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EX-32.2 - EXHIBIT 32.2 - ALION SCIENCE & TECHNOLOGY CORPc11674exv32w2.htm
EX-31.2 - EXHIBIT 31.2 - ALION SCIENCE & TECHNOLOGY CORPc11674exv31w2.htm
EX-31.1 - EXHIBIT 31.1 - ALION SCIENCE & TECHNOLOGY CORPc11674exv31w1.htm
EX-32.1 - EXHIBIT 32.1 - ALION SCIENCE & TECHNOLOGY CORPc11674exv32w1.htm
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2010
COMMISSION FILE NUMBER 333-89756
 
(ALION LOGO)
Alion Science and Technology Corporation
(Exact Name of Registrant as Specified in Its Charter)
     
DELAWARE
(State or Other Jurisdiction of
Incorporation of Organization)
  54-2061691
(I.R.S. Employer
Identification No.)
     
10 West 35th Street
Chicago, IL 60616
(312) 567-4000
  1750 Tysons Boulevard, Suite 1300
McLean, VA 22102
(703) 918-4480
(Address, including Zip Code and Telephone Number with Area Code, of Principal Executive Offices)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. o Yes þ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large Accelerated Filer o   Accelerated Filer o   Non-Accelerated Filer þ   Smaller Reporting Company o
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The number of shares outstanding of Alion Science and Technology Corporation Common Stock as of February 4, 2011 was: Common Stock 5,537,967
 
 

 

 


 

ALION SCIENCE AND TECHNOLOGY CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2010
         
 
 
       
    1  
 
       
    1  
 
       
    2  
 
       
    3  
 
       
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    26  
 
       
    39  
 
       
    40  
 
       
    40  
 
       
 
 
       
    40  
 
       
    40  
 
       
    40  
 
       
    40  
 
       
    40  
 
       
    40  
 
       
    41  
 
       
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2

 

 


Table of Contents

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
ALION SCIENCE AND TECHNOLOGY CORPORATION
Condensed Consolidated Balance Sheets (unaudited)
As of December 31, 2010 and September 30, 2010
                 
    December 31,     September 30,  
    2010     2010  
    (In thousands, except share and per  
    share information)  
Current assets:
               
Cash and cash equivalents
  $ 15,279     $ 26,695  
Accounts receivable, net
    173,622       174,032  
Receivable due from ESOP Trust
          1,896  
Prepaid expenses and other current assets
    5,911       5,159  
 
           
Total current assets
    194,812       207,782  
Property, plant and equipment, net
    9,817       10,798  
Intangible assets, net
    15,942       17,694  
Goodwill
    398,921       398,921  
Other assets
    11,115       11,107  
 
           
Total assets
  $ 630,607     $ 646,302  
 
           
Current liabilities:
               
Interest payable
  $ 15,823     $ 17,217  
Trade accounts payable
    46,556       44,486  
Accrued liabilities
    44,362       43,145  
Accrued payroll and related liabilities
    33,071       40,221  
Billings in excess of revenue earned
    3,097       2,917  
 
           
Total current liabilities
    142,909       147,986  
Senior secured notes
    279,625       275,831  
Senior unsecured notes
    244,375       246,126  
Accrued compensation and benefits, excluding current portion
    6,168       6,174  
Non-current portion of lease obligations
    7,778       7,848  
Deferred income taxes
    38,951       37,207  
Redeemable common stock, $0.01 par value, 8,000,000 shares authorized, 5,538,289 and 5,658,234 shares issued and outstanding at December 31, 2010 and September 30, 2010
    147,595       150,792  
Common stock warrants
    20,785       20,785  
Accumulated other comprehensive loss
    (177 )     (177 )
Accumulated deficit
    (257,402 )     (246,270 )
 
           
Total liabilities, redeemable common stock and accumulated deficit
  $ 630,607     $ 646,302  
 
           
See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

ALION SCIENCE AND TECHNOLOGY CORPORATION
Condensed Consolidated Statements of Operations (unaudited)
                 
    Three Months Ended  
    December 31,  
    2010     2009  
    (In thousands, except share and  
    per share information)  
Contract revenue
  $ 200,768     $ 205,738  
Direct contract expense
    155,514       158,996  
 
           
Gross profit
    45,254       46,742  
 
           
Operating expenses:
               
Indirect contract expense
    9,634       9,286  
Research and development
    88       261  
General and administrative
    16,215       16,007  
Rental and occupancy expense
    7,730       7,986  
Depreciation and amortization
    2,990       4,231  
 
           
Total operating expenses
    36,657       37,771  
 
           
Operating income
    8,597       8,971  
Other income (expense):
               
Interest income
    20       45  
Interest expense
    (18,404 )     (16,886 )
Other
    (61 )     (111 )
Gain on debt extinguishment
    460        
 
           
Total other income (expense)
    (17,985 )     (16,952 )
Loss before taxes
    (9,388 )     (7,981 )
Income tax (expense) benefit
    (1,744 )     40  
 
           
Net loss
  $ (11,132 )   $ (7,941 )
 
           
 
               
Basic and diluted loss per share
    (1.97 )     (1.46 )
 
           
Basic and weighted average common shares outstanding
    5,655,405       5,424,031  
 
           
See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

ALION SCIENCE AND TECHNOLOGY CORPORATION
Condensed Consolidated Statements of Cash Flows (unaudited)
                 
    Three Months Ended  
    December 31,  
    2010     2009  
    (In thousands)  
Cash flows from operating activities:
               
Net loss
  $ (11,132 )   $ (7,941 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    3,006       4,231  
Accretion of debt to face value
    1,564       606  
Amortization of debt issuance costs
    2,519       966  
Change in fair value of redeemable common stock warrants
          (160 )
Incentive and stock-based compensation
    868       605  
Gain on extinguishment of debt
    (460 )      
Deferred income taxes
    1,744        
Other gains and losses
    (1 )     19  
Changes in assets and liabilities:
               
Accounts receivable
    410       (4,988 )
Other assets
    (832 )     (536 )
Trade accounts payable
    2,071       (11,400 )
Accrued liabilities
    (6,806 )     (750 )
Interest payable
    (1,394 )     6,381  
Other liabilities
    170       1,333  
 
           
Net cash used in operating activities
    (8,273 )     (11,634 )
Cash flows from investing activities:
               
Cash paid for acquisition-related obligations
          (50 )
Capital expenditures
    (340 )     (814 )
Proceeds from sale of assets
    8        
 
           
Net cash used in investing activities
    (332 )     (864 )
Cash flows from financing activities:
               
Change in book overdraft
          5,074  
Repurchase Senior Unsecured Notes
    (1,510 )      
Payment of debt issue costs
          (3,127 )
Repayment of Term B Loan
          (608 )
Revolver borrowings
          15,900  
Revolver repayments
          (15,900 )
Loan to ESOP Trust
    (776 )      
ESOP loan repayment
    776        
Redeemable common stock purchased from ESOP Trust
    (3,197 )     (26 )
Redeemable common stock sold to ESOP Trust
    1,896        
 
           
Net cash (used in) provided by financing activities
    (2,811 )     1,313  
Net decrease in cash and cash equivalents
    (11,416 )     (11,185 )
Cash and cash equivalents at beginning of period
    26,695       11,185  
 
           
Cash and cash equivalents at end of period
  $ 15,279     $  
 
           
Supplemental disclosure of cash flow information:
               
Cash paid for interest
  $ 15,702     $ 7,916  
Cash paid for taxes
          (40 )
See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Description and Formation of the Business
Alion Science and Technology Corporation and its subsidiaries (collectively, the Company or Alion) provide scientific, engineering and information technology expertise to research and develop technological solutions for problems relating to national defense, homeland security, and energy and environmental analysis. Alion provides services to departments and agencies of the federal government and, to a lesser extent, to commercial and international customers.
Alion was established in October 2001 as a for-profit S-Corporation to purchase substantially all of the assets and certain liabilities of IIT Research Institute (IITRI), a not-for-profit corporation controlled by Illinois Institute of Technology (IIT). In December 2002, Alion acquired substantially all of IITRI’s assets and liabilities except for its Life Sciences Operation, for $127.3 million. Prior to that, the Company’s activities were organizational in nature.
On March 22, 2010, the Company became a C-Corporation because it no longer met the Internal Revenue Code S-corporation requirement that it have only a single class of stock. In connection with the sale of the Secured Note Units, Alion issued deep-in-the-money common stock warrants considered to be a second class of stock. See Note 12.
(2) Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of Alion Science and Technology Corporation (a Delaware corporation), and its wholly-owned subsidiaries and have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and note disclosures normally included in the annual financial statements, prepared in accordance with generally accepted accounting principles, have been omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. The statements are prepared on the accrual basis of accounting and include the accounts of Alion and its wholly-owned subsidiaries from their date of acquisition or formation. All inter-company accounts have been eliminated in consolidation. There were no changes to Alion’s subsidiaries in the current fiscal year.
In management’s opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments and reclassifications that are necessary for fair presentation of the periods presented. The results for the three months ended December 31, 2010 are not necessarily indicative of the results to be expected for the full fiscal year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s latest annual report on Form 10-K for the year ended September 30, 2010.
Fiscal, Quarter and Interim Periods
Alion’s 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 Alion’s financial position, results of operations, or cash flows.
Revenue Recognition
Alion derives its revenue from delivering technology services under a variety of contracts. Some contracts provide for reimbursement of costs plus fees; others are fixed-price or time-and-material type contracts. The Company generally recognizes revenue when a contract has been executed, the contract price is fixed or determinable, delivery of services or products has occurred and collectibility of the contract price is considered reasonably assured. Alion applies the percentage of completion method in Accounting Standards Codification (ASC) 605 — Revenue Recognition to recognize revenue.

 

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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Alion recognizes revenue on cost-reimbursement contracts as it incurs costs and includes estimated fees earned. The Company recognizes time-and-material contract revenue at negotiated, fixed, contractually billable rates as it delivers labor hours and incurs other direct expenses. Alion uses various performance measures under the percentage of completion method to recognize revenue for fixed-price contracts. Estimating contract costs at completion and recognizing revenue appropriately involve significant management estimates. Actual costs may differ from estimated costs and affect estimated profitability and timing of revenue recognition. From time to time, facts develop that require Alion to revise estimated total costs or expected revenue. Alion records the cumulative effect of revised estimates in the period in which the facts requiring revised estimates become known. Alion recognizes the full amount of anticipated losses on any type of contract in the period in which a loss becomes known. For each of the periods presented, the cumulative effects of revised estimates were immaterial to the Company’s financial performance.
Federal government agency contracts are subject to periodic funding. A customer may fund a contract in its entirety at inception or incrementally throughout its period of performance as services are provided. If Alion determines contract funding is not probable, it defers revenue recognition until realization is probable. The federal government can audit Alion’s contract costs and adjust amounts through negotiation. The government considers Alion a major contractor; its auditors maintain an office on site. The government has audited the Company’s claimed costs through fiscal year 2004. The Company negotiated and settled indirect rates through fiscal year 2004 with no material adverse effect on operating results or cash flows. DCAA is currently auditing the Company’s indirect cost proposals for fiscal 2005 and 2006. The Company submitted its fiscal year 2009, 2008 and 2007 indirect cost proposals in March 2010, 2009 and 2008. Alion has recorded federal government contract revenue in amounts it expects to realize.
Alion recognizes revenue on unpriced change orders as it incurs expenses and only to the extent it is probable it will recover such costs. The Company recognizes revenue in excess of costs on unpriced change orders only when management can also estimate beyond a reasonable doubt the amount of excess and experience provides a sufficient basis for recognition. Alion recognizes revenue on claims as expenses are incurred only to the extent it is probable that it will recover such costs and can reliably estimate the amount it will recover.
Alion generates software-related revenue from licensing software and providing services. In general, professional services are essential to the functionality of the solutions the Company sells.
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 Alion’s 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 Alion’s subsidiaries were qualified S-corporation subsidiaries or disregarded entities included in its consolidated federal tax returns.
On March 22, 2010, Alion issued deep-in-the-money warrants deemed to constitute a second class of stock. Because it was deemed to have two classes of stock, the Company ceased to qualify as an S-corporation and automatically became a C-corporation subject to federal and state income taxes. Some Alion subsidiaries also became subject to separate state income tax and reporting requirements. From its formation, Alion Science and Technology (Canada) Corporation has been subject to Canadian federal and provincial income taxes.
Alion accounts for income taxes by applying the provisions in currently enacted tax laws. The Company determines deferred income taxes based on the estimated future tax effects of differences between the financial statement and tax bases of its assets and liabilities. Deferred income tax provisions and benefits will change as assets or liabilities change from year-to-year. In providing for deferred taxes, Alion considers the tax regulations of the jurisdictions where it operates; estimates of future taxable income; and available tax planning strategies. If tax regulations, operating results or the ability to implement tax-planning strategies change, the carrying value of deferred tax assets and liabilities may require adjustment.
Alion has a history of operating losses for both tax and financial statement purposes. The Company has recorded valuation allowances equal to deferred tax assets based on the likelihood that it may not be able to realize the value of these assets. Alion recognizes the benefit of a tax position only after determining that the relevant tax authority would “more likely than not” sustain the Company’s position following an audit. For tax positions meeting the “more likely than not” threshold, the Company recognizes the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

