreement, dated as of March 22, 2010, by and among the Company, the lenders party
thereto and Credit Suisse AG, as administrative agent. (1) |
|||
10.96 | Intercreditor Agreement, dated as of March 22, 2010, by and among the Company, the other
grantors party thereto, Credit Suisse AG, as administrative agent, and Wilmington Trust
Company, as collateral agent and trustee. (1) |
|||
10.97 | Security Agreement, dated as of March 22, 2010, by and among the Company, certain
subsidiaries of the Company and Wilmington Trust Company, as collateral agent. (1) |
|||
10.98 | Guarantee Agreement, dated as of March 22, 2010, by and among the Company, certain
subsidiaries of the Company and Credit Suisse AG, as administrative agent. (1) |
|||
10.99 | Registration Rights Agreement, dated March 22, 2010, by and between the Company and Credit
Suisse Securities (USA) LLC. (1) |
|||
10.100 | Amendment, dated as of March 22, 2010, to the Stock Purchase Agreement, dated as of December
20, 2002, between the Company and the Alion Science and Technology Corporation Employee
Ownership, Savings and Investment Trust. (1) |
|||
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. |
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(1) | Incorporated by reference from the Companys Form 8-K/A filed with the SEC on March 25, 2010. | |
(2) | Incorporated by reference from the Companys Form 8-K filed with the SEC on March 3, 2010. | |
(3) | Incorporated by reference from the Companys Form 8-K filed with the SEC on February 4, 2010. |
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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: May 14, 2010
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