##### 



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 JUNE 30, 2005.
 COMMISSION FILE NUMBER 33389756
 
 
 Alion Science and Technology Corporation
  DELAWARE
    
    542061691(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation of Organization)
    
    Identification No.)10 West 35thStreet
    
    1750 Tysons Boulevard, Suite 1300Chicago, IL 60616
    
    McLean, VA 22102(312) 5674000
    
    (703) 9184480
 
 
   þ o
  o þ




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##### 



ALION
SCIENCE AND TECHNOLOGY CORPORATION
 FORM 10-Q
 FOR THE QUARTER ENDED JUNE 30, 2005
 PART I  FINANCIAL INFORMATION
    
    
    1ITEM 1. FINANCIAL STATEMENTS
    
    
    1Consolidated Balance Sheets
    
    
    1Consolidated Statements of Operations
    
    
    2Consolidated Statements of Cash Flows
    
    
    3Notes to Consolidated Financial Statements
    
    
    4ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    33ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    62ITEM 4. CONTROLS AND PROCEDURES
    
    
    63PART II  OTHER INFORMATION
    
    
    64ITEM 1. LEGAL PROCEEDINGS
    
    
    64ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    65ITEM 3. DEFAULTS UPON SENIOR SECURITIES
    
    
    65ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    65ITEM 5. OTHER INFORMATION
    
    
    65ITEM 6. EXHIBITS
    
    
    65




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##### 



PART I  FINANCIAL INFORMATION
 ITEM 1. FINANCIAL STATEMENTS
 ALION SCIENCE AND TECHNOLOGY CORPORATION
 Consolidated Balance Sheets
 As of June 30, 2005 (Unaudited) and September 30, 2004
(In thousands, except share and per share information)
 September 30,June 30, 2005
    
    2004Current assets:Cash
    
    $
    17,851
    
    
    $
    4,717Accounts receivable, less allowance of $4,153 and $2,896 at June 30, 2005
and September 30, 2004, respectively
    
    
    92,402
    
    
    
    68,949Stock subscriptions receivable
    
    
    12,068
    
    
    
    1,556Prepaid expenses
    
    
    2,717
    
    
    
    1,333Other current assets
    
    
    2,387
    
    
    
    1,008Total current assets
    
    
    127,425
    
    
    
    77,563Property plant and equipment, net
    
    
    11,879
    
    
    
    10,778Intangible assets, net
    
    
    33,359
    
    
    
    13,618Goodwill
    
    
    162,520
    
    
    
    83,075Other assets
    
    
    1,638
    
    
    
    1,688Deferred compensation assets
    
    
    2,202
    
    
    
    1,739Total assets
    
    
    339,023
    
    
    
    188,461Current liabilities:Current portion, Term B Senior Credit Facility note payable
    
    
    1420
    
    
    
    468Acquisition obligations
    
    
    6,611
    
    
    
    3,059Trade accounts payable and accrued liabilities
    
    
    28,221
    
    
    
    23,420Accrued payroll and related liabilities
    
    
    31,297
    
    
    
    20,689ESOP liabilities
    
    
    127
    
    
    
    136Current portion of accrued loss on operating leases
    
    
    1,033
    
    
    
    832Billings in excess of costs and estimated earnings on uncompleted contracts
    
    
    3,146
    
    
    
    676Total current liabilities
    
    
    71,837
    
    
    
    49,280Acquisition obligations, excluding current portion
    
    
    7,100
    
    
    
    Term B Senior Credit Facility note payable, excluding current portion
    
    
    138,100
    
    
    
    46,367Mezzanine note payable
    
    
    
    
    
    
    17,503Subordinated note payable
    
    
    41,917
    
    
    
    34,247Agreements with officers
    
    
    
    
    
    
    1,514Deferred compensation liability
    
    
    2,202
    
    
    
    1,735Accrued postretirement benefit obligations
    
    
    3,560
    
    
    
    3,398Non-current portion of accrued loss on operating leases
    
    
    3,807
    
    
    
    3,892Redeemable common stock warrants
    
    
    41,478
    
    
    
    20,777Total liabilities
    
    
    310,001
    
    
    
    178,713Shareholders equity, subject to redemption:Common stock (subject to redemption), $0.01 par value, 8,000,000 shares
authorized, 5,224,653 shares and 3,376,197 shares issued
and outstanding at June 30, 2005 and September 30, 2004 , respectively
    
    
    52
    
    
    
    34Additional paid-in capital
    
    
    90,879
    
    
    
    37,532Accumulated deficit
    
    
    (61,909
    )
    
    
    (27,818
    )Total shareholders equity, subject to redemption
    
    
    29,022
    
    
    
    9,748Total liabilities and shareholders equity, subject to redemption
    
    $
    339,023
    
    
    $
    188,461
 See accompanying notes to consolidated financial statements.
 1




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##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
 Consolidated Statements of Operations
 Three Months Ended June 30, 2005 and 2004 and
for the Nine Months Ended June 30, 2005 and 2004
(In thousands, except share and per share information)
(Unaudited)
 Three Months
    
    Three Months
    
    Nine Months
    
    Nine MonthsEnded June 30,
    
    Ended June 30,
    
    Ended June 30,
    
    Ended June 30,2005
    
    2004
    
    2005
    
    2004Contract revenue
    
    $
    110,795
    
    
    $
    69,808
    
    
    $
    260,707
    
    
    $
    193,111Direct contract expense
    
    
    80,184
    
    
    
    50,819
    
    
    
    189,821
    
    
    
    139,310Gross profit
    
    
    30,611
    
    
    
    18,989
    
    
    
    70,886
    
    
    
    53,801Operating expenses:Indirect contract expense
    
    
    10,539
    
    
    
    4,829
    
    
    
    19,668
    
    
    
    13,483Research and development
    
    
    123
    
    
    
    65
    
    
    
    394
    
    
    
    243General and administrative
    
    
    8,967
    
    
    
    6,834
    
    
    
    23,365
    
    
    
    21,099Rental and occupancy expense
    
    
    3,578
    
    
    
    3,329
    
    
    
    8,530
    
    
    
    8,337Depreciation and amortization
    
    
    5,459
    
    
    
    3,518
    
    
    
    12,718
    
    
    
    9,889Stock-based compensation (1)
    
    
    3,402
    
    
    
    450
    
    
    
    7,604
    
    
    
    1,358Bad debt expense
    
    
    114
    
    
    
    180
    
    
    
    529
    
    
    
    314Total operating expenses
    
    
    32,182
    
    
    
    19,205
    
    
    
    72,808
    
    
    
    54,723Operating income (loss)
    
    
    (1,571
    )
    
    
    (216
    )
    
    
    (1,922
    )
    
    
    (922
    )Other income (expense):Interest income
    
    
    136
    
    
    
    9
    
    
    
    192
    
    
    
    18Interest expense
    
    
    (9,418
    )
    
    
    (2,456
    )
    
    
    (32,303
    )
    
    
    (9,420
    )Other
    
    
    90
    
    
    
    (138
    )
    
    
    (9
    )
    
    
    (206
    )Loss before income taxes
    
    
    (10,763
    )
    
    
    (2,801
    )
    
    
    (34,042
    )
    
    
    (10,530
    )Income tax expense
    
    
    
    
    
    
    (4
    )
    
    
    (51
    )
    
    
    (4
    )Net loss
    
    
    (10,763
    )
    
    
    (2,805
    )
    
    
    (34,093
    )
    
    
    (10,534
    )Basic and diluted loss per share
    
    $
    (2.21
    )
    
    $
    (0.87
    )
    
    $
    (8.84
    )
    
    $
    (3.47
    )Basic and diluted weighted average common
shares outstanding
    
    
    4,863,099
    
    
    
    3,224,704
    
    
    
    3,854,543
    
    
    
    3,038,148
 
 (1)
    
    Stock-based compensation is a separately reported component of general and administrative expense. See accompanying notes to consolidated financial statements.
 2




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##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
 Consolidated Statements of Cash Flows
 Nine Months Ended June 30, 2005 and 2004
(In thousands)
(unaudited)
 Nine Months
    
    Nine MonthsEnded June 30,
    
    Ended June 30,2005
    
    2004Cash flows from operating activities:Net loss
    
    $
    (34,093
    )
    
    $
    (10,534
    )Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    12,718
    
    
    
    9,889Accretion of debt to face value
    
    
    2,835
    
    
    
    1,105Amortization of debt issuance costs
    
    
    633
    
    
    
    310Increase in value of interest rate cap agreement
    
    
    73
    
    
    
    50Change in fair value of redeemable common stock warrants
    
    
    20,618
    
    
    