 

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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Cash and Cash Equivalents
The Company considers cash in banks, and deposits with financial institutions with maturities of three months or less at time of purchase which it can liquidate without prior notice or penalty, to be cash and cash equivalents.
Accounts Receivable and Billings in Excess of Revenue Earned
Accounts receivable include billed accounts receivable, amounts currently billable and revenue in excess of billings on uncompleted contracts that represent accumulated project expenses and fees which have not been billed or are not currently billable as of the date of the consolidated balance sheet. Revenue in excess of billings on uncompleted contracts is stated at estimated realizable value. Unbilled accounts receivable include revenue recognized for customer-related work performed by Alion on new and existing contracts for which the Company had not received contracts or contract modifications. The allowance for doubtful accounts is Alion’s best estimate of the amount of probable losses in the Company’s 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 asset’s 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 asset’s estimated useful life or the life of the lease. Upon sale or retirement of an asset, costs and related accumulated depreciation are deducted from the accounts, and any gain or loss is recognized in the consolidated statements of operations.
Goodwill and Intangible Assets
Alion assigns the purchase price it pays to acquire the stock or assets of an entity to the net assets acquired based on the estimated fair value of the assets acquired. Goodwill is the purchase price in excess of the estimated fair value of the tangible net assets and separately identified intangible assets acquired. Purchase price allocations for acquisitions involve significant estimates and management judgments may be adjusted during the purchase price allocation period. There are no acquisitions with open measurement periods.
The Company accounts for goodwill and other intangible assets in accordance with the provisions of ASC 350 — Intangibles, Goodwill and Other Assets. Alion is required to review goodwill at least annually for impairment or, more frequently if events and circumstances indicate goodwill might be impaired. The Company performs its annual review at the end of each fiscal year. Alion is required to recognize an impairment loss to the extent that its goodwill carrying amount exceeds fair value. Evaluating any impairment to goodwill involves significant management estimates. To date, these annual reviews have resulted in no adjustments.
The Company operates in one segment and tests goodwill at the reporting unit level. Management has identified three reporting units for the purpose of testing goodwill for impairment. The reporting units are based on administrative organizational structure and the availability of discrete financial information. Each reporting unit provides a similar range of scientific, engineering and analytical services to departments and agencies of the U.S. government and commercial customers. The Company employs a reasonable, supportable and consistent method to assign goodwill to reporting units expected to benefit from the synergies arising from acquisitions. Alion determines reporting unit goodwill in a manner similar to the way it determines goodwill in a purchase allocation by using fair value to determine reporting unit purchase price, assets, liabilities and goodwill. Reporting unit residual fair value after this allocation is the implied fair value of reporting unit goodwill. The Company’s reporting units remained consistent in structure for all periods presented. The Company allocated changes in goodwill carrying value to reporting units based on acquisitions attributable to each unit’s current structure.
The Company performs its own independent analysis to determine whether goodwill is potentially impaired. The Company performs discounted cash flow and market-multiple-based analyses to estimate the enterprise fair value of Alion and its reporting units and the fair value of reporting unit goodwill in order to test goodwill for potential impairment. Management independently determines the rates and assumptions it uses to perform its goodwill impairment analysis and assesses the probability of future contracts and revenue to evaluate the recoverability of goodwill.

 

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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Alion’s cash flow analysis depends on several significant management inputs and assumptions. Management uses observable inputs, rates and assumptions generally consistent with those used by the independent third party to prepare the valuation report for the ESOP Trustee. Management’s 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 Company’s 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 Alion’s outstanding debt and a hypothetical market participant capital structure. Management estimates future years’ EBITDA based on Alion’s 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 Alion’s 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 Alion’s enterprise fair value and thus the Company’s 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 Alion’s internally computed enterprise fair value to confirm the reasonableness of the internal 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 unit’s carrying amount to its estimated fair value. If a reporting unit’s carrying value exceeds its estimated fair value, the Company compares the reporting unit’s 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. The estimated fair value of each reporting unit substantially exceeded its September 2010 carrying value. A hypothetical 10% decrease in fair value would not have resulted in impairment to goodwill for any reporting unit or triggered the need to perform additional step two analyses for any reporting unit. There were no changes to goodwill in the quarter ended December 31, 2010 nor were there any significant events in the quarter that indicated impairment to goodwill as of December 31, 2010.
Alion amortizes intangible assets as it consumes economic benefits over estimated useful lives. As of December 31, 2010, the Company had approximately $15.9 million in net intangible assets, primarily contracts purchased through 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 Alion’s redeemable common stock and therefore no observable price for its equity, individually or in the aggregate. The ESOP Trust holds all the Company’s outstanding common stock. Under certain circumstances, ESOP beneficiaries can require the ESOP Trust to distribute the value of their beneficial interests. The Internal Revenue Code (IRC) and ERISA require the Company to offer ESOP participants who receive Alion common stock a liquidity put right. The put right requires the Company to purchase distributed shares at any time during two put option periods at the then current fair market value. Common stock distributed by the ESOP Trust is subject to a right of first refusal. Prior to any subsequent transfer, the shares must first be offered to the Company and then to the ESOP Trust. Eventual redemption of shares of Alion common stock as a result of distributions is outside the Company’s control; therefore, Alion classifies its outstanding shares of redeemable common stock as a liability.

 

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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
At each reporting date, Alion is required to increase or decrease the reported value of its outstanding common stock to reflect its estimated redemption value. Management estimates the value of this liability in part by considering the most recent price at which the Company was able to sell shares to the ESOP Trust (current share price times total shares issued and outstanding). In its fiduciary capacity the ESOP Trustee is independent of the Company and its management. Consistent with its fiduciary responsibilities, the ESOP Trustee retains an independent third party valuation firm to assist it in determining the fair market value (share price) at which the ESOP Trustee may acquire or dispose of investments in Alion common stock. The Audit and Finance Committee of Alion’s Board of Directors reviews the reasonableness of the liability Management has determined is appropriate for the Company to recognize in its financial statements for outstanding redeemable common stock. The Audit and Finance Committee considers various factors in its review, including, in part, the most recent valuation report and the share price selected by the ESOP Trustee.
Alion records changes in the reported value of its outstanding common stock through an offsetting charge or credit to accumulated deficit. There were no fair value adjustments to redeemable common stock in the current quarter. The accumulated deficit at December 31, 2010 included $49.1 million for changes in the Company’s share redemption liability. Outstanding redeemable common stock had an aggregate fair value of approximately $147.6 million as of December 31, 2010.
Concentration of Credit Risk
Alion is subject to credit risk for its cash equivalents and accounts receivable. The Company believes the high credit quality of its cash equivalent investments limits its credit risk with respect to such investments. Alion believes its concentration of credit risk with respect to accounts receivable is limited as the receivables are principally due from the federal government.
Fair Value of Financial Instruments
The Company used the following methods and assumptions to estimate the fair value of each class of financial instruments for which it is practicable to estimate fair value. For each of the following items, the fair value is not materially different than the carrying value.
Cash, cash equivalents, accounts payable and accounts receivable. Carrying amounts approximate fair value because of the short maturity of those instruments.
Senior long-term debt. The carrying amount of the Company’s senior debt approximates fair value, estimated based on current rates offered to the Company for debt of the same remaining maturities, and reflects amounts Alion is contractually required to pay. Senior long-term debt includes the Company’s revolving credit agreement, its Secured Notes and its Unsecured Notes.
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 2010-28 (ASU 2010-28) Goodwill and Other Intangibles — When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts was issued in December 2010 and updates ASC 350 — Goodwill and Other Intangibles (ASC 350). ASU 2010-28 modifies goodwill impairment testing for reporting units with zero or negative carrying amounts.
ASU 2010-28 requires an entity to perform a step two goodwill impairment analysis for reporting units with zero or negative carrying value as part of an annual goodwill impairment analysis; whenever an event occurs or circumstances indicate that a reporting unit’s fair value is more likely than not below its carrying amount; whenever an event occurs or circumstances indicate that a goodwill impairment exists; and upon adoption of the standard.
ASU 2010-28 is effective for fiscal years beginning on or after June 15, 2011, and can only be applied prospectively. Any goodwill impairment recognized on adopting ASU 2010-28 is to be recorded as a cumulative effect adjustment to retained earnings in the period of adoption. Any goodwill impairments occurring subsequent to adoption are to be recognized in current earnings as required by ASC 350. The Company is currently evaluating the effect, if any, that adopting ASU 2010-28 will have on Alion’s consolidated financial position and operating results.

 

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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(3) Employee Stock Ownership Plan (ESOP) and ESOP Trust
In December 2001, the Company adopted the Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan (the Plan) and the ESOP Trust. The Plan, a tax qualified retirement plan, includes ESOP and non-ESOP components. In April 2010, the Internal Revenue Service (IRS) issued a determination letter that the ESOP Trust and the Plan, as amended and restated as of October 1, 2006, and including amendments to the Plan executed in June 2009 and May 2010, qualify under Sections 401(a) and 501(a) of the IRC. In August 2008, Alion amended the Trust Agreement between the Company and the ESOP Trust. Alion believes that the Plan and the ESOP Trust have been designed and are being operated in compliance with applicable IRC requirements.
(4) Earnings (Loss) Per Share
Basic and diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding excluding the impact of warrants and phantom stock. Even after including required adjustments to the earnings per share numerator, the warrants and phantom stock are anti-dilutive for all periods presented. The Company’s 1,630,437 Subordinated Note warrants were outstanding through March 22, 2010 when they were extinguished. Also on March 22, 2010, Alion issued 310,000 Units that include the Secured Notes and warrants to purchase 602,614 shares of Alion common stock The Secured Note warrants have a penny per share exercise price, are currently exercisable and expire March 15, 2017. The Secured Note warrants are not redeemable and do not have price protection; they are classified as permanent equity.
(5) Redeemable Common Stock Owned by ESOP Trust
The ESOP Trust owns all of Alion’s issued and outstanding common stock, for the benefit of current and former employee participants in the Alion KSOP. Participants and beneficiaries are entitled to a distribution of the fair value of their vested ESOP account balance upon death, disability, retirement or termination of employment. The Plan permits distributions to be paid over a five year period commencing the year after a participant’s 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.
Because Alion is now a C-corporation, terminating ESOP participants have the right to hold or immediately sell their distributed shares to the Company. If a participant elects to hold distributed shares, the IRC and ERISA require that Alion provide a put option to permit a recipient to sell the stock to the Company at the estimated fair value price per share based on the most recent price at which the Company was able to sell shares to the ESOP Trust ($26.25 at September 30, 2010). The put right requires the Company to purchase distributed shares during two put option periods at the then current fair market value. Consistent with its duty of independence from Alion Management and its fiduciary responsibilities, the ESOP Trustee retains an independent third party valuation firm to assist it in determining the fair market value (share price) at which the Trustee may acquire or dispose of investments in Alion common stock. The Audit and Finance Committee of Alion’s 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 Alion’s aggregate liability for outstanding redeemable common stock owned by the ESOP Trust. Certain participants who beneficially acquired shares of Alion common stock on December 20, 2002, have the right to sell such shares distributed from their accounts at the greater of the then current estimated fair value per share or the original $10.00 purchase price.
Although the Company and the ESOP retain the right to delay distributions consistent with the terms of the Plan, and to control the circumstances of future distributions, eventual redemption of shares of Alion common stock is deemed to be outside the Company’s control.
The Company makes 401(k) matching contributions in shares of Alion common stock and discretionary profit-sharing contributions in a combination of Alion common stock and cash. The Company matches the first 3% and one-half of the next 2% of eligible employee salary deferrals by contributing shares of Alion common stock to the ESOP Trust on March 31 and September 30 each year. The Company also makes a profit sharing contribution of Alion common stock to the ESOP Trust on the same dates equal to 1% of eligible employee compensation. Each pay period the Company makes a cash contribution to the non-ESOP component of the KSOP equal to 1.5% of eligible employee compensation. Alion recognized $3.1 million and $3.4 million in compensation expense for the KSOP for the quarters ended December 31, 2010 and 2009.

