UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2010
Alion Science and Technology Corporation
(Exact name of Registrant as Specified in its Charter)
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Delaware
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333-89756
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54-2061691 |
(State or Other Jurisdiction of
Organization)
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(Commission File Number)
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(IRS Employer Incorporation or
Identification No.) |
1750 Tysons Boulevard
Suite 1300
McLean, VA 22101
(703) 918-4480
(Address, including Zip Code and Telephone Number, including
Area Code, of Principal Executive Offices)
Securities registered pursuant to Section 12(b) or 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. o Yes þ No
Indicate by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. þ Yes o No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. o Yes þ No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). o Yes
o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. þ
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.:
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Large accelerated Filer o
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Accelerated filer o
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Non-accelerated filer þ |
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Smaller Reporting Company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). o Yes þ No
Aggregate market value of the voting and non-voting common equity held by non-affiliates
computed by reference to the price at which the common equity was last sold as of the last business
day of the registrants most recently completed second fiscal quarter: None
The number of shares outstanding of Alion Science and Technology Corporation common stock as
of September 30, 2010 was 5,658,234.
Documents Incorporated by Reference: None
ALION SCIENCE AND TECHNOLOGY CORPORATION
FORM 10-K
TABLE OF CONTENTS
PART I
Some of the statements under Business, Managements Discussion and Analysis of Financial
Condition and Results of Operations, and elsewhere in this annual report on Form 10-K constitute
forward-looking statements, which involve known and unknown 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, forecast, projections, could,
estimate, may, potential, should, would and similar expressions and may also include
references to assumptions.
Factors that could cause actual results to differ materially from anticipated results include,
but are not limited to:
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ERISA law changes affecting the Alion Science and Technology Corporation Employee
Ownership, Savings and Investment Plan; |
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tax law changes affecting treatment and deductibility of goodwill; |
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costs to comply with the Dodd-Frank Act, including changes in to SEC rules and
corporate governance requirements; |
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government customer failures to exercise contract options; |
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government project funding decisions; |
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government contract procurement risks, such as award protests and contract
terminations; |
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competitive pricing pressures and/or difficulty in hiring and retaining employees; |
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current and/or future legal or government agency proceedings arising from our
operations or our contracts and the risk of potential fines, penalties and contract
liabilities, suspension or debarment; |
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any future inability to maintain adequate control over financial reporting; |
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limits on our financial and operational flexibility given our substantial amount of
debt; |
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business acquisitions that increase costs or liabilities, are disruptive or which we
fail to integrate; |
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material changes in other laws or regulations affecting our business; |
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additional debt and financing terms and availability; |
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general volatility in the debt and securities markets; |
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our ability to meet existing and future debt covenants; |
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private securities litigation risks, regulatory proceedings or government
enforcement actions related to our prior debt covenant compliance disclosures; as well
as |
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other risks discussed elsewhere in this annual report. |
Readers are cautioned not to place undue reliance on these forward-looking statements, which
reflect managements view only as of December 14, 2010. We undertake no obligation to update any of
these factors or to publicly announce any change to our forward-looking statements in this report,
whether as a result of new information, future events, changes in expectations or otherwise.
Overview
Alion Science and Technology Corporation (Alion, the Company, we, our) is an
employee-owned company. We provide scientific, engineering and information technology solutions for
problems relating to national defense, homeland security, and energy and the environment. We
provide research and development services primarily to U.S. government agencies, particularly the
U.S. Department of Defense (DoD), state and foreign governments, and other commercial customers.
We had $834.0 million in revenue for the year ended September 30, 2010, a 4.0% increase over
2009. Federal government contract revenue was 97.5% of current year revenue; with 92.5% from DoD
contracts. For the year ended September 30, 2009, federal government contracts accounted for 96.5%
of revenue, with 91.7% from DoD contracts.
1
We provide professional engineering services and scientific expertise in a range of
specialized fields, or core business areas described below. Annual revenue, by core business area
was:
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Revenue by Fiscal Year |
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Core Business Area |
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2010 |
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2009 |
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2008 |
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(In thousands) |
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Naval Architecture and Marine Engineering |
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$ |
363,209 |
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43.6 |
% |
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$ |
365,917 |
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45.6 |
% |
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$ |
325,631 |
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44.1 |
% |
Defense Operations |
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194,940 |
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23.4 |
% |
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203,859 |
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25.4 |
% |
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220,539 |
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29.8 |
% |
Modeling and Simulation |
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152,420 |
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18.3 |
% |
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99,420 |
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12.4 |
% |
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67,119 |
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9.1 |
% |
Technology Integration |
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50,512 |
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6.1 |
% |
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50,762 |
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6.3 |
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51,294 |
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6.9 |
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Energy and Environmental Sciences |
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40,041 |
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4.8 |
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39,914 |
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5.0 |
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37,108 |
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5.0 |
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Information Technology and Wireless
Communications |
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32,866 |
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3.8 |
% |
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42,353 |
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5.3 |
% |
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37,791 |
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5.1 |
% |
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Total |
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$ |
833,988 |
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100.0 |
% |
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$ |
802,225 |
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100.0 |
% |
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$ |
739,482 |
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100.0 |
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Naval Architecture and Marine Engineering. We provide technical services for ship and
systems design from the initial phase of mission analysis and feasibility trade-off studies through
contract and detail design, production supervision, testing, and logistics support for the
commercial and naval markets.
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We provide total ship design services for military and commercial customers including
defining requirements, analyzing concepts, and studying feasibility. We provide contract
design, detail design and production support. |
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We provide systems engineering/design integration, hull form development and performance
analysis, structural design and analysis, weight engineering and intact and damage
stability analysis. |
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We design and engineer ship systems including propulsion, electrical, fluids/piping,
auxiliary, HVAC, deck machinery, and machinery automation and control systems. We provide
expertise for machinery integration, test and trials, failure analysis, modeling and
simulation, and integrated logistics support. |
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We provide mission and threat analysis, evaluate candidate warfare and combat systems,
and develop specifications and installation drawings for topside and below-deck interface
requirements, and ship modernizations. |
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We furnish acquisition planning, business and financial management, configuration and
data management, test and evaluation support, and production analysis and management in all
life cycle phases of equipment, systems and ships. |
Defense Operations. We perform military and policy analyses, assess logistics management
readiness and operational support training, and analyze critical infrastructure risks.
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We analyze major programs and issues related to joint warfare training, mission
rehearsal, experimentation and other transformational activities. We develop net-centric
initiatives and integrate C4I (command, control, communication, and computer intelligence)
initiatives. |
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We support DoD strategic planning efforts and operational exercises. We analyze, plan
and implement base realignments and assess the defense industrial base. |
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We provide program, systems and legislative analyses to Office of the Secretary of the
Air Force. |
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We help develop department-wide DoD education programs. We develop technology, compile
courseware and translate it into electronic and web-based distance learning media. |
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We provide the tools and support to assess vulnerabilities and protect infrastructure
such as ports, power plants and communications nodes. |
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We collaborate with DoD communities of interest and produce Joint Capabilities
Integration and Development System analysis and capabilities documents. |
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We provide DoD requirements and concepts integration analysis (futures analysis). |
2
Modeling and Simulation. We use our modeling and simulation expertise to assist our customers
in examining event outcomes.
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We design and conduct strategic and operations analytic war games to evaluate future
operational concepts and force transformation initiatives. We create and implement
multi-dimensional simulation system tactical training scenarios for the multi-national
experiment series. |
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We manage the DoD Modeling and Simulation Information Analysis Center. We develop
modeling and simulation tools to support integration and federation of stand-alone
simulator-based training and large scale distributed training events. |
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We develop phenomenological models for nuclear, chemical, biological and electromagnetic
environments. |
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We develop multi-dimensional visualization files to simultaneously display actual
improvised explosive device events, terrain databases and scenario scripts to replay events
and allow units to adjust tactics, techniques, and procedures. |
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We use current industry gaming technology to develop proprietary and open source
solutions for customers who use serious gaming for training and education. |
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We maintain a threat generation library to support world-wide Air Force and Joint
training and mission rehearsal operations. |
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We provide modeling and simulation, C4I and operational support for the U.S. Navys
Fleet Synthetic Training and its Continuous Training Environment which delivers
distributed, on-demand training. |
Technology Integration. We provide system integration and design services, including facility
engineering services, to DoD, other federal departments and agencies, and commercial customers.
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We use technology, re-engineering, and materials selection to enhance production,
improve performance, reduce cost, and extend the life of engineered systems. |
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We develop and integrate processes and equipment for rapid prototype production and
flexible manufacturing. We maintain our own rapid prototyping and limited production
manufacturing facilities. |
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We provide engineering, architectural, construction management, logistics, design
oversight, and inspection services. |
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We apply reliability engineering methods to improve system availability and enhance
maintainability and supportability. |
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We support numerous research and development activities focused on taking advantage of
new and emerging technologies. These include the Armys Night Vision and Electronic Sensors
Directorate, the Army, Air Force, and Navy Research Laboratories, and system developers
throughout DoD. |
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We develop human systems integration products and provide technical services to ensure
Army, Air Force and Navy staff and force structures can operate, support and maintain their
complex integrated systems. |
Information Technology and Wireless Communications. We provide services and technologies to
improve information flow across networks and organizations. We analyze customer requirements,
develop system concepts and perform trade off studies to identify and implement the best design. We
lead efforts to verify a design is properly built and integrated, and provide post-delivery end
user support.
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We provide management and information technology consulting services focused on
developing and implementing innovative business solutions and management services for
military, civilian and commercial customers. |
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We provide project management, earned value management, change management and process
design and improvement services. |
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We provide information management, enterprise architecture, service oriented
architecture, web portals and business intelligence. |
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We offer a full range of spectrum management, planning, and operational support services
to determine radio frequency propagation and coverage profiles for networks to operate free
of interference, cover desired geographic areas and perform as designed. |
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We deliver optimized information systems designs through advanced wireless design and
evaluation techniques using modeling and simulation, prototyping, experimentation, and
field testing. |
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We develop detailed data architectures and enhance data visualization to enable our
customers to design, document, test and deploy complex integrated systems that support
efficient data mining, data flow and knowledge management. |
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We provide wireless security, logistics and asset tracking technologies to support and
maximize fielded systems operational capabilities. |
3
Energy and Environmental Sciences. We support more cost-effective energy production and
enhance environmental protection for DoD, federal departments and agencies, and commercial
customers.
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We conduct, develop, and improve processes and equipment for generating power and
providing alternative energy sources. |
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We provide nuclear safety and other performance-related analyses to the U.S. Department
of Energy, National Laboratories, and the commercial power industry. |
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We develop and evaluate methods for detecting chemical, biological, and other toxic
agents. |
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We develop, test and implement methods for measuring air quality. |
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We operate laboratory facilities that determine the constituents and properties of
wastes and effluents, develop and validate analytical methods and instruments, and
determine the potential health effects of various substances for the U.S. Environmental
Protection Agency and the National Institutes of Health. |
Corporate History
Alion Science and Technology Corporation was organized in October 2001, as a for-profit
Delaware corporation to acquire substantially all the assets and liabilities of IITRI, a
not-for-profit Illinois corporation. Alion was an S-corporation from its formation until March 2010
when the Company issued common stock warrants constituting a second class of stock and became a
C-corporation. Alion is entirely owned by an employee stock ownership plan (ESOP, the Plan). The
Company is the successor in interest to IITRI, a government contractor founded in 1935. The Alion
Science and Technology Corporation Employee Ownership, Savings and Investment Trust (the ESOP
Trust) owns all of Alions issued and outstanding common stock. In December 2002, some eligible
IITRI employees directed funds from qualifying retirement account balances into Alions ESOP.
State Street Bank and Trust Company, the ESOP Trustee, used those proceeds to purchase Alion common
stock. The Company used the ESOP proceeds, together with funds from bank loans and other debt to
complete the IITRI purchase.
The Alion ESOP
The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan,
is a KSOP a qualified retirement plan that includes an ESOP invested in Alion common stock and a
non-ESOP component invested in mutual funds. The ESOP Trust owns all outstanding shares of our
common stock. Eligible employees can purchase beneficial interests in our common stock by:
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rolling over an eligible retirement account balance from another plan into the ESOP
when initially hired; |
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transferring funds to the ESOP from the non-ESOP component of the KSOP during
semi-annual election periods; and/or |
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directing a portion of pre-tax earnings to the ESOP. |
The ESOP Trustee uses the money employees invest in the ESOP to purchase Alion common stock
and allocates ESOP interests to employee accounts according to the Plans terms. We make retirement
plan contributions to the ESOP and the non-ESOP component for all eligible employee participants.
We also make matching contributions to the ESOP for eligible employees based on their pre-tax
salary deferrals.
The ESOP Trustee holds record title to all shares of Alion common stock allocated to ESOP
accounts. Except in certain limited circumstances, the ESOP Trustee must vote those shares as
directed by the ESOP committee. The ESOP committee consists of four members of Alions management
team and three other Alion employees; it is responsible for financial management and administration
of the ESOP.
By law, Alion is required to value the common stock held in the ESOP component at least once a
year. Alion has chosen to have the ESOP Trustee value the common stock in the ESOP twice a year
as of March 31 and September 30. All ESOP transactions must occur at the current fair market value
of the common stock held by the ESOP Trust. Semi-annual valuations permit employees to invest in
Alion common stock twice a year and permit former employees and beneficiaries to request ESOP
distributions at mid-year and year end.
4
Business Strategy
We plan to grow revenue organically and through strategic acquisitions, capitalizing on our
skilled work force and our sophisticated solutions competencies. We have several key strategies.
Broaden existing core competencies. We plan to expand our expertise and keep pace with
technological developments. We hire skilled employees, engage in business development initiatives
and invest in research and development to extend our core business area capabilities and enhance
our ability to serve our customers. Acquisitions significantly enhanced our core expertise in
naval architecture and marine engineering, information technology, modeling and simulation, and
defense operations. We increase our employees technology skills through training and customer- and
internally-funded research and development. Through Alion University we offer employees programs
in engineering, program management, and finance and administration to keep Alion at the forefront
of the federal and commercial technology solutions markets.
Expand market share by leveraging experience and reputation. We perform a variety of services
for a broad base of approximately 500 customers, including Cabinet-level government departments and
agencies, and state and foreign governments. We plan to use our sophisticated capabilities and
customer relationships to expand our market presence by delivering solutions to new customers and
offering existing customers new capabilities. We intend to use our customer relationships and our
sophisticated technology expertise to strategically expand our Department of Homeland Security
(DHS) customer base. For the third year in a row Washington Technology ranked us among the top
government contractors providing information technology products and services, systems integration,
telecommunications, and professional engineering services. Defense News ranked Alion in its Top
100 contractors and Washington Business Journal ranked us in its top twenty technology employers
and government contractors
Improve financial performance and increase sales. We believe key elements of our success have
been our focus on growing our business and achieving operating efficiencies. Over the past five
years our revenue grew at a 17.7% compound annual rate from $369.2 million in 2005 to $834.0
million in 2010. This year revenue grew by 4.0% organically. We intend to strengthen financial
performance through organic growth, strategic acquisitions, and controlling operating costs. We
believe that a more competitive cost structure will enhance our ability to win business and improve
our financial performance. We believe Alions increased size and expertise position us to bid on
larger government programs and broaden our customer base.
Market and Industry Background
In its first National Security Strategy (NSS) the Obama Administration called 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 including an expectation that the defense
budget will not decline. Understanding that a certain amount of growth is needed, President Barack
Obamas defense budget proposal calls for one percent real growth each year at a time when the
funding curve for all other federal agencies has flattened. The Obama Administrations FY 2011 and
estimated FY 2012 budget requests will seek 1% in inflation-adjusted real growth, 2%-3% in internal
cost avoidance and 4% year over year growth while maintaining force structure and modernization.
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.
Secretary Gates plans to eliminate organizational duplication, downsize certain commands, eliminate
certain information technology infrastructure programs and consolidate functions and offices within
DoD. 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 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). Secretary Gates has
directed the services to apply their annual cost savings to fund military pay and benefits and
weapons acquisition programs.
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.
5
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, personnel 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 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, 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. Management believes increased government in-sourcing for acquisition-skilled
support services will not materially adversely affect our operations or demand for our higher end
technical expertise. However, we expect in-sourcing may ultimately reduce some of our future
revenue from professional technical services contracts for program and acquisition management, and
operations, training and logistics support.
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.
We are primarily a government contractor.
For the years ended September 30, 2010, 2009 and 2008, 97.5%, 96.5% and 93.9% of our revenue
came from federal government contracts. The Defense Department is our largest customer. We expect
most of our revenue will continue to come from federal government contracts that we perform as a
prime contractor or subcontractor. As a prime contractor, we have
direct contact with the applicable government agency. As a subcontractor, we work for a prime
contractor, which serves as the point of contact with the government agency overseeing the program.
Our federal government contracts are normally multi-year contracts funded on an annual basis
at the discretion of Congress. Congress usually appropriates funds for a given program at the
beginning of each government fiscal year in October. This means a contract is usually only
partially funded at the outset of a major program. Normally a procuring agency commits additional
money to a contract only as Congress makes appropriations in future fiscal years. The government
can modify or discontinue any contract at its discretion or due to contractor default. The
government can terminate or modify a contract for any of a variety of reasons, including funding
constraints, changing government priorities or changes in program requirements. If the government
terminates one of our contracts at its discretion, it typically pays us for all the services we
performed and costs we incurred prior to termination, our termination-related costs, and a
negotiated contract fee.
Contract Types. We have a diverse contract base. Many customers utilize our ID/IQ
multiple-award delivery order contract vehicles. Five of our six largest contracts are ID/IQ
delivery order contracts representing 58.2% of this years revenue. Our single largest individual
contract generated approximately 13% of current year revenue. As of September 30, 2010, we had a
portfolio of approximately 955 individual active contracts and task orders. We have three types of
pricing structures for our contracts: cost-reimbursement, fixed-price and time-and-material.
6
Cost-reimbursement contracts allow us to recover our direct labor and materials costs, a share
of allocable indirect expenses, plus a fixed or variable fee depending on the contract. Indirect
expenses are costs related to operating our business that we recover under government contract
rules. Fixed-price contract customers pay a stated amount intended to cover all our direct and
indirect costs, and profits. We assume the risk of any cost overruns and receive the benefit of any
cost savings on fixed price contracts. Time-and-material contracts have fixed hourly billing rates
designed to cover our labor costs, indirect expenses and profit, and cost reimbursable provisions
for materials and other direct costs. We have traditional closed-end contracts and multiple award
contracts which require sustained post-award effort to realize revenue. The following table
summarizes our revenue by contract type for the years ended September 30, 2010, 2009, and 2008.
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|
|
|
|
|
|
|
For the Years Ended September 30, |
|
Contract Type |
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
Cost-reimbursement |
|
$ |
636,232 |
|
|
|
76.3 |
% |
|
$ |
567,284 |
|
|
|
70.8 |
% |
|
$ |
517,760 |
|
|
|
70.0 |
% |
Fixed-price |
|
|
87,610 |
|
|
|
10.5 |
% |
|
|
91,797 |
|
|
|
11.4 |
% |
|
|
70,078 |
|
|
|
9.5 |
% |
Time-and-material |
|
|
110,146 |
|
|
|
13.2 |
% |
|
|
143,144 |
|
|
|
17.8 |
% |
|
|
151,644 |
|
|
|
20.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
833,988 |
|
|
|
100.0 |
% |
|
$ |
802,225 |
|
|
|
100.0 |
% |
|
$ |
739,482 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We try to reduce our financial and performance risks at each stage in the contracting
process. However, sometimes we begin providing services before a U.S. government agency has
actually signed or funded a contract or task order. We are at risk for costs we incur before a new
contract is executed or an existing contract is modified. The practice is customary in our
industry, particularly where a company has oral notification of a contract award, but has not
received required contract documents. We designed our internal procedures to provide services at
risk only when we believe funding is highly probable and delays are administrative or technical in
nature. In most cases, we get paid for all our costs when a contract is ultimately executed or
modified. However, we cannot be certain, when we work at risk, that we will receive an executed
contract or that we will be paid for all our costs. As of September 30, 2010, we had $25.0 million
in contract costs at risk.
We compete for key contracts from various U.S. government agencies. Our business development
and technical personnel target contract opportunities, and analyze each customers priorities and
overall market dynamics. Depending upon whether a targeted contract is a renewal or a new
opportunity, we spend from three to 18 months developing and executing our competitive strategy.
When we decide to pursue a contract, we mobilize a core group of employees with the requisite
expertise to lead our bidding and proposal preparation efforts. We supplement our internal
capabilities with a network of consultants and other industry experts as necessary. To enhance our
prospects of winning a contract, we team with other contractors, frequently our competitors, who
have complementary technical strengths.
When we win a contract or task order, we assign a project manager and a task leader to ensure
we timely deliver high-quality services. Program managers regularly interface with customers to
evaluate Alions performance and customer satisfaction levels. Managers use our financial
management and information systems to compare costs to funding ceilings and measure performance and
profitability.
Government Oversight. Federal government auditors and technical specialists regularly review
our contract administration and cost accounting policies and practices. Costs on flexibly-priced
federal government contracts are subject to Defense Contract Audit Agency (DCAA) and other audits
and negotiated adjustments. An audit may reveal that some costs charged to a government contract
are not allowable, either in whole or in part. In these circumstances, we must repay the federal
government any money it paid us for unallowable costs, plus interest and possible penalties. The
government considers Alion a major contractor and maintains an on site audit office. DCAA is
currently auditing the Companys 2005 and 2006 claimed indirect costs. Indirect rates through 2004
have been settled. The Company timely submitted its indirect cost proposals for fiscal years 2009,
2008 and 2007 and expects to submit its 2010 proposal next March as required. The Company has
recorded revenue on federal government contracts in amounts it expects to realize.
Backlog. Our contract backlog represents an estimate, as of a specific date, of the remaining
future revenue we expect from existing contracts. On September 30, 2010, backlog on existing
contracts and executed delivery orders totaled $2.8 billion, of which $407.8 million was funded.
The Company estimates it has an additional $3.8 billion of unfunded contract ceiling value for an
aggregate total backlog of $6.6 billion. Funded backlog is the value of executed contract funding
less previously recognized revenue. Unfunded backlog is the estimated value of additional funding
not yet authorized by customers on our existing contracts. Pre-negotiated contract options,
options not yet exercised by a customer for additional years and other extension opportunities in
existing contracts are included in estimated contract ceiling backlog. The Company estimates
unfunded contract ceiling value for ID/IQ and similar contracts as the difference between estimated
total contract value and the total value of all executed delivery orders.
7
Because the U.S. government operates under annual appropriations, its departments and agencies
typically fund contracts on an incremental basis. Thus, only a portion of total contract backlog is
funded. Funded backlog varies based on procurement and funding cycles and other factors beyond
our control. Future funding from executing new contracts and extending or renewing existing
contracts increases our backlog; completed contracts, early terminations, and reductions in
estimated future revenue on existing contracts reduce backlog. Estimates of future revenue from
contract backlog are by their nature inexact. Timing and receipt of future revenue are subject to
various contingencies, many of which are outside of our control. Accordingly, year over year
comparisons are not necessarily indicative of future revenue trends. The table below shows the
value of our contract backlog as of September 30, 2010, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(In millions) |
|
Backlog: |
|
|
|
|
|
|
|
|
|
|
|
|
Funded |
|
$ |
407.8 |
|
|
$ |
376.5 |
|
|
$ |
340.5 |
|
Unfunded |
|
|
6,205.9 |
|
|
|
6,008.4 |
|
|
|
4,475.8 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,613.7 |
|
|
$ |
6,384.9 |
|
|
$ |
4,816.3 |
|
|
|
|
|
|
|
|
|
|
|
Proposal backlog is an estimate, as of a specific date, of the contract value of
proposals we are preparing to submit in response to a customer request, and proposals we have
submitted for which we are awaiting an award decision. How much of our proposal backlog we
ultimately realize as revenue depends upon our success in the competitive proposal process, and on
receiving tasks and funding under ensuing contracts. We will not win contract awards for all of the
proposals we submit to potential customers. Our past proposal backlog contract win rates should not
be viewed as an indication of our future success rates. The table below shows the value of our
proposal backlog as of September 30, 2010, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(In millions) |
|
In-process |
|
$ |
280.0 |
|
|
$ |
361.0 |
|
|
$ |
529.0 |
|
Submitted |
|
|
1,715.0 |
|
|
|
1,491.0 |
|
|
|
1,057.0 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,995.0 |
|
|
$ |
1,852.0 |
|
|
$ |
1,586.0 |
|
|
|
|
|
|
|
|
|
|
|
Corporate Culture, Employees and Recruiting
We strive to create a culture that promotes performance excellence, respect for colleagues
ideas and judgment, and recognizes the value of our professional staffs unique skills and
capabilities. We seek to attract highly qualified and ambitious employees. We strive to establish
an environment in which all employees can make their best personal contribution and have the
satisfaction of being part of a unique team. We believe we have a track record of successfully
attracting and retaining highly skilled employees because of the quality of our work environment,
the professional challenges of our assignments, and the financial and career advancement
opportunities we offer.
As of September 30, 2010, we had approximately 3,101 employees, and approximately 2,886
full-time employees. Approximately 30% of our employees have Ph.D.s or masters degrees, and
approximately 79% of our employees have college degrees. More than 29% of our employees have Top
Secret or higher level security clearances. We believe we have a good relationship with our
employees. None of our employees is covered by a collective bargaining agreement.
We view our employees as our most valuable asset. Our success depends in large part on
attracting and retaining talented, innovative, experienced professionals at all levels. We rely on
the availability of skilled technical and administrative employees to perform our research,
development and technological services for our customers. The market for certain technical skills
in our core business areas is at times extremely competitive. This makes employee recruiting and
retention in these and other specialized areas extremely important. We recognize that our benefits
package, work environment, incentive compensation, and employee-owned culture will continue to be
important in recruiting and retaining highly skilled employees.
8
Our Customers
We provide scientific, research and development, technical expertise, and operational support
to a diverse group of U.S. government customers, as well as commercial, state, local and
international government customers. As of September 30, 2010, we had approximately 500 customers,
including a number of Cabinet-level U.S. government departments and agencies, state, and foreign
governments. We have approximately 550 Department of Defense contracts and delivery orders with the
U.S. Navy, Army and Air Force; the Joint Forces Command; DARPA; the Defense Information Systems
Agency and others representing 92.5% of our 2010 revenue. Other federal government departments and
civilian agencies accounted for 5.0% of our sales, including the National Institute of
Environmental Health Sciences, the U.S. Department of Energy and the EPA. State and local
governments and commercial and international customers accounted for the remaining 2.5% of current
year revenue. The table below shows revenue by customer category for fiscal years ended September
30, 2010, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
U.S. Department of Defense |
|
$ |
771,835 |
|
|
|
92.5 |
% |
|
$ |
735,304 |
|
|
|
91.7 |
% |
|
$ |
660,969 |
|
|
|
89.4 |
% |
Other Federal Civilian Agencies |
|
|
41,413 |
|
|
|
5.0 |
% |
|
|
38,474 |
|
|
|
4.8 |
% |
|
|
33,168 |
|
|
|
4.5 |
% |
Commercial and International |
|
|
20,740 |
|
|
|
2.5 |
% |
|
|
28,447 |
|
|
|
3.5 |
% |
|
|
45,345 |
|
|
|
6.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
833,988 |
|
|
|
100.0 |
% |
|
$ |
802,225 |
|
|
|
100.0 |
% |
|
$ |
739,482 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Competition
The U.S. government engineering and technology services industries consist of a large number
of enterprises ranging from small, niche-oriented companies to multi-billion dollar corporations
that serve many U.S. government customers. Corporations frequently form teams to pursue contract
opportunities because large contracting initiatives are highly competitive and government customers
have diverse requirements. Prime contractors leading large proposal efforts typically select team
members based on particular capabilities and experience relevant to each opportunity. Companies
that compete on one opportunity may be team members on another opportunity.
We frequently compete against well-known firms in the industry as a prime contractor. Our
competitors include Booz Allen Hamilton, BAE, Battelle, CACI International Inc, Science
Applications International Corporation, SRA International, Inc., Computer Sciences Corporation and
the services divisions of Lockheed Martin, General Dynamics and Northrop Grumman. In the
commercial arena, we frequently compete with smaller, highly specialized technical companies, as
well as a number of larger companies such as, Westinghouse, General Electric, Enercon, Accenture,
CAE and L-3 Communications Corporation.
We also compete at the task order level, where knowledge of the customer, its procurement
requirements and its environment is often the key to winning business. We have been successful in
ensuring our presence on numerous contracts and GSA Schedules, and in competing for tasks under
those contracts. The variety of contract vehicles at our disposal, as a prime contractor or
subcontractor, allows us to market our services to any U.S. government agency. We have experience
providing services to a diverse array of U.S. government departments and agencies. We have
first-hand knowledge of our customers and their goals, problems and challenges. Most government
contracts we seek are competitive awards. We believe our customers typically consider the following
key factors in awarding contracts: technical capabilities and approach; personnel quality and
management capabilities; previous successful contract performance; and price.
In our experience, price and technical capabilities are a customers two most important
considerations in contracts for complex technological programs. We believe our customer knowledge,
our government contracting and technical capabilities, and our pricing policies enable us to
compete effectively. Over the past three years, we won 61% of the dollar value of all contracts we
bid on and over 83% of the dollar value of contract bids where we were the incumbent.
Change in Tax Status
From inception until March 22, 2010, Alion was an S-corporation and was not subject to federal
or most state income taxes. All our subsidiaries were qualified S-corporation subsidiaries or
disregarded entities. An S corporation is a reporting entity which can only have a single class of
stock, no more than 100 shareholders, and only certain types of shareholders, such as individuals,
trusts and certain tax-exempt organizations, including ESOPs. Alions income and losses were
allocated to the ESOP Trust, its tax-exempt shareholder.
9
On March 22, 2010, we issued deep-in-the-money warrants deemed to constitute a second class of
stock. Because we now have two classes of stock, we no longer qualify as an S-corporation and
automatically became a C-corporation. Some of our subsidiaries are also subject to separate state
income tax and reporting requirements. We will file two sets of tax returns this year, one for part
of the year as an S corporation and the other for the part of the year as a C corporation. We are
also subject to franchise and other business taxes that are not affected by our change in federal
tax status.
The Internal Revenue Code permits the IRS to impose significant penalties on a subchapter S
employer that maintains an ESOP if the ESOP allocates stock to certain disqualified persons above
statutory limits or if disqualified persons as a group own 50% or more of a companys stock. For
this purpose, a disqualified person is typically someone who owns 10% or more of the subchapter S
employers stock (including deemed ownership through stock options, warrants, stock appreciation
rights, phantom stock, and similar rights). The KSOP and the SAR plan include provisions designed
to prohibit allocations that violate these limits. Apart from the warrants related to the IIT
subordinated note that formerly represented approximately 24% of our common stock, no one person
held an ownership interests representing more than 5% of Alion while we were an S corporation. See
Note 14 Redeemable Common Stock Warrants in our audited financial statements elsewhere in this
report.
Business Development and Promotional Activities
We promote our contract research services by meeting face-to-face with current and potential
customers, obtaining new work from satisfied customers, and responding to requests for proposals
(RFPs) and international tenders current and prospective customers publish or direct to our
attention. We use our knowledge of and experience with U.S. government procurement procedures, and
our relationships with government personnel, to try to maximize our ability to respond timely to
RFPs and customer requests. We bid on contracts in our core business areas and related areas, that
we believe we have a good
chance of winning. When we bid on a potential contract, we draw on our core business area
expertise to display the technical skills we can bring to a particular contract.
Our business developers work face to face with customers, are experienced in marketing to
government customers, know the services and products they represent, and understand each particular
customers organization, mission and culture. These professionals possess a working knowledge of
rules governing the marketing limitations that are unique to the government arena. They understand
government funding systems, conflict of interest restrictions and procurement integrity directives,
and the procedural requirements designed to establish a level competitive playing field and ensure
appropriate use of public funds.
Our technical staff is an integral part of our promotional efforts. The customer relationships
they develop through their work often lead to additional business and new research opportunities.
We hold weekly company-wide business development meetings to review proposal opportunities and
determine strategy in pursuing these opportunities. We also use independent consultants for
promoting business, developing proposal strategies and preparing proposals as necessary.
We spent approximately $0.7 million, $0.7 million, and $1.0 million on internally-funded
research and development for the years ended September 30, 2010, 2009 and 2008. This is in addition
to our substantial research and development activities on customer-funded projects. We believe
actively fostering an environment of innovation is critical to our ability to grow our business,
allowing us to be proactive in addressing issues of national concern in public health, safety and
national defense.
Resources
In most of our work, we use computer and laboratory equipment and other supplies readily
available from multiple vendors. Disruption in availability from any particular vendor is not
likely to materially affect our ability to perform our contracts. For some of our specialized
laboratory work, we depend on supplies of special materials and equipment whose unavailability
could adversely affect experimental laboratory tasks. However, we believe these kinds of delays or
disruptions are not likely to materially affect our overall operations or financial condition.
Patents and Proprietary Information
Our research and development and engineering services do not depend on patent protection. In
accordance with applicable law, our U.S. government contracts often provide government agencies
certain license rights to our inventions and copyright works. Government agencies and other
contractors (including our competitors) can obtain the right to exploit our inventions. Similarly,
our U.S. government contracts often license to us patents and copyright works owned by third
parties. We maintain an active program to track and protect our intellectual property. We routinely
enter into intellectual property assignment agreements with our employees to protect our rights to
any patents or technologies they develop while employed by Alion.
10
Foreign Operations
In each of the past three fiscal years, nearly 100% of our revenue came from contracts with
U.S.-based customers. We treat sales to U.S. government customers as United States sales regardless
of where we perform our services.
Company Information Available on the Internet
Our internet address is www.alionscience.com. Information on the Companys website is not
incorporated by reference into this report.
Environmental Matters
We are subject to federal, state, local and foreign laws and regulations relating to, among
other things, emissions and discharges into the environment, handling and disposal of regulated
substances, and contamination by regulated substances and wastes. Some of our operations may
require environmental permits and/or controls to prevent or reduce air and water pollution.
Issuing authorities can renew, modify, or revoke these permits.
Operating and maintenance costs associated with environmental compliance and preventing
contamination at our facilities are a normal, recurring part of our operations. These costs have
not been material in the past and are not material to our total operating costs or cash flows.
Such costs are usually allowable under government contracts. Based on information
presently available to us and on current U.S. government environmental policies relating to
allowable costs, all of which are subject to change, we do not expect environmental compliance to
materially affect us. We also believe our facilities environmental compliance costs will continue
to be allowable.
Under existing U.S. environmental laws, potentially responsible parties can be held jointly
and severally liable. We could be potentially liable to the government or third parties for the
full cost of investigating or remediating contamination at our sites or at third-party sites in the
event contamination is identified and remediation is required. In the unlikely event that we were
required to fully fund remediation of a site, the statutory framework may allow us to pursue rights
of contribution from other potentially responsible parties.
Risks Related to Our Debt Structure
We have incurred a significant amount of debt; our debt load may limit our financial and
operational flexibility which could prevent us from fulfilling our obligations under our debt
agreements.
In August 2004, we refinanced the senior debt we incurred to acquire IITRIs assets. Partly to
fund our growth through subsequent acquisitions, we incurred substantial additional debt. In March
2010, we re-financed our outstanding Term B senior debt and subordinated debt by issuing Senior
Secured Notes. As of September, 2010, we owe lenders $580.5 million: approximately $313.3 million
in senior secured note principal; $250 million in unsecured note principal; and $17.2 million in
accrued interest. Secured note principal will increase from now through November 2014 as we issue
notes to pay payment-in-kind (PIK) interest. We have managed significant amounts of debt since
December 2002. However, we continue to face challenges in functioning as a highly leveraged company
in volatile and unfavorable credit markets.
Our substantial debt has and could continue to:
|
|
|
make it more difficult for us to satisfy our debt-related obligations; any
failure to comply with any of our debt instrument obligations, including restrictive
and financial covenants, could result in an event of default under our debt agreements; |
|
|
|
make it more difficult for us to satisfy our repurchase obligations to ESOP
participants; |
|
|
|
increase our vulnerability to general adverse economic and industry conditions
and make it more difficult for us to react to changing conditions; |
11
|
|
|
limit our ability to obtain additional financing for working capital, capital
expenditures, acquisitions, other business opportunities, new technologies or other
general corporate requirements; |
|
|
|
require a substantial portion of our operating cash flow to pay interest on our
debt and reduce our ability to use our cash flow for future business needs; |
|
|
|
limit our flexibility to plan for, or react to changes in our business and the
government contracting industry; and |
|
|
|
place us at a competitive disadvantage compared to less leveraged companies. |
Despite our current debt levels, we and our subsidiaries may still be able to incur more debt. This
could further aggravate risks associated with our substantial leverage.
We have the ability to incur additional debt, including the ability to raise up to $10 million
of additional senior secured indebtedness with first-out rights and an additional $10 million of
pari passu senior secured indebtedness, subject to limitations that are imposed by the covenants in
the new revolving credit facility, the indenture governing the 101/4% senior unsecured notes, which
we refer to as the First Indenture, and the indenture governing the 12% senior secured notes,
which we refer to as the Second Indenture. In addition, the payment of PIK interest on the
secured notes will increase our debt by the amount of such PIK payments. The First Indenture, the
new revolving credit facility and the Second Indenture do not completely prohibit us from incurring
additional debt. The more we borrow, the more we, and in turn our security holders, become exposed
to the risks described under We have incurred a significant amount of debt; our debt load may
limit our financial and operational flexibility which could prevent us from fulfilling our
obligations under our debt agreements. See Managements Discussion and Analysis of Financial
Condition and Results of Operation Discussion of Debt Structure for additional information.
Our First Indenture, the new revolving credit facility and the Second Indenture restrict our
operations.
