Attached files
file | filename |
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EX-32.1 - EXHIBIT 32.1 - ALION SCIENCE & TECHNOLOGY CORP | c04575exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - ALION SCIENCE & TECHNOLOGY CORP | c04575exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - ALION SCIENCE & TECHNOLOGY CORP | c04575exv31w2.htm |
EX-32.2 - EXHIBIT 32.2 - ALION SCIENCE & TECHNOLOGY CORP | c04575exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010.
COMMISSION FILE NUMBER 333-89756
Alion Science and Technology Corporation
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE | 54-2061691 | |
(State or Other Jurisdiction of | (I.R.S. Employer | |
Incorporation of Organization) | Identification No.) | |
10 West 35th Street | 1750 Tysons Boulevard, Suite 1300 | |
Chicago, IL 60616 | McLean, VA 22102 | |
(312) 567-4000 | (703) 918-4480 |
(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. Yes o No þ
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). Yes o No o
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 August 10, 2010 was: Common Stock 5,406,092
ALION SCIENCE AND TECHNOLOGY CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2010
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 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 June 30, 2010 and September 30, 2009
June 30, | September 30, | |||||||
2010 | 2009 | |||||||
(In thousands, except share | ||||||||
and per share information) | ||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 24,281 | $ | 11,185 | ||||
Accounts receivable, net |
171,328 | 180,157 | ||||||
Prepaid expenses and other current assets |
6,065 | 3,795 | ||||||
Total current assets |
201,674 | 195,137 | ||||||
Property, plant and equipment, net |
12,063 | 14,474 | ||||||
Intangible assets, net |
20,277 | 28,680 | ||||||
Goodwill |
398,921 | 398,921 | ||||||
Other assets |
10,651 | 10,286 | ||||||
Total assets |
$ | 643,586 | $ | 647,498 | ||||
Current liabilities: |
||||||||
Interest payable |
$ | 15,860 | $ | 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 |
46,586 | 60,707 | ||||||
Accrued liabilities |
43,448 | 45,425 | ||||||
Accrued payroll and related liabilities |
46,444 | 43,033 | ||||||
Billings in excess of revenue earned |
4,629 | 3,661 | ||||||
Total current liabilities |
156,967 | 167,304 | ||||||
Senior term loan payable, excluding current portion |
| 229,221 | ||||||
Senior secured notes |
272,089 | | ||||||
Senior unsecured notes |
245,905 | 245,241 | ||||||
Subordinated note payable |
| 46,932 | ||||||
Accrued compensation, excluding current portion |
5,079 | 5,740 | ||||||
Accrued postretirement benefit obligations |
752 | 717 | ||||||
Non-current portion of lease obligations |
7,873 | 7,286 | ||||||
Deferred income taxes |
35,615 | | ||||||
Commitments and contingencies
|
||||||||
Redeemable common stock warrants |
| 32,717 | ||||||
Redeemable common stock, $0.01 par value, 8,000,000 shares
authorized, 5,406,237 and 5,424,274 shares issued and outstanding
at June 30, 2010 and September 30, 2009 |
151,375 | 187,137 | ||||||
Common stock warrants |
20,785 | | ||||||
Accumulated other comprehensive loss |
(238 | ) | (238 | ) | ||||
Accumulated deficit |
(252,616 | ) | (274,559 | ) | ||||
Total liabilities, redeemable common stock and accumulated deficit |
$ | 643,586 | $ | 647,498 | ||||
See accompanying notes to condensed consolidated financial statements.
1
Table of Contents
ALION SCIENCE AND TECHNOLOGY CORPORATION
Condensed Consolidated Statements of Operations
(unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In thousands, except share and per share information) | ||||||||||||||||
Contract revenue |
$ | 213,309 | $ | 204,160 | $ | 622,593 | $ | 588,385 | ||||||||
Direct contract expense |
164,853 | 157,666 | 479,898 | 452,123 | ||||||||||||
Gross profit |
48,456 | 46,494 | 142,695 | 136,262 | ||||||||||||
Operating expenses: |
||||||||||||||||
Indirect contract expense |
10,167 | 9,443 | 29,435 | 27,899 | ||||||||||||
Research and development |
120 | 223 | 690 | 370 | ||||||||||||
General and administrative |
19,465 | 17,253 | 53,938 | 40,852 | ||||||||||||
Rental and occupancy expense |
7,499 | 8,169 | 23,783 | 24,375 | ||||||||||||
Depreciation and amortization |
4,064 | 5,156 | 12,507 | 14,662 | ||||||||||||
Total operating expenses |
41,315 | 40,244 | 120,353 | 108,158 | ||||||||||||
Operating income |
7,141 | 6,250 | 22,342 | 28,104 | ||||||||||||
Other income (expense): |
||||||||||||||||
Interest income |
16 | 15 | 73 | 63 | ||||||||||||
Interest expense |
(18,292 | ) | (15,766 | ) | (49,275 | ) | (40,098 | ) | ||||||||
Other |
(183 | ) | 90 | (207 | ) | (32 | ) | |||||||||
Gain on sale of non-operating assets |
| (19 | ) | | (19 | ) | ||||||||||
Gain on extinguishment of debt |
| | 50,749 | | ||||||||||||
Total other income (expense) |
(18,459 | ) | (15,680 | ) | 1,340 | (40,086 | ) | |||||||||
(Loss) income before taxes |
(11,318 | ) | (9,430 | ) | 23,682 | (11,982 | ) | |||||||||
Income tax (expense) benefit |
(1,798 | ) | (7 | ) | (35,573 | ) | 44 | |||||||||
Net loss |
$ | (13,116 | ) | $ | (9,437 | ) | $ | (11,891 | ) | $ | (11,938 | ) | ||||
Basic and diluted loss per share |
(2.40 | ) | (1.80 | ) | (2.19 | ) | (2.27 | ) | ||||||||
Basic and weighted average common
shares outstanding |
5,467,797 | 5,240,778 | 5,434,436 | 5,264,762 | ||||||||||||
See accompanying notes to condensed consolidated financial statements.
2
Table of Contents
ALION SCIENCE AND TECHNOLOGY CORPORATION
Condensed Consolidated Statements of Cash Flows
(unaudited)
Nine Months Ended June 30, | ||||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (11,891 | ) | $ | (11,938 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation and amortization |
12,507 | 14,662 | ||||||
Bad debt expense |
| 760 | ||||||
Accretion of debt to face value |
1,709 | 1,769 | ||||||
Amortization of debt issuance costs |
4,712 | 2,045 | ||||||
Change in fair value of redeemable common stock warrants |
(160 | ) | (6,738 | ) | ||||
Incentive and stock-based compensation |
2,645 | (5,353 | ) | |||||
Gain on extinguishment of debt |
(50,749 | ) | | |||||
Deferred income taxes |
35,615 | | ||||||
Other gains and losses |
12 | 37 | ||||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
8,829 | (8,895 | ) | |||||
Other assets |
(1,463 | ) | (1,214 | ) | ||||
Trade accounts payable |
(14,002 | ) | (16,310 | ) | ||||
Accrued liabilities |
3,266 | 16,331 | ||||||
Interest payable |
6,821 | 8,869 | ||||||
Other liabilities |
1,650 | 5,454 | ||||||
Net cash used in operating activities |
(499 | ) | (521 | ) | ||||
Cash flows from investing activities: |
||||||||
Cash paid for acquisition-related obligations |
(50 | ) | (166 | ) | ||||
Capital expenditures |
(1,639 | ) | (1,789 | ) | ||||
Proceeds from sale of assets |
5 | | ||||||
Net cash used in investing activities |
(1,684 | ) | (1,955 | ) | ||||
Cash flows from financing activities: |
||||||||
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 |
(18,177 | ) | | |||||
Repayment of Term B Loan |
(236,596 | ) | (1,825 | ) | ||||
Repurchase of Subordinated Note and related warrants |
(25,000 | ) | | |||||
Payment of Subordinated Note principal |
| (3,000 | ) | |||||
Revolver borrowings |
84,200 | 349,925 | ||||||
Revolver repayments |
(84,200 | ) | (349,925 | ) | ||||
Loan to ESOP Trust |
(5,323 | ) | (5,936 | ) | ||||
ESOP loan repayment |
5,323 | 5,936 | ||||||
Redeemable common stock purchased from ESOP Trust |
(9,326 | ) | (7,264 | ) | ||||
Redeemable common stock sold to ESOP Trust |
2,128 | 5,115 | ||||||
Net cash provided by (used in) financing activities |
15,279 | (11,621 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
13,096 | (14,097 | ) | |||||
Cash and cash equivalents at beginning of period |
11,185 | 16,287 | ||||||
Cash and cash equivalents at end of period |
$ | 24,281 | $ | 2,190 | ||||
See accompanying notes to condensed consolidated financial statements.
3
Table of Contents
ALION SCIENCE AND TECHNOLOGY CORPORATION
Condensed Consolidated Statements of Cash Flows (unaudited)
Condensed Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended June 30, | ||||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid for interest |
$ | 36,230 | $ | 30,284 | ||||
Cash paid (received) for taxes |
34 | (104 | ) | |||||
Non-cash financing activities: |
||||||||
Common stock issued to ESOP Trust in satisfaction of employer contribution liability |
$ | 5,268 | $ | 5,043 |
See accompanying notes to condensed consolidated financial statements.
4
Table of Contents
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL 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 Secured Note 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 United States
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 managements opinion, 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 nine months
ended June 30, 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 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.
5
Table of Contents
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL 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 incrementally 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 Accounting Standards Codification
(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 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, 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.
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL 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 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 June 30, 2010 nor were there any
significant events in the quarter that indicated impairment to goodwill as of June 30, 2010.
Alion amortizes intangible assets as it consumes economic benefits over estimated useful
lives. As of June 30, 2010, the Company had a recorded net intangible asset balance of
approximately $20.3 million, composed primarily of purchased contracts from the JJMA and Anteon
contract acquisitions.
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 FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL 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 Internal
Revenue Code (IRC) and ERISA require the Company to offer ESOP participants who receive Alion
common stock a liquidity put right. The put right requires the Company to purchase distributed
shares at any time during two put option periods at the then current fair market value. Common stock
distributed by the ESOP Trust is subject to a right of first refusal. Prior to any subsequent
transfer, the shares must first be offered to the Company and then to the ESOP Trust. Eventual
redemption of shares of Alion common stock as a result of distributions 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 June 30, 2010 included
$56.4 million for changes in the Companys share redemption liability. Outstanding redeemable
common stock had an aggregate fair value of approximately $151.4 million as of June 30, 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 used 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 considered 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 FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL 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 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 amendments to the Plan executed in June 2009 and May 2010, 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 Alions 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 FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Because Alion is now a C-corporation, terminating ESOP participants have the right to hold or
immediately sell their distributed shares to the Company. If a participant elects to hold
distributed shares, the IRC and ERISA require that Alion
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). The put right
requires the Company to purchase distributed shares during two put option periods at the then
current fair market value. 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 $3.3 million and $3.7 million in compensation expense for the KSOP
for the quarters ended June 30, 2010 and 2009, and $10.4 million for the nine months ended June 30,
2010 and 2009.
(6) Accounts Receivable
Accounts receivable at June 30, 2010 and September 30, 2009 consisted of the following:
June 30, | September 30, | |||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Billed receivables |
$ | 91,242 | $ | 108,566 | ||||
Unbilled receivables: |
||||||||
Amounts currently billable |
34,429 | 22,954 | ||||||
Revenues recorded in excess of milestone billings on fixed price contracts |
4,572 | 3,757 | ||||||
Revenues recorded in excess of estimated contract value or funding |
31,867 | 36,327 | ||||||
Retainages and other amounts billable upon contract completion |
13,027 | 12,972 | ||||||
Allowance for doubtful accounts |
(3,809 | ) | (4,419 | ) | ||||
Total Accounts Receivable |
$ | 171,328 | $ | 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 (DCAA) 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 $83.9
million as of June 30, 2010 and included approximately $31.9 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 $13.0 million at June 30, 2010.