    2,018Stock-based compensation
    
    
    7,604
    
    
    
    Loss on disposal of assets
    
    
    27
    
    
    
    Gain on investments, net
    
    
    (37
    )
    
    
    (36
    )Changes in assets and liabilities, net of effect of acquisitions:Accounts receivable, net
    
    
    (1,856
    )
    
    
    (10,978
    )Other assets
    
    
    885
    
    
    
    (2,529
    )Trade accounts payable and accruals
    
    
    7,064
    
    
    
    5,385Other liabilities
    
    
    154
    
    
    
    2,674Net cash provided by (used in) operating activities
    
    
    16,625
    
    
    
    (2,646
    )Cash flows from investing activities:Cash paid for acquisitions, net of cash acquired
    
    
    (70,644
    )
    
    
    (17,715
    )Capital expenditures
    
    
    (1,762
    )
    
    
    (2,786
    )Purchase of investment securities
    
    
    (1,194
    )
    
    
    (1,333
    )Net cash used in investing activities
    
    
    (73,600
    )
    
    
    (21,834
    )Cash flows from financing activities:Proceeds from Term B Senior Credit Facility note payable
    
    
    94,000
    
    
    
    Payment of debt issuance costs
    
    
    (1,307
    )
    
    
    Repayment of Term B Credit Facility note payable
    
    
    (720
    )
    
    
    Repayment of senior note payable
    
    
    
    
    
    
    (4,817
    )Repayment of mezzanine note payable
    
    
    (20,201
    )
    
    
    (750
    )Proceeds from agreement with officer
    
    
    
    
    
    
    750Payment of agreements with officers
    
    
    (1,823
    )
    
    
    Borrowings under revolving credit facility
    
    
    
    
    
    
    23,850Repayment of ITSC revolving credit facility
    
    
    
    
    
    
    (375
    )Payment of acquisition obligations
    
    
    
    
    
    
    (18
    )Purchase of shares of common stock from ESOP Trust
    
    
    (2,281
    )
    
    
    (748
    )Cash received from issuance of common stock to Trust
    
    
    2,441
    
    
    
    6,105Net cash provided by financing activities
    
    
    70,109
    
    
    
    23,997Net increase (decrease) in cash
    
    
    13,134
    
    
    
    (483
    )Cash at beginning of period
    
    
    4,718
    
    
    
    494Cash at end of period
    
    $
    17,852
    
    
    $
    11Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    7,138
    
    
    $
    3,570Cash paid for taxes
    
    $
    367
    
    
    $
    597Non-cash financing activities:Common stock issued to ESOP Trust in satisfaction of
employer contribution liability
    
    $
    4,019
    
    
    $
    2,217Common stock
issued for acquisitions
    
    
    37,250
    
    
    
    
 See accompanying notes to consolidated financial statements.
 3




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##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
 (1) Description and Formation of the Business
   
    
    $58,571 in cash, consisting of $56,721 paid to IITRI and $1,517 paid for
certain transaction expenses on behalf of IITRI, and $333 paid for other
transaction expenses;
    
    $39,900 in seller notes to IITRI, with detachable warrants representing
approximately 26% of the outstanding common stock of Alion at the closing date (on
a fully diluted basis). The seller notes bear interest at an effective interest
rate of 6.71% per annum. See notes 8 and 9;
    
    $20,343 in mezzanine notes to IITRI, with detachable warrants representing 12%
of the outstanding common stock of Alion at the closing date (on a fully diluted
basis). See notes 8 and 9;
    
    $2,300 in transaction costs less the $1,517 referenced above;
    
    $6,188 in assumed IITRI debt due to its bank; and
    
    $1,520 in additional amounts due to IITRI for purchase price adjustments
related to the Life Sciences Operation.
  4




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##### 



Cash and restricted cash
    
    $
    1,187Accounts receivable
    
    
    47,485Other current assets
    
    
    3,784Acquired contracts
    
    
    30,645Goodwill
    
    
    63,610Fixed assets
    
    
    9,094Liabilities assumed
    
    
    (28,500
    )$
    127,305
 (2) Summary of Significant Accounting Policies
 Basis of Presentation and Principles of Consolidation
    5




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Reclassifications
  Revenue Recognition
      6




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##### 



Income Taxes
  Accounts Receivable and Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts
   7




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##### 



Fixed Assets
  Fair Value of Financial Instruments
  Cash, Cash Equivalents, Accounts Payable and Accounts Receivable
  Marketable Securities
  Senior Long-term Debt
  Interest Rate Cap
  Redeemable Common Stock Warrants
  8




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##### 



(3) Employee Stock Ownership Plan (ESOP) and Stock Ownership Trust
  (4) Postretirement Benefits
    (5) Loss Per Share
  9




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##### 



(6) Shareholders Equity, Subject to Redemption
   (7) Goodwill and Intangible Assets
    (In thousands)For the remaining three months:
    
    
    2005
    
    
    $
    5,054For the year ended September 30:
    
    
    2006
    
    
    $
    12,5152007
    
    
    $
    10,1052008
    
    
    $
    5,684
  (8) Long-Term Debt
  10




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##### 



Term B Senior Credit Facility
  
    
    a senior term loan in the approximate amount of $143.3 million, (which includes the
incremental term loan), all of which was drawn down as of June 30, 2005;
    
    a senior revolving credit facility, in the amount of $30.0 million, of which
approximately $0.66 million the Company was deemed borrowed as of June 30, 2005,
through the issuance of letters of credit issued under the Companys prior senior
credit facility which remain outstanding under the Term B Senior Credit Facility and
the issuance of one additional letter of credit directly under the Term B Senior
Credit Facility; and
    
    an uncommitted incremental term loan accordion facility in the amount of $150.0
million.
    11




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##### 



Use of Proceeds.
 12




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##### 



Security.
 Interest and Fees.
 13




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##### 



Eurodollar
    
    
    
    
    
    Prime RateSpread
    
    ABR Spread
    
    ABR Spread (inLeverage Ratio
    
    (in basis points)
    
    (in basis points)
    
    basis points)Category 1
    
    
    275
    
    
    
    225
    
    
    
    175Greater than or equal to 3.00 to 1.00Category 2
    
    
    250
    
    
    
    200
    
    
    
    150Greater than or equal to 2.50 to
1.00 but less than 3.00 to 1.00Category 3
    
    
    225
    
    
    
    175
    
    
    
    125Greater than or equal to 2.00 to
1.00 but less than 2.50 to 1.00Category 4
    
    
    200
    
    
    
    150
    
    
    
    100Less than 2.00 to 1.00
     14




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##### 



Covenants.
 
    
    Leverage Ratio.The Companys leverage ratio is calculated by dividing the total
outstanding amount of all of the Companys consolidated indebtedness, but excluding
the amount owed under the Companys subordinated note and the aggregate amount of
letters of credit issued on the Companys behalf other than drawings which have not
been reimbursed, by the Companys consolidated EBITDA for the previous four fiscal
quarters on a rolling basis. The maximum total leverage ratio is measured as of the
end of each of our fiscal quarters. For purposes of
determining the Companys leverage ratio as of or for the quarters ended
 15




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##### 



on September 30, 2004, December 31, 2004 and March 31, 2005, the Term B Senior Credit
Facility deems the Companys consolidated EBITDA to be $7.5 million for the fiscal
quarter ended December 31, 2003, $7.0 million for the fiscal quarter ended March
31, 2004, and $7.7 million for the fiscal quarter ended June 30, respectively. For
each of the following time periods, the Company is required to maintain a maximum
leverage ratio not greater than the following:
 Period
    
    RatioAugust 2, 2004 through March 31, 2005
    
    
    3.85 to 1.00April 1, 2005 through December 31, 2005
    
    
    3.75 to 1.00January 1, 2006 through March 31, 2006
    
    
    3.50 to 1.00April 1, 2006 through March 31, 2007
    
    
    3.25 to 1.00April 1, 2007 through March 31, 2008
    
    
    2.75 to 1.00Thereafter
    
    
    2.25 to 1.00
 
    
    Interest Coverage Ratio.The Companys interest coverage ratio is calculated by
dividing the Companys consolidated EBITDA, less amounts the Company spends
attributable to property, plant, equipment and other fixed assets, by the Companys
consolidated interest expense. For purposes of determining the Companys interest
coverage ratio as of or for the quarters ended on September 30, 2004, December 31,
2004 and March 31, 2005, the Term B Senior Credit Facility deems the Companys
consolidated EBITDA to be $7.5 million for the fiscal quarter ended December 31, 2003,
$7.0 million for the fiscal quarter ended March 31, 2004, and $7.7 million for the
fiscal quarter ended June 30, 2004. The Company is required to maintain a minimum
fixed charge coverage ratio of at least the following:
 Date or Period
    
