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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, 2010.
 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 35th Street
    
    1750 Tysons Boulevard, Suite 1300Chicago, IL 60616
    
    McLean, VA 22102(312) 567-4000
    
    (703) 918-4480
  (Former name, former address and former fiscal year, if changed since last report)
 o þ
 Yes o No o
  Large Accelerated Filer o
    
    Accelerated Filer o
    
    Non-Accelerated Filer þ
    
    Smaller Reporting Company o(Do not check if a smaller reporting company)
 Yes o No þ




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##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 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)
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    35Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    53Item 4. Controls and Procedures
    
    
    53Item 4T. Controls and Procedures
    
    
    53PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    54Item 1A. Risk Factors
    
    
    54Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    54Item 3. Defaults Upon Senior Securities
    
    
    54Item 4. Removed and Reserved
    
    
    54Item 5. Other Information
    
    
    54Item 6. Exhibits
    
    
    55Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




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PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements (unaudited)
 ALION SCIENCE AND TECHNOLOGY CORPORATION
 
 Condensed Consolidated Balance Sheets

(unaudited)
 As of June 30, 2010 and September 30, 2009
 June 30,
    
    
    September 30,2010
    
    
    2009(In thousands, except shareand per share information)Current assets:Cash and cash equivalents
    
    $
    24,281
    
    
    $
    11,185Accounts receivable, net
    
    
    171,328
    
    
    
    180,157Prepaid expenses and other current assets
    
    
    6,065
    
    
    
    3,795Total current assets
    
    
    201,674
    
    
    
    195,137Property, plant and equipment, net
    
    
    12,063
    
    
    
    14,474Intangible assets, net
    
    
    20,277
    
    
    
    28,680Goodwill
    
    
    398,921
    
    
    
    398,921Other assets
    
    
    10,651
    
    
    
    10,286Total assets
    
    $
    643,586
    
    
    $
    647,498Current liabilities:Interest payable
    
    $
    15,860
    
    
    $
    9,039Current portion, senior term loan payable
    
    
    
    
    
    
    2,389Current portion, subordinated note payable
    
    
    
    
    
    
    3,000Current portion, acquisition obligations
    
    
    
    
    
    
    50Trade accounts payable
    
    
    46,586
    
    
    
    60,707Accrued liabilities
    
    
    43,448
    
    
    
    45,425Accrued payroll and related liabilities
    
    
    46,444
    
    
    
    43,033Billings in excess of revenue earned
    
    
    4,629
    
    
    
    3,661Total current liabilities
    
    
    156,967
    
    
    
    167,304Senior term loan payable, excluding current portion
    
    
    
    
    
    
    229,221Senior secured notes
    
    
    272,089
    
    
    
    Senior unsecured notes
    
    
    245,905
    
    
    
    245,241Subordinated note payable
    
    
    
    
    
    
    46,932Accrued compensation, excluding current portion
    
    
    5,079
    
    
    
    5,740Accrued postretirement benefit obligations
    
    
    752
    
    
    
    717Non-current portion of lease obligations
    
    
    7,873
    
    
    
    7,286Deferred income taxes
    
    
    35,615
    
    
    
    Commitments and contingenciesRedeemable common stock warrants
    
    
    
    
    
    
    32,717Redeemable common stock, $0.01 par value, 8,000,000 shares
authorized, 5,406,237 and 5,424,274 shares issued and outstanding
at June 30, 2010 and September 30, 2009
    
    
    151,375
    
    
    
    187,137Common stock warrants
    
    
    20,785
    
    
    
    Accumulated other comprehensive loss
    
    
    (238
    )
    
    
    (238
    )Accumulated deficit
    
    
    (252,616
    )
    
    
    (274,559
    )Total liabilities, redeemable common stock and accumulated deficit
    
    $
    643,586
    
    
    $
    647,498
 See accompanying notes to condensed consolidated financial statements.
  1




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ALION SCIENCE AND TECHNOLOGY CORPORATION
 
 Condensed Consolidated Statements of Operations

 (unaudited)
 Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands, except share and per share information)Contract revenue
    
    $
    213,309
    
    
    $
    204,160
    
    
    $
    622,593
    
    
    $
    588,385Direct contract expense
    
    
    164,853
    
    
    
    157,666
    
    
    
    479,898
    
    
    
    452,123Gross profit
    
    
    48,456
    
    
    
    46,494
    
    
    
    142,695
    
    
    
    136,262Operating expenses:Indirect contract expense
    
    
    10,167
    
    
    
    9,443
    
    
    
    29,435
    
    
    
    27,899Research and development
    
    
    120
    
    
    
    223
    
    
    
    690
    
    
    
    370General and administrative
    
    
    19,465
    
    
    
    17,253
    
    
    
    53,938
    
    
    
    40,852Rental and occupancy expense
    
    
    7,499
    
    
    
    8,169
    
    
    
    23,783
    
    
    
    24,375Depreciation and amortization
    
    
    4,064
    
    
    
    5,156
    
    
    
    12,507
    
    
    
    14,662Total operating expenses
    
    
    41,315
    
    
    
    40,244
    
    
    
    120,353
    
    
    
    108,158Operating income
    
    
    7,141
    
    
    
    6,250
    
    
    
    22,342
    
    
    
    28,104Other income (expense):Interest income
    
    
    16
    
    
    
    15
    
    
    
    73
    
    
    
    63Interest expense
    
    
    (18,292
    )
    
    
    (15,766
    )
    
    
    (49,275
    )
    
    
    (40,098
    )Other
    
    
    (183
    )
    
    
    90
    
    
    
    (207
    )
    
    
    (32
    )Gain on sale of non-operating assets
    
    
    
    
    
    
    (19
    )
    
    
    
    
    
    
    (19
    )Gain on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    50,749
    
    
    
    Total other income (expense)
    
    
    (18,459
    )
    
    
    (15,680
    )
    
    
    1,340
    
    
    
    (40,086
    )(Loss) income before taxes
    
    
    (11,318
    )
    
    
    (9,430
    )
    
    
    23,682
    
    
    
    (11,982
    )Income tax (expense) benefit
    
    
    (1,798
    )
    
    
    (7
    )
    
    
    (35,573
    )
    
    
    44Net loss
    
    $
    (13,116
    )
    
    $
    (9,437
    )
    
    $
    (11,891
    )
    
    $
    (11,938
    )Basic and diluted loss per share
    
    
    (2.40
    )
    
    
    (1.80
    )
    
    
    (2.19
    )
    
    
    (2.27
    )Basic and weighted average common
shares outstanding
    
    
    5,467,797
    
    
    
    5,240,778
    
    
    
    5,434,436
    
    
    
    5,264,762
 See accompanying notes to condensed consolidated financial statements.
  2




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ALION SCIENCE AND TECHNOLOGY CORPORATION
 
 Condensed Consolidated Statements of Cash Flows

(unaudited)
 Nine Months Ended June 30,2010
    
    
    2009(In thousands)Cash flows from operating activities:Net loss
    
    $
    (11,891
    )
    
    $
    (11,938
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    12,507
    
    
    
    14,662Bad debt expense
    
    
    
    
    
    
    760Accretion of debt to face value
    
    
    1,709
    
    
    
    1,769Amortization of debt issuance costs
    
    
    4,712
    
    
    
    2,045Change in fair value of redeemable common stock warrants
    
    
    (160
    )
    
    
    (6,738
    )Incentive and stock-based compensation
    
    
    2,645
    
    
    
    (5,353
    )Gain on extinguishment of debt
    
    
    (50,749
    )
    
    
    Deferred income taxes
    
    
    35,615
    
    
    
    Other gains and losses
    
    
    12
    
    
    
    37Changes in assets and liabilities:Accounts receivable
    
    
    8,829
    
    
    
    (8,895
    )Other assets
    
    
    (1,463
    )
    
    
    (1,214
    )Trade accounts payable
    
    
    (14,002
    )
    
    
    (16,310
    )Accrued liabilities
    
    
    3,266
    
    
    
    16,331Interest payable
    
    
    6,821
    
    
    
    8,869Other liabilities
    
    
    1,650
    
    
    
    5,454Net cash used in operating activities
    
    
    (499
    )
    
    
    (521
    )Cash flows from investing activities:Cash paid for acquisition-related obligations
    
    
    (50
    )
    
    
    (166
    )Capital expenditures
    
    
    (1,639
    )
    
    
    (1,789
    )Proceeds from sale of assets
    
    
    5
    
    
    