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(7) Property, Plant and Equipment
June 30, | September 30, | |||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Leasehold improvements |
$ | 11,034 | $ | 10,214 | ||||
Equipment and software |
33,414 | 32,807 | ||||||
Total cost |
44,448 | 43,021 | ||||||
Less: accumulated depreciation and amortization |
(32,385 | ) | (28,547 | ) | ||||
Net Property, Plant and Equipment |
$ | 12,063 | $ | 14,474 | ||||
Depreciation and leasehold amortization expense for fixed assets was approximately $1.3
million and $2.0 million for the quarters ended June 30, 2010 and 2009 and $4.1 million and $5.0
million for the nine months ended June 30, 2010 and 2009.
(8) Goodwill and Intangible Assets
As of June 30, 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 June 30, 2010 and September 30, 2009.
June 30, 2010 | September 30, 2009 | |||||||||||||||||||||||
Accumulated | Accumulated | |||||||||||||||||||||||
Gross | Amortization | Net | Gross | Amortization | Net | |||||||||||||||||||
Purchased contracts |
$ | 111,635 | $ | (91,700 | ) | $ | 19,935 | $ | 111,635 | $ | (83,563 | ) | $ | 28,072 | ||||||||||
Internal use software and
engineering designs |
2,155 | (1,815 | ) | 340 | 2,155 | (1,568 | ) | 587 | ||||||||||||||||
Non-compete agreements |
725 | (723 | ) | 2 | 725 | (704 | ) | 21 | ||||||||||||||||
Total |
$ | 114,515 | $ | (94,238 | ) | $ | 20,277 | $ | 114,515 | $ | (85,835 | ) | $ | 28,680 | ||||||||||
The weighted-average remaining amortization period of intangible assets was approximately five
years at June 30, 2010 and September 30, 2009. Amortization expense was approximately $2.8 million
and $3.1 million for the quarters ended June 30, 2010 and 2009 and $8.4 million and $9.7 million
for the nine months ended June 30, 2010 and 2009. Estimated aggregate amortization expense for the
next five years and thereafter is as follows.
(In thousands) | ||||
For the remaining three months: |
||||
2010 |
$ | 2,582 | ||
For the year ending September 30: |
||||
2011 |
6,843 | |||
2012 |
5,766 | |||
2013 |
3,246 | |||
2014 |
879 | |||
2015 |
737 | |||
Thereafter |
224 | |||
$ | 20,277 | |||
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(9) Long-Term Debt
Alions current debt structure includes a $25 million revolving credit facility, the Secured
Notes and the Unsecured Notes. On March 22, 2010, the Company retired its Term B Senior Credit
Agreement, its Subordinated Note and the Subordinated Note Warrants. The Company is in compliance
with each of the affirmative and negative financial and non-financial covenants in its existing
debt agreements.
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) none of which was actually
drawn as of June 30, 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, Credit Agreement lenders have a super priority right of payment with
respect to the underlying collateral, which is superior to the Secured Note lenders rights.
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. Alion can choose whether the Revolver bears interest at one of two
floating rates using either a Eurodollar rate or an alternative base rate. 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 of 175 basis
points per year on the prior quarters daily unused Revolver balance. The Company paid
approximately $112 thousand in commitment fees for the Revolver for the quarter ended June 30, 2010
and $210 thousand this year.
Alion must pay letter-of-credit issuance and administrative fees, and up to a 25 basis point
fronting fee. Each quarter Alion must also pay interest in arrears for all outstanding letters of
credit. The interest rate is based on the Eurodollar loan rate which was 6.0% as of June 30, 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
trailing twelve month Consolidated EBITDA levels for the periods indicated below:
Period | Minimum Consolidated EBITDA | |||
June 30, 2010 through March 31, 2011 |
$52.5 million | |||
April 1, 2011 through September 30, 2011 |
$55.0 million | |||
October 1, 2011 through September 30, 2012 |
$60.0 million | |||
October 1, 2012 through September 30, 2013 |
$62.5 million | |||
Thereafter |
$65.0 million |
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL 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 in face value of Alion private 12%
senior secured notes (Secured Notes) and a warrant to purchase 1.9439 shares of Alion 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; 10% is payable in cash and
2% increases the Secured Note principal (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. The Secured Notes mature November 1, 2014.
Unsecured Notes
On February 8, 2007, Alion issued and sold $250.0 million of 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 the private
Unsecured Notes for publicly tradable Unsecured Notes with the same terms.
Guarantees. Alions 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 issuing the Units to redeem and retire all amounts outstanding under the Term B
Senior Credit Agreement including all accrued and unpaid interest. Alion recognized a $6.9 million
loss on extinguishing the Term B loans.
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 only recorded penalty-related interest when
paid.
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 issuing 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
was not required to make the deferred January interest payment and de-recognized the related
interest expense.
Interest Payable
Interest Payable consisted of the following balances:
June 30, | September 30, | |||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Unsecured Notes |
$ | 10,677 | $ | 4,271 | ||||
Secured Notes |
5,183 | | ||||||
Senior Term Loan |
| 3,975 | ||||||
Subordinated Note Payable |
| 793 | ||||||
Total |
$ | 15,860 | $ | 9,039 | ||||
As of June 30, 2010, Alion must make the following principal repayments (at face amount before
debt discount) for its outstanding debt.
Fiscal Year: | 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 | ||||||||||||||
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 June 30, 2010, the $272.1 million carrying value on the face of the balance sheet included $310 million in principal, $1.7 million in accrued PIK interest and is net of $39.6 million in aggregate unamortized debt issue costs. Initial debt issue costs consist of $7.7 million in original issue discount, $13.5 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 $4.1 million in unamortized debt issue costs as of June 30, 2010 (initially $7.1 million). |
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(10) Fair Value Measurement
The Company adopted ASC 805 Fair Value Disclosures in fiscal year 2009 for all financial
assets and liabilities recognized or disclosed at fair value in the financial statements. The
Company adopted the provisions of ASC 805 for nonfinancial assets and liabilities recognized or
disclosed at fair value in the financial statements on a recurring basis; no such assets or
liabilities exist at the balance sheet date. The Company implemented ASC 805 this year for all
nonfinancial assets and liabilities recognized or disclosed at fair value in the financial
statements on a nonrecurring basis. Adopting ASC 805 for items such as goodwill and long lived
assets measured at fair value if impaired, did not materially affect the Companys consolidated
financial statements or results of operations.
ASC 805 defines fair value as the price that would be received to sell an asset or paid to
transfer a liability (an exit price) in an orderly transaction between market participants at the
measurement date. It establishes a fair value hierarchy and a framework which requires categorizing
assets and liabilities into one of three levels based on the assumptions (inputs) used in valuing
the asset or liability. Level 1 provides the most reliable measure of fair value, while Level 3
generally requires significant management judgment. Level 1 inputs are unadjusted, quoted market
prices in active markets for identical assets or liabilities. Level 2 inputs are observable inputs
other than quoted prices included in Level 1, such as quoted prices for similar assets or
liabilities in active markets or quoted prices for identical assets or liabilities in inactive
markets. Level 3 inputs include unobservable inputs that are supported by little, infrequent, or no
market activity and reflect managements own assumptions about inputs used in pricing the asset or
liability. The Company uses the following valuation techniques to measure fair value.
Level 1 primarily consists of financial instruments, such as overnight bank re-purchase
agreements or money market mutual funds whose value is based on quoted market prices published by a
financial institution, an exchange fund, exchange-traded instruments and listed equities.
Level 2 assets include U.S. Government and agency securities whose valuations are based on
market prices from a variety of industry-standard data providers or pricing that considers various
assumptions, including time value, yield curve, volatility factors, credit spreads, default rates,
loss severity, current market and contractual prices for the underlying instruments, and broker and
dealer quotes. All are observable in the market or can be derived principally from or corroborated
by observable market data for which the Company can obtain independent external valuation
information.
Level 3 consists of unobservable inputs. The Companys 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 selected by the ESOP Trustee and presented to
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 is not 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 de-recognized its December 2009 Subordinated Note Warrant
liability when it re-purchased the Subordinated Note and related Warrants from IIT.
16
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
At June 30, 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 September 30, 2009, and
indicates the fair value hierarchy of the valuation techniques utilized to determine such fair
value. As of June 30, 2010, the Company had no assets or liabilities it was required to measure at
fair value on a recurring basis.
Level 1 | Level 2 | Level 3 | ||||||||||
Liabilities: as of September 30, 2009
|
||||||||||||
Redeemable common stock warrants |
| | (32,557 | ) | ||||||||
Liabilities: as of September 30, 2009 |
$ | | $ | | $ | (32,557 | ) | |||||
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
June 30, 2010 and 2009.
As of June 30, | ||||||||
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 | ) | 6,738 | |||||
Issuances and settlements |
17,993 | | ||||||
Balance, end of period |
$ | | $ | (33,258 | ) | |||
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.
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(12) Redeemable Common Stock Warrants
Alion used an option pricing model to estimate the fair value of its now-retired 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 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 separated into Secured Notes and warrants on June 22, 2010. Each warrant will
become exercisable on March 22, 2011 and expires 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 June
30, 2010.
(14) Leases
Future minimum lease payments under non-cancelable operating leases for buildings, equipment
and automobiles at June 30, 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 $232 thousand at June 30, 2010. Alion also acquired a related sublease
pursuant to which it received 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.
18
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Lease Payments for Fiscal Years Ending | (In thousands) | |||
2010 (for the remainder of fiscal year) |
$ | 7,062 | ||
2011 |
26,718 | |||
2012 |
22,804 | |||
2013 |
21,321 | |||
2014 |
14,835 | |||
2015 |
14,688 | |||
And thereafter |
23,872 | |||
Gross lease payments |
$ | 131,300 | ||
Less: non-cancelable subtenant receipts |
(2,891 | ) | ||
Net lease payments |
$ | 128,409 | ||
Composition of Total Rent Expense
June 30, | ||||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Minimum rentals |
$ | 16,789 | $ | 19,494 | ||||
Less: Sublease rental income |
(1,378 | ) | (2,189 | ) | ||||
Total rent expense, net |
$ | 15,411 | $ | 17,305 | ||||
(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 $2.3 million in long term incentive
compensation expense for the quarter ended June 30, 2010 and $3.5 million year to date. In 2009,
Alion recognized long term incentive compensation expense of $924 thousand in the third quarter and
$2.8 million year to date.
(16) Stock Appreciation Rights
As of June 30, 2010, Alion had granted 1,445,510 SARs to employees under the 2004 SAR plan.
Compensation expense was $26 thousand and $374 thousand for the quarters ended June 30, 2010 and
2009. For the nine months ended June 30, 2010 and 2009, the Company recognized a credit to
compensation expense of approximately $853 thousand and $772 thousand.
The ESOP Trustee, consistent with its duty of independence from Alion management and its
fiduciary responsibilities, retains an independent third party valuation firm to assist it in
determining the fair market value (share price) at which the Trustee may acquire or dispose of
investments in Alion common stock. Management considers the share price selected by the ESOP
Trustee along with other factors such as risk free interest rates and volatility, to assist in
estimating Alions aggregate liability for outstanding stock appreciation rights. The Audit and
Finance Committee of Alions Board of Directors reviews the reasonableness of the liability for
outstanding stock appreciation rights that Management has determined is appropriate for the Company
to recognize in its financial statements. The Audit and Finance Committee considers risk free
interest rates, volatility and various other factors in its review, including in part, the most
recent valuation report and the related share price selected by the ESOP Trustee.
