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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2003.

COMMISSION FILE NUMBER 333–89756

(ALION SCIENCE AND TECHNOLOGY LOGO)

ALION SCIENCE AND TECHNOLOGY CORPORATION

(Exact Name of Registrant as Specified in Its Charter)
     
DELAWARE   54-2061691
(State or Other Jurisdiction of
Incorporation of Organization) 		  (I.R.S. Employer
Identification No.)
 
10 West 35th Street
Chicago, IL 60616
(312) 567-4000		   1750 Tysons Boulevard, Suite 1300
McLean, VA 22102
(703) 918-4480
(Address, including Zip Code and Telephone Number with
Area Code, of Principal Executive Offices)
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by

Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.

[X] Yes     [ ] No

Indicate by check mark whether the registrant is an

accelerated filer (as defined in Rule 12b–2 of the Exchange Act).

Yes [ ]     No [X]

The number of shares outstanding of Alion Science and Technology Corporation

common stock as of December 31, 2003, was:
Common Stock 2,923,782

 

ALION SCIENCE AND TECHNOLOGY CORPORATION

FORM 10-Q INDEX
FOR QUARTER ENDED DECEMBER 31, 2003
             
PART I — FINANCIAL INFORMATION     1  
 
Item 1.
  Financial Statements     1  
    Consolidated Balance Sheets     1  
    Consolidated Statements of Operations     2  
    Consolidated Statement of Operations and Pro Forma Consolidated Statement of Operations     3  
    Consolidated Statements of Cash Flows     4  
    Notes to Consolidated Financial Statements     5  
 
Item 2.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     12  
 
Item 3.
  Quantitative and Qualitative Disclosures About Market Risk     23  
 
Item 4.
  Controls and Procedures     23  
PART II — OTHER INFORMATION     24  
 
Item 1.
  Legal Proceedings     24  
 
Item 2.
  Changes in Securities and Use of Proceeds     25  
 
Item 3.
  Defaults Upon Senior Securities     25  
 
Item 4.
  Submission of Matters to a Vote of Security Holders     25  
 
Item 5.
  Other Information     25  
 
Item 6.
  Exhibits and Reports on Form 8-K     26  

 

PART I — FINANCIAL INFORMATION

 
ITEM 1: FINANCIAL STATEMENTS

ALION SCIENCE AND TECHNOLOGY CORPORATION

Consolidated Balance Sheets

As of December 31, 2003 (Unaudited) and September 30, 2003

(In thousands, except share information)
                     
December 31, September 30,
2003 2003
Assets
                
Current assets:
               
 
Cash
  $ 606     $ 494  
 
Restricted cash
    —       5  
 
Accounts receivable, less allowance of $2,552 at December 31, 2003 and $2,484 at September 30, 2003
    46,282       42,777  
 
Stock subscriptions receivable
    —       1,246  
 
Prepaid expense
    1,902       974  
 
Other current assets
    2,942       2,155  
     
     
 
   
Total current assets
    51,732       47,651  
Fixed assets, net
    8,785       8,696  
Intangible assets, net
    20,256       22,788  
Goodwill
    74,893       65,522  
Other
    97       97  
     
     
 
   
Total assets
  $ 155,763     $ 144,754  
     
     
 
Liabilities and Shareholder’s Equity
                
Current liabilities:
               
 
Note payable to bank
  $ 8,300     $ —  
 
Current portion of senior note payable
    5,000       5,000  
 
Acquisition obligations
    8,584       —  
 
Trade accounts payable and accrued liabilities
    15,260       9,661  
 
Accrued payroll and related liabilities
    11,065       15,385  
 
Advance payments
    —       5  
 
ESOP liabilities
    1,181       320  
 
Billings in excess of costs and estimated earnings on uncompleted contracts
    475       409  
     
     
 
   
Total current liabilities
    49,865       30,780  
Long-term debt
    466       2,928  
Senior note payable, excluding current portion
    21,759       22,903  
Mezzanine note payable
    17,112       17,636  
Subordinated note payable
    33,619       33,437  
Agreement with officer
    748       743  
Accrued postretirement benefit obligation
    3,364       3,319  
Deferred rent
    501       346  
Redeemable common stock warrants
    15,454       14,762  
     