    RatioAugust 2, 2004 through September 30, 2005
    
    
    3.75 to 1.00Thereafter
    
    
    4.00 to 1.00
  
    
    incur additional indebtedness other than permitted additional indebtedness;
    
    consolidate, merge or sell all or substantially all of the Companys assets;
 16




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##### 




    
    make certain loans and investments including acquisitions of businesses, other than
permitted acquisitions;
    
    pay dividends or distributions other than distributions needed for the ESOP to
satisfy its repurchase obligations, for the Company to satisfy any put right if
exercised by mezzanine warrant holders and for certain payments required under the
Companys equity based incentive plans;
    
    enter into transactions with the Companys shareholders and affiliates;
    
    enter into certain transactions not permitted under ERISA;
    
    grant certain liens and security interests;
    
    enter into sale and leaseback transactions;
    
    change lines of business;
    
    repay subordinated indebtedness and redeem or repurchase certain equity; or
    
    use the proceeds of the Companys borrowings other than as permitted by the Term B
Senior Credit Facility.
 Events of Default.
 
    
    payment default;
    
    breach of representations and warranties;
    
    uncured covenant breaches;
    
    default under certain other debt exceeding an agreed amount;
    
    bankruptcy and insolvency events;
    
    notice of debarment, suspension or termination under a material government
contract;
    
    certain ERISA violations;
    
    unstayed judgments in excess of an agreed amount;
 17




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##### 




    
    failure of the subordinated note to be subordinated to the Term B Senior Credit
Facility;
    
    failure of the guarantee of the Term B Senior Credit Facility to be in effect;
    
    failure of the security interests to be valid, perfected first priority security
interests in the collateral;
    
    failure of the Company to remain an S-corporation;
    
    the Trust is subject to certain taxes in excess of an agreed amount;
    
    final negative determination that the ESOP is not a qualified plan; or
    
    change of control (as defined below).
  Senior Credit Agreement
   18




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##### 



Mezzanine Note
    19




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##### 



Subordinated Note
  Other Notes and Agreements
    20




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##### 



6-Fiscal Year Period ($ in millions)2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    2010
    
    TotalSenior Secured Term B Loan (1)
    
    $
    0.36
    
    
    $
    1.44
    
    
    $
    1.44
    
    
    $
    1.44
    
    
    $
    138.60
    
    
    $
    
    
    
    $
    143.28Subordinated Note (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19.95
    
    
    
    19.95
    
    
    
    39.90Subordinated Paid-in-Kind Note
(3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7.18
    
    
    
    7.18
    
    
    
    14.36Total principal payments
    
    $
    0.36
    
    
    $
    1.44
    
    
    $
    1.44
    
    
    $
    1.44
    
    
    $
    165.73
    
    
    $
    27.13
    
    
    $
    197.54
 
 (1)
    
    The Term B Senior Credit Facility (as amended by Amendment One) requires the
Company to repay 1 percent of the principal balance outstanding under the Senior Secured Term
B Loan during each of the first four years (i.e., fiscal years 2005 through 2008) of the Term
B Senior Credit Facilitys term and 96 percent of the principal balance outstanding during the
fifth and final year of the term. As of June 30, 2005, the Company had paid approximately
$0.72 million in principal. The Company is required to pay at least $0.36 million in principal
during the remainder of fiscal year 2005. The Term B Senior Credit Facility also requires the
Company to make mandatory prepayments of principal depending upon whether the Company
generates certain excess cash flow in a given fiscal year, issues certain equity, issues or
incurs certain debt or sells certain assets. Due to the uncertainty of these payments, the
table does not reflect any such payments. The outstanding balance of approximately $143.3
million, as of June 30, 2005, is shown net of approximately $3.8 million of unamortized debt
discount. The Company recorded approximately $4.5 million of debt issuance costs as debt
discount.(2)
    
    Repayment of $39.9 million for the face value of the Subordinated Note in two equal
payments of $19.95 million in years 2009 and 2010.
At date of issuance, the Company recognized approximately $7.1
million as the fair value of warrants issued with the Subordinated Note in accordance with
Emerging Issues Task Force Issue No. 00-19, Accounting for Derivative Financial Instruments
Indexed to, and Potentially settled in, a Companys Own Stock. As of June 30, 2005, $5.0 million of the $7.1 million is unamortized.(3)
    
    During the eight-year term of the Subordinated Note, approximately $14.4 million of
principal accretes to the note through PIK notes. These amounts are included in the principal
payments in fiscal years 2009 and 2010. In fiscal years 2009 and 2010, interest at 16% will be
paid quarterly in cash on the original principal of $39.9 million. The principal, together
with the outstanding balance of the PIK notes, will be paid in equal amounts at the end of
fiscal years 2009 and 2010. 21




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##### 



(9) Redeemable Common Stock Warrants
  (10) Leases
  22




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##### 



Fiscal years ending:
    
    (In thousands)2005 (for the remainder of fiscal year)
    
    $
    4,4662006
    
    
    18,0102007
    
    
    17,0202008
    
    
    15,7452009
    
    
    12,8332010
    
    
    8,628and thereafter
    
    
    4,057Gross lease payments
    
    
    80,759Less: non-cancelable subtenant receipts
    
    
    8,073Net lease payments
    
    $
    72,686
  (11) Fixed Assets
  June 30,
    
    September 30,2005
    
    2004(in thousands)Leasehold improvements
    
    $
    2,625
    
    
    $
    1,992Equipment and software
    
    
    16,848
    
    
    
    13,358Total cost
    
    
    19,473
    
    
    
    15,350Less accumulated depreciation and
amortization
    
    
    7,594
    
    
    
    4,572Net fixed assets
    
    $
    11,879
    
    
    $
    10,778
  23




---



##### 



(12) Stock Appreciation Rights
  Number of
    
    Number of
    
    
    
    
    
    
    
    CumulativeSARs
    
    SARs granted
    
    Total Number
    
    
    
    Number ofEffective Date of
    
    Granted to
    
    to Board of
    
    of SARs
    
    Exercise
    
    SARsGrant
    
    Employees
    
    Directors
    
    Granted
    
    Price/Share
    
    GrantedDecember 23, 2002
    
    
    64,250
    
    
    
    29,400
    
    
    
    93,650
    
    
    $10.00/share
    
    
    93,650May 15, 2003
    
    
    300
    
    
    
    
    
    
    
    300
    
    
    $11.13/share
    
    
    93,950June 5, 2003
    
    
    300
    
    
    
    
    
    
    
    300
    
    
    $11.13/share
    
    
    94,250December 21, 2003
    
    
    129,550
    
    
    
    12,600
    
    
    
    142,150
    
    
    $14.71/share
    
    
    236,400
     24




---



##### 



Number of SARs
    
    Number of SARs
    
    Total Number
    
    
    
    CumulativeEffective Date of
    
    Granted to
    
    granted to Board
    
    of SARs
    
    Exercise
    
    Number of SARsGrant
    
    Employees
    
    of Directors
    
    Granted
    
    Price/Share
    
    GrantedFebruary 2005
    
    
    164,750
    
    
    
    12,600
    
    
    
    177,350
    
    
    $19.94/share
    
    
    177,350March 2005
    
    
    2,000
    
    
    
    
    
    
    
    2,000
    
    
    $19.94/share
    
    
    179,350April 2005
    
    
    33,000
    
    
    
    
    
    
    
    33,300
    
    
    $29.81/share
    
    
    212,350June 2005
    
    
    2,000
    
    
    
    
    
    
    
    2,000
    
    
    $29.81/share
    
    
    214,350
   (13) Phantom Stock Program
   Vested Amount for Grant inFebruaryAnniversary from Grant Date
    
    2003
    
    November 20031st
    
    
    
    
    
    
    20
    %2nd
    
    
    
    
    
    
    20
    %3rd
    
    
    50
    %
    
    
    20
    %4th
    
    
    25
    %
    
    
    20
    %5th
    
    
    25
    %
    
    
    20
    %
  25




---



##### 



Shares of Phantom
    
    Cumulative SharesStock awarded to
    
    of Phantom StockEffective date of Grant
    
    employees
    
    awardedFebruary 11, 2003
    
    
    171,000
    
    
    
    171,000November 11, 2003
    
    
    52,685
    
    
    
    223,685
      26




---



##### 



(14) Segment Information and Customer Concentration
    (15) Business
Combinations and Investments
 Acquisition of Innovative Technologies Solutions Corporation
  27