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The table below sets out the disclosures required by ASC 718 Stock Compensation and the
assumptions used to value a share of Alion common stock and the Companys SAR grants as of June
30, 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 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 June 30, 2010
Stock Appreciation Rights
As of June 30, 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 | ||||||||
May 2010 |
205,400 | 28.00 | | |||||||||
Total |
1,445,510 | 876,999 | ||||||||||
Weighted Average Exercise Price |
$ | 34.82 | $ | 37.07 |
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Stock-based Compensation Disclosures per ASC 718
Stock Appreciation Rights
As of June 30, 2010
Stock Appreciation Rights
As of June 30, 2010
Outstanding | Vested at | Exercisable | ||||||||||||||||||||||
Date of Grant | at 06/30/10 | Forfeited | Exercised | Expired | 06/30/10 | at 06/30/10 | ||||||||||||||||||
February 2005 |
| | 71,150 | | | | ||||||||||||||||||
March 2005 |
| | 2,000 | | | | ||||||||||||||||||
April 2005 |
| | 4,000 | 14,000 | | | ||||||||||||||||||
June 2005 |
| | | 2,000 | | | ||||||||||||||||||
December 2005 |
163,584 | 412 | 11,288 | | 163,584 | | ||||||||||||||||||
February 2006 |
7,750 | | | | 7,750 | | ||||||||||||||||||
February 2006 |
1,250 | | 1,250 | | 1,250 | | ||||||||||||||||||
May 2006 |
6,000 | | | | 6,000 | | ||||||||||||||||||
July 2006 |
8,000 | 500 | 1,500 | | 8,000 | | ||||||||||||||||||
October 2006 |
2,500 | | | | 1,875 | | ||||||||||||||||||
December 2006 |
159,280 | 3,492 | 8,728 | | 119,460 | | ||||||||||||||||||
February 2007 |
20,300 | 475 | 925 | | 15,225 | | ||||||||||||||||||
May 2007 |
2,000 | | | | 1,500 | | ||||||||||||||||||
September 2007 |
2,000 | | | | 1,000 | | ||||||||||||||||||
December 2007 |
173,240 | 7,713 | 6,787 | | 86,620 | | ||||||||||||||||||
April 2008 |
2,000 | | | | 1,000 | | ||||||||||||||||||
September 2008 |
2,000 | | | | 500 | | ||||||||||||||||||
December 2008 |
174,000 | 12,631 | 3,244 | | 43,500 | | ||||||||||||||||||
April 2009 |
1,000 | | | | 250 | | ||||||||||||||||||
May 2010 |
204,400 | 1,000 | | | ||||||||||||||||||||
Total |
929,304 | 26,223 | 110,872 | 16,000 | 457,514 | | ||||||||||||||||||
Weighted Average
Exercise Price |
$ | 36.47 | $ | 38.80 | $ | 25.94 | $ | 29.81 | $ | 38.54 | |
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Stock-based Compensation Disclosures per ASC 718
Stock Appreciation Rights
As of June 30, 2010
Stock Appreciation Rights
As of June 30, 2010
Expected | Remaining | |||||||||||||||||||||||
Date of Grant | Risk Free Interest Rate | Volatility | Life | 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 | | |||||||||||||||
July 2006 |
4.82 | % | | 4.83 | % | 35 | % | 4 yrs | | |||||||||||||||
October 2006 |
4.82 | % | | 4.83 | % | 35 | % | 4 yrs | 3.8 | |||||||||||||||
December 2006 |
4.54 | % | | 4.58 | % | 35 | % | 4 yrs | 5.8 | |||||||||||||||
February 2007 |
4.54 | % | | 4.58 | % | 35 | % | 4 yrs | 7.8 | |||||||||||||||
May 2007 |
4.54 | % | | 4.58 | % | 35 | % | 4 yrs | 10.7 | |||||||||||||||
September 2007 |
4.54 | % | | 4.54 | % | 35 | % | 4 yrs | 14.1 | |||||||||||||||
December 2007 |
4.23 | % | | 4.23 | % | 35 | % | 4 yrs | 17.8 | |||||||||||||||
April 2008 |
4.23 | % | | 4.23 | % | 35 | % | 4 yrs | 21.9 | |||||||||||||||
September 2008 |
4.23 | % | | 4.23 | % | 35 | % | 4 yrs | 26.5 | |||||||||||||||
December 2008 |
4.23 | % | | 4.23 | % | 35 | % | 4 yrs | 29.8 | |||||||||||||||
April 2009 |
4.23 | % | | 4.23 | % | 35 | % | 4 yrs | 33.4 | |||||||||||||||
May 2010 |
4.23 | % | 4.23 | % | 35 | % | 4 yrs | 46.4 | ||||||||||||||||
Weighted Average
Remaining Life
(months) |
20.5 |
(17) Phantom Stock Plans
As of June 30, 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 $7 thousand and
$37 thousand in phantom stock plan compensation expense for the quarters ended June 30, 2010 and
2009. Compensation expense was $21 thousand for the nine months ended June 30, 2010. For the nine
months ended June 30, 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. 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.
22
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The table below sets out the disclosures required by ASC 718 Stock Compensation and the
assumptions used to value a share of Alion common stock and the Companys phantom stock grants as
of June 30, 2010 and September 30, 2009. Alion uses a Black Scholes Merton option pricing model
to recognize compensation expense. Alion uses the fair market value of a share of its common stock
to recognize expense for all grants; 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 June 30, 2010
Director Phantom Stock Plan
as of June 30, 2010
Grant | ||||||||||||||||
Total | Date | |||||||||||||||
Shares | Shares | Share | Outstanding | |||||||||||||
Date of Grant | Granted | Granted | Price | at 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 June 30, 2010
Director Phantom Stock Plan
as of June 30, 2010
Outstanding | Vested at | Exercisable | ||||||||||||||||||||||
Date of Grant | at 06/30/10 | Forfeited | Exercised | Expired | 6/30/10 | at 06/30/10 | ||||||||||||||||||
November 2006 |
| | 4,839 | | | | ||||||||||||||||||
November 2007 |
4,995 | | 999 | | 2,664 | 2,664 | ||||||||||||||||||
Total |
4,995 | | 5,838 | | 2,664 | 2,664 | ||||||||||||||||||
Weighted Average Grant Date
Fair Value Price Per Share |
$ | 40.05 | $ | | $ | 40.85 | $ | | $ | 40.05 | $ | 40.05 |
Stock-based Compensation Disclosure per ASC 718
Director Phantom Stock Plan
as of June 30, 2010
Director Phantom Stock Plan
as of June 30, 2010
Risk Free Interest | Expected | Remaining | ||||||||||||
Date of Grant | Rate | Volatility | Life | Life (months) | ||||||||||
November 2006 |
4.54% 4.58% | 35 | % | 3 yrs | | |||||||||
November 2007 |
4.23% 4.23% | 35 | % | 3 yrs | 4.4 | |||||||||
Weighted Average Remaining Life |
4.4 |
(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 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.
23
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Contract receivables from federal government agencies represented approximately $168.1
million, or 96.4%, and $179.7 million, or 97.4%, of accounts receivable as of June 30, 2010 and
September 30, 2009. Contract revenue from federal government departments and agencies represented
approximately 97.2% and 96.4%, of total contract revenue for the nine months ended June 30, 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 Secured Notes, 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. Deferred tax liabilities will continue to increase for tax
amortization of goodwill. As of June 30, 2010 deferred tax assets were $36.1 million and deferred
tax liabilities were $35.6 million. For the quarter ended June 30, 2010, the Company recognized
$739 thousand in deferred tax assets and a corresponding valuation allowance. The Company also
recognized $1.8 million in deferred tax liabilities for goodwill amortization in the quarter ended
June 30, 2010.
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.
24
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
The provision for income taxes for the nine months ended June 30, 2010 is as follows:
June 30, 2010 | ||||
Current: |
||||
Federal |
$ | | ||
State |
(2 | ) | ||
Foreign |
(40 | ) | ||
Total current provision |
(42 | ) | ||
Deferred: |
||||
Federal |
29,312 | |||
State |
6,303 | |||
Foreign |
| |||
Total deferred provision/(benefit) |
35,615 | |||
Total provision for income taxes |
$ | 35,573 | ||
Alions tax provision at June 30, 2010 includes the effects of state income taxes, debt
extinguishment, converting from an S-corporation to a C-corporation and establishing a valuation
allowance. The provision for taxes for the nine months ended June 30, 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:
June 30, 2010 | June 30, 2010 | |||||||
Expected federal income tax (benefit) |
35.0 | % | $ | 8,289 | ||||
State taxes (net of federal benefit) |
17.3 | % | 4,105 | |||||
Nondeductible expenses |
0.6 | % | 150 | |||||
Provision to return true-ups |
0.0 | % | (2 | ) | ||||
Tax credits |
-0.2 | % | (40 | ) | ||||
Deferred tax assets |
-152.4 | % | (36,098 | ) | ||||
Valuation allowance |
152.4 | % | 36,098 | |||||
Deferred tax liabilities |
150.4 | % | 35,615 | |||||
Debt extinguishment and tax status change |
-53.0 | % | (12,544 | ) | ||||
Income tax expense (benefit) |
150.2 | % | $ | 35,573 | ||||
At June 30, 2010 the components of deferred tax assets and deferred tax liabilities were as
follows:
June 30, 2010 | ||||
Deferred tax assets: |
||||
Accrued expenses and reserves |
$ | 10,576 | ||
Intangible amortization |
13,191 | |||
Deferred rent |
2,591 | |||
Deferred wages |
3,894 | |||
Depreciation and leases |
2,707 | |||
Carryforwards and tax credits |
3,114 | |||
Other |
25 | |||
Gross deferred tax assets |
$ | 36,098 | ||
Less Valuation |
36,098 | |||
Net Deferred Tax Assets |
$ | | ||
Deferred tax liabilities: |
||||
Goodwill |
(35,615 | ) | ||
Net deferred tax asset/(liability) |
$ | (35,615 | ) | |
25
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL 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
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 DCAA. The federal government considers the Company 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
Certain of Alions 100% owned domestic subsidiaries have jointly, severally, fully and
unconditionally guaranteed both the Secured Notes and the Unsecured Notes. Alions Unsecured Notes
are general obligations of the Company. 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 and nine months ended June 30, 2009.