     
 
   
Total liabilities
    142,888       126,854  
Shareholder’s equity, subject to redemption:
               
 
Common stock (subject to redemption), $0.01 par value, 15,000,000 shares authorized, 2,973,813 shares and 2,973,813 shares issued, 2,923,782 and 2,973,813 shares outstanding, at December 31, 2003 and September 30, 2003 respectively
    29       29  
 
Additional paid-in capital
    30,579       30,578  
 
Treasury stock, at cost (50,031 shares)
    (736 )     —  
 
Accumulated deficit
    (16,997 )     (12,707 )
     
     
 
   
Total shareholder’s equity, subject to redemption
    12,875       17,900  
     
     
 
 
Total liabilities and shareholder’s equity, subject to redemption
  $ 155,763     $ 144,754  
     
     
 

See accompanying notes to consolidated financial statements.

1

 

ALION SCIENCE AND TECHNOLOGY CORPORATION

Consolidated Statements of Operations
Quarter Ended December 31, 2003
and Interim Period Ended December 20, 2002
(In thousands, except share information)
(Unaudited)
                     
Quarter Interim Period
Ended Ended
December 31, December 20,
2003 2002
Contract revenue
  $ 58,591     $ —  
Direct contract expense
    42,113       —  
     
     
 
   
Gross profit
    16,478       —  
     
     
 
Operating expenses:
               
 
Indirect contract expense
    3,989       —  
 
Research and development
    74       —  
 
General and administrative
    7,385       41  
 
Rental and occupancy expense
    2,513       —  
 
Depreciation and amortization
    3,104       —  
 
Bad debt expense
    42       —  
     
     
 
Total operating expenses
    17,107       41  
     
     
 
   
Operating income (loss)
    (629 )     41  
Other income (expense):
               
 
Interest income
    2       —  
 
Interest expense
    (3,236 )     —  
 
Other
    (429 )     —  
     
     
 
   
Income (loss) before income taxes
    (4,292 )     41  
 
Income tax expense
    —       —  
     
     
 
   
Net income (loss)
  $ (4,292 )   $ 41  
     
     
 
Basic and diluted loss per share
  $ (1.45 )        
     
         
Basic and diluted weighted average common shares outstanding
    2,966,743          

See accompanying notes to consolidated financial statements.

2

 

ALION SCIENCE AND TECHNOLOGY CORPORATION

Consolidated Statement of Operations
Quarter Ended December 31, 2003
Pro Forma Consolidated Statement of Operations (See Note 11)
Interim Period Ended December 20, 2002
(In thousands, except share information)
(Unaudited)
                     
Pro Forma
Quarter Interim Period
Ended Ended
December 31, December 20,
2003 2002
Contract revenue
  $ 58,591     $ 47,265  
Direct contract expenses
    42,113       34,655  
     
     
 
   
Gross profit
    16,478       12,610  
     
     
 
Operating expenses:
               
 
Indirect contract expense
    3,989       2,568  
 
Research and development
    74       36  
 
General and administrative
    7,385       5,313  
 
Non-recurring transaction costs
    —       5,448  
 
Rental and occupancy expense
    2,513       2,201  
 
Depreciation and amortization
    3,104       2,883  
 
Bad debt expense
    42       120  
     
     
 
Total operating expenses
    17,107       18,569  
     
     
 
   
Operating loss
    (629 )     (5,958 )
Other income (expense):
               
 
Interest income
    2       22  
 
Interest expense
    (3,236 )     (2,252 )
 
Other
    (429 )     (23 )
     
     
 
   
Loss before income taxes
    (4,292 )     (8,211 )
 
Income tax expense
    —       (27 )
     
     
 
   
Net loss
  $ (4,292 )   $ (8,238 )
     
     
 
Basic and diluted loss per share
  $ (1.45 )        
     
         
Basic and diluted weighted average common shares outstanding
    2,966,743          
Proforma basic and diluted loss per share
          $ (3.20 )
             
 
Proforma basic and diluted weighted average common shares outstanding
            2,575,508  

See accompanying notes to consolidated financial statements.