Our First Indenture, the new revolving credit facility, and the Second Indenture contain, and
our future debt agreements may contain, covenants that may restrict our ability to engage in
activities that may be in our long-term best interest, including financing future operations or
capital needs or engaging in other business activities. Our First Indenture, the new revolving
credit facility and the Second Indenture restrict, among other things, our ability and the ability
of our subsidiaries to:
|
|
|
incur additional debt other than permitted additional debt; |
|
|
|
pay dividends or distributions on our capital stock or purchase, redeem or
retire capital stock other than to satisfy ESOP repurchase obligations or pay certain
amounts required under our equity-based compensation plans; |
|
|
|
make acquisitions and investments other than permitted acquisitions and
permitted investments; |
|
|
|
issue or sell preferred stock of subsidiaries; |
|
|
|
create liens on our assets; |
|
|
|
enter into certain transactions with affiliates; |
|
|
|
merge or consolidate with another company; or |
|
|
|
transfer or sell assets outside the ordinary course of business. |
Our new revolving credit facility requires us, and our future debt agreements may require us,
to maintain specified financial levels relating to, among other things, our minimum trailing
four-quarter EBITDA. Our future debt agreements may also impose other minimum financial performance
requirements including, but not limited to, net worth tests. Events beyond our control can affect
our ability to meet these financial performance requirements; we cannot guarantee that we will meet
these tests.
Default under the new revolving credit facility, the First Indenture or the Second Indenture
could allow lenders to declare all amounts outstanding under the new revolving credit facility, the
Secured Notes and the Unsecured Notes to be immediately due and payable. We have pledged
substantially all of our assets to secure the debt under the new revolving credit facility and the
secured notes. If lenders under the new revolving credit facility declare amounts outstanding under
the new revolving credit facility to be due, they could proceed against those assets. Any event of
default could have a material adverse effect on our business, financial condition and operating
results if creditors were to exercise their rights.
12
From time to time we may require consents or waivers from our lenders to permit actions that
the new revolving credit facility, the First Indenture or the Second Indenture prohibit. If, in the
future, lenders refuse to waive the restrictive covenants and/or financial levels under the new
revolving credit facility, the First Indenture and/or the Second Indenture, then we could be in
default on the new revolving credit facility, the First Indenture and/or the Second Indenture. We
could be prohibited from undertaking actions necessary or desirable to maintain or expand our
business. There is no guarantee we will be able to obtain additional consents or waivers from our
lenders.
We may not be able to obtain financing in the future, and the terms of any future financings may
limit our ability to manage our business. Difficulties in obtaining financing on favorable terms
would have a negative effect on our ability to execute our business strategy.
We may need to seek additional capital in the future to refinance or replace existing
long-term debt, meet current or future business plans, meet working capital needs or for other
reasons. Based on current market conditions, the availability of financing is, and may continue to
be, limited. There can be no assurance that we will be able to obtain future financings on
acceptable terms, if at all. In addition, the secured notes, the new revolving credit facility and
the unsecured notes will all mature between August 2014 and February 2015, which could further
limit our ability to obtain additional financing on acceptable terms, if at all.
Our corporate family credit ratings at Standard & Poors and Moodys Investors Service were
lowered in fiscal year 2009 to B- and Caa3. A downgrade in such ratings could increase our cost of
capital, or limit any attempt to obtain additional
financing in the future. An increase in our cost of capital would adversely affect our results
of operations and our financial position.
If we are unable to obtain alternative or additional financing arrangements in the future, or
if we cannot obtain financing on acceptable terms, we may not be able to execute our business
strategies. Moreover, the terms of any such additional financing may restrict our financial
flexibility, including the debt we may incur in the future, or may restrict our ability to manage
our business as we had intended.
If we breach our financial covenants, we could have to amend the financial covenants of the new
revolving credit facility which could materially impact our ability to finance our future
operations, future acquisitions or capital needs.
In October 2009, we agreed with our then senior lenders to amend the interest coverage ratio
and the maximum senior secured leverage ratio covenants under our previously existing Term B Senior
Credit Agreement effective through the end of our fiscal year 2010 and through the end of our first
quarter of our fiscal year 2011 in order to provide us with more flexibility. On December 14, 2009,
we entered into a waiver agreement to the Term B Senior Credit Agreement under which our lenders
agreed to waive, among other things, covenant defaults that resulted from either the miscalculation
of Consolidated EBITDA or the failure to comply with covenants had the cash outflows relating to
the settlement of deferred compensation plans and certain retirement obligations been deducted from
the calculation of Consolidated EBITDA. The waiver applied to these defaults that existed on or
before December 14, 2009 and to any defaults that arose as a result of properly calculating
Consolidated EBITDA for the fiscal year and quarter ended September 30, 2009. The waiver did not
apply to any covenant breach after December 14, 2009 and for any periods after our fiscal year end
2009.
We expect to be able to meet the financial and other debt covenants under the new revolving
credit facility for at least the next 24 months. However, we may be unable to meet these financial
and other debt covenants in the future, which could require us to amend the new revolving credit
facility on less favorable terms. If we were to default under the new revolving credit facility, we
could pursue an amendment or waiver of the new revolving credit facility with our existing lenders,
but there can be no assurance that the lenders would grant an amendment or waiver. In light of
current credit market conditions, any such amendment or waiver might be on terms, including
additional fees, increased interest rates and other more stringent terms and conditions materially
disadvantageous to us. If we were unable to meet these financial covenants in the future and unable
to obtain future covenant relief or an appropriate senior lenders waiver, we could be in default
under the new revolving credit facility. This could cause all amounts borrowed under it and all
underlying letters of credit to become immediately due and payable, expose our assets to seizure,
cause a potential cross-default under our indentures and possibly require us to invoke insolvency
proceedings including, but not limited to, a voluntary case under the U.S. Bankruptcy Code.
13
Risks Related to Internal Controls
We could incur adverse effects from our prior disclosures relating to our failures to comply with
prior financial covenants.
In 2009, we determined that the Consolidated EBITDA we had reported to our lenders did not
conform to the definitions in our debt agreements. We failed to deduct certain deferred
compensation and ESOP-related cash outflows and this overstated our Consolidated EBITDA. As
correctly calculated, our Consolidated EBITDA indicated we had failed to comply with the senior
secured leverage and interest coverage ratio covenants in our now-extinguished Term B Senior Credit
Agreement. Our failure to meet these covenants led to non-compliance with other covenants in the
Term B Senior Credit Agreement. These covenant defaults made all amounts outstanding under the
Term B Senior Credit Agreement immediately callable by the administrative agent or lenders holding
a majority of the loans outstanding. As a result, we initially incorrectly reported these amounts
as non-current rather than current liabilities. In December 2009, we obtained a waiver of covenant
defaults that occurred prior to December 31, 2009.
We are unable to predict the likelihood of or potential outcomes from private securities
litigation, regulatory proceedings or government enforcement actions relating to our prior
disclosures regarding covenant compliance. These matters could be time-consuming and expensive to
resolve, distract management from other business concerns and harm our reputation and our business.
Adverse findings in litigation, regulatory proceedings or government enforcement actions, could
require us to pay damages or penalties or impose other remedies which could harm our reputation,
our business and our financial condition.
We discovered errors in our historic calculations of Consolidated EBITDA because of which we failed
to comply with certain covenants in our previously existing Term B Senior Credit Agreement. Our
prior disclosures relating to our compliance with our financial covenants could have material
adverse effects on our business and financial condition.
In late 2009, we discovered that the Consolidated EBITDA we had reported to our lenders did
not conform to the definition in our previously existing Term B Senior Credit Agreement. Since
entering into the agreement, we had miscalculated several components of Consolidated EBITDA over
numerous periods of time. For example, from 2004 to 2009 we had not deducted from Consolidated
EBITDA cash outflows related to deferred compensation plans, including the stock appreciation
rights plans, phantom stock plans and the Long-Term Incentive Plan, as well as share redemption
payments for prior 401-K matching and retirement plan contributions. These errors resulted in our
overstating Consolidated EBITDA by the amount of these deductions. After properly taking these
miscalculations into account, the result was that the Company was not compliant with the senior
secured leverage (or predecessor test) and interest coverage ratio covenants in the Term B Senior
Credit Agreement for eleven quarters between June 30, 2006 and September 30, 2009. Our
non-compliance with these financial covenants triggered non-compliance with other covenants under
the Term B Senior Credit Agreement.
We are unable to predict the likelihood of potential outcomes from private securities
litigation, regulatory proceedings or government enforcement actions relating to our prior
disclosures regarding covenant compliance. The resolution of these matters could be time-consuming
and expensive, distract management from other business concerns and harm our reputation and our
business. Furthermore, if we were subject to adverse findings in litigation, regulatory proceedings
or government enforcement actions, we could be required to pay damages, fines and penalties and
have other remedies imposed, which could harm our reputation and our business and financial
condition.
Risks Related to Our Business and Operations
We expect to experience net losses in at least our next four years of operation.
Despite recognizing a $50.7 million gain on extinguishing our subordinated debt this year, we
have had a net loss every year since our inception in late 2002. We expect to incur a net loss in
at least our next four years of operation, fiscal years 2011 through 2014. Interest expense on
existing debt, amortization of purchased contracts and future deferred income tax expense are among
the most significant factors contributing to our estimated future net losses. The size of future
losses and achieving profitability depend on sustaining significant revenue growth and controlling
expenses. We may not become profitable if revenue grows more slowly than we anticipate, or if
operating expenses exceed our expectations. Even if we become profitable, we may not be able to
sustain our profitability.
Our ability to meet our financial and other future obligations depends on our future operating
results. We cannot be sure we will be able to meet these obligations as they come due.
Our ability to pay our debt, to comply with financial covenants, and to fund working capital
and planned capital expenditures depends on our ability to generate cash flow in the future. We
cannot assure you that our business strategy will succeed or that we will achieve our anticipated
financial results. Our financial and operational performance depends upon a number of factors, many
of which are beyond our control. Risk factors include:
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when and how much of our contract backlog our customers fund; |
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how much time our customers take to pay us; |
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when and whether we win new contracts and how we perform on our contracts; |
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whether we can increase annual revenue and/or operating income; |
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how much in payroll deferrals and rollovers our employees spend to purchase our common
stock ; |
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how much we have to spend to repurchase our stock from current and former employees; |
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current economic conditions and conditions in the defense contracting industry; |
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U.S. government spending levels, both generally and by our particular customers; |
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failure by Congress to timely approve budgets for federal departments and agencies we
support; |
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operating difficulties, operating costs or pricing pressures; |
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new legislation or regulatory developments that adversely affect us; and |
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any delays in implementing strategic projects. |
These factors will also affect our ability to meet future ESOP repurchase obligations. In August
2014, we must re-pay any outstanding revolving credit facility balance. We are required to pay all
principal and accrued interest outstanding on our Senior Secured Notes on November 1, 2014. Three
months later on February 1, 2015, we are required to pay all principal and accrued interest
outstanding on our Senior Unsecured Notes.
We may not generate sufficient cash flow to comply with our financial covenants and meet our
payment obligations when they become due. If we are unable to comply with our financial covenants,
or if we are unable to generate sufficient cash flow or otherwise obtain the funds we need for
required debt payments, we may have to refinance our debt. We cannot be certain we could refinance
our obligations on favorable terms, or at all. Absent refinancing, our lenders would be able to
accelerate our debts maturity. As a result, we could default under our other senior debt, expose
our assets to seizure, or declare bankruptcy.
14
We face intense competition from many companies that have greater resources than we do. This could
cause price reductions, reduced profitability, and loss of market share.
We operate in highly competitive markets and often encounter intense competition to win
contracts. If we are unable to successfully compete for new business, our revenue growth and
operating margins may decline. Many of our competitors are larger and have greater financial,
technical, marketing, and public relations resources, larger client bases, and greater brand or
name recognition than we do. Larger competitors include U.S. federal systems integrators such as
Booz Allen Hamilton, Computer Sciences Corporation, CACI International Inc, Science Applications
International Corporation, SRA International, Inc., and the services divisions of large defense
contractors such as Lockheed Martin Corporation, General Dynamics Corporation and Northrop Grumman
Corporation. Our larger competitors may be able to vie more effectively for very large-scale
government contracts. Our larger competitors also may be able to provide clients with different or
greater capabilities or benefits than we can provide in areas such as technical qualifications,
past performance on large-scale contracts, geographic presence, price, and availability of key
professional personnel. Our competitors have established relationships among themselves or with
third parties, including through mergers and acquisitions, to increase their ability to address
client needs. They may establish new relationships; new competitors or competitive alliances may
emerge.
Our ability to compete for desirable contracts will depend on: the effectiveness of our
research and development programs; our ability to offer better performance than our competitors at
lower or comparable cost; the readiness of our facilities, equipment and personnel to perform the
programs for which we compete; and our ability to attract and retain key personnel. If we do not
continue to compete effectively and win contracts, our future business, financial condition,
results of operations and our ability to meet our financial obligations may be materially
compromised.
15
Historically, a few contracts have provided most of our revenue. If we do not retain or replace
these contracts our operations will suffer.
The following six federal government contracts accounted for half of our revenue both this
year and last year.
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Modeling and Simulation Information Analysis Center for the Defense Information Systems
Agency (13.0%, 6.8%) |
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Seaport Multiple Award Contract for the Naval Sea Systems Command (NAVSEA) (12.7%,
14.3%) |
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Technical and Analytical Support for the U.S. Air Force (10.3%, 9.5%) |
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Seaport E Multiple Award Contract for NAVSEA (9.2%, 5.2%) |
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Weapons System Information Analysis Center for the Defense Information Systems Agency
(6.0%, 5.5%) |
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Engineering, Financial and Program Management Support Services to the U.S. Navy Virtual
SYSCOM (5.0%, 7.0%) |
Termination of these contracts or our inability to renew or replace them when they expire
could cause our revenue to decrease and could have a material adverse effect on our business,
financial condition, operating results or ability to meet our financial obligations.
If we are unable to manage our growth, our business could be adversely affected.
Sustaining our growth has placed significant demands on our management, as well as on our
administrative, operational and financial resources. To continue to manage our growth, we must
continue to improve our operational, financial and management information systems and expand,
motivate and manage our workforce. If we are unable to successfully manage our growth without
compromising our quality of service and our profit margins, or if new systems we implement to
assist in managing our growth do not produce the expected benefits, our business, prospects,
financial condition, operating results or ability to meet our financial obligations could be
materially and adversely affected.
Acquisitions could increase our costs or liabilities or be disruptive.
One of our key operating strategies has been and continues to be to selectively pursue and
implement acquisitions. We have made a number of acquisitions in the past, and will consider other
acquisitions in the future. We may not be able to locate suitable acquisition candidates at prices
we consider appropriate or to finance acquisitions on terms satisfactory to us. If we do identify
an appropriate acquisition candidate, we may not be able to successfully negotiate acquisition
terms or financing or, if the acquisition occurs, integrate the acquired business into our existing
business. Negotiations of potential acquisitions and the integration of acquired business
operations could disrupt our business by diverting management away from day-to-day operations.
Acquisitions of businesses or other material operations may require additional debt or equity
financing, resulting in additional leverage or dilution of ownership. Integration difficulties
could be increased by the need to coordinate geographically dispersed organizations, integrate
personnel with disparate business backgrounds and combine different corporate cultures. We also may
not realize cost efficiencies or synergies that we anticipated when selecting our acquisition
candidates. In addition, future impairments of intangible assets could reduce our future reported
earnings. Acquisition candidates might have liabilities or adverse operating issues that we fail to
discover through due diligence prior to acquisition, but which we have to assume in an acquisition.
Such liabilities could have a material adverse effect on our business, financial condition,
operating results and ability to meet our financial obligations.
We depend on key management and may not be able to retain those employees due to competition for
their services.
We believe that our future success will be due, in part, to the continued services of our
senior management team. The loss of any one of these individuals could cause our operations to
suffer. We do not maintain key man life insurance policies on any members of management.
Our business could suffer if we fail to attract, train and retain skilled employees.
Availability of highly trained and skilled professional, administrative and technical
personnel is critical to our future growth and profitability. Even in the current economic climate,
competition in our industry for scientists, engineers, technicians, management and professional
personnel is intense and competitors aggressively recruit key employees. Due to our growth and this
competition for experienced personnel, particularly in highly specialized areas, it has become more
difficult to timely meet all our needs for these employees. We cannot be certain we will be able to
attract and retain such employees on
acceptable terms. Any failure to do so could have a material adverse effect on our business,
financial condition, results of operations and our ability to meet our financial obligations.
Failure to recruit and retain a sufficient number of these employees could adversely affect our
ability to maintain and grow our business. Some of our contracts require us to staff a program with
personnel the customer considers key to successful performance. If we cannot provide these key
personnel or acceptable substitutes, the customer may terminate the contract, and we may not be
able to recover our costs.
16
In order to succeed, we will have to keep up with rapid technological changes in a number of
industries. Various factors could affect our ability to keep pace with these changes.
Our success will depend on our ability to keep pace with changing technologies in our core
business areas. These technologies can change rapidly. Even if we keep up with the latest
developments and available technology, newer services or technologies could negatively affect our
business. Integrating our research services diverse technologies involved is complex and in many
instances has not been previously attempted. Our success will depend significantly on our ability
to develop, integrate and deliver technologically advanced products and services at the same or
faster pace as our competitors, many of which have greater resources than we do.
A continued economic downturn could harm our business.
Our business, financial condition, operating results and ability to meet our financial
obligations may be affected by various economic factors. Continued unfavorable economic conditions
may make it more difficult for us to maintain or continue our revenue growth. In an economic
recession, or under other adverse economic conditions which may arise from natural or man-made
events, customers and vendors may be less likely to meet contractual terms and payment or delivery
obligations. Continued weakness or further deterioration of economic conditions may have a material
adverse effect on our business, financial condition, operating results and ability to meet our
financial obligations.
Adverse changes in market conditions, the stock market or the merger and acquisition environment in
our industry could adversely affect the value of our goodwill which could cause us to recognize an
impairment charge.
If market conditions were to become more unfavorable, if merger and acquisition activity in
our industry were to occur at significantly lower prices, or we are unable to grow our revenue and
operating profit, we might have to recognize an impairment charge to the significant goodwill we
have from our prior acquisitions. An impairment charge could have a material adverse effect on our
operating results, our ability to meet our debt covenants and continuing access to our credit
facility.
Our employees may engage in misconduct or other improper activities, which could harm our business.
We are exposed to the risk of employee fraud or other misconduct. Employee misconduct could
include intentional failures to comply with U.S. government procurement regulations, unauthorized
activities, attempts to obtain reimbursement for improper expenses, or submission of falsified time
records. Employee misconduct could also involve improper use of our customers sensitive or
classified information, which could result in regulatory sanctions against us and serious harm to
our reputation. It is not always possible to deter employee misconduct, and the precautions we take
to prevent and detect this activity may not be effective in controlling unknown or unmanaged risks
or losses, which could harm our business, financial condition, results of operations and our
ability to meet our financial obligations.
The interests of the ESOP Trust may not be aligned with the interests of participants in the ESOP
component of the KSOP.
The ESOP Trust owns 100% of our outstanding shares of common stock. It can control the
election of a majority of our directors, the outcome of all matters submitted to a vote of
stockholders, and can change our management. The interests of the ESOP Trust may not be fully
aligned with the interests of the ESOP participants and this could lead to a strategy that is not
in the best interests of those participants.
Environmental laws and regulations and our use of hazardous materials may subject us to significant
liabilities.
Our operations are subject to U.S. federal, state and local environmental laws and
regulations, as well as environmental laws and regulations in the various countries in which we
operate. We are also subject to environmental laws and regulations relating to the discharge,
storage, treatment, handling, disposal and remediation of regulated substances and waste products,
such as radioactive, biochemical or other hazardous materials and explosives. We may incur
substantial costs in the future because of: modifications to current laws and regulations; new laws
and regulations; new guidance or new
interpretation of existing laws or regulations; violations of environmental laws or required
operating permits; or discovery of previously unknown contamination.
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On March 22, 2010, our S corporation election automatically terminated and we became a C
corporation for U.S. federal income tax purposes. As a C corporation we are subject to federal and
state income tax at regular corporate rates. The increase in our effective tax rate could reduce
cash available to pay our debt and other financial obligations and to invest in our operations.
At all times from Alions formation through March 22, 2010, we were treated as an S
corporation for U.S. federal income tax purposes. As an S corporation, we were not subject to
federal income taxes or most state income taxes. Our income, gains, losses, deductions and credits
flowed to our sole shareholder, the ESOP Trust. On March 22, 2010, we became a C-corporation
required to pay federal and state income taxes at regular corporate rates. Our change in tax
status could reduce cash available to repay debt, invest in operations or fulfill our other
financial obligations.
The Internal Revenue Service (IRS) could successfully challenge the validity of our S corporation
election for tax periods prior to March 22, 2010, and we could possibly owe additional U.S. federal
and state income tax.
At all times from Alions formation through March 22, 2010, we believe Alion was a valid S
corporation under the provisions of the Internal Revenue Code and in those states that recognize S
corporation status. We filed appropriate federal and state S corporation and state C corporation
tax returns for all years through fiscal 2009. If the IRS or state tax agencies were to
successfully challenge our S corporation status, we might owe additional federal and state income
taxes. Additional tax obligations would reduce cash available to repay debt, reinvest in operations
or fulfill our other financial obligations.
Risks Related to Our Industry
We depend on U.S. government contracts for substantially all of our revenue. Changes in the
contracting or fiscal policies of the U.S. government could adversely affect our business,
financial condition or results of operations.
U.S. government agency contracts provided approximately 98%, 97%, and 94% of our revenue for
the years ended September 30, 2010, 2009 and 2008. In fiscal years 2010, 2009 and 2008, DoD
contracts accounted for approximately 93%, 92% and 89% of our total revenue. Contracts with other
government agencies accounted for approximately 5% of our total revenue each year. We expect U.S.
government contracts are likely to continue to account for a significant portion of our revenue in
the future. Changes in U.S. government contracting policies could directly affect our financial
performance. Factors that could materially adversely affect our U.S. government contracting
business include:
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budgetary constraints affecting U.S. government spending generally, or specific
departments or agencies in particular; |
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changes in U.S. government fiscal policies or available funding; |
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changes in U.S. government programs or requirements; |
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U.S. government curtailment of its use of technology services firms; |
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adoption of new laws or regulations; |
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technological developments; |
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U.S. government shutdowns (such as that which occurred during the U.S. governments
1996 fiscal year); |
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Competition and consolidation in the information industry; and |
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General economic conditions. |
These or other factors could cause U.S. government departments or agencies to reduce their
purchases under contracts, to exercise their right to terminate contracts or fail to exercise
options to renew contracts, any of which could have a material adverse effect on our business,
financial condition, operating results and ability to meet our financial obligations.
Many of our U.S. government customers are subject to increasing constraints. We have
substantial contracts in place with many U.S. government departments and agencies. Our continuing
performance under these contracts, or the possibility of new contracts from these agencies, could
be materially adversely affected by agency spending reductions or budget cutbacks.
Such reductions or cutbacks could materially adversely affect our business, financial condition,
operating results and ability to meet our financial obligations.
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Failure by Congress to timely approve budgets for the federal agencies we support could delay or
reduce spending and cause us to lose revenue.
Each year, Congress must approve budgets for each of the U.S. government departments and
agencies we support. When Congress is unable to agree on budget priorities, and is unable to pass
the annual budget on a timely basis, it typically enacts a continuing resolution. A continuing
resolution allows U.S. government agencies to operate at spending levels equal to or less than
levels approved in the prior budget cycle. This can delay funding we expect to receive from clients
for work we are already performing. A continuing resolution can delay or even cancel new
initiatives which could adversely affect our business, financial condition, operating results and
ability to meet our financial obligations.
We may not realize the full amount of our backlog, which could lower future revenue.
The maximum contract value identified in a U.S. government contract does not necessarily
determine the revenue we will realize from that contract. Congress normally appropriates funds for
a given program each fiscal year, even when actual contract performance may take many years. As a
result, U.S. government contracts ordinarily are only partially funded at the time of award.
Normally a procuring agency commits additional money to a contract only as Congress makes
subsequent fiscal year appropriations. Estimates of future revenue attributed to backlog are not
necessarily precise. Receipt and timing of any of this revenue is subject to various contingencies
such as changed U.S. government spending priorities and government decisions not to exercise
existing contract options. Many contingencies are beyond our control. The backlog on a given
contract may not ultimately be funded or may only be partially funded, which may cause our revenue
to be lower than anticipated, and adversely affect our business, financial condition, operating
results and ability to meet our financial obligations.
Many of our U.S. government customers procure goods and services through ID/IQ, GWAC or GSA
Schedule contracts under which we must compete for post-award orders.
Budgetary pressures and reforms in the procurement process have caused many U.S. government
customers to purchase goods and services through ID/IQ, GSA Schedule contracts and other multiple
award and/or GWAC contract vehicles. These contract vehicles increase competition and pricing
pressure requiring us to make sustained post-award efforts to obtain awards and realize revenue.
There can be no assurance that we will increase revenue or otherwise sell successfully under these
contract vehicles. Our failure to compete effectively in this procurement environment could harm
our business, financial condition, operating results and ability to meet our financial obligations.
U.S. government contracts contain termination provisions that are unfavorable to us.
U.S. government agencies can terminate contracts with suppliers at any time without cause. If
a government agency terminates one of our contracts without cause, we are likely to be compensated
for services we have provided or costs we incurred up to the termination date, and receive payment
for termination-related costs and a negotiated contract fee. However, if the U.S. government
terminates a contract because we defaulted under the terms of the contract, we may be liable for
any extra costs the U.S. government incurs to procure undelivered services from another company.
Termination of any of our large U.S. government contracts could negatively impact our revenue and
adversely affect our business, financial condition, operating results and ability to meet our
financial obligations.
If we do not accurately estimate the expenses, time and resources necessary to meet our contractual
obligations, our contract profits will be lower than expected.
The total price on a cost-reimbursement contract is primarily based on allowable costs
incurred subject to a contract funding limit. U.S. government regulations require us to notify our
customers of any cost overruns or underruns on a cost-reimbursement contract. We may not be able to
recover cost overruns in excess of a contracts funding limit and may not earn the profit we
anticipated from the contract.
In a fixed-price contract, we estimate project costs and agree to perform services for a
predetermined price regardless of our actual costs. We pay for any cost overruns. If we fail to
anticipate technical problems, or accurately estimate or control costs, we may face a lower
fixed-price contract profit margin or even a loss. Provisions in our financial statements for
estimated contract losses may not be adequate to cover all our actual losses.
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Our operating margins and operating results may suffer if cost-reimbursement contracts increase in
proportion to our total contract mix.
Based on profit as a percentage of estimated standard costs, cost-reimbursement contracts are
our least profitable type of contract because government regulations limit cost-reimbursement
contract fee levels. Our U.S. government customers typically choose the type of contract they
issue. To the extent that in the future cost-reimbursement contracts increase as a percentage of
our contract mix, operating margins and results may suffer.
If our fixed-price contract revenue declines in total or as a proportion of our total business, or
if profit rates on these contracts deteriorate, our operating margins and operating results may
suffer.
We have historically earned higher profit margins on fixed-price contracts. If fixed-price
contract revenue decreases, or customers shift to other types of contracts, our operating margins
and operating results may suffer. We cannot ensure we will be able to maintain our historic
profitability levels on fixed-price contracts overall.
Our subcontractors failure to perform contractual obligations could damage our reputation as a
prime contractor and our ability to obtain future business.
As a prime contractor, we often rely significantly upon other companies as subcontractors to
perform work we are obligated to deliver to our customers. A failure by one or more of our
subcontractors to timely perform services satisfactorily could cause us to be unable to perform our
duties as a prime contractor. We have limited involvement in the work our subcontractors perform,
and as a result, we may have exposure to problems our subcontractors cause. Subcontractor
performance deficiencies could result in a government customer terminating our contract for
default. A default termination could make us liable for customer re-procurement costs, damage our
reputation, and hurt our ability to compete for future contracts.
Because U.S. government contracts are subject to government audits, contract payments are subject
to adjustment and repayment which may result in lower than expected contract revenue.
U.S. government contract payments received that exceed allowable costs are subject to
adjustment and repayment after the government audits our contract costs. All our federal government
contract indirect costs have been audited and negotiated through fiscal year 2004. The government
is auditing our claims for fiscal years 2005 and 2006. We timely submitted our incurred cost
proposals for fiscal years 2007-2009 and expect to submit our current year proposal when due. If
the estimated reserves in our financial statements for excess billings and contract losses are not
adequate, future government contract revenue may be lower than expected.
If we fail to recover at- risk contract costs, we may have reduced fees or losses.
We are at risk for any costs we incur before a contract is executed or renewed. A customer
may choose not to pay us for these costs. At September 30, 2010 we had $25 million in at-risk
costs. While such costs were associated with specific anticipated contracts and funding
modifications, we cannot be certain that our customers will execute these contracts or contract
renewals or that they we pay us for all our related at-risk costs.
Actual or perceived conflicts of interest may prevent us from being able to bid on or perform
contracts.
U.S. government agencies have conflict of interest policies that may prevent us from bidding
on or performing certain contracts. When dealing with U.S. government agencies that have conflict
of interest policies, we must decide, at times with insufficient information, whether to
participate in the design process and lose the chance of performing the contract or to turn down
the design opportunity for the chance of performing the future contract. We have, on occasion,
declined to bid on particular projects because of actual or perceived conflicts of interest. We
are likely to continue encountering such conflicts of interest in the future, particularly if we
acquire other U.S. government contractors. Future conflicts of interest could cause us to be unable
to secure key contracts with U.S. government customers.
As a U.S. government contractor, we must comply with complex procurement laws and regulations and
our failure to do so could have a negative impact upon our business.
We must comply with and are affected by laws and regulations relating to the formation,
administration and performance of U.S. government contracts, which may impose added costs on our
business. If a government review or investigation uncovers improper or illegal activities, we may
be subject to civil and/or criminal penalties and administrative
sanctions, including contract termination, fines, forfeiture of fees, suspension of payment and
suspension or debarment from doing business with U.S. government agencies, which may impair our
ability to conduct our business.
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We derive significant revenue from U.S. government contracts awarded through competitive bidding
which is an inherently unpredictable process.
We obtain most of our U.S. government contracts through competitive bidding. We face risks
associated with:
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the frequent need to bid on programs in advance of the completion of their design,
which can result in unforeseen technological difficulties and/or cost overruns; |
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the substantial time and effort, including design, development and promotional
activities, required to prepare bids and proposals for contracts we may not win; and |
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the rapid rate of technological advancement and design complexity of most of our
research offerings. |
Upon expiration, U.S. government contracts may be subject to a competitive re-bidding process.
We may not succeed in winning new contract awards or renewals in the future. Our failure to renew
or replace existing contracts when they expire or win new contracts, would negatively impact our
business, financial condition, operating results and ability to meet our financial obligations.
Our failure to obtain and maintain necessary security clearances may limit our ability to carry out
confidential work for U.S. government customers, which could cause our revenue to decline.
As of September 30, 2010, we had approximately 174 DoD contracts that required us to maintain
facility security clearances at our 27 sites, and approximately 2,715 of our employees held
security clearances needed to perform these contracts. Each cleared facility has a Facility
Security Officer and Key Management Personnel whom the U.S. Department of Defense Defense
Security Service requires to be cleared to the level of the facility security clearance. Individual
employees are selected to be cleared, based on specific classified contract task requirements and
each employees technical, administrative or management expertise. Once an employee gets security
clearance, he or she can have access to classified contract information, based on clearance level
and need to know. Protecting classified information is paramount. Loss of a facility clearance,
or an employees failure to obtain or maintain a security clearance, could result in a U.S.
government customer terminating an existing contract or choosing not to renew a contract. If we
cannot maintain or obtain the required security clearances for our facilities and our employees, or
obtain these clearances in a timely manner, we may be unable to perform certain U.S. government
contracts. Lack of required clearances could also impede our ability to bid on or win new
government contracts, which might result in terminating current research activities. This could
damage our reputation and our revenue would likely decline, which would adversely affect our
business, financial condition, operating results and ability to meet our financial obligations.
|
|
|
Item 1B. |
|
Unresolved Staff Comments |
None.
Our principal operating facility is in McLean, Virginia and consists of 23,823 square feet of
leased office space. We also lease approximately 74 additional office facilities totaling 997,664
square feet. Of these, our largest offices are located in Washington, DC; Fairfax, Alexandria,
Vienna, Arlington, Norfolk, Suffolk, and Newport News, Virginia; Pittsburgh and West Conshohocken,
Pennsylvania; Huntsville, Alabama; Mystic, Connecticut; Annapolis Junction and Lanham, Maryland;
Orlando, Florida; Rome, New York; Iselin, New Jersey; Pascagoula, Mississippi; Fairborn, Ohio; Mt.
Clements, Michigan; Boulder, Colorado; Durham, North Carolina; Bath, Maine; San Diego, California;
Albuquerque and Los Alamos, New Mexico; and Warrenville, Illinois. We lease 18 laboratory
facilities totaling 103,008 square feet, for contract-related research. Our largest laboratories
are located in Durham, North Carolina; Chicago and Geneva, Illinois; Annapolis Junction and Lanham,
Maryland; West Conshohocken, Pennsylvania; and Louisville, Colorado. Lease terms vary in length
from one to ten years, and are generally at market rates.
Aggregate average monthly base rental expense for fiscal years 2010 and 2009 was $2,647,976
and $2,005,800. We periodically enter into other lease agreements that are, in most cases,
directly chargeable to current contracts. These obligations are usually either covered by currently
available contract funds or cancelable upon termination of the related contracts. We
consider our leased space to be adequate for our current operations, and foresee no difficulties in
meeting any future space requirements.
21
|
|
|
Item 3. |
|
Legal Proceedings |
As previously reported, the Company is involved in a lawsuit related to a steam pipe explosion
that occurred on or about April 23, 2004 on a construction site at 17th Street, NW in Washington,
D.C. The Company no longer believes this legal proceeding to be material. We are not involved in
any other legal proceeding other than routine legal proceedings occurring in the ordinary course of
business. We believe that these routine legal proceedings, including the steam pipe lawsuit, are
not material to our financial condition, operating results, or cash flows.
As a government contractor, from time to time we may be subject to DCAA audits and federal
government inquiries. The federal government may suspend or debar for a period of time a federal
contractor found to have violated the False Claims Act, or who has been indicted or convicted of
violations of other federal laws. This could also result in fines or penalties. Given Alions
dependence on federal government contracts, suspension or debarment could have a material adverse
effect on our business, financial condition, operating results, and ability to meet our financial
obligations. We are not aware of any such pending federal government claims or investigations.
|
|
|
Item 4. |
|
[Removed and Reserved] |
PART II
|
|
|
Item 5. |
|
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities |
There is no established public trading market for Alions common stock. As of September 30,
2010, the ESOP Trust was the only holder of our common stock. The ESOP Trustee is independent of
the Company and its management. Consistent with its fiduciary responsibilities, the ESOP Trustee
retains an independent third party valuation firm to assist it in determining the fair market value
(share price) at which the Trustee may acquire or dispose of investments in Alion common stock.
Alions transactions with the Trust during the past two years were based on the fair market value
share prices and dates set out below.
|
|
|
|
|
|
|
Share |
|
Valuation Date |
|
Price |
|
|
|
|
|
|
September 30, 2010 |
|
$ |
26.65 |
|
March 31, 2010 |
|
$ |
28.00 |
|
September 30, 2009 |
|
$ |
34.50 |
|
March 31, 2009 |
|
$ |
34.30 |
|
In fiscal year 2010, Alion employees directed approximately $4.0 million in pre-tax salary
deferrals and rollovers to the ESOP Trust to purchase beneficial interests in Alion common stock,
approximately $2.1 million at $28.00 per share and approximately $1.9 million at $26.65 per share.
The Company did not use an underwriter and did not pay underwriter discounts or commissions. Alion
offered and sold beneficial interests in the KSOP to eligible employees under a registration
statement filed on Form S-8. There were no other sales of unregistered securities other than sales
of unregistered securities already reported by the Company in current reports on Form 8-K.
Dividend Policy
We are required to make distributions to purchase common stock from the ESOP to meet our
repurchase obligations. We do not expect to pay any dividends and the terms of our credit
agreements limit our ability to do so. We currently intend to retain future earnings, if any, to
use in operating our business. Any determination to pay dividends in the future will be at the
discretion of our Board of Directors and will depend on our operating results, our financial
condition, contractual restrictions, applicable law and other factors our Board of Directors
determines to be relevant. The Senior Secured Notes, the Senior Unsecured Notes and our revolving
credit facility prohibit us from paying dividends without consent from the respective lenders.