The following information presents condensed consolidating balance sheets as of June 30, 2010
and September 30, 2009, condensed consolidating statements of operations for the quarters and nine
months ended June 30, 2010 and 2009; and condensed consolidating statements of cash flows for the
nine months ended June 30, 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
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Balance Sheet as of June 30, 2010
Non- | ||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||
Parent | Companies | Companies | Eliminations | Consolidated | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 24,034 | $ | 238 | $ | 9 | $ | | $ | 24,281 | ||||||||||
Accounts receivable, net |
166,359 | 4,949 | 20 | | 171,328 | |||||||||||||||
Prepaid expenses and other current
assets |
5,957 | 108 | | | 6,065 | |||||||||||||||
Total current assets |
196,350 | 5,295 | 29 | | 201,674 | |||||||||||||||
Property, plant and equipment, net |
11,968 | 95 | | | 12,063 | |||||||||||||||
Intangible assets, net |
20,277 | | | | 20,277 | |||||||||||||||
Goodwill |
398,921 | | | | 398,921 | |||||||||||||||
Investment in subsidiaries |
21,291 | | | (21,291 | ) | | ||||||||||||||
Intercompany receivables |
867 | 20,230 | | (21,097 | ) | | ||||||||||||||
Other assets |
10,635 | 13 | 3 | | 10,651 | |||||||||||||||
Total assets |
$ | 660,309 | $ | 25,633 | $ | 32 | $ | (42,388 | ) | $ | 643,586 | |||||||||
Current liabilities: |
||||||||||||||||||||
Book cash overdraft |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Interest payable |
15,860 | | | | 15,860 | |||||||||||||||
Current portion, senior term loan
payable |
| | | | | |||||||||||||||
Current portion of subordinated note
payable |
| | | | | |||||||||||||||
Current portion, acquisition obligations |
| | | |||||||||||||||||
Trade accounts payable |
45,799 | 773 | 14 | | 46,586 | |||||||||||||||
Accrued liabilities |
42,289 | 1,157 | 2 | | 43,448 | |||||||||||||||
Accrued payroll and related liabilities |
44,933 | 1,465 | 46 | | 46,444 | |||||||||||||||
Billings in excess of revenue earned |
4,629 | | | | 4,629 | |||||||||||||||
Total current liabilities |
153,510 | 3,395 | 62 | | 156,967 | |||||||||||||||
Intercompany payables |
20,231 | | 866 | (21,097 | ) | | ||||||||||||||
Senior term loan payable, excluding
current portion |
| | | | | |||||||||||||||
Senior secured notes |
272,089 | | | | 272,089 | |||||||||||||||
Senior unsecured notes |
245,905 | | | | 245,905 | |||||||||||||||
Subordinated note payable |
| | | | | |||||||||||||||
Accrued compensation, excluding current
portion |
5,079 | | | | 5,079 | |||||||||||||||
Accrued postretirement benefit
obligations |
752 | | | 752 | ||||||||||||||||
Non-current portion of lease obligations |
7,822 | 51 | | | 7,873 | |||||||||||||||
Deferred income taxes |
35,615 | | | | 35,615 | |||||||||||||||
Commitments and contingencies |
| | | | | |||||||||||||||
Redeemable common stock warrants |
| | | | | |||||||||||||||
Redeemable common stock |
151,375 | | | | 151,375 | |||||||||||||||
Common stock warrants |
20,785 | | | | 20,785 | |||||||||||||||
Common stock of subsidiaries |
| 2,800 | | (2,800 | ) | | ||||||||||||||
Accumulated other comprehensive loss |
(238 | ) | | | | (238 | ) | |||||||||||||
Accumulated deficit |
(252,616 | ) | 19,387 | (896 | ) | (18,491 | ) | (252,616 | ) | |||||||||||
Total liabilities, redeemable common
stock and accumulated deficit |
$ | 660,309 | $ | 25,633 | $ | 32 | $ | (42,388 | ) | $ | 643,586 | |||||||||
27
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL 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
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Operations for the Three Months Ended June 30, 2010
Non- | ||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||
Parent | Companies | Companies | Eliminations | Consolidated | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Contract revenue |
$ | 205,660 | $ | 7,603 | $ | 46 | $ | | $ | 213,309 | ||||||||||
Direct contract expense |
159,764 | 5,054 | 35 | | 164,853 | |||||||||||||||
Gross profit |
45,896 | 2,549 | 11 | | 48,456 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||
Indirect contract expense |
9,286 | 869 | 12 | | 10,167 | |||||||||||||||
Research and development |
120 | | | | 120 | |||||||||||||||
General and administrative |
19,006 | 377 | 82 | | 19,465 | |||||||||||||||
Rental and occupancy expense |
7,339 | 149 | 11 | | 7,499 | |||||||||||||||
Depreciation and amortization |
4,050 | 14 | | | 4,064 | |||||||||||||||
Total operating expenses |
39,801 | 1,409 | 105 | | 41,315 | |||||||||||||||
Operating income |
6,095 | 1,140 | (94 | ) | | 7,141 | ||||||||||||||
Other income (expense): |
||||||||||||||||||||
Interest income |
15 | 1 | | | 16 | |||||||||||||||
Interest expense |
(18,292 | ) | | | | (18,292 | ) | |||||||||||||
Other |
(255 | ) | 72 | | | (183 | ) | |||||||||||||
Equity in net income of
subsidiaries |
1,119 | | | (1,119 | ) | | ||||||||||||||
Total other expenses |
(17,413 | ) | 73 | | (1,119 | ) | (18,459 | ) | ||||||||||||
(Loss) income before taxes |
(11,318 | ) | 1,213 | (94 | ) | (1,119 | ) | (11,318 | ) | |||||||||||
Income tax (expense) benefit |
(1,798 | ) | | | | (1,798 | ) | |||||||||||||
Net income (loss) |
$ | (13,116 | ) | $ | 1,213 | $ | (94 | ) | $ | (1,119 | ) | $ | (13,116 | ) | ||||||
29
Table of Contents
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Operations for the Three Months Ended June 30, 2009
Non- | ||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||
Parent | Companies | Companies | Eliminations | Consolidated | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Contract revenue |
$ | 195,465 | 5,167 | 3,528 | | $ | 204,160 | |||||||||||||
Direct contract expense |
151,834 | 3,205 | 2,627 | | 157,666 | |||||||||||||||
Gross profit |
43,631 | 1,962 | 901 | | 46,494 | |||||||||||||||
Indirect contract expense |
8,463 | 755 | 225 | | 9,443 | |||||||||||||||
Research and development |
223 | | | | 223 | |||||||||||||||
General and administrative |
17,005 | 259 | (11 | ) | | 17,253 | ||||||||||||||
Rental and occupancy expense |
8,000 | 80 | 89 | | 8,169 | |||||||||||||||
Depreciation and amortization |
5,143 | 6 | 7 | | 5,156 | |||||||||||||||
Total operating expenses |
38,834 | 1,100 | 310 | | 40,244 | |||||||||||||||
Operating income |
4,797 | 862 | 591 | | 6,250 | |||||||||||||||
Other income (expense): |
||||||||||||||||||||
Interest income |
12 | | 3 | | 15 | |||||||||||||||
Interest expense |
(15,766 | ) | | | | (15,766 | ) | |||||||||||||
Other |
(96 | ) | 189 | (3 | ) | | 90 | |||||||||||||
Gain on sale of
non-operating assets |
(19 | ) | | | | (19 | ) | |||||||||||||
Equity in net income of
subsidiaries |
1,642 | (1,642 | ) | | ||||||||||||||||
Total other expenses |
(14,227 | ) | 189 | | (1,642 | ) | (15,680 | ) | ||||||||||||
(Loss) income before taxes |
(9,430 | ) | 1,051 | 591 | (1,642 | ) | (9,430 | ) | ||||||||||||
Income tax (expense) benefit |
(7 | ) | | | | (7 | ) | |||||||||||||
Net income (loss) |
$ | (9,437 | ) | 1,051 | 591 | (1,642 | ) | $ | (9,437 | ) | ||||||||||
30
Table of Contents
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Operations for the Nine Months Ended June 30, 2010
Non- | ||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||
Parent | Companies | Companies | Eliminations | Consolidated | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Contract revenue |
$ | 598,126 | $ | 24,351 | $ | 116 | $ | | $ | 622,593 | ||||||||||
Direct contract expense |
463,578 | 16,240 | 80 | | 479,898 | |||||||||||||||
Gross profit |
134,548 | 8,111 | 36 | | 142,695 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||
Indirect contract expense |
26,680 | 2,725 | 30 | | 29,435 | |||||||||||||||
Research and development |
690 | | | | 690 | |||||||||||||||
General and administrative |
52,955 | 746 | 237 | | 53,938 | |||||||||||||||
Rental and occupancy expense |
23,307 | 444 | 32 | | 23,783 | |||||||||||||||
Depreciation and amortization |
12,468 | 39 | | | 12,507 | |||||||||||||||
Total operating expenses |
116,100 | 3,954 | 299 | | 120,353 | |||||||||||||||
Operating income |
18,448 | 4,157 | (263 | ) | | 22,342 | ||||||||||||||
Other income (expense): |
||||||||||||||||||||
Interest income |
72 | 1 | | | 73 | |||||||||||||||
Interest expense |
(49,275 | ) | | | | (49,275 | ) | |||||||||||||
Other |
(429 | ) | 222 | | | (207 | ) | |||||||||||||
Gain on extinguishment of debt |
50,749 | | | 50,749 | ||||||||||||||||
Equity in net income of
subsidiaries |
4,159 | | | (4,159 | ) | | ||||||||||||||
Total other expenses |
5,276 | 223 | | (4,159 | ) | 1,340 | ||||||||||||||
(Loss) income before taxes |
23,724 | 4,380 | (263 | ) | (4,159 | ) | 23,682 | |||||||||||||
Income tax (expense) benefit |
(35,615 | ) | 2 | 40 | | (35,573 | ) | |||||||||||||
Net income (loss) |
$ | (11,891 | ) | $ | 4,382 | $ | (223 | ) | $ | (4,159 | ) | $ | (11,891 | ) | ||||||
31
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statements of Operations for the Nine Months Ended June 30, 2009
Non- | ||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||
Parent | Companies | Companies | Eliminations | Consolidated | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Contract revenue |
$ | 561,582 | $ | 16,595 | $ | 10,208 | $ | | $ | 588,385 | ||||||||||
Direct contract expense |
433,204 | 11,239 | 7,680 | | 452,123 | |||||||||||||||
Gross profit |
128,378 | 5,356 | 2,528 | | 136,262 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||
Indirect contract expense |
25,097 | 2,276 | 526 | | 27,899 | |||||||||||||||
Research and development |
370 | | | | 370 | |||||||||||||||
General and administrative |
40,229 | 613 | 10 | | 40,852 | |||||||||||||||
Rental and occupancy expense |
23,924 | 225 | 226 | | 24,375 | |||||||||||||||
Depreciation and amortization |
14,624 | 17 | 21 | | 14,662 | |||||||||||||||
Total operating expenses |
104,244 | 3,131 | 783 | | 108,158 | |||||||||||||||
Operating income |
24,134 | 2,225 | 1,745 | | 28,104 | |||||||||||||||
Other income (expense): |
||||||||||||||||||||
Interest income |
44 | 16 | 3 | | 63 | |||||||||||||||
Interest expense |
(40,098 | ) | | | | (40,098 | ) | |||||||||||||
Other |
(363 | ) | 339 | (8 | ) | | (32 | ) | ||||||||||||
Gain on sale of
non-operating assets |
(19 | ) | | | | (19 | ) | |||||||||||||
Equity in net income (loss)
of subsidiaries |
4,320 | | | (4,320 | ) | | ||||||||||||||
Total other expenses |
(36,116 | ) | 355 | (5 | ) | (4,320 | ) | (40,086 | ) | |||||||||||
(Loss) income before taxes |
(11,982 | ) | 2,580 | 1,740 | (4,320 | ) | (11,982 | ) | ||||||||||||
Income tax (expense) benefit |
44 | | | | 44 | |||||||||||||||
Net income (loss) |
$ | (11,938 | ) | $ | 2,580 | $ | 1,740 | $ | (4,320 | ) | $ | (11,938 | ) | |||||||
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Cash Flows for the Nine Months Ended June 30, 2010
Non- | ||||||||||||||||
Guarantor | Guarantor | |||||||||||||||
Parent | Companies | Companies | Consolidated | |||||||||||||
(In thousands) | ||||||||||||||||
Net cash used in operating activities |
$ | (974 | ) | $ | 461 | $ | 14 | $ | (499 | ) | ||||||
Cash flows from investing activities: |
||||||||||||||||
Cash paid for acquisitions-related obligations |
(50 | ) | | | (50 | ) | ||||||||||
Capital expenditures |
(1,633 | ) | (6 | ) | | (1,639 | ) | |||||||||
Proceeds from sale of assets |
5 | | | 5 | ||||||||||||
Net cash used in investing activities |
(1,678 | ) | (6 | ) | | (1,684 | ) | |||||||||
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 |
(18,177 | ) | | | (18,177 | ) | ||||||||||
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 |
(9,326 | ) | | | (9,326 | ) | ||||||||||
Redeemable common stock sold to ESOP Trust |
2,128 | | | 2,128 | ||||||||||||
Net cash (used in) provided by financing activities |
15,279 | | | 15,279 | ||||||||||||
Net increase (decrease) in cash and cash equivalents |
12,627 | 455 | 14 | 13,096 | ||||||||||||
Cash and cash equivalents at beginning of period |
11,404 | (215 | ) | (4 | ) | 11,185 | ||||||||||
Cash and cash equivalents at end of period |
$ | 24,031 | $ | 240 | $ | 10 | $ | 24,281 | ||||||||
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Cash Flows for the Nine Months Ended June 30, 2009
Non- | ||||||||||||||||
Guarantor | Guarantor | |||||||||||||||
Parent | Companies | Companies | Consolidated | |||||||||||||
(In thousands) | ||||||||||||||||
Net cash used in operating activities |
$ | (597 | ) | $ | 26 | $ | 50 | $ | (521 | ) | ||||||
Cash paid for acquisitions-related obligations |
(166 | ) | | | (166 | ) | ||||||||||
Capital expenditures |
(1,789 | ) | | | (1,789 | ) | ||||||||||
Net cash used in investing activities |
(1,955 | ) | | | (1,955 | ) | ||||||||||
Cash flows from financing activities: |
||||||||||||||||
Cash (paid for) received from interest rate swap |
(4,647 | ) | | | (4,647 | ) | ||||||||||
Payment of senior term loan principal |
(1,825 | ) | | | (1,825 | ) | ||||||||||
Payment of subordinated note principal |
(3,000 | ) | | | (3,000 | ) | ||||||||||
Revolver borrowings |
349,925 | | | 349,925 | ||||||||||||
Revolver payments |
(349,925 | ) | | | (349,925 | ) | ||||||||||
Loan to ESOP Trust |
(5,936 | ) | | | (5,936 | ) | ||||||||||
ESOP loan repayment |
5,936 | | | 5,936 | ||||||||||||
Redeemable common stock purchased from ESOP Trust |
(7,264 | ) | | | (7,264 | ) | ||||||||||
Redeemable common stock sold to ESOP Trust |
5,115 | | | 5,115 | ||||||||||||
Net cash (used in) provided by financing activities |
(11,621 | ) | | | (11,621 | ) | ||||||||||
Net increase (decrease) in cash and cash equivalents |
(14,173 | ) | 26 | 50 | (14,097 | ) | ||||||||||
Cash and cash equivalents at beginning of period |
16,392 | (62 | ) | (43 | ) | 16,287 | ||||||||||
Cash and cash equivalents at end of period |
$ | 2,219 | $ | (36 | ) | $ | 7 | $ | 2,190 | |||||||
(23) Subsequent Events
On July 9, 2010, WCGS sold several contracts, primarily with the Office of Naval Research, to
MCR Federal LLC. MCR Federal agreed to assume certain liabilities and to pay a total of $5.0
million. WCGS received $4.5 million at closing. The balance is due on contract novation. The
Senior Secured Note Indenture requires Alion to either make a tender offer to note holders and use
the proceeds to redeem up to $5 million in Senior Secured Note principal at par or re-invest the
proceeds in the Companys business.
