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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 DECEMBER 31, 2009.
 COMMISSION
FILE NUMBER 333-89756
 
 
 Alion Science and Technology Corporation
  DELAWARE
(State or Other Jurisdiction of 
Incorporation of Organization)
    
    54-2061691
(I.R.S. Employer
Identification No.)
 1750 Tysons Boulevard, Suite 1300
McLean, VA 22102
(703) 918-4480
 
 (Former name, former address and former fiscal year, if changed since last report)
 o Yes þ No
 o Yes o No
  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 DECEMBER 31, 2009
 PART I  FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited)
    
    
    3Condensed Consolidated Balance Sheets (unaudited)
    
    
    3Condensed Consolidated Statements of Operations (unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows (unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    32Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    48Item 4. Controls and Procedures
    
    
    49Item 4T. Controls and Procedures
    
    
    49PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    50Item 1A. Risk Factors
    
    
    50Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    50Item 3. Defaults Upon Senior Securities
    
    
    50Item 4. Submission of Matters to a Vote of Security Holders
    
    
    50Item 5. Other Information
    
    
    50Item 6. Exhibits
    
    
    51Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   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 December 31, 2009 and September 30, 2009
 December 31,
    
    
    September 30,2009
    
    
    2009(In thousands, except shareand per share information)Current assets:Cash and cash equivalents
    
    $
    
    
    
    $
    11,185Accounts receivable, net
    
    
    185,144
    
    
    
    180,157Prepaid expenses and other current assets
    
    
    4,616
    
    
    
    3,795Total current assets
    
    
    189,760
    
    
    
    195,137Property, plant and equipment, net
    
    
    13,881
    
    
    
    14,474Intangible assets, net
    
    
    25,864
    
    
    
    28,680Goodwill
    
    
    398,921
    
    
    
    398,921Other assets
    
    
    10,620
    
    
    
    10,286Total assets
    
    $
    639,046
    
    
    $
    647,498Current liabilities:Book cash overdraft
    
    $
    5,074
    
    
    $
    Interest payable
    
    
    15,419
    
    
    
    9,039Current portion, senior term loan payable
    
    
    2,389
    
    
    
    2,389Current portion of subordinated note payable
    
    
    6,000
    
    
    
    3,000Current portion, acquisition obligations
    
    
    
    
    
    
    50Trade accounts payable
    
    
    49,188
    
    
    
    60,707Accrued liabilities
    
    
    53,066
    
    
    
    45,425Accrued payroll and related liabilities
    
    
    35,014
    
    
    
    43,033Billings in excess of revenue earned
    
    
    3,438
    
    
    
    3,661Total current liabilities
    
    
    169,588
    
    
    
    167,304Senior term loan payable, excluding current portion
    
    
    226,969
    
    
    
    229,221Senior unsecured notes
    
    
    245,462
    
    
    
    245,241Subordinated note payable
    
    
    45,715
    
    
    
    46,932Accrued compensation, excluding current portion
    
    
    6,058
    
    
    
    5,740Accrued postretirement benefit obligations
    
    
    729
    
    
    
    717Non-current portion of lease obligations
    
    
    7,594
    
    
    
    7,286Redeemable common stock warrants
    
    
    32,557
    
    
    
    32,717Commitments and contingencies
    
    
    
    
    
    
    Redeemable common stock, $0.01 par value, 8,000,000 shares
authorized, 5,423,529 and 5,424,274 shares issued and outstanding at December 31, 2009 and September 30,
2009
    
    
    187,112
    
    
    
    187,137Accumulated other comprehensive loss
    
    
    (238
    )
    
    
    (238
    )Accumulated deficit
    
    
    (282,500
    )
    
    
    (274,559
    )Total liabilities, redeemable common stock and accumulated deficit
    
    $
    639,046
    
    
    $
    647,498
 See accompanying notes to condensed consolidated financial statements.
  3




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ALION SCIENCE AND TECHNOLOGY CORPORATION
 
 Condensed Consolidated Statements of Operations (unaudited)
 Quarter Ended December 31,2009
    
    
    2008(In thousands, except shareand per share information)Contract revenue
    
    $
    205,738
    
    
    $
    188,796Direct contract expense
    
    
    158,996
    
    
    
    145,322Gross profit
    
    
    46,742
    
    
    
    43,474Operating expenses:Indirect contract expense
    
    
    9,286
    
    
    
    9,124Research and development
    
    
    261
    
    
    
    69General and administrative
    
    
    16,007
    
    
    
    10,173Rental and occupancy expense
    
    
    7,986
    
    
    
    7,738Depreciation and amortization
    
    
    4,231
    
    
    
    4,806Total operating expenses
    
    
    37,771
    
    
    
    31,910Operating income
    
    
    8,971
    
    
    
    11,564Other income (expense):Interest income
    
    
    45
    
    
    
    23Interest expense
    
    
    (16,886
    )
    
    
    (14,088
    )Other
    
    
    (111
    )
    
    
    (35
    )Total other expenses
    
    
    (16,952
    )
    
    
    (14,100
    )Loss before income taxes
    
    
    (7,981
    )
    
    
    (2,536
    )Income tax benefit (expense)
    
    
    40
    
    
    
    (4
    )Net loss
    
    $
    (7,941
    )
    
    $
    (2,540
    )Basic and diluted loss per share
    
    
    (1.46
    )
    
    
    (0.49
    )Basic and diluted weighted average common shares outstanding
    
    
    5,424,031
    
    
    
    5,229,523
 See accompanying notes to condensed consolidated financial statements.
  4




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ALION SCIENCE AND TECHNOLOGY CORPORATION
 
 Condensed Consolidated Statements of Cash Flows (unaudited)
 Quarter Ended December 31,2009
    
    
    2008(In thousands)Cash flows from operating activities:Net loss
    
    $
    (7,941
    )
    
    $
    (2,540
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    4,231
    
    
    
    4,806Bad debt expense
    
    
    
    
    
    
    253Loss on disposal of assets
    
    
    19
    
    
    
    Accretion of debt to face value
    
    
    606
    
    
    
    590Amortization of debt issuance costs
    
    
    966
    
    
    
    683Change in fair value of redeemable common stock warrants
    
    
    (160
    )
    
    
    (1,454
    )Incentive and stock-based compensation
    
    
    605
    
    
    
    (4,603
    )Loss on interest rate hedging agreements
    
    
    
    
    
    
    18Changes in assets and liabilities:Accounts receivable
    
    
    (4,988
    )
    
    
    (6,319
    )Other assets
    
    
    (536
    )
    
    
    (188
    )Trade accounts payable
    
    
    (11,400
    )
    
    
    (5,719
    )Accrued liabilities
    
    
    (750
    )
    
    
    (1,197
    )Interest payable
    
    
    6,381
    
    
    
    8,162Other liabilities
    
    
    1,333
    
    
    
    2,219Net cash used in operating activities
    
    
    (11,634
    )
    
    
    (5,289
    )Cash flows from investing activities:Cash paid for acquisitions-related obligations
    
    
    (50
    )
    
    
    (166
    )Capital expenditures
    
    
    (814
    )
    
    
    (407
    )Net cash used in investing activities
    
    
    (864
    )
    
    
    (573
    )Cash flows from financing activities:Change in book overdraft
    
    
    5,074
    
    
    
    Payment of debt issuance costs
    
    
    (3,127
    )
    
    
    Cash paid under interest rate swap
    
    
    
    
    
    
    (4,647
    )Payment of senior term loan principal
    
    
    (608
    )
    
    
    (608
    )Payment of subordinated note principal
    
    
    
    
    
    
    (3,000
    )Revolver borrowings
    
    
    15,900
    
    
    
    97,600Revolver payments
    
    
    (15,900
    )
    
    
    (97,600
    )Redeemable common stock purchased from ESOP Trust
    
    
    (26
    )
    
    
    (9
    )Redeemable common stock sold to ESOP Trust
    
    
    
    
    
    
    2,669Net cash provided (used in) by financing activities
    
    
    1,313
    
    
    
    (5,595
    )Net decrease in cash and cash equivalents
    
    
    (11,185
    )
    
    
    (11,457
    )Cash and cash equivalents at beginning of period
    
    
    11,185
    
    
    
    16,287Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    4,830Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    7,916
    
    
    $
    4,282Cash (received) paid for taxes
    
    $
    (40
    )
    