22
|
|
|
Item 6. |
|
Selected Financial Data |
The following table presents selected historical consolidated financial data for Alion for
each of the last five fiscal years through September 30, 2010. Read this information along with
Managements Discussion and Analysis of Financial Condition and Results of Operations and our
consolidated financial statements and related notes in this annual report. We derived our
consolidated operating data for the years ended September 30, 2010, 2009 and 2008 and our September
2010 and 2009 consolidated balance sheet data from our audited consolidated financial statements
included in this annual report. We derived our consolidated operating data for the years ended
September 30, 2007 and 2006 and our September 2008, 2007 and 2006 consolidated balance sheet data
from our consolidated financial statements not included in this annual report. Our historical
consolidated financial information may not be indicative of our future performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Financial Data of Alion Science and Technology Corporation |
|
|
|
For Years Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands, except share and per share data) |
|
Consolidated Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract revenue |
|
$ |
833,988 |
|
|
$ |
802,225 |
|
|
$ |
739,482 |
|
|
$ |
737,587 |
|
|
$ |
508,628 |
|
Direct contract expenses |
|
|
638,000 |
|
|
|
615,700 |
|
|
|
566,408 |
|
|
|
562,139 |
|
|
|
381,467 |
|
Operating expenses |
|
|
157,068 |
|
|
|
148,960 |
|
|
|
152,117 |
|
|
|
161,283 |
|
|
|
129,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
38,920 |
|
|
|
37,565 |
|
|
|
20,957 |
|
|
|
14,165 |
|
|
|
(2,305 |
) |
Interest expense (a) |
|
|
(67,613 |
) |
|
|
(55,154 |
) |
|
|
(47,382 |
) |
|
|
(51,226 |
) |
|
|
(29,691 |
) |
Net loss |
|
$ |
(15,232 |
) |
|
$ |
(17,041 |
) |
|
$ |
(25,334 |
) |
|
$ |
(42,770 |
) |
|
$ |
(31,115 |
) |
Basic and diluted loss per share |
|
$ |
(2.81 |
) |
|
$ |
(3.25 |
) |
|
$ |
(5.01 |
) |
|
$ |
(8.35 |
) |
|
$ |
(6.19 |
) |
|
|
|
|
|
|
|
|
|
Basic and diluted
weighted-average common shares
outstanding |
|
|
5,427,979 |
|
|
|
5,246,227 |
|
|
|
5,057,337 |
|
|
|
5,121,033 |
|
|
|
5,029,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data at End of Period: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net accounts receivable |
|
$ |
174,032 |
|
|
$ |
180,157 |
|
|
$ |
168,451 |
|
|
$ |
186,660 |
|
|
$ |
150,412 |
|
Total assets |
|
|
646,302 |
|
|
|
647,498 |
|
|
|
655,946 |
|
|
|
683,970 |
|
|
|
650,969 |
|
Working capital |
|
|
59,796 |
|
|
|
27,833 |
|
|
|
33,275 |
|
|
|
60,880 |
|
|
|
52,284 |
|
Current portion of long-term
debt and interest(b) |
|
|
17,217 |
|
|
|
14,428 |
|
|
|
11,932 |
|
|
|
14,541 |
|
|
|
2,816 |
|
Long-term debt, excluding
current portion(b) |
|
|
521,957 |
|
|
|
535,822 |
|
|
|
528,774 |
|
|
|
556,943 |
|
|
|
478,859 |
|
Common stock warrants |
|
|
20,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable common stock warrants |
|
|
|
|
|
|
32,717 |
|
|
|
39,996 |
|
|
|
33,610 |
|
|
|
35,234 |
|
Redeemable common stock |
|
|
150,792 |
|
|
|
187,137 |
|
|
|
200,561 |
|
|
|
200,768 |
|
|
|
213,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit |
|
|
(246,270 |
) |
|
|
(274,559 |
) |
|
|
(276,876 |
) |
|
|
(260,147 |
) |
|
|
(221,009 |
) |
Other Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
16,732 |
|
|
$ |
18,959 |
|
|
$ |
20,715 |
|
|
$ |
21,824 |
|
|
$ |
16,566 |
|
Cash flows provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
2,396 |
|
|
$ |
8,995 |
|
|
$ |
29,320 |
|
|
$ |
(5,008 |
) |
|
$ |
(15,678 |
) |
Investing activities |
|
|
(2,147 |
) |
|
|
(2,347 |
) |
|
|
(12,152 |
) |
|
|
(25,438 |
) |
|
|
(284,423 |
) |
|
|
|
(b) |
|
Interest expense includes interest payable in cash, non-cash expenses for amortizing
original issue discount and debt issue costs, and changes in the fair value of redeemable
stock warrants. |
|
(c) |
|
Debt, current and long-term, includes senior and subordinated debt and accrued interest
and is net of unamortized debt issue costs and original issue discount. |
There were no acquisitions or material dispositions in 2010, 2009 or 2008. Operating results
for all acquisitions are included in Alions results from their dates of acquisition. In July
2007, we bought substantially all the assets of LogConGroup, Inc. for $1.7 million plus up to $0.5
million in contingent consideration through 2011. In June 2006, Alion paid Anteon Corporation
approximately $221.7 million for a group of customer contracts and related workforce. In May 2006,
we acquired Micro Analysis and Design, Inc. for approximately $18.0 million. In February 2006, we
purchased BMH Associates, Inc. for approximately $26.5 million and Washington Consulting, Inc. for
$20.3 million.
23
|
|
|
Item 7. |
|
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 consolidated financial statements and related notes included in this annual
report. This discussion contains forward-looking statements about our business and operations that
involve risks and uncertainties. Future results may differ materially from those we currently
anticipate as a result of the Risk Factors described
beginning on page 14 and elsewhere in this
annual report.
About This Managements Discussion and Analysis
Our discussion provides an overview of our business and critical accounting policies; explains
year-over-year changes in operating results; describes our liquidity, capital resources and certain
other obligations; and discloses market and other risks that could affect us.
Overview
Alion provides scientific, engineering and information technology solutions and expertise to
research and develop technological solutions for problems relating to national defense, homeland
security, and energy and the environment. Our principal customers are federal government
departments and agencies and, to a lesser extent, commercial and international entities. Our
revenue increased 4.0%, 8.5%, and 0.3% for the years ended September 30, 2010, 2009 and 2008. The
following table presents summary operating results and contract backlog data for the past three
fiscal years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Revenue |
|
$ |
833,988 |
|
|
$ |
802,225 |
|
|
$ |
739,482 |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(15,232 |
) |
|
$ |
(17,041 |
) |
|
$ |
(25,334 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(In millions) |
|
Backlog: |
|
|
|
|
|
|
|
|
|
|
|
|
Funded |
|
$ |
407.8 |
|
|
$ |
376.5 |
|
|
$ |
340.5 |
|
Unfunded |
|
|
6,205.9 |
|
|
|
6,008.4 |
|
|
|
4,475.8 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,613.7 |
|
|
$ |
6,384.9 |
|
|
$ |
4,816.3 |
|
|
|
|
|
|
|
|
|
|
|
Alion contracts primarily with the federal government. We expect most of our revenue will
continue to come from U.S. Department of Defense contracts. The rest of our revenue comes from a
variety of commercial entities, and state, local and foreign government customers. The table below
shows the percentage of revenue we derived from each major customer type for each of the past three
fiscal years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
U.S. Department of Defense |
|
$ |
771,835 |
|
|
|
92.5 |
% |
|
$ |
735,304 |
|
|
|
91.7 |
% |
|
$ |
660,969 |
|
|
|
89.4 |
% |
Other Federal Civilian Agencies |
|
|
41,413 |
|
|
|
5.0 |
% |
|
|
38,474 |
|
|
|
4.8 |
% |
|
|
33,168 |
|
|
|
4.5 |
% |
Commercial and International |
|
|
20,740 |
|
|
|
2.5 |
% |
|
|
28,447 |
|
|
|
3.5 |
% |
|
|
45,345 |
|
|
|
6.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
833,988 |
|
|
|
100.0 |
% |
|
$ |
802,225 |
|
|
|
100.0 |
% |
|
$ |
739,482 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
We intend to expand our research offerings in commercial and international markets; however,
any expansion will be incremental. Commercial and international revenue amounted to approximately
2.5%, 3.5%, and 6.1% of total revenue in fiscal 2010, 2009 and 2008. Our international revenue
primarily comes from naval architecture and marine engineering services and telecommunications
research and software.
We earn our revenue by providing employee and subcontractor services. The key to generating
revenue is hiring new employees to meet customer requirements; retaining existing employees; and
deploying our staff on revenue-generating contracts. We closely monitor hiring success, attrition
trends, and direct labor utilization. Hiring enough employees with appropriate security clearances
is a key challenge in maintaining and growing our business. We try to optimize employee labor
content on our contracts because we can earn higher profits from employee services than from
subcontractor services or from other contract costs like hardware or software we re-sell to
customers. We plan to continue to grow revenue organically by capitalizing on our skilled work
force and our sophisticated solutions competencies. If we identify opportunities and we have
sufficient financial resources available, we intend to pursue strategic acquisitions.
Our mix of contract types (i.e., cost-reimbursement, fixed-price, and time-and-material)
affects our revenue and operating margins. A significant portion of our revenue comes from
services performed on cost-reimbursement contracts under which customers pay us for approved costs,
plus a fee (profit) on the work we perform. We recognize revenue on cost-reimbursement contracts
based on our actual costs plus a pro-rata share of fees earned. We also have a number of
fixed-price government and commercial contracts for which we use the percentage-of-completion
method to recognize revenue. Fixed price contracts involve higher financial risks, and in some
cases higher margins, because we must deliver specified services at a predetermined price
regardless of our actual costs. Failure to anticipate technical problems, estimate costs accurately
or control performance costs on a fixed-price contract may reduce the contracts overall profit or
cause a loss. On time-and-material contracts, customers pay us for labor and related costs at
negotiated, fixed hourly rates. We recognize time-and-material contract revenue at contractually
billable rates as we deliver labor hours and incur direct expenses.
Despite the Presidents stated goal of reducing governments use of cost-reimbursable
contracts, Alions cost-reimbursable revenue increased this year as it has for the past several
years. Because the scientific and engineering services we deliver are not by nature inherently
governmental functions, Management believes any changes aimed at reducing overall reliance on
government contractors will not materially adversely affect operations. If the government
ultimately shifts contracting activity away from the cost-reimbursement arena to fixed-price
contracting, Management believes Alion would likely benefit. All other factors being equal, the
Companys fixed price type contracts traditionally generate higher profit margins than
cost-reimbursable contracts.
The table below summarizes revenue by contract type for each of the past three fiscal years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended September 30, |
|
Contract Type |
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Cost-reimbursement |
|
$ |
636,232 |
|
|
|
76.3 |
% |
|
$ |
567,284 |
|
|
|
70.8 |
% |
|
$ |
517,760 |
|
|
|
70.0 |
% |
Fixed-price |
|
|
87,610 |
|
|
|
10.5 |
% |
|
|
91,797 |
|
|
|
11.4 |
% |
|
|
70,078 |
|
|
|
9.5 |
% |
Time-and-material |
|
|
110,146 |
|
|
|
13.2 |
% |
|
|
143,144 |
|
|
|
17.8 |
% |
|
|
151,644 |
|
|
|
20.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
833,988 |
|
|
|
100.0 |
% |
|
$ |
802,225 |
|
|
|
100.0 |
% |
|
$ |
739,482 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of Operations
There were no significant acquisitions affecting reported results for each of the past three
fiscal years, except for this years sale of Human Factors Applications Inc. (HFA) and several
Office of Naval Research (ONR) contracts. The Company sold several ONR contracts on July 9, 2010.
Consolidated results include the ONR contracts for all periods presented through the date of sale.
The Company sold its HFA subsidiary on September 30, 2010. Consolidated results include HFA for
all periods presented.
25
Year ended September 30, 2010 Compared to Year ended September 30, 2009
The table below presents selected comparative financial information for fiscal years ended
September 30, 2010 and 2009. Our discussion and analysis refers to financial information in this
table and to Alions consolidated financial statements in this annual report on Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
Selected Financial Information |
|
|
|
|
|
Revenue |
|
|
|
|
|
|
Revenue |
|
|
|
(In thousands) |
|
Total revenue |
|
$ |
833,988 |
|
|
|
|
|
|
$ |
802,225 |
|
|
|
|
|
Total direct contract costs |
|
|
638,000 |
|
|
|
76.5 |
% |
|
|
615,700 |
|
|
|
76.7 |
% |
Direct labor costs |
|
|
272,015 |
|
|
|
32.6 |
% |
|
|
272,148 |
|
|
|
33.9 |
% |
Material and subcontract costs |
|
|
348,437 |
|
|
|
41.8 |
% |
|
|
316,957 |
|
|
|
39.5 |
% |
Other direct costs |
|
|
17,548 |
|
|
|
2.1 |
% |
|
|
26,595 |
|
|
|
3.3 |
% |
Gross profit |
|
|
195,988 |
|
|
|
23.5 |
% |
|
|
186,525 |
|
|
|
23.3 |
% |
Total operating expense |
|
|
157,068 |
|
|
|
18.8 |
% |
|
|
148,960 |
|
|
|
18.6 |
% |
Major components of operating expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect expenses including facilities costs |
|
|
71,238 |
|
|
|
8.5 |
% |
|
|
68,457 |
|
|
|
8.5 |
% |
General and administrative |
|
|
70,976 |
|
|
|
8.5 |
% |
|
|
60,867 |
|
|
|
7.6 |
% |
Depreciation and amortization |
|
|
16,732 |
|
|
|
2.0 |
% |
|
|
18,959 |
|
|
|
2.4 |
% |
Income from operations |
|
$ |
38,920 |
|
|
|
4.7 |
% |
|
$ |
37,565 |
|
|
|
4.7 |
% |
Contract Revenue. Fiscal 2010 revenue increased $31.8 million (4.0%) over fiscal 2009. This
was driven by a $68.9 million (12.2%) increase in cost-reimbursable contract revenue which was
offset by a $33.0 million (23.1%) decline in time and material contract revenue and a $4.2 million
(4.6%) drop in fixed price contract revenue. Modeling and Simulation revenue increased $53.0
million (53.3%) and was more than 167% of total increased sales as government customers extended
periods of performance and directed work to Alions Information Analysis Center contracts. This
change coincided with a related increase in cost-plus contract work and a decline in
time-and-material tasking, a continuation of recent trends in our contract mix. Revenue from all
other core business areas declined. Defense Operations sales were down $8.9 million (4.4%) and
Naval Architecture and Marine Engineering revenue was essentially flat (down $2.7 million, less
than one percent). Other areas declined $9.6 million in the aggregate (7.2%). Federal government
contract revenue increased $39.5 million (5.1%) this year. Department of Defense contracts
accounted for $36.5 million of that increase. Revenue from state and local government contracts
and commercial and international customers continued to decline (down $7.7 million, more than 27%).
Alion continues to experience weak customer demand as lower state revenues and the slow pace of
economic expansion continue to limit these markets.
Direct Contract Expenses and Gross Profit. Fiscal 2010 direct contract costs increased $22.3
million (3.6%) over fiscal 2009. Direct labor costs did not change materially but declined as a
percentage of revenue. Other direct costs declined by $9.0 million while subcontractor and
material costs increased $31.5 million (up 9.9%). Increased subcontractor costs are the result of
continued reliance on Alion as a prime contractor rather overseeing the work of other contractors.
Gross profit in fiscal 2010 grew by $9.5 million (5.1%) partly as a result of recognizing
additional cost-plus revenue related to prior years indirect rate variances. Contract fee rates
were slightly lower (7.1%) this year compared to 2009 where rates reached an historical level of
7.3% overall.
Operating Expenses. Fiscal 2010 operating expenses were up $8.1 million (5.4% overall)
compared to fiscal 2009 and increased to 18.8% of current year sales. Indirect contract expenses
were up $4.6 million (12.9%) reflecting lower overall labor productivity. Rent and related costs
declined $1.8 million as the Company shed some excess space. Depreciation and amortization
expense declined by $2.2 million as charges for prior years acquired contracts began to tail off.
Fiscal 2009 general and administrative expenses included $5.2 million in credits to stock-based
compensation from changes in Alions share price and employee forfeitures of prior years phantom
stock grants. This year, Alion recognized $1.2 million in stock-based compensation credits for
changes in Alions share price. Excluding executive compensation expense (stock-based
compensation, bonuses, severance and incentive compensation), fiscal 2010 general and
administrative expenses increased $5.8 million (9.6%) over prior year expenses. The Company spent
$2.1 million in increased legal costs including contract protests and financing related activities
and $2.7 million for information technology and management reporting improvements. Other general
and administrative expense fluctuations were immaterial.
In July 2010, Alion subsidiary WCGS sold several contracts with the Office of Naval Research
for $5.0 million and recognized a gain on the transaction. In September 2010, Alion sold its HFA
subsidiary for $275 thousand and recognized a $2.4 million loss. There were no comparable
transactions in 2009. The Company classified these transactions as operating expenses (credits) as
the underlying activities of HFA and the ONR contracts were and remain part of Alions ongoing
business operations. Alion continues to perform work for the U.S. Navy and is still engaged in
providing environmental services.
26
Operating Income. The $2.6 million gain from the ONR and HFA sales partially offset
significantly higher operating expenses this year. Revenue from prior years indirect rate
variances improved operating margins by $3.2 million. As a result, this years $38.9 million in
operating income was only $1.4 million less than last years $37.6 million and operating income for
both years was 4.7% of revenue.
Other Expense. Interest income, interest expense and other aggregate non-operating expenses
for 2010 increased $12.3 million compared to 2009. 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 on our revolver ($0.7 million decrease) and modestly higher interest income ($28
thousand increase). 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. Fees and penalties associated with the September and December 2009 covenant waivers
ultimately cost Alion 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, we had to pay a $2.6 million fee (100 basis points) to the Term B Lenders on March 1,
2010.
This year Alion had $16.3 million in Senior Secured Note cash pay interest expense. This was
partially offset by not having to pay interest for more than six months for the extinguished Term B
and Subordinated Notes (savings of $11.9 million and $2.4 million respectively). In fiscal 2010,
non-cash interest expense was $7.5 million higher than it was in 2009. We faced increased charges
for PIK interest on the Senior Secured Notes ($3.3 million). Our debt issue cost amortization
charges increased $2.1 million to $7.2 million for the current year as a result of issuing our
Senior Secured Notes in March. Last year, Alion had a $7.3 million benefit from the Subordinated
Note Warrants decline in value; this year, we only had a $160 thousand credit to expense. In
fiscal 2009 we had $4.9 million in deferred non-cash Subordinated Note interest charges; we had no
comparable expense this year.
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In millions) |
|
Cash Pay Interest |
|
|
|
|
|
|
|
|
Revolver |
|
$ |
320 |
|
|
$ |
1,005 |
|
Senior Term Loan |
|
|
11,047 |
|
|
|
22,925 |
|
Senior Secured Notes |
|
|
16,303 |
|
|
|
|
|
Senior Unsecured Notes |
|
|
25,625 |
|
|
|
25,625 |
|
Subordinated Note |
|
|
|
|
|
|
2,447 |
|
Other cash pay interest and fees |
|
|
4,023 |
|
|
|
447 |
|
|
|
|
|
|
|
|
Sub-total cash pay interest |
|
|
57,318 |
|
|
|
52,449 |
|
Deferred and Non- cash Interest |
|
|
|
|
|
|
|
|
Debt issue costs and other non-cash items |
|
|
7,192 |
|
|
|
5,067 |
|
Senior Secured Notes PIK Interest |
|
|
3,263 |
|
|
|
|
|
Subordinated Note interest |
|
|
|
|
|
|
4,917 |
|
Redeemable warrants |
|
|
(160 |
) |
|
|
(7,279 |
) |
|
|
|
|
|
|
|
Sub-total non-cash interest |
|
|
10,295 |
|
|
|
2,705 |
|
|
|
|
|
|
|
|
Total interest expense |
|
$ |
67,613 |
|
|
$ |
55,154 |
|
|
|
|
|
|
|
|
Debt Extinguishment. On March 22, 2010, Alion used proceeds from issuing $310 million of
Secured Note 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.
27
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 initially 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 $1.6 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 on conversion
to C corporation status.
In the second half of this year, we recognized additional deferred tax assets and a related
valuation allowance of approximately $1.5 million; we recorded $3.4 million in deferred tax
liabilities related to goodwill amortization. This year, we recognized $37.2 million in total
current tax expense for deferred tax liabilities and $36.9 million for deferred tax assets and
valuation allowances. In 2010 our Canadian subsidiary recognized a $40 thousand tax benefit for
Canadian research and development tax credits received compared to $152 thousand in similar credits
received in 2009.
Net Loss. This years $15.2 million net loss was $1.8 million (10.6%) less than last years
because of our operating results, our significant interest expense, our $50.7 million gain on debt
extinguishment and our $37.2 million in income tax expense.
Year ended September 30, 2009 Compared to Year ended September 30, 2008
The table below presents selected comparative financial information for fiscal years ended
September 30, 2009 and 2008. Our discussion and analysis refers to financial information in this
table and to Alions consolidated financial statements in this annual report on Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
Selected Financial Information |
|
|
|
|
|
Revenue |
|
|
|
|
|
|
Revenue |
|
|
|
(In thousands) |
|
Total revenue |
|
$ |
802,225 |
|
|
|
|
|
|
$ |
739,482 |
|
|
|
|
|
Total direct contract costs |
|
|
615,700 |
|
|
|
76.7 |
% |
|
|
566,408 |
|
|
|
76.6 |
% |
Direct labor costs |
|
|
272,148 |
|
|
|
33.9 |
% |
|
|
248,409 |
|
|
|
33.6 |
% |
Material and subcontract costs |
|
|
316,957 |
|
|
|
39.5 |
% |
|
|
295,122 |
|
|
|
39.9 |
% |
Other direct costs |
|
|
26,595 |
|
|
|
3.3 |
% |
|
|
22,877 |
|
|
|
3.1 |
% |
Gross profit |
|
|
186,525 |
|
|
|
23.3 |
% |
|
|
173,074 |
|
|
|
23.4 |
% |
Total operating expense |
|
|
148,960 |
|
|
|
18.6 |
% |
|
|
152,117 |
|
|
|
20.6 |
% |
Indirect personnel and facilities |
|
|
68,457 |
|
|
|
8.5 |
% |
|
|
70,930 |
|
|
|
9.6 |
% |
General and administrative expense |
|
|
60,867 |
|
|
|
7.6 |
% |
|
|
59,484 |
|
|
|
8.0 |
% |
Depreciation and amortization |
|
|
18,959 |
|
|
|
2.4 |
% |
|
|
20,715 |
|
|
|
2.8 |
% |
Income from operations |
|
$ |
37,565 |
|
|
|
4.7 |
% |
|
$ |
20,957 |
|
|
|
2.8 |
% |
28
Contract Revenue. Fiscal year 2009 revenue increased $62.7 million (8.5%) over prior year
revenue. This was driven by a $49.5 million (9.6%) increase in cost-reimbursable contract revenue;
a $21.7 million (31.0%) increase in fixed price contract revenue; and an $8.5 million (5.6%)
decline in time and material contract revenue. Naval Architecture and Marine Engineering revenue
increased $40.3 million (12.4%) and was more than 64% of total increased sales. Modeling and
Simulation revenue increased $32.3 million (48.1%) which was more than 51% of the total sales
increase. Information Technology sales grew by $4.6 million (12.1%), about 7% of overall increased
sales. Growth in these areas in 2009 was offset
by a $16.7 million decline in Defense Operations revenue (7.6%), which was more than one-quarter of
Alions year over year change in revenue. Federal government contract revenue increased $79.6
million (11.5%) this year. Department of Defense contracts accounted for $74.3 million of that
increase. Revenue from state and local government contracts and commercial and international
customers continued to decline as customers in these areas reduced expenses in response to lower
tax revenues and weakened customer demand. Alions increased fixed price revenue is partly due to
its decision to offer its commercial business capabilities to government customers.
Direct Contract Expenses and Gross Profit. Fiscal year 2009 direct contract costs increased
$49.3 million (8.7%) over the prior year. Direct costs as a percentage of revenue did not
materially change. Direct labor and other costs grew by nearly 10% while subcontract and material
costs only increased by 7.4% reflecting increased work as a prime contractor rather than as a
subcontractor. Gross profit in 2009 grew at a slightly lower rate (7.8%) than revenue did while
contract fee rates increased to historical levels (7.3% overall) compared to the lower levels seen
the prior year (5.6%).
Operating Expenses. Fiscal year 2009 operating expenses were down $3.1 million (2.1%
overall) compared to the prior year and declined to 18.6% of current year sales. Indirect contract
expenses were down 11.4%, almost $4.6 million, as a result of higher labor productivity and reduced
information technology expenses. Higher rent and related costs ($2.1 million increase) were driven
by expanded use of existing space, declining sublease income and modest escalations in lease costs.
Amortization expense declined by almost $2.0 million as charges for prior years acquired
contracts began to tail off. Credits to stock-based compensation expense in fiscal 2009 were the
result of forfeitures of prior years phantom stock grants. Excluding stock-based compensation
adjustments, fiscal 2009 general and administrative expenses increased $7.1 million (12.1%).
Aggregate executive compensation expenses increased approximately $2.8 million: $5.5 million for
bonuses and long-term incentive programs was offset by $2.7 million in reduced executive severance
costs. The Company expanded its business development and IDIQ contract vehicle program management
office increasing current year costs by $2.4 million. The Company invested an additional $1.9
million in 2009 to expand and improve its information technology and management systems. Reduced
litigation expenses ($1.2 million) offset fiscal 2009 costs to upgrade corporate finance and
accounting functions and consolidate offices in Virginia.
Operating Income. Fiscal year 2009 operating income of $37.6 million was $16.6 million
(79.2%) greater than prior year operating income due to higher contract fee margins and reduced
operating expenses. Operating income was 4.7% of revenue, compared to 2.8% of revenue the prior
year.
29
Other Expense. Other expense for fiscal year 2009 increased $8.5 million (18.3%) over last
year almost solely due to increases in cash interest expense. Amendments to the Subordinated Note
in 2008 increased total interest expense and interest payable in cash ($2.4 million). The higher
interest rate on the Term B Senior Credit Agreement cost the Company $6.5 million more in interest
in 2009 (39.3% increase) despite slightly lower interest expense for the revolving credit facility
due to lower average balances. Reduced non-cash interest expense from the decline in the value of
outstanding warrants was offset by increased expenses for amortizing prior year debt issue costs
and loan amendment fees. In fiscal 2008, Alion recognized a $750 thousand gain on the sale of
non-operating assets compared to a $19 thousand loss in 2009. In 2009, the Company recognized $402
thousand in other income for de-recognition of acquisition-related liabilities.
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In millions) |
|
Cash Pay Interest |
|
|
|
|
|
|
|
|
Revolver |
|
$ |
1,005 |
|
|
$ |
1,884 |
|
Senior Term Loan |
|
|
22,925 |
|
|
|
16,453 |
|
Senior Unsecured Notes |
|
|
25,625 |
|
|
|
25,625 |
|
Subordinated Note |
|
|
2,447 |
|
|
|
|
|
Other cash pay interest and fees |
|
|
447 |
|
|
|
426 |
|
|
|
|
|
|
|
|
Sub-total cash pay interest |
|
|
52,449 |
|
|
|
44,388 |
|
Deferred and Non-cash Interest |
|
|
|
|
|
|
|
|
Debt issue costs and other non-cash items |
|
|
5,067 |
|
|
|
1,766 |
|
Subordinated Note interest |
|
|
4,917 |
|
|
|
3,978 |
|
Redeemable warrants |
|
|
(7,279 |
) |
|
|
(2,750 |
) |
|
|
|
|
|
|
|
Sub-total non-cash interest |
|
|
2,705 |
|
|
|
2,994 |
|
|
|
|
|
|
|
|
Total interest expense |
|
$ |
55,154 |
|
|
$ |
47,382 |
|
|
|
|
|
|
|
|
Income Tax Expense. Throughout 2009 and 2008 Alion was a qualified subchapter S corporation
and all its wholly-owned domestic subsidiaries were qualified subchapter S subsidiaries disregarded
for federal income tax purposes. Some states do not recognize the effect of these elections or
Alions S-corporation status. The Companys Canadian subsidiary, Alion Science and Technology
(Canada) Corporation, accrued a tax liability, as required. In fiscal year 2009, Alion recognized
a $152 thousand tax benefit for Canadian research and development tax credits received compared to
$7 thousand in state income tax expense in 2008.
Net Loss. The 2009 $17.0 million net loss was $8.3 million (32.7%) less than the prior years
loss due to increased sales, improved contract margins and lower operating expenses which offset
higher borrowing costs.
Liquidity and Capital Resources
The Company requires liquidity to service its debt, invest in capital assets, and fund working
capital and acquisitions. Our principal working capital need is funding accounts receivable, which
increase as our business grows. We are funding our current business with cash from operating
activities and access to our revolving credit facility. We intend to fund future operations in a
similar fashion.
Cash Flows.
Alion continued to sustain losses; $15.2 million after taxes in fiscal 2010 versus $17.0
million in 2009. This year we generated approximately $2.4 million from operations including $4.7
million from selling some contracts and our HFA subsidiary. We received $4.5 million in cash from
the sale of certain contracts we had with the Office of Naval Research and an additional $200
thousand from our HFA sale. This year, we experienced significant fluctuations in both cash
activities and non-cash charges. Although debt extinguishment contributed $50.7 million to our
bottom line and offset the $37.2 million we recognized for income taxes, these were non-cash
transactions. The cash flow effects of issuing new debt and extinguishing our former debt are
reported in our financing activities. Current year non-cash charges for depreciation ($16.8
million) declined $2.3 million from last year. Non-cash charges for compensation increased $4.8
million ($3.3 million in current year expense versus a $1.5 million prior year credit). Non-cash
debt-related expenses including interest accruals climbed to $18.5 million in 2010. Last year our
redeemable common stock warrants declined by $7.3 million which reduced non-cash debt-related
expenses for 2009 to less than $300 thousand. This year we had higher non-cash debt-related
expenses due to higher charges for amortizing the cost of our newly-issued Senior Secured Notes and
increased interest expense overall.
Last year subcontractor and other expense accruals for which Alion had yet to receive invoices
generated $12.7 million more in cash than the $1.6 million provided this year. We used
approximately $16.1 million to pay invoices which we funded in part from increased collection of
receivables. Last year we funded $12.7 million of billed and unbilled receivables and $4.3 million
in other assets. This year operating cash flow declined by $6.6 million compared to last year
because of increased vendor payments. 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 $2.5 million in cash; this year that increased $5.7 million to $8.2 million.
30
Alion collected $849.8 million in receivables in fiscal 2010, $15.3 million more than the
$834.0 million in revenue recognized. Prior year collections were $801.2 million. This is the
second year in a row that our improved collections led days sales outstanding (DSO) to decline.
At September 30, 2010 DSO had dropped to 76.2 days, a slight increase over our third quarter
performance and 5.8 days better than last years 82.0 days outstanding. (We determine DSO based
on trailing twelve month revenue and net receivables.)
Our collections efforts led billed receivables to decline by $13.9 million year over year.
Our unbilled receivables increased by $7.2 million over last year largely attributable to variance
revenue recognized late in the fourth quarter that the Company expects to bill and collect in the
first quarter of fiscal 2011. Unbilled accounts receivable continue at significant levels and are 47% of total accounts
receivable. Currently billable amounts increased by $12.9 million. At risk receivables declined
by $11.4 million as we achieved progress in obtaining previously delayed contract funding.
Contract retainages and rate variances increased by $6.3 million consistent with fourth quarter
variance revenue recognized. Increased unbilled balances from obtaining contract funding 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 expenditure levels this year were unchanged from last year. There were no significant
earn outs or asset sales.
Cash management efforts continued to hold total year-to-date revolver borrowing activity to $84.2
million. Our revolver borrowing this year is down $420.7 million from $504.9 million in 2009
activity. From October 2009 through March 2010 our highest revolver balance was $12.4 million and
our weighted average utilized balance was less than $1.1 million. We did not use our revolver at
all from April through September 2010 which caused our average utilized revolver balance to
decrease to $509 thousand for the full year.
Alions re-financing transactions were our 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.
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. At year end, we had $26.6 million
in available cash and access to our $25 million revolving credit facility which had no outstanding
balance.
Share redemptions from the ESOP Trust and loans to the ESOP Trust were not materially
different year over year. However, employee investments in Alion common stock continued to decline
by almost $900 thousand this year. Last year, we received all employee deferrals within the fiscal
year and $2.8 million in prior year deferrals. This year, we only received the mid-year employee
salary deferrals invested in Alion common stock. We received the September salary deferrals at the
beginning of fiscal 2011.
The Company cannot predict with any degree of accuracy the extent to which share re-purchases
for distribution and diversification demands will increase in future years. However, as more
employees meet statutory and Plan-specific age and length of service requirements, potential
distribution and diversification demands are likely to increase. These demands can increase
further with any increase in the price of a share of Alion common stock. While a decline in the
price of a share of Alion common stock could reduce the value of each individual Plan participants
beneficial interest, such a potential price decline could be offset by increased distribution and
diversification requests and thus might not reduce the aggregate value of future demands on the
Companys cash. The Company attempts to monitor future potential impacts through reliance in part
on internal and external financial models that incorporate Plan census data along with financial
inputs intended to simulate changes in Alions share price.
Based on our existing long-term financing, our cash on hand, and our continuing cash management
efforts we believe we will have sufficient cash from operations and the revolver to meet
obligations over the next twenty four months. Alion retains the ability to restrict or defer
certain types of cash payments that in the past caused the Company to fail to comply with certain
prior debt covenants.
31
Cash flow effects and risks associated with equity-related obligations
Changes in the price of a share of Alion common stock affect cash outflows for ESOP share
redemptions. Management is unable to forecast the share price the ESOP Trustee will determine in
future valuations. Because future share prices may differ from the current share price, the
Company is unable to forecast share redemption outflows. Current financial information includes
the effects of the most recent ESOP Trust transactions. The next regularly scheduled valuation
period ends March 2011. Interest rates, market-based factors and volatility, as well as the
Companys financial results will affect the future value of a share of Alion common stock.
After each semi-annual valuation period, the ESOP Plan permits former employees and
beneficiaries to request distribution of their vested ESOP account balances. Consistent with the
terms of the Plan, the Company intends to pay distribution requests in five annual installments and
to defer initial payments as permitted. The Plan allows the Company to defer initial installment
payments for five years for former employees who are not disabled, deceased or retired.
Discussion of Debt Structure
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 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 deemed or
actually drawn as of September 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, 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, superior to Secured Note holders rights.
Guarantees. The Companys Credit Agreement obligations are guaranteed by the Companys
subsidiaries, IPS, CATI, METI, JJMA, BMH, WCI, WCGS, MA&D and Alion Canada (US) Corporation. These
subsidiaries also guarantee all the Companys Secured Note and Unsecured Note obligations
(described below). Previously, only 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 8.5%. The Eurodollar interest rate is 600 basis points plus a 2.5% minimum
interest rate. The alternate base rate is 500 basis points plus a 3.5% 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 $235 thousand in Revolver commitment fees for fiscal year 2010.
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 September 30,
2010. The Credit Agreement also requires the Company to pay an annual agents fee.
32
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 |
The Credit Agreement defines Consolidated EBITDA as: (a) net income (or loss), as defined in the
Credit Agreement; 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 the 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.
Senior 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 Alions 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, 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, 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.
Covenants. As of September 30, 2010, the Company was in compliance with the covenants set
forth in the Companys Indenture with respect to the Companys 12% Senior Secured Notes (Secured
Note Indenture). The Companys Indenture does not contain any financial covenants.
The Company is subject to a covenant under its Secured Note Indenture that restricts the
Companys ability to incur additional indebtedness. The Company and its Restricted Subsidiaries
are prohibited from issuing, incurring, assuming, guaranteeing, and otherwise becoming liable for
any Indebtedness as defined under the Secured Note Indenture unless the Companys ratio of Adjusted
EBITDA to Consolidated Interest Expense (each as defined in the Indenture) exceeds 2.0 to 1.0.
Even if the Companys Adjusted EBITDA to Consolidated Interest Expense ratio does not exceed 2.0 to
1.0, the Company may incur other permitted indebtedness which includes:
|
|
|
Indebtedness incurred pursuant to the Credit Agreement and certain other contracts up to
$25 million less principal repayments made under that indebtedness; |
|
|
|
Permitted inter-company indebtedness; |
|
|
|
The Companys 12% notes ; |
|
|
|
Indebtedness pre-existing the issuance of the Companys 12% notes; |
|
|
|
Permitted Indebtedness of acquired subsidiaries;
|
33
|
|
|
Permitted refinancing Indebtedness; |
|
|
|
Indebtedness under hedging agreements; |
|
|
|
Performance, bid, appeal and surety bonds and completion guarantees; |
|
|
|
Ordinary course insufficient funds coverage; |
|
|
|
Guarantees in connection with permitted refinancing indebtedness; |
|
|
|
Indebtedness of non-U.S. subsidiaries incurred for working capital purposes; |
|
|
|
Indebtedness incurred for capital expenditure purposes and indebtedness for capital and
synthetic leases not exceeding in the aggregate $25 million and 2.5% of the Companys Total
Assets as defined in the Indenture; |
|
|
|
Permitted subordinated indebtedness of the Company or any Restricted Subsidiary incurred
to finance a permitted acquisition, certain permitted transactions involving the ESOP and
refinancing indebtedness of acquired non-U.S. subsidiaries in an amount not exceeding in
the aggregate $35 million; |
|
|
|
Reimbursement obligations with regard to letters of credit; |
|
|
|
Certain agreements in connection with the acquisition of a business as long as the
liabilities incurred in connection therewith are not reflected on the Companys balance
sheet; |
|
|
|
Certain deferred compensation agreements; and |
|
|
|
Certain other indebtedness not exceeding $20 million. |
The Company is subject to a covenant under its Secured Note Indenture that restricts the
Companys ability to declare and pay any cash dividend or other distribution with regard to any
equity interest in the Company, make any repurchase or redemption of any equity interest of the
Company, make any repurchase or redemption of subordinated indebtedness, and make certain
investments, except that the Company may make such payments in limited amounts if the Companys
ratio of Adjusted EBITDA to Consolidated Interest Expense exceeds 2.0 to 1.0 subject to certain
limitations. Even if the Companys Adjusted EBITDA to Consolidated Interest Expense does not
exceed 2.0 to 1.0, the Company may make or pay:
|
|
|
Restricted Payments out of substantially concurrent contributions of equity to the
Company and substantially concurrent incurrences of permitted indebtedness; |
|
|
|
Certain limited and permitted dividends; |
|
|
|
Certain repurchases of the Companys equity securities deemed to occur upon exercise of
stock options or warrants; |
|
|
|
Cash payments in lieu of the issuance of fractional shares in connection with the
exercise of warrants, options or other securities convertible into or exchangeable for the
Companys equity securities; |
|
|
|
The required premium payable on the Senior Unsecured Notes in connection with a change
of control of the Company; |
|
|
|
Certain permitted inter-company subordinated obligations; |
|
|
|
Certain repurchases and redemptions of subordination obligations of the Company or a
Subsidiary Guarantor from Net Available Cash (as defined in the Secured Note Indenture); |
|
|
|
Repurchases of subordinated obligations in connection with an asset sale to the extent
required by the Secured Note Indenture; |
|
|
|
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 the Companys ability to engage in other transactions
including restricting the ability of subsidiaries to make distributions and pay dividends to
parents, merging or selling all or substantially all of the Companys assets, making certain
issuances of Subsidiary equity securities, engaging in certain transactions with affiliates,
incurring liens, entering into sale lease-back transactions and engaging in business unrelated to
the Companys business at the time the Company issued the Senior Unsecured Notes.
34
Events of Default. The Secured Note Indenture contains customary events of default,
including:
|
|
|
uncured covenant breaches; |
|
|
|
default under an acceleration of certain other debt exceeding $30 million; |
|
|
|
|
certain bankruptcy and insolvency events; |
|
|
|
a judgment for payment in excess of $30 million entered against the Company or any
material subsidiary that remains outstanding for a period of 60 days and is not discharged,
waived or stayed; |
|
|
|
failure of any guarantee of the Senior Unsecured Notes to be in effect or the denial or
disaffirmation by any subsidiary guarantor 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 repurchase its notes in cash for 101% of principal plus accrued and unpaid interest. Any of
the following events constitutes a change in control:
|
|
|
subject to certain exceptions, a person, other than the ESOP Trust, is or becomes the
beneficial owner, directly or indirectly, of more than 35% of the total voting power or
voting stock of Alion; |
|
|
|
individuals who constituted Alions board of directors on the date the Senior Secured
Notes were issued, cease for any reason to constitute a majority of the Companys board of
directors; |
|
|
|
the adoption of a plan relating to Alions liquidation or dissolution; and |
|
|
|
subject to certain exceptions, the merger or consolidation of the Company with or into
another person or the merger of another person with or into the Company, or the sale of all
or substantially all the assets of Alion to another person. |
Optional Redemption. Prior to April 1, 2013, not more than once in any twelve month period, 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 |
% |
Exchange Offer; Registration Rights. The Company filed a registration statement with the SEC
offering to exchange the Senior Secured Notes for publicly registered notes. The registration
statement was declared effective July 30, 2010; the exchange offer closed September 10, 2010; all
outstanding notes were exchanged for publicly registered notes with the same terms.
