##### 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 Science and Technology Corporation
  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
  (Former name, former address and former fiscal year, if changed since last report)
 o þ
 o o
  Large Accelerated Filer o
    
    Accelerated Filer o
    
    Non-Accelerated Filer þ
    
    Smaller Reporting Company o(Do not check if a smaller reporting company)
 o þ




---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2010
 PART I  FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited)
    
    
    1Condensed Consolidated Balance Sheets (unaudited)
    
    
    1Condensed Consolidated Statements of Operations (unaudited)
    
    
    2Condensed Consolidated Statements of Cash Flows (unaudited)
    
    
    3Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    26Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    39Item 4. Controls and Procedures
    
    
    40Item 4T. Controls and Procedures
    
    
    40PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    40Item 1A. Risk Factors
    
    
    40Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    40Item 3. Defaults Upon Senior Securities
    
    
    40Item 4. Removed and Reserved
    
    
    40Item 5. Other Information
    
    
    40Item 6. Exhibits
    
    
    41Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 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 pershare information)Current assets:Cash and cash equivalents
    
    $
    15,279
    
    
    $
    26,695Accounts receivable, net
    
    
    173,622
    
    
    
    174,032Receivable due from ESOP Trust
    
    
    
    
    
    
    1,896Prepaid expenses and other current assets
    
    
    5,911
    
    
    
    5,159Total current assets
    
    
    194,812
    
    
    
    207,782Property, plant and equipment, net
    
    
    9,817
    
    
    
    10,798Intangible assets, net
    
    
    15,942
    
    
    
    17,694Goodwill
    
    
    398,921
    
    
    
    398,921Other assets
    
    
    11,115
    
    
    
    11,107Total assets
    
    $
    630,607
    
    
    $
    646,302Current liabilities:Interest payable
    
    $
    15,823
    
    
    $
    17,217Trade accounts payable
    
    
    46,556
    
    
    
    44,486Accrued liabilities
    
    
    44,362
    
    
    
    43,145Accrued payroll and related liabilities
    
    
    33,071
    
    
    
    40,221Billings in excess of revenue earned
    
    
    3,097
    
    
    
    2,917Total current liabilities
    
    
    142,909
    
    
    
    147,986Senior secured notes
    
    
    279,625
    
    
    
    275,831Senior unsecured notes
    
    
    244,375
    
    
    
    246,126Accrued compensation and benefits, excluding current portion
    
    
    6,168
    
    
    
    6,174Non-current portion of lease obligations
    
    
    7,778
    
    
    
    7,848Deferred income taxes
    
    
    38,951
    
    
    
    37,207Redeemable 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
    
    
    
    150,792Common stock warrants
    
    
    20,785
    
    
    
    20,785Accumulated 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.
  1




---



##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION
 
 Condensed Consolidated
Statements of Operations (unaudited)
 Three Months EndedDecember 31,2010
    
    
    2009(In thousands, except share andper share information)Contract revenue
    
    $
    200,768
    
    
    $
    205,738Direct contract expense
    
    
    155,514
    
    
    
    158,996Gross profit
    
    
    45,254
    
    
    
    46,742Operating expenses:Indirect contract expense
    
    
    9,634
    
    
    
    9,286Research and development
    
    
    88
    
    
    
    261General and administrative
    
    
    16,215
    
    
    
    16,007Rental and occupancy expense
    
    
    7,730
    
    
    
    7,986Depreciation and amortization
    
    
    2,990
    
    
    
    4,231Total operating expenses
    
    
    36,657
    
    
    
    37,771Operating income
    
    
    8,597
    
    
    
    8,971Other income (expense):Interest income
    
    
    20
    
    
    
    45Interest 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
    )
    
    
    40Net 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.
  2




---



##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION
 Condensed Consolidated Statements of Cash Flows (unaudited)
 Three Months EndedDecember 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
    
    
    
    4,231Accretion of debt to face value
    
    
    1,564
    
    
    
    606Amortization of debt issuance costs
    
    
    2,519
    
    
    