    Net cash used in investing activities
    
    
    (1,684
    )
    
    
    (1,955
    )Cash flows from financing activities:Cash paid for interest rate swap
    
    
    
    
    
    
    (4,647
    )Sale of Secured Notes
    
    
    281,465
    
    
    
    Sale of Common Stock Warrants
    
    
    20,785
    
    
    
    Payment of debt issue costs
    
    
    (18,177
    )
    
    
    Repayment of Term B Loan
    
    
    (236,596
    )
    
    
    (1,825
    )Repurchase of Subordinated Note and related warrants
    
    
    (25,000
    )
    
    
    Payment of Subordinated Note principal
    
    
    
    
    
    
    (3,000
    )Revolver borrowings
    
    
    84,200
    
    
    
    349,925Revolver repayments
    
    
    (84,200
    )
    
    
    (349,925
    )Loan to ESOP Trust
    
    
    (5,323
    )
    
    
    (5,936
    )ESOP loan repayment
    
    
    5,323
    
    
    
    5,936Redeemable common stock purchased from ESOP Trust
    
    
    (9,326
    )
    
    
    (7,264
    )Redeemable common stock sold to ESOP Trust
    
    
    2,128
    
    
    
    5,115Net cash provided by (used in) financing activities
    
    
    15,279
    
    
    
    (11,621
    )Net increase (decrease) in cash and cash equivalents
    
    
    13,096
    
    
    
    (14,097
    )Cash and cash equivalents at beginning of period
    
    
    11,185
    
    
    
    16,287Cash and cash equivalents at end of period
    
    $
    24,281
    
    
    $
    2,190
 See accompanying notes to condensed consolidated financial statements.
  3




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ALION SCIENCE AND TECHNOLOGY CORPORATION
Condensed Consolidated Statements of Cash Flows (unaudited)
 Nine Months Ended June 30,2010
    
    
    2009(In thousands)Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    36,230
    
    
    $
    30,284Cash paid (received) for taxes
    
    
    34
    
    
    
    (104
    )Non-cash financing activities:Common stock issued to ESOP Trust in satisfaction of employer contribution liability
    
    $
    5,268
    
    
    $
    5,043
 See accompanying notes to condensed consolidated financial statements.
  4




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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
   5




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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    Revenue Recognition .
 Income Taxes
      6




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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
   7




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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
  8




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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Redeemable Common Stock
    Concentration of Credit Risk
  Fair Value of Financial Instruments
  Cash, cash equivalents, accounts payable and accounts receivable
 Senior long-term debt
 Subordinated notes and redeemable common stock warrants.
  9




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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Redeemable Alion common stock.
 Recently Issued Accounting Pronouncements
 Revenue Recognition  Multiple Deliverable
Revenue Arrangements Revenue Recognition
 Certain Revenue Arrangements That Include
Software Elements Software  Revenue Recognition
 (3) Employee Stock Ownership Plan (ESOP) and ESOP Trust
  (4) Earnings (Loss) Per Share
  (5) Redeemable Common Stock Owned by ESOP Trust
   10




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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    (6) Accounts Receivable
  June 30,
    
    
    September 30,2010
    
    
    2009(In thousands)Billed receivables
    
    $
    91,242
    
    
    $
    108,566Unbilled receivables:Amounts currently billable
    
    
    34,429
    
    
    
    22,954Revenues recorded in excess of milestone billings on fixed price contracts
    
    
    4,572
    
    
    
    3,757Revenues recorded in excess of estimated contract value or funding
    
    
    31,867
    
    
    
    36,327Retainages and other amounts billable upon contract completion
    
    
    13,027
    
    
    
    12,972Allowance for doubtful accounts
    
    
    (3,809
    )
    
    
    (4,419
    )Total Accounts Receivable
    
    $
    171,328
    
    
    $
    180,157
   11




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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (7) Property, Plant and Equipment
 June 30,
    
    
    September 30,2010
    
    
    2009(In thousands)Leasehold improvements
    
    $
    11,034
    
    
    $
    10,214Equipment and software
    
    
    33,414
    
    
    
    32,807Total cost
    
    
    44,448
    
    
    
    43,021Less: accumulated depreciation and amortization
    
    
    (32,385
    )
    
    
    (28,547
    )Net Property, Plant and Equipment
    
    $
    12,063
    
    
    $
    14,474
  (8) Goodwill and Intangible Assets
   June 30, 2010
    
    
    September 30, 2009Accumulated
    
    
    
    
    
    
    
    
    
    
    AccumulatedGross
    
    
    Amortization
    
    
    Net
    
    
    Gross
    
    
    Amortization
    
    
    NetPurchased contracts
    
    $
    111,635
    
    
    $
    (91,700
    )
    
    $
    19,935
    
    
    $
    111,635
    
    
    $
    (83,563
    )
    
    $
    28,072Internal use software and
engineering designs
    
    
    2,155
    
    
    
    (1,815
    )
    
    
    340
    
    
    
    2,155
    
    
    
    (1,568
    )
    
    
    587Non-compete agreements
    
    
    725
    
    
    
    (723
    )
    
    
    2
    
    
    
    725
    
    
    
    (704
    )
    
    
    21Total
    
    $
    114,515
    
    
    $
    (94,238
    )
    
    $
    20,277
    
    
    $
    114,515
    
    
    $
    (85,835
    )
    
    $
    28,680
  (In thousands)For the remaining three months:2010
    
    $
    2,582For the year ending September 30:2011
    
    
    6,8432012
    
    
    5,7662013
    
    
    3,2462014
    
    
    8792015
    
    
    737Thereafter
    
    
    224$
    20,277
  12




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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (9) Long-Term Debt
  Credit Agreement
    Security.
 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
  13




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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Secured Notes
  Security .
 Guarantees
 Interest and Fees.
 Unsecured Notes
  Guarantees
 Interest and Fees.
 Retired Term B Senior Credit Agreement
   14




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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Retired Subordinated Note
    Interest Payable
  June 30,
    
    
    September 30,2010
    
    
    2009(In thousands)Unsecured Notes
    
    $
    10,677
    
    
    $
    4,271Secured Notes
    
    
    5,183
    
    
    
    Senior Term Loan
    
    
    
    
    
    
    3,975Subordinated Note Payable
    
    
    
    
    
    
    793Total
    
    $
    15,860
    
    
    $
    9,039
  Fiscal Year:
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    2014
    
    
    2015
    
    
    TotalSecured Notes and PIK Interest(1)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    339,788
    
    
    $
    339,788Unsecured Notes(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250,000
    
    
    
    250,000Total Principal Payments
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    589,788
    
    
    $
    589,788
 1.
    
    The Secured Notes due in 2015 include $310 million of debt issued in March 2010 and an
estimated $29.8 million in PIK interest added to principal over the life of the notes. As
of June 30, 2010, the $272.1 million carrying value on the face of the balance sheet
included $310 million in principal, $1.7 million in accrued PIK interest and is net of
$39.6 million in aggregate unamortized debt issue costs. Initial debt issue costs consist
of $7.7 million in original
issue discount, $13.5 million in third-party costs and $20.8 million for the initial fair
value of the new Secured Note warrants.2.
    