Senior Unsecured Notes
On February 8, 2007, Alion issued and sold $250.0 million of its private 10.25% senior
unsecured notes due February 1, 2015 (Senior Unsecured Notes) to Credit Suisse, which informed the
Company it had resold most of the notes to qualified institutional buyers. On June 20, 2007, Alion
exchanged its private Senior Unsecured Notes for publicly tradable Senior Unsecured Notes with the
same terms.
Interest and Fees. The Senior Unsecured Notes bear interest at 10.25% per year, payable
semi-annually in arrears on February 1 and August 1. Alion pays interest to holders of record as
of the immediately preceding January 15 and July 15. The Company must pay interest on overdue
principal or interest at 11.25% per annum to the extent lawful.
35
Covenants. As of September 30, 2009, the Company was in compliance with the covenants set
forth in the Companys Indenture with respect to the Companys 10.25% Senior Unsecured Notes
(Unsecured Note Indenture). The Companys Unsecured Note Indenture does not contain any
financial covenants.
The Company is subject to a covenant under its Unsecured Note Indenture that restricts the
Companys ability to incur additional indebtedness. The Company and its Restricted Subsidiaries
are prohibited from issuing, incurring, assuming, guaranteeing, and otherwise becoming liable for
any Indebtedness as defined under the Unsecured Note Indenture unless the Companys ratio of
Adjusted EBITDA to Consolidated Interest Expense (each as defined in the Indenture) exceeds 2.0 to
1.0. Even if the Companys Adjusted EBITDA to Consolidated Interest Expense ratio does not exceed
2.0 to 1.0, the Company may incur other permitted indebtedness which includes:
|
|
|
Indebtedness incurred pursuant to the Senior Credit Facility and certain other contracts
up to $360 million less principal repayments made under that indebtedness; |
|
|
|
Permitted inter-company indebtedness; |
|
|
|
The Companys 10.25% notes ; |
|
|
|
Indebtedness pre-existing the issuance of the Companys 10.25% notes; |
|
|
|
Permitted Indebtedness of acquired subsidiaries; |
|
|
|
Permitted refinancing Indebtedness; |
|
|
|
Indebtedness under hedging agreements; |
|
|
|
Performance, bid, appeal and surety bonds and completion guarantees; |
|
|
|
Ordinary course insufficient funds coverage; |
|
|
|
Guarantees in connection with permitted refinancing indebtedness; |
|
|
|
Indebtedness of non-U.S. subsidiaries incurred for working capital purposes; |
|
|
|
Indebtedness incurred for capital expenditure purposes and indebtedness for capital and
synthetic leases not exceeding in the aggregate $25 million and 2.5% of the Companys Total
Assets as defined in the Indenture; |
|
|
|
Permitted subordinated indebtedness of the Company or any Restricted Subsidiary incurred
to finance a permitted acquisition, certain permitted transactions involving the ESOP and
refinancing indebtedness of acquired non-U.S. subsidiaries in an amount not exceeding in
the aggregate $35 million; |
|
|
|
Reimbursement obligations with regard to letters of credit; |
|
|
|
Certain agreements in connection with the acquisition of a business as long as the
liabilities incurred in connection therewith are not reflected on the Companys balance
sheet; |
|
|
|
Certain deferred compensation agreements; and |
|
|
|
Certain other indebtedness not exceeding $35 million. |
The Company is subject to a covenant under its Unsecured Note Indenture that restricts the
Companys ability to declare and pay any cash dividend or other distribution with regard to any
equity interest in the Company, make any repurchase or redemption of any equity interest of the
Company, make any repurchase or redemption of subordinated indebtedness, and make certain
investments, except that the Company may make such payments in limited amounts if the Companys
ratio of Adjusted EBITDA to Consolidated Interest Expense exceeds 2.0 to 1.0 subject to certain
limitations. Even if the Companys Adjusted EBITDA to Consolidated Interest Expense does not
exceed 2.0 to 1.0, the Company may make or pay:
|
|
|
Restricted Payments out of substantially concurrent contributions of equity to the
Company and substantially concurrent incurrences of permitted indebtedness; |
|
|
|
Certain limited and permitted dividends; |
|
|
|
Certain repurchases of the Companys equity securities deemed to occur upon exercise of
stock options or warrants; |
|
|
|
|
Cash payments in lieu of the issuance of fractional shares in connection with the
exercise of warrants, options or other securities convertible into or exchangeable for the
Companys equity securities; |
|
|
|
The required premium payable on the Senior Unsecured Notes in connection with a change
of control of the Company; |
|
|
|
Certain permitted inter-company subordinated obligations; |
36
|
|
|
Certain repurchases and redemptions of subordination obligations of the Company or a
Subsidiary Guarantor from Net Available Cash (as defined in the Indenture); |
|
|
|
Repurchases of subordinated obligations in connection with an asset sale to the extent
required by the Indenture; |
|
|
|
The redemption or repurchase for value of any Company equity securities for former
Company employees who were also former Joint Spectrum Center employees after voluntary or
involuntary termination of employment with the Company; |
|
|
|
Certain permitted transactions with the ESOP not exceeding $25 million in the aggregate;
and |
|
|
|
Certain other payments not exceeding $30 million in the aggregate. |
The Unsecured Note Indenture restricts the Companys ability to engage in other transactions
including restricting the ability of subsidiaries to make distributions and pay dividends to
parents, merging or selling all or substantially all of the Companys assets, making certain
issuances of Subsidiary equity securities, engaging in certain transactions with affiliates,
incurring liens, entering into sale lease-back transactions and engaging in business unrelated to
the Companys business at the time the Company issued the Senior Unsecured Notes.
Events of Default. The Indenture contains customary events of default, including:
|
|
|
uncured covenant breaches; |
|
|
|
default under an acceleration of certain other debt exceeding $30 million; |
|
|
|
certain bankruptcy and insolvency events; |
|
|
|
a judgment for payment in excess of $30 million entered against the Company or any
material subsidiary that remains outstanding for a period of 60 days and is not discharged,
waived or stayed; and |
|
|
|
failure of any guarantee of the Senior Unsecured Notes to be in effect or the denial or
disaffirmation by any subsidiary guarantor of its guaranty obligations. |
Change of Control. Upon a change in control, each Senior Unsecured Note holder has the right
to require Alion repurchase its notes in cash for 101% of principal plus accrued and unpaid
interest. Any of the following events constitutes a change in control:
|
|
|
subject to certain exceptions, a person, other than the ESOP Trust, is or becomes the
beneficial owner, directly or indirectly, of more than 35% of the total voting power or
voting stock of Alion; |
|
|
|
individuals who constituted Alions board of directors on the date the Senior Unsecured
Notes were issued, cease for any reason to constitute a majority of the Companys board of
directors; |
|
|
|
the adoption of a plan relating to Alions liquidation or dissolution; and |
|
|
|
subject to certain exceptions, the merger or consolidation of the Company with or into
another person or the merger of another person with or into the Company, or the sale of all
or substantially all the assets of Alion to another person. |
Optional Redemption. Prior to February 1, 2011, the Company may redeem all, but not less than
all, of the Senior Unsecured Notes at a redemption price equal to 100% of the principal amount of
the Senior Unsecured Notes plus accrued and unpaid interest to the redemption date plus an
applicable make-whole premium as of the redemption date.
On or after February 1, 2011, the Company may redeem all or a portion of the Senior Unsecured
Notes at the redemption prices set forth below (expressed in percentages of principal amount on the
redemption date), plus accrued and unpaid interest to the redemption date, if redeemed during the
12-month period commencing on February 1 of the years set forth below:
|
|
|
|
|
Period |
|
Redemption Price |
|
2011 |
|
|
105.125 |
% |
2012 |
|
|
102.563 |
% |
2013 and thereafter |
|
|
100.000 |
% |
Exchange Offer; Registration Rights. The Company filed a registration statement with the SEC
offering to exchange the Senior Unsecured Notes for publicly registered notes. The registration
statement was declared effective May 10, 2007; the exchange offer closed June 20, 2007; all
outstanding notes were exchanged for publicly registered notes with the same terms.
37
During
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5-Fiscal Year Period ($ In thousands) |
|
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015 |
|
Bank revolving credit facility |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Interest(1) |
|
$ |
444 |
|
|
$ |
445 |
|
|
$ |
444 |
|
|
$ |
396 |
|
|
$ |
|
|
Senior Secured Notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Interest |
|
|
31,223 |
|
|
|
31,850 |
|
|
|
32,490 |
|
|
|
33,144 |
|
|
|
16,821 |
|
- Principal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
339,788 |
|
Senior Unsecured Notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Interest |
|
|
25,625 |
|
|
|
25,625 |
|
|
|
25,625 |
|
|
|
25,625 |
|
|
|
12,813 |
|
- Principal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash pay interest |
|
|
57,292 |
|
|
|
57,920 |
|
|
|
58,559 |
|
|
|
59,165 |
|
|
|
29,634 |
|
Total cash pay principal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
589,788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
57,292 |
|
|
$ |
57,920 |
|
|
$ |
58,559 |
|
|
$ |
59,165 |
|
|
$ |
619,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Alion anticipates it will maintain its $25.0 million revolving credit facility to meet
working capital needs. The present revolving credit facility matures in August 2014. The
Company estimates the average utilized revolver balance will be minimal. Interest expense
represents estimated fees for the $25.0 million revolving credit facilitys unused balance. |
Contingent Obligations
Earn-outs
The Company has one remaining earn-out commitment arising from its July 2007 LogCon Group
acquisition. The maximum potential earn out is $100 thousand through 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
KSOP share repurchases and diversifications will affect Alions cash flow. Through September
2010, Alion spent a cumulative total of approximately $80.9 million to repurchase shares of its
common stock to satisfy ESOP distribution requests from former employees and Plan beneficiaries.
In 2008, the Company changed its prior practice of immediately paying out all distribution requests
in full and 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 and to
meet certain debt covenant restrictions Management estimates that cash flow benefits from using a
five-year payout cycle will diminish over the next two years. The table below lists current and
prior year share repurchases.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
|
|
|
|
Total Value |
|
Date |
|
Repurchased |
|
|
Share Price |
|
|
Purchased |
|
|
|
|
|
|
|
|
|
|
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 |
|
|
$ |
,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 |
|
|
$ |
1,760 |
|
July 2010 |
|
|
145 |
|
|
$ |
28.00 |
|
|
$ |
4 |
|
August 2010 |
|
|
89 |
|
|
$ |
28.00 |
|
|
$ |
2 |
|
September 2010 |
|
|
209 |
|
|
$ |
28.00 |
|
|
$ |
6 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
527,749 |
|
|
|
|
|
|
$ |
18,511 |
|
|
|
|
|
|
|
|
|
|
|
|
38
Alion management believes cash flow from operations and cash available under current and
anticipated revolving credit facilities should provide sufficient capital to fulfill current
business plans and fund working capital needs for at least the next 24 months. Management believes
that because Alion has been able to manage its obligations without having had to access its
revolving credit facility for the past six months that over the next 24 four months the Company
will likely have access to its revolver as and when necessary. Because the financial covenants in
Alions existing debt agreements are less restrictive than the principal financial covenants in the
Term B Senior Credit Agreement were, Management believes it is more likely than not that the
Company will be able to meet its financial covenants and maintain access to its revolver,
Alion intends to focus on organic growth, margin improvement and process improvement.
Management expects to continue improving cash flow from operations through careful cash management
and more efficient business practices overall. Although Alion expects to have positive cash flow
from operations, it will need to generate significant additional revenue beyond current levels and
earn net income in order to repay principal and interest on the Senior Secured Notes and Senior
Unsecured Notes, and to meet ESOP repurchase and diversification obligations.
The indentures governing the Senior Secured Notes and the Senior Unsecured Notes allow Alion
to make certain permitted acquisitions, and if the Company identifies suitable candidates it
intends to use available financing to make permitted acquisitions. Alion will need to refinance
some, if not all, its senior debt prior to maturity in November 2014 and February 2015. The Company
is uncertain whether it will be able to refinance these obligations or if refinancing terms will be
favorable. If we are unable to refinance our senior debt, we will not have sufficient cash from
operations to satisfy all our obligations. If plans or assumptions change, if assumptions prove
inaccurate, if we consummate 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 flow from operations prove insufficient, we may need to obtain
additional financing sooner than we expect. We intend only to enter into new financing or
refinancing Management considers advantageous. However, despite the improving state of the credit
markets, we cannot be certain sources of financing will be available in the future, or, if
available, that financing terms would be favorable.
The following table summarizes the contractual and other long-term debt obligations the
Company is legally obligated to pay. The table does not include income tax obligations as we do
not expect to have to pay taxes for at least the next five years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Fiscal Year (In thousands) |
|
|
|
Total |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015 |
|
|
Thereafter |
|
Contractual Obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt including
principal and interest |
|
$ |
852,358 |
|
|
$ |
57,292 |
|
|
$ |
57,920 |
|
|
$ |
58,559 |
|
|
$ |
59,165 |
|
|
$ |
619,422 |
|
|
$ |
|
|
Lease Obligations |
|
|
129,251 |
|
|
|
27,676 |
|
|
|
24,081 |
|
|
|
22,098 |
|
|
|
15,443 |
|
|
|
15,292 |
|
|
|
24,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual
obligations |
|
$ |
981,609 |
|
|
$ |
84,968 |
|
|
$ |
82,001 |
|
|
$ |
80,657 |
|
|
$ |
74,608 |
|
|
$ |
634,714 |
|
|
$ |
24,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Financing Arrangements
The Company accounts for operating leases entered into in the routine course of business in
accordance with ASC 840 Leases. The Company has no off-balance sheet financing arrangements other
than its operating leases. The Company has no relationship with any unconsolidated or special
purpose entity, nor has it issued any guarantees.
Summary of Critical Accounting Policies
Revenue Recognition
Alions revenue comes from delivering technology services under three types of contracts.
Some contracts provide for reimbursement of costs plus fees; others are fixed-price or
time-and-material type contracts. The Company 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.
39
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 contract in
the period 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 contracts are subject to periodic funding by the contracting agency
customer. A customer may fund a contract at inception or incrementally throughout the period of
performance as services are provided. If Alion determines contract funding is not probable, it
defers revenue recognition until realization is probable. Federal government contract costs are
subject to government audit and adjustment via negotiation with government representatives. The
government considers Alion a major contractor and maintains an office on site to perform various
audits. The government has audited the Companys claimed costs through fiscal year 2004. Indirect
rates have been negotiated and settled through fiscal year 2004. Settlement had no material
adverse effect on the Companys operating results or cash flows. DCAA is currently auditing
the Companys indirect cost proposals for fiscal 2005 and 2006. The Company has submitted incurred
cost proposals for all fiscal years through 2009 and plans to submit its current year proposal in
March 2011. The Company has recorded revenue on federal government contracts in amounts it expects
to realize.
Alion recognizes revenue on unpriced change orders as it incurs expenses and only to the
extent it is probable it will recover such costs. The Company recognizes revenue in excess of costs
on unpriced change orders only when management can also estimate beyond a reasonable doubt the
amount of excess and experience provides a sufficient basis for recognition. Alion recognizes
revenue on claims as expenses are incurred only to the extent it is probable that it will recover
such costs and can reliably estimate the amount it will recover.
The Company generates software-related revenue from licensing software and providing services.
Because professional services are essential to the functionality of the solutions Alion sells, the
Company applies the percentage of completion method in Accounting Standards Codification (ASC) 605
Revenue Recognition to recognize software-related revenue.
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. From September 2008 through September
2010, Alion recognized $50 thousand in additional goodwill for contingent consideration from a
prior acquisition and allocated this change based on current reporting unit structure.
40
The Company performs its own independent analysis to determine whether goodwill is potentially
impaired. Management 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. It compares forecast
revenue to contract backlog and proposal backlog to assess the probability of future contracts and
revenue and to evaluate the recoverability of goodwill. September 2010 contract backlog was
approximately eight times trailing twelve month revenue.
Alions cash flow analysis depends on several significant management inputs and assumptions.
Management uses observable inputs, rates and assumptions 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 7.5 to a high of 11.1, with a median value of 8.1. Market multiples for
trailing twelve month revenue ranged from a low of 0.61 to a high of 0.76, with a median value of
0.71. 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. Consistent with industry norms,
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 9.0 to a high of 12.7, with a median value of 10.4. Prior year 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. The prior year weighted average cost of capital rate was 12.5% 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 to evaluate goodwill in
prior periods. 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, 2010 would have produced a corresponding approximate 5% decrease or increase in
estimated enterprise value. At September 30, 2010, market-multiple based enterprise value was not
materially different from discounted cash flow enterprise value.
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 2010 and concluded no goodwill impairment existed as of September 30, 2010. As of September
30, 2010, the estimated fair value of each reporting unit substantially exceeded its carrying value
and enterprise value. Given the results of the Companys impairment testing under step one; it is
unlikely that a reasonably likely change in assumptions would have triggered an impairment. 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 significant events in the year ended September 30, 2010, that indicated
impairment to Alions $398.9 million of goodwill as of September 30, 2010.
Alion amortizes intangible assets as it consumes their economic benefit over the assets
estimated useful lives. As of September 30, 2010, the Company had a recorded net intangible asset
balance of approximately $17.7 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 |
41
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 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 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. The Company decreased its liability for
redeemable common stock by approximately $41.1 million for the year ended September 30, 2010. The
accumulated deficit at September 30, 2010 included $49.1 million for changes in the Companys share
redemption liability. Outstanding redeemable common stock had an aggregate fair value of
approximately $150.8 million as of September 30, 2010.
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.
42
|
|
|
Item 7A. |
|
Quantitative and Qualitative Disclosures About Market Risk |
Interest rate risk
We face interest rate risk for periodic borrowings on our $25.0 million senior revolving
credit facility. Outstanding balances, if any, bear interest at a variable rate based on Credit
Suisses prime rate plus a maximum spread of 500 basis points. Variable rates increase the risk
that interest charges could increase materially if both market interest rates and outstanding
balances were to increase. The Senior Secured Notes and the Senior Unsecured Notes are fixed-rate
obligations. Other than the current revolving credit facility, Alion has currently has no variable
rate debt. We do not use derivatives for trading purposes. We invest excess cash in short-term,
investment grade, and interest-bearing securities.
Foreign currency risk
International contract expenses and revenues are U.S. dollar-denominated. Alion does not
believe operations are subject to material risks from currency fluctuations.
Risk associated with value of Alion common stock
Changes in the fair market value of Alions stock affect the Companys estimated KSOP share
repurchase obligations and stock-based compensation obligations for stock appreciation rights.
Several factors affect the timing and amount of these obligations, including: the number of
employees who seek to redeem shares of Alion stock following termination of employment, and the
number of employees who exercise stock appreciation rights during any particular time period.
43
|
|
|
Item 8. |
|
Financial Statements and Supplementary Data |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements of Alion Science and Technology Corporation
|
|
|
|
|
|
|
|
45 |
|
|
|
|
|
|
Consolidated Financial Statements: |
|
|
|
|
|
|
|
|
|
|
|
|
46 |
|
|
|
|
|
|
|
|
|
47 |
|
|
|
|
|
|
|
|
|
48 |
|
|
|
|
|
|
|
|
|
49 |
|
|
|
|
|
|
|
|
|
50 |
|
|
|
|
|
|
Consolidated Financial Statement Schedule |
|
|
|
|
|
|
|
|
|
|
|
|
106 |
|
44
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Alion Science and Technology Corporation
McLean, Virginia
We have audited the accompanying consolidated balance sheets of Alion Science and Technology
Corporation and subsidiaries (the Company) as of September 30, 2010 and 2009, and the related
consolidated statements of operations, redeemable common stock and accumulated deficit, and cash
flows for each of the three years in the period ended September 30, 2010. Our audits also included
the financial statement schedule listed in the Index at Item 15. These financial statements and
financial statement schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on the financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects,
the financial position of Alion Science and Technology Corporation and subsidiaries as of September
30, 2010 and 2009, and the results of their operations and their cash flows for each of the three
years in the period ended September 30, 2010, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material, respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
McLean, Virginia
December 14, 2010
45
ALION SCIENCE AND TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands, except share and |
|
|
|
per share information) |
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
26,695 |
|
|
$ |
11,185 |
|
Accounts receivable, net |
|
|
174,032 |
|
|
|
180,157 |
|
Receivable due from ESOP Trust |
|
|
1,896 |
|
|
|
|
|
Prepaid expenses and other current assets |
|
|
5,159 |
|
|
|
3,795 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
207,782 |
|
|
|
195,137 |
|
Property, plant and equipment, net |
|
|
10,798 |
|
|
|
14,474 |
|
Intangible assets, net |
|
|
17,694 |
|
|
|
28,680 |
|
Goodwill |
|
|
398,921 |
|
|
|
398,921 |
|
Other assets |
|
|
11,107 |
|
|
|
10,286 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
646,302 |
|
|
$ |
647,498 |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Interest payable |
|
$ |
17,217 |
|
|
$ |
9,039 |
|
Current portion, senior term loan payable |
|
|
|
|
|
|
2,389 |
|
Current portion of subordinated note payable |
|
|
|
|
|
|
3,000 |
|
Trade accounts payable |
|
|
44,486 |
|
|
|
60,707 |
|
Accrued liabilities |
|
|
43,145 |
|
|
|
45,475 |
|
Accrued payroll and related liabilities |
|
|
40,221 |
|
|
|
43,033 |
|
Billings in excess of revenue earned |
|
|
2,917 |
|
|
|
3,661 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
147,986 |
|
|
|
167,304 |
|
Senior secured notes |
|
|
275,831 |
|
|
|
|
|
Senior unsecured notes |
|
|
246,126 |
|
|
|
245,241 |
|
Senior term loan payable, excluding current portion |
|
|
|
|
|
|
229,221 |
|
Subordinated note payable |
|
|
|
|
|
|
46,932 |
|
Accrued compensation and benefits, excluding current portion |
|
|
6,174 |
|
|
|
6,457 |
|
Non-current portion of lease obligations |
|
|
7,848 |
|
|
|
7,286 |
|
Deferred income taxes |
|
|
37,207 |
|
|
|
|
|
Redeemable common stock warrants |
|
|
|
|
|
|
32,717 |
|
Redeemable common stock, $0.01 par value, 8,000,000 shares
authorized, 5,658,234 and 5,424,274 shares issued and
outstanding at September 30, 2010 and September 30, 2009 |
|
|
150,792 |
|
|
|
187,137 |
|
Common stock warrants |
|
|
20,785 |
|
|
|
|
|
Accumulated other comprehensive loss |
|
|
(177 |
) |
|
|
(238 |
) |
Accumulated deficit |
|
|
(246,270 |
) |
|
|
(274,559 |
) |
|
|
|
|
|
|
|
Total liabilities, redeemable common stock, warrants and
accumulated deficit |
|
$ |
646,302 |
|
|
$ |
647,498 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
46
ALION SCIENCE AND TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands, except share and per share |
|
|
|
information) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract revenue |
|
$ |
833,988 |
|
|
$ |
802,225 |
|
|
$ |
739,482 |
|
Direct contract expense |
|
|
638,000 |
|
|
|
615,700 |
|
|
|
566,408 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
195,988 |
|
|
|
186,525 |
|
|
|
173,074 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Indirect contract expense |
|
|
40,034 |
|
|
|
35,473 |
|
|
|
40,050 |
|
Research and development |
|
|
716 |
|
|
|
677 |
|
|
|
988 |
|
General and administrative |
|
|
70,976 |
|
|
|
60,867 |
|
|
|
59,484 |
|
Rental and occupancy expense |
|
|
31,204 |
|
|
|
32,984 |
|
|
|
30,880 |
|
Depreciation and amortization |
|
|
16,732 |
|
|
|
18,959 |
|
|
|
20,715 |
|
Loss on sale of subsidiary |
|
|
2,420 |
|
|
|
|
|
|
|
|
|
Gain on sale of contracts |
|
|
(5,014 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
157,068 |
|
|
|
148,960 |
|
|
|
152,117 |
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
38,920 |
|
|
|
37,565 |
|
|
|
20,957 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
119 |
|
|
|
91 |
|
|
|
423 |
|
Interest expense |
|
|
(67,613 |
) |
|
|
(55,154 |
) |
|
|
(47,382 |
) |
Other |
|
|
(242 |
) |
|
|
305 |
|
|
|
655 |
|
Gain on debt extinguishment |
|
|
50,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expenses) |
|
|
(16,987 |
) |
|
|
(54,758 |
) |
|
|
(46,304 |
) |
Income (loss) before income taxes |
|
|
21,933 |
|
|
|
(17,193 |
) |
|
|
(25,347 |
) |
Income tax (expense) benefit |
|
|
(37,165 |
) |
|
|
152 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(15,232 |
) |
|
$ |
(17,041 |
) |
|
$ |
(25,334 |
) |
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share |
|
$ |
(2.81 |
) |
|
$ |
(3.25 |
) |
|
$ |
(5.01 |
) |
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average
common shares outstanding |
|
|
5,427,979 |
|
|
|
5,246,227 |
|
|
|
5,057,337 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
47
ALION SCIENCE AND TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF REDEEMABLE COMMON STOCK,
COMMON STOCK WARRANTS AND ACCUMULATED DEFICIT
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2009, AND 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
Redeemable Common Stock |
|
|
Stock |
|
|
Comprehensive |
|
|
Accumulated |
|
|
|
Shares |
|
|
Amount |
|
|
Warrants |
|
|
Income |
|
|
Deficit |
|
|
|
(In thousands, except share and per share information) |
|
Balances at September 30, 2007 |
|
|
5,012,934 |
|
|
$ |
200,768 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(260,147 |
) |
Redeemable common stock issued |
|
|
316,117 |
|
|
|
12,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable common stock retired |
|
|
(99,295 |
) |
|
|
(4,051 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Change in common stock redemption value |
|
|
|
|
|
|
(8,605 |
) |
|
|
|
|
|
|
|
|
|
|
8,605 |
|
Postretirement medical plan actuarial cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36 |
) |
|
|
|
|
Net loss for year ended September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,334 |
) |
|
|
(25,334 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss for year ended
September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,370 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at September 30, 2008 |
|
|
5,229,756 |
|
|
$ |
200,561 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(276,876 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable common stock issued |
|
|
439,637 |
|
|
|
15,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable common stock retired |
|
|
(245,119 |
) |
|
|
(9,175 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Change in common stock redemption value |
|
|
|
|
|
|
(19,358 |
) |
|
|
|
|
|
|
|
|
|
|
19,358 |
|
Postretirement medical plan actuarial cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(202 |
) |
|
|
|
|
Net loss for
year ended September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,041 |
) |
|
|
(17,041 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss for year ended
September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(17,243 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at September 30, 2009 |
|
|
5,424,274 |
|
|
$ |
187,137 |
|
|
$ |
|
|
|
|
|
|
|
$ |
(274,559 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable common stock issued |
|
|
516,590 |
|
|
|
14,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable common stock retired |
|
|
(282,630 |
) |
|
|
(9,338 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Common stock warrants issued |
|
|
|
|
|
|
|
|
|
|
20,785 |
|
|
|
|
|
|
|
|
|
Change in common stock redemption value |
|
|
|
|
|
|
(41,131 |
) |
|
|
|
|
|
|
|
|
|
|
41,131 |
|
Postretirement medical plan actuarial
benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61 |
|
|
|
|
|
Loss on sale of subsidiary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,390 |
|
Net loss for year ended September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,232 |
) |
|
|
(15,232 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss for year ended
September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(15,171 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at September 30, 2010 |
|
|
5,658,234 |
|
|
$ |
150,792 |
|
|
$ |
20,785 |
|
|
|
|
|
|
$ |
(246,270 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
48
ALION SCIENCE AND TECHNOLOGY
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(15,232 |
) |
|
$ |
(17,041 |
) |
|
$ |
(25,334 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
16,777 |
|
|
|
18,959 |
|
|
|
20,715 |
|
Bad debt expense |
|
|
|
|
|
|
1,014 |
|
|
|
(578 |
) |
Accretion of debt to face value |
|
|
3,263 |
|
|
|
2,359 |
|
|
|
1,146 |
|
Amortization of debt issuance costs |
|
|
7,199 |
|
|
|
2,708 |
|
|
|
1,766 |
|
Change in fair value of redeemable common stock warrants |
|
|
(160 |
) |
|
|
(7,279 |
) |
|
|
(3,895 |
) |
Incentive compensation |
|
|
3,171 |
|
|
|
(1,519 |
) |
|
|
500 |
|
Gain on debt extinguishment |
|
|
(50,749 |
) |
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
37,207 |
|
|
|
|
|
|
|
|
|
Loss on sale of subsidiary |
|
|
2,589 |
|
|
|
|
|
|
|
|
|
Gain on sale of contracts |
|
|
(514 |
) |
|
|
|
|
|
|
|
|
Other gains and losses |
|
|
(59 |
) |
|
|
(370 |
) |
|
|
(422 |
) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
6,624 |
|
|
|
(12,718 |
) |
|
|
18,941 |
|
Other assets |
|
|
(1,287 |
) |
|
|
(4,283 |
) |
|
|
771 |
|
Trade accounts payable |
|
|
(16,102 |
) |
|
|
3,544 |
|
|
|
11,059 |
|
Accrued liabilities |
|
|
1,595 |
|
|
|
14,340 |
|
|
|
6,119 |
|
Interest payable |
|
|
8,178 |
|
|
|
2,496 |
|
|
|
(5,568 |
) |
Other liabilities |
|
|
(104 |
) |
|
|
6,785 |
|
|
|
4,100 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
2,396 |
|
|
|
8,995 |
|
|
|
29,320 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisitions-related obligations |
|
|
(50 |
) |
|
|
(166 |
) |
|
|
(7,946 |
) |
Capital expenditures |
|
|
(2,207 |
) |
|
|
(2,186 |
) |
|
|
(4,986 |
) |
Proceeds from sale of fixed assets |
|
|
110 |
|
|
|
5 |
|
|
|
780 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(2,147 |
) |
|
|
(2,347 |
) |
|
|
(12,152 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash (paid for) received from interest rate swap |
|
|
|
|
|
|
(4,647 |
) |
|
|
4,333 |
|
Sale of Secured Notes |
|
|
281,465 |
|
|
|
|
|
|
|
|
|
Sale of Common Stock Warrants |
|
|
20,785 |
|
|
|
|
|
|
|
|
|
Payment of debt issuance cost |
|
|
(18,183 |
) |
|
|
|
|
|
|
(500 |
) |
Repayment of Term B Loan |
|
|
(236,596 |
) |
|
|
|
|
|
|
|
|
Repurchase of Subordinated Note and related warrants |
|
|
(25,000 |
) |
|
|
|
|
|
|
|
|
Payment of senior term loan principal |
|
|
|
|
|
|
(2,433 |
) |
|
|
(6,474 |
) |
Payment of Subordinated Note principal |
|
|
|
|
|
|
(3,000 |
) |
|
|
|
|
Revolver borrowings |
|
|
84,200 |
|
|
|
504,900 |
|
|
|
450,505 |
|
Revolver repayments |
|
|
(84,200 |
) |
|
|
(504,900 |
) |
|
|
(459,755 |
) |
Loan to ESOP Trust |
|
|
(5,323 |
) |
|
|
(5,936 |
) |
|
|
(3,369 |
) |
ESOP loan repayment |
|
|
5,323 |
|
|
|
5,936 |
|
|
|
3,369 |
|
Redeemable common stock purchased from ESOP Trust |
|
|
(9,338 |
) |
|
|
(9,174 |
) |
|
|
(4,051 |
) |
Redeemable common stock sold to ESOP Trust |
|
|
2,128 |
|
|
|
7,504 |
|
|
|
3,377 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
15,261 |
|
|
|
(11,750 |
) |
|
|
(12,565 |
) |
Net increase (decrease) in cash and cash equivalents |
|
|
15,510 |
|
|
|
(5,102 |
) |
|
|
4,603 |
|
Cash and cash equivalents at beginning of period |
|
|
11,185 |
|
|
|
16,287 |
|
|
|
11,684 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
26,695 |
|
|
$ |
11,185 |
|
|
$ |
16,287 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
49,161 |
|
|
$ |
49,953 |
|
|
$ |
49,909 |
|
Cash paid (received) for taxes |
|
|
(41 |
) |
|
|
(152 |
) |
|
|
28 |
|
Non-cash financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued to ESOP Trust in satisfaction of employer contribution
liability |
|
|
10,099 |
|
|
|
10,273 |
|
|
|
9,781 |
|
See accompanying notes to consolidated financial statements.
49
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO 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 serves federal government departments and agencies, and to a
lesser extent, commercial and international customers.
Alion was formed as a for-profit S corporation in October 2001, to purchase substantially all
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
approximately $127.3 million. Prior to that time, the Companys activities were organizational in
nature.
(2) Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying audited consolidated financial statements include the accounts of Alion
Science and Technology Corporation and its subsidiaries and have been prepared in accordance with
U.S. generally accepted accounting principles on the accrual basis of accounting. The statements
include the accounts of Alion and its wholly-owned subsidiaries from date of formation or
acquisition. All inter-company accounts have been eliminated in consolidation. The wholly-owned
subsidiaries are:
|
|
|
Innovative Technology Solution Corporation (ITSC) acquired October 2003 |
|
|
|
Alion IPS Corporation (IPS) acquired February 2004 |
|
|
|
Alion METI Corporation (METI) acquired February 2005 |
|
|
|
Alion CATI Corporation (CATI) acquired February 2005 |
|
|
|
Alion Canada (US) Corporation established February 2005 |
|
|
|
Alion Science and Technology (Canada) Corporation established February 2005 |
|
|
|
Alion JJMA Corporation (JJMA) acquired April 2005 |
|
|
|
Alion Technical Services Corporation (Virginia) established July 2005 |
|
|
|
Alion BMH Corporation (BMH) acquired February 2006 |
|
|
|
Washington Consulting, Inc. (WCI) acquired February 2006 |
|
|
|
Alion MA&D Corporation (MA&D) acquired May 2006 |
|
|
|
Alion Technical Services Corporation (Delaware) established May 2006 |
|
|
|
Washington Consulting Government Services, Inc. (WCGS) established July 2007 |
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.
Summary of Critical Accounting Policies
Revenue Recognition
Alions revenue comes from delivering technology services under three types of contracts.
Some contracts provide for reimbursement of costs plus fees; others are fixed-price or
time-and-material type contracts. The Company 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.
50
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO 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 contract in
the period 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 contracts are subject to periodic funding by the contracting agency
customer. A customer may fund a contract at inception or ratably throughout the period of
performance as services are provided. If Alion determines contract funding is not probable, it
defers revenue recognition until realization is probable. Federal government contract costs are
subject to government audit and adjustment via negotiation with government representatives. The
government considers Alion a major contractor and maintains an office on site to perform various
audits. The government has audited the Companys claimed costs through fiscal year 2004. Indirect
rates have been negotiated and settled through fiscal year 2004. Settlement had no material
adverse effect on the Companys results of operations or cash flows. DCAA is currently auditing
the Companys indirect cost proposals for fiscal 2005 and 2006. The Company has submitted incurred
cost proposals for all fiscal years through 2009 and plans to submit its current year proposal in
March 2011. The Company has recorded revenue on federal government contracts in amounts it expects
to realize.
Alion recognizes revenue on unpriced change orders as it incurs expenses and only to the
extent it is probable it will recover such costs. The Company recognizes revenue in excess of costs
on unpriced change orders only when management can also estimate beyond a reasonable doubt the
amount of excess and experience provides a sufficient basis for recognition. Alion recognizes
revenue on claims as expenses are incurred only to the extent it is probable that it will recover
such costs and can reliably estimate the amount it will recover.
The Company generates software-related revenue from licensing software and providing services.
Because professional services are essential to the functionality of the solutions Alion sells, the
Company applies the percentage of completion method in Accounting Standards Codification (ASC) 605
Revenue Recognition to recognize software-related revenue.
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. From
September 2008 through September 2010, Alion recognized $50 thousand in additional goodwill for
contingent consideration from a prior acquisition and allocated this change based on current
reporting unit structure.
51
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company performs its own independent analysis to determine whether goodwill is potentially
impaired. Management 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. It compares forecast
revenue to contract backlog and proposal backlog to assess the probability of future contracts and
revenue and to evaluate the recoverability of goodwill. September 2010 contract backlog was
approximately eight times trailing twelve month revenue.
Alions cash flow analysis depends on several significant management inputs and assumptions.
Management uses observable inputs, rates and assumptions 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 7.5 to a high of 11.1, with a median value of 8.1. Market multiples for
trailing twelve month revenue ranged from a low of 0.61 to a high of 0.76, with a median value of
0.71. 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. Consistent with industry norms,
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 9.0 to a high of 12.7, with a median value of 10.4. Prior year 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. The prior year weighted average cost of capital rate was 12.5% 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 to evaluate goodwill in
prior periods. 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, 2010 would have produced a corresponding approximate 5% decrease or increase in
estimated enterprise value. At September 30, 2010, market-multiple based enterprise value was not
materially different from discounted cash flow enterprise value.
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 2010 and concluded no goodwill impairment existed as of September 30, 2010. As of September
30, 2010, the estimated fair value of each reporting unit substantially exceeded its carrying value
and enterprise value. Given the results of the Companys impairment testing under step one; it is
unlikely that a reasonably likely change in assumptions would have triggered an impairment. 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 significant events in the year ended September 30, 2010, that indicated
impairment to Alions $398.9 million of goodwill as of September 30, 2010.
52
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Alion amortizes intangible assets as it consumes their economic benefit over the assets
estimated useful lives. As of September 30, 2010, the Company had a recorded net intangible asset
balance of approximately $17.7 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 |
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 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 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. The Company decreased its liability for
redeemable common stock by approximately $41.1 million for the year ended September 30, 2010. The
accumulated deficit at September 30, 2010 included $49.1 million for changes in the Companys share
redemption liability. Outstanding redeemable common stock had an aggregate fair value of
approximately $150.8 million as of September 30, 2010.