 

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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(6) Accounts Receivable
Accounts receivable at December 31, 2010 and September 30, 2010 consisted of the following:
                 
    December 31,     September 30,  
    2010     2010  
    (In thousands)  
Billed receivables
  $ 88,159     $ 94,662  
Unbilled receivables:
               
Amounts currently billable
    32,109       36,021  
Revenues recorded in excess of milestone billings on fixed price contracts
    3,081       2,917  
Revenues recorded in excess of estimated contract value or funding
    31,487       24,952  
Retainages and other amounts billable upon contract completion
    22,586       19,278  
Allowance for doubtful accounts
    (3,800 )     (3,798 )
 
           
Total Accounts Receivable
  $ 173,622     $ 174,032  
 
           
Revenue recorded in excess of milestone billings on fixed price contracts is not yet contractually billable. Amounts currently billable consist principally of amounts to be billed within the next year. Any remaining unbilled balance including retainage is billable upon contract completion or completion of Defense Contract Audit Agency (DCAA) audits. Revenue recorded in excess of contract value or funding is billable upon receipt of contractual amendments or other modifications. Contract revenue recognized in excess of billings totaled approximately $89.3 million as of December 31, 2010 and included approximately $31.5 million for customer-requested work for which the Company had not received contracts or contract modifications. In keeping with industry practice, Alion classifies all contract-related accounts receivable as current assets based on contractual operating cycles which frequently exceed one year. Unbilled receivables are expected to be billed and collected within one year except for $22.6 million at December 31, 2010.
(7) Property, Plant and Equipment
                 
    December 31,     September 30,  
    2010     2010  
    (In thousands)  
Leasehold improvements
  $ 10,847     $ 10,862  
Equipment and software
    33,789       33,693  
 
           
Total cost
    44,636       44,555  
Less: accumulated depreciation and amortization
    (34,819 )     (33,757 )
 
           
Net Property, Plant and Equipment
  $ 9,817     $ 10,798  
 
           
Depreciation and leasehold amortization expense for fixed assets was approximately $1.2 million and $1.4 million for the quarters ended December 31, 2010 and 2009.

 

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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(8) Goodwill and Intangible Assets
As of December 31, 2010, Alion had approximately $399 million in goodwill. There were no changes in the goodwill carrying amount during the current quarter.
Intangible assets consist primarily of contracts acquired through the Anteon and JJMA transactions. The table below shows intangible assets as of December 31, 2010 and September 30, 2010.
                                                 
    December 31, 2010     September 30, 2010  
            Accumulated                     Accumulated        
    Gross     Amortization     Net     Gross     Amortization     Net  
 
                                               
Purchased contracts
  $ 111,635     $ (95,928 )   $ 15,707     $ 111,635     $ (94,228 )   $ 17,407  
Internal use software and engineering designs
    2,155       (1,920 )     235       2,155       (1,868 )     287  
Non-compete agreements
    725       (725 )           725       (725 )      
 
                                   
Total
  $ 114,515     $ (98,573 )   $ 15,942     $ 114,515     $ (96,821 )   $ 17,694  
 
                                   
The weighted-average remaining amortization period of intangible assets was approximately five years at December 31, 2010 and September 30, 2010. Amortization expense was approximately $1.8 million and $2.8 million for the quarters ended December 31, 2010 and 2009. Estimated aggregate amortization expense for the next five years and thereafter is as follows.
         
    (In thousands)  
 
     
For the remaining nine months:
       
2011
  $ 5,090  
For the year ending September 30:
       
2012
    5,766  
2013
    3,246  
2014
    879  
2015
    737  
2016
    141  
Thereafter
    83  
 
     
 
  $ 15,942  
 
     
(9) Long-Term Debt
Alion’s current debt structure includes a $25 million revolving credit facility, the Secured Notes and the Unsecured Notes. On March 22, 2010, the Company retired its Term B Senior Credit Agreement, its Subordinated Note and the Subordinated Note Warrants. The Company is in compliance with each of the affirmative and negative financial and non-financial covenants in its existing debt agreements.
Credit Agreement
On March 22, 2010, the Company entered into a Credit Agreement (Credit Agreement), which consists of a $25.0 million senior revolving credit facility (Revolver) none of which was actually drawn as of December 31, 2010.
Under the Credit Agreement, Alion may request up to $10.0 million in letters of credit and may borrow up to $5.0 million in swing line loans for short-term borrowing needs. The Company must pay all principal obligations under the Credit Agreement in full no later than August 22, 2014.
The Credit Agreement permits Alion to use the Revolver for working capital, other general corporate purposes, and to finance permitted acquisitions.
Security. The Credit Agreement is secured by a first priority security interest in all current and future tangible and intangible property of Alion and its guarantor subsidiaries, 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.

 

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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Guarantees. The Company’s obligations under the Credit Agreement are guaranteed by the Company’s subsidiaries, IPS, CATI, METI, JJMA, BMH, WCI, WCGS, MA&D and Alion Canada (US) Corporation. These subsidiaries also guarantee all of the Company’s obligations under the Secured Notes and Unsecured Notes (each described below).
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 8.50%. 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 quarter’s daily unused Revolver balance. The Company paid approximately $112 thousand in commitment fees for the Revolver for the quarter ended December 31, 2010. For the quarter ended December 31, 2009, Alion paid $32 thousand in commitment fees on its prior revolving credit facility.
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 December 31, 2010. The Credit Agreement also requires the Company to pay an annual agent’s 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
Consolidated EBITDA is defined as: (a) net income (or loss), as defined therein; plus (b) the following items, without duplication, to the extent deducted from net income or included in the net loss, the sum of: (i) consolidated interest expense; (ii) provision for income taxes; (iii) depreciation and amortization, including amortization of other intangible assets; (iv) cash contributions to the ESOP in respect of the repurchase liability of the Company under the ESOP Plan; (v) any non-cash charges or expenses including (A) non-cash expenses associated with the recognition of the difference between the fair market value of the (now extinguished Subordinate Note) Warrants and the exercise price of the Warrants, (B) non-cash expenses with respect to the stock appreciation rights and phantom stock plans, and the Warrants and accretion of the Warrants and (C) non-cash contributions to the ESOP; (vi) any extraordinary losses and (vii) any nonrecurring charges and adjustments by third-party valuation firm that prepares valuation reports in connection with the ESOP; minus (c) without duplication, (i) all cash payments made on account of reserves, restructuring charges and other non-cash charges added to net income (or included in net loss) pursuant to clause (b)(v) above in a previous period and (ii) to the extent included in net income (or net loss), any extraordinary gains and all non-cash items of income, in accordance with GAAP.
Secured Notes
On March 22, 2010, Alion issued and sold $310 million of its private units (Units) to Credit Suisse, which informed the Company it had resold most of the units to qualified institutional buyers. Each of the 310,000 Units sold consisted of $1,000 in face value of Alion private 12% senior secured notes (Secured Notes) and a warrant to purchase 1.9439 shares of Alion common stock.
Security. The Secured Notes are secured by a first priority security interest in all current and future tangible and intangible property of Alion and its guarantor subsidiaries, 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 Company’s obligations under the Secured Notes are guaranteed by the Company’s subsidiaries, IPS, CATI, METI, JJMA, BMH, WCI, WCGS, MA&D and Alion Canada (US) Corporation.

 

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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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. Alion’s obligations under the Unsecured Notes are guaranteed by the Company’s 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.
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 IITRI’s 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. 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 Alion’s 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.

 

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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Interest Payable
Interest Payable consisted of the following balances:
                 
    December 31,     September 30,  
    2010     2010  
    (In thousands)  
Unsecured Notes
  $ 10,593     $ 4,271  
Secured Notes
    5,230       12,946  
 
           
Total
  $ 15,823     $ 17,217  
 
           
As of December 31, 2010, Alion must make the following principal repayments (at face amount before debt discount) for its outstanding debt.
                                                 
Fiscal Year:   2011     2012     2013     2014     2015     Total  
 
Secured Notes and PIK Interest(1)
  $     $     $     $     $ 339,788     $ 339,788  
Unsecured Notes(2)
                            248,000       248,000  
 
                                   
Total Principal Payments
  $     $     $     $     $ 587,788     $ 587,788  
 
                                   
 
     
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 December 31, 2010, the $279.6 million carrying value on the face of the balance sheet included $310 million in principal, $4.8 million in accrued PIK interest and is net of $35.2 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 $248 million in principal and $3.6 million in unamortized debt issue costs as of December 31, 2010 (initially $7.1 million).
(10) Fair Value Measurement
The Company adopted ASC 805 — Fair Value Disclosures in fiscal year 2010 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 Company’s consolidated financial position or operating results.
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 management’s 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 Company’s 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.

 

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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
The following table provides a summary of the changes in fair value of all the Company’s financial liabilities that were measured at fair value on a recurring basis as of December 31, 2009, using significant unobservable inputs (Level 3). The Company had no other assets or liabilities it was required to measure at fair value on a recurring basis. As of December 31, 2010, the Company had no assets or liabilities it was required to measure at fair value on a recurring basis.
                 
    As of December 31,  
    2010     2009  
    Redeemable Common Stock  
    Warrants  
Balance, beginning of period
  $     $ (32,717 )
Total realized and unrealized gains and (losses)
             
Included in interest expense
          160  
Issuances and settlements
           
 
           
Balance, end of period
  $     $ (32,557 )
 
           
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The Company’s investment in VectorCommand is tested annually for impairment and is not adjusted to market value at the end of each reporting period. Fair value would only be determined on a nonrecurring basis if this investment were deemed to be other-than-temporarily impaired. The Company has not recorded any other-than-temporary impairments to its VectorCommand investment during the reporting period.
(11) 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 Company’s aggregate liability for outstanding redeemable common stock warrants. The Audit and Finance Committee of Alion’s 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.

 

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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 amending the Subordinated Note. 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.
In accordance with ASC 815 — Derivatives, Alion classified the Subordinated Note warrants as debt instruments indexed to and potentially settled in the Company’s own stock and not as equity.
(12) 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 becomes 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 Alion’s former share price of $34.50. Alion recognized the value of the warrants as part of the debt issue costs for the Secured Notes and recorded the corresponding credit to equity. The Company accounts for the Secured Note warrants as equity and must reassess this classification each reporting period. The Company identified no required changes in accounting treatment as of December 31, 2010.
(13) Leases
Future minimum lease payments under non-cancelable operating leases for buildings, equipment and automobiles at December 31, 2010 are set out below. Under these operating leases, Alion subleased some excess capacity to subtenants under non-cancelable operating leases. In connection with certain acquisitions, Alion assumed operating leases at above-market rates; recorded loss accruals of approximately $4.9 million based on the estimated fair value of the lease liabilities assumed; and is amortizing these amounts over the lease terms. The remaining unamortized loss related to these acquisitions was $125 thousand at December 31, 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 a $586 thousand asset which it amortized over the lease term.
         