    966Change in fair value of redeemable common stock warrants
    
    
    
    
    
    
    (160
    )Incentive and stock-based compensation
    
    
    868
    
    
    
    605Gain on extinguishment of debt
    
    
    (460
    )
    
    
    Deferred income taxes
    
    
    1,744
    
    
    
    Other gains and losses
    
    
    (1
    )
    
    
    19Changes 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
    )
    
    
    6,381Other liabilities
    
    
    170
    
    
    
    1,333Net 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
    
    
    
    
    
    
    5,074Repurchase Senior Unsecured Notes
    
    
    (1,510
    )
    
    
    Payment of debt issue costs
    
    
    
    
    
    
    (3,127
    )Repayment of Term B Loan
    
    
    
    
    
    
    (608
    )Revolver borrowings
    
    
    
    
    
    
    15,900Revolver 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
    )
    
    
    1,313Net decrease in cash and cash equivalents
    
    
    (11,416
    )
    
    
    (11,185
    )Cash and cash equivalents at beginning of period
    
    
    26,695
    
    
    
    11,185Cash and cash equivalents at end of period
    
    $
    15,279
    
    
    $
    Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    15,702
    
    
    $
    7,916Cash paid for taxes
    
    
    
    
    
    
    (40
    )
 See accompanying notes to condensed consolidated financial statements.
  3




---



##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (1) Description and Formation of the Business
    (2) Summary of Significant Accounting Policies
 Basis of Presentation and Principles of Consolidation
   Fiscal, Quarter and Interim Periods
  Use of Estimates
  Revenue Recognition
 Revenue
Recognition .
  4




---



##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
     Income Taxes
      5




---



##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Cash and Cash Equivalents
  Accounts Receivable and Billings in Excess of Revenue Earned
  Property, Plant and Equipment
  Goodwill and Intangible Assets
  Intangibles, Goodwill and Other Assets
    6




---



##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      Purchased contracts
    
    1  13 yearsInternal use software and engineering designs
    
    2 3 yearsNon-compete agreements
    
    3 6 years
 Redeemable Common Stock
   7




---



##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   Concentration of Credit Risk
  Fair Value of Financial Instruments
  Cash, cash equivalents, accounts payable and accounts receivable
 Senior long-term debt
 Redeemable Alion common stock.
 Recently Issued Accounting Pronouncements
 Goodwill and Other Intangibles  When to
Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying
Amounts Goodwill and Other Intangibles
    8




---



##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (3) Employee Stock Ownership Plan (ESOP) and ESOP Trust
  (4) Earnings (Loss) Per Share
  (5) Redeemable Common Stock Owned by ESOP Trust
      9




---



##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (6) Accounts Receivable
  December 31,
    
    
    September 30,2010
    
    
    2010(In thousands)Billed receivables
    
    $
    88,159
    
    
    $
    94,662Unbilled receivables:Amounts currently billable
    
    
    32,109
    
    
    
    36,021Revenues recorded in excess of milestone billings on fixed price contracts
    
    
    3,081
    
    
    
    2,917Revenues recorded in excess of estimated contract value or funding
    
    
    31,487
    
    
    
    24,952Retainages and other amounts billable upon contract completion
    
    
    22,586
    
    
    
    19,278Allowance for doubtful accounts
    
    
    (3,800
    )
    
    
    (3,798
    )Total Accounts Receivable
    
    $
    173,622
    
    
    $
    174,032
  (7) Property, Plant and Equipment
 December 31,
    
    
    September 30,2010
    
    
    2010(In thousands)Leasehold improvements
    
    $
    10,847
    
    
    $
    10,862Equipment and software
    
    
    33,789
    
    
    
    33,693Total cost
    
    
    44,636
    
    
    
    44,555Less: accumulated depreciation and amortization
    
    
    (34,819
    )
    
    
    (33,757
    )Net Property, Plant and Equipment
    
    $
    9,817
    
    
    $
    10,798
   10




---



##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (8) Goodwill and Intangible Assets
   December 31, 2010
    