    $
    4
 See accompanying notes to condensed consolidated financial statements.
  5




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ALION SCIENCE AND TECHNOLOGY CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIALS 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
   6




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ALION SCIENCE AND TECHNOLOGY CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
    Revenue Recognition.
 Income Taxes
  Cash and Cash Equivalents
  Accounts Receivable and Billings in Excess of Revenue Earned
   7




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ALION SCIENCE AND TECHNOLOGY CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
 Property, Plant and Equipment
  Goodwill and Intangible Assets
  Intangibles, Goodwill and Other Assets
     8




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ALION SCIENCE AND TECHNOLOGY CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
     Purchased contracts
    
    1  13 yearsInternal use software and engineering designs
    
    2  3 yearsNon-compete agreements
    
    3  6 years
 Redeemable Common Stock
     9




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ALION SCIENCE AND TECHNOLOGY CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
 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.
 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
  10




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##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
 (3) Employee Stock Ownership Plan (ESOP) and ESOP Trust
  (4) Earnings (Loss) Per Share
  (5) Redeemable Common Stock Owned by ESOP Trust
      11




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ALION SCIENCE AND TECHNOLOGY CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
 (6) Accounts Receivable
  December 31,
    
    
    September 30,2009
    
    
    2009(In thousands)Billed receivables
    
    $
    105,043
    
    
    $
    108,566Unbilled receivables:Amounts currently billable
    
    
    35,240
    
    
    
    22,954Revenues recorded in excess of milestone billings on fixed price
contracts
    
    
    3,380
    
    
    
    3,757Revenues recorded in excess of estimated contract value or funding
    
    
    32,259
    
    
    
    36,327Retainages and other amounts billable upon contract completion
    
    
    13,218
    
    
    
    12,972Allowance for doubtful accounts
    
    
    (3,996
    )
    
    
    (4,419
    )Total Accounts Receivable
    
    $
    185,144
    
    
    $
    180,157
  (7) Property, Plant and Equipment
 December 31,
    
    
    September 30,2009
    
    
    2009(In thousands)Leasehold improvements
    
    $
    10,208
    
    
    $
    10,214Equipment and software
    
    
    33,564
    
    
    
    32,807Total cost
    
    
    43,771
    
    
    
    43,021Less: accumulated depreciation and amortization
    
    
    (29,890
    )
    
    
    (28,547
    )Net Property, Plant and Equipment
    
    $
    13,881
    
    
    $
    14,474
  (8) Goodwill and Intangible Assets
   December 31, 2009
    
    
    September 30, 2009Accumulated
    
    
    
    
    
    
    
    
    
    
    AccumulatedGross
    
    
    Amortization
    
    
    Net
    
    
    Gross
    
    
    Amortization
    
    
    NetPurchased contracts
    
    $
    111,635
    
    
    $
    (86,276
    )
    
    $
    25,359
    
    
    $
    111,635
    
    
    $
    (83,563
    )
    
    $
    28,072Internal use software
and engineering
designs
    
    
    2,155
    
    
    
    (1,665
    )
    
    
    490
    
    
    
    2,155
    
    
    
    (1,568
    )
    
    
    587Non-compete agreements
    
    
    725
    
    
    
    (710
    )
    
    
    15
    
    
    
    725
    
    
    
    (704
    )
    
    
    21Total
    
    $
    114,515
    
    
    $
    (88,651
    )
    
    $
    25,864
    
    
    $
    114,515
    
    
    $
    (85,835
    )
    
    $
    28,680
  12




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ALION SCIENCE AND TECHNOLOGY CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
  (In thousands)For the remaining nine months:2010
    
    $
    8,169For the year ending September 30:2011
    
    
    6,8432012
    
    
    5,7662013
    
    
    3,2462014
    
    
    8792015
    
    
    737Thereafter
    
    
    224$
    25,864
 (9) Long-Term Debt
 Term B Senior Credit Agreement
  
    
    In April 2005, the first amendment made certain changes and added $72.0 million in
senior term loans to the total Term B Senior Credit Agreement debt.
 
    
    In March 2006, the second amendment made certain changes, increased the senior term
loan commitment by $68.0 million (drawn in full) and increased
the revolving credit (Revolver)
commitment from $30.0 million to $50.0 million.
 
    
    In June 2006, the third amendment made certain changes and added $50.0 million in
senior term loans to the total Term B Senior Credit Agreement debt.
 
    
    In January 2007, the fourth increment added $15.0 million in senior term loans to
the total Term B Senior Credit Agreement debt.
 
    
    In February 2007, the fourth amendment made certain changes, extended the senior
term loan maturity date to February 6, 2013, adjusted the principal repayment schedule
to require a balloon principal payment at maturity, and added an incurrence test as an
additional condition precedent to Alions ability to borrow additional funds.
 
    
    In July 2007, the fifth increment added $25.0 million in senior term loans to the
Term B Senior Credit Agreement.
 
    
    On September 30, 2008, the fifth amendment made certain changes.
 
    
    It increased the interest rate by 350 basis points to a minimum
Eurodollar interest rate of 3.50% plus 600 basis points, and a minimum alternate
base rate of 4.50% plus 500 basis points.
    
    If the Company refinances, replaces or extends the maturity of its
existing revolving line of credit with an interest rate spread which is more
than 50 basis points higher than the then-current senior term loan interest rate
spread, Alions interest rate spread will increase by the difference between the
higher revolving credit facility interest rate spread and 50 basis points.
    
    Alion must use any excess annual cash flow to prepay outstanding
senior term loans.
    
    It amended financial covenants to provide Alion flexibility through
September 30, 2009.
    
    It restricts the Companys ability to pay the CEO or COO for
previously awarded shares of phantom stock.
    
    It permits Alion to incur additional second lien debt, subject to
certain conditions.
  13




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ALION SCIENCE AND TECHNOLOGY CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
 
    
    In July 2009, the sixth amendment extended the Revolver maturity
date to September 25, 2009 and reduced the aggregate credit
commitments from $50 million to $40 million.
 
    
    In September 2009, the seventh amendment extended the Revolver
maturity date to October 9, 2009 and reduced from $40
million to $25 million.
 
    
    In October 2009, the ninth amendment extended the Revolver date to
September 30, 2010; added an uncommitted $25 million incremental revolving credit
facility; and modified certain negative covenants.
 
    
    Alion must pay in kind an additional 100 basis points in interest if the Company
fails to secure an additional $10 million in revolving credit commitments by
February 1, 2010.
    
    The Company must pay in kind a further 100 basis points in interest if its
Senior Secured Leverage Ratio exceeds 2.75 to 1.00 as of June 30, 2010.
    
    The interest rate increases by 50 basis points each quarter if the Company fail
to meet the required leverage ratio.
    
    If the Company fails to meet the June 2010 leverage ratio, the senior lenders may
appoint a designee to Alions board of directors.
    
    Alion is no longer required to maintain its S-corporation status.
    
    Alion may not make more than $8 million in capital expenditures from June 30,
2009 to September 30, 2010.
  
    
    a senior term loan in the approximate amount of $236.0 million;
 
    
    a $25.0 million senior revolving credit facility only $182 thousand of which was
allocated to letters of credit and deemed borrowed, but none of which was actually
drawn as of December 31, 2009; and
 
    
    a $110.0 million uncommitted incremental term loan accordion facility for which
loans may be permitted subject to satisfying the leverage-based incurrence test.
     Use of Proceeds
  14




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ALION SCIENCE AND TECHNOLOGY CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
  Security
 Interest and Fees.
 Senior Term Loan
 Revolver.
  Other Fees and Expenses.
  Financial Covenants and Waiver Agreement.
    15




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ALION SCIENCE AND TECHNOLOGY CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
  Senior Unsecured Notes
  Use of Proceeds .
 Security.
 Ranking .
 Interest and Fees.
 Optional Redemption.
  Covenants.
 Exchange Offer; Registration Rights.
 Interest Payable
  December 31,
    
    
    September 30,2009
    
    
    2009(In thousands)Senior Unsecured Notes
    
    $
    10,677
    
    
    $
    4,271Term B Senior Credit Agreement Note Payable
    
    
    3,950
    
    
    
    3,975Subordinated Note Payable
    
    
    793
    
    
    
    793Total
    
    $
    15,419
    
    
    $
    9,039
  16




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ALION SCIENCE AND TECHNOLOGY CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
 Subordinated Note
     2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    2014
    
    
    2015
    
    
    Total(In thousands)Senior Secured
Term B Loan(1)
    
    $
    1,825
    
    
    $
    2,433
    
    
    $
    2,433
    
    
    $
    229,297
    
    
    $
    
    
    
    $
    
    
    
    $
    235,988Senior Unsecured Notes(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250,000
    
    
    
    250,000Subordinated Seller
Note(3)
    
    
    3,000
    
    
    
    3,000
    
    
    
    2,000
    
    
    
    70,311
    
    
    
    
    
    
    
    
    
    
    
    78,311Total Principal Payments
    
    $
    4,825
    
    
    $
    5,433
    
    
    $
    4,433
    
    
    $
    299,608
    
    
    $
    
    
    
    $
    250,000
    
    
    $
    564,299
 1.
    