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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 our 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 U.S. government 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 Nine Months Ended June 30, | ||||||||||||||||
Revenue by Contract Type | 2010 | 2009 | ||||||||||||||
(In thousands) | ||||||||||||||||
Cost-reimbursement |
$ | 465,829 | 74.8 | % | $ | 419,451 | 71.3 | % | ||||||||
Fixed-price |
71,586 | 11.5 | % | 60,553 | 10.3 | % | ||||||||||
Time-and-material |
85,178 | 13.7 | % | 108,381 | 18.4 | % | ||||||||||
Total |
$ | 622,593 | 100.0 | % | $ | 588,385 | 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 Nine Months Ended June 30, | ||||||||||||||||
Revenue by Customer Type | 2010 | 2009 | ||||||||||||||
(In thousands) | ||||||||||||||||
U.S. Department of Defense (DoD) |
$ | 573,402 | 92.1 | % | $ | 538,770 | 91.6 | % | ||||||||
Other Federal Civilian Agencies |
31,869 | 5.1 | % | 28,490 | 4.8 | % | ||||||||||
Commercial / State / Local and International |
17,322 | 2.8 | % | 21,125 | 3.6 | % | ||||||||||
Total |
$ | 622,593 | 100.0 | % | $ | 588,385 | 100.0 | % | ||||||||
In its first National Security Strategy (NSS) the Obama Administration calls economic revival
its top priority and an attack from weapons of mass destruction (WMD) the nations top threat.
While focusing important attention on the imperative to rebuild Americas economy and to reduce the
federal deficit, the NSS lays out broad policy objectives. We are a nation at war, and the
Department of Defense does not expect the defense budget to decline according to Ashton B. Carter,
Under Secretary of Defense for Acquisition, Technology and Logistics. Understanding that a certain
amount of growth is needed, President Barack Obamas defense budget proposal calls for 1 percent
real growth each year at a time when the funding curve for all other federal agencies has
flattened.
To achieve these budget and program priorities, the Defense Department is taking steps to
achieve efficiencies needed to save $100 billion over five years beginning in fiscal 2012. Defense
spending is approximately $700 billion per year with approximately $300 billion of those funds
spent for internal military and civilian salaries and benefits, operations and sustaining the
facilities and infrastructure. The remainder -about $400 billion is spent equally between products
(e.g., weapons, electronics, fuel, and facilities) and services (e.g., IT services, knowledge-based
services, facilities upkeep, and transportation).
Phasing out time-and-material and sole source ID/IQ contracts, utilizing fixed-price
performance-based contracts and fixed-price level of effort or cost-plus-fixed-fee contracts are
among the many cornerstones of Under Secretary Carters Do more without more initiative that
seeks savings by providing incentives for greater efficiency in industry service contracting.
Reduced internal defense overhead, eliminating unproductive or unneeded programs and
activities, and improved contracting efficiencies are expected to yield two-thirds of the savings
according to Deputy Secretary of Defense Lynn.
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Defense Secretary Gates has directed the military services to adopt an expanded set of
counterinsurgency (COIN) models and simulation tools to be prepared for the operational,
geographic, linguistic and cultural complexities that are confronting military forces. We must
align our training, personal processes and programs to provide deploying units....with language,
cultural, tactical and interagency skills required to conduct COIN operations, according to Gates.
The Defense Department has consistently sought less expensive, but more effective training, in
all segments of the training market: Virtual; Live; Constructive/C4ISR; and Education. Spending on
training continues with slow but stable growth. Complex missions and increased use of improvised
explosive devices have increased the need for high-fidelity mission rehearsal simulations, allowing
military personnel to see, hear and act as they would in a real mission with specialized
recognition, detection, avoidance and execution mission scenarios for Iraq and Afghanistan.
Similarly, redesign and improvement of training ranges and distance learning and modern computer
based education continues to remain fairly stable.
The U.S. military has almost no situational awareness when a cyber attack is underway on
the 7 million computers and 15,000 computer networks it operates, according to Lieutenant General
Keith Alexander, the new Commander of the U.S. Cyber Command and Director of the U.S. National
Security Agency. The lack of real-time situational awareness puts military forces (and operations)
at substantial risk. Situational awareness refers to the ability to understand whats going on
around you. On a battlefield, it means knowing where allied and enemy forces are and what they are
doing. In cyberspace, it means understanding who is on particular networks and what they are
doing. The Cyber Command is providing technical assistance to the Department of Homeland Security,
which is the lead federal agency for defending non-defense government web sites while law
enforcement agencies such as the FBI help defend the private sector from cyber crime and
intellectual property theft.
Even as the government focuses on changing the procurement environment and contracting
activity, Alions cost-reimbursable revenue has continued to increase each year. We do not perform
inherently governmental functions; we deliver highly sophisticated scientific and engineering
research services. As a result, Management believes increased government in-sourcing for
acquisition-skilled support services will not materially adversely affect our operations and demand
will continue for our higher end technical expertise.
Because Alion is not involved in producing or designing many of the major platforms that are
facing budgetary constraints, we do not expect future acquisition program cuts or delays to
materially adversely affect us. Although the CG(X) ship acquisition program which we support was
cancelled, we believe we have significant opportunities in other ship programs we already support
with key waterfront and headquarters roles, such as DDG-51, Littoral Combat Ships and the Joint
High Speed Vessel program.
We do not expect other acquisition program cuts or delays to adversely affect us
significantly. Rather, we expect to benefit from a focus on extending the service life and
capabilities of existing systems across all branches of the Defense Department because we provide
these kinds of services. We think cost-containment will help us sell the government services and
technical solutions that improve operating efficiency and effectiveness. However, we expect
in-sourcing may ultimately reduce some of our future revenue from professional technical services
contracts for program management and acquisition management, operations and training support and
logistics support.
For the Nine Months Ended | ||||||||||||||||
June 30, | ||||||||||||||||
Core Business Area | 2010 | 2009 | ||||||||||||||
(In thousands) | ||||||||||||||||
Naval Architecture and Marine Engineering |
$ | 272,907 | 43.8 | % | $ | 268,759 | 45.8 | % | ||||||||
Defense Operations |
151,930 | 24.4 | % | 154,322 | 26.2 | % | ||||||||||
Modeling and Simulation |
111,140 | 17.9 | % | 67,827 | 11.5 | % | ||||||||||
Technology Integration |
32,356 | 5.2 | % | 36,672 | 6.2 | % | ||||||||||
Energy and Environmental Sciences |
29,463 | 4.7 | % | 27,786 | 4.7 | % | ||||||||||
Information Technology and Wireless
Communications |
24,797 | 4.0 | % | 33,019 | 5.6 | % | ||||||||||
Total |
$ | 622,593 | 100.0 | % | $ | 588,385 | 100.0 | % | ||||||||
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Backlog. Contract backlog represents an estimate, as of a specific date, of the future revenue
Alion expects from existing contracts. At June 30, 2010, backlog on existing contracts and
executed delivery orders totaled $2.8 billion, of which $359 million was funded. We estimate we
have an additional $3.8 billion of unfunded contract ceiling value for an aggregate total backlog
of $6.6 billion.
Results of Operations
Quarter Ended June 30, 2010 Compared to Quarter Ended June 30, 2009
Consolidated Operations of Alion | ||||||||||||||||
Quarter Ended June 30, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||
% of | % of | |||||||||||||||
Selected Financial Information | revenue | revenue | ||||||||||||||
Total contract revenue |
$ | 213,309 | $ | 204,160 | ||||||||||||
Total direct contract costs |
164,853 | 77.3 | % | 157,666 | 77.2 | % | ||||||||||
Direct labor costs |
69,471 | 32.6 | % | 68,700 | 33.7 | % | ||||||||||
Material and subcontract costs |
90,738 | 42.5 | % | 81,229 | 39.8 | % | ||||||||||
Other direct costs |
4,644 | 2.2 | % | 7,737 | 3.8 | % | ||||||||||
Gross profit |
48,456 | 22.7 | % | 46,494 | 22.8 | % | ||||||||||
Total operating expense |
41,315 | 19.4 | % | 40,244 | 19.7 | % | ||||||||||
Major components of operating expense: |
||||||||||||||||
Indirect expenses including facilities costs |
17,666 | 8.3 | % | 17,711 | 8.7 | % | ||||||||||
General and administrative |
19,465 | 9.1 | % | 17,253 | 8.5 | % | ||||||||||
Depreciation and amortization |
4,064 | 1.9 | % | 5,156 | 2.5 | % | ||||||||||
Income from operations |
$ | 7,141 | 3.3 | % | $ | 6,250 | 3.1 | % |
Revenue. Third quarter revenue this year was $213.3 million up $9.1 million and 4.5% over the
comparable period last year. Increased cost-reimbursement revenue (up $19.4 million and 12.8%) and
fixed price contract revenue (up $1.0 million and 4.9%) were offset in part by an $11.0 million
decline in time and material contract revenue (down 31.4%). DoD revenue grew by $9.3 million
(5.0%) and overall government contract revenue grew $10.0 million (5.1%) compared to the similar
quarter last year.
Modeling and Simulation revenue continued to grow dramatically up $15.5 million (62.3%) over
third quarter 2009 performance. Most of this work came through Alions M&S Information Analysis
Center contract with the Defense Information Systems Agency. We had continuing growth from our
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 $17.2 million this quarter,
up almost 32% over the similar period last year. Alion delivered increased program management
effort for SAFTAS technology upgrades. Naval Architecture and Marine Engineering and Defense
Operations remained strong despite a modest 1.6% decline Revenue from other core business areas
was down almost $4.0 million (12.6%) compared to third quarter last year, as Alion has yet to see
demand in these areas recover to prior levels.
Our prime contract revenue continues to increase with sales up $12.6 million (7.6%) compared
to last year. Alions revenue from work as a subcontractor to other prime contractors declined
$3.5 million to $35.4 million, down 8.9%. 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 and subcontracts both improved (up $1.4 million) to 7.1%
overall.
Direct Contract Expense and Gross Profit. Third quarter 2010 direct contract expenses
increased $7.2 million (4.6%) to $164.9 million compared to third quarter last year, consistent
with year over year growth in revenue. Material and subcontract costs on Alions prime contracts
increased $9.5 million (11.7%) to 42.5% of quarterly revenue. Direct labor increased by $0.8
million but declined modestly as a percentage of quarterly revenue. 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 is continuing to focus on improving labor productivity to increase
higher-margin, internally-derived revenue. Gross profit for the current quarter at $48.5 million
increased by almost $2 million compared to third quarter 2009. Although gross margin growth has
not kept pace with revenue growth, this quarters gross margin percentage is not materially
different from third quarter results last year. This is consistent with increased third-party
costs on which Alion typically earns a lower margin.
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Table of Contents
Operating Expenses. Third quarter operating expenses were up $1.1 million overall compared to
the same period last year with indirect expenses essentially flat and depreciation and amortization
expenses down approximately $1.1 million. Spending on information technology for collaborative
technologies, project management and control, and expanded reporting and analytical capabilities
increased costs by $727 thousand this quarter compared to 2009 third quarter performance.