    The Unsecured Notes on the face of the balance sheet include $250 million in principal
and $4.1 million in unamortized debt issue costs as of June 30, 2010 (initially $7.1
million).  15




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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (10) Fair Value Measurement
 Fair Value Disclosures
        16




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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Assets and Liabilities Measured at Fair Value on a Recurring Basis
  Level 1
    
    
    Level 2
    
    
    Level 3Liabilities: as of September 30, 2009Redeemable common stock warrants
    
    
    
    
    
    
    
    
    
    
    (32,557
    )Liabilities: as of September 30, 2009
    
    $
    
    
    
    $
    
    
    
    $
    (32,557
    )
  As of June 30,2010
    
    
    2009Redeemable Common StockWarrantsBalance, beginning of period
    
    $
    (32,557
    )
    
    $
    (39,996
    )Total realized and unrealized gains and
(losses)
    
    
    14,724
    
    
    
    Included in interest expense
    
    
    (160
    )
    
    
    6,738Issuances and settlements
    
    
    17,993
    
    
    
    Balance, end of period
    
    $
    
    
    
    $
    (33,258
    )
 Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
  (11) Interest Rate Swap
   17




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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (12) Redeemable Common Stock Warrants
    Derivatives
 (13) Secured Note Common Stock Warrants
    (14) Leases
   18




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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Lease Payments for Fiscal Years Ending
    
    (In thousands)2010 (for the remainder of fiscal year)
    
    $
    7,0622011
    
    
    26,7182012
    
    
    22,8042013
    
    
    21,3212014
    
    
    14,8352015
    
    
    14,688And thereafter
    
    
    23,872Gross lease payments
    
    $
    131,300Less: non-cancelable subtenant receipts
    
    
    (2,891
    )Net lease payments
    
    $
    128,409
 Composition of Total Rent Expense
 June 30,2010
    
    
    2009(In thousands)Minimum rentals
    
    $
    16,789
    
    
    $
    19,494Less: Sublease rental income
    
    
    (1,378
    )
    
    
    (2,189
    )Total rent expense, net
    
    $
    15,411
    
    
    $
    17,305
 (15) Long Term Incentive Compensation Plan
  (16) Stock Appreciation Rights
    19




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##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Stock Compensation
 Stock-based Compensation Disclosure per ASC 718
Stock Appreciation Rights
As of June 30, 2010
 SharesGranted to
    
    
    Exercise
    
    
    OutstandingDate of Grant
    
    Employees
    
    
    Price
    
    
    at 9/30/09February 2005
    
    
    165,000
    
    
    $
    19.94
    
    
    
    71,150March 2005
    
    
    2,000
    
    
    $
    19.94
    
    
    
    2,000April 2005
    
    
    33,000
    
    
    $
    29.81
    
    
    
    18,000June 2005
    
    
    2,000
    
    
    $
    29.81
    
    
    
    2,000December 2005
    
    
    276,675
    
    
    $
    35.89
    
    
    
    175,284February 2006
    
    
    13,000
    
    
    $
    35.89
    
    
    
    7,750February 2006
    
    
    7,500
    
    
    $
    35.89
    
    
    
    2,500May 2006
    
    
    7,000
    
    
    $
    37.06
    
    
    
    6,000July 2006
    
    
    15,000
    
    
    $
    37.06
    
    
    
    10,000October 2006
    
    
    2,500
    
    
    $
    41.02
    
    
    
    2,500December 2006
    
    
    238,350
    
    
    $
    41.02
    
    
    
    171,500February 2007
    
    
    33,450
    
    
    $
    41.02
    
    
    
    21,700May 2007
    
    
    2,000
    
    
    $
    43.37
    
    
    
    2,000September 2007
    
    
    2,000
    
    
    $
    43.37
    
    
    
    2,000December 2007
    
    
    232,385
    
    
    $
    40.05
    
    
    
    187,740April 2008
    
    
    2,000
    
    
    $
    41.00
    
    
    
    2,000September 2008
    
    
    2,000
    
    
    $
    41.00
    
    
    
    2,000December 2008
    
    
    203,250
    
    
    $
    38.35
    
    
    
    189,875April 2009
    
    
    1,000
    
    
    $
    34.30
    
    
    
    1,000May 2010
    
    
    205,400
    
    
    
    28.00
    
    
    
    Total
    
    
    1,445,510
    
    
    
    
    
    
    
    876,999Weighted Average Exercise Price
    
    $
    34.82
    
    
    
    
    
    
    $
    37.07
  20




---



##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Stock-based Compensation Disclosures per ASC 718
Stock Appreciation Rights
As of June 30, 2010
 Outstanding
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Vested at
    
    
    ExercisableDate of Grant
    
    at 06/30/10
    
    
    Forfeited
    
    
    Exercised
    
    
    Expired
    
    
    06/30/10
    
    
    at 06/30/10February 2005
    
    
    
    
    
    
    
    
    
    
    71,150
    
    
    
    
    
    
    
    
    
    
    
    March 2005
    
    
    
    
    
    
    
    
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    April 2005
    
    
    
    
    
    
    
    
    
    
    4,000
    
    
    
    14,000
    
    
    
    
    
    
    
    June 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,000
    
    
    
    
    
    
    
    December 2005
    
    
    163,584
    
    
    
    412
    
    
    
    11,288
    
    
    
    
    
    
    
    163,584
    
    
    
    February 2006
    
    
    7,750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,750
    
    
    
    February 2006
    
    
    1,250
    
    
    
    
    
    
    
    1,250
    
    
    
    
    
    
    
    1,250
    
    
    
    May 2006
    
    
    6,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,000
    
    
    
    July 2006
    
    
    8,000
    
    
    
    500
    
    
    
    1,500
    
    
    
    
    
    
    
    8,000
    
    
    
    October 2006
    
    
    2,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,875
    
    
    
    December 2006
    
    
    159,280
    
    
    
    3,492
    
    
    
    8,728
    
    
    
    
    
    
    
    119,460
    
    
    
    February 2007
    
    
    20,300
    
    
    
    475
    
    
    
    925
    
    
    
    
    
    
    
    15,225
    
    
    
    May 2007
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,500
    
    
    
    September 2007
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    December 2007
    
    
    173,240
    
    
    
    7,713
    
    
    
    6,787
    
    
    
    
    
    
    
    86,620
    
    
    
    April 2008
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    September 2008
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500
    
    
    
    December 2008
    
    
    174,000
    
    
    
    12,631
    
    
    
    3,244
    
    
    
    
    
    
    
    43,500
    
    
    
    April 2009
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250
    
    
    
    May 2010
    
    
    204,400
    
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    929,304
    
    
    
    26,223
    
    
    
    110,872
    
    
    
    16,000
    
    
    
    457,514
    
    
    
    Weighted Average
Exercise Price
    
    $
    36.47
    
    
    $
    38.80
    
    
    $
    25.94
    
    
    $
    29.81
    
    
    $
    38.54
    
    
    
    
  21




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##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Stock-based Compensation Disclosures per ASC 718
Stock Appreciation Rights
As of June 30, 2010
 Expected
    
    
    RemainingDate of Grant
    
    Risk Free Interest Rate
    
    
    Volatility
    
    
    Life
    
    
    Life (months)February 2005
    
    
    3.10
    %
    
    
    
    
    
    
    3.60
    %
    
    
    45
    %
    
    4 yrs
    
    
    March 2005
    
    
    3.10
    %
    
    
    
    
    
    
    3.60
    %
    
    
    45
    %
    
    4 yrs
    
    
    April 2005
    
    
    4.10
    %
    
    
    
    
    
    
    4.20
    %
    
    
    45
    %
    
    4 yrs
    
    
    June 2005
    
    
    4.10
    %
    
    
    
    
    
    
    4.20
    %
    
    
    45
    %
    
    4 yrs
    
    
    December 2005
    
    
    4.20
    %
    
    
    
    
    
    
    4.20
    %
    
    
    40
    %
    
    4 yrs
    
    
    February 2006
    
    
    4.20
    %
    
    
    
    
    
    
    4.20
    %
    
    
    40
    %
    
    4 yrs
    
    
    February 2006
    
    
    4.20
    %
    
    
    
    
    
    
    4.20
    %
    
    
    40
    %
    
    4 yrs
    
    
    May 2006
    
    
    4.82
    %
    
    
    
    
    
    
    4.83
    %
    
    
    35
    %
    
    4 yrs
    
    
    July 2006
    
    
    4.82
    %
    
    
    
    
    
    
    4.83
    %
    
    
    35
    %
    
    4 yrs
    
    
    October 2006
    
    
    4.82
    %
    
    
    
    
    
    
    4.83
    %
    
    
    35
    %
    
    4 yrs
    
    
    3.8December 2006
    
    
    4.54
    %
    
    
    
    
    
    
    4.58
    %
    
    
    35
    %
    
    4 yrs
    
    
    5.8February 2007
    
    
    4.54
    %
    
    
    
    
    
    
    4.58
    %
    
    
    35
    %
    
    4 yrs
    
    
    7.8May 2007
    
    
    4.54
    %
    
    
    
    
    
    
    4.58
    %
    
    
    35
    %
    
    4 yrs
    
    
    10.7September 2007
    
    
    4.54
    %
    
    
    
    
    
    
    4.54
    %
    
    
    35
    %
    
    4 yrs
    
    
    14.1December 2007
    
    
    4.23
    %
    
    
    
    
    
    
    4.23
    %
    
    
    35
    %
    
    4 yrs
    
    
    17.8April 2008
    
    
    4.23
    %
    
    
    
    
    
    
    4.23
    %
    
    
    35
    %
    
    4 yrs
    
    
    21.9September 2008
    
    
    4.23
    %
    
    
    