    The table does not include any Term B Senior Credit Agreement principal pre-payments.
The timing and amount of such payments is uncertain. The total on the face of the balance
sheet for the Term B senior term loan includes approximately $236.0 million in principal
and $6.6 million in unamortized debt issue costs as of December 31, 2009. Debt issue costs
for the original loan and subsequent modifications totaled $12.5 million through December
2009. The Company estimates it will need to refinance the Term B Senior Credit Agreement
before it matures.2.
    
    The Senior Unsecured Notes on the face of the balance sheet include $250 million in
principal and $4.5 million in unamortized debt issue costs as of December 31, 2009
(originally $7.1 million).3.
    
    The Subordinated Note on the face of the balance sheet includes approximately $9.6
million of unamortized original issue discount for the fair value of the detachable
warrants Alion issued in December 2002 and the warrants Alion
issued for the August 2008
amendment. The first set of Subordinated Note warrants had an initial fair value of
approximately $7.1 million The amendment to the first set of warrants had an initial fair
value of $1.3 million and the additional warrants had an initial fair value of
approximately $9.0 million. The Company recognized original issue discount for the fair
value of the warrants. The amounts presented do not reflect the anticipated effect of the
Companys agreement with IIT to retire the Subordinated Note and related Warrants for $25
million prior to April 2010.  17




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ALION SCIENCE AND TECHNOLOGY CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
 (10) Fair Value Measurement
 Fair Value Disclosures
     Assets
and Liabilities Measured at Fair Value on a Recurring Basis
  Level 1
    
    
    Level 2
    
    
    Level 3Liabilities: Redeemable common stock warrantsAs of
December 31, 2009
    
    $
    
    
    
    $
    
    
    
    $
    (32,557
    )As of September 30, 2009
    
    
    
    
    
    
    
    
    
    $
    (32,717
    )
  18




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ALION SCIENCE AND TECHNOLOGY CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
  Quarter EndedDecember 31, 2009 and 2008Redeemable
Common Stock WarrantsBalance, beginning of period
    
    $
    (32,717
    )
    
    $
    (39,996
    )Total realized and unrealized gains and (losses)Included in interest expense
    
    
    160
    
    
    
    1,454Issuances and settlements
    
    
    
    
    
    
    Balance, end of period
    
    $
    (32,557
    )
    
    $
    (38,542
    )
 Assets
and Liabilities Measured at Fair Value on a Nonrecurring Basis
  (11) Interest Rate Swap
  (12) Redeemable Common Stock Warrants
    Derivatives
  19




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ALION SCIENCE AND TECHNOLOGY CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
 (13) Leases
  Lease Payments for Fiscal Years Ending
    
    (In thousands)2010 (for the remainder of fiscal year)
    
    $
    21,2102011
    
    
    25,9842012
    
    
    22,1982013
    
    
    20,6342014
    
    
    14,2312015
    
    
    14,253And thereafter
    
    
    24,180Gross lease payments
    
    $
    142,690Less: non-cancelable subtenant receipts
    
    
    (2,529
    )Net lease payments
    
    $
    140,161
 Composition of Total Rent Expense
 December 31,2009
    
    
    2008(In thousands)Minimum rentals
    
    $
    5,956
    
    
    $
    6,183Less: Sublease rental income
    
    
    (467
    )
    
    
    (743
    )Total rent expense, net
    
    $
    5,489
    
    
    $
    5,440
 14) Long Term Incentive Compensation Plan
  (15) Stock Appreciation Rights (SAR)
    20




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##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
 Stock Compensation
 Stock-based Compensation Disclosure per ASC 718
Stock Appreciation Rights
As of December 31, 2009
 SharesGranted to
    
    
    Exercise
    
    
    Outstanding atDate of Grant
    
    Employees
    
    
    Price
    
    
    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
    
    
    
    1,000Total
    
    
    1,240,110
    
    
    
    
    
    
    
    876,999Weighted Average Exercise Price
    
    $
    35.95
    
    
    
    
    
    
    $
    37.07
  21




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##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
 Stock-based Compensation Disclosure per ASC 718
Stock Appreciation Rights
As of December 31, 2009
 Outstanding
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Vested at
    
    
    ExercisableDate of Grant
    
    at 12/31/09
    
    
    Forfeited
    
    
    Exercised
    
    
    Expired
    
    
    12/31/09
    
    
    at 12/31/09February 2005
    
    
    71,150
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    71,150
    
    
    
    March 2005
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,000
    
    
    
    April 2005
    
    
    18,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,000
    
    
    
    June 2005
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,000
    
    
    
    December 2005
    
    
    170,134
    
    
    
    412
    
    
    
    4,738
    
    
    
    
    
    
    
    170,134
    
    
    
    February 2006
    
    
    7,750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,813
    
    
    
    February 2006
    
    
    2,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,875
    
    
    
    May 2006
    
    
    6,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,500
    
    
    
    July 2006
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,500
    
    
    
    October 2006
    
    
    2,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,875
    
    
    
    December 2006
    
    
    165,250
    
    
    
    2,000
    
    
    
    4,250
    
    
    
    
    
    
    
    123,938
    
    
    
    February 2007
    
    
    21,200
    
    
    
    250
    
    
    
    250
    
    
    
    
    
    
    
    10,600
    
    
    
    May 2007
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    September 2007
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    December 2007
    
    
    182,890
    
    
    
    2,888
    
    
    
    1,962
    
    
    
    
    
    
    
    91,445
    
    
    
    April 2008
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500
    
    
    
    September 2008
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500
    
    
    
    December 2008
    
    
    183,475
    
    
    
    5,525
    
    
    
    875
    
    
    
    
    
    
    
    45,869
    
    
    
    April 2009
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    853,849
    
    
    
    11,075
    
    
    
    12,075
    
    
    
    
    
    
    
    559,698
    
    
    
    Weighted Average
Exercise Price
    
    $
    37.02
    
    
    $
    39.24
    
    
    $
    38.66
    
    
    $
    
    
    
    $
    35.78
    
    
    $
    
  22




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##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
 Stock-based Compensation Disclosures per ASC 718
Stock Appreciation Rights
As of December 31, 2009
 Risk Free Interest
    
    
    
    
    
    Expected
    
    Remaining LifeDate of Grant
    
    Rate
    
    Volatility
    
    
    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
    
    
    1.3February 2006
    
    4.20%  4.20%
    
    
    40
    %
    
    4 yrs
    
    
    1.8May 2006
    
    4.82%  4.83%
    
    
    35
    %
    
    4 yrs
    
    
    4.6July 2006
    
    4.82%  4.83%
    
    
    35
    %
    
    4 yrs
    
    
    6.0October 2006
    
    4.82%  4.83%
    
    
    35
    %
    
    4 yrs
    
    
    9.8December 2006
    
    4.54%  4.58%
    
    
    35
    %
    
    4 yrs
    
    
    11.7February 2007
    
    4.54%  4.58%
    
    
    35
    %
    
    4 yrs
    
    
    13.7May 2007
    
    4.54%  4.58%
    
    
    35
    %
    
    4 yrs
    
    
    16.6September 2007
    
    4.54%  4.54%
    
    
    35
    %
    
    4 yrs
    
    
    20.1December 2007
    
    4.23%  4.23%
    
    
    35
    %
    
    4 yrs
    
    
    23.7April 2008
    
    4.23%  4.23%
    
    
    35
    %
    
    4 yrs
    
    
    27.9September 2008
    
    4.23%  4.23%
    
    
    35
    %
    
    4 yrs
    
    
    32.5December 2008
    
    4.23%  4.23%
    
    
    35
    %
    
    4 yrs
    
    
    35.7April 2009
    
    4.23%  4.23%
    
    
    35
    %
    
    4 yrs
    
    
    39.4Weighted Average Remaining Life (months)
    