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.
53
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 and that can be liquidated 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.
Postretirement Benefits
Alion accounts for postretirement medical and related benefits in accordance ASC Topic 715
Compensation Retirement Benefits. The Company accrues the cost of providing postretirement
benefits over employees periods of active service and determines costs on an actuarial basis. The
Company recognizes a liability for the underfunded status of its defined benefit postretirement
plan and recognizes in income, the effects of any change in funded status in the year a change
occurs. Alion curtailed its postretirement benefits plan at the end of fiscal year 2006. See Note
5 for further discussion.
Fair Value of Financial Instruments
It was impracticable for the Company to estimate the fair value of its formerly outstanding
subordinated debt because the only market for this financial instrument involved principal to
principal transactions. The Company carried its subordinated debt at amortized cost. 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.
Alion used an option pricing model to estimate the fair value of its now-retired 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, the valuation report prepared for and the share price
selected by the ESOP Trustee. Alion repurchased and extinguished its subordinated note and
related redeemable common stock warrants on March 22, 2010.
54
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Redeemable Alion Common Stock. Management estimates the fair value price per share of Alion
common stock by considering in part the most recent price at which the Company was able to sell
shares to the ESOP Trust as well as information contained in the most recent valuation report that
an independent, third-party firm prepares for the ESOP Trustee.
Recently Issued Accounting Pronouncements
Accounting Standards Update 2009-13 Revenue Recognition Multiple Deliverable Revenue
Arrangements (ASU 2009-13) was issued in October 2009 and updates Accounting Standards Codification
(ASC) 605 Revenue Recognition. ASU 2009-13 removes the
objective-and-reliable-evidence-of-fair-value criterion from the separation criteria used to
determine whether an arrangement involving multiple deliverables contains more than one unit of
accounting; replaces references to fair value with selling price to distinguish from the fair
value measurements required under the Fair Value Measurements and Disclosures guidance; provides
a hierarchy that entities must use to estimate the selling price; eliminates the use of the
residual method for allocation; and expands the ongoing disclosure requirements. ASU 2009-13 is
effective for fiscal years beginning on or after June 15, 2010, and can be applied prospectively or
retrospectively. 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.
(3) Business Combinations
Fiscal Year 2010 Sale
On September 30, 2010, Alion sold its HFA subsidiary for $275 thousand. The Company received
$200 thousand at closing and recognized a $2.4 million loss on the sale.
On July 9, 2010, Alions WCGS subsidiary sold several of its contracts with the U.S. Navy
along with certain related assets and liabilities for $5.0 million. WCGS received $4.5 million in
cash at closing and recognized a $5.1 million gain on the sale. Alion and WCGS continue to provide
professional engineering services to the U.S. Navy under a variety of existing contracts.
Neither the sale of Alions HFA subsidiary nor the WCGS contract sale was material or
significant; therefore no pro forma disclosures are presented in these consolidated financial
statements.
Fiscal Year 2008 Acquisition
In March 2008, the Company purchased several delivery orders from General Dynamics
Information Technology for approximately $116 thousand and assigned this amount to acquired
intangible assets. This acquisition was neither material nor significant; therefore no pro forma
disclosures are presented in these consolidated financial statements.
55
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) 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 Trust. The Plan, a tax-qualified retirement
plan, includes ESOP and non-ESOP components. In January 2007, Alion amended and restated the Plan
effective as of October 1, 2006. The Company adopted the first amendment to the restated plan in
July 2007 and the second amendment in September 2007. Alion adopted the third plan amendment in May
2010 and the fourth amendment in June 2010. In April 2010, the Internal Revenue Service issued a
determination that the Trust and the Plan including the first and third plan amendments, qualify
under Sections 401(a) and 501(a) of the Internal Revenue of 1986, as amended. The Company believes
that the Plan as amended subsequent to the IRS determination letter, complies with and is being
operated in accordance with IRC 401(a) and IRC 501 (a).
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 $13.4 million, $13.6 million and $12.3 million in contribution
expense for the KSOP for the years ended September 30, 2010, 2009 and 2008.
(5) Postretirement Benefits
Alion sponsors a postretirement plan providing medical, dental, and vision coverage to
eligible former employees. The Company is self-insured with a stop-loss limit under an insurance
agreement. The plan was closed to new participants in fiscal 2008. It provides benefits until age
65 for employees who met certain age and service requirements. Alion requires most participants to
pay the full expected cost of benefits. A limited number of participants, eligible for coverage
after age 65, contribute a lesser amount. As of September 30, 2010, the Company had recognized a
$675 thousand unfunded plan liability. Alion paid $59 thousand, $83 thousand and $854 thousand in
plan benefits for the years ended September 30, 2010, 2009 and 2008. Participants contributed $20
thousand, $21 thousand and $218 thousand for the years ended September 30, 2010, 2009, and 2008.
(6) Loss Per Share
Basic and diluted loss per share is computed by dividing net loss by the weighted average
number of common shares outstanding excluding the impact of warrants, phantom stock and stock
appreciation rights described herein as this impact would be anti-dilutive for all periods
presented.
(7) Redeemable common stock owned by ESOP Trust
The ESOP Trust owns all of the Companys common stock, for the benefit of current and former
employee participants in the Alion KSOP. Participants and beneficiaries are entitled to
distribution of the fair value of their vested ESOP account balance upon death, disability,
retirement or termination of employment. The ESOP 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.
A participant can choose whether to receive a distribution in cash or shares of Alion common
stock. If Alion distributes common stock to a participant or beneficiary, the IRC and ERISA
require that it provide a put option to permit a recipient to sell the shares 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 ($26.65 at September 30, 2010 and $28.00 at March 31, 2010).
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.
56
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Although the Company and the ESOP retain the right to delay distributions consistent with the
terms of the Alion KSOP and to control the circumstances of future distributions, eventual
redemption of shares of Alion common stock is deemed to be outside the Companys control.
(8) Accounts Receivable
Accounts receivable at September 30 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Billed receivables |
|
$ |
94,662 |
|
|
$ |
108,566 |
|
Unbilled receivables: |
|
|
|
|
|
|
|
|
Amounts currently billable |
|
|
36,021 |
|
|
|
22,954 |
|
Revenues recorded in excess of milestone billings on fixed price contracts |
|
|
2,917 |
|
|
|
3,757 |
|
Revenues recorded in excess of estimated contract value or funding |
|
|
24,952 |
|
|
|
36,327 |
|
Retainages and other amounts billable upon contract completion |
|
|
19,278 |
|
|
|
12,972 |
|
Allowance for doubtful accounts |
|
|
(3,798 |
) |
|
|
(4,419 |
) |
|
|
|
|
|
|
|
Total Accounts Receivable |
|
$ |
174,032 |
|
|
$ |
180,157 |
|
|
|
|
|
|
|
|
Revenues recorded in excess of milestone billings on fixed price contracts are 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 DCAA audits. Revenue recorded in excess of contract value or funding is
billable upon receipt of contractual amendments or other modifications. Costs and estimated
earnings in excess of billings on uncompleted contracts totaled approximately $83.2 million as of
September 30, 2010 and included approximately $25.0 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 $19.3 million at September 30, 2010.
(9) Property, Plant and Equipment
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Leasehold improvements |
|
$ |
10,862 |
|
|
$ |
10,214 |
|
Equipment and software |
|
|
33,693 |
|
|
|
32,807 |
|
|
|
|
|
|
|
|
Total cost |
|
|
44,555 |
|
|
|
43,021 |
|
Less: accumulated depreciation and amortization |
|
|
(33,757 |
) |
|
|
(28,547 |
) |
|
|
|
|
|
|
|
Net Property, Plant and Equipment |
|
$ |
10,798 |
|
|
$ |
14,474 |
|
|
|
|
|
|
|
|
Depreciation and leasehold amortization expense for fixed assets was approximately $5.7
million, $6.4 million and $6.2 million for the years ended September 30, 2010, 2009, and 2008.
57
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) Goodwill and Intangible Assets
The Company accounts for goodwill and other intangible assets according to ASC 350 Intangibles
Goodwill and Other which requires that Alion review goodwill at least annually for impairment.
The Company performs this review at the end of each fiscal year. As of September 30, 2010, Alion
recorded approximately $398.9 million in goodwill. The table below summarizes the changes in
goodwill carrying amounts during the years ended September 30, 2010 and 2009.
|
|
|
|
|
|
|
Total |
|
|
|
(In thousands) |
|
Balance as of October 1, 2008 |
|
$ |
398,871 |
|
Goodwill acquired during the year |
|
|
|
|
Adjustment to initial allocation (includes earn out obligations) |
|
|
50 |
|
|
|
|
|
Balance as of September 30, 2009 |
|
$ |
398,921 |
|
Goodwill acquired during the year |
|
|
|
|
Adjustment to initial allocation (includes earn out obligations) |
|
|
|
|
|
|
|
|
Balance as of September 30, 2010 |
|
$ |
398,921 |
|
|
|
|
|
Intangible assets consist primarily of contracts acquired through the Anteon and JJMA
transactions. The table below shows the components of intangible assets as of September 30, 2010
and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
September 30, 2009 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Gross |
|
|
Amortization |
|
|
Net |
|
|
Gross |
|
|
Amortization |
|
|
Net |
|
Purchased contracts |
|
$ |
111,635 |
|
|
$ |
(94,228 |
) |
|
$ |
17,407 |
|
|
$ |
111,635 |
|
|
$ |
(83,563 |
) |
|
$ |
28,072 |
|
Internal use software and
engineering designs |
|
|
2,155 |
|
|
|
(1,868 |
) |
|
|
287 |
|
|
|
2,155 |
|
|
|
(1,568 |
) |
|
|
587 |
|
Non-compete agreements |
|
|
725 |
|
|
|
(725 |
) |
|
|
|
|
|
|
725 |
|
|
|
(704 |
) |
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
114,515 |
|
|
$ |
(96,821 |
) |
|
$ |
17,694 |
|
|
$ |
114,515 |
|
|
$ |
(85,835 |
) |
|
$ |
28,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average remaining amortization period of intangible assets was approximately six
years at September 30, 2010. Amortization expense was approximately $11.0 million, $12.6 million,
and $14.5 million for the years ended September 30, 2010, 2009 and 2008. Estimated aggregate
amortization expense for the next five years and thereafter is as follows.
|
|
|
|
|
Fiscal year ending |
|
|
|
September 30, |
|
(In thousands) |
|
2011 |
|
|
6,842 |
|
2012 |
|
|
5,766 |
|
2013 |
|
|
3,246 |
|
2014 |
|
|
879 |
|
2015 |
|
|
737 |
|
Thereafter |
|
|
224 |
|
|
|
|
|
|
|
$ |
17,694 |
|
|
|
|
|
(11) 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 at September 30, 2010.
58
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 September 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, 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, 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 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 8.5%. The Eurodollar interest rate is 500 basis points plus a 3.5% minimum
interest rate. The alternate base rate is 400 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 $235 thousand in commitment fees for the Revolver for fiscal year 2010.
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 |
|
The Credit Agreement defines Consolidated EBITDA as: (a) net income (or loss), as defined in
the Credit Agreement; 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.
59
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. On September 2, 2010, Alion exchanged the private
Secured Notes for publicly tradable Secured Notes with the same terms.
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, 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, 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, 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.
60
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO 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 consists of the following balances.
Interest payable consisted of the following balances:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Unsecured Notes |
|
$ |
4,271 |
|
|
$ |
4,271 |
|
Secured Notes |
|
|
12,946 |
|
|
|
|
|
Senior Term Loan |
|
|
|
|
|
|
3,975 |
|
Subordinated Note Payable |
|
|
|
|
|
|
793 |
|
|
|
|
|
|
|
|
Total |
|
$ |
17,217 |
|
|
$ |
9,039 |
|
|
|
|
|
|
|
|
As of September 30, 2010, Alion must make the following principal repayments (at face amount before debt
discount) for its outstanding debt.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2010, the $275.8 million carrying value on the face of the balance sheet
included $310 million in principal, $3.3 million in accrued PIK interest and is net of
$37.4 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 $3.9 million in unamortized debt issue costs as of September 30, 2010 (initially $7.1
million). |
61
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) 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.
At September 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. The Company used Level 3 inputs to measure the
fair value of its now-extinguished redeemable common stock warrants.
62
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below provides a summary of the changes in fair value of all financial liabilities
measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the
years ended September 30, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
Redeemable Common Stock |
|
|
|
Warrants |
|
Balance, beginning of period |
|
$ |
(32,717 |
) |
|
$ |
(39,996 |
) |
Total realized and unrealized gains and (losses) |
|
|
14,564 |
|
|
|
|
|
Included as a credit to interest expense |
|
|
160 |
|
|
|
7,279 |
|
Issuances and settlements |
|
|
17,993 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
|
|
|
$ |
(32,717 |
) |
|
|
|
|
|
|
|
(13) Interest Rate Swap
In January 2008, Alion executed an interest rate swap with one of its lenders affiliates to
convert floating rate interest payable on a portion of its Term B senior term loan to a fixed rate,
and to effectively shift timing of some Term B senior term loan net interest payments. The swap
agreement had a notional amount of $240 million and expired in November 2008. The Company made its
final semi-annual interest payment November 1, 2008. Under the swap Alion received quarterly
floating rate interest payments on February 1, May 1, August 1 and November 1, 2008, at the London
Interbank Offering Rate plus 250 basis points. The floating rate was 7.32% for the six months
ended May 1, 2008 and 5.49% for the six months ended November 1, 2008. Alion paid interest at
6.52%. All swap payments were net cash settled. Alion was exposed to credit risk for net
settlements under the swap agreement, but not for the notional amount.
(14) 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.
63
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) 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 registered 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 reassesses this classification each
reporting period. The Company identified no required changes in accounting treatment as of
September 30, 2010.
(16) Leases
Future minimum lease payments under non-cancelable operating leases for buildings, equipment
and automobiles at September 30, 2010 are set out below. Alion subleased some excess capacity
under its operating leases 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 $178 thousand at September 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
|
|
|
|
|
Lease Payments for Fiscal Years Ending |
|
(In thousands) |
|
2011 |
|
$ |
27,676 |
|
2012 |
|
|
24,081 |
|
2013 |
|
|
22,098 |
|
2014 |
|
|
15,443 |
|
2015 |
|
|
15,292 |
|
And thereafter |
|
|
24,661 |
|
|
|
|
|
Gross lease payments |
|
$ |
129,251 |
|
Less: non-cancelable subtenant receipts |
|
|
(2,382 |
) |
|
|
|
|
Net lease payments |
|
$ |
126,869 |
|
|
|
|
|
Composition of Total Rent Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Minimum rentals |
|
$ |
22,100 |
|
|
$ |
25,742 |
|
|
$ |
24,794 |
|
Less: Sublease rental income |
|
|
(1,829 |
) |
|
|
(2,655 |
) |
|
|
(3,559 |
) |
|
|
|
|
|
|
|
|
|
|
Total rent expense, net |
|
$ |
20,271 |
|
|
$ |
23,087 |
|
|
$ |
21,235 |
|
|
|
|
|
|
|
|
|
|
|
64
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(17) Stock-based Compensation
SAR Plan
Alions Stock Appreciation Rights Plan adopted in 2004 expires in 2014. Total outstanding SAR
grants cannot exceed 12% of the Companys outstanding common stock shares on a fully diluted basis.
The chief executive officer may award SARs as he deems appropriate. Awards vest ratably over four
years with payment following the grant date fifth anniversary. Grants with no intrinsic value
expire on their year-five payment date. The Plan permits accelerated vesting in the event of
death, disability or a change in control of the Company. Approximately 888 thousand SARs were
outstanding at September 30, 2010, at a weighted average grant date fair value of $36.74 per share.
No outstanding grant has any intrinsic value. For the years ended September 30, 2010 and 2009 the
Company recognized credits to compensation expense of $932 thousand and $611 thousand. In 2008,
the Company recognized a $580 thousand charge to compensation expense.
Phantom Stock Plans
Alion formerly maintained an Executive and a Director Phantom Stock Plan. In 2009, executives
forfeited outstanding phantom stock awards. There is one director phantom stock grant of 4,995
shares outstanding worth approximately $133 thousand, payable January 2011. Phantom stock
represents a theoretical share of Alion common stock which confers no voting or other common stock
ownership rights. Plan references to shares of common stock are for accounting and valuation
purposes only. The Company is authorized to issue up to 2.0 million shares of phantom stock. At
vesting, grantees are entitled to payment for their vested shares at Alions then-current share
price, based on the most recent ESOP Trust stock valuation. Alion recognized credits to
compensation expense of approximately $218 thousand, $4.5 million and $80 thousand for the years
ended September 30, 2010, 2009 and 2008.
The Company uses a Black-Scholes-Merton option pricing model based on the fair market value of
a share of its common stock to recognize compensation 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, to use in operating its business.
(18) Long Term Incentive 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 $4.3 million and $3.7 million in long term
incentive compensation expense for the years ended September 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.
65
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 September 30, 2010 deferred tax assets and related valuation
allowances were $36.9 million and deferred tax liabilities were $37.2 million.
Alion had previously adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes now codified as ASC 740, Income Taxes. ASC 740 prescribes a recognition threshold and a
measurement attribute for financial statement recognition and measurement of tax positions taken or
expected to be taken in a tax return. The Company may recognize a benefit for that amount which it
has a more than 50% chance of realizing. If the Companys position involves uncertainty, then in
order to recognize a benefit, a given tax position must be more-likely-than-not to be sustained
upon examination by taxing authorities. Alion will continue its existing practice of recognizing
tax-related interest and penalties separately from income tax expense.
IRC Section 108(i), allows the Company to elect to defer recognizing until fiscal year 2015,
the gain on extinguishing its Subordinated Note. The gain on extinguishing the related warrants is
not subject to income taxes. Management is currently evaluating whether an election to defer the
extinguishment gain for tax purposes will be beneficial to the Company. Although the Company
offers post-retirement prescription drug coverage to a limited number of retirees and
beneficiaries, Alion has not claimed any federal tax credit in prior years. The recently enacted
health care reform legislation has reduced the value of the federal subsidy for retiree drug
coverage. Alions tax provision is unaffected by this legislative change. Management will decide
whether to seek a subsidy in the future based on its anticipated value and the cost associated with
seeking the subsidy.
As a result of Alions change in tax status, the Company will file two short-year returns for
the current fiscal year. Alion will allocate approximately half of current year results to its
period as an S-corporation and approximately half to its period as a C-corporation.
Alion may become subject to federal or state income tax examination for tax years ending
September 2007 through 2009. 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.
66
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The provision for income taxes for the year ended September 30, 2010 is as follows:
|
|
|
|
|
|
|
September 30, |
|
|
|
2010 |
|
Current: |
|
|
|
|
Federal |
|
$ |
|
|
State |
|
|
(2 |
) |
Foreign |
|
|
(40 |
) |
|
|
|
|
Total current provision |
|
|
(42 |
) |
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
Federal |
|
|
30,622 |
|
State |
|
|
6,585 |
|
Foreign |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred provision/(benefit) |
|
|
37,207 |
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes |
|
$ |
37,165 |
|
|
|
|
|
Alions tax provision at September 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 year ended September 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:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
Expected federal income tax (benefit) |
|
|
35.0 |
% |
|
$ |
7,677 |
|
State taxes (net of federal benefit) |
|
|
0.8 |
% |
|
|
201 |
|
Nondeductible expenses |
|
|
1.2 |
% |
|
|
260 |
|
Provision to return true-ups |
|
|
0.0 |
% |
|
|
(2 |
) |
Tax credits |
|
|
-0.2 |
% |
|
|
(40 |
) |
Deferred tax assets at conversion |
|
|
-161.2 |
% |
|
|
(35,359 |
) |
Deferred tax liabilities at conversion |
|
|
154.2 |
% |
|
|
33,818 |
|
Valuation allowance |
|
|
168.4 |
% |
|
|
36,929 |
|
S-Corp share
of pre-tax income |
|
|
-16.6 |
% |
|
|
(3,638 |
) |
Non-taxable debt extinguishment gain |
|
|
-12.2 |
% |
|
|
(2,681 |
) |
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
169.4 |
% |
|
$ |
37,165 |
|
|
|
|
|
|
|
|
At September 30, 2010 the components of deferred tax assets and deferred tax liabilities were as follows:
|
|
|
|
|
|
|
September 30,
2010 |
|
Deferred tax assets: |
|
|
|
|
Accrued expenses and reserves |
|
$ |
11,083 |
|
Intangible amortization |
|
|
13,650 |
|
Deferred rent |
|
|
2,635 |
|
Deferred wages |
|
|
4,329 |
|
Depreciation and leases |
|
|
3,580 |
|
Carryforwards and tax credits |
|
|
1,626 |
|
Other |
|
|
25 |
|
|
|
|
|
Gross deferred tax assets |
|
$ |
36,929 |
|
|
|
|
|
Less Valuation |
|
|
36,929 |
|
|
|
|
|
Net Deferred Tax Assets |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
Goodwill |
|
|
37,207 |
|
|
|
|
|
Net deferred tax asset/(liability) |
|
$ |
(37,207 |
) |
|
|
|
|
67
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(20) Segment Information and Customer Concentration
The Company operates in one segment, delivering a broad array of scientific and engineering
expertise to research and develop technological solutions for problems relating to national
defense, public health and safety, and nuclear safety and analysis under contracts with the federal
government, state and local governments, and commercial customers. The Companys federal government
customers typically exercise independent contracting authority. Offices or divisions within an
agency or department may directly, or through a prime contractor, use the Companys services as a
separate customer so long as that customer has independent decision-making and contracting
authority within its organization.
Contract receivables from agencies of the federal government represented approximately $170.8
million, or 97.5%, $179.7 million, or 97.4%, and $164.2 million, or 95.2%, of accounts receivable
at September 30, 2010, 2009, and 2008. Contract revenue from agencies of the federal government
represented approximately 97.5%, 96.5% and 93.9% of total contract revenue during the years ended
September 30, 2010, 2009 and 2008. The following customers represent 5% or more of consolidated
revenue during the years 2010, 2009 or 2008. In the aggregate, they account for approximately one
half of Alions consolidated revenue each year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
Government Agency |
|
Contract |
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DoD Defense Information Systems Agency (DISA) |
|
Modeling and Simulation Information Analysis Center for DISA |
|
|
13.0 |
% |
|
|
6.8 |
% |
|
|
4.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DoD U.S. Navy |
|
Seaport Multiple Award Contract for the Naval Sea Systems Command (NAVSEA) |
|
|
12.7 |
% |
|
|
14.3 |
% |
|
|
17.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DoD U.S. Air Force |
|
Technical and Analytical Support for the U.S. Air Force |
|
|
10.3 |
% |
|
|
9.5 |
% |
|
|
9.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DoD U.S. Navy |
|
Seaport E Multiple Award Contract for NAVSEA |
|
|
9.2 |
% |
|
|
5.2 |
% |
|
|
2.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DoD DISA |
|
Weapons System Information Analysis Center DISA |
|
|
6.0 |
% |
|
|
5.5 |
% |
|
|
5.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DoD U.S. Navy |
|
Engineering, Financial and Program Management Support Services to the U.S. Navy Virtual SYSCOM |
|
|
5.0 |
% |
|
|
7.0 |
% |
|
|
8.6 |
% |
(21) Guarantor/Non-guarantor Condensed Consolidated Financial Information
Alions Senior Secured and Senior Unsecured Notes are general obligations of the Company.
Certain of Alions 100% owned domestic subsidiaries have jointly, severally, fully and
unconditionally guaranteed the Senior Secured and Senior Unsecured Notes. The following
information presents condensed consolidating balance sheets as of September 30, 2010 and September
30, 2009; and condensed consolidating statements of operations and cash flows for the years ended
September 30, 2010, 2009 and 2008 of the parent company issuer, the guarantor subsidiaries and the
non-guarantor subsidiaries. Investments include investments in subsidiaries held by the parent
company issuer and have been presented using the equity method of accounting. As disclosed in Note
20, Alion sold its HFA guarantor subsidiary in September 2010. The results of HFAs operations and
cash flows are included in the condensed consolidating statements for all years presented. HFA and
Alions investment in HFA are included in the condensed consolidating balance sheets as of
September 30, 2009 only.
68
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Balance Sheet Information at September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Companies |
|
|
Companies |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
(In thousands) |
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
26,770 |
|
|
$ |
(75 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
26,695 |
|
Accounts receivable, net |
|
|
170,676 |
|
|
|
3,312 |
|
|
|
44 |
|
|
|
|
|
|
|
174,032 |
|
Receivable due from ESOP Trust |
|
|
1,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,896 |
|
Prepaid expenses and other current assets |
|
|
5,112 |
|
|
|
47 |
|
|
|
|
|
|
|
|
|
|
|
5,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
204,454 |
|
|
|
3,284 |
|
|
|
44 |
|
|
|
|
|
|
|
207,782 |
|
Property, plant and equipment, net |
|
|
10,755 |
|
|
|
43 |
|
|
|
|
|
|
|
|
|
|
|
10,798 |
|
Intangible assets, net |
|
|
17,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,694 |
|
Goodwill |
|
|
398,921 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
398,921 |
|
Investment in subsidiaries |
|
|
18,844 |
|
|
|
|
|
|
|
|
|
|
|
(18,844 |
) |
|
|
|
|
Intercompany receivables |
|
|
1,054 |
|
|
|
18,235 |
|
|
|
|
|
|
|
(19,289 |
) |
|
|
|
|
Other assets |
|
|
11,091 |
|
|
|
13 |
|
|
|
3 |
|
|
|
|
|
|
|
11,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
662,813 |
|
|
$ |
21,575 |
|
|
$ |
47 |
|
|
$ |
(38,133 |
) |
|
$ |
646,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest payable |
|
$ |
17,217 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
17,217 |
|
Trade accounts payable |
|
|
44,065 |
|
|
|
421 |
|
|
|
|
|
|
|
|
|
|
|
44,486 |
|
Accrued liabilities |
|
|
42,865 |
|
|
|
271 |
|
|
|
9 |
|
|
|
|
|
|
|
43,145 |
|
Accrued payroll and related liabilities |
|
|
39,277 |
|
|
|
924 |
|
|
|
20 |
|
|
|
|
|
|
|
40,221 |
|
Billings in excess of costs revenue earned |
|
|
2,882 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
2,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
146,306 |
|
|
|
1,651 |
|
|
|
29 |
|
|
|
|
|
|
|
147,986 |
|
Intercompany payables |
|
|
18,236 |
|
|
|
|
|
|
|
1,053 |
|
|
|
(19,289 |
) |
|
|
|
|
Senior secured notes |
|
|
275,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
275,831 |
|
Senior unsecured notes |
|
|
246,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
246,126 |
|
Accrued compensation and benefits,
excluding current portion |
|
|
6,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,174 |
|
Non-current portion of lease obligations |
|
|
7,805 |
|
|
|
43 |
|
|
|
|
|
|
|
|
|
|
|
7,848 |
|
Deferred income taxes |
|
|
37,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,207 |
|
Redeemable common stock |
|
|
150,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,792 |
|
Common stock of subsidiaries |
|
|
|
|
|
|
2,801 |
|
|
|
|
|
|
|
(2,801 |
) |
|
|
|
|
Common stock warrants |
|
|
20,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,785 |
|
Accumulated other comprehensive loss |
|
|
(177 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(177 |
) |
Accumulated surplus (deficit) |
|
|
(246,272 |
) |
|
|
17,080 |
|
|
|
(1,035 |
) |
|
|
(16,043 |
) |
|
|
(246,270 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, redeemable common
stock and accumulated deficit |
|
$ |
662,813 |
|
|
$ |
21,575 |
|
|
$ |
47 |
|
|
$ |
(38,133 |
) |
|
$ |
646,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Balance Sheet Information at September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Companies |
|
|
Companies |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
(In thousands) |
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
11,404 |
|
|
$ |
(215 |
) |
|
$ |
(4 |
) |
|
$ |
|
|
|
$ |
11,185 |
|
Accounts receivable, net |
|
|
174,456 |
|
|
|
5,663 |
|
|
|
38 |
|
|
|
|
|
|
|
180,157 |
|
Prepaid expenses and other current assets |
|
|
3,659 |
|
|
|
133 |
|
|
|
3 |
|
|
|
|
|
|
|
3,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
189,519 |
|
|
|
5,581 |
|
|
|
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 |
|
$ |
659,570 |
|
|
$ |
21,661 |
|
|
$ |
40 |
|
|
$ |
(33,773 |
) |
|
$ |
647,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest payable |
|
$ |
9,039 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
9,039 |
|
Current portion, senior term loan payable |
|
|
2,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,389 |
|
Current portion, subordinated note payable |
|
|
3,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,000 |
|
Trade accounts payable |
|
|
59,742 |
|
|
|
963 |
|
|
|
2 |
|
|
|
|
|
|
|
60,707 |
|
Accrued liabilities |
|
|
44,034 |
|
|
|
1,441 |
|
|
|
|
|
|
|
|
|
|
|
45,475 |
|
Accrued payroll and related liabilities |
|
|
41,642 |
|
|
|
1,381 |
|
|
|
10 |
|
|
|
|
|
|
|
43,033 |
|
Billings in excess of costs revenue earned |
|
|
3,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
163,507 |
|
|
|
3,785 |
|
|
|
12 |
|
|
|
|
|
|
|
167,304 |
|
Intercompany payables |
|
|
15,939 |
|
|
|
|
|
|
|
702 |
|
|
|
(16,641 |
) |
|
|
|
|
Senior unsecured notes |
|
|
245,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
245,241 |
|
Senior term loan payable, excluding
current portion |
|
|
229,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
229,221 |
|
Subordinated note payable |
|
|
46,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,932 |
|
Accrued compensation and benefits,
excluding current portion |
|
|
6,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,457 |
|
Non-current portion of lease obligations |
|
|
7,216 |
|
|
|
70 |
|
|
|
|
|
|
|
|
|
|
|
7,286 |
|
Redeemable common stock warrants |
|
|
32,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,717 |
|
Common stock of subsidiaries |
|
|
|
|
|
|
2,800 |
|
|
|
|
|
|
|
(2,800 |
) |
|
|
|
|
Redeemable common stock |
|
|
187,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
187,137 |
|
Accumulated other comprehensive loss |
|
|
(238 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(238 |
) |
Accumulated surplus (deficit) |
|
|
(274,559 |
) |
|
|
15,006 |
|
|
|
(674 |
) |
|
|
(14,332 |
) |
|
|
(274,559 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, redeemable common
stock and accumulated deficit |
|
$ |
659,570 |
|
|
$ |
21,661 |
|
|
$ |
40 |
|
|
$ |
(33,773 |
) |
|
$ |
647,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Operations for the Year Ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Companies |
|
|
Companies |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
(In thousands) |
|
Contract revenue |
|
$ |
803,565 |
|
|
$ |
30,276 |
|
|
$ |
147 |
|
|
$ |
|
|
|
$ |
833,988 |
|
Direct contract expenses |
|
|
618,018 |
|
|
|
19,864 |
|
|
|
118 |
|
|
|
|
|
|
|
638,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
185,547 |
|
|
|
10,412 |
|
|
|
29 |
|
|
|
|
|
|
|
195,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect contract expense |
|
|
36,482 |
|
|
|
3,505 |
|
|
|
47 |
|
|
|
|
|
|
|
40,034 |
|
Research and development |
|
|
716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
716 |
|
General and administrative |
|
|
69,732 |
|
|
|
903 |
|
|
|
341 |
|
|
|
|
|
|
|
70,976 |
|
Rental and occupancy expense |
|
|
30,619 |
|
|
|
541 |
|
|
|
44 |
|
|
|
|
|
|
|
31,204 |
|
Depreciation and amortization |
|
|
16,687 |
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
16,732 |
|
Loss on sale of subsidiary |
|
|
(6,056 |
) |
|
|
8,476 |
|
|
|
|
|
|
|
|
|
|
|
2,420 |
|
Gain (loss) on sale of contracts |
|
|
|
|
|
|
(5,014 |
) |
|
|
|
|
|
|
|
|
|
|
(5,014 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
148,180 |
|
|
|
8,456 |
|
|
|
432 |
|
|
|
|
|
|
|
157,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
37,367 |
|
|
|
1,956 |
|
|
|
(403 |
) |
|
|
|
|
|
|
38,920 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
93 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
119 |
|
Interest expense |
|
|
(67,613 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67,613 |
) |
Other |
|
|
(559 |
) |
|
|
317 |
|
|
|
|
|
|
|
|
|
|
|
(242 |
) |
Gain on debt extinguishment |
|
|
50,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,749 |
|
Equity in net income of subsidiaries |
|
|
1,938 |
|
|
|
|
|
|
|
|
|
|
|
(1,938 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
(15,392 |
) |
|
|
343 |
|
|
|
|
|
|
|
(1,938 |
) |
|
|
(16,987 |
) |
Income (loss) before income taxes |
|
|
21,975 |
|
|
|
2,299 |
|
|
|
(403 |
) |
|
|
(1,938 |
) |
|
|
21,933 |
|
Income tax (expense) benefit |
|
|
(37,207 |
) |
|
|
2 |
|
|
|
40 |
|
|
|
|
|
|
|
(37,165 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(15,232 |
) |
|
$ |
2,301 |
|
|
$ |
(363 |
) |
|
$ |
(1,938 |
) |
|
$ |
(15,232 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Operations for the Year Ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Companies |
|
|
Companies |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
(In thousands) |
|
Contract revenue |
|
$ |
766,297 |
|
|
$ |
35,884 |
|
|
$ |
44 |
|
|
$ |
|
|
|
$ |
802,225 |
|
Direct contract expenses |
|
|
590,934 |
|
|
|
24,737 |
|
|
|
29 |
|
|
|
|
|
|
|
615,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
175,363 |
|
|
|
11,147 |
|
|
|
15 |
|
|
|
|
|
|
|
186,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect contract expense |
|
|
31,968 |
|
|
|
3,509 |
|
|
|
(4 |
) |
|
|
|
|
|
|
35,473 |
|
Research and development |
|
|
677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
677 |
|
General and administrative |
|
|
59,615 |
|
|
|
998 |
|
|
|
254 |
|
|
|
|
|
|
|
60,867 |
|
Rental and occupancy expense |
|
|
32,370 |
|
|
|
592 |
|
|
|
22 |
|
|
|
|
|
|
|
32,984 |
|
Depreciation and amortization |
|
|
18,907 |
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
18,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
143,537 |
|
|
|
5,151 |
|
|
|
272 |
|
|
|
|
|
|
|
148,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
31,826 |
|
|
|
5,996 |
|
|
|
(257 |
) |
|
|
|
|
|
|
37,565 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
72 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
91 |
|
Interest expense |
|
|
(55,154 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,154 |
) |
Other |
|
|
(129 |
) |
|
|
434 |
|
|
|
|
|
|
|
|
|
|
|
305 |
|
Equity in net income of subsidiaries |
|
|
6,300 |
|
|
|
|
|
|
|
|
|
|
|
(6,300 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
(48,911 |
) |
|
|
453 |
|
|
|
|
|
|
|
(6,300 |
) |
|
|
(54,758 |
) |
Income (loss) before income taxes |
|
|
(17,085 |
) |
|
|
6,449 |
|
|
|
(257 |
) |
|
|
(6,300 |
) |
|
|
(17,193 |
) |
Income tax benefit (expense) |
|
|
44 |
|
|
|
(2 |
) |
|
|
110 |
|
|
|
|
|
|
|
152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(17,041 |
) |
|
$ |
6,447 |
|
|
$ |
(147 |
) |
|
$ |
(6,300 |
) |
|
$ |
(17,041 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Operations for the Year Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Companies |
|
|
Companies |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
(In thousands) |
|
Contract revenue |
|
$ |
706,699 |
|
|
$ |
32,593 |
|
|
$ |
190 |
|
|
$ |
|
|
|
$ |
739,482 |
|
Direct contract expense |
|
|
542,674 |
|
|
|
23,608 |
|
|
|
126 |
|
|
|
|
|
|
|
566,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
164,025 |
|
|
|
8,985 |
|
|
|
64 |
|
|
|
|
|
|
|
173,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect contract expense |
|
|
34,779 |
|
|
|
5,118 |
|
|
|
153 |
|
|
|
|
|
|
|
40,050 |
|
Research and development |
|
|
944 |
|
|
|
|
|
|
|
44 |
|
|
|
|
|
|
|
988 |
|
General and administrative |
|
|
58,582 |
|
|
|
923 |
|
|
|
(21 |
) |
|
|
|
|
|
|
59,484 |
|
Rental and occupancy expense |
|
|
30,869 |
|
|
|
(13 |
) |
|
|
24 |
|
|
|
|
|
|
|
30,880 |
|
Depreciation and amortization |
|
|
20,572 |
|
|
|
143 |
|
|
|
|
|
|
|
|
|
|
|
20,715 |
|
Gain (loss) on sale of contracts |
|
|
(193 |
) |
|
|
(463 |
) |
|
|
1 |
|
|
|
|
|
|
|
(655 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
145,553 |
|
|
|
5,708 |
|
|
|
201 |
|
|
|
|
|
|
|
151,462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
18,472 |
|
|
|
3,277 |
|
|
|
(137 |
) |
|
|
|
|
|
|
21,612 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
412 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
423 |
|
Interest expense |
|
|
(47,382 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47,382 |
) |
Equity in operations of
subsidiaries |
|
|
3,151 |
|
|
|
|
|
|
|
|
|
|
|
(3,151 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expenses) |
|
|
(43,819 |
) |
|
|
11 |
|
|
|
|
|
|
|
(3,151 |
) |
|
|
(46,959 |
) |
Income (loss) before income taxes |
|
|
(25,347 |
) |
|
|
3,288 |
|
|
|
(137 |
) |
|
|
(3,151 |
) |
|
|
(25,347 |
) |
Income tax benefit |
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(25,334 |
) |
|
$ |
3,288 |
|
|
$ |
(137 |
) |
|
$ |
(3,151 |
) |
|
$ |
(25,334 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Cash Flows
Year Ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
Parent |
|
|
Guarantors |
|
|
Guarantors |
|
|
Consolidated |
|
|
|
(In thousands) |
|
Net cash provided by (used in) operating activities |
|
$ |
2,250 |
|
|
$ |
143 |
|
|
$ |
3 |
|
|
$ |
2,396 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisitions-related obligations |
|
|
(50 |
) |
|
|
|
|
|
|
|
|
|
|
(50 |
) |
Capital expenditures |
|
|
(2,205 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
(2,207 |
) |
Proceeds from sale of fixed assets |
|
|
110 |
|
|
|
|
|
|
|
|
|
|
|
110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(2,145 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
(2,147 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of Secured Notes |
|
|
281,465 |
|
|
|
|
|
|
|
|
|
|
|
281,465 |
|
Sale of Common Stock Warrants |
|
|
20,785 |
|
|
|
|
|
|
|
|
|
|
|
20,785 |
|
Payment of debt issuance cost |
|
|
(18,183 |
) |
|
|
|
|
|
|
|
|
|
|
(18,183 |
) |
Repayment of Term B Loan |
|
|
(236,596 |
) |
|
|
|
|
|
|
|
|
|
|
(236,596 |
) |
Repurchase of Subordinated Note and related
warrants |
|
|
(25,000 |
) |
|
|
|
|
|
|
|
|
|
|
(25,000 |
) |
Revolver borrowings |
|
|
84,200 |
|
|
|
|
|
|
|
|
|
|
|
84,200 |
|
Revolver repayments |
|
|
(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 |
|
|
(9,338 |
) |
|
|
|
|
|
|
|
|
|
|
(9,338 |
) |
Redeemable common stock sold to ESOP Trust |
|
|
2,128 |
|
|
|
|
|
|
|
|
|
|
|
2,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
15,261 |
|
|
|
|
|
|
|
|
|
|
|
15,261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
15,366 |
|
|
|
141 |
|
|
|
3 |
|
|
|
15,510 |
|
Cash and cash equivalents at beginning of period |
|
|
11,404 |
|
|
|
(215 |
) |
|
|
(4 |
) |
|
|
11,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
26,770 |
|
|
$ |
(74 |
) |
|
$ |
(1 |
) |
|
$ |
26,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Cash Flows
Year Ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
Parent |
|
|
Guarantors |
|
|
Guarantors |
|
|
Consolidated |
|
|
|
(In thousands) |
|
Net cash provided by (used in) operating activities |
|
$ |
9,056 |
|
|
$ |
(63 |
) |
|
$ |
2 |
|
|
$ |
8,995 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisitions, net of cash acquired |
|
|
(166 |
) |
|
|
|
|
|
|
|
|
|
|
(166 |
) |
Capital expenditures |
|
|
(2,160 |
) |
|
|
(22 |
) |
|
|
(4 |
) |
|
|
(2,186 |
) |
Proceeds from sale of assets |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(2,321 |
) |
|
|
(22 |
) |
|
|
(4 |
) |
|
|
(2,347 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash inflows (outflows) from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid under interest rate swap |
|
|
(4,647 |
) |
|
|
|
|
|
|
|
|
|
|
(4,647 |
) |
Payment of senior term loan principal |
|
|
(2,433 |
) |
|
|
|
|
|
|
|
|
|
|
(2,433 |
) |
Payment of subordinated note principal |
|
|
(3,000 |
) |
|
|
|
|
|
|
|
|
|
|
(3,000 |
) |
Revolver borrowings |
|
|
504,900 |
|
|
|
|
|
|
|
|
|
|
|
504,900 |
|
Revolver repayments |
|
|
(504,900 |
) |
|
|
|
|
|
|
|
|
|
|
(504,900 |
) |
Loan to ESOP trust |
|
|
(5,936 |
) |
|
|
|
|
|
|
|
|
|
|
(5,936 |
) |
ESOP loan repayment |
|
|
5,936 |
|
|
|
|
|
|
|
|
|
|
|
5,936 |
|
Redeemable common stock from ESOP trust |
|
|
(9,175 |
) |
|
|
|
|
|
|
|
|
|
|
(9,175 |
) |
Redeemable common stock sold to ESOP Trust |
|
|
7,505 |
|
|
|
|
|
|
|
|
|
|
|
7,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(11,750 |
) |
|
|
|
|
|
|
|
|
|
|
(11,750 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(4,988 |
) |
|
|
(112 |
) |
|
|
(2 |
) |
|
|
(5,102 |
) |
Cash and cash equivalents at beginning of period |
|
|
16,392 |
|
|
|
(103 |
) |
|
|
(2 |
) |
|
|
16,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
11,404 |
|
|
$ |
(215 |
) |
|
$ |
(4 |
) |
|
$ |
11,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Cash Flows
Year Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
|
|
|
|
Parent |
|
|
Companies |
|
|
Companies |
|
|
Consolidated |
|
|
|
|
|
|
(In thousands) |
|
|
|
|
Net cash provided by (used in) operating activities |
|
$ |
29,268 |
|
|
$ |
(9 |
) |
|
$ |
61 |
|
|
$ |
29,320 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisitions, net of cash acquired |
|
|
(7,946 |
) |
|
|
|
|
|
|
|
|
|
|
(7,946 |
) |
Capital expenditures |
|
|
(4,863 |
) |
|
|
(20 |
) |
|
|
(103 |
) |
|
|
(4,986 |
) |
Proceeds from sale of non-operating assets |
|
|
780 |
|
|
|
|
|
|
|
|
|
|
|
780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(12,029 |
) |
|
|
(20 |
) |
|
|
(103 |
) |
|
|
(12,152 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash received from interest rate swap |
|
|
4,333 |
|
|
|
|
|
|
|
|
|
|
|
4,333 |
|
Payment of debt issuance costs |
|
|
(500 |
) |
|
|
|
|
|
|
|
|
|
|
(500 |
) |
Payment of senior term loan principal |
|
|
(6,474 |
) |
|
|
|
|
|
|
|
|
|
|
(6,474 |
) |
Revolver borrowings |
|
|
450,505 |
|
|
|
|
|
|
|
|
|
|
|
450,505 |
|
Revolver repayments |
|
|
(459,755 |
) |
|
|
|
|
|
|
|
|
|
|
(459,755 |
) |
Loan to ESOP Trust |
|
|
(3,369 |
) |
|
|
|
|
|
|
|
|
|
|
(3,369 |
) |
ESOP to loan repayment |
|
|
3,369 |
|
|
|
|
|
|
|
|
|
|
|
3,369 |
|
Redeemable common stock purchased from ESOP Trust |
|
|
(4,051 |
) |
|
|
|
|
|
|
|
|
|
|
(4,051 |
) |
Redeemable common stock sold to ESOP Trust |
|
|
3,377 |
|
|
|
|
|
|
|
|
|
|
|
3,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(12,565 |
) |
|
|
|
|
|
|
|
|
|
|
(12,565 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
4,674 |
|
|
|
(70 |
) |
|
|
(1 |
) |
|
|
4,603 |
|
Cash and cash equivalents at beginning of period |
|
|
11,718 |
|
|
|
(33 |
) |
|
|
(1 |
) |
|
|
11,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
16,392 |
|
|
$ |
(103 |
) |
|
$ |
(2 |
) |
|
$ |
16,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22) Related Party Transactions
Up through December 31, 2010, Alion used the consulting services of One Team, a company owned
by General George Joulwan, (USA Ret.), a member of Alions board of directors. The Company paid
One Team approximately $60 thousand per year for fiscal years 2010, 2009 and 2008.