Lease Payments for Fiscal Years Ending   (In thousands)  
2011 (for the remainder of fiscal year)
  $ 20,569  
2012
    24,129  
2013
    22,164  
2014
    15,402  
2015
    15,208  
2016
    11,576  
And thereafter
    13,050  
 
     
Gross lease payments
  $ 122,098  
Less: non-cancelable subtenant receipts
    (2,167 )
 
     
Net lease payments
  $ 119,931  
 
     

 

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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Composition of Total Rent Expense
                 
    December 31,  
    2010     2009  
    (In thousands)  
Minimum rentals
  $ 5,543     $ 5,956  
Less: Sublease rental income
    (478 )     (467 )
 
           
Total rent expense, net
  $ 5,065     $ 5,489  
 
           
(14) Long Term Incentive Compensation Plan
In December 2008, Alion adopted a long-term incentive compensation plan to provide cash compensation to certain executives. Individual grants 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 $831 thousand and $603 thousand in long term incentive compensation expense for the quarters ended December 31, 2010 and 2009.
(15) Stock Based Compensation
SAR Plan
Alion’s Stock Appreciation Rights Plan adopted in 2004 expires in 2014. 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 710 thousand SARs were outstanding at December 31, 2010, at a weighted average grant date fair value of $36.60 per share. No outstanding grant has any intrinsic value. For the quarters ended December 31, 2010 and 2009 the Company recognized compensation expense of $33 thousand and $14 thousand.
Phantom Stock Plans
Alion formerly maintained an Executive and a Director Phantom Stock Plan. There is one director phantom stock grant of 4,995 shares outstanding worth approximately $133 thousand, payable in 2011. Phantom stock represents a theoretical share of Alion common stock which confers no voting or other common stock ownership rights. 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 Alion’s then-current share price, based on the most recent ESOP Trust stock valuation. Alion recognized $4 thousand in compensation expense and a $12 thousand credit to expense for the quarters ended December 31, 2010 and 2009.
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 Alion’s 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.
(16) Segment Information and Customer Concentration
The Company operates in one segment, delivering a broad array of scientific, engineering and information technology expertise to research and develop technological solutions for problems relating to national defense, homeland security, and energy and environmental analysis. Alion provides services to departments and agencies of the federal government and, to a lesser extent, to commercial and international customers. The Company’s 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 Company’s services as a separate customer so long as that customer has independent decision-making and contracting authority within its organization.
Contract receivables from federal government agencies represented approximately $172.7 million, or 97.9%, and $172.3 million, or 99.0%, of accounts receivable as of December 31, 2010 and September 30, 2010. Contract revenue from federal government departments and agencies represented approximately 96.8% and 97.0%, of total contract revenue for the three months ended December 31, 2010 and 2009.

 

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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(17) Income Taxes
Deferred Taxes
Alion is subject to income taxes in the U.S., various states and Canada. Tax statutes and regulations within each jurisdiction are subject to interpretation and require the application of significant judgment. This quarter, we recorded $1.7 million in deferred tax expense and liabilities related to tax-basis goodwill amortization. We recorded a full valuation allowance for all deferred tax assets as continuing losses make it unlikely we will be able to realize these tax benefits. Our effective tax rate for the three months ended December 31, 2010 was -18.6%. As of December 31, 2010 and September 30, 2010 our net deferred tax liability was:
                 
    December 31,     September 30,  
    2010     2010  
    (in thousands)  
Current deferred tax asset
  $ 8,009     $ 11,175  
Noncurrent deferred tax asset
    34,291       25,754  
Valuation allowance
    (42,300 )     (36,929 )
Noncurrent deferred tax liability
    (38,951 )     (37,207 )
 
           
Net deferred tax liability
  $ (38,951 )   $ (37,207 )
 
           
Tax Uncertainties
We periodically assess our liabilities and contingencies for all periods open to examination by tax authorities based on the latest available information. Where we believe there is more than a 50 percent chance that our tax position will not be sustained, we record our best estimate of the resulting tax liability, including interest. Any interest or penalties we incur related to income taxes are reported separately from income tax expense. We have recorded liabilities for tax uncertainties for all years that remain open to review. We do not expect resolution of tax matters for these years to materially affect our operating results, financial condition, cash flows or effective tax rate.
(18) Debt Extinguishment
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.
(19) Commitments and Contingencies
Earn-Out and Hold-Back Commitments
The Company has a $100 thousand maximum earn-out commitment through July 2011 for its LogConGroup acquisition.
Legal Proceedings
The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect upon the Company’s business, financial position, operating results or ability to meet its financial obligations.

 

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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Government Audits
The amount of federal government contract revenue and expense reflected in the consolidated financial statements attributable to cost reimbursement contracts is subject to audit and possible adjustment by DCAA. The federal government considers the Company a major contractor and DCAA maintains an office on site to perform its various audits throughout the year. All the Company’s federal government contract indirect costs have been audited and indirect rates settled through 2004. The Company has recorded federal government contract revenue in amounts it expects to realize on final settlement.
(20) Guarantor/Non-guarantor Condensed Consolidated Financial Information
Certain of Alion’s 100% owned domestic subsidiaries have jointly, severally, fully and unconditionally guaranteed both the Secured Notes and the Unsecured Notes. Alion’s Unsecured Notes are general obligations of the Company. In March 2010, the Unsecured Note Indenture was amended to include as Unsecured Note guarantors all subsidiaries serving as Secured Note guarantors. The financial information set out below includes the effects of adding additional entities as guarantors of the Unsecured Notes and therefore differs from information the Company previously presented as of September 30, 2009 and for the three months ended December 31, 2009.
The following information presents condensed consolidating balance sheets as of December 31, 2010 and September 30, 2010, condensed consolidating statements of operations for the quarters and three months ended December 31, 2010 and 2009; and condensed consolidating statements of cash flows for the three months ended December 31, 2010 and 2009 of the parent company issuer, the guarantor subsidiaries and the non-guarantor subsidiaries. Investments include investments in subsidiaries held by the parent company issuer presented using the equity method of accounting.

 

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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Balance Sheet as of December 31, 2010
                                         
                    Non-              
            Guarantor     Guarantor              
    Parent     Companies     Companies     Eliminations     Consolidated  
    (In thousands)  
Current assets:
                                       
Cash and cash equivalents
  $ 15,341     $ (62 )   $     $     $ 15,279  
Accounts receivable, net
    170,190       3,193       239             173,622  
Prepaid expenses and other current assets
    5,863       48                   5,911  
 
                             
Total current assets
    191,394       3,179       239             194,812  
Property, plant and equipment, net
    9,777       40                   9,817  
Intangible assets, net
    15,942                         15,942  
Goodwill
    398,921                         398,921  
Investment in subsidiaries
    20,154                   (20,154 )      
Intercompany receivables
    1,278       20,968             (22,246 )      
Other assets
    11,099       13       3             11,115  
 
                             
Total assets
  $ 648,565     $ 24,200     $ 242     $ (42,400 )   $ 630,607  
 
                             
Current liabilities:
                                       
Interest payable
    15,823                         15,823  
Trade accounts payable
    46,298       258                   46,556  
Accrued liabilities
    42,536       1,802       24             44,362  
Accrued payroll and related liabilities
    32,209       840       22             33,071  
Billings in excess of revenue earned
    3,064       33                   3,097  
 
                             
Total current liabilities
    139,930       2,933       46             142,909  
Intercompany payables
    20,968             1,278       (22,246 )      
Senior secured notes
    279,625                         279,625  
Senior unsecured notes
    244,375                         244,375  
Accrued compensation and benefits, excluding current portion
    6,168                         6,168  
Non-current portion of lease obligations
    7,746       32                   7,778  
Deferred income taxes
    38,951                         38,951  
Redeemable common stock
    147,595                         147,595  
Common stock warrants
    20,785                         20,785  
Common stock of subsidiaries
          2,801             (2,801 )      
Accumulated other comprehensive loss
    (177 )                       (177 )
Accumulated deficit
    (257,401 )     18,434       (1,082 )     (17,353 )     (257,402 )
 
                             
Total liabilities, redeemable common stock and accumulated deficit
  $ 648,565     $ 24,200     $ 242     $ (42,400 )   $ 630,607  
 
                             

 

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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Balance Sheet as of September 30, 2010
(In thousands)
                                         
                    Non-              
            Guarantor     Guarantor              
    Parent     Companies     Companies     Eliminations     Consolidated  
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  
 
                             
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  
Accumulated other comprehensive loss
    (177 )                       (177 )
Accumulated 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  
 
                             

 

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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Operations for the Three Months Ended December 31, 2010
                                         
                    Non-              
            Guarantor     Guarantor              
    Parent     Companies     Companies     Eliminations     Consolidated  
    (In thousands)  
Contract revenue
  $ 195,761     $ 4,816     $ 191     $     $ 200,768  
Direct contract expense
    152,591       2,789       134             155,514  
 
                             
Gross profit
    43,170       2,027       57             45,254  
 
                             
Operating expenses:
                                       
Indirect contract expense
    9,023       610       1             9,634  
Research and development
    88                         88  
General and administrative
    16,042       83       90             16,215  
Rental and occupancy expense
    7,627       91       12             7,730  
Depreciation and amortization
    2,987       3                   2,990  
 
                             
Total operating expenses
    35,767       787       103             36,657  
 
                             
Operating income
    7,403       1,240       (46 )           8,597  
Other income (expense):
                                       
Interest income
    20                         20  
Interest expense
    (18,404 )                       (18,404 )
Other
    (176 )     115                   (61 )
Gain on extinguishment of debt
    460                         460  
Equity in net income of subsidiaries
    1,309                   (1,309 )      
 
                             
Total other expenses
    (16,791 )     115             (1,309 )     (17,985 )
 
                             
(Loss) income before taxes
    (9,388 )     1,355       (46 )     (1,309 )     (9,388 )
Income tax (expense) benefit
    (1,744 )                       (1,744 )
 
                             
Net income (loss)
  $ (11,132 )   $ 1,355     $ (46 )   $ (1,309 )   $ (11,132 )
 
                             

 

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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Operations for the Three Months Ended December 31, 2009
                                         
                    Non-              
            Guarantor     Guarantor              
    Parent     Companies     Companies     Eliminations     Consolidated  
    (In thousands)  
Contract revenue
  $ 197,274       5,087       3,377           $ 205,738  
Direct contract expense
    153,466       2,998       2,532             158,996  
 
                             
Gross profit
    43,808       2,089       845             46,742  
 
                             
Indirect contract expense
    8,371       780       135             9,286  
Research and development
    261                         261  
General and administrative
    15,777       162       68             16,007  
Rental and occupancy expense
    7,830       76       80             7,986  
Depreciation and amortization
    4,219       5       7             4,231  
 
                             
Total operating expenses
    36,458       1,023       290             37,771  
 
                             
Operating income
    7,350       1,066       555             8,971  
Other income (expense):
                                       
Interest income
    45                         45  
Interest expense
    (16,886 )                       (16,886 )
Other
    (182 )     74       (3 )           (111 )
Equity in net income (loss) of subsidiaries
    1,731                     (1,731 )      
 
                             
Total other expenses
    (15,292 )     74       (3 )     (1,731 )     (16,952 )
 
                             
(Loss) income before taxes
    (7,942 )     1,140       552       (1,731 )     (7,981 )
Income tax (expense) benefit
                40             40  
 
                             
Net income (loss)
  $ (7,942 )     1,140       592       (1,731 )   $ (7,941 )
 
                             

 

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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Cash Flows for the Three Months Ended December 31, 2010
                                 
                    Non-        
            Guarantor     Guarantor        
    Parent     Companies     Companies     Consolidated  
    (In thousands)  
Net cash (used in) provided by operating activities
  $ (8,287 )   $ 13     $ 1     $ (8,273 )
 
                               
Cash flows from investing activities:
                               