    
    September 30, 2010Accumulated
    
    
    
    
    
    
    
    
    
    
    AccumulatedGross
    
    
    Amortization
    
    
    Net
    
    
    Gross
    
    
    Amortization
    
    
    NetPurchased contracts
    
    $
    111,635
    
    
    $
    (95,928
    )
    
    $
    15,707
    
    
    $
    111,635
    
    
    $
    (94,228
    )
    
    $
    17,407Internal use software and
engineering designs
    
    
    2,155
    
    
    
    (1,920
    )
    
    
    235
    
    
    
    2,155
    
    
    
    (1,868
    )
    
    
    287Non-compete agreements
    
    
    725
    
    
    
    (725
    )
    
    
    
    
    
    
    725
    
    
    
    (725
    )
    
    
    Total
    
    $
    114,515
    
    
    $
    (98,573
    )
    
    $
    15,942
    
    
    $
    114,515
    
    
    $
    (96,821
    )
    
    $
    17,694
  (In thousands)For the remaining nine months:2011
    
    $
    5,090For the year ending September 30:2012
    
    
    5,7662013
    
    
    3,2462014
    
    
    8792015
    
    
    7372016
    
    
    141Thereafter
    
    
    83$
    15,942
 (9) Long-Term Debt
  Credit Agreement
    Security.
  11




---



##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Guarantees
 Interest and Fees.
 Other Fees and Expenses.
  Covenants.
 Period
    
    Minimum Consolidated EBITDAJune 30, 2010 through March 31, 2011
    
    $52.5 millionApril 1, 2011 through September 30, 2011
    
    $55.0 millionOctober 1, 2011 through September 30, 2012
    
    $60.0 millionOctober 1, 2012 through September 30, 2013
    
    $62.5 millionThereafter
    
    $65.0 million
  Secured Notes
  Security .
 Guarantees
  12




---



##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Interest and Fees.
 Unsecured Notes
  Guarantees
 Interest and Fees.
 Retired Term B Senior Credit Agreement
   Retired Subordinated Note
    13




---



##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Interest Payable
  December 31,
    
    
    September 30,2010
    
    
    2010(In thousands)Unsecured Notes
    
    $
    10,593
    
    
    $
    4,271Secured Notes
    
    
    5,230
    
    
    
    12,946Total
    
    $
    15,823
    
    
    $
    17,217
  Fiscal Year:
    
    2011
    
    
    2012
    
    
    2013
    
    
    2014
    
    
    2015
    
    
    TotalSecured Notes and PIK Interest(1)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    339,788
    
    
    $
    339,788Unsecured Notes(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    248,000
    
    
    
    248,000Total 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
 Fair Value Disclosures
      14




---



##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    As of December 31,2010
    
    
    2009Redeemable Common StockWarrantsBalance, beginning of period
    
    $
    
    
    
    $
    (32,717
    )Total realized and unrealized gains and
(losses)
    
    
    Included in interest expense
    
    
    
    
    
    
    160Issuances and settlements
    
    
    
    
    
    
    Balance, end of period
    
    $
    
    
    
    $
    (32,557
    )
 Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
  (11) Redeemable Common Stock Warrants
    15




---



##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Derivatives
 (12) Secured Note Common Stock Warrants
    (13) Leases
  Lease Payments for Fiscal Years Ending
    
    (In thousands)2011 (for the remainder of fiscal year)
    
    $
    20,5692012
    
    
    24,1292013
    
    
    22,1642014
    
    
    15,4022015
    
    
    15,2082016
    
    
    11,576And thereafter
    
    
    13,050Gross lease payments
    
    $
    122,098Less: non-cancelable subtenant receipts
    
    
    (2,167
    )Net lease payments
    
    $
    119,931
  16




---



##### Table of Contents



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
    
    
    $
    5,956Less: Sublease rental income
    
    
    (478
    )
    