    
    
    
    4.23
    %
    
    
    35
    %
    
    4 yrs
    
    
    26.5December 2008
    
    
    4.23
    %
    
    
    
    
    
    
    4.23
    %
    
    
    35
    %
    
    4 yrs
    
    
    29.8April 2009
    
    
    4.23
    %
    
    
    
    
    
    
    4.23
    %
    
    
    35
    %
    
    4 yrs
    
    
    33.4May 2010
    
    
    4.23
    %
    
    
    
    
    
    
    4.23
    %
    
    
    35
    %
    
    4 yrs
    
    
    46.4Weighted Average
Remaining Life
(months)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20.5
 (17) Phantom Stock Plans
     22




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##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Stock Compensation
 Stock-based Compensation Disclosure per ASC 718
Director Phantom Stock Plan
as of June 30, 2010
 GrantTotal
    
    
    DateShares
    
    
    Shares
    
    
    Share
    
    
    OutstandingDate of Grant
    
    Granted
    
    
    Granted
    
    
    Price
    
    
    at 9/30/09November 2006
    
    
    5,978
    
    
    
    5,978
    
    
    
    41.02
    
    
    
    4,839November 2007
    
    
    6,993
    
    
    
    6,993
    
    
    
    40.05
    
    
    
    5,994Total
    
    
    12,971
    
    
    
    12,971
    
    
    
    
    
    
    
    10,833Weighted Average Grant Date
Fair Value Price Per Share
    
    $
    40.50
    
    
    $
    40.50
    
    
    
    
    
    
    $
    40.48
 Stock-based Compensation Disclosure per ASC 718
Director Phantom Stock Plan
as of June 30, 2010
 Outstanding
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Vested at
    
    
    ExercisableDate of Grant
    
    at 06/30/10
    
    
    Forfeited
    
    
    Exercised
    
    
    Expired
    
    
    6/30/10
    
    
    at 06/30/10November 2006
    
    
    
    
    
    
    
    
    
    
    4,839
    
    
    
    
    
    
    
    
    
    
    
    November 2007
    
    
    4,995
    
    
    
    
    
    
    
    999
    
    
    
    
    
    
    
    2,664
    
    
    
    2,664Total
    
    
    4,995
    
    
    
    
    
    
    
    5,838
    
    
    
    
    
    
    
    2,664
    
    
    
    2,664Weighted Average Grant Date
Fair Value Price Per Share
    
    $
    40.05
    
    
    $
    
    
    
    $
    40.85
    
    
    $
    
    
    
    $
    40.05
    
    
    $
    40.05
 Stock-based Compensation Disclosure per ASC 718
Director Phantom Stock Plan
as of June 30, 2010
 Risk Free Interest
    
    
    
    
    
    Expected
    
    
    RemainingDate of Grant
    
    Rate
    
    Volatility
    
    
    Life
    
    
    Life (months)November 2006
    
    4.54%  4.58%
    
    
    35
    %
    
    3 yrs
    
    
    November 2007
    
    4.23%  4.23%
    
    
    35
    %
    
    3 yrs
    
    
    4.4Weighted Average Remaining Life
    
    
    
    
    
    
    
    
    
    
    
    
    4.4
 (18) Segment Information and Customer Concentration
   23




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##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  (19) Income Taxes
    Income Taxes
    24




---



##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   June 30, 2010Current:Federal
    
    $
    State
    
    
    (2
    )Foreign
    
    
    (40
    )Total current provision
    
    
    (42
    )Deferred:Federal
    
    
    29,312State
    
    
    6,303Foreign
    
    
    Total deferred provision/(benefit)
    
    
    35,615Total provision for income taxes
    
    $
    35,573
  June 30, 2010
    
    
    June 30, 2010Expected federal income tax (benefit)
    
    
    35.0
    %
    
    $
    8,289State taxes (net of federal benefit)
    
    
    17.3
    %
    
    
    4,105Nondeductible expenses
    
    
    0.6
    %
    
    
    150Provision to return true-ups
    
    
    0.0
    %
    
    
    (2
    )Tax credits
    
    
    -0.2
    %
    
    
    (40
    )Deferred tax assets
    
    
    -152.4
    %
    
    
    (36,098
    )Valuation allowance
    
    
    152.4
    %
    
    
    36,098Deferred tax liabilities
    
    
    150.4
    %
    
    
    35,615Debt extinguishment and tax status change
    
    
    -53.0
    %
    
    
    (12,544
    )Income tax expense (benefit)
    
    
    150.2
    %
    
    $
    35,573
  June 30, 2010Deferred tax assets:Accrued expenses and reserves
    
    $
    10,576Intangible amortization
    
    
    13,191Deferred rent
    
    
    2,591Deferred wages
    
    
    3,894Depreciation and leases
    
    
    2,707Carryforwards and tax credits
    
    
    3,114Other
    
    
    25Gross deferred tax assets
    
    $
    36,098Less Valuation
    
    
    36,098Net Deferred Tax Assets
    
    $
    Deferred tax liabilities:Goodwill
    
    
    (35,615
    )Net deferred tax asset/(liability)
    
    $
    (35,615
    )
  25




---



##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (20) Debt Extinguishment
  (21) Commitments and Contingencies
 Earn-Out and Hold-Back Commitments
  Legal Proceedings
  Government Audits
  (22) Guarantor/Non-guarantor Condensed Consolidated Financial Information
    26




---



##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Condensed Consolidating Balance Sheet as of June 30, 2010
 Non-Guarantor
    
    
    GuarantorParent
    
    
    Companies
    
    
    Companies
    
    
    Eliminations
    
    
    Consolidated(In thousands)Current assets:Cash and cash equivalents
    
    $
    24,034
    
    
    $
    238
    
    
    $
    9
    
    
    $
    
    
    
    $
    24,281Accounts receivable, net
    
    
    166,359
    
    
    
    4,949
    
    
    
    20
    
    
    
    
    
    
    
    171,328Prepaid expenses and other current
assets
    
    
    5,957
    
    
    
    108
    
    
    
    
    
    
    
    
    
    
    
    6,065Total current assets
    
    
    196,350
    
    
    
    5,295
    
    
    
    29
    
    
    
    
    
    
    
    201,674Property, plant and equipment, net
    
    
    11,968
    
    
    
    95
    
    
    
    
    
    
    
    
    
    
    
    12,063Intangible assets, net
    
    
    20,277
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,277Goodwill
    
    
    398,921
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    398,921Investment in subsidiaries
    
    
    21,291
    
    
    
    
    
    
    
    
    
    
    
    (21,291
    )
    
    
    Intercompany receivables
    
    
    867
    
    
    
    20,230
    
    
    
    
    
    
    
    (21,097
    )
    
    
    Other assets
    
    
    10,635
    
    
    
    13
    
    
    
    3
    
    
    
    
    
    
    
    10,651Total assets
    
    $
    660,309
    
    
    $
    25,633
    
    
    $
    32
    
    
    $
    (42,388
    )
    
    $
    643,586Current liabilities:Book cash overdraft
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Interest payable
    
    
    15,860
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,860Current portion, senior term loan
payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Current portion of subordinated note
payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Current portion, acquisition obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Trade accounts payable
    
    
    45,799
    
    
    
    773
    
    
    
    14
    
    
    
    
    
    
    
    46,586Accrued liabilities
    
    
    42,289
    
    
    
    1,157
    
    
    
    2
    
    
    
    
    
    
    
    43,448Accrued payroll and related liabilities
    
    
    44,933
    
    
    
    1,465
    
    
    
    46
    
    
    
    
    
    
    
    46,444Billings in excess of revenue earned
    
    
    4,629
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,629Total current liabilities
    
    
    153,510
    
    
    
    3,395
    
    
    
    62
    
    
    
    
    
    
    
    156,967Intercompany payables
    
    
    20,231
    
    
    
    
    
    
    
    866
    
    
    
    (21,097
    )
    
    
    Senior term loan payable, excluding
current portion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Senior secured notes
    
    
    272,089
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    272,089Senior unsecured notes
    
    
    245,905
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    245,905Subordinated note payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accrued compensation, excluding current
portion
    
    
    5,079
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,079Accrued postretirement benefit
obligations
    
    
    752
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    752Non-current portion of lease obligations
    
    
    7,822
    
    
    
    51
    
    
    
    
    
    
    
    
    
    
    