Capital expenditures
    (340 )                 (340 )
Proceeds from sale of assets
    8                   8  
 
                       
Net cash used in investing activities
    (332 )                 (332 )
Cash flows from financing activities:
                               
Sale of Secured Notes
    (1,510 )                 (1,510 )
Sale of Common Stock Warrants
                       
Revolver borrowings
                       
Revolver payments
                       
Loan to ESOP Trust
    (776 )                 (776 )
ESOP loan repayment
    776                   776  
Redeemable common stock purchased from ESOP Trust
    (3,197 )                 (3,197 )
Redeemable common stock sold to ESOP Trust
    1,896                   1,896  
 
                       
Net cash used in financing activities
    (2,811 )                 (2,811 )
Net (decrease) increase in cash and cash equivalents
    (11,430 )     13       1       (11,416 )
Cash and cash equivalents at beginning of period
    26,770       (75 )           26,695  
 
                       
Cash and cash equivalents at end of period
  $ 15,340     $ (62 )   $ 1     $ 15,279  
 
                       

 

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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Cash Flows for the Three Months Ended December 31, 2009
                                 
                    Non-        
            Guarantor     Guarantor        
    Parent     Companies     Companies     Consolidated  
    (In thousands)  
Net cash (used in) provided by operating activities
  $ (11,774 )   $ 110     $ 30     $ (11,634 )
 
                               
Cash flows from investing activities:
                               
Cash paid for acquisitions-related obligations
    (50 )                 (50 )
Capital expenditures
    (799 )     (15 )           (814 )
 
                       
Net cash used in investing activities
    (849 )     (15 )           (864 )
Cash flows from financing activities:
                               
Change in book overdraft
    5,074                   5,074  
Payment of debt issue costs
                      (3,127 )
Payment of senior term loan principal
    (608 )                 (608 )
Revolver borrowings
    (15,900 )                 (15,900 )
Revolver payments
    15,900                   15,900  
Redeemable common stock purchased from ESOP Trust
    (26 )                 (26 )
 
                       
Net cash provided by financing activities
    1,313                   1,313  
Net (decrease) increase in cash and cash equivalents
    (11,310 )     95       30       (11,185 )
Cash and cash equivalents at beginning of period
    11,404       (143 )     (76 )     11,185  
 
                       
Cash and cash equivalents at end of period
  $ 94     $ (48 )   $ (46 )   $  
 
                       

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of Alion’s financial condition and results of operations should be read together with the condensed consolidated financial statements (unaudited) and the notes to those statements. This updates the information contained in our Annual Report on Form 10-K for the year ended September 30, 2010, and presumes that readers have access to, and will have read, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in that report.
Overview
Alion provides scientific, engineering and information technology expertise to research and develop technological solutions for problems relating to national defense, homeland security and energy and environmental analysis, principally to U.S. government departments and agencies and, to a lesser extent, to commercial and international customers.
The following table summarizes revenue attributable to each contract type for the periods indicated.
                                 
    For the Three Months Ended December 31,  
Revenue by Contract Type   2010     2009  
            (In thousands)          
Cost-reimbursement
  $ 164,534       81.9 %   $ 150,500       73.2 %
Fixed-price
    13,794       6.9 %     22,938       11.1 %
Time-and-material
    22,441       11.2 %     32,300       15.7 %
 
                       
Total
  $ 200,768       100.0 %   $ 205,738       100.0 %
 
                       
Management expects Alion’s revenue will continue to come from government contracts, mostly from contracts with the U.S. Department of Defense (DoD) and other federal agencies with some revenue from a variety of commercial, state, local and international customers.
                                 
    For the Three Months Ended December 31,  
Revenue by Customer Type   2010     2009  
            (In thousands)          
U.S. Department of Defense (DoD)
  $ 185,043       92.1 %   $ 189,560       92.1 %
Other Federal Civilian Agencies
    9,359       4.7 %     10,092       4.9 %
Commercial / State / Local and International
    6,366       3.2 %     6,086       3.0 %
 
                       
Total
  $ 200,768       100.0 %   $ 205,738       100.0 %
 
                       
On January 6, 2011, Secretary of Defense Gates announced the next major steps in the Obama Administration’s reform agenda focused on eliminating unnecessary spending while protecting the U.S. military’s size and strength.
Secretary Gates addressed the Department’s efforts to reduce overhead, invest in high priority programs and reduce defense budget spending growth. The Administration’s budget plan proposes 3% real growth over current continuing resolution levels declining to zero growth in fiscal 2015 and 2016. The proposed plan focuses on steady, sustainable and predictable growth.
Secretary Gates identified organizational and programmatic changes intended to eliminate redundancies and duplicative efforts with savings to be invested in proven programs and systems. Many of the program cuts affect large procurements or staffing activities in which Alion is not involved. Because we deliver highly sophisticated scientific and engineering research services, we continue to believe demand will persist for our higher end technical expertise. We do not expect other acquisition program cuts or delays to adversely affect us significantly.

 

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Despite the changing procurement environment, our cost-reimbursable revenue remains steady. We believe recently announced budget priorities will limit DoD in-sourcing efforts as the Administration seeks to reduce civilian and military staffing for overhead functions. We expect Alion will 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 designed to improve operating efficiency and effectiveness.
                                 
    For the Three Months Ended  
    December 31,  
Core Business Area   2010     2009  
            (In thousands)          
Naval Architecture and Marine Engineering
  $ 81,691       40.7 %   $ 89,718       43.6 %
Defense Operations
    48,418       24.1 %     50,295       24.4 %
Modeling and Simulation
    41,454       20.6 %     35,559       17.3 %
Technology Integration
    13,043       6.5 %     12,463       6.1 %
Energy and Environmental Sciences
    8,743       4.4 %     9,731       4.7 %
Information Technology and Wireless Communications
    7,419       3.7 %     7,972       3.9 %
 
                       
 
                               
Total
  $ 200,768       100.0 %   $ 205,738       100.0 %
 
                       
Backlog. Contract backlog represents an estimate, as of a specific date, of the future revenue Alion expects from existing contracts. At December 31, 2010, backlog on existing contracts and executed delivery orders totaled $2.4 billion, of which $321 million was funded. We estimate we have an additional $3.8 billion of unfunded contract ceiling value for an aggregate total backlog of $6.2 billion.
Results of Operations
Quarter Ended December 31, 2010 Compared to Quarter Ended December 31, 2009
                                 
    Consolidated Operations of Alion  
    Quarter Ended December 31,  
    2010     2009  
            (Dollars in thousands)        
            % of             % of  
Selected Financial Information           revenue             revenue  
Total contract revenue
  $ 200,768             $ 205,738          
Total direct contract costs
    155,514       77.5 %     158,996       77.3 %
Direct labor costs
    62,599       31.2 %     67,127       32.6 %
Material and subcontract costs
    88,668       44.2 %     88,143       42.8 %
Other direct costs
    4,247       2.1 %     3,726       1.8 %
 
                               
Gross profit
    45,254       22.5 %     46,742       22.7 %
 
                               
Total operating expense
    36,657       18.3 %     37,771       18.4 %
Major components of operating expense:
                               
Indirect expenses including facilities costs
    17,364       8.6 %     17,272       8.4 %
General and administrative
    16,215       8.1 %     16,007       7.8 %
Depreciation and amortization
    2,990       1.5 %     4,231       2.1 %
 
                               
Income from operations
  $ 8,597       4.3 %   $ 8,971       4.4 %
Revenue. First quarter revenue this year was $200.8 million down $5.0 million (2.4%) over the comparable period last year partly because we sold off HFA and several ONR contracts. Cost-reimbursement revenue was up $14.0 million (9.3%); fixed price contract revenue declined $9.1 million (39.9%) and time and material contract revenue dropped $9.9 million (30.54%). DoD revenue slid $4.5 million (2.4%) and overall government contract revenue declined $5.3 million (2.6%) compared to the similar quarter last year.

 

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Modeling and Simulation revenue continued its growth trend — up $5.9 million (16.6%) over first quarter 2010 performance. Most of this work came through Alion’s contracts with the Defense Information Systems Agency. We had increased work from setting up a new Modeling and Simulation laboratory in Norfolk; expanded information assurance support to SPAWAR; and reduced revenue from work we completed for TARDEC. Naval Architecture and Marine Engineering revenue dropped $8.1 million (8.9%) as some of Alion’s key contracts in this area saw curtailed first quarter activity and anticipated awards did not materialize. Defense Operations revenue declined $1.9 million (3.7%) while revenue from other core business areas also declined $1.0 million (3.2%) compared to first quarter last year. Our prime contract revenue was also down $3.5 million (2.1%). Contract margins remained unchanged at 7.1% overall.
Direct Contract Expense and Gross Profit. First quarter 2011 direct contract expenses decreased $3.5 million (2.2%) to $155.5 million compared to first quarter last year, consistent with lower revenue levels. Direct labor costs declined $4.5 million to 31.2% of current quarter sales. Material and subcontract costs and other direct costs increased minimally. Gross profit for the current quarter at $45.3 million was down $1.5 million compared to first quarter 2010. This quarter’s gross margin percentage is not materially different from first quarter results last year and remains consistent with the level of third-party costs which typically generate lower margins.
Operating Expenses. First quarter operating expenses were down $1.1 million compared to the same period last year as depreciation and amortization expenses declined approximately $1.2 million. There were no other significant expense variances.
Income from Operations. Operating income for the quarter ended December 31, 2010 decreased 4.2% to $8.6 million and 4.3% of quarterly revenue.
Other Expense. Net interest income, interest expense and other expense in the aggregate for the quarter ended December 31, 2010 increased $1.5 million to $18.4 million compared to the first quarter of 2010. The increase is the result of higher cash pay interest expense on greater outstanding debt levels and related non-cash charges for amortizing the costs of issuing our Senior Secured Notes. We recognized an almost $0.5 million gain on retiring $2.0 million of Senior Unsecured Notes in November which partially offset higher quarterly interest expense.
                 
    Three Months Ended  
    December 31,  
    2010     2009  
    (In thousands)  
Cash Pay Interest
               
Revolver
  $ 112     $ 3  
Senior Term Loan
          5,739  
Secured Notes
    7,819        
Unsecured Notes
    6,377       6,406  
Subordinated Note
          793  
Other cash pay interest and fees
    13       1,355  
 
           
Sub-total cash pay interest
    14,321       14,296  
 
               
Deferred and Non-cash Interest
               
Secured Notes PIK interest
    1,564        
Debt issue costs and other non-cash items
    2,519       1,573  
Subordinated Note interest
          1,177  
Subordinated Note warrants
          (160 )
 
           
Sub-total non-cash interest
    4,083       2,590  
 
           
Total interest expense
  $ 18,404     $ 16,886  
 
           
Income Tax Expense. In the first quarter this year, we recorded a full valuation allowance for the deferred tax assets we recognized because our history of losses makes it unlikely that we will reasonably be able to realize the full benefit of our deferred tax assets. We had $1.7 million in deferred tax expense and liabilities related to tax-basis goodwill amortization.
Net Loss. Increased interest expense on our long-term debt and deferred income tax expense increased our net loss to $11.1 million this quarter. This quarter’s loss was $3.2 million greater than our $7.9 million first quarter loss last year.