    
    
    
    
    
    
    
    
    
    15.8
 (16)
Phantom Stock Plans
     23




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##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
 Stock Compensation
 Stock-based Compensation Disclosure per ASC 718
Phantom Stock
as of December 31, 2009
 Shares Granted
    
    
    Shares Granted
    
    
    Total Shares
    
    
    Grant Date
    
    
    Outstanding atDate of Grant
    
    to Employees
    
    
    to Directors
    
    
    Granted
    
    
    Share Price
    
    
    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
Phantom Stock
as of December 31, 2009
 Outstanding at
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Vested at
    
    
    ExercisableDate of Grant
    
    12/31/09
    
    
    Forfeited
    
    
    Exercised
    
    
    Expired
    
    
    12/31/09
    
    
    at 12/31/09November 2006
    
    
    4,839
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,839
    
    
    
    4,839November 2007
    
    
    5,994
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,663
    
    
    
    3,663Total
    
    
    10,833
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,502
    
    
    
    8,502Weighted Average
Grant Date Fair Value
Price Per Share
    
    $
    40.48
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    40.60
    
    
    $
    40.60
 Stock-based Compensation Disclosures per ASC 718
Phantom Stock
as of December 31, 2009
 Risk Free Interest
    
    
    
    
    
    Expected
    
    Remaining LifeDate of Grant
    
    Rate
    
    Volatility
    
    
    Life
    
    (months)November 2006
    
    4.54%  4.58%
    
    
    35
    %
    
    3 yrs
    
    
    November 2007
    
    4.23%  4.23%
    
    
    35
    %
    
    3 yrs
    
    
    10.4Weighted Average
Remaining Life
    
    
    
    
    
    
    
    
    
    
    5.8
 (17) Segment Information and Customer Concentration
    24




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##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
 (18) Guarantor/Non-guarantor Condensed Consolidated Financial Information
   25




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##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
 Condensed Consolidating Balance Sheet Information at December 31, 2009
(In thousands)
 Non-Guarantor
    
    
    GuarantorParent
    
    
    Companies
    
    
    Companies
    
    
    Eliminations
    
    
    ConsolidatedCurrent assets:Cash and cash equivalents
    
    $
    93
    
    
    $
    (47
    )
    
    $
    (46
    )
    
    $
    
    
    
    $
    Accounts receivable
    
    
    178,569
    
    
    
    3,491
    
    
    
    3,084
    
    
    
    
    
    
    
    185,144Prepaid expenses and other current assets
    
    
    4,526
    
    
    
    67
    
    
    
    23
    
    
    
    
    
    
    
    4,616Total current assets
    
    
    183,188
    
    
    
    3,511
    
    
    
    3,061
    
    
    
    
    
    
    
    189,760Property, plant and equipment, net
    
    
    13,751
    
    
    
    77
    
    
    
    53
    
    
    
    
    
    
    
    13,881Intangible assets, net
    
    
    25,864
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,864Goodwill
    
    
    398,921
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    398,921Investment in subsidiaries
    
    
    18,863
    
    
    
    
    
    
    
    
    
    
    
    (18,863
    )
    
    
    Intercompany receivables
    
    
    774
    
    
    
    13,401
    
    
    
    3,193
    
    
    
    (17,368
    )
    
    
    Other assets
    
    
    10,604
    
    
    
    13
    
    
    
    3
    
    
    
    
    
    
    
    10,620Total assets
    
    $
    651,965
    
    
    $
    17,002
    
    
    $
    6,310
    
    
    $
    (36,321
    )
    
    $
    639,046Current liabilities:Book cash overdraft
    
    $
    5,074
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    5,074Interest payable
    
    
    15,419
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,419Current portion, senior term loan payable
    
    
    2,389
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,389Current portion, subordinated note payable
    
    
    6,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,000Trade accounts payable
    
    
    48,407
    
    
    
    277
    
    
    
    504
    
    
    
    
    
    
    
    49,188Accrued liabilities
    
    
    51,495
    
    
    
    1,072
    
    
    
    499
    
    
    
    
    
    
    
    53,066Accrued payroll and related liabilities
    
    
    33,753
    
    
    
    786
    
    
    
    475
    
    
    
    
    
    
    
    35,014Billings in excess of costs revenue earned
    
    
    3,438
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,438Total current liabilities
    
    
    165,975
    
    
    
    2,135
    
    
    
    1,478
    
    
    
    
    
    
    
    169,588Intercompany payables
    
    
    16,594
    
    
    
    
    
    
    
    774
    
    
    
    (17,368
    )
    
    
    Senior term loan payable, excluding current portion
    
    
    226,969
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    226,969Senior unsecured notes
    
    
    245,462
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    245,462Subordinated note payable
    
    
    45,715
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,715Accrued compensation, excluding current
portion
    
    
    6,058
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,058Accrued postretirement benefit obligations
    
    
    729
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    729Non-current portion of lease obligations
    
    
    7,530
    
    
    
    45
    
    
    
    19
    
    
    
    
    
    
    
    7,594Redeemable common stock warrants
    
    
    32,557
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,557Common stock of subsidiaries
    
    
    
    
    
    
    2,799
    
    
    
    1
    
    
    
    (2,800
    )Redeemable common stock
    
    
    187,112
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    187,112Accumulated other comprehensive loss
    
    
    (238
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (238
    )Accumulated surplus (deficit)
    
    
    (282,500
    )
    
    
    12,023
    
    
    
    4,040
    
    
    
    (16,063
    )
    
    
    (282,500
    )Total liabilities, redeemable
common stock and accumulated
deficit
    
    $
    651,963
    
    
    $
    17,002
    
    
    $
    6,312
    
    
    $
    (36,231
    )
    
    $
    639,046
  26




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##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
 Condensed Consolidating Balance Sheet
as of September 30, 2009
 Non-Guarantor
    
    
    GuarantorParent
    
    
    Companies
    
    
    Companies
    
    
    Eliminations
    
    
    ConsolidatedCurrent assets:Cash and cash equivalents
    
    $
    11,404
    
    
    $
    (143
    )
    
    $
    (76
    )
    
    $
    
    
    
    $
    11,185Accounts receivable, net
    
    
    174,456
    
    
    
    3,421
    
    
    
    2,280
    
    
    
    
    
    
    
    180,157Prepaid expenses and other
current assets
    
    
    3,659
    
    
    
    107
    
    
    
    29
    
    
    
    
    
    
    
    3,795Total current assets
    
    
    189,519
    
    
    
    3,385
    
    
    
    2,233
    
    
    
    
    
    
    
    195,137Property, plant and equipment, net
    
    
    14,346
    
    
    
    68
    
    
    
    60
    
    
    
    
    
    
    
    14,474Intangible assets, net
    
    
    28,680
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,680Goodwill
    
    
    398,921
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    398,921Investment in subsidiaries
    
    
    17,132
    
    
    
    
    
    
    
    
    
    
    
    (17,132
    )
    
    
    Intercompany receivables
    
    
    702
    
    
    
    12,534
    
    
    
    3,405
    
    
    
    (16,641
    )
    
    
    Other assets
    
    
    10,270
    
    
    
    13
    
    
    
    3
    
    
    
    
    
    
    
    10,286Total assets
    
    $
    659,570
    
    
    $
    16,000
    
    
    $
    5,701
    
    
    $
    (33,773
    )
    
    $
    647,498Current liabilities:Interest payable
    
    
    9,039
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    9,039Current portion, senior term loan
payable
    
    
    2,389
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,389Current portion, subordinated note
payable
    
    
    3,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,000Current portion, acquisition
obligations
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50Trade accounts payable
    
    
    59,742
    
    
    
    300
    
    
    
    665
    
    
    
    
    
    
    
    60,707Accrued liabilities
    
    
    43,984
    
    
    
    1,135
    
    
    
    306
    
    
    
    
    
    
    
    45,425Accrued payroll and related liabilities
    
    
    41,642
    
    
    
    832
    
    
    
    559
    
    
    
    
    
    
    
    43,033Billings in excess of revenue
earned
    
    
    3,661
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,661Total current liabilities
    