    7,873Deferred income taxes
    
    
    35,615
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,615Commitments and contingencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Redeemable common stock warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Redeemable common stock
    
    
    151,375
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    151,375Common stock warrants
    
    
    20,785
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,785Common stock of subsidiaries
    
    
    
    
    
    
    2,800
    
    
    
    
    
    
    
    (2,800
    )
    
    
    Accumulated other comprehensive loss
    
    
    (238
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (238
    )Accumulated deficit
    
    
    (252,616
    )
    
    
    19,387
    
    
    
    (896
    )
    
    
    (18,491
    )
    
    
    (252,616
    )Total liabilities, redeemable common
stock and accumulated deficit
    
    $
    660,309
    
    
    $
    25,633
    
    
    $
    32
    
    
    $
    (42,388
    )
    
    $
    643,586
  27




---



##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Condensed Consolidating Balance Sheet as of September 30, 2009
(In thousands)
 Non-Guarantor
    
    
    GuarantorParent
    
    
    Companies
    
    
    Companies
    
    
    Eliminations
    
    
    ConsolidatedCurrent assets:Cash and cash equivalents
    
    $
    11,404
    
    
    $
    (215
    )
    
    $
    (4
    )
    
    $
    
    
    
    $
    11,185Accounts receivable, net
    
    
    174,458
    
    
    
    5,661
    
    
    
    38
    
    
    
    
    
    
    
    180,157Prepaid expenses and other current
assets
    
    
    3,659
    
    
    
    133
    
    
    
    3
    
    
    
    
    
    
    
    3,795Total current assets
    
    
    189,521
    
    
    
    5,579
    
    
    
    37
    
    
    
    
    
    
    
    195,137Property, plant and equipment, net
    
    
    14,346
    
    
    
    128
    
    
    
    
    
    
    
    
    
    
    
    14,474Intangible assets, net
    
    
    28,680
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,680Goodwill
    
    
    398,921
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    398,921Investment in subsidiaries
    
    
    17,132
    
    
    
    
    
    
    
    
    
    
    
    (17,132
    )
    
    
    Intercompany receivables
    
    
    702
    
    
    
    15,939
    
    
    
    
    
    
    
    (16,641
    )
    
    
    Other assets
    
    
    10,270
    
    
    
    13
    
    
    
    3
    
    
    
    
    
    
    
    10,286Total assets
    
    $
    659,572
    
    
    $
    21,659
    
    
    $
    40
    
    
    $
    (33,773
    )
    
    $
    647,498Interest payable
    
    $
    9,039
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    9,039Current portion, senior term loan
payable
    
    
    2,389
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,389Current portion of subordinated note
payable
    
    
    3,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,000Current portion, acquisition obligations
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50Trade accounts payable
    
    
    59,742
    
    
    
    963
    
    
    
    2
    
    
    
    
    
    
    
    60,707Accrued liabilities
    
    
    43,985
    
    
    
    1,440
    
    
    
    
    
    
    
    
    
    
    
    45,425Accrued payroll and related liabilities
    
    
    41,643
    
    
    
    1,381
    
    
    
    9
    
    
    
    
    
    
    
    43,033Billings in excess of revenue earned
    
    
    3,661
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,661Total current liabilities
    
    
    163,509
    
    
    
    3,784
    
    
    
    11
    
    
    
    
    
    
    
    167,304Intercompany payables
    
    
    15,939
    
    
    
    
    
    
    
    702
    
    
    
    (16,641
    )
    
    
    Senior term loan payable, excluding
current portion
    
    
    229,221
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    229,221Senior unsecured notes
    
    
    245,241
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    245,241Subordinated note payable
    
    
    46,932
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,932Accrued compensation, excluding current
portion
    
    
    5,740
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,740Accrued postretirement benefit
obligations
    
    
    717
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    717Non-current portion of lease obligations
    
    
    7,216
    
    
    
    70
    
    
    
    
    
    
    
    
    
    
    
    7,286Redeemable common stock warrants
    
    
    32,717
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,717Redeemable common stock
    
    
    187,137
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    187,137Common stock of subsidiaries
    
    
    
    
    
    
    2,800
    
    
    
    
    
    
    
    (2,800
    )
    
    
    Accumulated other comprehensive loss
    
    
    (238
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (238
    )Accumulated deficit
    
    
    (274,559
    )
    
    
    15,005
    
    
    
    (673
    )
    
    
    (14,332
    )
    
    
    (274,559
    )Total liabilities, redeemable common
stock and accumulated deficit
    
    $
    659,572
    
    
    $
    21,659
    
    
    $
    40
    
    
    $
    (33,773
    )
    
    $
    647,498
  28




---



##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Condensed Consolidating Statement of Operations for the Three Months Ended June 30, 2010
 Non-Guarantor
    
    
    GuarantorParent
    
    
    Companies
    
    
    Companies
    
    
    Eliminations
    
    
    Consolidated(In thousands)Contract revenue
    
    $
    205,660
    
    
    $
    7,603
    
    
    $
    46
    
    
    $
    
    
    
    $
    213,309Direct contract expense
    
    
    159,764
    
    
    
    5,054
    
    
    
    35
    
    
    
    
    
    
    
    164,853Gross profit
    
    
    45,896
    
    
    
    2,549
    
    
    
    11
    
    
    
    
    
    
    
    48,456Operating expenses:Indirect contract expense
    
    
    9,286
    
    
    
    869
    
    
    
    12
    
    
    
    
    
    
    
    10,167Research and development
    
    
    120
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    120General and administrative
    
    
    19,006
    
    
    
    377
    
    
    
    82
    
    
    
    
    
    
    
    19,465Rental and occupancy expense
    
    
    7,339
    
    
    
    149
    
    
    
    11
    
    
    
    
    
    
    
    7,499Depreciation and amortization
    
    
    4,050
    
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    4,064Total operating expenses
    
    
    39,801
    
    
    
    1,409
    
    
    
    105
    
    
    
    
    
    
    
    41,315Operating income
    
    
    6,095
    
    
    
    1,140
    
    
    
    (94
    )
    
    
    
    
    
    
    7,141Other income (expense):Interest income
    
    
    15
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    16Interest expense
    
    
    (18,292
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,292
    )Other
    
    
    (255
    )
    
    
    72
    
    
    
    
    
    
    
    
    
    
    
    (183
    )Equity in net income of
subsidiaries
    
    
    1,119
    
    
    
    
    
    
    
    
    
    
    
    (1,119
    )
    
    
    Total other expenses
    
    
    (17,413
    )
    
    
    73
    
    
    
    
    
    
    
    (1,119
    )
    
    
    (18,459
    )(Loss) income before taxes
    
    
    (11,318
    )
    
    
    1,213
    
    
    
    (94
    )
    
    
    (1,119
    )
    
    
    (11,318
    )Income tax (expense) benefit
    
    
    (1,798
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,798
    )Net income (loss)
    
    $
    (13,116
    )
    
    $
    1,213
    
    
    $
    (94
    )
    
    $
    (1,119
    )
    
    $
    (13,116
    )
  29




---



##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Condensed Consolidating Statement of Operations for the Three Months Ended June 30, 2009
 Non-Guarantor
    
    
    GuarantorParent
    
    
    Companies
    
    
    Companies
    
    
    Eliminations
    
    
    Consolidated(In thousands)Contract revenue
    
    $
    195,465
    
    
    
    5,167
    
    
    
    3,528
    
    
    
    
    
    
    $
    204,160Direct contract expense
    
    
    151,834
    
    
    
    3,205
    
    
    
    2,627
    
    
    
    
    
    
    
    157,666Gross profit
    
    
    43,631
    
    
    
    1,962
    
    
    
    901
    
    
    
    
    
    
    
    46,494Indirect contract expense
    
    
    8,463
    
    
    
    755
    
    
    
    225
    
    
    
    
    
    
    
    9,443Research and development
    
    
    223
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    223General and administrative
    
    
    17,005
    
    
    
    259
    
    
    
    (11
    )
    
    
    
    
    
    
    17,253Rental and occupancy expense
    
    
    8,000
    
    
    
    80
    
    
    
    89
    
    
    
    
    
    
    
    8,169Depreciation and amortization
    
    
    5,143
    
    
    
    6
    
    
    
    7
    
    
    
    
    
    
    
    5,156Total operating expenses
    
    
    38,834
    
    
    
    1,100
    
    
    
    310
    
    
    
    
    
    
    