    
    (467
    )Total rent expense, net
    
    $
    5,065
    
    
    $
    5,489
 (14) Long Term Incentive Compensation Plan
  (15) Stock Based Compensation
 SAR Plan
  Phantom Stock Plans
   (16) Segment Information and Customer Concentration
    17




---



##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (17) Income Taxes
 Deferred Taxes
  December 31,
    
    
    September 30,2010
    
    
    2010(in thousands)Current deferred tax asset
    
    $
    8,009
    
    
    $
    11,175Noncurrent deferred tax asset
    
    
    34,291
    
    
    
    25,754Valuation allowance
    
    
    (42,300
    )
    
    
    (36,929
    )Noncurrent deferred tax liability
    
    
    (38,951
    )
    
    
    (37,207
    )Net deferred tax liability
    
    $
    (38,951
    )
    
    $
    (37,207
    )
 Tax Uncertainties
  (18) Debt Extinguishment
  (19) Commitments and Contingencies
 Earn-Out and Hold-Back Commitments
  Legal Proceedings
   18




---



##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Government Audits
  (20) Guarantor/Non-guarantor Condensed Consolidated Financial Information
    19




---



##### Table of Contents



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




---



##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Condensed Consolidating Balance Sheet as of September 30, 2010
(In thousands)
 Non-Guarantor
    
    
    GuarantorParent
    
    
    Companies
    
    
    Companies
    
    
    Eliminations
    
    
    ConsolidatedCurrent assets:Cash and cash equivalents
    
    $
    26,770
    
    
    $
    (75
    )
    
    $
    
    
    
    $
    
    
    
    $
    26,695Accounts receivable, net
    
    
    170,676
    
    
    
    3,312
    
    
    
    44
    
    
    
    
    
    
    
    174,032Receivable due from ESOP Trust
    
    
    1,896
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,896Prepaid expenses and other current
assets
    
    
    5,112
    
    
    
    47
    
    
    
    
    
    
    
    
    
    
    
    5,159Total current assets
    
    
    204,454
    
    
    
    3,284
    
    
    
    44
    
    
    
    
    
    
    
    207,782Property, plant and equipment, net
    
    
    10,755
    
    
    
    43
    
    
    
    
    
    
    
    
    
    
    
    10,798Intangible assets, net
    
    
    17,694
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,694Goodwill
    
    
    398,921
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    398,921Investment in subsidiaries
    
    
    18,844
    
    
    
    
    
    
    
    
    
    
    
    (18,844
    )
    
    
    Intercompany receivables
    
    
    1,054
    
    
    
    18,235
    
    
    
    
    
    
    
    (19,289
    )
    
    
    Other assets
    
    
    11,091
    
    
    
    13
    
    
    
    3
    
    
    
    
    
    
    
    11,107Total assets
    
    $
    662,813
    
    
    $
    21,575
    
    
    $
    47
    
    
    $
    (38,133
    )
    
    $
    646,302Interest payable
    
    $
    17,217
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    17,217Trade accounts payable
    
    
    44,065
    
    
    
    421
    
    
    
    
    
    
    
    
    
    
    
    44,486Accrued liabilities
    
    
    42,865
    
    
    
    271
    
    
    
    9
    
    
    
    
    
    
    
    43,145Accrued payroll and related liabilities
    
    
    39,277
    
    
    
    924
    
    
    
    20
    
    
    
    
    
    
    
    40,221Billings in excess of costs revenue
earned
    
    
    2,882
    
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    2,917Total current liabilities
    
    
    146,306
    
    
    
    1,651
    
    
    
    29
    
    
    
    
    
    
    
    147,986Intercompany payables
    
    
    18,236
    
    
    
    
    
    
    
    1,053
    
    
    
    (19,289
    )
    
    
    Senior secured notes
    
    
    275,831
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    275,831Senior unsecured notes
    
    
    246,126
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    246,126Accrued compensation and benefits,
excluding current portion
    
    
    6,174
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,174Non-current portion of lease obligations
    
    
    7,805
    
    
    
    43
    
    
    
    
    
    
    
    
    
    
    