    
    163,507
    
    
    
    2,267
    
    
    
    1,530
    
    
    
    
    
    
    
    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
    
    
    
    51
    
    
    
    19
    
    
    
    
    
    
    
    7,286Redeemable common stock warrants
    
    
    32,717
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,717Common stock of subsidiaries
    
    
    
    
    
    
    2,799
    
    
    
    1
    
    
    
    (2,800
    )
    
    
    Redeemable common stock
    
    
    187,137
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    187,137Accumulated other comprehensive loss
    
    
    (238
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (238
    )Accumulated surplus (deficit)
    
    
    (274,559
    )
    
    
    10,883
    
    
    
    3,449
    
    
    
    (14,332
    )
    
    
    (274,559
    )Total liabilities, redeemable
common stock and accumulated
deficit
    
    $
    659,570
    
    
    $
    16,000
    
    
    $
    5,701
    
    
    $
    (33,773
    )
    
    $
    647,498
  27




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##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
 Condensed Consolidating Statement of Operations
for the Three Months Ended December 31, 2009
(In thousands)
 Non-Guarantor
    
    
    GuarantorParent
    
    
    Companies
    
    
    Companies
    
    
    Eliminations
    
    
    ConsolidatedContract revenue
    
    $
    197,275
    
    
    $
    5,087
    
    
    $
    3,377
    
    
    $
    
    
    
    $
    205,738Direct contract expense
    
    
    153,466
    
    
    
    2,998
    
    
    
    2,532
    
    
    
    
    
    
    
    158,996Gross profit
    
    
    43,808
    
    
    
    2,089
    
    
    
    845
    
    
    
    
    
    
    
    46,742Operating expenses:Indirect contract expense
    
    
    8,371
    
    
    
    780
    
    
    
    135
    
    
    
    
    
    
    
    9,286Research and development
    
    
    261
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    261General and administrative
    
    
    15,777
    
    
    
    162
    
    
    
    68
    
    
    
    
    
    
    
    16,007Rental and occupancy expense
    
    
    7,830
    
    
    
    76
    
    
    
    80
    
    
    
    
    
    
    
    7,986Depreciation and amortization
    
    
    4,219
    
    
    
    5
    
    
    
    7
    
    
    
    
    
    
    
    4,231Total operating expenses
    
    
    36,458
    
    
    
    1,023
    
    
    
    290
    
    
    
    
    
    
    
    37,771Operating income
    
    
    7,350
    
    
    
    1,066
    
    
    
    555
    
    
    
    
    
    
    
    8,971Other income (expense):Interest income
    
    
    45
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45Interest expense
    
    
    (16,886
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,886
    )Other
    
    
    (182
    )
    
    
    74
    
    
    
    (3
    )
    
    
    
    
    
    
    (111
    )Gain on sale of non-operating assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Equity in net income (loss) of
subsidiaries
    
    
    1,731
    
    
    
    
    
    
    
    
    
    
    
    (1,731
    )
    
    
    Total other income (expense)
    
    
    (15,292
    )
    
    
    74
    
    
    
    (3
    )
    
    
    (1,731
    )
    
    
    (16,952
    )Income (loss) before income
taxes
    
    
    (7,942
    )
    
    
    1,140
    
    
    
    552
    
    
    
    (1,731
    )
    
    
    (7,981
    )Income tax benefit
    
    
    
    
    
    
    
    
    
    
    40
    
    
    
    
    
    
    
    40Net income (loss)
    
    $
    (7,942
    )
    
    $
    1,140
    
    
    $
    592
    
    
    $
    (1,731
    )
    
    $
    (7,941
    )
  28




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##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
 Condensed Consolidating Statement of Operations
for the Three Months Ended December 31, 2008
(In thousands)
 Non-Guarantor
    
    
    GuarantorParent
    
    
    Companies
    
    
    Companies
    
    
    Eliminations
    
    
    ConsolidatedContract revenue
    
    $
    179,964
    
    
    $
    5,650
    
    
    $
    3,182
    
    
    $
    
    
    
    $
    188,796Direct contract expense
    
    
    138,720
    
    
    
    4,168
    
    
    
    2,434
    
    
    
    
    
    
    
    145,322Gross profit
    
    
    41,244
    
    
    
    1,482
    
    
    
    748
    
    
    
    
    
    
    
    43,474Operating expenses:Indirect contract expense
    
    
    8,154
    
    
    
    842
    
    
    
    128
    
    
    
    
    
    
    
    9,124Research and development
    
    
    69
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69General and administrative
    
    
    10,062
    
    
    
    111
    
    
    
    
    
    
    
    
    
    
    
    10,173Rental and occupancy expense
    
    
    7, 613
    
    
    
    64
    
    
    
    61
    
    
    
    
    
    
    
    7,738Depreciation and amortization
    
    
    4,794
    
    
    
    5
    
    
    
    7
    
    
    
    
    
    
    
    4,806Total operating expenses
    
    
    30,692
    
    
    
    1,022
    
    
    
    196
    
    
    
    
    
    
    
    31,910Operating income
    
    
    10,552
    
    
    
    460
    
    
    
    552
    
    
    
    
    
    
    
    11,564Other income (expense):Interest income
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23Interest expense
    
    
    (14,088
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,088
    )Other
    
    
    (94
    )
    
    
    61
    
    
    
    (2
    )
    
    
    
    
    
    
    (35
    )Equity in net income (loss) of
subsidiaries
    
    
    1,071
    
    
    
    
    
    
    
    
    
    
    
    (1,071
    )
    
    
    Income (loss) before income
Taxes
    
    
    (2,536
    )
    
    
    521
    
    
    
    550
    
    
    
    (1,071
    )
    
    
    (2,536
    )Income tax expense
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )Net income (loss)
    
    $
    (2,540
    )
    
    $
    521
    
    
    $
    550
    
    
    $
    (1,071
    )
    
    $
    (2,540
    )
  29




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##### Table of Contents



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




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##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
 Condensed Consolidating Statement of Cash Flows
for the Three Months Ended December 31, 2008
(In thousands)
 Non-Guarantor
    
    
    GuarantorParent
    
    
    Companies
    
    
    Companies
    
    
    ConsolidatedNet cash (used in) provided by operating activities
    
    $
    (5,288
    )
    
    $
    (39
    )
    
    $
    38
    
    
    $
    (5,289
    )Cash flows from investing activities:Cash paid for acquisitions
    
    
    (166
    )
    
    
    
    
    
    
    
    
    
    
    (166
    )Capital expenditures
    
    
    (431
    )
    
    
    24
    
    
    
    
    
    
    
    (407
    )Net cash (used in) provided by investing activities
    
    
    (597
    )
    
    
    24
    
    
    
    
    
    
    
    (573
    )Cash flows from financing activities:Net cash paid from interest rate swap
    
    
    (4,647
    )
    
    
    
    
    
    
    
    
    
    
    (4,647
    )Payment of senior term loan payable
    
    
    (608
    )
    
    
    
    
    
    
    
    
    
    
    (608
    )Payment of subordinated note payable
    
    
    (3,000
    )
    
    
    
    
    
    
    
    
    
    
    (3,000
    )Revolver borrowings
    
    
    97,600
    
    
    
    
    
    
    
    
    
    
    
    97,600Revolver payments
    
    
    (97,600
    )
    
    
    
    
    
    
    
    
    
    
    (97,600
    )Purchase of common stock from ESOP Trust
    
    
    (9
    )
    
    
    
    
    
    
    
    
    
    
    (9
    )Cash received from sale of common stock
to ESOP Trust
    
    
    2,669
    
    
    
    
    
    
    
    
    
    
    
    2,669Net cash used in financing activities
    
    
    (5,595
    )
    
    
    
    
    
    
    
    
    
    
    (5,595
    )Net increase (decrease) in cash and cash equivalents
    
    
    (11,480
    )
    
    
    (15
    )
    
    
    38
    
    
    
    (11,457
    )Cash and cash equivalents at beginning of period
    
    
    16,392
    
    
    
    (62
    )
    
    
    (43
    )
    
    
    16,287Cash and cash equivalents at end of period
    
    $
    4,912
    
    
    $
    (77
    )
    
    $
    (5
    )
    
    $
    4,830
 (19) Commitments and Contingencies
 Earn-Out and Hold-Back Commitments
  Legal Proceedings
  Government Audits
   31