 

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Liquidity and Capital Resources
Alion requires liquidity to timely pay its vendors and debt obligations, to fund operations while awaiting payment from customers and to invest in capital projects, Accounts receivable require cash when balances increase as business grows or when customers delay contract funding actions. We are funding our current business with cash from operating activities and the cash we have from issuing the Secured Notes. We plan to fund future operations in a similar fashion. We also have access to a $25 million revolving credit facility. Management does not currently estimate Alion will need to use its revolving credit facility to any significant extent.
Cash Flows
We used approximately $8.3 million to fund our first quarter operations this year. Although our higher net loss was primarily due to higher non-cash debt-related charges and income taxes, we were still able to use $3.3 million less for operations than we did in our first quarter last year. Last year, growth in receivables and reductions in payables consumed $16.4 million; interest accruals offset this by $6.4 million. This year receivables and payables generated $2.5 million in cash; while expense and interest accruals consumed $8.2 million in cash as we made an interest payment on our Senior Secured Notes in November.
Alion collected almost $208 million in receivables through December 31, 2010, $4.7 million more than we collected in the first quarter last year. Collections outpaced revenue by $7.2 million and kept this quarter’s days’ sales outstanding (DSO) stable at 76.4 days as of December 31, 2010. (We determine DSO based on trailing twelve month revenue). Unbilled receivables continue at significant levels despite progress in obtaining previously delayed contract funding. Funding limitations imposed by the continuing resolution are likely to slow the process of obtaining contract funding documents for at least the next several months. However, we expect DSO will track at current levels.
Although capital expenditures this quarter are slightly lower than they were last year, we expect to invest in our business at levels consistent with last year’s expenditures. This year we accelerated certain ESOP transactions into the first quarter. Share repurchases ($3.2 million) were offset in part by employee investments from last year ($1.9 million) that we received this quarter. Last year we had no first quarter ESOP proceeds and minimal share redemptions. Last year we also had to spend $3.1 million for loan modifications and debt issue costs for our former revolver. This year, we spent $1.5 million to retire $2 million in Unsecured Notes. We have continued our practice (in place since our March 2010 re-financing) of not accessing our revolving credit facility. In our first quarter last year, we used our revolver to a limited extent; our maximum balance drawn was $3.5 million.
We have a long-term revolving credit facility through August 2014 and additional available cash from re-financing activities. Management expects that for the next several years, Alion will be able to meet existing debt covenants which are less stringent and restrictive than previous Term B Loan covenants were. This will allow us to maintain access to our revolving credit facility, even though Management does not foresee needing to draw on it in any material amount or for any extended period. Management believes Alion will have sufficient cash on hand, cash flow from operations and cash available from its $25 million revolving credit facility to continue to meet obligations as they come due notwithstanding an overall increase in interest payments associated with the Secured Notes. We retain the ability to restrict or defer certain types of cash payments that in the past caused us to fail to comply with certain prior debt covenants. The Revolving Credit facility also limits our ability to offer and fund certain types of discretionary diversification options that create demands on Alion’s cash flows.
We cannot predict with any degree of accuracy the extent to which re-purchase and diversification demands will increase in future years. As more employees meet statutory and Plan-specific age and length of service requirements, potential diversification demands are likely to increase. These demands can increase further with any increase in the price of a share of Alion common stock. While a drop in our share price could reduce the value of each individual Plan participant’s beneficial interest, such a potential price decline could be offset by increased diversification demands and thus might not reduce the aggregate value of future demands on our cash. Current debt agreements limit our ability to offer discretionary diversification options to ESOP participants and this should reduce future cash flow demands. We try to monitor future potential impacts by relying in part on internal and external financial models that incorporate Plan census data and financial inputs intended to simulate changes in Alion’s share price.

 

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Cash flow effects and risks associated with equity-related obligations
Changes in the price of a share of Alion common stock used to affect warrant-related interest expense. Our outstanding Secured Note warrants have a one penny exercise price and are in the money. They do not have a cash liquidation option and therefore Alion will only recognize interest expense for the debt issue cost associated with the initial fair value of these warrants. We no longer have significant stock-based compensation liabilities as no outstanding SARs have any intrinsic value; only a modest number of phantom shares remained outstanding at December 31, 2010. Management is unable to forecast the share price the ESOP Trustee will determine in future valuations.
Although current financial information includes the effects of the most recent ESOP Trust transactions, future expenses for stock-based compensation are likely to differ from estimates as the price of a share of Alion common stock changes. Our next regularly scheduled valuation period ends in March 2011. Interest rates, market-based factors and volatility, as well as Alion’s financial results will affect the future value of a share of our common stock.
Certain stock-based compensation grantees can choose to defer their payments by having us deposit funds in a rabbi trust we own. Any such deferrals will not materially affect our planned payments or our overall anticipated cash outflows.
After each semi-annual valuation period, the Plan permits former employees and beneficiaries to request distribution of their vested ESOP account balances. Consistent with the terms of the Plan and the IRC, we intend to pay distribution requests in five annual installments and to defer initial payments as permitted. The Plan allows Alion to defer initial installment distributions for five years for former employees who are not disabled, deceased or retired.
Discussion of Debt Structure
The discussion below describes our current debt structure which includes a $25 million revolving credit facility, the Unsecured Notes and the Secured Notes. On March 22, 2010, we retired the Term B Senior Credit Agreement, the Subordinated Note and the Subordinated Note Warrants.
Credit Agreement
On March 22, 2010, we executed a new Credit Agreement (Credit Agreement), which consists of a $25.0 million senior revolving credit facility (Revolver) none of which was actually drawn as of December 31, 2010. The Credit Agreement lets us request up to $10.0 million in letters of credit and borrow up to $5.0 million in swing line loans for short-term needs. We must pay all Credit Agreement obligations in full by August 22, 2014. Alion can use the Revolver for working capital, permitted acquisitions and other general corporate purposes.
Security. The Credit Agreement is secured by a first priority security interest in all current and future tangible and intangible property of Alion and its guarantor subsidiaries, HFA, IPS, CATI, METI, JJMA, BMH, WCI, WCGS, MA&D and Alion Canada (US) Corporation. On March 22, 2010 Alion and its subsidiary guarantors executed an Intercreditor Agreement with Wilmington Trust Company and Credit Suisse AG, Cayman Islands Branch (Intercreditor Agreement) which gives Credit Agreement lenders a super priority right of payment with respect to the underlying collateral. Credit Agreement lender rights are superior to the Secured Note lender rights.
Guarantees. Our subsidiaries, HFA, IPS, CATI, METI, JJMA, BMH, WCI, WCGS, MA&D and Alion Canada (US) Corporation guaranteed our Credit Agreement obligations. They also guaranteed all our Secured and Unsecured Note obligations (each described below).
Interest and Fees. We can choose whether the Revolver bears interest at one of two floating rates using either a Eurodollar rate or an alternative base rate. The minimum interest rate on the Revolver is 9.50%. The Eurodollar interest rate is 600 basis points plus a 3.5% minimum interest rate. The alternate base rate is 500 basis points plus a 4.5% minimum interest rate.
Other Fees and Expenses. Each quarter Alion is required to pay a commitment fee of 175 basis points per year on the prior quarter’s daily unused Revolver balance. As of December 31, 2010, $112 thousand was allocated to outstanding letters of credit. We paid approximately $112 thousand in commitment fees for the Revolver for the quarter ended December 31, 2010 and $179 thousand this year.
Alion must pay letter-of-credit issuance and administrative fees and up to a 25 basis point fronting fee. Each quarter we must also pay interest in arrears for all outstanding letters of credit. The interest rate is based on the Eurodollar loan rate which was 6.0% as of December 31, 2010. The Credit Agreement also requires us to pay an annual agent’s fee.

 

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Covenants. The Credit Agreement requires us to achieve the following minimum trailing twelve month Consolidated EBITDA levels for the periods indicated:
     
Period   Minimum Consolidated EBITDA
June 30, 2010 through March 31, 2011
  $52.5 million
April 1, 2011 through September 30, 2011
  $55.0 million
October 1, 2011 through September 30, 2012
  $60.0 million
October 1, 2012 through September 30, 2013
  $62.5 million
Thereafter
  $65.0 million
Consolidated EBITDA is defined as: (a) net income (or loss); plus (b) the following items, without duplication, to the extent deducted from net income or included in the net loss, the sum of: (i) consolidated interest expense; (ii) provision for income taxes; (iii) depreciation and amortization, including amortization of other intangible assets; (iv) cash contributions to the ESOP in respect of the repurchase liability of the Company under the ESOP Plan; (v) any non-cash charges or expenses including (A) non-cash expenses associated with the recognition of the difference between the fair market value of the (now extinguished Subordinated Note) Warrants and the exercise price of the Warrants, (B) non-cash expenses with respect to the stock appreciation rights and phantom stock plans, and the Warrants and accretion of the Warrants and (C) non-cash contributions to the ESOP; (vi) any extraordinary losses and (vii) any nonrecurring charges and adjustments by third-party valuation firm that prepares valuation reports in connection with the ESOP; minus (c) without duplication, (i) all cash payments made on account of reserves, restructuring charges and other non-cash charges added to net income (or included in net loss) pursuant to clause (b)(v) above in a previous period and (ii) to the extent included in net income (or net loss), any extraordinary gains and all non-cash items of income, in accordance with GAAP.
The Credit Agreement restricts us from doing any of the following without the prior consent of syndicate bank members that extended more than 50 percent of the aggregate amount of all Credit Agreement loans then outstanding:
    incur additional debt other than permitted additional debt;
    grant certain liens and security interests;
    enter into sale and leaseback transactions;
    make certain loans and investments including acquisitions of businesses, other than permitted acquisitions;
    consolidate, merge or sell all or substantially all our assets;
    pay dividends or distributions other than distributions required by the ESOP Plan or by certain legal requirements;
    enter into certain transactions with our shareholders and affiliates;
    change lines of business;
    repay subordinated debt before it is due and redeem or repurchase certain equity;
    enter into certain transactions not permitted under ERISA;
    make more than $8 million in capital expenditures in any fiscal year;
    pay certain earn-outs in connection with permitted acquisitions; or
    change our fiscal year.
Events of Default. The Credit Agreement contains customary events of default including, without limitation:
    breach of representations and warranties;
    payment default;
    uncured covenant breaches;
    default under certain other debt exceeding an agreed amount;
    bankruptcy and insolvency events;
    incurrence of a civil or criminal liability in excess of $5 million of Alion or any subsidiary arising from a government investigation;
    unstayed judgments in excess of an agreed amount;
    failure of any Credit Agreement guarantee to be in effect;
    failure of the security interests to be valid, perfected first priority security interests in the collateral;
    notice of debarment, suspension or termination under a material government contract;
    actual termination of a material contract due to alleged fraud, willful misconduct, negligence, default or any other wrongdoing;
    certain ERISA violations;
    imposition on the ESOP Trust of certain taxes in excess of an agreed amount;
    final determination the ESOP is not a qualified plan;
    so long as any Secured Notes remain outstanding, the Intercreditor Agreement shall fail to be effective; or
    change of control (as defined below).