---



##### 



Acquisition of Identix Public Sector, Inc.
    Acquisition of Countermeasures, Inc.
   Acquisition
of ManTech Environmental Technology, Inc.
   28




---



##### 



Acquisition of Carmel Applied Technologies, Inc.
   Investment in VectorCommand Ltd.
  Acquisition of John J. McMullen Associates, Inc. and Pro Forma Information
  Fair ValueForm of Consideration
    
    (in millions)Cash paid, net of cash acquired
    
    $
    52.8Stock issued
    
    
    37.3Future payments
    
    
    8.3Acquisition costs
    
    
    1.1Total consideration
    
    $
    99.5
    29




---



##### 



Three Months Ended June 30, 2005
    
    Three Months Ended June 30, 2004JJMA
    
    Alion
    
    
    
    
    
    JJMA
    
    AlionAlion
    
    Pro Forma
    
    Pro Forma
    
    Alion
    
    Pro Forma
    
    Pro FormaPro Forma Revenue
    
    $
    110,795
    
    
    $
    
    
    
    $
    110,795
    
    
    $
    69,808
    
    
    $
    25,815
    
    
    $
    95,623Pro Forma Net
Income (loss)
    
    $
    (10,763
    )
    
    $
    
    
    
    $
    (10,763
    )
    
    $
    (2,805
    )
    
    $
    (11
    )
    
    $
    (2,816
    )Weighted Average
Shares
Outstanding
    
    
    4,863,099
    
    
    
    
    
    
    
    
    
    
    
    4,571,681
    
    
    
    
    
    
    
    4,571,681Earnings Per Share
    
    $
    (2.21
    )
    
    $
    
    
    
    $
    (2.21
    )
    
    $
    (0.61
    )
    
    $
    
    
    
    $
    (0.62
    )
 Nine Months Ended June 30, 2005
    
    Nine Months Ended June 30, 2004JJMA
    
    Alion
    
    
    
    
    
    JJMA
    
    AlionAlion
    
    Pro Forma
    
    Pro Forma
    
    Alion
    
    Pro Forma
    
    Pro FormaPro Forma Revenue
    
    $
    260,707
    
    
    $
    51,103
    
    
    $
    311,810
    
    
    $
    193,111
    
    
    $
    77,431
    
    
    $
    270,542Pro Forma Net
Income (loss)
    
    $
    (34,093
    )
    
    $
    (17,457
    )
    
    $
    (51,550
    )
    
    $
    (10,534
    )
    
    $
    (3,517
    )
    
    $
    (14,051
    )Weighted Average
Shares
Outstanding
    
    
    4,752,675
    
    
    
    
    
    
    
    4,752,675
    
    
    
    4,385,272
    
    
    
    
    
    
    
    4,385,272Earnings Per Share
    
    $
    (7.17
    )
    
    $
    
    
    
    $
    (10.85
    )
    
    $
    (2.40
    )
    
    $
    
    
    
    $
    (3.20
 (16) Related Party Transactions
   30




---



##### 



(17) Commitments and Contingencies
 Earn-Out Commitments
      Legal Proceedings
   31




---



##### 



Government Audits
  (18) Subsequent Events
 AB Tech settlement
  32




---



##### 



Joint Spectrum Center Contract
  ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   33




---



##### 



Critical Accounting Estimates and Policies
    Revenue Recognition, Cost Estimation and Payment
   34




---



##### 




    
    Cost-reimbursement contracts  revenue is recognized as costs are incurred and
include an estimate of applicable fees earned.
    
    Fixed-price contracts  revenue is recognized using the percentage-of-completion
method based on various performance measures. From time to time, facts develop that
require the Company to revise its estimated total costs or revenues expected. The
cumulative effect of revised estimates is recorded in the period in which the facts
requiring revisions become known. The full amount of anticipated losses on any type of
contract are recognized in the period in which they become known.
    
    Time-and-material contracts  revenue is recognized at contractually billable rates
as labor hours and direct expenses are incurred. Labor and related costs are
reimbursed at negotiated, fixed hourly rates.
  For the Nine Months Ended June 30,Contract Type
    
    2005
    
    2004(in millions)Cost-reimbursement
    
    $
    157
    
    
    
    60
    %
    
    $
    116
    
    
    
    60
    %Fixed-price
    
    $
    50
    
    
    
    19
    %
    
    $
    29
    
    
    
    15
    %Time-and-material
    
    $
    54
    
    
    
    21
    %
    
    $
    48
    
    
    
    25
    %Total
    
    $
    261
    
    
    
    100
    %
    
    $
    193
    
    
    
    100
    %
   35




---



##### 



36




---



##### 



For the Nine Months Ended June 30,Contract Type
    
    2005
    
    2004(in millions)U.S. Department of Defense (DoD)
    
    $
    240
    
    
    
    92
    %
    
    $
    178
    
    
    
    92
    %Other Federal Civilian Agencies
    
    $
    14
    
    
    
    5
    %
    
    $
    11
    
    
    
    6
    %Commercial / State / Local and
International
    
    $
    7
    
    
    
    3
    %
    
    $
    4
    
    
    
    2
    %Total
    
    $
    261
    
    
    
    100
    %
    
    $
    193
    
    
    
    100
    %
 Goodwill and Identifiable Intangible Assets
  
    
    Significant underperformance relative to expected historical or projected future
operating results;
    
    Significant changes in the manner of use of acquired assets or overall business
strategy;
    
    Significant negative industry or economic trends; and
    
    Significant decline in Alions stock price for a sustained period.
   Comparison of Results of Operations
  37




---



##### 



Results of Operations
 Three Months Ended June 30, 2005 Compared to Three Months Ended June 30, 2004
 Three Months Ended June 30, 2005
    
    Three Months Ended June 30, 2004(in millions)
    
    (in millions)Consolidated
    
    
    
    
    
    
    
    
    
    ConsolidatedConsolidated
    
    
    
    
    
    Operations Less
    
    Consolidated
    
    
    
    
    
    Operations LessOperations of
    
    Acquired
    
    Acquired
    
    Operations of
    
    Acquired
    
    AcquiredFinancial information
    
    Alion
    
    Operations
    
    Operations
    
    Alion
    
    Operations
    
    OperationsTotal revenue
    
    $
    110.8
    
    
    $
    30.7
    
    
    $
    80.1
    
    
    $
    69.8
    
    
    $
    0.0
    
    
    $
    69.8Material and subcontract revenue
    
    
    29.9
    
    
    
    8.2
    
    
    
    21.7
    
    
    
    17.8
    
    
    
    0.0
    
    
    
    17.8Total direct contract expenses
    
    
    80.2
    
    
    
    22.2
    
    
    
    58.0
    
    
    
    50.8
    
    
    
    0.0
    
    
    
    50.8Major components of direct contract expenseDirect labor cost
    
    
    47.6
    
    
    
    12.9
    
    
    
    34.7
    
    
    
    30.9
    
    
    
    0.0
    
    
    
    30.9Other direct cost (ODC)
    
    
    3.4
    
    
    
    1.3
    
    
    
    2.1
    
    
    
    2.6
    
    
    
    0.0
    
    
    
    2.6Material and subcontract (M&S) cost
    
    
    29.2
    
    
    
    8.0
    
    
    
    21.2
    
    
    
    17.3
    
    
    
    0.0
    
    
    
    17.3Gross profit
    
    
    30.6
    
    
    
    8.5
    
    
    
    22.1
    
    
    
    19.0
    
    
    
    0.0
    
    
    
    19.0Total operating expense
    
    
    32.2
    
    
    
    7.7
    
    
    
    24.5
    
    
    
    19.2
    
    
    
    0.0
    
    
    
    19.2Major components of operating expenseIndirect personnel and facilities
    
    
    14.1
    
    
    
    3.2
    
    
    
    10.9
    
    
    
    8.2
    
    
    
    0.0
    
    
    
    8.2General and administrative
    
    
    9.0
    
    
    
    2.9
    
    
    
    6.1
    
    
    
    6.8
    
    
    
    0.0
    
    
    
    6.8Depreciation and amortization
    
    
    5.5
    
    
    
    1.6
    
    
    
    3.9
    
    
    
    3.5
    
    
    
    0.0
    
    
    
    3.5Stock-based compensation
    
    
    3.4
    
    
    
    0.0
    
    
    
    3.4
    
    
    
    0.5
    
    
    
    0.0
    
    
    
    0.5Income (loss) from operations
    
    
    (1.6
    )
    
    
    0.8
    
    
    
    (2.4
    )
    
    
    (0.2
    )
    
    
    0.0
    
    
    
    (0.2
    )Other income and expense
    
    
    (9.2
    )
    
    
    0.0
    
    
    
    (9.2
    )
    
    
    (2.6
    )
    
    
    0.0
    
    
    
    (2.6
    )Income tax benefit / (expense)
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Net income (loss)
    
    $
    (10.8
    )
    
    $
    1.0
    
    
    $
    (11.8
    )
    
    $
    (2.8
    )
    
    $
    0.0
    
    
    $
    (2.8
    )
 
 *
    
    The operations of the the acquired entities CATI, METI, and JJMA have been fully integrated within Alion on a consolidated basis.The financial information attributed to these entities are the estimates of management. Revenues.
  38




---



##### 



$
 Direct Contract Expenses.
  