    40,244Operating income
    
    
    4,797
    
    
    
    862
    
    
    
    591
    
    
    
    
    
    
    
    6,250Other income (expense):Interest income
    
    
    12
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    15Interest expense
    
    
    (15,766
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,766
    )Other
    
    
    (96
    )
    
    
    189
    
    
    
    (3
    )
    
    
    
    
    
    
    90Gain on sale of
non-operating assets
    
    
    (19
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19
    )Equity in net income of
subsidiaries
    
    
    1,642
    
    
    
    
    
    
    
    
    
    
    
    (1,642
    )
    
    
    Total other expenses
    
    
    (14,227
    )
    
    
    189
    
    
    
    
    
    
    
    (1,642
    )
    
    
    (15,680
    )(Loss) income before taxes
    
    
    (9,430
    )
    
    
    1,051
    
    
    
    591
    
    
    
    (1,642
    )
    
    
    (9,430
    )Income tax (expense) benefit
    
    
    (7
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7
    )Net income (loss)
    
    $
    (9,437
    )
    
    
    1,051
    
    
    
    591
    
    
    
    (1,642
    )
    
    $
    (9,437
    )
  30




---



##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Condensed Consolidating Statement of Operations for the Nine Months Ended June 30, 2010
 Non-Guarantor
    
    
    GuarantorParent
    
    
    Companies
    
    
    Companies
    
    
    Eliminations
    
    
    Consolidated(In thousands)Contract revenue
    
    $
    598,126
    
    
    $
    24,351
    
    
    $
    116
    
    
    $
    
    
    
    $
    622,593Direct contract expense
    
    
    463,578
    
    
    
    16,240
    
    
    
    80
    
    
    
    
    
    
    
    479,898Gross profit
    
    
    134,548
    
    
    
    8,111
    
    
    
    36
    
    
    
    
    
    
    
    142,695Operating expenses:Indirect contract expense
    
    
    26,680
    
    
    
    2,725
    
    
    
    30
    
    
    
    
    
    
    
    29,435Research and development
    
    
    690
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    690General and administrative
    
    
    52,955
    
    
    
    746
    
    
    
    237
    
    
    
    
    
    
    
    53,938Rental and occupancy expense
    
    
    23,307
    
    
    
    444
    
    
    
    32
    
    
    
    
    
    
    
    23,783Depreciation and amortization
    
    
    12,468
    
    
    
    39
    
    
    
    
    
    
    
    
    
    
    
    12,507Total operating expenses
    
    
    116,100
    
    
    
    3,954
    
    
    
    299
    
    
    
    
    
    
    
    120,353Operating income
    
    
    18,448
    
    
    
    4,157
    
    
    
    (263
    )
    
    
    
    
    
    
    22,342Other income (expense):Interest income
    
    
    72
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    73Interest expense
    
    
    (49,275
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (49,275
    )Other
    
    
    (429
    )
    
    
    222
    
    
    
    
    
    
    
    
    
    
    
    (207
    )Gain on extinguishment of debt
    
    
    50,749
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,749Equity in net income of
subsidiaries
    
    
    4,159
    
    
    
    
    
    
    
    
    
    
    
    (4,159
    )
    
    
    Total other expenses
    
    
    5,276
    
    
    
    223
    
    
    
    
    
    
    
    (4,159
    )
    
    
    1,340(Loss) income before taxes
    
    
    23,724
    
    
    
    4,380
    
    
    
    (263
    )
    
    
    (4,159
    )
    
    
    23,682Income tax (expense) benefit
    
    
    (35,615
    )
    
    
    2
    
    
    
    40
    
    
    
    
    
    
    
    (35,573
    )Net income (loss)
    
    $
    (11,891
    )
    
    $
    4,382
    
    
    $
    (223
    )
    
    $
    (4,159
    )
    
    $
    (11,891
    )
  31




---



##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Condensed Consolidating Statements of Operations for the Nine Months Ended June 30, 2009
 Non-Guarantor
    
    
    GuarantorParent
    
    
    Companies
    
    
    Companies
    
    
    Eliminations
    
    
    Consolidated(In thousands)Contract revenue
    
    $
    561,582
    
    
    $
    16,595
    
    
    $
    10,208
    
    
    $
    
    
    
    $
    588,385Direct contract expense
    
    
    433,204
    
    
    
    11,239
    
    
    
    7,680
    
    
    
    
    
    
    
    452,123Gross profit
    
    
    128,378
    
    
    
    5,356
    
    
    
    2,528
    
    
    
    
    
    
    
    136,262Operating expenses:Indirect contract expense
    
    
    25,097
    
    
    
    2,276
    
    
    
    526
    
    
    
    
    
    
    
    27,899Research and development
    
    
    370
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    370General and administrative
    
    
    40,229
    
    
    
    613
    
    
    
    10
    
    
    
    
    
    
    
    40,852Rental and occupancy expense
    
    
    23,924
    
    
    
    225
    
    
    
    226
    
    
    
    
    
    
    
    24,375Depreciation and amortization
    
    
    14,624
    
    
    
    17
    
    
    
    21
    
    
    
    
    
    
    
    14,662Total operating expenses
    
    
    104,244
    
    
    
    3,131
    
    
    
    783
    
    
    
    
    
    
    
    108,158Operating income
    
    
    24,134
    
    
    
    2,225
    
    
    
    1,745
    
    
    
    
    
    
    
    28,104Other income (expense):Interest income
    
    
    44
    
    
    
    16
    
    
    
    3
    
    
    
    
    
    
    
    63Interest expense
    
    
    (40,098
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (40,098
    )Other
    
    
    (363
    )
    
    
    339
    
    
    
    (8
    )
    
    
    
    
    
    
    (32
    )Gain on sale of
non-operating assets
    
    
    (19
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19
    )Equity in net income (loss)
of subsidiaries
    
    
    4,320
    
    
    
    
    
    
    
    
    
    
    
    (4,320
    )
    
    
    Total other expenses
    
    
    (36,116
    )
    
    
    355
    
    
    
    (5
    )
    
    
    (4,320
    )
    
    
    (40,086
    )(Loss) income before taxes
    
    
    (11,982
    )
    
    
    2,580
    
    
    
    1,740
    
    
    
    (4,320
    )
    
    
    (11,982
    )Income tax (expense) benefit
    
    
    44
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44Net income (loss)
    
    $
    (11,938
    )
    
    $
    2,580
    
    
    $
    1,740
    
    
    $
    (4,320
    )
    
    $
    (11,938
    )
  32




---



##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Condensed Consolidating Statement of Cash Flows for the Nine Months Ended June 30, 2010
 Non-Guarantor
    
    
    GuarantorParent
    
    
    Companies
    
    
    Companies
    
    
    Consolidated(In thousands)Net cash used in operating activities
    
    $
    (974
    )
    
    $
    461
    
    
    $
    14
    
    
    $
    (499
    )Cash flows from investing activities:Cash paid for acquisitions-related obligations
    
    
    (50
    )
    
    
    
    
    
    
    
    
    
    
    (50
    )Capital expenditures
    
    
    (1,633
    )
    
    
    (6
    )
    
    
    
    
    
    
    (1,639
    )Proceeds from sale of assets
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    5Net cash used in investing activities
    
    
    (1,678
    )
    
    
    (6
    )
    
    
    
    
    
    
    (1,684
    )Cash flows from financing activities:Change in book overdraft
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash (paid for) received from interest rate swap
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Sale of Secured Notes
    
    
    281,465
    
    
    
    
    
    
    
    
    
    
    
    281,465Sale of Common Stock Warrants
    
    
    20,785
    
    
    
    
    
    
    
    
    
    
    
    20,785Payment of debt issue costs
    
    
    (18,177
    )
    
    
    
    
    
    
    
    
    
    
    (18,177
    )Payment of Term B Loan
    
    
    (236,596
    )
    
    
    
    
    
    
    
    
    
    
    (236,596
    )Repurchase of Subordinated Note and related warrants
    
    
    (25,000
    )
    
    
    
    
    
    
    
    
    
    
    (25,000
    )Payment of Subordinated Note
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Revolver borrowings
    
    
    84,200
    
    
    
    
    
    
    
    
    
    
    
    84,200Revolver payments
    
    
    (84,200
    )
    
    
    
    
    
    
    
    
    
    
    (84,200
    )Loan to ESOP Trust
    
    
    (5,323
    )
    
    
    
    
    
    
    
    
    