    7,848Deferred income taxes
    
    
    37,207
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,207Redeemable common stock
    
    
    150,792
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,792Common stock of subsidiaries
    
    
    
    
    
    
    2,801
    
    
    
    
    
    
    
    (2,801
    )
    
    
    Common stock warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,785Accumulated 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
  21




---



##### Table of Contents



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
    
    
    GuarantorParent
    
    
    Companies
    
    
    Companies
    
    
    Eliminations
    
    
    Consolidated(In thousands)Contract revenue
    
    $
    195,761
    
    
    $
    4,816
    
    
    $
    191
    
    
    $
    
    
    
    $
    200,768Direct contract expense
    
    
    152,591
    
    
    
    2,789
    
    
    
    134
    
    
    
    
    
    
    
    155,514Gross profit
    
    
    43,170
    
    
    
    2,027
    
    
    
    57
    
    
    
    
    
    
    
    45,254Operating expenses:Indirect contract expense
    
    
    9,023
    
    
    
    610
    
    
    
    1
    
    
    
    
    
    
    
    9,634Research and development
    
    
    88
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88General and administrative
    
    
    16,042
    
    
    
    83
    
    
    
    90
    
    
    
    
    
    
    
    16,215Rental and occupancy expense
    
    
    7,627
    
    
    
    91
    
    
    
    12
    
    
    
    
    
    
    
    7,730Depreciation and amortization
    
    
    2,987
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    2,990Total operating expenses
    
    
    35,767
    
    
    
    787
    
    
    
    103
    
    
    
    
    
    
    
    36,657Operating income
    
    
    7,403
    
    
    
    1,240
    
    
    
    (46
    )
    
    
    
    
    
    
    8,597Other income (expense):Interest income
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20Interest expense
    
    
    (18,404
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,404
    )Other
    
    
    (176
    )
    
    
    115
    
    
    
    
    
    
    
    
    
    
    
    (61
    )Gain on extinguishment of debt
    
    
    460
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    460Equity 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
    )
  22




---



##### Table of Contents



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
    
    
    GuarantorParent
    
    
    Companies
    
    
    Companies
    
    
    Eliminations
    
    
    Consolidated(In thousands)Contract revenue
    
    $
    197,274
    
    
    
    5,087
    
    
    
    3,377
    
    
    
    
    
    
    $
    205,738Direct contract expense
    
    
    153,466
    
    
    
    2,998
    
    
    
    2,532
    
    
    
    
    
    
    
    158,996Gross profit
    
    
    43,808
    
    
    
    2,089
    
    
    
    845
    
    
    
    
    
    
    
    46,742Indirect contract expense
    
    
    8,371
    
    
    
    780
    
    
    
    135
    
    
    
    
    
    
    
    9,286Research and development
    
    
    261
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    261General and administrative
    
    
    15,777
    
    
    
    162
    
    
    
    68
    
    
    
    
    
    
    
    16,007Rental and occupancy expense
    
    
    7,830
    
    
    
    76
    
    
    
    80
    
    
    
    
    
    
    
    7,986Depreciation and amortization
    
    
    4,219
    
    
    
    5
    
    
    
    7
    
    
    
    
    
    
    
    4,231Total operating expenses
    
    
    36,458
    
    
    
    1,023
    
    
    
    290
    
    
    
    
    
    
    
    37,771Operating income
    
    
    7,350
    
    
    
    1,066
    
    
    
    555
    
    
    
    
    
    
    
    8,971Other income (expense):Interest income
    
    
    45
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45Interest 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
    
    
    
    
    
    
    
    40Net income (loss)
    
    $
    (7,942
    )
    
    
    1,140
    
    
    
    592
    
    
    
    (1,731
    )
    
    $
    (7,941
    )
  23




---



##### Table of Contents



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
    
    
    GuarantorParent
    
    
    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
    
    
    
    
    
    
    
    
    
    
    
    8Net 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
    
    
    
    
    
    
    
    
    
    
    
    776Redeemable common stock purchased from ESOP Trust
    
    
    (3,197
    )
    