 

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For purposes of the Credit Agreement, a change of control generally occurs when, before Alion lists its common stock to trade on a national securities exchange and obtains net proceeds from an underwritten public offering of at least $35.0 million, the ESOP Trust fails to own at least 51 percent of Alion’s outstanding equity interests, or, after such a qualified public offering, any person or group other than the ESOP Trust owns more than 37.5 percent of Alion’s outstanding equity interests. A change of control may also occur if a majority of the seats (other than vacant seats) on Alion’s Board of Directors shall at any time be occupied by persons who were neither nominated by the board nor were appointed by directors so nominated. A change of control may also occur if a change of control occurs under any of Alion’s material indebtedness including the Secured and Unsecured Note Indentures.
Secured Notes
On March 22, 2010, Alion issued and sold $310 million of its private units (Units) to Credit Suisse, which informed the Company it resold most of the units to qualified institutional buyers. Each of the 310,000 Units consisted of $1,000 in face value of Alion private senior secured notes (Secured Notes) and a warrant to purchase 1.9439 shares of Alion common stock. The Company filed a registration statement with the SEC offering to exchange the Secured Notes for publicly registered notes. The SEC declared the registration statement effective July 30, 2010; the exchange offer closed September 2, 2010; all outstanding notes were exchanged for publicly registered notes.
Security. The Secured Notes are secured by a first priority security interest in all current and future tangible and intangible property of Alion and its guarantor subsidiaries, HFA, IPS, CATI, METI, JJMA, BMH, WCI, WCGS and MA&D.
The Secured Notes are senior obligations of Alion and rank parri passu in right of payment with existing and future senior debt, including the Credit Agreement, except to the extent that the Intercreditor agreement provides Credit Agreement lenders with a super priority right of payment with respect to the underlying collateral.
Guarantees. The Company’s obligations under the Secured Notes are guaranteed by the Company’s subsidiaries, HFA, IPS, CATI, METI, JJMA, BMH, WCI, WCGS, MA&D and Alion Canada (US) Corporation.
Interest and Fees. The Secured Notes bear interest at 12% per year; 10% is payable in cash and 2% increases the Secured Note principal (PIK Interest). Interest is payable semi-annually in arrears on May 1 and November 1. Alion pays interest to holders of record as of the immediately preceding April 15 and October 15. We must pay interest on overdue principal or interest at 13% per annum to the extent lawful.
Covenants. There are no financial covenants in the Secured Note Indenture. As of December 31, 2010, we were in compliance with Secured Note Indenture non-financial covenants.
A Secured Note Indenture covenant restricts our ability to incur additional debt. Defined terms in the Secured Note Indenture include: Net Available Cash, Total Assets, Restricted Subsidiaries, Indebtedness, Adjusted EBITDA and Consolidated Interest Expense. Alion and its Restricted Subsidiaries may not issue, incur, assume, guarantee, or otherwise becoming liable for any debt unless our Adjusted EBITDA to Consolidated Interest Expense ratio is greater than 2.0 to 1.0. Even if Adjusted EBITDA is not at least two times Consolidated Interest Expense, we may incur other permitted debt including:
    Debt pursuant to certain agreements up to $25 million;
    Permitted inter-company debt;
    The Secured Notes and any public notes exchanged for those notes;
    Debt pre-dating the Secured Notes;
    Permitted debt of acquired subsidiaries;
    Permitted refinancing debt;
    Hedging agreement debt;
    Performance, bid, appeal and surety bonds and completion guarantees;
    Ordinary course insufficient funds coverage;
    Permitted refinancing debt guarantees;
    Working capital debt of non-U.S. subsidiaries;
    Debt for capital expenditures, and capital and synthetic leases up to $25 million in the aggregate $25 million and 2.5% of Alion’s Total Assets ;
    Permitted subordinated debt of Alion or any Restricted Subsidiary to finance a permitted acquisition, certain permitted ESOP transactions and refinancing debt of acquired non-U.S. subsidiaries up to $35 million in the aggregate;
    Letter of credit reimbursement obligations;
    Certain agreements in connection with acquiring a business provided liabilities incurred in connection therewith are not reflected on the Company’s balance sheet;
    Certain deferred compensation agreements; and
    Certain other debt up to $20 million.

 

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The Secured Note Indenture has a covenant that restricts our ability to declare and pay any cash dividend or other distribution related to any equity interest in Alion, repurchase or redeem any equity interest of Alion, repurchase or redeem the Unsecured Notes or other subordinated debt, or make certain investments. However, within certain limits we may make such payments in limited amounts if Adjusted EBITDA is at least two times Consolidated Interest Expense. Even if Adjusted EBITDA to Consolidated Interest Expense is not greater than 2.0 to 1.0, we may make or pay:
    Such payments out of substantially concurrent contributions of equity and substantially concurrent incurrences of permitted debt;
 
    Certain limited and permitted dividends;
 
    Certain repurchases of the Company’s equity securities deemed to occur upon exercise of stock options or warrants;
 
    Cash payments in lieu of issuing fractional shares for the exercise of warrants, options or other securities convertible into or exchangeable for our equity securities;
 
    The required Secured Note premium payable on a change of control;
 
    Certain permitted inter-company subordinated obligations;
    Certain repurchases and redemptions of subordination obligations of the Company or a Subsidiary Guarantor from Net Available Cash;
    Repurchases of subordinated obligations in connection with an asset sale to the extent required by the Secured Note Indenture;
    Certain permitted ESOP transactions;
    Long-term incentive plan payments to our directors, officers and employees, subject to a $3 million annual cap that may increase annually;
    Any purchase, repurchase, redemption, defeasance or other acquisition or retirement for value of the Unsecured Notes, up to an aggregate amount of $10 million; and
    Certain other payments not exceeding $10 million in the aggregate.
The Secured Note Indenture restricts our ability to engage in other transactions including restricting our subsidiaries from making distributions and paying dividends to parents, merging or selling all or substantially all our assets, issuing certain subsidiary equity securities, engaging in certain transactions with affiliates, incurring liens, entering into sale lease-back transactions and engaging in business unrelated to our business when we issued the Secured Notes.
Events of Default. The Secured Note Indenture contains customary events of default, including:
    Payment default;
    Uncured covenant breaches;
    Default under an acceleration of certain other debt exceeding $30 million;
    Certain bankruptcy and insolvency events;
    Judgment for payment in excess of $30 million entered against Alion or any material subsidiary that remains outstanding for a period of 60 days and is not discharged, waived or stayed;
    Failure of any Secured Note guarantee to be in effect or any subsidiary guarantor’s denial or disaffirmation of its guaranty obligations; and
    Failure of any Secured Note security interest to constitute a valid and perfected lien with its applicable priority after a permitted cure period.
Change of Control. Upon a change in control, each Secured Note holder has the right to require Alion to repurchase its notes in cash for 101% of principal plus accrued and unpaid interest. Any of the following events constitutes a change in control:
    Subject to certain exceptions, a person, other than the ESOP Trust, is or becomes the beneficial owner, directly or indirectly, of more than 35% of the total voting power or voting stock of Alion;
    Individuals who constituted Alion’s board of directors on March 22, 2010, cease for any reason to constitute a majority of the Company’s board of directors;
    Adoption of a plan relating to Alion’s liquidation or dissolution; and
    Subject to certain exceptions, Alion’s merger or consolidation with or into another person or the merger of another person with or into Alion, or the sale of all or substantially all our assets to another person.

 

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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. On June 18, 2010, we complied with the requirement that we file a registration statement with the SEC offering to exchange the Secured Notes for publicly registered notes with the same terms. The registration statement was declared effective on July 30, 2010. The exchange offer will close September 2, 2010.
Unsecured Notes
On February 8, 2007, we issued and sold $250.0 million of private 10.25% unsecured notes due February 1, 2015 (Unsecured Notes) to Credit Suisse, which informed us it had resold most of the notes to qualified institutional buyers. On June 20, 2007, we exchanged the private Unsecured Notes for publicly tradable Unsecured Notes with the same terms.
Guarantees. Alion’s obligations under the Unsecured Notes are guaranteed by our subsidiaries, HFA, IPS, CATI, METI, JJMA, BMH, WCI, WCGS, MA&D and Alion Canada (US) Corporation.
Interest and Fees. The Unsecured Notes bear interest at 10.25% per year, payable semi-annually in arrears on February 1 and August 1. We pay interest to holders of record as of the immediately preceding January 15 and July 15. We must pay interest on overdue principal or interest at 11.25% per annum to the extent lawful.
Covenants. There are no financial covenants in the Unsecured Note Indenture. As of December 31, 2010, we were in compliance with Unsecured Note Indenture non-financial covenants.
A covenant in the Unsecured Note Indenture restricts our ability to incur additional debt. Defined terms in the Secured Note Indenture include: Net Available Cash, Total Assets, Restricted Subsidiaries, Indebtedness, Adjusted EBITDA and Consolidated Interest Expense. Alion and its Restricted Subsidiaries may not issue, incur, assume, guarantee, or otherwise become liable for any indebtedness unless our Adjusted EBITDA to Consolidated Interest Expense ratio is greater than 2.0 to 1.0. Even if Adjusted EBITDA is not at least two times Consolidated Interest Expense, we may incur other permitted debt including:
    Debt pursuant to our now terminated Term B Senior Credit Facility and certain other contracts up to $360 million less principal repayments made under that debt;
    Permitted inter-company debt;
    The Unsecured Notes;
    Debt pre-dating the Unsecured Notes;
    Permitted debt of acquired subsidiaries;
    Permitted refinancing debt;
    Hedging agreement debt;
    Performance, bid, appeal and surety bonds and completion guarantees;
    Ordinary course insufficient funds coverage;

 

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    Permitted refinancing debt guarantees;
    Working capital debt of non-U.S. subsidiaries;
    Debt for capital expenditures, and capital and synthetic leases up to $25 million in the aggregate $25 million and 2.5% of Alion’s Total Assets;
    Permitted subordinated debt of Alion or any Restricted Subsidiary to finance a permitted acquisition, certain permitted ESOP transactions and refinancing debt of acquired non-U.S. subsidiaries up to $35 million in the aggregate;
    Letter of credit reimbursement obligations;
    Certain agreements in connection with acquiring a business provided liabilities incurred in connection therewith are not reflected on the Company’s balance sheet;
    Certain deferred compensation agreements; and
    Certain other debt up to $35 million.
The Unsecured Note Indenture has a covenant that restricts our ability to declare and pay any cash dividend or other distribution related to any equity interest in Alion, repurchase or redeem any equity interest of Alion, repurchase or redeem subordinated debt, or make certain investments. However, within certain limits we may make such payments in limited amounts if Adjusted EBITDA is at least two times Consolidated Interest Expense. Even if Adjusted EBITDA to Consolidated Interest Expense is not greater than 2.0 to 1.0, we may make or pay:
    Such payments out of substantially concurrent contributions of equity and substantially concurrent incurrences of permitted debt;
    Certain limited and permitted dividends;
    Certain repurchases of the Company’s equity securities deemed to occur upon exercise of stock options or warrants;
    Cash payments in lieu of issuing fractional shares for the exercise of warrants, options or other securities convertible into or exchangeable for our equity securities;
    The required Unsecured Note premium payable on a change of control;
    Certain permitted inter-company subordinated obligations;
    Certain repurchases and redemptions of subordination obligations of the Company or a Subsidiary Guarantor from Net Available Cash;
    Repurchases of subordinated obligations in connection with an asset sale to the extent required by the Indenture;
    Repurchase of common stock from former Alion Joint Spectrum Center employees;
    Certain permitted transactions with the ESOP not exceeding $25 million in the aggregate; and
    Certain other payments not exceeding $30 million in the aggregate.
The Unsecured Note Indenture restricts our ability to engage in other transactions including restricting our subsidiaries from making distributions and paying dividends to parents, merging or selling all or substantially all our assets, issuing certain subsidiary equity securities, engaging in certain transactions with affiliates, incurring liens, entering into sale lease-back transactions and engaging in business unrelated to our business when we issued the Unsecured Notes.
Events of Default. The Unsecured Note Indenture contains customary events of default, including:
    Payment default;
    Uncured covenant breaches;
    Default under an acceleration of certain other debt exceeding $30 million;
    Certain bankruptcy and insolvency events;
    Judgment for payment in excess of $30 million entered against Alion or any material subsidiary that remains outstanding for a period of 60 days and is not discharged, waived or stayed; and
    Failure of any Unsecured Note guarantee to be in effect or any subsidiary guarantor’s denial or disaffirmation of its guaranty obligations.
Change of Control. Upon a change in control, each Unsecured Note holder has the right to require Alion to repurchase its notes in cash for 101% of principal plus accrued and unpaid interest. Any of the following events constitutes a change in control:
    Subject to certain exceptions, a person, other than the ESOP Trust, is or becomes the beneficial owner, directly or indirectly, of more than 35% of the total voting power or voting stock of Alion;
    Individuals who constituted Alion’s board of directors on February 8, 2007, cease for any reason to constitute a majority of the Company’s board of directors;
    Adoption of a plan relating to Alion’s liquidation or dissolution; and
    Subject to certain exceptions, Alion’s merger or consolidation with or into another person or the merger of another person with or into Alion, or the sale of all or substantially all our assets to another person.