    
    Direct labor expense for the three months ended June 30, 2005 increased by
$16.7 million, or 54.1%, to $47.6 million from $30.9 million for the three months
ended June 30, 2004. As a percentage of revenue, direct labor expense was 43.0%
for the three months ended June 30, 2005 and 44.3% for the three months ended June
30, 2004.
    
    M&S expense increased approximately $11.9 million, or 68.8%, to $29.2 million
for the three months ended June 30, 2005, compared to $17.3 million for the three
months ended June 30, 2004. As a percentage of revenue, M&S expense was 26.4% for
the three months ended June 30, 2005 as compared to 24.8% for the three months
ended June 30, 2004. The percentage increase in M&S expense is directly associated
with the relative percentage increase in M&S revenue as described above. As a
percentage of M&S revenue, M&S expense was approximately 97.7% during the three
months ended June 30, 2005, as compared to 97.2% for the three months ended June
30, 2004.
 Gross Profit.
 39




---



##### 




    
    Gross profit increase generated by the activities of the acquired operations
    
    $
    8.5 million
    
    Gross profit increase generated primarily by work performed
under contracts that were in existence during the prior fiscal
year or that were awarded during the current fiscal year
    
    $
    3.1 millionTotal:
    
    $
    11.6 million
  Operating Expenses.
 
    
    Operating expense increase incurred by the activities of the acquired operations
    
    $
    7.7 million
    
    Operating expense increase incurred by the activities of the non-acquired operations
    
    $
    5.3 millionTotal:
    
    $
    13.0 million
  
    
    Overhead expenses for indirect personnel and facilities costs related to rental and
occupancy expenses increased approximately $5.9 million, or 71.9%, to $14.1 million for
the three months ended June 30, 2005, from $8.2 million for the three months ended June
30, 2004. Of the $5.9 million increase in indirect personnel and facilities expense,
approximately $3.2 million was generated by the acquired operations and approximately $2.7
million was incurred by the business activities of the non-acquired operations. As a
percentage of revenue, operating expense relating to indirect personnel and facilities
expense was approximately 12.7% for
 40




---



##### 



the three months ended June 30, 2005 as compared to
11.7% for the three months ended June 30, 2004.
    
    General and administrative (G&A) expense increased approximately $2.2 million, or
48.9%, to $9.0 million for the three months ended June 30, 2005, compared to $6.8 million
for the three months ended June 30, 2004. As a percentage of revenues, G&A expenses were
8.1% for the three months ended June 30, 2005, compared to 9.7% for the three months ended
June 30, 2004.
    
    Stock-based compensation and deferred compensation relate primarily to the SAR and
phantom stock plans. This expense increased approximately $2.9 million, or approximately
580% to $3.4 million for the three months ended June 30, 2005, from approximately $0.5
million for the three months ended June 30, 2004. As a percentage of revenue, operating
expense relating to stock-based compensation and deferred compensation expense was 3.1%
and 0.5% for the three-month periods ended June 30, 2005 and 2004, respectively. The
increase in stock-based compensation and deferred compensation is a result of the increase
in the value of Alions common stock and the increase in the total amount of outstanding
SARs and phantom stock.
    
    Depreciation and amortization expense increased approximately
$2.0 million, or 55.2%,
to $5.5 million for the three months ended June 30, 2005, as compared to $3.5 million for
the three months ended June 30, 2004.For the three months ended June 30, 2005 and 2004, approximately $4.3 million and $2.8
million, respectively, of amortization expense incurred was associated with purchased
contracts of IITRI and of the acquired operations. As a percentage of revenue,
depreciation and amortization expense was 4.9% for the three months ended June 30, 2005 as
compared to 5.0% for the three months ended June 30, 2004.
 Operating Loss.
 
    
    Operating loss generated from the non-acquired operations
    
    $
    (2.2) million
    
    Operating income generated from the acquired operations
    
    $
    0.8 millionTotal:
    
    $
    (1.4) million
 Other Income (Expense).
 41




---



##### 



For Three Months Ended June 30,(in millions)2005
    
    2004Revolving facility
    
    $
    
    
    
    $
    0.3Senior term loan
    
    
    2.6
    
    
    
    0.5Mezzanine note  cash pay interest
    
    
    
    
    
    
    0.6 accretion of debt discount
    
    
    
    
    
    
    0.1Subordinated note  PIK interest
    
    
    0.6
    
    
    
    0.6 accretion of long-term deferred interest
    
    
    0.2
    
    
    
    0.2 accretion of debt discount
    
    
    0.2
    
    
    
    0.2Accretion of warrant liability (a)
    
    
    5.8
    
    
    
    $
    9.4
    
    
    $
    2.5
 
 (a)
    
    Reflects change in value assigned to the detachable warrants associated with the Mezzanine and Subordinated notes based Income Tax (Expense) Benefit.
 Net Loss.
 42




---



##### 



Nine Months Ended June 30, 2005 Compared to Nine Months Ended June 30, 2004
 Nine Months Ended June 30, 2005
    
    Nine Months Ended June 30, 2004(millions)
    
    (millions)Consolidated
    
    
    
    
    
    
    
    
    
    ConsolidatedConsolidated
    
    
    
    
    
    Operations Less
    
    Consolidated
    
    
    
    
    
    Operations LessOperations of
    
    Acquired
    
    Acquired
    
    Operations of
    
    Acquired
    
    AcquiredFinancial information
    
    Alion
    
    Operations
    
    Operations
    
    Alion
    
    Operations
    
    OperationsTotal revenue
    
    $
    260.7
    
    
    $
    32.9
    
    
    $
    227.8
    
    
    $
    193.1
    
    
    $
    0.0
    
    
    $
    193.1Material and subcontract revenue
    
    
    68.5
    
    
    
    8.4
    
    
    
    60.1
    
    
    
    45.5
    
    
    
    0.0
    
    
    
    45.5Total direct contract expenses
    
    
    189.8
    
    
    
    23.7
    
    
    
    166.1
    
    
    
    139.3
    
    
    
    0.0
    
    
    
    139.3Major components of direct contract expenseDirect labor cost
    
    
    115.2
    
    
    
    14.1
    
    
    
    101.1
    
    
    
    88.1
    
    
    
    0.0
    
    
    
    88.1Other direct cost (ODC)
    
    
    7.2
    
    
    
    1.4
    
    
    
    5.8
    
    
    
    7.0
    
    
    
    0.0
    
    
    
    7.0Material and subcontract (M&S) cost
    
    
    67.4
    
    
    
    8.3
    
    
    
    59.1
    
    
    
    44.2
    
    
    
    0.0
    
    
    
    44.2Gross profit
    
    
    70.9
    
    
    
    9.2
    
    
    
    61.7
    
    
    
    53.8
    
    
    
    0.0
    
    
    
    53.8Total operating expense
    
    
    72.8
    
    
    
    8.3
    
    
    
    64.5
    
    
    
    54.7
    
    
    
    0.0
    
    
    
    54.7Major components of operating expenseIndirect personnel and facilities
    
    
    28.2
    
    
    
    3.5
    
    
    
    24.7
    
    
    
    21.8
    
    
    
    0.0
    
    
    
    21.8General and administrative
    
    
    23.4
    
    
    
    3.2
    
    
    
    20.2
    
    
    
    21.1
    
    
    
    0.0
    
    
    
    21.1Depreciation and amortization
    
    
    12.7
    
    
    
    1.6
    
    
    
    11.1
    
    
    
    9.9
    
    
    
    0.0
    
    
    
    9.9Stock-based compensation
    
    
    7.6
    
    
    
    0.0
    
    
    
    7.6
    
    
    
    1.4
    
    
    
    0.0
    
    
    
    1.4Income (loss) from operations
    
    
    (1.9
    )
    
    
    0.9
    
    
    
    (2.8
    )
    
    
    (0.9
    )
    
    
    0.0
    
    
    
    (0.9
    )Other income and expense
    
    
    (32.1
    )
    
    
    
    0.0
    
    
    
    (32.1
    )
    
    
    (9.6
    )
    
    
    0.0
    
    
    
    (9.6
    )Income tax benefit / (expense)
    
    
    (0.1
    )
    
    
    0.0
    
    
    
    (0.1
    )
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Net income (loss) from operations
    
    $
    (34.1
    )
    
    $
    0.9
    
    
    $
    (35.0
    )
    
    $
    (10.5
    )
    
    $
    (0.0
    )
    
    $
    (10.5
    )
 
 *
    
    The operations of the the acquired entities CATI, METI, and JJMA have been fully integrated within Alion on a consolidated basis.The financial information attributed to these entities are the estimates of management. Revenues.
   43




---



##### 



Direct Contract Expenses.
  