Incentive compensation expense was $1.4 million higher than it was in the third quarter last year.
Income from Operations. Operating income for the quarter ended June 30, 2010 increased 14% to
$7.1 million and 3.3% of quarterly revenue. Additional gross margin dollars were offset by
increased compensation expense and costs for information technology efforts.
Other Expense. Net interest income, interest expense and other expense in the aggregate for
the quarter ended June 30, 2010 increased materially compared to the third quarter of 2009.
Although cash management efforts reduced revolver borrowings and related interest expense by $177
thousand, cash pay interest expense increased. The Senior Secured Notes have a higher interest
rate and a higher outstanding principal than our former Term B Senior Credit Facility. This cost
the Company more than $2.0 million this quarter compared to last year. However, we also saved $903
thousand in Subordinated Note interest and other fees.
This quarter debt issue cost amortization increased $1.2 million compared to the third quarter
last year. Secured Note debt issue costs exceed the expenses we recognized for recently
extinguished debt instruments. PIK interest on the Secured Notes increased interest expense by a
further $1.6 million. These costs were offset by $1.2 million in savings from extinguishing the
Subordinated Note and warrants earlier this year.
Three Months Ended June 30, | ||||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Cash Pay Interest |
||||||||
Revolver |
$ | 112 | $ | 289 | ||||
Senior Term Loan |
| 5,711 | ||||||
Secured Notes |
7,761 | | ||||||
Unsecured Notes |
6,406 | 6,406 | ||||||
Subordinated Note |
| 784 | ||||||
Other cash pay interest and fees |
(31 | ) | 88 | |||||
Sub-total cash pay interest |
14,248 | 13,278 | ||||||
Deferred and Non-cash Interest |
||||||||
Secured Notes PIK interest |
1,554 | | ||||||
Debt issue costs and other non-cash
items |
2,490 | 1,270 | ||||||
Subordinated Note interest |
| 1,057 | ||||||
Subordinated Note warrants |
| 161 | ||||||
Sub-total non-cash interest |
4,044 | 2,488 | ||||||
Total interest expense |
$ | 18,292 | $ | 15,766 | ||||
Income Tax Expense. In the third quarter this year, we recognized deferred tax assets and a
related valuation allowance of approximately $739 thousand. We recorded a full valuation allowance
for the deferred tax assets we recognized this quarter because our history of losses makes it
unlikely that we will reasonably be able to realize the full benefit of our deferred tax assets.
We had $1.8 million in deferred tax expense and liabilities related to tax-basis goodwill
amortization. For more detail on our tax provision, please see the discussion of our year to date
results that follows.
Net Income. Increased interest expense on our long-term debt more than offset our increased
operating income and materially contributed to our $13.1 million current quarter loss.
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Nine Months Ended June 30, 2010 Compared to Nine Months Ended June 30, 2009
Consolidated Operations of Alion | ||||||||||||||||
Nine Months Ended June 30, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||
% of | % of | |||||||||||||||
Selected Financial Information | revenue | revenue | ||||||||||||||
Total contract revenue |
$ | 622,593 | $ | 588,385 | ||||||||||||
Total direct contract costs |
479,898 | 77.1 | % | 452,123 | 76.8 | % | ||||||||||
Direct labor costs |
205,575 | 33.0 | % | 203,287 | 34.5 | % | ||||||||||
Material and subcontract costs |
261,305 | 42.0 | % | 229,078 | 38.9 | % | ||||||||||
Other direct costs |
13,018 | 2.1 | % | 19,757 | 3.4 | % | ||||||||||
Gross profit |
142,695 | 22.9 | % | 136,262 | 23.2 | % | ||||||||||
Total operating expense |
120,353 | 19.3 | % | 108,158 | 18.4 | % | ||||||||||
Major components of operating expense: |
||||||||||||||||
Indirect expenses including facilities costs |
53,218 | 8.5 | % | 52,274 | 8.9 | % | ||||||||||
General and administrative |
53,938 | 8.7 | % | 46,205 | 7.9 | % | ||||||||||
Depreciation and amortization |
12,507 | 2.0 | % | 14,662 | 2.5 | % | ||||||||||
Income from operations |
$ | 22,342 | 3.6 | % | $ | 28,104 | 4.8 | % |
Revenue. Our $622.6 million in revenue this year was $34.2 million greater than the $588.4
million for the similar period in 2009. Alions Air Force work this year increased $48.8 million
(31.9%) over last year largely because of expanded SAFTAS program support for technology upgrades.
Other DoD revenue is down $14.2 million (3.7%). Overall, our work for DoD is up $34.6 million
(6.4%) over last year. Expanded work for federal departments and agencies outside DoD was up $3.4
million and 11%. This helped offset a continuing decline in commercial sales which were down by
$3.8 million compared to last year.
Our 5.8% sales growth was attributable to $46.4 million more cost-reimbursement contract
revenue (up 11.1%) and $11.0 million more in fixed price contract sales (up 18.2%). Increases were
offset by a $23.2 million drop in time and material (T&M) contract activity (down 21.4%). Our
increasing percentage of cost-reimbursable work and a lower level of T&M work continue to place
pressure on our contract margins. However, higher margin fixed price work is showing recovery with
an $11.0M increase (18.2% growth over prior year). Despite downward pressure from our contract
mix, margins increased to $43.4 million (up $3.9 million) representing 7.0% of target cost, up from
6.7% from last year.
Modeling and Simulation revenue, on the Companys Information Analysis Center contracts and
other contracts, grew $43.3 million, a 63.9% increase compared to last year. Revenue continued to
grow 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. We also support the U.S. Navys Warfare Development
Command. Naval architecture and marine engineering increased 1.5% ($4.1 million) and Defense
Operations Support declined 1.5% ($2.4 million) Revenue from other core business areas declined
$10.9 million (11.7%). Alion has yet to see its customers for its information technology and
telecommunications services recover from the lingering effects of the global recession.
Alions prime contract revenue continues to trend upward as a percentage of overall revenue
(up $48.1 million and 10.2%) over last year while our revenue from subcontracts with other prime
contractors was down $13.9 million or 11.8%. Each of these trends is consistent with expanded
capabilities that enable Alion to operate as a prime contractor on a greater number of key
government programs. We continue to realize a significant portion of our revenue from contract
vehicles on which we compete for task orders. Over 59% of year to date revenue came from ID/IQ
contracts. While ID/IQ contract revenue increased modestly as a percentage of overall revenue,
ID/IQ revenue grew by $25.2 million, up 7.3% from last year.
39
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Direct Contract Expense and Gross Profit. Direct contract expenses increased by $27.8 million
to 77.1% of year to date revenue compared to 76.8% of revenue for the comparable period last year.
Increasing prime contract activity includes work that Alion shares with its teammates and led to
higher material and subcontract cost both in total dollars ($32.2 million) and as a percentage of
revenue (up 3.1% to 42.0% of revenue). Direct labor only increased by 1.1% ($2.3 million) while
other direct costs declined $6.7 million to 2.1% of revenue. Year to date gross profit at $142.7
million grew $6.4 million (4.7%) compared to $136.3 million for the first nine 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 75%
of revenue. Cost reimbursement contracts typically have lower profit percentages which offset a
portion of performance risk.
Operating Expenses. Through June 30, 2010, operating expenses climbed $12.2 million overall
compared to last years performance and eroded 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, expense credits for changes in Alions share price were only $0.8 million. Facilities and
indirect expenses were up 1.8% over last year ($0.9 million) consistent with salary increases and
ordinary building operating expense pass-throughs and offset partially by planned space reductions.
Depreciation and amortization declined by $2.2 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 $6.7 million. We spent almost $2.6 million to re-structure
and/or re-finance our 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 nine months ended June 30, 2010 dropped by
$5.8 million to $22.3 million compared with $28.1 million for the similar period last year because
of our higher operating expenses described above.
Other Expense. Interest income, interest expense and other expense in the aggregate for the
nine months ended June 30, 2010 increased by $9.2 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 ($0.6 million) and marginally
higher interest income ($10 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 $5.3 million higher
than it was in 2009. Last year, Alion recognized a $6.7 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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Nine Months Ended June 30, | ||||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Cash Pay Interest |
||||||||
Revolver |
$ | 210 | $ | 811 | ||||
Senior Term Loan |
11,047 | 17,166 | ||||||
Secured Notes |
8,536 | | ||||||
Unsecured Notes |
19,219 | 19,219 | ||||||
Subordinated Note |
| 1,655 | ||||||
Other cash pay interest and fees |
4,002 | 302 | ||||||
Sub-total cash pay interest |
43,014 | 39,153 | ||||||
Deferred and Non-cash Interest |
||||||||
Secured Notes PIK interest |
1,709 | | ||||||
Debt issue costs and other non-cash items |
4,712 | 3,814 | ||||||
Subordinated Note interest |
| 3,869 | ||||||
Subordinated Note warrants |
(160 | ) | (6,738 | ) | ||||
Sub-total non-cash interest |
6,261 | 945 | ||||||
Total interest expense |
$ | 49,275 | $ | 40,098 | ||||
Debt Extinguishment. On March 22, 2010, Alion used proceeds from issuing $310 million of
Units to retire the then-outstanding Term B Credit Facility loans, the Subordinated Note and
related warrants, and to pay debt issue costs. We paid approximately $240 million to retire Term B
debt at par plus accrued interest. We 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. We recognized a $67.7 million gain on
extinguishing these liabilities 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
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 our 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. We were required to recognize current income tax expense for the effect of our 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. We 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, Alion had a $1.5 million net deferred tax asset arising from conversion to a
C-corporation. However, our history of losses makes it unlikely that we will be able to realize
the full benefit of our deferred tax assets. We were required to establish a full valuation
allowance for deferred tax assets and recognize $33.8 million in deferred tax expense last quarter.
In the third quarter of this year, we recognized additional deferred tax assets and a related
valuation allowance of approximately $739 thousand; we recorded $1.8 million in deferred tax
liabilities related to goodwill amortization. This year, we recognized $35.6 million in total
current tax expense for deferred tax liabilities and $36.1 million for deferred tax assets and
valuation allowances.
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Net Income. Even with a $50.7 million gain on debt extinguishment, interest expense and
income tax charges kept Alion in an overall net loss position for the year. Even if one were to
exclude our debt extinguishment gain, required tax provisions and debt covenant waiver fees and
penalties we paid this year, Alion would still not have been profitable as higher interest expense
on long-term debt more than offset increases in operating income.
Liquidity and Capital Resources
Alion requires liquidity to timely pay its vendors and debt obligations, to fund operations
while awaiting payment from customers and to invest in capital projects, Accounts receivable
require cash when balances increase as business grows or when customers delay contract funding
actions. We are funding our current business with cash from operating activities and the cash we
have from issuing the Secured Notes. We plan to fund future operations in a similar fashion. We
also have 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 $15.1 million to net income, these were non-cash
transactions. The cash flow effects of these transactions are reported in our financing
activities. We used approximately $0.5 million to fund our operations for the nine months ended
June 2010 and 2009 even though we experienced significant fluctuation in both cash activities and
non-cash charges. Current year non-cash charges for depreciation, compensation and debt-related
expenses were $21.3 million. Last year, charges were only $6.4 million for the similar period. We
had an $8.0 million increase in non-cash compensation charges due to last years phantom stock
forfeiture credits and increased incentive compensation expenses this year. Non-cash debt-related
expenses increased $9.1 million, due to higher charges for amortizing the cost of our newly-issued
Senior Secured Notes and because we did not benefit from any significant fair value adjustments for
our now-extinguished Subordinated Note warrants.
Last year subcontractor and other expense accruals for subcontractor work for which Alion had
yet to receive invoices generated $16.9 million more in cash than the $4.9 million they provided
this year. While we used approximately $2.3 million to pay invoices, we collected significantly
more of our receivables. Last year we funded $8.9 million of billed and unbilled receivables.
This year we generated $8.8 million in cash flow an almost $18 million year over year
improvement. 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. Last year interest accruals provided $8.9
million in cash; this year that declined $2.1 million to $6.8 million.