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
   For the Three Months Ended December 31,Revenue by Contract Type
    
    2009
    
    
    2008(In thousands)Cost-reimbursement
    
    $
    150,500
    
    
    
    73.2
    %
    
    $
    134,164
    
    
    
    71.1
    %Fixed-price
    
    
    22,938
    
    
    
    11.1
    %
    
    
    18,752
    
    
    
    9.9
    %Time-and-material
    
    
    32,300
    
    
    
    15.7
    %
    
    
    35,879
    
    
    
    19.0
    %Total
    
    $
    205,738
    
    
    
    100.0
    %
    
    $
    188,796
    
    
    
    100.0
    %
  For the Three Months Ended December 31,Revenue by Customer Type
    
    2009
    
    
    2008(In thousands)U.S. Department of Defense (DoD)
    
    $
    189,560
    
    
    
    92.1
    %
    
    $
    171,921
    
    
    
    91.1
    %Other Federal Civilian Agencies
    
    
    10,092
    
    
    
    4.9
    %
    
    
    8,862
    
    
    
    4.7
    %Commercial / State / Local and International
    
    
    6,086
    
    
    
    3.0
    %
    
    
    8,012
    
    
    
    4.2
    %Total
    
    $
    205,738
    
    
    
    100.0
    %
    
    $
    188,796
    
    
    
    100.0
    %
    32




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##### Table of Contents



For the Three Months Ended December 31,Core Business Area
    
    2009
    
    
    2008(In thousands)Naval Architecture and Marine Engineering
    
    $
    89,718
    
    
    
    43.6
    %
    
    $
    84,467
    
    
    
    44.7
    %Defense Operations
    
    
    50,295
    
    
    
    24.4
    %
    
    
    50,465
    
    
    
    26.7
    %Modeling and Simulation
    
    
    35,559
    
    
    
    17.3
    %
    
    
    20,924
    
    
    
    11.1
    %Technology Integration
    
    
    12,463
    
    
    
    6.1
    %
    
    
    11,326
    
    
    
    6.0
    %Energy and Environmental Sciences
    
    
    9,731
    
    
    
    4.7
    %
    
    
    10,091
    
    
    
    5.3
    %Information Technology and Wireless
Communications
    
    
    7,972
    
    
    
    3.9
    %
    
    
    11,523
    
    
    
    6.1
    %Total
    
    $
    205,738
    
    
    
    100.0
    %
    
    $
    188,796
    
    
    
    100.0
    %
 Backlog .
  33




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##### Table of Contents



Results of Operations
 Quarter Ended December 31, 2009 Compared to Quarter Ended December 31, 2008
 Consolidated Operations of AlionQuarter Ended December 31,2009
    
    
    2008(Dollars in thousands)%
    
    
    
    
    
    
    %Selected Financial Information
    
    
    
    
    
    revenue
    
    
    
    
    
    
    revenueTotal contract revenue
    
    $
    205,738
    
    
    
    
    
    
    $
    188,796Total direct contract costs
    
    
    158,996
    
    
    
    77.3
    %
    
    
    145,322
    
    
    
    77.0
    %Direct labor costs
    
    
    67,127
    
    
    
    32.6
    %
    
    
    66,829
    
    
    
    35.4
    %Material and subcontract costs
    
    
    88,143
    
    
    
    42.8
    %
    
    
    72,464
    
    
    
    38.4
    %Other direct costs
    
    
    3,726
    
    
    
    1.8
    %
    
    
    6,029
    
    
    
    3.2
    %Gross profit
    
    
    46,742
    
    
    
    22.7
    %
    
    
    43,474
    
    
    
    23.0
    %Total operating expense
    
    
    37,771
    
    
    
    18.4
    %
    
    
    31,910
    
    
    
    16.9
    %Major components of operating expenseIndirect expenses including facilities costs
    
    
    17,272
    
    
    
    8.4
    %
    
    
    16,862
    
    
    
    8.9
    %General and administrative (excluding stock-
based compensation)
    
    
    16,005
    
    
    
    7.8
    %
    
    
    14,776
    
    
    
    7.8
    %Stock-based compensation
    
    
    2
    
    
    immaterial
    
    
    (4,603
    )
    
    
    (2.4
    )%Depreciation and amortization
    
    
    4,231
    
    
    
    2.1
    %
    
    
    4,806
    
    
    
    2.5
    %Income from operations
    
    $
    8,971
    
    
    
    4.4
    %
    
    $
    11,564
    
    
    
    6.1
    %
 Revenue.
    34




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##### Table of Contents



Direct Contract Expense and Gross Profit.
 Operating Expenses.
 Income from Operations.
 Other Expense.
  Quarter Ended December 31,2009
    
    
    2008(In thousands)Cash Pay InterestRevolver
    
    $
    3
    
    
    $
    132Senior term loan
    
    
    5,739
    
    
    
    5,793Senior
unsecured notes
    
    
    6,406
    
    
    
    6,406Subordinated
note
    
    
    793
    
    
    
    95Other cash pay interest and fees
    
    
    1,355
    
    
    
    98Sub-total cash pay interest
    
    
    14,296
    
    
    
    12,524Deferred and Non-cash InterestDebt issue costs and other non-cash items
    
    
    1,573
    
    
    
    1,272Subordinated
note interest
    
    
    1,177
    
    
    
    1,746Redeemable warrants
    
    
    (160
    )
    
    
    (1,454
    )Sub-total non-cash interest
    
    
    2,590
    
    
    
    1,564Total interest expense
    
    
    16,886
    
    
    $
    14,088
 Income Tax Expense.
  35




---



##### Table of Contents



Net Income (Loss)
 Liquidity and Capital Resources
  Cash Flows
        36




---



##### Table of Contents



Cash flow effects and risks associated with equity-related obligations
     Discussion of Debt Structure
  Term B Senior Credit Agreement
  
    
    a senior term loan in the approximate amount of $236.0 million;
 
    
    a $25.0 million senior revolving credit facility approximately $182 thousand of which
was allocated to letters of credit and deemed borrowed, but none of which was actually
drawn as of December 31, 2009; and
 
    
    a $110.0 million uncommitted incremental term loan accordion facility which the
Company may be able to access in the future subject to satisfying a leverage-based
incurrence test.
  
    
    In April 2005, the first amendment made certain changes and added $72.0 million in
senior term loans to the total Term B Senior Credit Agreement debt.
 
    
    In March 2006, the second amendment made certain changes, increased the senior term loan
commitment by $68.0 million (drawn in full) and increased the revolving credit commitment
from $30.0 million to $50.0 million.
 
    
    In June 2006, the third amendment made certain changes and added $50.0 million in senior
term loans to the total Term B Senior Credit Agreement debt.
 
    
    In January 2007, the fourth increment added $15.0 million in senior term loans to the
total Term B Senior Credit Agreement debt.
  37




---



##### Table of Contents




    
    In February 2007, the fourth amendment made certain changes, extended the senior term
loan maturity date to February 6, 2013, adjusted the principal repayment schedule to
require a balloon principal payment at maturity, and added an incurrence test as an
additional condition precedent to Alions ability to borrow additional funds.
 
    
    In July 2007, the fifth increment added $25.0 million in senior term loans to the Term B
Senior Credit Agreement.
 
    
    On September 30, 2008, the fifth amendment made certain changes.
 
    
    It increased the interest rate by 350 basis points to a minimum Eurodollar interest
rate of 3.50% plus 600 basis points, and a minimum alternate base rate of 4.50% plus
500 basis points.
 
    
    If the Company refinances, replaces or extends the maturity of its existing
revolving line of credit with an interest rate spread which is more than 50 basis
points higher than the then-current senior term loan interest rate spread, Alions
interest rate spread will increase by the difference between the higher revolving
credit facility interest rate spread and 50 basis points.
 
    
    Alion must use any excess annual cash flow to prepay outstanding senior term loans.
 
    
    It amended financial covenants to provide Alion flexibility through September 30,
2009.
 
    
    It restricts the Companys ability to pay the CEO or COO for previously awarded
 shares of phantom stock.
 
    
    It permits Alion to incur additional second lien debt, subject to certain
conditions.
 
    
    In July 2009, the sixth amendment extended the revolving credit facility maturity date to
September 25, 2009 and reduced the aggregate amount of the revolving credit commitments from
$50 million to $40 million.
 