(23) Commitments and Contingencies
Earn-Out and Hold-Back Commitments
The Company has a $100 thousand maximum remaining earn-out commitment through July 2011 for
its LogConGroup acquisition.
Government Audits
Federal government cost-reimbursement contract revenues and expenses in the consolidated
financial statements are subject to DCAA audit and possible adjustment. Alion is a major contractor
and DCAA maintains an office on site to perform its various audits throughout the year. The Company
has settled indirect rates through 2004 based on completed DCAA audits. Alion has recorded federal
government contract revenue based on amounts it expects to realize upon final settlement.
76
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Legal Proceedings
The Company is involved in a lawsuit related to a steam pipe explosion
that occurred on or about April 23, 2004 on a construction site at 17th Street, NW in Washington,
D.C. The Company no longer believes this legal proceeding to be material. We are not involved in
any other legal proceeding other than routine legal proceedings occurring in the ordinary course of
business. We believe that these routine legal proceedings, including the steam pipe lawsuit, are
not material to our financial condition, operating results, or cash flows.
As a government contractor, from time to time we may be subject to DCAA audits and federal
government inquiries. The federal government may suspend or debar for a period of time a federal
contractor found to have violated the False Claims Act, or who has been indicted or convicted of
violations of other federal laws. This could also result in fines or penalties. Given Alions
dependence on federal government contracts, suspension or debarment could have a material adverse
effect on our business, financial condition, operating results, and ability to meet our financial
obligations. We are not aware of any such pending federal government claims or investigations.
(24) Interim Period (Unaudited, in thousands except per share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Quarters |
|
|
|
1st |
|
|
2nd |
|
|
3rd |
|
|
4th |
|
Revenue |
|
$ |
205,738 |
|
|
$ |
203,546 |
|
|
$ |
213,309 |
|
|
$ |
211,395 |
|
Gross profit |
|
$ |
46,742 |
|
|
$ |
47,497 |
|
|
$ |
48,456 |
|
|
$ |
53,293 |
|
Net income (loss) |
|
$ |
(7,941 |
) |
|
$ |
9,165 |
|
|
$ |
(13,116 |
) |
|
$ |
(3,341 |
) |
Income (loss) per share |
|
$ |
(1.46 |
) |
|
$ |
1.69 |
|
|
$ |
(2.40 |
) |
|
$ |
(0.62 |
) |
Current assets |
|
$ |
189,760 |
|
|
$ |
221,579 |
|
|
$ |
201,674 |
|
|
$ |
207,782 |
|
Current liabilities |
|
$ |
169,588 |
|
|
$ |
171,138 |
|
|
$ |
156,967 |
|
|
$ |
147,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Quarters |
|
|
|
1st |
|
|
2nd |
|
|
3rd |
|
|
4th |
|
Revenue |
|
$ |
188,796 |
|
|
$ |
195,429 |
|
|
$ |
204,160 |
|
|
$ |
213,840 |
|
Gross profit |
|
$ |
43,474 |
|
|
$ |
46,294 |
|
|
$ |
46,494 |
|
|
$ |
50,263 |
|
Net income (loss) |
|
$ |
(2,540 |
) |
|
$ |
39 |
|
|
$ |
(9,437 |
) |
|
$ |
(5,103 |
) |
Income (loss) per share |
|
$ |
(0.49 |
) |
|
$ |
0.01 |
|
|
$ |
(1.80 |
) |
|
$ |
(0.97 |
) |
Current assets |
|
$ |
183,275 |
|
|
$ |
188,135 |
|
|
$ |
183,013 |
|
|
$ |
195,137 |
|
Current liabilities |
|
$ |
383,750 |
|
|
$ |
389,738 |
|
|
$ |
387,591 |
|
|
$ |
167,304 |
|
(25) Subsequent Event
On November 9, 2010, Alion re-purchased $2.0 million of its Senior Unsecured Notes at
approximately 25% less than face value and recognized a $460 thousand gain on the transaction.
77
|
|
|
Item 9. |
|
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
|
|
|
Item 9A. |
|
Controls and Procedures |
Disclosure Controls and Procedure. 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.
Limitations on the Effectiveness of Controls. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Therefore, even those
systems determined to be effective can provide only reasonable assurance with respect to financial
statement preparation and presentation. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures.
Managements Report on Internal Control Over Financial Reporting. The Companys management is
responsible for establishing and maintaining adequate internal control over financial reporting (as
defined in Rule 13a-15(f) under the Exchange Act). The Companys internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability of our financial
reporting and the preparation of published financial statements in accordance with generally
accepted accounting principles
The Companys management assessed the effectiveness of our internal control over financial
reporting as of September 30, 2010. In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control Integrated Framework. Based on our assessment, we believe that as of September 30, 2010,
our internal control over financial reporting was effective based on criteria set forth by COSO in
Internal Control Integrated Framework. Based upon the assessments, the Companys management has
concluded that as of September 30, 2010 our internal control over financial reporting was
effective.
Changes in Internal Control Over Financial Reporting. During the three months ended September
30, 2010, there were no changes in our internal control over financial reporting (as such term is
defined in Rule 15d 15(f) under the Exchange Act) that have materially affected, or are
reasonably likely to materially affect, our internal control for financial reporting.
Scope of the Assessment. This annual report does not include an attestation report of the
Companys registered public accounting firm regarding internal control over financial reporting.
Managements report was not subject to attestation by the Companys registered public accounting
firm pursuant to the exemption provided to issuers that are not large accelerated filers or
accelerated filers under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
|
|
|
Item 9B. |
|
Other Information |
In the fourth quarter of our fiscal year ended September 30, 2010, we reported all information
we were required to disclose in a current report on Form 8-K.
78
PART III
|
|
|
Item 10. |
|
Directors, Executive Officers and Corporate Governance |
Information Regarding the Directors of the Registrant
The names, ages and positions of our current directors are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term |
|
|
Director |
|
Name |
|
Age |
|
|
Position |
|
Expires |
|
|
Since |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bahman Atefi |
|
|
57 |
|
|
President, Chief Executive Officer and Chairman |
|
|
2011 |
|
|
|
2001 |
|
Edward C. (Pete) Aldridge, Jr. |
|
|
72 |
|
|
Director |
|
|
2012 |
|
|
|
2003 |
|
Leslie L. Armitage |
|
|
42 |
|
|
Director |
|
|
2010 |
|
|
|
2002 |
|
Lewis Collens |
|
|
72 |
|
|
Director |
|
|
2010 |
|
|
|
2002 |
|
Admiral (Ret.) Harold W. Gehman, Jr. |
|
|
67 |
|
|
Director |
|
|
2010 |
|
|
|
2002 |
|
General (Ret.) Michael V. Hayden |
|
|
65 |
|
|
Director |
|
|
2012 |
|
|
|
2010 |
|
General (Ret.) George A. Joulwan |
|
|
71 |
|
|
Director |
|
|
2011 |
|
|
|
2002 |
|
General (Ret.) Michael E. Ryan |
|
|
68 |
|
|
Director |
|
|
2011 |
|
|
|
2002 |
|
David J. Vitale |
|
|
64 |
|
|
Director |
|
|
2012 |
|
|
|
2009 |
|
The Companys directors are divided into three classes. The first class of directors: Edward
C. Aldridge, Jr., General Michael V. Hayden and David J. Vitale; have terms expiring on the date of
Alions 2012 annual shareholder meeting. The second class of directors: Leslie Armitage, Lewis
Collens and Admiral Harold W. Gehman, Jr.; have terms expiring on the date of Alions 2013 annual
shareholder meeting. The third class of directors: Bahman Atefi, General George A. Joulwan, General
Michael E. Ryan and David J. Vitale; have terms expiring on the date of the Alions 2011 annual
shareholder meeting.
The following sets forth the business experience, principal occupations and employment of each
of our directors, as well as their specific experience, qualifications, attributes and skills
relevant to our business that led to the conclusion that each of these individuals should serve as
an Alion director.
Bahman Atefi was appointed president and chief executive officer of Alion in December 2001. He
is also chairman of Alions Board of Directors. Dr. Atefi also serves as chairman of the ESOP
committee. Dr. Atefi served as president of IITRI from August 1997 and as its chief executive
officer from October 2000 until December 20, 2002, the closing date of the Transaction. From June
1994 to August 1997, Dr. Atefi served as manager of the energy and environmental group at Science
Applications International Corporation. In this capacity, he was responsible for operation of a
600-person business unit, with annual revenues in 1997 of approximately $80 million, which provided
scientific and engineering support to the U.S. Department of Energy, Nuclear Regulatory Commission,
Environmental Protection Agency, DoD, as well as commercial and international customers. Dr. Atefi
is a member of the board of trustees of Illinois Institute of Technology. Dr. Atefi received a BS
in Electrical Engineering from Cornell University, a masters degree in nuclear engineering and a
doctor of science in nuclear engineering from the Massachusetts Institute of Technology.
Dr. Atefi was selected and continues to serve as a director of the company because of his
institutional and operational knowledge of the Companys business, his financial acumen, his
service as the Companys chief executive officer and his more than twenty-five years of experience
in the government contracting professional services market.
Edward C. (Pete) Aldridge, Jr. has served as a director of Alion since November 2003. Mr.
Aldridge retired from government service in May 2003 as the Under Secretary of Defense for
Acquisition, Technology, and Logistics, a position he held since May 2001. In this position, Mr.
Aldridge was responsible for all matters relating to DoD acquisition, research and development,
advanced technology, international programs, and the industrial base. From March 1992 to May 2001,
Mr. Aldridge also served as president and CEO of the Aerospace Corporation, president of McDonnell
Douglas Electronic Systems, Secretary of the Air Force, and numerous other positions within DoD. He
has been a director of Lockheed Martin Corporation since June 2003 and has been a director of
Global Crossing, Ltd. since December 2003.
79
Mr. Aldridge was selected and continues to serve as a director of the Company because of his
extensive domain expertise which he developed over a long, exemplary career that includes prior
leadership positions in both public and private government contracting professional services
organizations and his service as Secretary of the Air Force.
Leslie L. Armitage has served as a director of Alion since May 2002. Ms. Armitage currently
serves as a Senior Managing Director and Co-Founder of Relativity Capital, a position she has held
since January 2006. Ms. Armitage served as a Managing Director and Partner of The Carlyle Group
from January 1999 until May 2005 and held various positions at Carlyle from 1990 to 1999. Ms.
Armitage has served on the Board of Directors of Nivisys Industries LLC and Berkshire Manufactured
Products since March 2008 and on the Board of Directors of MHF Services, Inc. since June 2009. She
previously served on the Board of Directors of Vought Aircraft Industries, Inc., Honsel
International Technologies, and United Components, Inc.
Ms. Armitage was selected and continues to serve as a director of the Company because of her
extensive financial experience and acumen developed over the course of more than fifteen years in
the private equity market, in addition to her familiarity with companies in the government
contracting professional services industry.
Lewis Collens has served as a director of Alion since May 2002. From 1990 to 2009, Mr. Collens
served as president of Illinois Institute of Technology (IIT). He is currently President Emeritus
and Professor of Law at IIT, Chicago-Kent College of Law, a position he has held since August 2009.
Mr. Collens previously served as chief executive officer of IITRI from 1990 to October 2000. Mr.
Collens has served as a director of Amsted Industries since February 1991 and as a director of
Colson Company since March 2002.
Mr. Collens was selected and continues to serve as a director of the Company because of his
familiarity with the Companys business from his prior roles as the Chief Executive Officer and
Board Chairman of the companys predecessor IIT Research Institute, as well as the financial and
legal expertise he has developed over his career.
Admiral (Ret.) Harold W. Gehman, Jr. has served as a director of Alion since September 2002.
Admiral Gehman retired from over 35 years of active duty in the U.S. Navy in October 2000. While in
the U.S. Navy, Admiral Gehman served as NATOs Supreme Allied Commander, Atlantic and as the
Commander in Chief of the U.S. Joint Forces Command from September 1997 to September 2000. Since
his retirement in November 2000, Admiral Gehman has served as an independent consultant to the U.S.
Government from October 2000 to present. Admiral Gehman has served on the Boards of Directors of
Maersk Lines, Ltd. since April 2001, Transystems Corp since January 2002 and Nivisys Corp. since
July 2008. He also served on the board of visitors of Old Dominion University. Admiral Gehman is a
senior fellow at the National Defense University and was the chairman of the Governor of Virginias
Advisory Commission for Veterans Affairs. Admiral Gehman served as co-chairman of the DoDs
investigation into the October 2000 attack on the U.S.S. Cole in Aden Harbor, Yemen, as chairman of
the Space Shuttle Columbia Accident Investigation Board, and as the Commissioner of the 2005
National Base Realignment and Closure Act.
Admiral Gehman was selected and continues to serve as a director of the Company because of his
extensive domain expertise developed over the course of his service as a Naval officer, as well as
his years of leadership in the most senior levels of the U.S. defense establishment.
General Michael V. Hayden has served as a director of Alion since July 2010. General Hayden
retired from over forty years of service in the United States Air Force in July 2008. General
Hayden served as Director of the Central Intelligence Agency from May 2006 until February 2009, and
as Director of the National Security Agency from 1999 until 2005. He entered active duty in 1969
after earning a bachelors degree in history in 1967 and a masters degree in modern American
history in 1969, both from Duquesne University. He is a distinguished graduate of Duquesnes ROTC
program. General Hayden served as Commander of the Air Intelligence Agency and as Director of the
Joint Command and Control Warfare Center. He has also served in senior staff positions at the
Pentagon, Headquarters U.S. European Command, National Security Council and the U.S. Embassy to the
Peoples Republic of Bulgaria. General Hayden served as Deputy Chief of Staff, United Nations
Command and U.S. Forces Korea, Yongsan Army Garrison, South Korea. He currently serves as a
Distinguished Visiting Professor at George Mason University School of Public Policy and as a
Principal at the Chertoff Group. General Hayden has served on the Board of Directors of National
Interest Security Company since April 2009 and on the Board of Directors of Kaseman LLC since April
2009,
General Hayden was selected and continues to serve as a director of the Company because of his
extensive domain expertise developed over the course of his service as an Air Force officer, as
well as his years of leadership in the senior-most levels of the U.S. defense and intelligence
establishments, having served as director both the Central Intelligence Agency and the National
Security Agency.
80
General (Ret.) George A. Joulwan has served as a director of Alion since May 2002. General
Joulwan retired from 36 years of service in the military in September 1997. While in the military,
General Joulwan served as commander in chief for the U.S. Army, for U.S. Southern Command in Panama
from 1990-1993 and served as commander in chief of the U.S.
European Command and NATO Supreme Allied Command from 1993-1997. From 1998 to 2000, General
Joulwan served as an Olin Professor at the U.S. Military Academy at West Point. General Joulwan has
also served as an adjunct professor at the National Defense University from 2001 to 2002. Since
1998, General Joulwan has served as president of One Team, Inc., a strategic consulting company.
General Joulwan has served as a director of General Dynamics Corporation since 1998, Accenture NSS
since 2002, TRS-LLC since 2001, IAP Worldwide Services since 2005, Freedom Group, Inc. since 2007,
and nGrain (Canada) Corporation since 2004.
General Joulwan was selected and continues to serve as a director of the Company because of
his extensive domain expertise developed over the course of his service as an Army officer, as well
as his years of leadership in the senior-most levels of the U.S. defense establishment.
General (Ret.) Michael E. Ryan has served as a director of Alion since May 2002. General Ryan
retired from the military in 2001 after 36 years of service. He served his last four years as the
16th Air Force Chief of Staff, responsible for organizing, training and equipping over 700,000
active duty, reserve and civilian members. He is currently president of the consulting firm, Ryan
Associates, focusing on national defense issues, a position he has held since January 2001. He is
chairman of the board of CAE USA, Inc., SELEX Galileo Inc. and the Air Force Village Charitable
Foundation. He has served on the Board of Directors of United Services Automobile Association since
November 2004, Circadence Corporation since December 2003, VT Services, Inc. since December 2004,
CAE USA since August 2002, Nivisys Industries LLC since July 2008 and SELEX Galileo Inc. since June
2005. He is a senior trustee of the Air Force Academy Falcon Foundation.
General Ryan was selected and continues to serve as a director of the company because of his
extensive domain expertise developed over the course of his service as an Air Force officer, as
well as his years of leadership in the senior-most levels of the U.S. defense establishment,
including as a Chief of Staff of the Air Force.
David J. Vitale has served as a director of Alion since September 2009. He was the Chief
Administrative Officer of the Chicago Public School System from 2003 -2008. From February of 2001
through November of 2002, Mr. Vitale served as President and Chief Executive Officer of the Chicago
Board of Trade and as a member of its Board of Directors and Executive Committee. Mr. Vitale also
served as President and CEO of the MidAmerica Commodity Exchange, an affiliate of the Chicago Board
of Trade. He is a former Vice Chairman and Director of Bank One Corporation, where he was
responsible for Bank Ones Commercial Banking, Real Estate, Private Banking, Investment Management
and Corporate Investments businesses. Mr. Vitale has served on the Boards of Directors of United
Continental Holdings, Inc. since February 2006, ISO New England, Inc. since September 2004, Wheels
Inc. since September 1999, DNP Select Income Fund, Inc. since April 2000, DTF Tax-Free Income Inc.
since May 2005, Duff & Phelps Utility & Corp. Bond Trust Inc. since May 2005, Ariel Capital
Management Holdings, Inc. since November 2000 and Urban Partnership Bank since August 2010.
Mr. Vitale was selected and continues to serve as a director of the company because of his
extensive financial experience and acumen and his experience as a senior officer and director of
Fortune 500 companies.
Establishment of Committees
The Board of Directors has established three committees, an Audit and Finance Committee, a
Compensation Committee, and a Governance and Compliance Committee. Each committee currently
consists of the following members:
|
|
|
|
|
Committee |
|
Chairperson |
|
Members |
Audit and Finance Committee
|
|
Leslie Armitage
|
|
Lewis Collens, Harold Gehman, Michael Ryan, David Vitale |
Compensation Committee
|
|
Harold Gehman
|
|
Pete Aldridge, Leslie Armitage, Lewis Collens, George Joulwan |
Governance and Compliance
Committee
|
|
Michael Ryan
|
|
Bahman Atefi, Harold Gehman, Michael Hayden, George Joulwan |
Special Projects Committee
|
|
Pete Aldridge
|
|
George Joulwan, Michael Ryan |
81
The Board of Directors has determined that Leslie Armitage qualifies as audit committee
financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K, and that she is independent
as independence for audit committee members is defined in the listing standards of NYSE Amex
Equities, formerly known as the American Stock Exchange or AMEX (NYSE Amex).
Audit and Finance Committee
The responsibilities of the Audit and Finance Committee are set forth in its charter and
include periodically reviewing and making recommendations to the Board of Directors and management
of the Company concerning:
|
|
|
professional services provided by our independent registered public accounting firm; |
|
|
|
independence of our independent registered public accounting firm from our
management; |
|
|
|
our quarterly and annual financial statements and our system of internal control
over financial reporting; |
|
|
|
our capital structure, including the issuance of equity and debt securities, the
incurrence of indebtedness, and related matters; |
|
|
|
general financial planning, including cash flow and working capital management,
capital budgeting and expenditures, tax planning and compliance and related matters; |
|
|
|
mergers, acquisitions and strategic transactions; |
|
|
|
investment policies, financial performance and funding of our employee benefit
plans; and |
|
|
|
other transactions or financial issues that the Board of Directors or management
presents to the committee to review. |
The Audit and Finance Committee met six times during fiscal year 2010.
Compensation Committee
The responsibilities of the Compensation Committee set forth in its charter include:
|
|
|
determining the compensation of our Chief Executive Officer and reviewing and
approving the compensation of our other executive officers; |
|
|
|
exercising all rights, authority and functions under our KSOP, retirement and other
compensation plans; |
|
|
|
approving and making recommendations to the Board regarding non-employee director
compensation; |
|
|
|
preparing an annual report on executive compensation for inclusion in our annual
report on Form 10-K in accordance with the rules and regulations of the Securities and
Exchange Commission; |
|
|
|
establishing, implementing and monitoring adherence to the Companys compensation
philosophy; and |
|
|
|
evaluating performance and compensation to ensure that the Company maintains its
ability to attract and retain superior employees in key positions and that compensation
provided to key employees remains competitive relative to the compensation paid to
similarly situated executives of other companies. |
The Compensation Committee met four times during fiscal year 2010.
Corporate Governance and Compliance Committee
The Corporate Governance and Compliance Committee oversees and reviews nominations for our
Board of Directors and evaluates and recommends corporate governance policies and procedures. The
Corporate Governance and Compliance Committee is charged with annually assessing the performance of
the Board of Directors and its committees. This includes overseeing each committees annual
self-assessment, including the Corporate Governance and Compliance Committee itself. These
assessments are intended to monitor the effectiveness of the Board of Directors and each of its
committees; gather information regarding the ability of the Board and its committees to fulfill
their mandates and responsibilities; and provide a basis to further evaluate and improve policies
of the Board and its committees. The Corporate Governance and Compliance Committee met five times
during fiscal year 2010.
Board of Directors Diversity
Alions Corporate Governance and Compliance Committee is charged with recommending director
candidates to the full Board. The Board of Directors nominates directors for election by Alions
sole stockholder, the ESOP Trust. The Governance and Compliance Committee does not have a formal
policy regarding diversity when identifying and considering director nominees. In evaluating
director nominees, the Governance and Compliance Committee typically considers an individuals
overall experience, subject matter expertise, military service, financial knowledge, and
international business and military experience. The Corporate Governance and Compliance Committee
is focused on constructing a board with a well-balanced distribution of experience among its
members to support the Companys growth and performance in the government contracting professional
services industry.
82
Registrant Chief Executive Officer and Chairman of the Board
Dr. Atefi was selected to act as both the first CEO and Chairman of the Board of Directors of
Alion in 2002 largely because both Illinois Institute of Technology (IIT) and the ESOP Trustee
(initially the two largest holders of Alions debt and common stock at the time) required him to
act as CEO to successfully conclude Alions employee buyout of IITRIs assets. Both IIT and the
ESOP Trustee also believed Dr. Atefi was the individual most qualified to serve as Chairman because
of his institutional and operational knowledge and his financial acumen. The Company continues to
believe this leadership structure remains the most appropriate structure for Alion. Dr. Atefis
leadership as both the CEO and Board Chairman over the past eight years has been instrumental in
growing Alions revenue by more than four hundred percent, establishing the Companys long term
capital structure and increasing shareholder value through growth in Alions share price.
Board of Directors Role in Risk Oversight
The Board of Directors actively oversees potential risks and risk management activities,
including discussing Alions with management and evaluating such risks at meetings of the Board and
its Committees. Members of the Board of Directors also use their independent knowledge and
understanding the risks Alion and other professional services government contractors face. The
Board of Directors regularly reviews Alions corporate strategy in light of the evolving nature of
the risks the Company faces and adjusts strategy when appropriate.
The Board of Directors has also delegated risk oversight to certain of its standing committees
within their areas of responsibility. The Corporate Governance and Compliance Committee and the
Audit and Finance Committee assist the Board of Directors in its risk oversight function with
regard to internal control over financial reporting, periodic filings, procedures relating to the
receipt and treatment of complaints, and policies and procedures designed to ensure adherence to
applicable laws and regulations.
The Board of Directors has delegated to the Corporate Governance and Compliance Committee
responsibility for oversight of certain of the Companys risk oversight and compliance matters,
including oversight of (i) material legal proceedings and material contingent liabilities, (ii) the
Companys policies regarding risk assessment and management, (iii) the Companys compliance
programs with respect to legal and regulatory requirements and the Companys Code of Conduct, and
(iv) related party transactions and conflicts of interest.
The Board of Directors has also delegated to the Audit and Finance Committee the
responsibility for oversight of certain of the Companys risk oversight and compliance matters,
including reviewing the Companys accounting policies, practices and disclosure controls and
establishing procedures for the receiving and handling of complaints regarding accounting, internal
accounting controls and auditing matters.
Information Regarding the Executive Officers of the Registrant
The names, ages and positions of the Companys current executive officers and the dates from
which these positions have been held are set forth below.
|
|
|
|
|
|
|
|
|
Name |
|
Age |
|
|
Office |
|
Position Since |
|
|
|
|
|
|
|
|
|
Bahman Atefi
|
|
|
57 |
|
|
President, Chief
Executive Officer and
Chairman of the Board
of Directors
(1)
|
|
December 2001 |
|
|
|
|
|
|
|
|
|
Stacy Mendler
|
|
|
47 |
|
|
Chief Operating
Officer and Executive
Vice President
(1)
|
|
September 2006 |
|
|
|
|
|
|
|
|
|
Michael Alber
|
|
|
53 |
|
|
Chief Financial
Officer, Senior Vice
President and
Treasurer
(1)
|
|
November 2008 |
|
|
|
|
|
|
|
|
|
Scott Fry
|
|
|
61 |
|
|
Sector Senior Vice
President
Engineering and
Integration Solutions
Sector (1)
|
|
October 2005 |
|
|
|
|
|
|
|
|
|
Walter (Buck) Buchanan
|
|
|
60 |
|
|
Sector Senior Vice
President
Engineering and
Information Technology
Sector
|
|
June 2007 |
|
|
|
|
|
|
|
|
|
David Ohle
|
|
|
66 |
|
|
Sector Senior Vice
President Defense
Operations Integration
Sector
|
|
November 2008 |
|
|
|
|
|
|
|
|
|
Thomas McCabe
|
|
|
55 |
|
|
Senior Vice President,
General Counsel and
Secretary
|
|
March 2010 |
|
|
|
(1) |
|
Member of the ESOP committee |
83
The following sets forth the business experience, principal occupations and employment of each
of the current executive officers who do not serve on the Board of Directors. Please read
Information Regarding the Directors of the Registrant above for the information with respect to
Dr. Atefi.
Stacy Mendler has served as Chief Operating Officer and Executive Vice President of Alion
since September 2006. She served as Executive Vice President and Chief Administrative Officer of
Alion from September 2005 until September 2006, and as Senior Vice President and Chief
Administrative Officer of Alion from May 2002 until September 2005. She is also a member of Alions
ESOP committee. Ms. Mendler served IITRI as Senior Vice President and Director of Administration
from October 1997 until December 20, 2002, the closing date of the Transaction. As of May 2002, Ms.
Mendler was IITRIs Chief Administrative Officer, as well as Senior Vice President. She also served
as IITRIs Assistant Corporate Secretary from November 1998 through completion of the Transaction
and has been a member of the Board of Directors of Human Factors Applications, Inc. since February
1999. From February 1995 to October 1997, Ms. Mendler was Vice President and Group Contracts
Manager for the Energy and Environment Group at Science Applications International Corporation
where she managed strategy, proposals, contracts, procurements, subcontracts and accounts
receivable. She currently serves on the Board of Directors of NVTC the VA Chamber of Commerce and
the Professional Services Counsel (PCS). Ms. Mendler received a BBA in Marketing from James
Madison University and a MS in Contracts and Acquisition Management from Florida Institute of
Technology.
Michael Alber has served as Senior Vice President, Chief Financial Officer and Treasurer since
November 2008. He was Senior Vice President and acting Chief Financial Officer from February 2008
to November 2008. He served as Senior Vice President and Director of Finance from November 2007 to
February 2008. Prior to joining Alion, Mr. Alber served as Senior Vice President and Group
Controller at Science Applications International Corporation (SAIC) from April 1990 to November
2007 where he was responsible for the financial and administrative oversight of the IT & Network
Solutions Group comprising three business units with over 9,300 employees and over 20 international
and domestic locations and with annual operating revenues over $1.5 billion. Prior to SAIC, Mr.
Alber held various senior finance and contract related positions with Network Solutions Inc.,
GeoTrans Inc. and System Development Corporation. Mr. Alber received a BS in Business
Administration from George Mason University.
Scott Fry has served as Sector Senior Vice President for Alions Engineering and Integration
Solutions Sector since September 2006. Mr. Fry served as Senior Vice President and Sector Manager
of Alions JJMA Maritime Sector from October 2005 until September 2006, and as Senior Vice
President and Deputy Sector Manager for the JJMA Maritime Sector from April 2005 to October 2005.
Between January 2004 and April 2005 Mr. Fry was a Group Senior Vice President for Alions Strategic
Systems Group. Prior to joining Alion in January 2004, Mr. Fry served in the U.S. Navy for 32
years, retiring at the rank of Vice Admiral. His career included command and staff positions both
at sea and ashore with the Navy, NATO, and Joint Chiefs of Staff. In his last active duty
assignment he commanded the United States Sixth Fleet during Operation Iraqi Freedom and the Global
War on Terrorism. Mr. Fry received a B.S from the United States Naval Academy in Annapolis,
Maryland.
Walter E. Buchanan III has served as Sector Senior Vice President for the Engineering and
Information Technology Sector since June 2007. Mr. Buchanan served as Deputy Sector Manager for
the Engineering and Information Technology Sector from July 2006 to December 2006 and as a Group
Manager from December 2006 to June 2007. Prior to joining Alion in July 2006, Mr. Buchanan served
in the United States Air Force for 34 years, retiring at the rank of Lieutenant General. His
career included planning and execution of air operations in the Middle East to include those in
Iraq and Afghanistan. He served as a command pilot and has more than 3800 flight hours primarily in
fighter aircraft. He is a Distinguished Graduate of the Army Command and General Staff College and
graduate of the National War College. Mr. Buchanan received a Masters Degree in Management from
Troy State University and a Bachelor of Science degree in Life Science from the US Air Force
Academy, where he also received his commission.
84
David H. Ohle has served as Senior Sector Vice President for the Defense Operations
Integration Sector since November 2008. Prior to joining Alion, Mr. Ohle was Vice President and
General Manager for Army Programs, CSC. Previously, he was Vice President, Human Resources, for
Shell Oil Company in Houston, Texas. Mr. Ohle formerly served as a Lieutenant General in the United
States Army where his last position was Deputy Chief of Staff for Personnel. His military
experience spans more than 30 years of service at various levels of command and staff positions. He
commanded both a
platoon and company in combat. Mr. Ohle later served on the faculty at both the United States
Military Academy and the National War College in Washington, D.C. He then served as the deputy
commandant of the Command and General Staff College at Fort Leavenworth, Kansas. Mr. Ohle graduated
from the United States Military Academy and began his career in the United States Army as an
infantry officer. He holds a Master of Arts degree in organizational behavior from Ohio State
University.
Thomas McCabe has served as Alions General Counsel since March 2010 and as its Senior Vice
President, General Counsel and Secretary since May 2010. From 2008 to February 2010, Mr. McCabe
was Executive Vice President and General Counsel, and President of the Federal business, of
publicly-traded Braintech, Inc., which provided automated vision systems for industrial and
military robots. He was Vice President and Deputy General Counsel of XM Satellite Radio from 2005
through its merger with Sirius Satellite Radio in 2008. From 2001 to 2005, he was President, CEO
and a director of software provider MicroBanx Systems and President, CEO and a director of its
parent company, COBIS Corporation from 2004 to 2005. From 1992 to 2000, he was a senior executive at
GRC International, Inc, a publicly-traded defense contractor, serving as Senior Vice President,
General Counsel, Secretary and Director of Corporate Development through its sale to AT&T in 2000.
Mr. McCabe was an attorney in private practice from 1982 to 1991. He began his career as judicial
clerk for Judge Charles R. Richey at the United States District Court for the District of Columbia
from 1981 to 1982. Mr. McCabe has a BA from Georgetown University and an MBA and JD from the
University of Notre Dame.
There is no known family relationship between any director or executive officer.