    
    Direct labor expense for the nine months ended June 30, 2005 increased by $27.1
million, or 30.8%, to $115.2 million from $88.1 million for the nine months ended
June 30, 2004. As a percentage of revenue, direct labor expense was 44.2% and
45.6% for each of the nine-month periods ended June 30, 2005 and 2004,
respectively.
    
    M&S expense increased approximately $23.2 million, or 52.5%, to $67.4 million
for the nine months ended June 30, 2005, compared to $44.2 million for the nine
months ended June 30, 2004. As a percentage of revenue, M&S expense was 25.9% for
the nine months ended June 30, 2005 as compared to 22.9% for the nine months ended
June 30, 2004. The percentage increase in M&S expense is directly associated with
the relative percentage increase in M&S expense of the contracts as described
above. As a percentage of M&S revenue, M&S expense was approximately 98.4% during
the nine months ended June 30, 2005, as compared to 97.1% for the nine months
ended June 30, 2004.
 44




---



##### 



Gross Profit.
 
    
    Gross profit increase generated by the activities of the acquired operations
    
    $
    9.2 million
    
    Gross profit increase generated primarily by work performed
under contracts that were in existence during the prior year
or that were awarded during the current fiscal year
    
    $
    7.9 millionTotal:
    
    $
    17.1 million
  Operating Expenses.
 
    
    Operating expense increase incurred
by the activities of the non-acquired operations
    
    $
    9.8 million
    
    Operating expense increase incurred by the activities of the acquired operations
    
    $
    8.3 millionTotal:
    
    $
    18.1 million
  
    
    Overhead expenses for indirect personnel and facilities costs related to rental and
occupancy expenses increased approximately $6.4 million, or 29.4%, to $28.2 million for
the nine months ended June 30, 2005, from $21.8 million for the nine months ended June 30,
2004. As a percentage of revenue, operating expense relating to indirect personnel and
facilities expense was 10.8% for the nine months ended June 30, 2005 as compared to 11.3%
for the nine months ended June 30, 2004.
 45




---



##### 




    
    G&A expense increased approximately $2.3 million, or 10.9%, to $23.4 million for the
nine months ended June 30, 2005, compared to $21.1 million for the nine months ended June
30, 2004. As a percentage of revenues, G&A expenses were 9.0% for the nine months ended
June 30, 2005, compared to 10.9% for the nine months ended June 30, 2004.
    
    Stock-based compensation and deferred compensation relate primarily to the SAR and
phantom stock plans. This expense increased approximately $6.2 million, or 442.8% to $7.6
million for the nine months ended June 30, 2005, from approximately $1.4 million for the
nine months ended June 30, 2004. As a percentage of revenue, operating expense relating to
stock-based compensation and deferred compensation expense was 2.9% and 0.7% the nine
months ended June 30, 2005 and 2004, respectively. The $6.2 million increase is a result
of the increase in the value of Alion common stock and the increase in the total amount of
outstanding SARs and phantom stock.
    
    Depreciation and amortization expense increased approximately $2.8 million, or 28.3%,
to $12.7 million for the nine months ended June 30, 2005, as compared to $9.9 million for
the nine months ended June 30, 2004.For each nine-month period ended June 30, 2005 and 2004, approximately $9.6 million of
amortization expense was associated with purchased contracts of IITRI and of the acquired
operations. As a percentage of revenue, operating expense relating to depreciation and
amortization expense was 4.9% for the nine months ended June 30,
2005 as compared to 5.1%
for the nine months ended June 30, 2004.
    
    Bad debt expense increased approximately $0.2 million to $0.5 million, or 66.7%, for
the nine months ended June 30, 2005, from $0.3 million for the nine months ended June 30,
2004. As a percentage of revenue, bad debt expense was 0.2% for both the nine-month
periods ended June 30, 2005 and 2004.
 Operating Loss.
 
    
    An increase in operating income generated from the activities of the acquired operations
    
    $
    0.9 million
    
    An increase in operating loss generated from the activities of the non-acquired operations
    
    $

(1.9) millionTotal:
    
    $
    1.0 million
 46




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##### 



Other Income (Expense).
 For Nine Months Ended June 30,(in millions)2005
    
    2004Revolving facility
    
    $
    0.3
    
    
    $
    0.9Senior term loan
    
    
    4.7
    
    
    
    1.3Mezzanine note  cash pay interest
    
    
    1.8
    
    
    
    1.8 accretion of debt discount
    
    
    2.2
    
    
    
    0.4Subordinated note  PIK interest
    
    
    1.8
    
    
    
    1.8 accretion of long-term deferred interest
    
    
    0.4
    
    
    
    0.3 accretion of debt discount
    
    
    0.7
    
    
    
    0.6Accretion of warrant liability (a)
    
    
    20.4
    
    
    
    2.3$
    32.3
    
    
    $
    9.4
 
 (a)
    
    Reflects change in value assigned to the detachable warrants associated
with the Mezzanine and Subordinated notes based on changes
in the value of Alion common stock. Income Tax (Expense) Benefit.
 Net Loss.
 Liquidity and Capital Resources.
  47




---



##### 



Discussion of Debt Structure
  48




---



##### 



Term B Senior Credit Facility
  
    
    a senior term loan in the approximate amount of $143.3 million, (which includes the
incremental term loan), all of which was drawn down as of June 30, 2005;
    
    a senior revolving credit facility, in the amount of $30.0 million, of which
approximately $0.66 million was deemed borrowed as of June 30, 2005, through the
issuance of letters of credit issued under the Companys prior senior credit facility
which remain outstanding under the Term B Senior Credit Facility and the issuance of
one additional letter of credit directly under the Term B Senior Credit Facility; and
    
    an uncommitted incremental term loan accordion facility in the amount of $150.0
million.
    49




---



##### 



Use of Proceeds.
  50




---



##### 



Security.
 Interest and Fees.
 Eurodollar
    
    
    
    
    
    Prime RateSpread
    
    ABR Spread
    
    ABR SpreadLeverage Ratio
    
    (in basis points)
    
    (in basis points)
    
    (in basis points)Category 1
    
    
    275
    
    
    
    225
    
    
    
    175Greater than or equal to 3.00 to 1.00Category 2
    
    
    250
    
    
    
    200
    
    
    
    150Greater than or equal to 2.50 to
1.00 but less than 3.00 to 1.00Category 3
    
    
    225
    
    
    
    175
    
    
    
    125Greater than or equal to 2.00 to
1.00 but less than 2.50 to 1.00Category 4
    
    
    200
    
    
    
    150
    
    
    
    100Less than 2.00 to 1.00
  51




---



##### 



52




---



##### 



Covenants.
 