    
    In September 2009, the seventh amendment extended the revolving credit facility maturity
date to October 9, 2009 and reduced revolving credit commitments from $40 million to $25
million.
 
    
    In October 2009, the ninth amendment extended the revolving credit maturity date to
September 30, 2010; added an uncommitted $25 million incremental revolving credit facility;
and modified certain negative covenants.
 
    
    Alion must pay in kind an additional 100 basis points in interest if the Company fails
to secure an additional $10 million in revolving credit commitments by February 1, 2010.
 
    
    The Company must pay in kind a further 100 basis points in interest if its Senior
Secured Leverage Ratio exceeds 2.75 to 1.00 as of June 30, 2010.
 
    
    The interest rate increases by 50 basis points each quarter if the Company fail to meet
the required leverage ratio.
 
    
    If the Company fails to meet the June 2010 leverage ratio, the senior lenders may
appoint a designee to Alions board of directors.
 
    
    Alion is no longer required maintain its S-corporation status.
 
    
    Alion may not make more than $8 million in capital expenditures from June 30, 2009 to
September 30, 2010.
     38




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##### Table of Contents



Use
of Proceeds.
  Security.
 Interest and Fees.
 Interest Rate Swap.
 Other Fees and Expenses.
  39




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##### Table of Contents



Financial Covenants and Waiver Agreement.
      Period
    
    RatioJuly 1, 2009 through June 30, 2010
    
    4.00 to 1.00July 1, 2010 through December 31, 2010
    
    3.75 to 1.00Thereafter
    
    3.00 to 1.00
   40




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##### Table of Contents



Period
    
    RatioJuly 1, 2009 through March 31, 2010
    
    1.10 to 1.00April 1, 2010 through June 30, 2010
    
    1.15 to 1.00July 1, 2010 through December 31, 2010
    
    1.25 to 1.00Thereafter
    
    1.35 to 1.00
  Twelve Months EndedDecember 31,2009
    
    
    2008Senior Secured Leverage Ratio
    
    
    3.86
    
    
    
    4.49Interest Coverage Ratio
    
    
    1.16
    
    
    
    1.09
  
    
    incur additional indebtedness other than permitted additional indebtedness after
satisfying a senior secured leverage-based incurrence test;
 
    
    consolidate, merge or sell all or substantially all of the Companys assets;
 
    
    make certain loans and investments including acquisitions of businesses, other than
permitted acquisitions;
 
    
    pay dividends or distributions other than distributions needed for the ESOP to satisfy
its repurchase obligations and certain payments required under the Companys equity based
incentive plans;
 
    
    enter into certain transactions with the Companys shareholders and affiliates;
 
    
    enter into certain transactions not permitted under ERISA;
 
    
    grant certain liens and security interests;
 
    
    enter into sale and leaseback transactions;
 
    
    change lines of business;
 
    
    repay subordinated indebtedness before it is due and redeem or repurchase certain
equity;
 
    
    pay certain earn-outs in connection with permitted acquisitions;
 
    
    spend more than $8 million on capital expenditures from June 30, 2009 to September 30,
2010;
 
    
    make payments to directors, officers, and employees of the Company or its subsidiaries
in connection with warrants, stock appreciation rights, phantom stock plans or similar
incentives or equity-based incentives in excess of $20 million in the aggregate; or
 
    
    use the proceeds of the Companys borrowings other than as permitted by the Term B
Senior Credit Agreement.
 Events of Default.
 
    
    payment default;
 
    
    breach of representations and warranties;
 
    
    uncured covenant breaches;
 
    
    default under certain other debt exceeding an agreed amount;
 
    
    bankruptcy and insolvency events;
 
    
    notice of debarment, suspension or termination under a material government contract;
 
    
    certain ERISA violations;
  41




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##### Table of Contents




    
    unstayed judgments in excess of an agreed amount;
 
    
    failure of the subordinated note to remain subordinated to the Term B Senior Credit
Agreement;
 
    
    failure of any guarantee of the Term B Senior Credit Agreement to be in effect;
 
    
    failure of the security interests to be valid, perfected first priority security
interests in the collateral;
 
    
    imposition on the ESOP Trust of certain taxes in excess of an agreed amount;
 
    
    final determination the ESOP is not a qualified plan;
 
    
    incurrence of a civil or criminal liability in excess of $5 million of the Company or
any subsidiary arising from a government investigation;
 
    
    actual termination of a material contract due to alleged fraud, willful misconduct,
negligence, default or any other wrongdoing; or
 
    
    change of control (as defined below).
  Subordinated Note  Redeemable Common Stock Warrants
       42




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##### Table of Contents



Senior Unsecured Notes
  Interest and Fees.
 Covenants.
  
    
    Indebtedness incurred pursuant to the Senior Credit Facility and certain other contracts
up to $360 million less principal repayments made under that indebtedness
 
    
    Permitted inter-company indebtedness
 
    
    The Companys 10.25% notes
 
    
    Indebtedness pre-existing the issuance of the Companys 10.25% notes
 
    
    Permitted Indebtedness of acquired subsidiaries
 
    
    Permitted refinancing Indebtedness
 
    
    Indebtedness under hedging agreements
 
    
    Performance, bid, appeal and surety bonds and completion guarantees
 
    
    Ordinary course insufficient funds coverage
 
    
    Guarantees in connection with permitted refinancing indebtedness
 
    
    Indebtedness of non-U.S. subsidiaries incurred for working capital purposes
 
    
    Indebtedness incurred for capital expenditure purposes and indebtedness for capital and
synthetic leases not exceeding in the aggregate $25 million and 2.5% of the Companys Total
Assets as defined in the Indenture
  43




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##### Table of Contents




    
    Permitted subordinated indebtedness of the Company or any Restricted Subsidiary incurred
to finance a permitted acquisition, certain permitted transactions involving the ESOP and
refinancing indebtedness of acquired non-U.S. subsidiaries in an amount not exceeding in
the aggregate $35 million
 
    
    Reimbursement obligations with regard to letters of credit
 
    
    Certain agreements in connection with the acquisition of a business as long as the
liabilities incurred in connection therewith are not reflected on the Companys balance
sheet
 
    
    Certain deferred compensation agreements
 
    
    Certain other indebtedness not exceeding $35 million.
  
    
    Restricted Payments out of substantially concurrent contributions of equity to the
Company and substantially concurrent incurrences of permitted indebtedness
 
    
    Certain limited and permitted dividends
 
    
    Certain repurchases of the Companys equity securities deemed to occur upon exercise of
stock options or warrants
 
    
    Cash payments in lieu of the issuance of fractional shares in connection with the
exercise of warrants, options or other securities convertible into or exchangeable for the
Companys equity securities
 
    
    The required premium payable on the Senior Unsecured Notes in connection with a change
of control of the Company
 
    
    Certain permitted inter-company subordinated obligations
 
    
    Certain repurchases and redemptions of subordination obligations of the Company or a
Subsidiary Guarantor from Net Available Cash (as defined in the Indenture)
 
    
    Repurchases of subordinated obligations in connection with an asset sale to the extent
required by the Indenture
 
    
    The redemption or repurchase for value of any Company equity securities for former
Company employees who were also former Joint Spectrum Center employees after voluntary or
involuntary termination of employment with the Company
 
    
    Certain permitted transactions with the ESOP not exceeding $25 million in the aggregate
 
    
    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;
 
    
    a judgment for payment in excess of $30 million entered against the Company or any
material subsidiary that remains outstanding for a period of 60 days and is not discharged,
waived or stayed; and
 
    
    failure of any guarantee of the Senior Unsecured Notes to be in effect or the denial or
disaffirmation by any subsidiary guarantor of its guaranty obligations.
  44




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##### Table of Contents



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 the date the Senior Unsecured
Notes were issued, cease for any reason to constitute a majority of the Companys board of
directors;
 
    
    the adoption of a plan relating to Alions liquidation or dissolution; and
 
    
    subject to certain exceptions, the merger or consolidation of the Company with or into
another person or the merger of another person with or into the Company, or the sale of all
or substantially all the assets of Alion to another person.
 Optional Redemption
   Period
    
    Redemption Price2011
    
    
    105.125
    %2012
    
    
    102.563
    %2013 and thereafter
    
    
    100.000
    %
  6-Fiscal Years ($ In thousands)2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    2014
    
    
    2015Bank revolving credit facility- Interest(1)
    