Code of Ethics
In December 2001, Alion adopted a Code of Ethics, Conduct, and Responsibility that applied to
all employees, executive officers and directors of the Company and served as a code of ethics for
the Companys chief executive officer, chief financial officer, director of finance, controller,
and any person performing similar functions. In 2004, Alion reviewed the Companys 2001 Code of
Ethics and in September 2004, adopted a revised Code applicable to all Alion employees, including
Alions CEO and CFO. The 2001 Code met the definitional requirements set forth in the rules and
regulations of the Securities and Exchange Commission. In November 2009, the Company adopted a
newly revised Code of Ethics that applies to all Alion employees and meets the definitional
requirements set forth in the rules and regulations of the Securities and Exchange Commission. In
November 2010, the Company adopted a newly revised Code of Ethics. Alion provides access to a
telephone hotline so employees can report suspected instances of improper business practices such
as fraud, waste, and violations of the Code. A copy of the 2010 Code of Ethics is posted for all employees on the Companys internal
website.
85
|
|
|
Item 11. |
|
Executive Compensation |
Compensation Discussion and Analysis
Objectives of Executive Compensation Program
Our executive compensation programs primary objective is to attract and retain qualified,
energetic employees who are enthusiastic about Alions mission and to reward them for their
contributions to Alion. Our executive compensation program is designed to create strong financial
incentive for our officers to increase revenue, profit, cash flow, operating efficiency and
returns, which we expect will lead to increased shareholder value. We strive to promote an
ownership mentality in our key leaders and our Board of Directors. We endeavor to ensure that our
compensation program is perceived as fundamentally fair to all stakeholders.
The Compensation Committee of the Board of Directors (the Compensation Committee) evaluates
both performance and compensation to ensure Alion maintains its ability to attract and retain
employees in key positions. We seek to compensate key employees at levels that are competitive
with what our peer group companies pay similarly situated executives. The Compensation Committee
believes Alions compensation packages for named executives and other officers should include
current cash and long-term incentives to reward performance as measured against established goals.
What Our Compensation Program is Designed to Reward
We believe we designed our compensation program to reward each employees contribution to
Alion. The Compensation Committee considers numerous factors including the Companys growth and
financial performance in measuring named executive officers contributions. Throughout this Form
10-K, individuals who served as the Companys
Chief Executive Officer and Chief Financial Officer during fiscal year 2010, as well as the other
individuals included in the Summary Compensation Table, are referred to as named executive
officers.
Roles and Responsibilities for Our Compensation Program
Role of the Compensation Committee
The Compensation Committee is responsible for establishing, implementing and monitoring
adherence to Alions compensation philosophy and for setting the individual cash and incentive
compensation levels for executive officers. The Compensation Committees responsibilities are set
forth in its charter and discussed in Item 10 under Establishment of Committees.
Role of the Chief Executive Officer
Our Chief Executive Officer makes recommendations to the Compensation Committee in evaluating
Alions executive officers, including recommendations of individual cash and incentive compensation
amounts for executive officers. Dr. Atefi relies on his personal experience as Alions Chief
Executive Officer in evaluating other executive officers and on comparable compensation guidance
provided by an outside compensation consultant. Dr. Atefi was not present during Committee
deliberations and voting pertaining to the determination of his own compensation.
Role of the Compensation Consultant
The Compensation Committee annually retains a consultant to provide independent advice on
executive compensation matters and to perform specific project-related work. In fiscal year 2010,
we engaged Hewitt Associates LLC to review the compensation of our named executive officers and to
provide competitive data and analysis to the Compensation Committee. They performed no other
services for the Company.
Elements of Companys Executive Compensation Plan
Alions compensation program includes several major elements. We pay our named executive
officers salaries that are competitive and non-discriminatory to attract, retain, and motivate
them. We offer an incentive program designed to encourage exceptional employee performance. As an
employee-owned company, we offer our named executive officers the ability to invest in the future
of our company through our ESOP. The Alion Science and Technology Corporation Employee Ownership,
Savings and Investment Plan, included an ESOP, which allows employees to own an interest in the
companys stock, and a 401(k) salary deferral component that allows employees to have diversified
retirement savings in other investments. Investments in the ESOP are indirect investments in Alion
common stock. Investments in the 401(k) are investments in a variety of mutual funds. We offer
fringe benefit and employee morale and wellness programs designed to attract and retain our named
executive officers.
86
Base Salary
Alion pays each named executive officer a base salary for services rendered during the fiscal
year. This fixed annual amount for performing specific job responsibilities is the minimum income
the named executive officer may receive in any given year. Each Alion executives base salary is
determined by his or her responsibilities and performance as well as comparative compensation
levels for the executives peers. The Compensation Committee determines the Chief Executive
Officers base salary, including periodic changes, and determines base salaries and changes, for
other named executive officers following recommendations by the Chief Executive Officer.
Base salaries for our named executive officers for the 2010 fiscal year were:
|
|
|
|
|
Named Executive Officer |
|
Fiscal 2010 Base Salary |
|
Bahman Atefi |
|
$ |
700,000 |
|
Stacy Mendler |
|
$ |
400,000 |
|
Michael Alber |
|
$ |
325,000 |
|
Scott Fry |
|
$ |
350,000 |
|
David Ohle |
|
$ |
350,000 |
|
James Fontana* |
|
$ |
280,000 |
|
|
|
|
* |
|
Mr. Fontana resigned as General Counsel and Secretary on December 8, 2009. |
Each year, the Compensation Committee utilizes salary survey information provided by its
outside compensation consultant for appropriate salary data for Alions senior positions.
In reviewing base salaries for our named executive officers, the Compensation Committee
considers:
|
|
|
market data provided by the Companys outside compensation consultant; |
|
|
|
the executives compensation, individually and relative to other officers; |
|
|
|
the executives individual performance; and |
|
|
|
Alions financial and operating results. |
The Compensation Committee and its outside consultant use publicly available data from other
professional services government contracting companies to benchmark compensation for Alions named
executive officers. The benchmark companies include some of the publicly-traded companies Alion
uses in its market analyses to calculate enterprise value for goodwill impairment testing. The
Compensation Committee compares Alion data to median data for the benchmark group in evaluating
total named executive officer compensation and individual elements of total compensation. Among
other factors, the Compensation Committee evaluates base salaries, total cash compensation and
various types of long term incentive compensation provided to named executives at benchmark
companies in making decisions about the components and levels of compensation for Alions named
executive officers. The Compensation Committee sets these levels of total compensation to be
within the range of the peer companies.
For fiscal 2010, the Compensation Committee reviewed a peer group of companies from the
information technology, professional services, and defense and aerospace industries. In its
analysis, the Compensation Committee compared data for the selected peer group with data from
several broader, national compensation surveys and Alions current executive compensation levels.
The following companies made up the compensation peer group.
|
|
|
|
|
|
|
Argon ST Inc.
|
|
DynCorp International Inc.
|
|
ManTech International Corp.
|
|
Stanley, Inc. |
CACI International Inc.
|
|
Harris Corp.
|
|
Maximus Inc.
|
|
VSE Corp. |
CIBER Inc.
|
|
Heico Corp.
|
|
NCI, Inc. |
|
|
Cubic Corp.
|
|
ICF International, Inc.
|
|
Orbital Sciences Corp. |
|
|
Dynamics Research Corp.
|
|
IHS Inc.
|
|
SRA International Inc. |
|
|
87
Annual Bonus
We use annual bonuses in our compensation program to motivate and reward our named executive
officers for current, short term performance such as meeting annual financial performance goals,
and achieving certain milestones and other non-financial performance goals within a given year. The
Compensation Committee believes it is important to encourage and reward both short-term and
long-term performance. The Compensation Committee has the discretion to set goals and objectives it
believes are consistent with creating shareholder value, including financial measures, operating
objectives, growth goals and other measures. Objectives may be based upon Alion achieving revenue
or earnings targets as well as other financial and business objectives. Revenue growth and
profitability are weighted as the most significant factors. The Compensation Committee evaluates
achievement of objectives following the end of each year and makes annual bonus awards based on
this assessment. The Compensation Committee considers individual achievement and also relies on
the Chief Executive Officers recommendations with respect to other executive officers.
Long-term Incentives/Awards
We use our long-term incentives to motivate, retain and reward our named executive officers
for both short-term and sustained performance. The Compensation Committee establishes
performance-based award opportunities specific to Alions financial performance and the specific
business unit and/or corporate department an individual leads.
Long-Term Incentive Plan
Effective November 1, 2008, we established the Alion Science and Technology Corporation
Long-Term Incentive Plan (LTIP). The LTIP provides for award opportunities based on the
achievement of predefined individual performance goals established by the Compensation Committee.
LTIP awards are settled in cash. Our named executive officers and other key employees are eligible
to receive LTIP awards.
We established the LTIP to:
|
|
|
provide certain employees an incentive for excellence in achieving certain Company and
business unit or departmental goals; |
|
|
|
facilitate key employee retention and recruitment; |
|
|
|
provide at-risk awards contingent on achievement of selected performance criteria over
an extended period; and |
|
|
|
provide a meaningful incentive to achieve long-term growth and improve profitability. |
Under the LTIP, our Compensation Committee is responsible for:
|
|
|
selecting individuals to participate in the LTIP from certain of our key employees; |
|
|
|
determining the period during which a participant must achieve his or her performance
goals, (performance period); |
|
|
|
setting each participants award opportunities with respect to a given performance
period; and |
|
|
|
establishing the conditions for vesting of awards. |
Following consultation with the outside compensation consultant retained by the Compensation
Committee, we determined Alion needed a non-equity based compensation plan to motivate and
appropriately reward named executive officers and other key employees. Subject to certain
limitations, LTIP compensation costs are allowable indirect expenses that can be reimbursed through
government contracts. We do not expect to recover all LTIP compensation costs. Our LTIP is
intended to differ from our prior equity-based compensation plans which were not an allowable
indirect expense and could not be reimbursed through our government contracts.
The Board of Directors adopted separate forms of LTIP award agreements. In 2010, the Board of
Directors established Category G LTIP awards. Each of our named executive officers, except for Mr.
Fontana, received a Category G award in 2010. Category G LTIP grants vest over a three year period
ending November 15, 2013. In 2008, the Board of Directors established five initial LTIP award
categories for named executive officers. (See our discussion below of 2009 compensation and LTIP
awards).
Performance goals under these award agreements include, among others, reaching certain
company-planned revenue targets; achieving certain levels of Consolidated EBITDA (as determined for
our debt covenants); achieving certain levels of reporting unit revenue and net income; complying
with debt covenants; and achieving targeted levels of days sales outstanding. One third of each
three-year grant relates to each annual performance cycle during the term of the grant.
88
Subject to the Compensation Committees discretion, each executives performance is evaluated
at the end of each year, and then at the end of the three-year performance cycle, a recipient may
receive anywhere from 50% to 150% of the target amount up through the end of a performance cycle
depending on whether the individual and the company achieve performance goals, or substantially
under- or over-achieve performance goals. The 50% floor was established in order to foster
executive retention, while the 150% ceiling is intended to reward outstanding performance. Subject
to the annual evaluations on this percentage-based scale, each earned award vests in full on its
vesting date, provided that the named executive officer is still employed with us.
The following table sets forth the target amounts approved by our Compensation Committee and
Board of Directors, for each of our named executive officers under each of the above-mentioned
categories of LTIP award agreements with respect to all performance cycles covered by such award
agreements. Consistent with the design of the LTIP, the Compensation Committee and the Board of
Directors approved LTIP awards to senior corporate officers in addition to our named executive
officers listed below.
|
|
|
|
|
|
|
Total |
|
|
|
2010 Category G |
|
Name |
|
LTIP Awards |
|
Bahman Atefi |
|
$ |
1,000,000 |
|
Stacy Mendler |
|
$ |
350,000 |
|
Michael Alber |
|
$ |
200,000 |
|
Scott Fry |
|
$ |
250,000 |
|
David Ohle |
|
$ |
150,000 |
|
James Fontana |
|
|
|
|
The ranges reflect participation levels determined for each named executive officer in the
LTIP based on market information provided to us by our compensation consultant. Each named
executive officers participation level is based on his or her specific position, responsibilities,
accountabilities and impact within our company. We vet these target participation levels against
the participation levels of similarly situated executive officers at peer companies.
Phantom Stock Plans
Phantom stock refers to hypothetical shares of Alion common stock. Each recipient of a phantom
stock award receives a grant of a specified number of shares. Recipients, upon vesting, are
generally entitled to receive cash equal to the number of hypothetical vested shares times the
current value of Alion common stock, based on the most recent stock valuation performed for the
ESOP Trust. Phantom stock may increase or decrease in value over time, resulting in cash payments
greater or less than the phantom stocks grant date value. The Compensation Committee administers
Alions phantom stock plans and is authorized to grant phantom stock to the named executive
officers.
Stock Appreciation Rights (SAR) Plan
2004 SAR Plan. In January 2005, the Board of Directors adopted the Alion Science and
Technology Corporation 2004 Stock Appreciation Rights Plan (the 2004 SAR Plan), to comply with the
deferred compensation provisions of the American Jobs Creation Act of 2004. The 2004 SAR Plan is
administered by the Compensation Committee or its delegate (the administrative committee). The 2004
SAR Plan has a 10-year term and permits grants to Alion directors, officers, employees and
consultants. Under the 2004 SAR Plan, the Chief Executive Officer has the authority to award SARs,
as he deems appropriate; however, awards to executive officers are subject to the approval of the
administrative committee of the Plan.
Severance/Change in Control and Provisions in Employment Agreements
We maintain employment agreements with certain named executive officers to help ensure they
will perform their roles for an extended period of time. These agreements provide for severance
payments if an executives employment is terminated under certain conditions, such as following a
change of control or a termination without cause as defined in the agreements.
89
Change in Control
As part of our normal course of business, we engage in discussions with other companies about
possible collaborations and/or other ways to work together to further our respective long-term
objectives. Many larger, established companies consider companies at stages of development similar
to ours as potential acquisition targets. In certain circumstances, a potential merger, acquisition
or material investment could be in the best interests of our shareholders. We provide severance
compensation if an executives employment is terminated following a change in control transaction.
We do this to promote the ability of our senior executives to act in the best interests of our
stockholders even though their employment could be terminated as a result of a transaction.
Termination without Cause
If we terminate the employment of a named executive officer without cause as defined in his or
her employment agreement, we are obligated to continue to pay certain amounts as described below
under Other Potential Post-Termination Payments. This provides us with flexibility to make a change
in senior management if such a change is in the best interests of Alion and its shareholders.
Health and Welfare Benefits
Alion provides all its named executive officers a comprehensive, balanced, and flexible fringe
benefit program. Our fringe benefit programs design plays an important role in attracting new
employees and retaining our named executive officers. We review industry-wide fringe benefit
packages annually to ensure that Alions fringe benefit program continues to provide the best value
to our named executive officers. Benefits include medical, prescription drug, vision and dental
coverage; life insurance; accidental death and dismemberment insurance, short and long-term
disability insurance; business travel accident, kidnap and ransom insurance; an employee assistance
program and flexible spending accounts for medical expense reimbursement and child care. Alion
provides workers compensation insurance and unemployment benefits required by law to all
employees, including named executive officers. We purchase workers compensation insurance and are
self-insured for unemployment payments. Our plans do not discriminate in favor of our named
executive officers. Alion provides
the major portion of its fringe benefit program as a core package of standard benefits
supplemented by a set of employee-selected optional benefits. All eligible employees, including
named executive officers contribute to the cost of certain benefits at the same rates and in the
same manner.
KSOP
Alions KSOP is a qualified retirement plan that includes an ESOP and a 401(k). The ESOP
Trust owns all of the Companys outstanding shares of common stock. Alion makes retirement plan
contributions to both the ESOP and 401(k) components on behalf of all eligible employee KSOP
participants. The Company also makes matching contributions on behalf of eligible employees, in
the ESOP component, based on their pre-tax Alion salary deferrals. Named Executive Officers do not
receive preferential KSOP benefits.
Compensation Risk Assessment
The Compensation Committee believes that the design and mix of our compensation program
appropriately encourages our employees to focus on the creation of long-term shareholder value
while also serving to attract, retain and motivate needed talent. We believe our approach to
setting company and individual goals with target payouts at multiple performance levels encourages
a level of risk-taking behavior consistent with our business. We also believe we have allocated our
compensation among base salary, annual cash incentives and long-term incentive compensation in such
a way as not to encourage excessive risk-taking.
In its discussions, the Compensation Committee noted the following attributes of our
compensation program.
There is a balance between short- and long-term financial and strategic objectives, intended
to reward managers for continuous improvement in revenue and operating income and growth in
shareholder value.
A significant portion of management compensation is at risk and depends on achieving
specific company-wide strategic operational and financial goals, as well as individual
performance goals that can be objectively determined. These corporate goals have
pre-established minimum, target and stretch performance levels, with individual metrics and
overall maximums.
The Compensation Committee considers other qualitative matters in determining annual
performance payments and achievement of long term incentive goals.
Our named executives ongoing long term compensation grants vest over a three year period
with annual performance evaluations for each year of a grant. Some executives have grants
with performance goals only measured at the end of a three-year period. We believe this
encourages our executives to focus on Alions long term performance.
90
Based on this review and currently known facts and circumstances, the Compensation Committee
believes Alions compensation policies and practices, individually and in the aggregate, do not
create known risks that are reasonably likely to materially adversely affect the Company.
Summary Compensation Table Fiscal Year 2010
The following table sets forth all compensation with respect to our Chief Executive Officer
and our other named executive officers for the year ended September 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive |
|
|
Non-Equity |
|
|
|
|
|
|
|
Name and Principal |
|
|
|
|
|
|
|
|
|
Plan |
|
|
Incentive Plan |
|
|
All other |
|
|
|
|
Position |
|
Salary |
|
|
Bonus |
|
|
Awards |
|
|
Compensation |
|
|
Compensation |
|
|
Total |
|
|
Bahman Atefi |
|
$ |
718,940 |
|
|
$ |
|
|
|
$ |
1,000,000 |
|
|
$ |
700,000 |
|
|
$ |
124,689 |
|
|
$ |
2,543,629 |
|
Chief Executive
Officer and
President |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stacy Mendler |
|
$ |
411,601 |
|
|
$ |
|
|
|
$ |
350,000 |
|
|
$ |
300,000 |
|
|
$ |
86,127 |
|
|
$ |
1,147,728 |
|
Chief Operating
Officer and
Executive Vice
President |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Alber |
|
$ |
320,735 |
|
|
$ |
50,000 |
|
|
$ |
200,000 |
|
|
$ |
200,000 |
|
|
$ |
53,916 |
|
|
$ |
824,651 |
|
Senior Vice
President and
Chief
Financial Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott Fry |
|
$ |
362,228 |
|
|
$ |
|
|
|
$ |
250,000 |
|
|
$ |
220,000 |
|
|
$ |
60,777 |
|
|
$ |
893,005 |
|
Engineering and
Integration
Solutions Sector,
Senior Vice
President |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Ohle |
|
$ |
348,241 |
|
|
$ |
|
|
|
$ |
150,000 |
|
|
$ |
220,000 |
|
|
$ |
52,233 |
|
|
$ |
770,473 |
|
Defense Operations
Integration Sector,
Senior Vice
President |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James Fontana |
|
|
102,274 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
392,586 |
|
|
$ |
494,860 |
|
Senior Vice
President, General
Counsel and
Secretary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonuses include non-incentive based cash bonuses, such as special performance bonuses, paid to
Named Executive Officers.
Non-Equity Incentive compensation includes cash bonuses awarded to our named executive
officers for fiscal 2010 service. Other compensation includes the following: 401(k) matching and
profit sharing contributions under Alions KSOP; Company contributions for long and short term
disability; amounts paid for life insurance premiums; amounts paid or reimbursed with respect to
health and welfare; amounts paid or reimbursed with respect to social club membership; amounts paid
or reimbursed with respect to leased cars; and termination related payments for previously
unreported vested Phantom Stock exercised.
91
Mr. Fontana resigned as Senior Vice President and Secretary on December 8, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other Compensation Fiscal Year 2010 |
|
|
Company |
|
|
|
|
|
|
Long and |
|
|
|
|
|
|
Matching |
|
|
|
|
|
|
Short Term |
|
|
|
|
|
|
Contributions |
|
|
Health and |
|
|
Disability |
|
|
Club |
|
Name and Principal |
|
Under Alions |
|
|
Welfare |
|
|
Paid by the |
|
|
Membership |
|
Position |
|
KSOP |
|
|
Benefits |
|
|
Company |
|
|
Fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bahman Atefi |
|
$ |
15,925 |
|
|
$ |
67,249 |
|
|
$ |
5,130 |
|
|
$ |
5,490 |
|
Stacy Mendler |
|
$ |
15,925 |
|
|
$ |
41,794 |
|
|
$ |
3,354 |
|
|
$ |
|
|
Michael Alber |
|
$ |
6,213 |
|
|
$ |
27,516 |
|
|
$ |
2,901 |
|
|
$ |
|
|
Scott Fry |
|
$ |
11,129 |
|
|
$ |
20,231 |
|
|
$ |
3,069 |
|
|
$ |
|
|
David Ohle |
|
$ |
6,125 |
|
|
$ |
23,767 |
|
|
$ |
3,066 |
|
|
$ |
|
|
James Fontana |
|
$ |
1,408 |
|
|
$ |
19,917 |
|
|
$ |
1,109 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other Compensation Fiscal Year 2010 (continued) |
|
|
Term Life |
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Paid |
|
|
|
|
|
|
Termination |
|
|
|
|
Name and Principal |
|
by the |
|
|
Leased |
|
|
Related |
|
|
|
|
Position |
|
Company |
|
|
Cars |
|
|
Payment(1) |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bahman Atefi |
|
$ |
457 |
|
|
$ |
30,438 |
|
|
$ |
|
|
|
$ |
124,689 |
|
Stacy Mendler |
|
$ |
359 |
|
|
$ |
24,695 |
|
|
$ |
|
|
|
$ |
86,127 |
|
Michael Alber |
|
$ |
289 |
|
|
$ |
16,998 |
|
|
$ |
|
|
|
$ |
53,916 |
|
Scott Fry |
|
$ |
318 |
|
|
$ |
26,030 |
|
|
$ |
|
|
|
$ |
60,777 |
|
David Ohle |
|
$ |
318 |
|
|
$ |
18,957 |
|
|
$ |
|
|
|
$ |
52,233 |
|
James Fontana |
|
$ |
153 |
|
|
$ |
|
|
|
$ |
370,000 |
|
|
$ |
392,586 |
|
92
Summary Compensation Table Fiscal Year 2009
The following table sets forth all compensation with respect to our Chief Executive Officer
and other named executive officers, whose total salary and bonus exceeded $100,000 for the year
ended September 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term |
|
|
Non-Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive |
|
|
Incentive |
|
|
|
|
|
|
|
Name and Principal |
|
|
|
|
|
|
|
|
|
Plan |
|
|
Plan |
|
|
All other |
|
|
|
|
Position |
|
Salary |
|
|
Bonus |
|
|
Awards |
|
|
Compensation |
|
|
Compensation |
|
|
Total |
|
|
Bahman Atefi |
|
$ |
644,187 |
|
|
$ |
|
|
|
$ |
1,000,000 |
|
|
$ |
650,000 |
|
|
$ |
103,866 |
|
|
$ |
2,398,053 |
|
Chief Executive
Officer and President |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stacy Mendler |
|
$ |
367,307 |
|
|
$ |
|
|
|
$ |
350,000 |
|
|
$ |
250,000 |
|
|
$ |
84,838 |
|
|
$ |
1,052,145 |
|
Chief Operating
Officer and Executive
Vice President |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Alber |
|
$ |
303,000 |
|
|
$ |
|
|
|
$ |
200,000 |
|
|
$ |
200,000 |
|
|
$ |
44,277 |
|
|
$ |
747,277 |
|
Senior Vice President
and
Chief Financial
Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott Fry |
|
$ |
339,824 |
|
|
$ |
256,444 |
|
|
$ |
250,000 |
|
|
$ |
250,000 |
|
|
$ |
66,409 |
|
|
$ |
1,162,677 |
|
Engineering and
Integration Solutions
Sector, Senior Vice
President |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James Fontana |
|
$ |
288,803 |
|
|
$ |
637,176 |
|
|
$ |
|
|
|
$ |
90,000 |
|
|
$ |
74,987 |
|
|
$ |
1,090,966 |
|
Senior Vice
President, General
Counsel and Secretary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonuses include non-incentive based cash bonuses, such as special performance bonuses,
paid to Named Executive Officers. There were no phantom stock grants in fiscal 2009. In fiscal
2009, Named Executive Officers forfeited previously vested phantom stock awards. The Company
recognized credits to stock-based compensation expense for: Dr. Atefi $2,466,756; Ms. Mendler
$1,137,091; Mr. Alber $26,600; Mr. Fry $465,300; and Mr. Fontana $748,222.
Non-Equity Incentive compensation includes cash bonuses awarded to our named executive
officers for fiscal 2009 service. Other compensation includes the following: 401(k) matching and
profit sharing contributions under Alions KSOP; Company contributions for long and short term
disability; amounts paid for life insurance premiums; amounts paid or reimbursed with respect to
health and welfare; amounts paid or reimbursed with respect to social club membership; amounts paid
or reimbursed with respect to leased cars; and termination related payments for previously
unreported vested Phantom Stock exercised.
93
Mr. Fontana resigned as Senior Vice President and Secretary on December 8, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other Compensation Fiscal Year 2009 |
|
|
Company |
|
|
|
|
|
|
Long and |
|
|
|
|
|
|
Matching |
|
|
|
|
|
|
Short Term |
|
|
|
|
|
|
Contributions |
|
|
Health and |
|
|
Disability |
|
|
Club |
|
Name and Principal |
|
Under Alions |
|
|
Welfare |
|
|
Paid by the |
|
|
Membership |
|
Position |
|
KSOP |
|
|
Benefits |
|
|
Company |
|
|
Fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bahman Atefi |
|
$ |
14,950 |
|
|
$ |
52,228 |
|
|
$ |
5,234 |
|
|
$ |
5,410 |
|
Stacy Mendler |
|
$ |
14,950 |
|
|
$ |
37,572 |
|
|
$ |
3,574 |
|
|
$ |
1,647 |
|
Michael Alber |
|
$ |
5,750 |
|
|
$ |
15,074 |
|
|
$ |
3,119 |
|
|
$ |
1,029 |
|
Scott Fry |
|
$ |
14,242 |
|
|
$ |
19,107 |
|
|
$ |
3,385 |
|
|
$ |
|
|
James Fontana |
|
$ |
15,391 |
|
|
$ |
33,918 |
|
|
$ |
3,031 |
|
|
$ |
500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other Compensation Fiscal Year 2009 (continued) |
|
|
Term Life |
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Paid |
|
|
|
|
|
|
Termination |
|
|
|
|
Name and Principal |
|
by the |
|
|
Leased |
|
|
Related |
|
|
|
|
Position |
|
Company |
|
|
Cars |
|
|
Payment(1) |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bahman Atefi |
|
$ |
810 |
|
|
$ |
25,234 |
|
|
$ |
|
|
|
$ |
103,866 |
|
Stacy Mendler |
|
$ |
598 |
|
|
$ |
26,497 |
|
|
$ |
|
|
|
$ |
84,838 |
|
Michael Alber |
|
$ |
475 |
|
|
$ |
18,830 |
|
|
$ |
|
|
|
$ |
44,277 |
|
Scott Fry |
|
$ |
548 |
|
|
$ |
29,127 |
|
|
$ |
|
|
|
$ |
66,409 |
|
James Fontana |
|
$ |
451 |
|
|
$ |
21,696 |
|
|
$ |
|
|
|
$ |
74,987 |
|
In 2009, the Board of Directors adopted the following separate forms of LTIP award agreements.
Some named executive officers were eligible to receive awards under more than one of these
agreements. The forms of LTIP award agreements provide for the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum/ |
|
|
Form of Award |
|
|
|
Performance |
|
Maximum |
|
|
Agreement |
|
Date of Grant |
|
Cycles |
|
Award Amount |
|
Vesting Date |
Category A
|
|
November 1, 2008
|
|
November 1, 2008
until performance
goals achieved
|
|
N/A
|
|
Date performance
goals achieved |
|
|
|
|
|
|
|
|
|
Category B
|
|
November 1, 2008
|
|
November 1, 2008-October 31, 2009
|
|
80%/120%
|
|
November 15, 2009 |
|
|
|
|
|
|
|
|
|
Category C
|
|
November 1, 2008
|
|
November 1, 2008-October 31, 2009
|
|
50%/150%
|
|
November 15, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1, 2009-October 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Category D
|
|
November 1, 2008
|
|
November 1, 2008-October 31, 2009
|
|
50%/150%
|
|
November 15, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1, 2009-October 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1, 2010-October 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Category E
|
|
November 1, 2008
|
|
November 1, 2009-October 31, 2011
|
|
50%/150%
|
|
November 15, 2011 |
|
|
|
|
|
|
|
|
|
Category F
|
|
November 1, 2009
|
|
November 1, 2009-October 31, 2012
|
|
50%/150%
|
|
November 15, 2012 |
94
Performance goals under these award agreements include, among others, reaching certain
company-planned revenue targets; achieving certain levels of Consolidated EBITDA (as determined for
our debt covenants); achieving certain levels of reporting unit revenue and net income; complying
with debt covenants; and achieving targeted levels of days sales outstanding. For two-year
grants, one half of the awarded amount relates to each performance cycle during the term of the
grant, and for three year-grants, one third of the awarded amount relates to each performance cycle
during the term of the grant.
Subject to the Compensation Committees discretion, and as set forth in the table above, a
recipient may receive from 50% to 150% of the target amount up through the end of a performance
cycle depending on whether the individual achieves performance goals, or substantially under- or
over-achieves performance goals. Each earned award vests in full on its vesting date, provided
that the named executive officer is still employed with us.
The following table sets forth the target amounts approved by our Compensation Committee and
Board of Directors, in 2009 for each of our named executive officers under each of the
above-mentioned categories of LTIP award agreements with respect to all performance cycles covered
by such award agreements. Consistent with the design of the LTIP, the Compensation Committee and
the Board of Directors approved LTIP awards to senior corporate officers in addition to our named
executive officers listed below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name |
|
Category A |
|
|
Category B |
|
|
Category C |
|
|
Category D |
|
|
Category E |
|
|
Category F |
|
Bahman Atefi |
|
$ |
998,223 |
|
|
$ |
934,910 |
|
|
$ |
1,738,830 |
|
|
|
|
|
|
$ |
800,000 |
|
|
$ |
1,000,000 |
|
Stacy Mendler |
|
$ |
479,559 |
|
|
$ |
411,360 |
|
|
$ |
725,782 |
|
|
|
|
|
|
$ |
300,000 |
|
|
$ |
350,000 |
|
Scott Fry |
|
|
|
|
|
$ |
233,125 |
|
|
$ |
191,511 |
|
|
|
|
|
|
$ |
250,000 |
|
|
$ |
250,000 |
|
Michael Alber |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
94,646 |
|
|
$ |
150,000 |
|
|
$ |
200,000 |
|
The ranges reflect participation levels determined for each named executive officer in the
LTIP based on market information provided to us by our compensation consultant. Each named
executive officers participation level was based on his or her specific position,
responsibilities, accountabilities and impact within our company. We vetted these target
participation levels against the participation levels of similarly situated executive officers at
peer companies.
95
Summary Compensation Table Fiscal Year 2008
The following table sets forth all compensation with respect to our Chief Executive Officer
and our other named executive officers, whose total salary and bonus exceeded $100,000 for the year
ended September 30, 2008.
Summary Compensation Table Fiscal Year 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and |
|
|
|
|
|
|
|
|
|
Phantom |
|
|
|
|
|
|
Non-Equity |
|
|
|
|
|
|
|
Principal |
|
|
|
|
|
|
|
|
|
Stock |
|
|
SAR |
|
|
Incentive Plan |
|
|
All other |
|
|
|
|
Position |
|
Salary |
|
|
Bonus |
|
|
Awards |
|
|
Awards |
|
|
Compensation |
|
|
Compensation |
|
|
Total |
|
|
Bahman Atefi |
|
$ |
604,749 |
|
|
$ |
|
|
|
$ |
1,630,296 |
|
|
$ |
|
|
|
$ |
500,000 |
|
|
$ |
146,488 |
|
|
$ |
2,881,533 |
|
Chief Executive
Officer and
President |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stacy Mendler |
|
$ |
333,185 |
|
|
$ |
|
|
|
$ |
759,346 |
|
|
$ |
|
|
|
$ |
200,000 |
|
|
$ |
100,071 |
|
|
$ |
1,392,602 |
|
Chief Operating
Officer and
Executive Vice
President |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Alber |
|
$ |
220,000 |
|
|
$ |
95,000 |
|
|
$ |
15,836 |
|
|
$ |
3,000 |
|
|
$ |
150,000 |
|
|
$ |
29,910 |
|
|
$ |
513,746 |
|
Senior Vice
President and Chief
Financial Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott Fry |
|
$ |
316,171 |
|
|
$ |
|
|
|
$ |
183,937 |
|
|
$ |
|
|
|
$ |
225,000 |
|
|
$ |
51,263 |
|
|
$ |
776,371 |
|
Engineering and
Integration
Solutions Sector
Senior Vice
President |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonuses include non-incentive based cash bonuses, such as sign-on bonuses paid to Named
Executive Officers.
Non-Equity Incentive compensation includes cash bonuses awarded to our named executive
officers for fiscal 2008 service. Other compensation includes the following: 401(k) matching and
profit sharing contributions under Alions KSOP; Company contributions for long and short term
disability; amounts paid for life insurance premiums; amounts paid or reimbursed with respect to
health and welfare; amounts paid or reimbursed with respect to social club membership; and amounts
paid or reimbursed with respect to leased cars.
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other Compensation Fiscal Year 2008 |
|
|
Company |
|
|
|
|
|
|
Long and |
|
|
|
|
|
|
Matching |
|
|
|
|
|
|
Short Term |
|
|
|
|
|
|
Contributions |
|
|
Health and |
|
|
Disability |
|
|
Club |
|
Name and Principal |
|
Under Alions |
|
|
Welfare |
|
|
Paid by the |
|
|
Membership |
|
Position |
|
KSOP |
|
|
Benefits |
|
|
Company |
|
|
Fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bahman Atefi |
|
$ |
14,625 |
|
|
$ |
94,337 |
|
|
$ |
4,840 |
|
|
$ |
5,120 |
|
Stacy Mendler |
|
$ |
14,625 |
|
|
$ |
55,208 |
|
|
$ |
3,210 |
|
|
$ |
|
|
Michael Alber |
|
$ |
|
|
|
$ |
12,530 |
|
|
$ |
2,421 |
|
|
$ |
|
|
Scott Fry |
|
$ |
10,228 |
|
|
$ |
13,748 |
|
|
$ |
3,108 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other Compensation Fiscal Year 2008 (continued) |
|
|
Term Life |
|
|
|
|
|
|
|
|
|
|
|
|
Insurance |
|
|
|
|
|
|
|
|
|
|
Name and Principal |
|
Paid by the |
|
|
Leased |
|
|
|
|
|
|
|
Position |
|
Company |
|
|
Cars |
|
|
Settlement |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bahman Atefi |
|
$ |
735 |
|
|
$ |
26,831 |
|
|
$ |
|
|
|
$ |
146,488 |
|
Stacy Mendler |
|
$ |
531 |
|
|
$ |
26,497 |
|
|
$ |
|
|
|
$ |
100,071 |
|
Michael Alber |
|
$ |
356 |
|
|
$ |
14,603 |
|
|
$ |
|
|
|
$ |
29,910 |
|
Scott Fry |
|
$ |
512 |
|
|
$ |
23,667 |
|
|
$ |
|
|
|
$ |
51,263 |
|
Phantom Stock Plans
Executive Phantom Stock Plan
On November 9, 2004, the Companys Compensation Committee approved, and the full
Board of Directors adopted, The Alion Science and Technology Corporation Performance Shares and
Retention Phantom Stock Plan (the Second Phantom Stock Plan) to comply with the requirements of the
American Jobs Creation Act. The Second Phantom Stock Plan permits awards of retention share phantom
stock and performance share phantom stock. A retention award is for a fixed number of shares
determined at the date of grant. A performance award is for an initial number of shares subject to
change at the vesting date. Performance phantom shares are subject to forfeiture for failure to
achieve a specified threshold value for a share of the Companys common stock as of the vesting
date. If the value of a share of the Companys common stock equals the threshold value but does not
exceed the target value, the number of performance shares in a given grant may be decreased by a
specified percentage (generally up to 50 percent). If the value of a share of the Companys common
stock exceeds a pre-established target price on the vesting date, the number of performance shares
in a given grant may be increased by a specified percentage (generally up to 20%).
Vesting. Performance share awards vest three years from date of grant (unless otherwise
provided in an individual award agreement) and retention share awards vest as specified in each
individual award agreement, provided that the grantee is still employed by the Company. Accelerated
vesting is provided in the event of death, disability, involuntary termination without cause, or
upon a change in control of the Company or in other circumstances, unless the individual award
agreement provides otherwise.
Payments. Grants are to be paid out on the payment date specified in the award agreement,
which is generally five years and sixty days from the date of grant, unless the award holder
elected to accelerate payment by filing an election no later than December 31, 2005, or elects to
defer the proceeds of phantom stock into the Alion Science and Technology Corporation Executive
Deferred Compensation Plan, as described below.
Amendment. In November 2005, the Board of Directors amended the Second Phantom Stock Plan to
permit employees to make a one-time election to receive payment for phantom shares as they vest
each year or when fully vested. An award holder who does not make an acceleration election as
described above may elect to defer the proceeds of phantom stock into the Alion Science and
Technology Corporation Executive Deferred Compensation Plan for a 5 year period, if he or she is
eligible for the plan, by filing a deferral election with the Company at least one year in advance
of the payment event.
97
As of September 30, 2010, the Company had granted 340,312 shares of retention incentive
phantom stock and 213,215 shares of performance incentive phantom stock of the Company pursuant to
the Second Phantom Stock Plan. The performance-based grants were fixed based on the September 30,
2008 share price.
Director Phantom Stock Plan
In November 9, 2005, the Companys Compensation Committee approved, and the full Board of
Directors adopted, the Alion Science and Technology Corporation Board of Directors Phantom Stock
Plan (the Director Phantom Stock Plan). The Director Phantom Stock Plan provides for annual awards
of shares of phantom stock to non-employee directors of the Company. In 2008 and 2009, the number
of shares of phantom stock granted to each non-employee director was equal to the quotient obtained
by dividing $35,000 by the fair market value of one share of the Companys stock as of the date of
the award rounded up to the next highest whole number. There were no grants to directors in fiscal
2010 or 2009. Fair market value is determined by the Compensation Committee in its sole discretion
using the most recent valuation of the Companys common stock made by an independent appraisal that
meets the requirements of IRC Section 401(a)(28)(C), as of a date that is no more than 12 months
before the date of the award.