    
    
    
    
    
    
    
    
    
    (3,197
    )Redeemable common stock sold to ESOP Trust
    
    
    1,896
    
    
    
    
    
    
    
    
    
    
    
    1,896Net 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
    )
    
    
    
    
    
    
    26,695Cash and cash equivalents at end of period
    
    $
    15,340
    
    
    $
    (62
    )
    
    $
    1
    
    
    $
    15,279
  24




---



##### Table of Contents



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
    
    
    GuarantorParent
    
    
    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
    
    
    
    
    
    
    
    
    
    
    
    5,074Payment of debt issue costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,127
    )Payment of senior term loan principal
    
    
    (608
    )
    
    
    
    
    
    
    
    
    
    
    (608
    )Revolver borrowings
    
    
    (15,900
    )
    
    
    
    
    
    
    
    
    
    
    (15,900
    )Revolver payments
    
    
    15,900
    
    
    
    
    
    
    
    
    
    
    
    15,900Redeemable common stock purchased from ESOP Trust
    
    
    (26
    )
    
    
    
    
    
    
    
    
    
    
    (26
    )Net cash provided by financing activities
    
    
    1,313
    
    
    
    
    
    
    
    
    
    
    
    1,313Net (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
    )
    
    
    11,185Cash and cash equivalents at end of period
    
    $
    94
    
    
    $
    (48
    )
    
    $
    (46
    )
    
    $
    
  25




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
   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
    %
  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
    %
     26




---



##### Table of Contents



For the Three Months EndedDecember 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 .
 Results of Operations
 Quarter Ended December 31, 2010 Compared to Quarter Ended December 31, 2009
 Consolidated Operations of AlionQuarter Ended December 31,2010
    
    
    2009(Dollars in thousands)% of
    
    
    
    
    
    
    % ofSelected Financial Information
    
    
    
    
    
    revenue
    
    
    
    
    
    
    revenueTotal contract revenue
    
    $
    200,768
    
    
    
    
    
    
    $
    205,738Total 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.
  27




---



##### Table of Contents



Direct Contract Expense and Gross Profit.
 Operating Expenses.
 Income from Operations.
 Other Expense.
 Three Months EndedDecember 31,2010
    
    
    2009(In thousands)Cash Pay InterestRevolver
    
    $
    112
    
    
    $
    3Senior Term Loan
    
    
    
    
    
    
    5,739Secured Notes
    
    
    7,819
    
    
    
    Unsecured Notes
    
    
    6,377
    
    
    
    6,406Subordinated Note
    
    
    
    
    
    
    793Other cash pay interest and fees
    
    
    13
    
    
    
    1,355Sub-total cash pay interest
    
    
    14,321
    
    
    
    14,296Deferred and Non-cash InterestSecured Notes PIK interest
    
    
    1,564
    
    
    
    Debt issue costs and other non-cash items
    
    
    2,519
    
    
    
    1,573Subordinated Note interest
    
    
    
    
    
    
    1,177Subordinated Note warrants
    
    
    
    
    
    
    (160
    )Sub-total non-cash interest
    
    
    4,083
    
    
    
    2,590Total interest expense
    
    $
    18,404
    
    
    $
    16,886
 Income Tax Expense.
 Net Loss
  28




---



##### Table of Contents



Liquidity and Capital Resources
  Cash Flows
       29




---



##### Table of Contents



Cash flow effects and risks associated with equity-related obligations
     Discussion of Debt Structure
  Credit Agreement
  Security.
 Guarantees
 Interest and Fees.
 Other Fees and Expenses.
   30




---



##### Table of Contents



Covenants.
 Period
    
    Minimum Consolidated EBITDAJune 30, 2010 through March 31, 2011
    
    $52.5 millionApril 1, 2011 through September 30, 2011
    
    $55.0 millionOctober 1, 2011 through September 30, 2012
    
    $60.0 millionOctober 1, 2012 through September 30, 2013
    
    $62.5 millionThereafter
    
    $65.0 million
   
    
    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.
 