    
    (5,323
    )ESOP loan repayment
    
    
    5,323
    
    
    
    
    
    
    
    
    
    
    
    5,323Redeemable common stock purchased from ESOP Trust
    
    
    (9,326
    )
    
    
    
    
    
    
    
    
    
    
    (9,326
    )Redeemable common stock sold to ESOP Trust
    
    
    2,128
    
    
    
    
    
    
    
    
    
    
    
    2,128Net cash (used in) provided by financing activities
    
    
    15,279
    
    
    
    
    
    
    
    
    
    
    
    15,279Net increase (decrease) in cash and cash equivalents
    
    
    12,627
    
    
    
    455
    
    
    
    14
    
    
    
    13,096Cash and cash equivalents at beginning of period
    
    
    11,404
    
    
    
    (215
    )
    
    
    (4
    )
    
    
    11,185Cash and cash equivalents at end of period
    
    $
    24,031
    
    
    $
    240
    
    
    $
    10
    
    
    $
    24,281
  33




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##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Condensed Consolidating Statement of Cash Flows for the Nine Months Ended June 30, 2009
 Non-Guarantor
    
    
    GuarantorParent
    
    
    Companies
    
    
    Companies
    
    
    Consolidated(In thousands)Net cash used in operating activities
    
    $
    (597
    )
    
    $
    26
    
    
    $
    50
    
    
    $
    (521
    )Cash paid for acquisitions-related obligations
    
    
    (166
    )
    
    
    
    
    
    
    
    
    
    
    (166
    )Capital expenditures
    
    
    (1,789
    )
    
    
    
    
    
    
    
    
    
    
    (1,789
    )Net cash used in investing activities
    
    
    (1,955
    )
    
    
    
    
    
    
    
    
    
    
    (1,955
    )Cash flows from financing activities:Cash (paid for) received from interest rate swap
    
    
    (4,647
    )
    
    
    
    
    
    
    
    
    
    
    (4,647
    )Payment of senior term loan principal
    
    
    (1,825
    )
    
    
    
    
    
    
    
    
    
    
    (1,825
    )Payment of subordinated note principal
    
    
    (3,000
    )
    
    
    
    
    
    
    
    
    
    
    (3,000
    )Revolver borrowings
    
    
    349,925
    
    
    
    
    
    
    
    
    
    
    
    349,925Revolver payments
    
    
    (349,925
    )
    
    
    
    
    
    
    
    
    
    
    (349,925
    )Loan to ESOP Trust
    
    
    (5,936
    )
    
    
    
    
    
    
    
    
    
    
    (5,936
    )ESOP loan repayment
    
    
    5,936
    
    
    
    
    
    
    
    
    
    
    
    5,936Redeemable common stock purchased from ESOP Trust
    
    
    (7,264
    )
    
    
    
    
    
    
    
    
    
    
    (7,264
    )Redeemable common stock sold to ESOP Trust
    
    
    5,115
    
    
    
    
    
    
    
    
    
    
    
    5,115Net cash (used in) provided by financing activities
    
    
    (11,621
    )
    
    
    
    
    
    
    
    
    
    
    (11,621
    )Net increase (decrease) in cash and cash equivalents
    
    
    (14,173
    )
    
    
    26
    
    
    
    50
    
    
    
    (14,097
    )Cash and cash equivalents at beginning of period
    
    
    16,392
    
    
    
    (62
    )
    
    
    (43
    )
    
    
    16,287Cash and cash equivalents at end of period
    
    $
    2,219
    
    
    $
    (36
    )
    
    $
    7
    
    
    $
    2,190
 (23) Subsequent Events
   34




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
   For the Nine Months Ended June 30,Revenue by Contract Type
    
    2010
    
    
    2009(In thousands)Cost-reimbursement
    
    $
    465,829
    
    
    
    74.8
    %
    
    $
    419,451
    
    
    
    71.3
    %Fixed-price
    
    
    71,586
    
    
    
    11.5
    %
    
    
    60,553
    
    
    
    10.3
    %Time-and-material
    
    
    85,178
    
    
    
    13.7
    %
    
    
    108,381
    
    
    
    18.4
    %Total
    
    $
    622,593
    
    
    
    100.0
    %
    
    $
    588,385
    
    
    
    100.0
    %
  For the Nine Months Ended June 30,Revenue by Customer Type
    
    2010
    
    
    2009(In thousands)U.S. Department of Defense (DoD)
    
    $
    573,402
    
    
    
    92.1
    %
    
    $
    538,770
    
    
    
    91.6
    %Other Federal Civilian Agencies
    
    
    31,869
    
    
    
    5.1
    %
    
    
    28,490
    
    
    
    4.8
    %Commercial / State / Local and International
    
    
    17,322
    
    
    
    2.8
    %
    
    
    21,125
    
    
    
    3.6
    %Total
    
    $
    622,593
    
    
    
    100.0
    %
    
    $
    588,385
    
    
    
    100.0
    %
     35




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##### Table of Contents



For the Nine Months EndedJune 30,Core Business Area
    
    2010
    
    
    2009(In thousands)Naval Architecture and Marine Engineering
    
    $
    272,907
    
    
    
    43.8
    %
    
    $
    268,759
    
    
    
    45.8
    %Defense Operations
    
    
    151,930
    
    
    
    24.4
    %
    
    
    154,322
    
    
    
    26.2
    %Modeling and Simulation
    
    
    111,140
    
    
    
    17.9
    %
    
    
    67,827
    
    
    
    11.5
    %Technology Integration
    
    
    32,356
    
    
    
    5.2
    %
    
    
    36,672
    
    
    
    6.2
    %Energy and Environmental Sciences
    
    
    29,463
    
    
    
    4.7
    %
    
    
    27,786
    
    
    
    4.7
    %Information Technology and Wireless
Communications
    
    
    24,797
    
    
    
    4.0
    %
    
    
    33,019
    
    
    
    5.6
    %Total
    
    $
    622,593
    
    
    
    100.0
    %
    
    $
    588,385
    
    
    
    100.0
    %
  36




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##### Table of Contents



Backlog .
 Results of Operations
 Quarter Ended June 30, 2010 Compared to Quarter Ended June 30, 2009
 Consolidated Operations of AlionQuarter Ended June 30,2010
    
    
    2009(Dollars in thousands)% of
    
    
    
    
    
    
    % ofSelected Financial Information
    
    
    
    
    
    revenue
    
    
    
    
    
    
    revenueTotal contract revenue
    
    $
    213,309
    
    
    
    
    
    
    $
    204,160Total direct contract costs
    
    
    164,853
    
    
    
    77.3
    %
    
    
    157,666
    
    
    
    77.2
    %Direct labor costs
    
    
    69,471
    
    
    
    32.6
    %
    
    
    68,700
    
    
    
    33.7
    %Material and subcontract costs
    
    
    90,738
    
    
    
    42.5
    %
    
    
    81,229
    
    
    
    39.8
    %Other direct costs
    
    
    4,644
    
    
    
    2.2
    %
    
    
    7,737
    
    
    
    3.8
    %Gross profit
    
    
    48,456
    
    
    
    22.7
    %
    
    
    46,494
    
    
    
    22.8
    %Total operating expense
    
    
    41,315
    
    
    
    19.4
    %
    
    
    40,244
    
    
    
    19.7
    %Major components of operating expense:Indirect expenses including facilities costs
    
    
    17,666
    
    
    
    8.3
    %
    
    
    17,711
    
    
    
    8.7
    %General and administrative
    
    
    19,465
    
    
    
    9.1
    %
    
    
    17,253
    
    
    
    8.5
    %Depreciation and amortization
    
    
    4,064
    
    
    
    1.9
    %
    
    
    5,156
    
    
    
    2.5
    %Income from operations
    
    $
    7,141
    
    
    
    3.3
    %
    
    $
    6,250
    
    
    
    3.1
    %
 Revenue.
   Direct Contract Expense and Gross Profit.
  37




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##### Table of Contents



Operating Expenses.
 Income from Operations.
 Other Expense.
  Three Months Ended June 30,2010
    
    
    2009(In thousands)Cash Pay InterestRevolver
    
    $
    112
    
    
    $
    289Senior Term Loan
    
    
    
    
    
    
    5,711Secured Notes
    
    
    7,761
    
    
    
    Unsecured Notes
    
    
    6,406
    
    
    
    6,406Subordinated Note
    
    
    
    
    