 

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Optional Redemption. Prior to February 1, 2011, we may redeem all, but not less than all, the Unsecured Notes at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest to the redemption date plus an applicable make-whole premium as of the redemption date.
On or after February 1, 2011, we may redeem all or a portion of the Unsecured Notes at the redemption prices set forth below (expressed in percentages of principal amount on the redemption date), plus accrued and unpaid interest to the redemption date, if redeemed during the 12-month period commencing on February 1 of the years set forth below:
         
Period   Redemption Price  
2011
    105.125 %
2012
    102.563 %
2013 and thereafter
    100.000 %
Exchange Offer; Registration Rights. The Company filed a registration statement with the SEC offering to exchange the Unsecured Notes for publicly registered notes. The registration statement was declared effective May 10, 2007; the exchange offer closed June 20, 2007; all outstanding notes were exchanged for publicly registered notes.
Retired Term B Senior Credit Agreement
In August 2004, Alion entered into the Term B Senior Credit Agreement with a syndicate of financial institutions. On March 22, 2010, we used approximately $240 million in proceeds from issuing the Units to redeem and retire all the outstanding Term B loans and pay all unpaid interest accrued to redemption.
Retired Subordinated Note
In December 2002, Alion issued a $39.9 million Subordinated Note to IITRI as part of the purchase price for substantially all of IITRI’s assets. In July 2004, IIT acquired the Subordinated Note and related warrant agreement from IITRI. On March 22, 2010, we used $25 million in proceeds from issuing the Units to redeem the Subordinated Note and the related warrants held by IIT.
Revolving Credit Agreement — Covenant Compliance
Our revolving credit agreement defines Consolidated EBITDA and requires us to achieve certain levels in order to maintain access to our credit facility and avoid cross default on our Senior Secured and Unsecured Notes. Neither EBITDA nor Consolidated EBITDA is a measure of financial performance in accordance with generally accepted accounting principles.
Our revolving credit agreement permits us to exclude certain expenses and requires us to exclude certain one-time gains from Consolidated EBITDA. The revolving credit agreement requires us to have a minimum $52.5 million in Consolidated EBITDA for the twelve months ended December 31, 2010. We had $62.3 million in Consolidated EBITDA for the twelve months ended December 31, 2010 and exceeded the requirement by $9.8 million.

 

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During the rest of this year and the next five fiscal years the Company expects that at a minimum, it will have to make the estimated interest and principal payments set forth below.
                                         
    (In thousands)  
Fiscal Year:   2011     2012     2013     2014     2015  
Bank revolving credit facility(1)
                                       
- Interest
  $ 332     $ 445     $ 444     $ 396     $  
Secured Notes(2)
                                       
- Interest
    15,689       31,850       32,490       33,144       16,821  
 
                                       
- Principal and PIK Interest
                            339,788  
Unsecured Notes(3)
                                       
- Interest
    25,420       25,420       25,420       25,420       12,710  
 
                                       
- Principal
                            248,000  
 
                             
Total cash — pay interest
    41,441       57,715       58,354       58,960       29,531  
 
                                       
Total cash — pay principal and PIK Interest
                            587,788  
 
                             
 
                                       
Total
  $ 41,441     $ 57,715     $ 58,354     $ 58,960     $ 617,319  
 
                             
     
(1)   We expect we will occasionally use our $25.0 million revolving credit facility to meet working capital needs through 2014. Management expects the average utilized revolver balance will be immaterial and that interest expense will consist of commitment fees for unused balances. The current facility expires August 22, 2014.
 
(2)   The Secured Notes bear interest at 10% in cash and 2% in PIK. Outstanding principal will increase over time for the 2% compounding PIK interest added to the initial $310 million in principal. The Secured Notes, including $29.8 million in PIK interest, mature November 1, 2014.
 
(3)   The Senior Unsecured Notes bear interest at 10.25% and mature February 1, 2015.
Contingent Obligations
Earn-outs
Alion has one remaining earn-out commitment arising from our 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 Alion’s cash flows, financial position or operating results.
Other contingent obligations which will impact the Company’s cash flow
Management forecasts that continuing net operating losses for income tax purposes will permit Alion to avoid significant cash outflows for income taxes. The Senior Secured Note Indenture requires us to either make a tender offer to note holders and use the proceeds of the WCGS ONR contract sale to redeem up to $5 million in Senior Secured Note principal at par, or re-invest the proceeds in our business. Other contingent obligations which will impact our cash flow include:
    ESOP share repurchase and diversification obligations; and
    Long-term incentive compensation plan obligations.

 

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As of December 31, 2010, Alion had spent a cumulative total of $84.1 million to repurchase shares of its common stock to satisfy ESOP distribution and diversification requests from former employees and Plan beneficiaries. In 2008, we changed our prior practice of immediately paying out all distribution requests in full. In March 2008, we began paying ESOP beneficiaries over the five-year distribution period permitted by ERISA and the terms of the Plan. Alion intends to continue this practice for the foreseeable future in part to offset the cash flow effects of annual employee diversification requests that began in fiscal 2008 and which are expected to continue for the foreseeable future. Our debt agreements limit our ability to fund certain discretionary ESOP diversification demands on our cash flow. The table below lists current and prior year share re-purchases.
                         
    Number of                
    Shares             Total Value  
Date   Repurchased     Share Price     Purchased  
                    (In thousands)  
December 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  
December 2010
    119,945     $ 26.65       3,197  
 
                   
Total
    402,576             $ 12,534  
 
                   
Management believes cash on hand, cash flow from operations and cash available under the current revolving credit facility will provide sufficient capital to fulfill current business plans and fund working capital needs for the next two to three years. Alion intends to focus on organic growth and improving processes and margins.
Although we expect to have positive annual operating cash flow eventually, we will need to generate significant additional revenue beyond current levels and earn net income in order to pay interest on the Secured Notes and Unsecured Notes and satisfy ESOP repurchase and diversification obligations.
The Secured Indenture, Unsecured Indenture and the revolving credit facility allow Alion to make certain permitted acquisitions, and we intend to use available financing to do so. We will ultimately have to refinance the Secured Notes and Unsecured Notes which mature in November 2014 and February 2015 and will require us to pay out more than $600 million over a three-month period. We are uncertain whether, when and under what terms we can refinance these obligations. If we cannot refinance these obligations, we will not have sufficient cash from operations to meet all our obligations.
If plans or assumptions change, if assumptions prove inaccurate, if Alion consummates additional or larger investments in or acquisitions of other companies than are currently planned, if we experience unexpected costs or competitive pressures, or if existing cash and projected cash flows from operations prove insufficient, we may need to obtain additional financing and sooner than expected. We intend to only enter into new financing or refinancing we consider advantageous. However, even with moderately improved conditions in the high-yield credit market, we cannot be certain financing sources will be available in the future, or, if available, that financing terms would be favorable.
Recently Issued Accounting Pronouncements
Accounting Standards Update 2010-28 (ASU 2010-28) Goodwill and Other Intangibles — When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts was issued in December 2010 and updates ASC 350 — Goodwill and Other Intangibles (ASC 350). ASU 2010-28 modifies goodwill impairment testing for reporting units with zero or negative carrying amounts.
ASU 2010-28 requires an entity to perform a step two goodwill impairment analysis for reporting units with zero or negative carrying value as part of an annual goodwill impairment analysis; whenever an event occurs or circumstances indicate that a reporting unit’s fair value is more likely than not below its carrying amount; whenever an event occurs or circumstances indicate that a goodwill impairment exists; and upon adoption of the standard.
ASU 2010-28 is effective for fiscal years beginning on or after June 15, 2011, and can only be applied prospectively. Any goodwill impairment recognized on adopting ASU 2010-28 is to be recorded as a cumulative effect adjustment to retained earnings in the period of adoption. Any goodwill impairments occurring subsequent to adoption are to be recognized in current earnings as required by ASC 350. The Company is currently evaluating the effect, if any, that adopting ASU 2010-28 will have on Alion’s consolidated financial position and operating results.

 

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Forward Looking Statements
Information included and incorporated by reference in this Form 10-Q may contain forward-looking statements that involve risks and uncertainties. These statements relate to our future plans, objectives, expectations and intentions and are for illustrative purposes only. These statements may be identified by the use of words such as “believe,” “expect,” “intend,” “plan,” “anticipate,” “likely,” “will,” “pro forma,” “forecast,” “projections,” “could,” “estimate,” “may,” “potential,” “should,” “would,” and similar expressions.
Factors that could cause actual results to differ materially from anticipated results include, but are not limited to:
    Any future inability to maintain adequate internal control over financial reporting;
    Limits on our financial and operational flexibility given our substantial debt and debt covenants;
    ERISA law changes related to the KSOP;
    Tax law changes that could affect our tax liabilities or effective tax rate;
    Changes in SEC rules, and other corporate governance requirements;
    Failure of government customers to exercise contract options;
    U.S. government project funding decisions;
    Government contract bid protest and termination risks;
    Competitive factors such as pricing pressures and/or competition to hire and retain employees;
    Results of current and/or future legal proceedings and government agency proceedings which may arise from our operations with attendant risks of fines, liabilities, penalties, suspension and/or debarment;
    Undertaking acquisitions that increase costs or liabilities or are disruptive;
    Taking on additional debt to fund acquisitions;
    Failing to adequately integrate acquired businesses;
    Risks from private securities litigation, regulatory proceedings or government enforcement actions relating to prior covenant compliance disclosures;
    Material changes in laws or regulations affecting our businesses; and
    Other risk factors discussed in Alion’s annual report on Form 10-K for the year ended September 30, 2010 filed with the SEC on December 14, 2010 and any subsequent reports.
Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s view only as of February 4, 2011. We undertake no obligation to update any of the forward-looking statements made herein, whether as a result of new information, future events, changes in expectations or otherwise. This discussion addresses only continuing operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest rate risk
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 Suisse’s 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.
We currently do not forecast drawing any material balance on our revolving credit facility. Therefore, any rate increase is not expected to materially affect Alion’s operating results or cash flows for any period from now through August 2014 when our revolving credit facility matures.
Our Senior Secured Notes and 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
Expenses and revenues from international contracts are generally denominated in U.S. dollars. Alion does not believe operations are subject to material risks from currency fluctuations.
Risk associated with value of Alion common stock
Changes in the fair market value of Alion’s stock affect our estimated KSOP share repurchase and stock-based compensation obligations. Several factors affect the timing and amount of these obligations, including: the number of employees who seek to redeem shares of Alion stock following termination of employment. Based on our current $26.65 share price, no outstanding stock appreciation rights have any intrinsic value.

 

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Item 4. Controls and Procedures
Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s 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 Commission’s 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 Company’s management, including its Chief Executive and Chief Financial Officers, as appropriate to allow timely decisions regarding required disclosures. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective and timely.
Changes in Internal Control Over Financial Reporting. There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rule 15d — 15(f) under the Exchange Act) during the quarter ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 4T. Controls and Procedures
See disclosure under Item 4.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
See Note 21 to the Condensed Consolidated Financial Statements. Other than the actions discussed in the Company’s most recent Annual Report on Form 10-K, the Company is not involved in any legal proceeding other than routine legal proceedings occurring in the ordinary course of business. Alion believes that these routine legal proceedings, in the aggregate, are not material to its financial condition or operating results.
As a government contractor, Alion may be subject from time to time to federal government inquiries relating to its operations and to DCAA audits. The federal government can suspend or debar, for a period of time, a contractor that is indicted or found to have violated the False Claims Act or other federal laws. Such an event could also result in fines or penalties.
Item 1A. Risk Factors
As of December 31, 2010, the risk factors included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010, have not materially changed.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no sales of unregistered securities during the quarter ended December 31, 2010.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Removed and Reserved
Item 5. Other Information
None.

 

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Item 6. Exhibits
         
Exhibit    
No.   Description
  31.1    
Certification of Chief Executive Officer of Alion Science and Technology Corporation pursuant to Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
  31.2    
Certification of Chief Financial Officer of Alion Science and Technology Corporation pursuant to 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
  32.1    
Certification of Chief Executive Officer of Alion Science and Technology Corporation, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2    
Certification of Chief Financial Officer of Alion Science and Technology Corporation, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  ALION SCIENCE AND TECHNOLOGY CORPORATION
 
 
  By:   /s/ Michael J. Alber    
    Name:   Michael J. Alber   
    Title:   Principal Financial Officer and Duly Authorized Officer   
Date: February 4, 2011

 

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