    
    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).
  31




---



##### Table of Contents



Secured Notes
  Security.
 parri passu
 Guarantees
 Interest and Fees.
 Covenants.
  
    
    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.
  32




---



##### Table of Contents




    
    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.
  Events of Default.
 
    
    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.
 
    
    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.
  33




---



##### Table of Contents



Optional Redemption
    Period
    
    Redemption PriceApril 1, 2013 to September 30, 2013
    
    
    105.0
    %October 1, 2013 to March 31, 2014
    
    
    103.0
    %April 1, 2014 and thereafter
    
    
    100.0
    %
  Unsecured Notes
  Guarantees
 Interest and Fees.
 Covenants.
  
    
    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;
  34




---



##### Table of Contents




    
    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.
  
    
    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.
  Events of Default.
 
    
    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.
 
    
    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.
  35




---



##### Table of Contents



Optional Redemption
  Period
    
    Redemption Price2011
    
    
    105.125
    %2012
    
    
    102.563
    %2013 and thereafter
    
    
    100.000
    %
  Retired Term B Senior Credit Agreement
  Retired Subordinated Note
  Revolving Credit Agreement  Covenant Compliance
    36




---



##### Table of Contents



(In thousands)Fiscal Year:
    
    2011
    
    
    2012
    
    
    2013
    
    
    2014
    
    
    2015Bank 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    339,788Unsecured Notes(3)- Interest
    
    
    25,420
    
    
    
    25,420
    
    
    
    25,420
    
    
    
    25,420
    
    
    
    12,710- Principal
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    248,000Total cash  pay interest
    
    
    41,441
    
    
    
    57,715
    
    
    
    58,354
    
    
    
    58,960
    
    
    
    29,531Total cash  pay principal and
PIK Interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    587,788Total
    
    $
    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
  Other contingent obligations which will impact the Companys cash flow
  
    
    ESOP share repurchase and diversification obligations; and
 
    
    Long-term incentive compensation plan obligations.
  37




---



##### Table of Contents



Number ofShares
    
    
    
    
    
    
    Total ValueDate
    
    Repurchased
    
    
    Share Price
    
    
    Purchased(In thousands)December 2009
    
    
    745
    
    
    $
    34.50
    
    
    $
    26March 2010
    
    
    218,408
    
    
    $
    34.50
    
    
    
    7,535April 2010
    
    
    52
    
    
    $
    28.00
    
    
    
    1May 2010
    
    
    108
    
    
    $
    28.00
    
    
    
    3June 2010
    
    
    62,875
    
    
    $
    28.00
    
    
    
    1,760July 2010
    
    
    145
    
    
    $
    28.00
    
    
    
    4August 2010
    
    
    89
    
    
    $
    28.00
    
    
    
    2September 2010
    
    
    209
    
    
    $
    28.00
    
    
    
    6December 2010
    
    
    119,945
    
    
    $
    26.65
    
    
    
    3,197Total
    
    
    402,576
    
    
    
    
    
    
    $
    12,534
     Recently Issued Accounting Pronouncements
 Goodwill and Other Intangibles  When to
Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying
Amounts
    38




---



##### Table of Contents



Forward Looking Statements
   
    
    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.
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Interest rate risk
    Foreign currency risk
  Risk associated with value of Alion common stock
   39




---



##### Table of Contents



Item 4. Controls and Procedures
 Disclosure Controls and Procedures.
 Changes in Internal Control Over Financial Reporting.
 
 Item 4T. Controls and Procedures
  
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
   
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Removed and Reserved
 
 Item 5. Other Information
   40




---



##### Table of Contents



Item 6. Exhibits
 ExhibitNo.
    
    Description31.1
    
    
    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.
  41




---



##### Table of Contents



SIGNATURES
  ALION SCIENCE AND TECHNOLOGY CORPORATIONBy:
    /s/  Michael J. AlberName:
    Michael J. AlberTitle:
    Principal Financial Officer and Duly Authorized Officer   42