    
    784Other cash pay interest and fees
    
    
    (31
    )
    
    
    88Sub-total cash pay interest
    
    
    14,248
    
    
    
    13,278Deferred and Non-cash InterestSecured Notes PIK interest
    
    
    1,554
    
    
    
    Debt issue costs and other non-cash
items
    
    
    2,490
    
    
    
    1,270Subordinated Note interest
    
    
    
    
    
    
    1,057Subordinated Note warrants
    
    
    
    
    
    
    161Sub-total non-cash interest
    
    
    4,044
    
    
    
    2,488Total interest expense
    
    $
    18,292
    
    
    $
    15,766
 Income Tax Expense.
 Net Income
  38




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##### Table of Contents



Nine Months Ended June 30, 2010 Compared to Nine Months Ended June 30, 2009
 Consolidated Operations of AlionNine Months Ended June 30,2010
    
    
    2009(Dollars in thousands)% of
    
    
    
    
    
    
    % ofSelected Financial Information
    
    
    
    
    
    revenue
    
    
    
    
    
    
    revenueTotal contract revenue
    
    $
    622,593
    
    
    
    
    
    
    $
    588,385Total direct contract costs
    
    
    479,898
    
    
    
    77.1
    %
    
    
    452,123
    
    
    
    76.8
    %Direct labor costs
    
    
    205,575
    
    
    
    33.0
    %
    
    
    203,287
    
    
    
    34.5
    %Material and subcontract costs
    
    
    261,305
    
    
    
    42.0
    %
    
    
    229,078
    
    
    
    38.9
    %Other direct costs
    
    
    13,018
    
    
    
    2.1
    %
    
    
    19,757
    
    
    
    3.4
    %Gross profit
    
    
    142,695
    
    
    
    22.9
    %
    
    
    136,262
    
    
    
    23.2
    %Total operating expense
    
    
    120,353
    
    
    
    19.3
    %
    
    
    108,158
    
    
    
    18.4
    %Major components of operating expense:Indirect expenses including facilities costs
    
    
    53,218
    
    
    
    8.5
    %
    
    
    52,274
    
    
    
    8.9
    %General and administrative
    
    
    53,938
    
    
    
    8.7
    %
    
    
    46,205
    
    
    
    7.9
    %Depreciation and amortization
    
    
    12,507
    
    
    
    2.0
    %
    
    
    14,662
    
    
    
    2.5
    %Income from operations
    
    $
    22,342
    
    
    
    3.6
    %
    
    $
    28,104
    
    
    
    4.8
    %
 Revenue
     39




---



##### Table of Contents



Direct Contract Expense and Gross Profit.
 Operating Expenses.
 Income from Operations.
 Other Expense.
  40




---



##### Table of Contents



Nine Months Ended June 30,2010
    
    
    2009(In thousands)Cash Pay InterestRevolver
    
    $
    210
    
    
    $
    811Senior Term Loan
    
    
    11,047
    
    
    
    17,166Secured Notes
    
    
    8,536
    
    
    
    Unsecured Notes
    
    
    19,219
    
    
    
    19,219Subordinated Note
    
    
    
    
    
    
    1,655Other cash pay interest and fees
    
    
    4,002
    
    
    
    302Sub-total cash pay interest
    
    
    43,014
    
    
    
    39,153Deferred and Non-cash InterestSecured Notes PIK interest
    
    
    1,709
    
    
    
    Debt issue costs and other non-cash items
    
    
    4,712
    
    
    
    3,814Subordinated Note interest
    
    
    
    
    
    
    3,869Subordinated Note warrants
    
    
    (160
    )
    
    
    (6,738
    )Sub-total non-cash interest
    
    
    6,261
    
    
    
    945Total interest expense
    
    $
    49,275
    
    
    $
    40,098
 Debt Extinguishment.
  Income Tax Expense.
     41




---



##### Table of Contents



Net Income
 Liquidity and Capital Resources
  Cash Flows
       42




---



##### Table of Contents



Cash flow effects and risks associated with equity-related obligations
     Discussion of Debt Structure
  Credit Agreement
   43




---



##### Table of Contents



Security.
 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
   
    
    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;
  44




---



##### Table of Contents




    
    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).
  Secured Notes
  Security. parri passu
 Guarantees
  45




---



##### Table of Contents



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.
  
    
    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;
  46




---



##### Table of Contents




    
    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.
 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
    %
  47




---



##### Table of Contents



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;
 
    
    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;
  48




---



##### Table of Contents




    
    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.
 Optional Redemption
  Period
    
    Redemption Price2011
    
    
    105.125
    %2012
    
    
    102.563
    %2013 and thereafter
    
    
    100.000
    %
   49




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##### Table of Contents



Retired Term B Senior Credit Agreement
  Retired Subordinated Note
  Revolving Credit Agreement  Covenant Compliance
    ($ In thousands)Fiscal Year:
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    2014
    
    
    2015Bank revolving credit facility(1)- Interest
    
    $
    112
    
    
    $
    444
    
    
    $
    445
    
    
    $
    444
    
    
    $
    396
    
    
    $
    Secured Notes(2)- Interest
    
    
    
    
    
    
    31,223
    
    
    
    31,850
    
    
    
    32,490
    
    
    
    33,144
    
    
    
    16,821- Principal and PIK Interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    339,788Unsecured Notes(3)- Interest
    
    
    12,813
    
    
    
    25,625
    
    
    
    25,625
    
    
    
    25,625
    
    
    
    25,625
    
    
    
    12,813- Principal
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250,000Total cash  pay interest
    
    
    12,925
    
    
    
    57,292
    
    
    
    57,920
    
    
    
    58,559
    
    
    
    59,165
    
    
    
    29,634Total cash  pay principal and
PIK Interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    589,788Total
    
    $
    12,925
    
    
    $
    57,292
    
    
    $
    57,920
    
    
    $
    58,559
    
    
    $
    59,165
    
    
    $
    619,422
 (1)
    
    We expect we will occasionally use our $25.0 million revolving credit facility to meet
working capital needs through 2014. Management expects the average utilized revolver balance
will be immaterial and that interest expense will consist of commitment fees for unused
balances. The current facility expires August 22, 2014.(2)
    
    The Secured Notes bear interest at 10% in cash and 2% in PIK. Outstanding principal will
increase over time for the 2% compounding PIK interest added to the initial $310 million in
principal. The Secured Notes, including $29.8 million in PIK interest, mature November 1,
2014.(3)
    
    The Senior Unsecured Notes bear interest at 10.25% and mature February 1, 2015.  50




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##### Table of Contents



Contingent Obligations
 Secured Notes registration rights agreement
  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.
  Number ofShares
    
    
    
    
    
    
    Total ValueDate
    
    Repurchased
    
    
    Share Price
    
    
    Purchased(In thousands)December 2008
    
    
    233
    
    
    $
    38.35
    
    
    $
    9March 2009
    
    
    189,038
    
    
    $
    38.35
    
    
    
    7,250April 2009
    
    
    122
    
    
    $
    34.30
    
    
    
    4May 2009
    
    
    38
    
    
    $
    34.30
    
    
    
    1July 2009
    
    
    100
    
    
    $
    34.30
    
    
    
    3July 2009
    
    
    127
    
    
    $
    38.35
    
    
    
    5August 2009
    
    
    178
    
    
    $
    34.30
    
    
    
    6September 2009
    
    
    55,282
    
    
    $
    34.30
    
    
    
    1,896December 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
    
    
    
    1,761Total
    
    
    527,306
    
    
    
    
    
    
    $
    18,500
    51




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##### Table of Contents



Recently Issued Accounting Pronouncements
 Revenue Recognition  Multiple Deliverable Revenue
Arrangements Revenue Recognition
 Certain Revenue Arrangements That Include Software
Elements Software  Revenue
Recognition
 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;
  52




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##### Table of Contents




    
    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, 2009 filed with the SEC on December 24, 2009 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
  
 Item 4. Controls and Procedures
 Disclosure Controls and Procedures.
 Changes in Internal Control Over Financial Reporting.
 
 Item 4T. Controls and Procedures
   53




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##### Table of Contents



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
   54




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##### 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.
  55




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##### Table of Contents



SIGNATURES
  ALION SCIENCE AND TECHNOLOGY CORPORATIONBy:
    
    /s/ Michael J. AlberName:
    
    Michael J. AlberTitle:
    
    Principal Financial Officer and Duly Authorized OfficerDate:
August 10, 2010
  56