Vesting. Grants under the Director Phantom Stock Plan vest in one-third increments each year
for three years from the date of the award. Vesting of an award accelerates upon a grantees death
or disability or upon a change of control of the Company or in other circumstances.
Payments. Before each award is granted (or within 30 days of the grant date for an individual
who becomes a director on the grant date), a director may elect whether to receive payment for
phantom shares as they vest, or when the award is fully vested. A director who elects to receive
payment when an award has fully vested may elect to defer the proceeds of the award into the Alion
Science and Technology Director Deferred Compensation Plan provided the election is made no later
than one year before the award fully vests. All payments made under the awards are required to be
in cash. As of September 30, 2010, the Company had granted 20,779 shares of phantom stock under
the Director Phantom Stock Plan.
Under the three phantom stock plans, members of the Companys Compensation Committee who are
eligible to receive phantom stock or who have been granted phantom stock may vote on any matters
affecting the administration of the plan or the grant of phantom stock, except that a member cannot
act upon the granting of phantom stock to himself or herself. These voting provisions also apply to
members of the Companys Board of Directors when the board resolves to act under the plans.
When granted, phantom stock provides the employee with the right to receive payment upon
exercise of the phantom stock. The terms of each phantom stock grant are evidenced in a phantom
stock agreement which determines the:
|
|
|
Number of shares of the phantom stock awarded; and |
|
|
|
Provisions governing vesting of the phantom stock awarded. |
The plans also provide that phantom stock awarded at different times need not contain similar
provisions.
Under the plans, the payment that the Company will make upon the vesting of phantom stock is
intended to be made in one lump sum within 60 days of the date of vesting unless a later date is
set forth in an individual award agreement. The Compensation Committee, or the Companys Board of
Directors, if it resolves to do so, may delay payment for five years. If the payment is delayed, it
will include interest accrued at the prime rate as of the date of vesting until the payment date.
The Company expects the Compensation Committee, or the Board of Directors if it resolves to do so,
to examine the Companys available cash and anticipated cash needs in determining whether to delay
payment. Under limited circumstances, payments from the exercise of phantom stock may be rolled
over into any non-qualified deferred compensation plan.
No voting or other rights associated with ownership of the Companys common stock are given to
phantom stockholders. References to shares of common stock under the plan are for accounting and
valuation purposes only. As a result, an individual who receives phantom stock does not have any of
the rights of a stockholder as a result of a grant of phantom stock.
The phantom stock plans permit the Compensation Committee to defer payments if it determines
that payment is administratively impracticable or would jeopardize the solvency of the Company
(provided that such impracticability or insolvency was unforeseeable as of the grant date), or if
the payment would violate a loan covenant or similar contract, or not
be deductible under Section 162(m) of the Internal Revenue Code or if the payment would violate
U.S. securities laws or other applicable law.
98
The phantom stock plans contain a provision to prevent an award to a person who is or would
become (if the award were made) a disqualified person for as long as the Company maintains the
ESOP. For this purpose, disqualified person means any individual who directly or beneficially
(such as under the Alion ESOP) holds at least 10% of Alion equity, including outstanding common
stock and synthetic equity, such as SARs or phantom stock. Any award that violates this provision
is void.
Subject to adjustments for merger or other significant corporate transactions or special
circumstances, the shares of common stock that may be used for awards under the phantom stock plans
of the Company shall not exceed 2,000,000 shares (whether or not such awards have expired,
terminated unexercised, or become unexercisable, or have been forfeited or otherwise terminated,
surrendered or cancelled).
The number of shares of the Companys common stock used for reference purposes with respect to
outstanding grants of phantom stock for the last three fiscal years is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Shares |
|
|
|
|
|
|
|
|
|
|
|
Authorized under all |
|
Date of Issuance |
|
Shares Issued |
|
|
Cumulative Shares Issued |
|
|
Plans |
|
|
November 2007 |
|
|
6,993 |
(1) |
|
|
20,779 |
|
|
|
2,000,000 |
(1) |
|
|
|
(1) |
|
Number of shares authorized under the Executive and Director Phantom
Stock Plans as periodically amended and approved by the Compensation Committee of
Alions Board of Directors. |
The following table sets forth information regarding phantom stock granted in the last three
fiscal years to the Named Executive Officers pursuant to the Second phantom stock plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
Name |
|
shares |
|
|
Grant Date |
|
Grant Type |
|
Full vesting period |
|
Period(s) until payout |
Bahman Atefi |
|
|
17,478 |
|
|
November 2007 |
|
Retention |
|
November 2010 (1) |
|
November 2010 (1) (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Alber |
|
|
1,248 |
|
|
January 2008 |
|
Retention |
|
January 2011 (1) |
|
January 2011 (1) (4) |
|
|
|
1,219 |
|
|
May 2008 |
|
Retention |
|
May 2011 (1) |
|
May 2011 (1) (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stacy Mendler |
|
|
4,994 |
|
|
November 2007 |
|
Retention |
|
November 2010 (1) |
|
November 2010 (1) (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert Goff |
|
|
4,994 |
|
|
November 2007 |
|
Retention |
|
November 2010 (1) |
|
November 2010 (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott Fry |
|
|
4,994 |
|
|
November 2007 |
|
Retention |
|
November 2010 (1) |
|
November 2010 (1) (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Jim Fontana |
|
|
2,497 |
|
|
February 2007 |
|
Retention |
|
November 2010 (1) |
|
November 2010 (1) (4) |
|
|
|
(1) |
|
The Second Phantom Stock Plan, permits performance- and/or retention-based phantom stock
awards. Performance-based phantom stock vested three years after the grant date;
retention-based phantom stock vested as specified in individual agreements. Performance- and
retention-based phantom stock awards for vested shares were paid as specified in individual
agreements. |
|
(2) |
|
Phantom Stock grants issued in February and November 2003 fully vested on the fifth year from
the grant date |
|
(3) |
|
Initially, recipients were to be paid commencing on the fifth year from the grant date. In
November 2005, the Phantom Stock Plan was amended to permit employees to make a one-time
election to receive payment for phantom shares as they vested each year or when fully vested.
Dr. Atefi and Ms. Mendler made this election; Mr. Goff did not. |
|
(4) |
|
In December 2008, Dr. Atefi, Ms. Mendler, Mr. Fry and Mr. Fontana forfeited their right to
receive payment for certain vested, unpaid phantom stock awards. Along with Mr. Alber, they
also forfeited all phantom stock awards that had not yet vested. |
99
Stock Appreciation Rights (SAR) Plans
2004 SAR Plan
On January 13, 2005, the Companys Board of Directors adopted the Alion Science and Technology
Corporation 2004 Stock Appreciation Rights Plan (the 2004 SAR Plan), to comply with the deferred
compensation provisions of the American Jobs Creation Act of 2004. The 2004 SAR Plan is
administered by the Compensation Committee or its delegate (the administrative committee). The 2004
SAR Plan has a 10-year term and permits grants to Alion directors, officers, employees and
consultants. Under the 2004 SAR Plan, the chief executive officer has the authority to award SARs,
as he deems appropriate; however, awards to executive officers are subject to the approval of the
administrative committee of the 2004 SAR Plan. Outstanding SAR awards cannot exceed the equivalent
of 12 percent of the Companys outstanding shares of common stock on a fully diluted basis
(assuming the exercise of any outstanding options, warrants and rights including, without
limitation, SARs, and assuming the conversion into stock of any outstanding securities convertible
into stock), which amount may be adjusted in the event of a merger or other significant corporate
transaction or in other special circumstances. The plan does not permit awards to a disqualified
person.
Vesting. Awards to employees vest ratably over four years and awards to directors vest ratably
over each directors term of service. The 2004 SAR Plan contains a provision for accelerated
vesting in the event of death, disability or a change in control of the Company or in other special
circumstances.
Payments. SARs are normally paid on the first anniversary of the date the award becomes fully
vested, or earlier upon the SAR holders death, disability or termination of service, or a change
in control. The 2004 SAR Plan permits eligible awardees to defer SAR payments into the Alion
Science and Technology Corporation Executive Deferred Compensation Plan for a 5-year period, by
filing a deferral election at least one year in advance of the payment event. The 2004 SAR Plan
permits the Compensation Committee to defer payments if it determines payment is administratively
impracticable or would jeopardize the solvency of the Company (provided that such impracticability
or insolvency was unforeseeable as of the grant date); if the payment would violate a loan covenant
or similar contract, or would not be deductible under Section 162(m) of the Internal Revenue Code;
or if the payment would violate U.S. securities or other applicable laws.
A grantee under the 2004 SAR Plan has the right to receive payment for vested SARs equal to
the difference between the appraised value of a share of Alion common stock as of the grant date
and the appraised value of a share of Alion common stock as of the exercise date per the most
recent valuation of the common stock held by the ESOP Trust.
Amendment. In November 2005, the Board of Directors amended the 2004 SAR Plan to eliminate the
timely exercise requirement for an employee to receive payment for vested SARs. Subject to certain
restrictions, our Board of Directors may amend or terminate either SAR plan at any time. As of
September 30, 2010, approximately 880,000 SARs were outstanding.
Grants of Plan-Based Awards
There were no grants of plan-based awards to named executive officers during fiscal year 2010.
Outstanding Equity Awards at Fiscal Year-End
The following table lists SAR awards held by named executive officers during fiscal year 2010.
There are no outstanding named executive officer Phantom Stock awards.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Number of |
|
|
|
|
|
|
|
|
|
securities |
|
|
securities |
|
|
|
|
|
|
|
|
|
underlying |
|
|
underlying |
|
|
|
|
|
|
|
|
|
unexercised |
|
|
unexercised |
|
|
|
|
|
|
|
|
|
SARs (#) |
|
|
SARs (#) |
|
|
SAR exercise |
|
|
SAR expiration |
|
Name |
|
Exercisable |
|
|
Unexercisable |
|
|
price ($) |
|
|
date |
|
Mike Alber (1) |
|
|
|
|
|
|
5,000 |
|
|
|
40.05 |
|
|
|
12/13/13 |
|
|
|
|
(1) |
|
In December 2007, Mr. Alber was awarded 5,000 SARs at the exercise price of $40.05 per
share, all of which were outstanding as of September 30, 2010. |
100
SAR Exercises
The table below lists SARs exercised by the named executive officers during fiscal year 2010.
There were no SAR or Phantom Stock grants to named executive officers in fiscal 2010.
|
|
|
|
|
|
|
|
|
|
|
SAR Awards |
|
|
|
Number of |
|
|
|
|
|
|
shares |
|
|
Value realized |
|
|
|
acquired on |
|
|
on |
|
|
|
exercise |
|
|
exercise |
|
Name |
|
(#) |
|
|
($) |
|
|
|
|
|
|
|
|
|
|
Scott Fry |
|
|
4,000 |
|
|
$ |
58,240 |
|
Mr. Fry held 4,000 SARs issued at $19.94 per share that he exercised at $34.50 per share.
Deferred Compensation Plans
We maintain two Deferred Compensation Plans. One plan, the Executive Deferred Compensation
Plan, covers members of management and other highly compensated officers of the Company. The other
plan, the Directors Deferred Compensation Plan, covers members of the Companys Board of Directors.
Each plan permits an individual to make a qualifying election to forego current payment and
defer a portion of his or her compensation. Officers may defer up to 50% of their annual base
salary and up to 100% of bonus and/or stock-based compensation payments. Directors may defer up to
100% of their fees and their stock-based compensation payments.
Each Plan permits an individual to defer payment to a specified future date and to specify
whether deferrals are to be paid in a lump sum or installments. Under certain limited
circumstances, deferrals may be paid out early or further deferred. Typically, individuals may only
make one qualifying deferral election per year.
Scott Fry is the only named executive officer who elected to defer compensation to a
non-tax-qualified defined contribution plan during fiscal year 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive |
|
|
Registrant |
|
|
Aggregate |
|
|
Aggregate |
|
|
Aggregate |
|
|
|
Contributions |
|
|
Contributions |
|
|
Earnings in |
|
|
Withdrawals/ |
|
|
Balance at Last |
|
|
|
in Last FY |
|
|
in Last FY |
|
|
Last FY |
|
|
Distributions |
|
|
FYE |
|
Name |
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
Scott Fry |
|
$ |
|
|
|
$ |
|
|
|
$ |
31,191 |
|
|
$ |
|
|
|
$ |
352,442 |
|
Other Potential Post-Termination Payments
We have agreements and arrangements with several named executive officers to provide payments
and certain benefits in the event their employment is terminated without cause or we have a change
in control.
Employment Agreements. We have employment agreements with four named executive officers,
which provide that if the officer is involuntarily terminated without cause or terminated following
a change in control, he or she will be entitled to receive a lump sum cash payment as set forth in
his or her individual agreement. These named executive officers are entitled to receive
Consolidated Omnibus Budget Reconciliation Act (COBRA) benefits for 18 months following
termination plus up to $25,000 in outplacement services up through December 31 of the second
calendar year following an officers separation from service.
Long Term Incentive and Deferred Compensation Plans. Under the terms of our long term
incentive and deferred compensation plans, all unvested awards held by the named executive
officers, are subject to accelerated vesting following termination.
101
The table below lists estimated potential cash payments and benefits, and accelerated vested
LTIP awards to be received by named executive officers per their employment agreements and our
plans, assuming a change in control of Alion occurred on the last business day of fiscal 2010.
Termination by the Company without Cause;
Termination by Executive based upon Constructive Termination;
Termination in the event of Death or Disability;
Termination upon Expiration of the Employment Agreement due to Company Election Not to
Extend; Change in Control
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Early |
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of |
|
|
|
|
|
|
|
|
|
Severance |
|
|
LTIP |
|
|
|
|
|
|
|
Name |
|
Amount |
|
|
Awards |
|
|
Other |
|
|
Total |
|
|
|
(a) |
|
|
(b) |
|
|
(c) |
|
|
(d) |
|
|
|
|
|
|
|
|
|
|
Bahman Atefi |
|
$ |
2,870,000 |
|
|
$ |
786,667 |
|
|
$ |
25,000 |
|
|
$ |
3,681,667 |
|
Stacy Mendler |
|
$ |
1,087,500 |
|
|
$ |
295,000 |
|
|
$ |
25,000 |
|
|
$ |
1,407,500 |
|
Michael Alber |
|
$ |
535,000 |
|
|
$ |
242,607 |
|
|
$ |
25,000 |
|
|
$ |
802,607 |
|
Scott Fry |
|
$ |
580,000 |
|
|
$ |
247,917 |
|
|
$ |
25,000 |
|
|
$ |
852,917 |
|
|
|
|
(a) |
|
Based on a percentage of the executives annual salary and bonus he or she would
have earned as of such date based upon the bonus actually paid for fiscal 2010
performance. |
|
|
|
|
|
|
|
|
|
Name |
|
Salary |
|
|
Bonus |
|
|
|
|
|
|
|
|
|
|
Bahman Atefi |
|
|
200 |
% |
|
|
200 |
% |
Stacy Mendler |
|
|
150 |
% |
|
|
150 |
% |
Michael Alber |
|
|
100 |
% |
|
|
100 |
% |
Scott Fry |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
(b) |
|
This is the value as of September 2010 of vested LTIP awards not yet payable and LTIP not yet
vested. This does not include unvested Category F and G awards as no Named Executive Officer
has yet completed 18 months of post-award service. These amounts would be paid if termination
were to occur within one year after execution of a definitive change in control agreement if
such transaction were subsequently consummated. |
|
(c) |
|
This is the value of outplacement services (not to exceed $25,000) to be provided by a firm
selected and paid by the Alion. No such outplacement services will be provided beyond
December 31 of the second calendar year following the calendar year in which the executive
separates from service. |
|
|
|
Alion is also obligated to pay the executive, if he or she is eligible for and elects to
receive, medical and/or dental benefits under COBRA for the individual and/or any qualifying
beneficiaries. Alion will pay the amount by which the COBRA premium exceeds the premium payable
by the executive for the same level of coverage immediately prior to termination. |
|
(1) |
|
This column represents the total fees including the annual retainer fee to non-employee
directors. The Companys employee directors do not receive any additional compensation for
their services as members of the Board of Directors. For the year ended September 30,
2010, the Companys non-employee directors received an annual retainer and compensation of
$70,000, payable in quarterly installments, for their services as members of the Board of
Directors. In addition, each director receives a fee of $2,500 for in-person attendance at
a Board of Directors meeting, and $1,000 for telephone attendance at a Board of Directors
meeting. The chairman of the Audit and Finance Committee receives $7,500 per year for each
year he or she serves in such capacity. The other board committee chairpersons receive
$5,000 per year for each year he or she serves in such capacity. Board committee members
receive $1,000 per committee meeting if the committee meeting occurs on a day other than
the day of a full Alion Board of Directors meeting. Alion reimburses directors for
reasonable travel expenses in connection with attendance at Board of Directors and board
committee meetings. |
|
(2) |
|
The amounts included in this column represent the amount paid by the Company for travel
expenses to attend Board of Directors meetings. |
102
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee are Harold Gehman (Chairman), Leslie Armitage, Lewis
Collens, George Joulwan, and Pete Aldridge. None of the members, during the fiscal year, was an
officer or employee of our Company, formerly an officer of the Company or involved in a related
party transaction. Dr. Atefi is a member of the board of trustees of IIT where Mr. Collens was the
President until July 2007. Dr. Atefi is the President and Chief Executive Officer of the Company.
Compensation Committee Report
The Compensation, Committee of the Company has reviewed and discussed the Compensation
Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on
such review and discussions, the Compensation Committee recommended to the Board of Directors that
the Compensation Discussion and Analysis be included in this Annual Report.
THE COMPENSATION COMMITTEE
Harold Gehman, Jr., Chairman
Pete Aldridge, Jr., Committee Member
Leslie Armitage, Committee Member
Lewis Collens, Committee Member
George Joulwan, Committee Member
|
|
|
Item 12. |
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters |
The following table sets forth certain information as of September 30, 2010, regarding the
beneficial ownership of the Companys common stock by certain beneficial owners and all directors
and Named Executive Officers, both individually and as a group. The Company knows of no other
person not disclosed herein who beneficially owns more than 5% of the Companys common stock. The
address of the beneficial owner (as required) and the dates applicable to the beneficial ownership
indicated are set forth in the footnotes below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of |
|
|
|
|
|
|
|
|
|
|
Nature of |
|
|
Percentage |
|
|
|
|
|
|
|
Beneficial |
|
|
of Class |
|
Name of Beneficial Owner |
|
Title of Class |
|
|
Ownership |
|
|
(1) |
|
Five Percent Security Holders: |
|
|
|
|
|
|
|
|
|
|
|
|
None |
|
Common Stock |
|
|
|
|
|
|
|
|
Directors (2) and Executive Officers |
|
|
|
|
|
|
|
|
|
|
|
|
Bahman Atefi |
|
Common Stock |
|
|
57,538 |
(3) |
|
|
1.0 |
|
Stacy Mendler |
|
Common Stock |
|
|
75,096 |
(3) |
|
|
1.3 |
|
Michael Alber |
|
Common Stock |
|
|
155 |
(3) |
|
|
|
|
Scott Fry |
|
Common Stock |
|
|
5,679 |
(3) |
|
|
0.1 |
|
David Ohle |
|
Common Stock |
|
|
88 |
(3) |
|
|
|
|
Jim Fontana |
|
Common Stock |
|
|
4,706 |
(3) |
|
|
0.1 |
|
All Directors and Executive Officers as a Group (5 persons) |
|
Common Stock |
|
|
138,555 |
(3) |
|
|
2.5 |
|
|
|
|
(1) |
|
Applicable percentages are based on 5,658,234 shares outstanding on September 30, 2010
excluding 602,614 shares of common stock subject to warrants. This table is based upon
information in the Companys possession and believed to be accurate. Unless indicated in the
footnotes to this table and subject to community property laws where applicable, the Company
believes that each of the shareholders named in this table has sole voting and investment
power with respect to the shares indicated as beneficially owned. |
103
|
|
|
(2) |
|
No directors (other than Dr. Atefi) are believed by the Company to be beneficial owners of its
common stock. |
|
(3) |
|
Includes beneficial ownership of shares of Alions common stock held by the Alion KSOP. |
Changes in Control
The Company does not know of any arrangements, the operation of which may at a subsequent date
result in a change in control of the Company.
|
|
|
Item 13. |
|
Certain Relationships and Related Transactions, and Director Independence |
Since the beginning of the Companys last fiscal year, including any currently proposed
transactions, no directors, executive officers or immediate family members of such individuals were
engaged in transactions with us or any subsidiary involving more than $120,000 other than the
arrangements described in the section Executive Compensation.
In accordance with our Audit and Finance Committee Charter and procedures established by the
committee, our Audit and Finance Committee is responsible for reviewing and approving the terms and
conditions of all related party transactions. Any material financial transaction with a director or
executive officer of our company or a member of the immediate family of a director or officer would
need to be approved by our Audit and Finance Committee prior to our company entering into such
transaction.
Independent Directors
At least a majority of the Companys directors meet the test of independence as defined by
the NYSE AMEX rules. The NYSE AMEX rules provide that to qualify as an independent director, in
addition to satisfying certain bright-line criteria, the board of directors must affirmatively
determine that a director has no material relationship with the Company (either directly or as a
partner, shareholder or officer of an organization that has a relationship with the Company). Our
board of directors has determined that Pete Aldridge, Jr., Leslie Armitage, Lewis Collens, Harold
Gehman, Jr., Michael Hayden, George Joulwan, Michael Ryan and David Vitale satisfy the bright-line
criteria and that none has a relationship with the Company that would interfere with such persons
ability to exercise independent judgment as a member of the board. Therefore, we believe that each
of these directors is independent under the NYSE AMEX rules.
The Audit and Finance Committee currently consists of Leslie Armitage, Lewis Collens, Harold
Gehman, Jr., Michael Ryan and David Vitale. All members of the Audit and Finance Committee are
independent in accordance with the NYSE AMEX Rules.
The Compensation Committee currently consists of Harold Gehman, Jr., Pete Aldridge, Jr.,
Leslie Armitage, Lewis Collens and George Joulwan. All members of the Compensation Committee are
independent in accordance with the NYSE AMEX rules.
The Governance and Compliance Committee currently consists of Michael Ryan, Bahman Atefi,
Michael Hayden, George Joulwan and Harold Gehman, Jr. All members of the Governance and Compliance
Committee, excluding Bahman Atefi, are independent in accordance with the NYSE AMEX rules.
Item 14. Principal Accountant Fees and Services
Consistent with its charter, the Audit and Finance Committee is responsible for engaging the
Companys independent public accountants. Since December 2003, all audit and permitted non-audit
services require advance approval by the Audit and Finance Committee. The full Committee approves
proposed services and estimated fees for these services. The Audit and Finance Committee approved
in advance all services performed by our auditors in fiscal 2010 and 2009.
104
The following table summarizes the fees of Deloitte & Touche LLP, the Companys independent
registered public accounting firm, billed to the Company for each of the last two fiscal years for
audit services and other services:
Fee Category
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Audit Fees(1) |
|
$ |
1,250,000 |
|
|
$ |
1,075,000 |
|
Audit-Related Fees(2) |
|
|
317,000 |
|
|
|
133,515 |
|
Tax Fees and All Other Fees |
|
|
131,167 |
|
|
|
196,088 |
|
|
|
|
|
|
|
|
Total Fees |
|
$ |
1,698,167 |
|
|
$ |
1,404,603 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Audit fees include fees for auditing Alions financial statements, reviewing interim
financial statements included in quarterly reports on Form 10-Q, and providing other
professional services in connection with statutory and regulatory filings or engagements. |
|
(2) |
|
Audit-related fees are fees for assurance and similar services for employee benefit plan
audits and services provided in conjunction with acquisitions and accounting consultations.
These services were approved by the Audit and Finance Committee. |
|
|
|
Item 15. |
|
Exhibits and Financial Statement Schedules |
Consolidated Financial Statements of Alion Science and Technology Corporation
|
|
|
|
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm |
|
|
45 |
|
|
Consolidated Financial Statements: |
|
|
|
|
Consolidated Balance Sheets as of September 30, 2010 and 2009 |
|
|
46 |
|
Consolidated Statements of Operations for the years ended September 30, 2010, 2009 and 2008 |
|
|
47 |
|
Consolidated Statements of Redeemable Common Stock and Accumulated Deficit for the years
ended September 30, 2010, 2009, and 2008 |
|
|
48 |
|
Consolidated Statements of Cash Flows for the years ended September 30, 2010, 2009, and 2008 |
|
|
49 |
|
Notes to Consolidated Financial Statements |
|
|
50 |
|
|
Consolidated Financial Statement Schedule |
|
|
|
|
Schedule II Valuation and Qualifying Accounts |
|
|
106 |
|
105
Schedule II Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions |
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
Charged to |
|
|
|
|
|
|
Balance at |
|
Allowance for Doubtful |
|
Beginning |
|
|
Costs and |
|
|
|
|
|
|
End |
|
Accounts Receivable |
|
of Year |
|
|
Expenses |
|
|
Deductions (1) |
|
|
of Year |
|
Fiscal year ended 2010 |
|
$ |
4,419 |
|
|
$ |
|
|
|
$ |
(621 |
) |
|
$ |
3,798 |
|
Fiscal year ended 2009 |
|
$ |
3,962 |
|
|
$ |
1,014 |
|
|
$ |
(557 |
) |
|
$ |
4,419 |
|
Fiscal year ended 2008 |
|
$ |
5,272 |
|
|
$ |
(578 |
) |
|
$ |
(732 |
) |
|
$ |
3,962 |
|
|
|
|
(1) |
|
Accounts receivable written off against the allowance for doubtful accounts. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions |
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
Charged to |
|
|
|
|
|
|
Balance at |
|
Deferred Tax Asset |
|
Beginning |
|
|
Costs and |
|
|
|
|
|
|
End |
|
Valuation |
|
of Year |
|
|
Expenses (2) |
|
|
Deductions |
|
|
of Year |
|
Fiscal year ended 2010 |
|
$ |
|
|
|
$ |
36,929 |
|
|
$ |
|
|
|
$ |
36,929 |
|
Fiscal year ended 2009 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Fiscal year ended 2008 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
(2) |
|
Change in Alions tax status. Establish deferred tax assets and corresponding full valuation allowance. |
106
(c) Exhibits
|
|
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
3.1 |
|
|
Third Amended and Restated Certificate of Incorporation of Alion Science and Technology Corporation. (1) |
|
3.2 |
|
|
Amended and Restated By-laws of Alion Science and Technology Corporation. (2) |
|
4.1 |
|
|
Indenture dated as of February 8, 2007, among Alion Science and Technology Corporation,
certain subsidiary guarantors and Wilmington Trust Company, as trustee. (3) |
|
4.2 |
|
|
Form of 10.25% Senior Notes due 2015. (3) |
|
4.3 |
|
|
Amended and Restated Alion Science and Technology Corporation Employee Ownership, Savings and
Investment Plan. (4) |
|
4.4 |
|
|
First Amendment to Amended and Restated Alion Science and Technology Corporation Employee
Ownership, Savings and Investment Plan. (5) |
|
4.5 |
|
|
Second Amendment to Amended and Restated Alion Science and Technology Corporation Employee
Ownership, Savings and Investment Plan. (6) |
|
4.6 |
|
|
Third Amendment to Amended and Restated Alion Science and Technology Corporation Employee
Ownership, Savings and Investment Plan. (7) |
|
4.7 |
|
|
Fourth Amendment to Amended and Restated Alion Science and Technology Corporation Employee
Ownership, Savings and Investment Plan. (7) |
|
4.8 |
|
|
Indenture, dated as of March 22, 2010, among the Company, certain subsidiary guarantors of
the Company and Wilmington Trust Company, as trustee. (2) |
|
4.9 |
|
|
Form of 12% Senior Secured Notes due 2014. (2) |
|
4.10 |
|
|
Form of Warrant. (2) |
|
4.11 |
|
|
Form of Unit. (2) |
|
10.1 |
|
|
Employment Agreement between Alion Science and Technology Corporation and Dr. Bahman Atefi. (8)* |
|
10.2 |
|
|
Employment Agreement between Alion Science and Technology Corporation and Stacy Mendler. (9)* |
|
10.3 |
|
|
Employment Agreement by and between Alion Science and Technology Corporation and Michael J.
Alber. * (10) |
|
10.4 |
|
|
Separation Agreement and General Release with John M. Hughes. * (11) |
|
10.5 |
|
|
Employment Agreement between Alion Science and Technology Corporation and Scott Fry. (12) * |
|
10.6 |
|
|
Employment Agreement between Alion Science and Technology Corporation and Buck Buchanan. (12)* |
|
10.7 |
|
|
Separation Agreement and General Release with Leroy R. Goff, III. (6)* |
|
10.8 |
|
|
Settlement Agreement and General Release with John M. Hughes. (6)* |
|
10.9 |
|
|
Alion Science and Technology Corporation Long-Term Incentive Plan. (6)* |
|
10.10 |
|
|
Form of Alion Science and Technology Corporation Category A Long Term Incentive Plan Award
Agreement. (6)* |
|
10.11 |
|
|
Form of Alion Science and Technology Corporation Category B Long Term Incentive Plan Award
Agreement. (6)* |
|
10.12 |
|
|
Form of Alion Science and Technology Corporation Category C Long Term Incentive Plan Award
Agreement. (6)* |
|
10.13 |
|
|
Form of Alion Science and Technology Corporation Category D Long Term Incentive Plan Award
Agreement. (6)* |
|
10.14 |
|
|
Form of Alion Science and Technology Corporation Ongoing Long Term Incentive Plan Award
Agreement. (6)* |
|
10.15 |
|
|
Separation Agreement dated as of December 8, 2009 between Alion Science and Technology
Corporation and James C. Fontana. (14)* |
|
10.16 |
|
|
First Supplemental Indenture, dated as February 26, 2010, between Alion-IPS Corporation,
Washington Consulting Government Services, Inc., Alion Canada (US) Corporation, Alion Science
and Technology Corporation and Wilmington Trust Company, as trustee. (15) |
|
10.17 |
|
|
Purchase Agreement dated as of March 11, 2010, by and between the Company and Credit Suisse
Securities (USA) LLC. (2) |
|
10.18 |
|
|
Warrant Agreement, dated as of March 22, 2010, by and between the Company and Wilmington
Trust Company, as warrant agent. (2) |
|
10.19 |
|
|
Credit Agreement, dated as of March 22, 2010, by and among the Company, the lenders party
thereto and Credit Suisse AG, as administrative agent. (2) |
|
10.20 |
|
|
Intercreditor Agreement, dated as of March 22, 2010, by and among the Company, the other
grantors party thereto, Credit Suisse AG, as administrative agent, and Wilmington Trust
Company, as collateral agent and trustee. (2) |
|
10.21 |
|
|
Security Agreement, dated as of March 22, 2010, by and among the Company, certain
subsidiaries of the Company and Wilmington Trust Company, as collateral agent. (2) |
107
|
|
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
10.22 |
|
|
Guarantee Agreement, dated as of March 22, 2010, by and among the Company, certain
subsidiaries of the Company and Credit Suisse AG, as administrative agent. (2) |
|
10.23 |
|
|
Registration Rights Agreement, dated March 22, 2010, by and between the Company and Credit
Suisse Securities (USA) LLC. (2) |
|
10.24 |
|
|
Amendment, dated as of March 22, 2010, to the Stock Purchase Agreement, dated as of December
20, 2002, between the Company and the Alion Science and Technology Corporation Employee
Ownership, Savings and Investment Trust. (2) |
|
10.25 |
|
|
Alion Science and Technology Corporation 2004 Stock Appreciation Rights Plan, as amended and
restated effective January 1, 2007. (7)* |
|
10.26 |
|
|
Alion Science and Technology Performance Shares and Retention Phantom Stock Plan, as amended
and restated effective November 1, 2007. (7)* |
|
10.27 |
|
|
Alion Science and Technology Director Phantom Stock Plan, as amended and restated effective
January 1, 2007. (7)* |
|
10.28 |
|
|
Alion Executive Deferred Compensation Plan, as amended and restated effective January 1,
2008. (7)* |
|
10.29 |
|
|
Alion Director Deferred Compensation Plan, as amended and restated effective January 1,
2008. (7)* |
|
10.30 |
|
|
First Amendment to Alion Science and Technology Corporation 2004 Stock Appreciation Rights
Plan (as amended and restated), dated as of January 22, 2010. (7)* |
|
10.31 |
|
|
First Amendment to Alion Science and Technology Corporation Director Phantom Stock Plan (as
amended and restated), dated as of January 22, 2010. (7)* |
|
10.32 |
|
|
First Amendment to Alion Science and Technology Corporation Long-Term Incentive Plan, dated
as of January 22, 2010. (7)* |
|
12 |
|
|
Computation of Ratios |
|
21 |
|
|
Subsidiaries of Alion Science and Technology Corporation are wholly-owned (either directly or
indirectly) by Alion Science and Technology Corporation: |
|
(i |
) |
|
Innovative Technology Solutions Corporation, incorporated in the State of New Mexico, |
(ii
|
) |
|
Alion-IPS Corporation, incorporated in the Commonwealth of Virginia, |
(iii
|
) |
|
Alion-METI Corporation, incorporated in the Commonwealth of Virginia, |
(iv
|
) |
|
Alion-CATI Corporation, incorporated in the State of California, |
|
(v |
) |
|
Alion-JJMA Corporation, incorporated in the State of New York, |
(vi
|
) |
|
Alion Technical Services Corporation, incorporated in the Commonwealth of Virginia, |
(vii
|
) |
|
Alion Technical Services Corporation, incorporated in the State of Delaware, |
(vii
|
) |
|
Alion Canada (U.S.), Inc., incorporated in the State of Delaware, |
(ix
|
) |
|
Alion Science and Technology (Canada) Corporation, incorporated in the Province of Nova Scotia, |
|
(x |
) |
|
Alion-BMH Corporation, incorporated in the Commonwealth of Virginia, |
(xi
|
) |
|
Washington Consulting, Inc., incorporated in the Commonwealth of Virginia, |
(xii
|
) |
|
Alion-MA&D Corporation, incorporated in the State of Colorado, and |
(xiii
|
) |
|
Washington Consulting Government Services, Inc., incorporated in the Commonwealth of Virginia. |
108
|
|
|
|
|
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. |
|
|
|
(1) |
|
Incorporated by reference from the Companys Form 10-Q filed with the SEC on May 13, 2005. |
|
(2) |
|
Incorporated by reference from the Companys Form 8-K filed with the SEC on March 25, 2010. |
|
(3) |
|
Incorporated by reference from the Companys Form 8-K filed with the SEC on February 8, 2007. |
|
(4) |
|
Incorporated by reference from the Companys Form S-4 filed with the SEC on April 30, 2007. |
|
(5) |
|
Incorporated by reference from the Companys Form 8-K filed with the SEC on July 13, 2007. |
|
(6) |
|
Incorporated by reference from the Companys Form 10-K filed with the SEC on December 23,
2008. |
|
(7) |
|
Incorporated by reference from the Companys Form 10-Q filed with the SEC on May 14, 2010. |
|
(8) |
|
Incorporated by reference from the Companys Form S-4 (8-K) filed with the SEC on June 21,
2007. |
|
(9) |
|
Incorporated by reference from the Companys Form 8-K filed with the SEC on July 20, 2007. |
|
(10) |
|
Incorporated by reference from the Companys Form 8-K filed with the SEC on April 8, 2008. |
|
(11) |
|
Incorporated by reference from the Companys Form 10-Q filed with the SEC on August 13, 2008. |
|
(12) |
|
Incorporated by reference from the Companys Form 10-K filed with the SEC on December 28,
2007. |
|
(13) |
|
Incorporated by reference from the Companys Form 10-K filed with the SEC on December 24,
2009. |
|
(14) |
|
Incorporated by reference from the Companys Form 8-K filed with the SEC on February 4, 2010. |
|
(15) |
|
Incorporated by reference from the Companys Form 8-K filed with the SEC on March 3, 2010. |
|
* |
|
Denotes management contract and/or compensatory plan/arrangement. |
109
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
|
|
|
ALION SCIENCE AND TECHNOLOGY CORPORATION
(Registrant)
|
|
Date: December 14, 2010
|
|
|
|
|
By: |
/s/ BAHMAN ATEFI
|
|
|
|
Bahman Atefi |
|
|
|
Chairman, Chief Executive Officer and Director |
|
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has
been signed below by the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ Bahman Atefi
Bahman Atefi
|
|
Chairman, Chief Executive
Officer and Director
|
|
December 14, 2010 |
|
|
|
|
|
/s/ Michael J. Alber
Michael J. Alber
|
|
Senior Vice President and
Chief Financial Officer
|
|
December 14, 2010 |
|
|
|
|
|
/s/ Jeffrey L. Boyers
Jeffrey L. Boyers
|
|
Corporate Vice President and
Principal Accounting Officer
|
|
December 14, 2010 |
|
|
|
|
|
/s/ Edward C. Aldridge, Jr.
Edward C. (Pete) Aldridge, Jr.
|
|
Director
|
|
December 14, 2010 |
|
|
|
|
|
/s/ Leslie L. Armitage
Leslie Armitage
|
|
Director
|
|
December 14, 2010 |
|
|
|
|
|
/s/ Lewis Collens
Lewis Collens
|
|
Director
|
|
December 14, 2010 |
|
|
|
|
|
/s/ Harold W. Gehman, Jr.
Harold Gehman
|
|
Director
|
|
December 14, 2010 |
|
|
|
|
|
/s/ Michael V. Hayden
Michael V. Hayden
|
|
Director
|
|
December 14, 2010 |
|
|
|
|
|
/s/ George A. Joulwan
George A. Joulwan
|
|
Director
|
|
December 14, 2010 |
|
|
|
|
|
/s/ Michael E. Ryan
Michael E. Ryan
|
|
Director
|
|
December 14, 2010 |
|
|
|
|
|
/s/ David J. Vitale
David J. Vitale
|
|
Director
|
|
December 14, 2010 |
Supplemental Information to be Furnished with Reports Filed Pursuant to Section 15(d) of the
Act by Registrants which Have Not Registered Securities Pursuant to Section 12 of the Act
No annual report or proxy material has been sent to security holders.
110