Alion collected $640.1 million in receivables through June 30, 2010, $17.5 million more than
the $622.6 million in revenue recognized. Prior year collections were $589.7 million. Our
improved collections this quarter led days sales outstanding (DSO) to decline from 82.8 days to
74.8 days as of June 30, 2010. (We determine DSO based on trailing twelve month revenue). Both
billed and unbilled receivables declined this quarter. Unbilled receivables continue at
significant levels despite progress in obtaining previously delayed contract funding. Increased
balances from growth in revenue represent currently billable amounts for which we intend to issue
invoices next quarter and collect payment within typical time frames. Management expects DSO to
track at current levels.
Capital expenditures this year are down less than $300 thousand over the same period last year
when we purchased several contract delivery orders from General Dynamics for $116 thousand. ESOP
loans were $613 thousand less this year than last year. ESOP share redemptions increased over last
year partly as a result of timing differences. We processed share redemption requests in June this
year compared to September last year. 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 held total year-to-date revolver borrowing activity to $84.2 million.
We did not use our revolver at all from April through June 2010. Our year to date borrowing is
down $265.7 million from our $349.9 million in year-to-date borrowings through June 2009.
Nevertheless, Alions re-financing transactions were the most significant non-operating activities
this year. On March 22, 2010, Alion issued 310,000 Units for gross proceeds of $302.3 million. We
allocated $20.8 million in proceeds to the warrants issued along with the Secured Notes and paid
$13.5 million in third-party debt issue costs and $1.3 million in debt issue costs for our current
revolving credit agreement. Earlier this year we paid $825 thousand to renew our former revolving
credit facility and $2.6 million in Term B Loan fees that we charged directly to interest expense.
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We used $240 million from selling the 310,000 Units to retire the Term B Loan and pay off
accrued interest. Last year we paid $3.0 million in Subordinated Note principal. This year,
pursuant to our December 2009 agreement with IIT, we paid $25 million to re-purchase the entire
Subordinated Note and related warrants at a significant discount to carrying value. We 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.
We have a long-term revolving credit facility through August 2014 and additional available
cash from re-financing activities. Management expects that for the next several years, Alion will
be able to meet existing debt covenants which are less stringent and restrictive than previous Term
B Loan covenants were. This will allow us to maintain access to our revolving credit facility, even
though Management does not foresee needing to draw on it 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 obligations as
they come due notwithstanding an overall increase in interest payments associated with the Secured
Notes. We retain the ability to restrict or defer certain types of cash payments that in the past
caused us to fail to comply with certain prior debt covenants. The Revolving Credit facility also
limits our ability to offer and fund certain types of discretionary diversification options that
create demands on Alions cash flows.
We 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 drop in our share price 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 our
cash. Current debt agreements limit our ability to offer discretionary diversification options to
ESOP participants and this should reduce future cash flow demands. We try to monitor future
potential impacts by relying in part on internal and external financial models that incorporate
Plan census data and 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 used to affect warrant-related interest
expense. Our outstanding Secured Note warrants have a one penny exercise price and are in the
money. They do not have a cash liquidation option and therefore Alion will only recognize interest
expense for the debt issue cost associated with the initial fair value of these warrants. We no
longer have significant stock-based compensation liabilities as no outstanding SARs have any
intrinsic value; 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.
Although current financial information includes the effects of the most recent ESOP Trust
transactions, future expenses for stock-based compensation are likely to differ from estimates as
the price of a share of Alion common stock changes. Our next regularly scheduled valuation period
ends in September 2010. Interest rates, market-based factors and volatility, as well as Alions
financial results will affect the future value of a share of our common stock.
Certain SAR and Phantom Stock grantees can make qualifying elections to further defer
stock-based compensation payments by having funds deposited into a rabbi trust we own. These
elections will not materially affect our planned payments or our overall anticipated cash outflows.
After each semi-annual valuation period, the 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, we intend to pay distribution requests in five annual installments and to defer
initial payments as permitted. The Plan allows Alion to defer initial installment distributions
for five years for former employees who are not disabled, deceased or retired.
Discussion of Debt Structure
The discussion below describes our current debt structure which includes a $25 million
revolving credit facility, the Unsecured Notes and the Secured Notes. On March 22, 2010, we
retired the Term B Senior Credit Agreement, the Subordinated Note and the Subordinated Note
Warrants.
Credit Agreement
On March 22, 2010, we executed a new Credit Agreement (Credit Agreement), which consists of a
$25.0 million senior revolving credit facility (Revolver) none of which was actually drawn as of
June 30, 2010. The Credit Agreement lets
us request up to $10.0 million in letters of credit and borrow up to $5.0 million in swing line
loans for short-term needs. We must pay all Credit Agreement obligations in full by August 22,
2014. Alion can use the Revolver for working capital, permitted acquisitions and other general
corporate purposes.
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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 its subsidiary guarantors executed an Intercreditor Agreement with Wilmington Trust
Company and Credit Suisse AG, Cayman Islands Branch (Intercreditor Agreement) which gives Credit
Agreement lenders a super priority right of payment with respect to the underlying collateral.
Credit Agreement lender rights are superior to the Secured Note lender rights.
Guarantees. Our subsidiaries, HFA, IPS, CATI, METI, JJMA, BMH, WCI, WCGS, MA&D and Alion
Canada (US) Corporation guaranteed our Credit Agreement obligations. They also guaranteed all our
Secured and Unsecured Note obligations (each described below).
Interest and Fees. We can choose whether the Revolver bears interest at one of two floating
rates using either a Eurodollar rate or an alternative base rate. 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 of 175 basis
points per year on the prior quarters daily unused Revolver balance. As of June 30, 2010, $112
thousand was allocated to outstanding letters of credit. We paid approximately $112 thousand in
commitment fees for the Revolver for the quarter ended June 30, 2010 and $179 thousand this year.
Alion must pay letter-of-credit issuance and administrative fees and up to a 25 basis point
fronting fee. Each quarter we must also pay interest in arrears for all outstanding letters of
credit. The interest rate is based on the Eurodollar loan rate which was 6.0% as of June 30,
2010. The Credit Agreement also requires us to pay an annual agents fee.
Covenants. The Credit Agreement requires us to achieve the following minimum trailing twelve
month Consolidated EBITDA levels for the periods indicated:
Period | Minimum Consolidated EBITDA | |||
June 30, 2010 through March 31, 2011 |
$52.5 million | |||
April 1, 2011 through September 30, 2011 |
$55.0 million | |||
October 1, 2011 through September 30, 2012 |
$60.0 million | |||
October 1, 2012 through September 30, 2013 |
$62.5 million | |||
Thereafter |
$65.0 million |
Consolidated EBITDA is defined as: (a) net income (or loss); 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 restricts us from doing any of the following without the prior consent of
syndicate bank members that extended more than 50 percent of the aggregate amount of all Credit
Agreement loans then outstanding:
| incur additional debt other than permitted additional debt; |
| 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 our assets; |
| pay dividends or distributions other than distributions required by the ESOP Plan or by certain legal requirements; |
| enter into certain transactions with our shareholders and affiliates; |
| change lines of business; |
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| repay subordinated debt before it is due and redeem or repurchase certain equity; |
| enter into certain transactions not permitted under ERISA; |
| make more than $8 million in capital expenditures in any fiscal year; |
| pay certain earn-outs in connection with permitted acquisitions; or |
| change our 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 Alion or any subsidiary arising from a government investigation; |
| unstayed judgments in excess of an agreed amount; |
| failure of any Credit Agreement guarantee 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 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 Alions outstanding equity interests, or, after such a qualified public offering, any
person or group other than the ESOP Trust owns more than 37.5 percent of Alions 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
Secured and Unsecured Note Indentures.
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 resold most of the units to qualified institutional buyers.
Each of the 310,000 Units consisted of $1,000 in face value of Alion private senior secured notes
(Secured Notes) and a warrant to purchase 1.9439 shares of Alion common stock. On July 30, 2010,
the SEC declared effective an Alion registration statement on Form S-4 to effect an exchange offer
of the Secured Notes for publicly registered Secured Notes with the same terms. The exchange offer
opened August 3, 2010 and will close September 2, 2010.
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.
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Interest and Fees. The Secured Notes bear interest at 12% per year; 10% is payable in cash and
2% increases the Secured Note principal (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. We must pay interest on overdue principal or interest at 13%
per annum to the extent lawful.
Covenants. There are no financial covenants in the Secured Note Indenture. As of June 30,
2010, we were in compliance with Secured Note Indenture non-financial covenants.
A Secured Note Indenture covenant restricts our ability to incur additional debt. Defined
terms in the Secured Note Indenture include: Net Available Cash, Total Assets, Restricted
Subsidiaries, Indebtedness, Adjusted EBITDA and Consolidated Interest Expense. Alion and its
Restricted Subsidiaries may not issue, incur, assume, guarantee, or otherwise becoming liable for
any debt unless our Adjusted EBITDA to Consolidated Interest Expense ratio is greater than 2.0 to
1.0. Even if Adjusted EBITDA is not at least two times Consolidated Interest Expense, we may incur
other permitted debt including:
| Debt pursuant to certain agreements up to $25 million; |
| Permitted inter-company debt; |
| The Secured Notes and any public notes exchanged for those notes; |
| Debt pre-dating the Secured Notes; |
| Permitted debt of acquired subsidiaries; |
| Permitted refinancing debt; |
| Hedging agreement debt; |
| Performance, bid, appeal and surety bonds and completion guarantees; |
| Ordinary course insufficient funds coverage; |
| Permitted refinancing debt guarantees; |
| Working capital debt of non-U.S. subsidiaries; |
| Debt for capital expenditures, and capital and synthetic leases up to $25 million in the aggregate $25 million and 2.5% of Alions Total Assets; |
| Permitted subordinated debt of Alion or any Restricted Subsidiary to finance a permitted acquisition, certain permitted ESOP transactions and refinancing debt of acquired non-U.S. subsidiaries up to $35 million in the aggregate; |
| Letter of credit reimbursement obligations; |
| Certain agreements in connection with acquiring a business provided liabilities incurred in connection therewith are not reflected on the Companys balance sheet; |
| Certain deferred compensation agreements; and |
| Certain other debt up to $20 million. |
The Secured Note Indenture has a covenant that restricts our ability to declare and pay any
cash dividend or other distribution related to any equity interest in Alion, repurchase or redeem
any equity interest of Alion, repurchase or redeem the Unsecured Notes or other subordinated debt,
or make certain investments. However, within certain limits we may make such payments in limited
amounts if Adjusted EBITDA is at least two times Consolidated Interest Expense. Even if Adjusted
EBITDA to Consolidated Interest Expense is not greater than 2.0 to 1.0, we may make or pay:
| Such payments out of substantially concurrent contributions of equity and substantially concurrent incurrences of permitted debt; |
| 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 issuing fractional shares for the exercise of warrants, options or other securities convertible into or exchangeable for our equity securities; |
| The required Secured Note premium payable on a change of control; |
| Certain permitted inter-company subordinated obligations; |
| Certain repurchases and redemptions of subordination obligations of the Company or a Subsidiary Guarantor from Net Available Cash; |
| Repurchases of subordinated obligations in connection with an asset sale to the extent required by the Secured Note Indenture; |
| Certain permitted ESOP transactions; |
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| Long-term incentive plan payments to our directors, officers and employees, subject to a $3 million annual cap that may increase annually; |
| Any purchase, repurchase, redemption, defeasance or other acquisition or retirement for value of the Unsecured Notes, up to an aggregate amount of $10 million; and |
| Certain other payments not exceeding $10 million in the aggregate. |
The Secured Note Indenture restricts our ability to engage in other transactions including
restricting our subsidiaries from making distributions and paying dividends to parents, merging or
selling all or substantially all our assets, issuing certain subsidiary equity securities, engaging
in certain transactions with affiliates, incurring liens, entering into sale lease-back
transactions and engaging in business unrelated to our business when we 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; |
| Judgment for payment in excess of $30 million entered against Alion or any material subsidiary that remains outstanding for a period of 60 days and is not discharged, waived or stayed; |
| Failure of any Secured Note guarantee to be in effect or any subsidiary guarantors denial or disaffirmation of its guaranty obligations; and |
| Failure of any Secured Note security interest 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 March 22, 2010, cease for any reason to constitute a majority of the Companys board of directors; |
| Adoption of a plan relating to Alions liquidation or dissolution; and |
| Subject to certain exceptions, Alions merger or consolidation with or into another person or the merger of another person with or into Alion, or the sale of all or substantially all our assets to another person. |
Optional Redemption. Prior to April 1, 2013, not more than once in any twelve month period, we
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 | % |
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Exchange Offer; Registration Rights. On June 18, 2010, we complied with the requirement that
we file a registration statement with the SEC offering to exchange the Secured Notes for publicly
registered notes with the same terms. The registration statement was declared effective on July
30, 2010. The exchange offer will close September 2, 2010.