    
    Leverage Ratio.The Companys leverage ratio is calculated by dividing the total
outstanding amount of all of the Companys consolidated indebtedness, but excluding
the amount owed under the Companys subordinated note and the aggregate amount of
letters of credit issued on the Companys behalf other than drawings which have not
been reimbursed, by the Companys consolidated EBITDA for the previous four fiscal
quarters on a rolling basis. The maximum total leverage ratio is measured as of the
end of each of our fiscal quarters. For purposes of determining the Companys leverage
ratio as of or for the periods ended on September 30, 2004, December 31, 2004 and
March 31, 2005, the Term B Senior Credit Facility deems the Companys consolidated
EBITDA to be $7.5 million for the fiscal quarter ended December 31,
2003, $7.0 million for the fiscal quarter ended March 31, 2004, and $7.7 million
for the fiscal quarter ended June 30, 2004, respectively. For each of the following time periods,
the Company is required to maintain a maximum leverage ratio not greater than the
following:
 Period
    
    RatioAugust 2, 2004 through March 31, 2005
    
    
    3.85 to 1.00April 1, 2005 through December 31, 2005
    
    
    3.75 to 1.00January 1, 2006 through March 31, 2006
    
    
    3.50 to 1.00April 1, 2006 through March 31, 2007
    
    
    3.25 to 1.00April 1, 2007 through March 31, 2008
    
    
    2.75 to 1.00Thereafter
    
    
    2.25 to 1.00
 53




---



##### 




    
    Interest Coverage Ratio.The Companys interest coverage ratio is calculated by
dividing the Companys consolidated EBITDA, less amounts the Company spends
attributable to property, plant, equipment and other fixed assets, by the Companys
consolidated interest expense. For purposes of determining the Companys interest
coverage ratio as of or for the periods ended on September 30, 2004, December 31, 2004
and March 31, 2005, the Term B Senior Credit Facility deems the Companys consolidated
EBITDA to be $7.5 million for the fiscal quarter ended December 31, 2003, $7.0 million
for the fiscal quarter ended March 31, 2004, and $7.7 million for the fiscal quarter
ended June 30, 2004. The Company is required to maintain a minimum fixed charge
coverage ratio of at least the following:
 Date or Period
    
    RatioAugust 2, 2004 through September 30, 2005
    
    3.75 to 1.00Thereafter
    
    4.00 to 1.00
  
    
    incur additional indebtedness other than permitted additional indebtedness;
    
    consolidate, merge or sell all or substantially all of the Companys assets;
    
    make certain loans and investments including acquisitions of businesses, other than
permitted acquisitions;
    
    pay dividends or distributions other than distributions needed for the ESOP to
satisfy its repurchase obligations, for the Company to satisfy any put right if
exercised by mezzanine warrant holders and for certain payments required under the
Companys equity based incentive plans;
    
    enter into transactions with the Companys shareholders and affiliates;
    
    enter into certain transactions not permitted under ERISA;
    
    grant certain liens and security interests;
    
    enter into sale and leaseback transactions;
    
    change lines of business;
 54




---



##### 




    
    repay subordinated indebtedness and redeem or repurchase certain equity; or
    
    use the proceeds of the Companys borrowings other than as permitted by the Term B
Senior Credit Facility.
 Events of Default.
 
    
    payment default;
    
    breach of representations and warranties;
    
    uncured covenant breaches;
    
    default under certain other debt exceeding an agreed amount;
    
    bankruptcy and insolvency events;
    
    notice of debarment, suspension or termination under a material government
contract;
    
    certain ERISA violations;
    
    unstayed judgments in excess of an agreed amount;
    
    failure of the subordinated note to be subordinated to the Term B Senior Credit
Facility;
    
    failure of the guarantee of the Term B Senior Credit Facility to be in effect;
    
    failure of the security interests to be valid, perfected first priority security
interests in the collateral;
    
    failure of the Company to remain an S-corporation;
    
    the Trust is subject to certain taxes in excess of an agreed amount;
    
    final negative determination that the ESOP is not a qualified plan; or
    
    change of control (as defined below).
  55




---



##### 



Mezzanine Note
 Subordinated Note.
 Warrants
 56




---



##### 



Other Notes and Agreements.
  57




---



##### 



6-Fiscal Year Period ($ in thousands)2005*
    
    2006
    
    2007
    
    2008
    
    2009
    
    2010Bank revolving credit facility Interest(1)
    
    $
    49
    
    
    $
    150
    
    
    $
    150
    
    
    $
    150
    
    
    $
    150
    
    
    $
    Senior Secured Term B Loan Interest(2)
    
    
    2,800
    
    
    
    10,825
    
    
    
    11,281
    
    
    
    9,465
    
    
    
    4,791
    
    
    
     Principal(3)
    
    
    360
    
    
    
    1,440
    
    
    
    1,440
    
    
    
    1,440
    
    
    
    138,600
    
    
    
    Subordinated Note Interest(4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,384
    
    
    
    3,192 Principal(4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,132
    
    
    
    27,132Total cash  Pay interest
    
    
    2,849
    
    
    
    10,975
    
    
    
    11,431
    
    
    
    9,615
    
    
    
    11,325
    
    
    
    3,192Total cash  Pay principal
    
    
    360
    
    
    
    1,440
    
    
    
    1,440
    
    
    
    1,440
    
    
    
    165,732
    
    
    
    27,132Total
    
    $
    3,209
    
    
    $
    12,415
    
    
    $
    12,871
    
    
    $
    11,055
    
    
    $
    177,057
    
    
    $
    30,324
 
 *
    
    For the remaining quarter of fiscal year 2005.1)
    
    We anticipate accessing, from time to time, our $30.0 million bank revolving
credit facility to finance our ongoing working capital needs. The term of the revolving credit
facility is five years. For the three months remaining in fiscal year 2005, and for the fiscal
years 2006 through 2009, we anticipate the balance drawn on the revolving credit facility to
be minimal. The interest expense value includes an estimate for the unused balance fee on the
$30.0 million revolving credit facility.(2)
    
    The projected average annual balance which we estimate will be drawn under the
Senior Secured Term B Loan is as follows: $143.3 million, $141.8 million, $140.4 million,
$139.0 million, and $69.9 million for the three months remaining in fiscal year 2005, and for
fiscal years ending September 30, 2006, 2007, 2008, and 2009, respectively. Based on an
estimated LIBOR rate plus the CSFB Eurodollar spread, the effective annual interest rate for
fiscal years 2005, 2006, 2007, 2008, and 2009 is estimated to be approximately 6.0%, 6.5%,
6.7%, 6.8%, and 6.9%, respectively. The effective interest rate takes into account the
interest rate cap agreements which limit the interest rate we will pay on a portion, but not
all, of the outstanding principal balance of the Term B Senior Credit Facility. The current
cap agreements expire in September 2007. Outstanding principal balances not under the cap
agreements have interest expense based on the Eurodollar rate. The term of the Senior Secured
Term B Loan is five years. The approximate impact of a 1% increase in the interest rate, as
applied to principal balances drawn under the Senior Secured Term B Loan not covered by the
current interest rate cap agreements would be $0.4 million, 58




---



##### 



$0.8 million, $0.8 million, $1.4
million, and $0.7 million for the three months remaining in fiscal year 2005 and for the
fiscal years ending September 30, 2006, 2007, 2008 and 2009, respectively. The estimated
interest expense value includes an estimate for the commitment fee on the Senior Secured Term
B Loan.(3)
    
    The Term B Senior Credit Facility requires us to repay 1 percent of the principal
balance outstanding under the senior term loan during each of the first four years (i.e.,
fiscal years 2005 through 2008) of its term and 96 percent of the principal balance
outstanding during the fifth and final year of the loan. The table reflects the balance drawn
of $143.3 million as of June 30, 2005, resulting in expected principal payments of
approximately $0.4 million for the three months remaining in fiscal year 2005 and
approximately $1.4 million each year for fiscal years 2006, 2007, and 2008. During the fifth
year, or 2009, we expect to pay principal in the amount of $138.6 million. The Term B Senior
Credit Facility also requires us to make mandatory prepayments of principal depending upon
whether we generate certain excess cash flow in a given fiscal year, we issue certain equity,
we issue or incur certain debt or we sell certain assets. As of June 30, 2005, no mandatory
prepayments are due.(4)
    
    Interest expense on the Subordinated Note during the four fiscal years from 2005 to
2008 is 6% simple interest, paid-in-kind by the issuance of the PIK notes. These interest
amounts accrue to principal increasing the principal value of the Subordinated Note. PIK notes
do not bear interest. Interest obligations paid by issuance of the PIK notes will not be
compounded. In the years 2005 through 2008, the PIK interest on the Subordinated Note will be
approximately $2.4 million in each year. During the eight-year term of the Subordinated Note,
approximately $14.4 million of principal accretes to the note through issuance of PIK notes.
These amounts are included in the principal payments in fiscal years 2009 and 2010. In years
2009 and 2010, interest at 16% will be paid quarterly in cash on the original principal of
$39.9 million. The principal, together with the outstanding balance of the PIK notes, will be
paid in equal amounts at the end of fiscal years 2009 and 2010. Other Obligations
 Earn-outs
   59




---



##### 



Lease Payments
   
    
    Repurchase obligations under the KSOP;
    
    Obligations related to the holders put rights associated with the Mezzanine
Note warrants;
    
    Obligations related to the holders put rights associated with the Subordinated
Note warrants; and
    
    Obligations relating to our stock appreciation rights and phantom stock
programs.
 60




---



##### 



Number of Shares
    
    
    