    $
    914
    
    
    $
    1,039
    
    
    $
    859
    
    
    $
    692
    
    
    $
    731
    
    
    $
    439Senior Term Loan- Interest(2)
    
    
    16,957
    
    
    
    22,466
    
    
    
    22,293
    
    
    
    7,851
    
    
    
    
    
    
    
    - Principal(3)
    
    
    1,825
    
    
    
    2,433
    
    
    
    2,433
    
    
    
    229,297
    
    
    
    
    
    
    
    Senior Unsecured Notes- Interest
    
    
    25,625
    
    
    
    25,625
    
    
    
    25,625
    
    
    
    25,625
    
    
    
    25,625
    
    
    
    12,813- Principal
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250,000Subordinated Note(4)- Interest
    
    
    3,223
    
    
    
    3,369
    
    
    
    3,594
    
    
    
    3,332
    
    
    
    
    
    
    
    - Principal
    
    
    3,000
    
    
    
    3,000
    
    
    
    2,000
    
    
    
    70,311
    
    
    
    
    
    
    
    Total cash  pay interest
    
    
    46,719
    
    
    
    52,499
    
    
    
    53,371
    
    
    
    37,500
    
    
    
    26,356
    
    
    
    13,252Total cash  pay principal
    
    
    4,825
    
    
    
    5,433
    
    
    
    4,433
    
    
    
    299,608
    
    
    
    
    
    
    
    250,000Total
    
    $
    51,544
    
    
    $
    57,932
    
    
    $
    56,804
    
    
    $
    337,108
    
    
    $
    26,356
    
    
    $
    263,252
 (1)
    
    Alion anticipates it will regularly utilize a $25.0 million revolving credit facility to meet
working capital needs. The present revolving credit facility matures
in September 2010. The
Company expects to replace it with a similar facility at least through 2015. Alion estimates
the average utilized revolver balance will be $12.0 million for fiscal year 2010; $10.0
million for fiscal year 2011, $8.0 million for 2012, $6.0 for fiscal years 2013 and 2014, $3
million for fiscal year 2015 and minimal thereafter. Interest expense includes estimated fees
for the unused balance of a $25.0 million revolving credit facility. The Company estimates
the effective average cash-pay interest rate, excluding fees for the unused balance on the
revolver, will be 9.5% for all periods presented. Alion expects it will be able to meet
existing Term B Senior Credit Agreement financial covenants for the next 12 months.
Therefore, the Company believes it will continue to have access to its $25.0 million revolving
credit facility.  45




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##### Table of Contents



(2)
    
    Alion forecasts the average annual Term B Senior Credit Agreement senior term loan balance
will be: $235.7 million, $233.3 million, $230.8 million, and $81.0 million for fiscal years
2010 through 2013. The senior term loan matures February 2013. The Company expects it will need
to refinance the Term B senior term loan before it matures and forecasts interest expense to
continue at levels similar to prior years based on a forecast LIBOR rate plus the Credit
Suisse Eurodollar spread. If Alion does not meet certain financial covenants by February
2010, interest on the Term B Senior Credit Agreement will increase beyond this rate by 100
basis points retroactive to the beginning of fiscal 2010. If Alion does not meet certain
additional financial covenants by June 2010, interest will increase by an additional 100 basis
points retroactive to the beginning of fiscal 2010. Each quarter that Alion continues not to
meet the June 2010 financial covenants, interest will increase by a further 25 basis points.
Alion estimates the effective annual interest rates for the fiscal years 2010 through 2013
will be approximately 9.6%, 9.6%, 9.8%, and 10.1%. Interest expense includes estimated senior
term loan commitment fees. Alion expects it will be able to meet existing Term B Senior Credit
Agreement financial covenants for the next 12 months and that the senior term loan principal
will not be callable prior to maturity.(3)
    
    The Term B Senior Credit Agreement requires Alion to repay approximately 1.0 percent of the
principal balance outstanding under the senior term loan annually. On a cumulative basis,
Alion will pay approximately 4.3% of the principal through the first quarter of fiscal year
2013. The remaining principal balance is due on February 6, 2013, the senior term loan
maturity date. The table reflects the balance drawn of $236.0 million as of December 31, 2009,
payments of approximately $1.8 million for the balance of fiscal 2010 and $2.4 million in
fiscal years 2011 and 2012, approximately $0.6 million payable the first quarter of fiscal
2013, and payment of the remaining principal (balance of $228.7 million) on February 2013. If
Alion generates certain excess cash flow in a given fiscal year, issues or incurs certain debt
or sells certain assets, the Term B Senior Credit Agreement requires the Company to prepay a
portion of the principal. As of September 30, 2009, no mandatory prepayments are due.(4)
    
    The Term B Senior Credit Agreement prohibits Alion from making cash payments for principal or
interest on the Subordinated Note. The Company and IIT modified the Subordinated Note to
defer cash interest payments due January 2010 to April 2010. Failure to timely pay
Subordinated Note principal is not an event of default; failure to pay Subordinated Note
interest is an event of default that can accelerate repayment of the Term B Senior Credit
Agreement. The Company expects to be able to either retire the Subordinated Note prior to
April 2010 or amend it to defer cash interest payments until after the Term B Senior Credit
Agreement expires. Contingent Obligations
 Earn-outs
  Other Contingent obligations which will impact the Companys cash flow
  
    
    IITs Subordinated Note warrant put rights;
 
    
    Stock-based and long-term incentive compensation plan obligations; and
 
    
    ESOP share repurchase and diversification obligations.
   46




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##### Table of Contents



Number of Shares
    
    
    
    
    
    
    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
    
    
    
    26Total
    
    
    245,864
    
    
    
    
    
    
    $
    9,200
     Recently Issued Accounting Pronouncements
 Revenue Recognition  Multiple Deliverable Revenue
Arrangements Revenue Recognition
 Certain Revenue Arrangements That Include Software
Elements Software  Revenue
Recognition
  47




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##### Table of Contents



Forward Looking Statements
   
    
    changes to the ERISA laws related to the KSOP;
 
    
    changes to Alions subchapter S status, or any change in Alions effective tax rate;
 
    
    additional costs to comply with the Sarbanes-Oxley Act of 2002, including any 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 out of Alions operations and attendant risks of fines, liabilities,
penalties, suspension and/or debarment;
 
    
    undertaking acquisitions that increase costs or liabilities or are disruptive;
 
    
    taking on additional debt to fund acquisitions;
 
    
    failing to adequately integrate acquired businesses;
 
    
    material changes in laws or regulations affecting Alions businesses;
 
    
    other risk factors discussed in the Companys annual report on Form 10-K for the year
ended September 30, 2009 filed with the SEC on December 24, 2009.
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Interest rate risk
    48




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##### Table of Contents



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
   49




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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. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
   50




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##### Table of Contents



Item 6. Exhibits
 ExhibitNo.
    
    Description10.62
    
    Amendment No. 9 to the Term B Senior Credit Agreement. (1)10.63
    
    Waiver dated as of December 14, 2009, by and among the Company, HFA, METI,
CATI, JJMA, BMH, WCI, MA&D, WCGS, CS and the lenders party thereto, related
to the Term B Senior Credit Agreement. (2)10.64
    
    Note and Warrant Redemption Agreement, Fourth Amendment to Seller Note
Securities Purchase Agreement, First Amendment to the Second Amended and
Restated Seller Note and Rights Agreement Termination Agreement, dated as of
December 18, 2009 between Alion Science and Technology Corporation and
Illinois Institute of Technology. (3)31.1
    
    Certification of Chief Executive Officer of Alion Science and Technology
Corporation pursuant to Rule 15d-14(a) promulgated under the Securities
Exchange Act of 1934, as amended.31.2
    
    Certification of Chief Financial Officer of Alion Science and Technology
Corporation pursuant to 15d-14(a) promulgated under the Securities Exchange
Act of 1934, as amended.32.1
    
    Certification of Chief Executive Officer of Alion Science and Technology
Corporation, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer of Alion Science and Technology
Corporation, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
  (1)
    
    Incorporated by reference from the Companys Form 8-K filed with the SEC on October 13, 2009.  (2)
    
    Incorporated by reference from the Companys Form 8-K filed with the SEC on December 16, 2009.  (3)
    
    Incorporated by reference from the Companys Form 8-K filed with the SEC on December 24, 2009.  51




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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 Officer   52