Unsecured Notes
On February 8, 2007, we issued and sold $250.0 million of private 10.25% unsecured notes due
February 1, 2015 (Unsecured Notes) to Credit Suisse, which informed us it had resold most of the
notes to qualified institutional buyers. On June 20, 2007, we exchanged the private Unsecured
Notes for publicly tradable Unsecured Notes with the same terms.
Guarantees. Alions obligations under the Unsecured Notes are guaranteed by our 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. We pay interest to holders of record as of the immediately
preceding January 15 and July 15. We must pay interest on overdue principal or interest at 11.25%
per annum to the extent lawful.
Covenants. There are no financial covenants in the Unsecured Note Indenture. As of June 30,
2010, we were in compliance with Unsecured Note Indenture non-financial covenants.
A covenant in the Unsecured Note Indenture restricts our ability to incur additional debt.
Defined terms in the Secured Note Indenture include: Net Available Cash, Total Assets, Restricted
Subsidiaries, Indebtedness, Adjusted EBITDA and Consolidated Interest Expense. Alion and its
Restricted Subsidiaries may not issue, incur, assume, guarantee, or otherwise become liable for any
indebtedness unless our Adjusted EBITDA to Consolidated Interest Expense ratio is greater than 2.0
to 1.0. Even if Adjusted EBITDA is not at least two times Consolidated Interest Expense, we may
incur other permitted debt including:
| Debt pursuant to our now terminated Term B Senior Credit Facility and certain other contracts up to $360 million less principal repayments made under that debt; |
| Permitted inter-company debt; |
| The Unsecured Notes; |
| Debt pre-dating the Unsecured Notes; |
| Permitted debt of acquired subsidiaries; |
| Permitted refinancing debt; |
| Hedging agreement debt; |
| Performance, bid, appeal and surety bonds and completion guarantees; |
| Ordinary course insufficient funds coverage; |
| Permitted refinancing debt guarantees; |
| Working capital debt of non-U.S. subsidiaries; |
| Debt for capital expenditures, and capital and synthetic leases up to $25 million in the aggregate $25 million and 2.5% of Alions Total Assets; |
| Permitted subordinated debt of Alion or any Restricted Subsidiary to finance a permitted acquisition, certain permitted ESOP transactions and refinancing debt of acquired non-U.S. subsidiaries up to $35 million in the aggregate; |
| Letter of credit reimbursement obligations; |
| Certain agreements in connection with acquiring a business provided liabilities incurred in connection therewith are not reflected on the Companys balance sheet; |
| Certain deferred compensation agreements; and |
| Certain other debt up to $35 million. |
The Unsecured Note Indenture has a covenant that restricts our ability to declare and pay any
cash dividend or other distribution related to any equity interest in Alion, repurchase or redeem
any equity interest of Alion, repurchase or redeem subordinated debt, or make certain investments.
However, within certain limits we may make such payments in limited amounts if Adjusted EBITDA is
at least two times Consolidated Interest Expense. Even if Adjusted EBITDA to Consolidated Interest
Expense is not greater than 2.0 to 1.0, we may make or pay:
| Such payments out of substantially concurrent contributions of equity and substantially concurrent incurrences of permitted debt; |
| Certain limited and permitted dividends; |
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| Certain repurchases of the Companys equity securities deemed to occur upon exercise of stock options or warrants; |
| Cash payments in lieu of issuing fractional shares for the exercise of warrants, options or other securities convertible into or exchangeable for our equity securities; |
| The required Unsecured Note premium payable on a change of control; |
| Certain permitted inter-company subordinated obligations; |
| Certain repurchases and redemptions of subordination obligations of the Company or a Subsidiary Guarantor from Net Available Cash; |
| Repurchases of subordinated obligations in connection with an asset sale to the extent required by the Indenture; |
| Repurchase of common stock from former Alion Joint Spectrum Center employees; |
| 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 our ability to engage in other transactions including
restricting our subsidiaries from making distributions and paying dividends to parents, merging or
selling all or substantially all our assets, issuing certain subsidiary equity securities, engaging
in certain transactions with affiliates, incurring liens, entering into sale lease-back
transactions and engaging in business unrelated to our business when we 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; |
| Judgment for payment in excess of $30 million entered against Alion or any material subsidiary that remains outstanding for a period of 60 days and is not discharged, waived or stayed; and |
| Failure of any Unsecured Note guarantee to be in effect or any subsidiary guarantors denial or disaffirmation 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 February 8, 2007, cease for any reason to constitute a majority of the Companys board of directors; |
| Adoption of a plan relating to Alions liquidation or dissolution; and |
| Subject to certain exceptions, Alions merger or consolidation with or into another person or the merger of another person with or into Alion, or the sale of all or substantially all our assets to another person. |
Optional Redemption. Prior to February 1, 2011, we may redeem all, but not less than all, the
Unsecured Notes at a redemption price equal to 100% of the principal amount plus accrued and unpaid
interest to the redemption date plus an applicable make-whole premium as of the redemption date.
On or after February 1, 2011, we 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.
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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, we used approximately $240 million in proceeds from
issuing the Units to redeem and retire all the outstanding Term B loans and pay all unpaid interest
accrued to 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, we used $25 million
in proceeds from issuing the Units to redeem the Subordinated Note and the related warrants held by
IIT.
Revolving Credit Agreement Covenant Compliance
Our revolving credit agreement defines Consolidated EBITDA and requires us to achieve certain
levels in order to maintain access to our credit facility and avoid cross default on our Senior
Secured and Unsecured Notes. Neither EBITDA nor Consolidated EBITDA is a measure of financial
performance in accordance with generally accepted accounting principles.
Our revolving credit agreement permits us to exclude certain expenses and requires us to
exclude certain one-time gains from Consolidated EBITDA. The revolving credit agreement requires
us to have a minimum $52.5 million in Consolidated EBITDA for the twelve months ended June 30,
2010. We had $58.6 million in Consolidated EBITDA for the twelve months ended June 30, 2010 and
exceeded the requirement by $6.1 million.
During the rest of this year and the next five fiscal years the Company expects that at a
minimum, it will have to make the estimated interest and principal payments set forth below.
($ In thousands) | ||||||||||||||||||||||||
Fiscal Year: | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | ||||||||||||||||||
Bank revolving credit facility(1) |
||||||||||||||||||||||||
- Interest |
$ | 112 | $ | 444 | $ | 445 | $ | 444 | $ | 396 | $ | | ||||||||||||
Secured Notes(2) |
||||||||||||||||||||||||
- Interest |
| 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 |
12,925 | 57,292 | 57,920 | 58,559 | 59,165 | 29,634 | ||||||||||||||||||
Total cash pay principal and
PIK Interest |
| | | | | 589,788 | ||||||||||||||||||
Total |
$ | 12,925 | $ | 57,292 | $ | 57,920 | $ | 58,559 | $ | 59,165 | $ | 619,422 | ||||||||||||
(1) | We expect we will occasionally use our $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. | |
(3) | The Senior Unsecured Notes bear interest at 10.25% and mature February 1, 2015. |
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Contingent Obligations
Secured Notes registration rights agreement
We entered into a registration rights agreement in connection with the sale of the Units which
required us to file a registration statement with the SEC in order to conduct an offer to exchange
the Secured Notes for publicly registered Secured Notes with the same terms. We filed a
registration statement with the SEC on June 18, 2010 which was declared effective on July 30,
2010.
Earn-outs
Alion has one remaining earn-out commitment arising from our 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. The Senior Secured Note Indenture
requires us to either make a tender offer to note holders and use the proceeds of the WCGS ONR
contract sale to redeem up to $5 million in Senior Secured Note principal at par, or re-invest the
proceeds in our business. Other contingent obligations which will impact our cash flow include:
| ESOP share repurchase and diversification obligations; and |
| Long-term incentive compensation plan obligations. |
As of June 30, 2010, Alion had spent a cumulative total of $80.9 million to repurchase shares
of its common stock to satisfy ESOP distribution and diversification requests from former employees
and Plan beneficiaries. In 2008, we changed our prior practice of immediately paying out all
distribution requests in full. In March 2008, we 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. Our debt agreements limit our ability to fund certain discretionary ESOP
diversification demands on our 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 |
127 | $ | 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 | 7,535 | ||||||||
April 2010 |
52 | $ | 28.00 | 1 | ||||||||
May 2010 |
108 | $ | 28.00 | 3 | ||||||||
June 2010 |
62,875 | $ | 28.00 | 1,761 | ||||||||
Total |
527,306 | $ | 18,500 | |||||||||
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. Alion intends to focus on organic
growth and improving processes and margins.
Although we expect to have positive annual operating cash flow eventually, we will need to
generate significant additional revenue beyond current levels and earn net income in order to pay
interest on the Secured Notes and Unsecured Notes and satisfy ESOP repurchase and diversification
obligations.
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The Secured Indenture, Unsecured Indenture and the revolver allow Alion to make certain
permitted acquisitions, and we intend to use available financing to do so. We will ultimately have
to refinance the Secured Notes and Unsecured Notes which mature in November 2014 and February 2015
and will require us to pay out more than $600 million over a three-month period. We are uncertain
whether, when and under what terms we can refinance these obligations. If we cannot refinance
these obligations, we will not have sufficient cash from operations to meet all our 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 we experience unexpected costs or competitive pressures, or if existing cash and projected cash
flows from operations prove insufficient, we may need to obtain additional financing and sooner
than expected. We intend to only enter into new financing or refinancing we consider advantageous.
However, even with moderately improved conditions in the high-yield credit market, we cannot be
certain financing sources 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. We are currently evaluating the effect, if any, that adopting ASU 2009-13 will
have on our 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. We are currently evaluating the effect, if any, that
adopting ASU 2009-14 will have on our 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 our
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 our financial and operational flexibility given our substantial debt and debt covenants; |
| ERISA law changes related to the KSOP; |
| Tax law changes that could affect our tax liabilities or 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 from our operations with attendant risks of fines, liabilities, penalties, suspension and/or debarment; |
| Undertaking acquisitions that increase costs or liabilities or are disruptive; |
| Taking on additional debt to fund acquisitions; |
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| Failing to adequately integrate acquired businesses; |
| Risks from private securities litigation, regulatory proceedings or government enforcement actions relating to prior covenant compliance disclosures; |
| Material changes in laws or regulations affecting our businesses; and |
| Other risk factors discussed in Alions annual report on Form 10-K for the year ended September 30, 2009 filed with the SEC on December 24, 2009 and any subsequent reports. |
Readers are cautioned not to place undue reliance on these forward-looking statements, which
reflect managements view only as of August 10, 2010. We undertake 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. We only face interest rate
risk for amounts outstanding under the $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%, our interest expense would increase. However, we currently do not forecast drawing any
material balance on the revolver. 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. We do not use derivatives for trading purposes. We invest 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 our estimated KSOP share repurchase
and 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. Based on our current $28.00 per share price, no outstanding stock
appreciation rights have any intrinsic value.
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 June 30, 2010 that have materially affected, or
are reasonably likely to materially affect, the Companys internal control over financial
reporting.
Item 4T. Controls and Procedures
See disclosure under Item 4.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
See Note 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
As of June 30, 2010, the risk factors included in the Companys Annual Report on Form 10-K for
the fiscal year ended September 30, 2009 as supplemented by the risk factors included in the
Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, have not materially
changed.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no sales of unregistered securities during the quarter ended June 30, 2010.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Removed and Reserved
Item 5. Other Information
None.
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Item 6. Exhibits
Exhibit | ||||
No. | Description | |||
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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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:
August 10, 2010 |
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