    
    
    Total ValueDate
    
    Repurchased
    
    Share Price
    
    RepurchasedJune 2003
    
    
    5,248
    
    
    $
    11.13
    
    
    $
    58,412July 2003
    
    
    2,696
    
    
    $
    11.13
    
    
    $
    30,000December 2003
    
    
    50,031
    
    
    $
    14.71
    
    
    $
    735,956May 2004
    
    
    117
    
    
    $
    16.56
    
    
    $
    1,945June 2004
    
    
    727
    
    
    $
    16.56
    
    
    $
    12,039June 2004
    
    
    743
    
    
    $
    16.56
    
    
    $
    12,297July 2004
    
    
    48,309
    
    
    $
    16.56
    
    
    $
    799,997December 2004
    
    
    46,816
    
    
    $
    19.94
    
    
    $
    933,505March 2005
    
    
    5,691
    
    
    $
    19.94
    
    
    $
    113,486June 2005
    
    
    45,846
    
    
    $
    29.81
    
    
    $
    1,366,674
    61




---



##### 



Joint Spectrum Center Contract
  ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Risk
   62




---



##### 



Foreign Currency Risk
  Investment Risk
  
    
    Repurchase obligations under the KSOP;
    
    Obligations related to the holders put rights associated with the Mezzanine
Note warrants;
    
    Obligations related to the holders put rights associated with the Subordinated
Note warrants; and
    
    Obligations relating to its stock appreciation rights and phantom stock
programs.
 ITEM 4. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures.
 Internal Control Over Financial Reporting.
 63




---



##### 



PART IIOTHER INFORMATION
 ITEM 1. LEGAL PROCEEDINGS
  th th
     64




---



##### 



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  ITEM 5. OTHER INFORMATION
 ITEM 6. EXHIBITS
 Exhibit No.
    
    Description3.1
    
    Second Amended and Restated Certificate of Incorporation of Beagle Holdings, Inc.(3)3.2
    
    Amended and Restated By-laws of Alion Science and Technology Corporation.(1)3.3
    
    Third Amended and Restated Certificate of Incorporation of Alion Science and Technology Corporation.4.1
    
    Amended and Restated Alion Science and Technology Corporation Employee Ownership, Savings and Investment
Plan.(2)4.2
    
    First Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment
Plan.(4)4.3
    
    Second Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment
Plan.(5)4.4
    
    Third Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment
Plan.(5)4.5
    
    Fourth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment
Plan.(5)4.6
    
    Fifth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment
Plan.(7)4.7
    
    Sixth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment
Plan. (7)4.8
    
    Seventh Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment
Plan. (7)
 65




---



##### 



Exhibit No.
    
    Description4.9
    
    Eighth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment
Plan. (7)4.10
    
    Ninth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment
Plan.(8)10.37
    
    First Amendment to the Mezzanine Warrant Agreement. (9)10.38
    
    First Amendment to the Seller Warrant Agreement. (9)10.39
    
    First Amendment to the Alion Mezzanine Warrant Agreement between Alion Science and Technology Corporation,
Alion Science and Technology Corporation Employee Ownership, Savings and Investment Trust, and Bahman
Atefi. (9)10.40
    
    Third Amendment to the Alion Science and Technology Corporation Phantom Stock Plan.(10)10.41
    
    Alion Science and Technology Corporation Performance Shares and Retention Phantom Stock Plan. (10)10.42
    
    Second Amendment to the Alion Science and Technology Corporation 2002 Stock Appreciation Rights Plan.
(10)10.43
    
    Alion Science and Technology Corporation 2004 Stock Appreciation Rights Plan. (10)10.44
    
    Second Amendment to the Alion Science and Technology Corporation Directors Deferred Compensation Plan.
(10)10.45
    
    Second Amendment to the Alion Science and Technology Corporation Executive Deferred Compensation Plan.
(10)10.46
    
    Second Amendment to the Seller Warrant Agreement. (10)10.47
    
    Second Amendment to the Mezzanine Warrant Agreement. (10)10.48
    
    Second Amendment to the Alion Mezzanine Warrant Agreement between Alion Science and Technology Corporation,
Alion Science and Technology Corporation Employee Ownership, Savings and Investment Trust, and Bahman Atefi.(10)10.49
    
    Commitment letter by and between Alion Science and Technologies, Inc. and Credit Suisse First Boston for the
$72 million Term Loan Facility, for Amendment One to existing Term Loan Facility. (11)10.50
    
    Third Amendment to the Seller Warrant Agreement.(12)10.51
    
    Third Amendment to Mezzanine Warrant Agreement.(12)10.52
    
    Third Amendment to the Alion Mezzanine Warrant Agreement between Alion Science and Technology Corporation,
Alion Science and Technology Corporation Employee Ownership, Savings and Investment Trust, and Bahman Atefi.(12)10.53
    
    Stock Purchase Agreement by and among Alion Science and Technology, Inc, John J. Mc Mullen Associates, Inc.,
Marshall and Ilsley Trust Company, N.A. as Trustee to the John J. McMullen, Inc. Employee Stock Ownership Trust
and P. Thomas Diamant, Anthony Serro, and David Hanafourde. 13)10.54
    
    Incremental Term Loan Assumption Agreement and Amendment Number One to existing Term Loan Facility with Credit
Suisse First. (14)
 66




---



##### 



Exhibit No.
    
    Description10.55
    
    Employment Agreement between Alion Science and Technology, Inc. and Anthony Serro. (15)10.56
    
    Employment Agreement between Alion Science and Technology, Inc. and P. Thomas Diamant. (15)31.1
    
    Certification of Chief Executive Officer of Alion Science and Technology Corporation pursuant to Rule 15d-14(a)
promulgated under the Securities Exchange Act of 1934, as amended.31.2
    
    Certification of Chief Financial Officer of Alion Science and Technology Corporation pursuant to 15d-14(a)
promulgated under the Securities Exchange Act of 1934, as amended.32.1
    
    Certification of Chief Executive Officer of Alion Science and Technology Corporation, pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer of Alion Science and Technology Corporation, pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 (1)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys
Post-Effective Amendment No. 2 to the Registration
Statement on Form S-1 filed with the Securities and
Exchange Commission on December 9, 2002 (File no.
333-89756).(2)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys
Pre-Effective Amendment No. 3 to the Registration
Statement on Form S-1 filed with the Securities and
Exchange Commission on October 7, 2002 (File no.
333-89756).(3)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys
Pre-Effective Amendment No. 2 to the Registration
Statement on Form S-1 filed with the Securities and
Exchange Commission on September 17, 2002 (File no.
333-89756).(4)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys
Post-Effective Amendment No. 3 to the Registration
Statement on Form S-1 filed with the Securities and
Exchange Commission on March 24, 2003 (File no.
333-89756).(5)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys quarterly
report on Form 10-Q for the quarterly period ended July 4,
2003, filed with the Securities and Exchange Commission on
August 15, 2003.(6)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys
Registration Statement on Form S-8 filed with the
Securities and Exchange Commission on April 28, 2004 (File
no. 333-114935).(7)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys quarterly
report on Form 10-Q for the quarterly period ended
December 31, 2003, filed with the Securities and Exchange
Commission on February 17, 2003 (File no. 333-89756).(8)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys annual
report on Form 10-K for the fiscal year ended September
30, 2004, filed with the Securities and Exchange
Commission on December 28, 2004 (File no. 333-89756).(9)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys annual
report Form 10-K for the fiscal year ended September 30,
2004, filed with the Securities and Exchange Commission on
December 28, 2004 (File no. 333-89756).(10)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the 67




---



##### 



Companys
Post-effective Amendment No. 5 to the Registration
Statement on Form S-1 filed with the Securities and
Exchange Commission on January 24, 2005 (File no.
333-89756).(11)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys Form 8-K
filed with the Securities and Exchange Commission on March
9, 2005 (File no. 333-89756).(12)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys Form 8-K
filed with the Securities and Exchange Commission on March
14, 2005 (File no. 333-89756).(13)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys Form 8-K
filed with the Securities and Exchange Commission on April
6, 2005 (File no. 333-89756).(14)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys Form 8-K
filed with the Securities and Exchange Commission on April
6, 2005 (File no. 333-89756).(15)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys Form 8-K
filed with the Securities and Exchange Commission on April
7, 2005 (File no. 333-89756). 68




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SIGNATURES
    By:
    
    /s/ John M. HughesName: John M. HughesTitle: Chief Financial Officer(Principal Financial and Accounting Officer
and Duly Authorized Officer)
 69