3

 

ALION SCIENCE AND TECHNOLOGY CORPORATION

Consolidated Statements of Cash Flows
Quarter Ended December 31, 2003
and Interim Period Ended December 20, 2002
(In thousands, except share information)
(Unaudited)
                   
Quarter Interim Period
Ended Ended
December 31, December 20,
2003 2002
Cash flows from operating activities:
               
 
Net loss
  $ (4,292 )   $ (41 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
 
Depreciation and amortization
    3,105       —  
 
Accretion of debt to face value
    413       —  
 
Amortization of debt issuance costs
    106       —  
 
Change in fair value of redeemable common stock warrants
    693       —  
Changes in assets and liabilities, net of effect of acquisition:
               
 
Accounts receivable, net
    (1,644 )     —  
 
Other assets
    (185 )     —  
 
Trade accounts payable and accruals
    976       36  
 
Other liabilities
    199       —  
     
     
 
Net cash used in operating activities
    (629 )     (5 )
Cash flows from investing activities:
               
 
Cash paid for acquisition, net of cash acquired
    (3,703 )     (58,571 )
 
Capital expenditures
    (641 )     —  
 
Purchase of non-marketable securities
    (1,333 )     —  
     
     
 
Net cash used in investing activities
    (5,677 )     (58,571 )
Cash flows from financing activities:
               
 
Proceeds from senior note payable
    —       35,000  
 
Payment of debt issuance costs
    —       (1,700 )
 
Repayment of senior note payable
    (1,250 )     —  
 
Repayment of mezzanine note payable
    (750 )     —  
 
Repayment of ITSC revolving credit agreement
    (375 )     —  
 
Repayments under IITRI revolving credit agreement
    —       (6,188 )
 
Borrowings under revolving credit facility
    8,300       7,000  
 
Repayment of note payable to bank
    —       (10 )
 
Cash paid for Daedalic acquisition earnout
    (18 )     —  
 
Purchase of 50,031 shares from ESOP Trust
    (736 )     —  
 
Payment of stock subscription for common stock issued to ESOP Trust
    1,247       25,458  
     
     
 
Net cash provided by financing activities
    6,418       59,560  
     
     
 
Net increase in cash
    112       984  
Cash at beginning of period
    494       5  
     
     
 
Cash at end of period
  $ 606     $ 989  
     
     
 
Supplemental disclosure of cash flow information:
               
 
Cash paid for interest
  $ 1,151     $ —  
Non-cash investing and financing activities:
               
 
Mezzanine note and warrants issued in connection with acquisition of selected operations of IITRI
    —       20,343  
 
Subordinated note and warrants issued in connection with acquisition of selected operations of IITRI
    —       39,900  
 
Issuance of 29,637 shares of common stock to ESOP Trust for amount due to ESOP Trust
    —       296  
 
Deferred compensation arrangement with officer
    —       857  

See accompanying notes to consolidated financial statements.

4

 

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Quarter Ended December 31, 2003 and Interim Period Ended December 20, 2002 (unaudited)

 
1. Description and Formation of the Business

      Alion Science and Technology Corporation (Alion or the Company) provides scientific and engineering expertise to research and develop technological solutions for problems relating to national defense, public health and safety. The Company provides these research services primarily to agencies of the federal government and, to a lesser extent, to commercial and international customers.

      Alion, a for-profit S Corporation, was formed in October 2001 for the purpose of purchasing substantially all of the assets and certain of the liabilities of IIT Research Institute (IITRI), a not-for-profit membership corporation affiliated with and controlled by the Illinois Institute of Technology. Prior to the acquisition of substantially all of the assets and liabilities of IITRI (the Transaction), the Company’s activities had been organizational in nature.

      On December 20, 2002, Alion acquired substantially all of the assets and liabilities of IITRI (Business), excluding the assets and liabilities of IITRI’s Life Sciences Operation, for aggregate total proceeds of $127.3 million consisting of (in thousands):

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

      The acquisition was accounted for using the purchase method. The purchase price has been allocated to the acquired assets and assumed liabilities based on their estimated fair values at the date of acquisition. As a result of the Transaction, the Company recorded goodwill of approximately $63.6 million, which is subject to an annual impairment review, as discussed below. In addition, the Company recorded intangible assets of approximately $30.6 million, comprised of purchased contracts. The intangible assets have an estimated useful life of three years and are amortized using the straight-line method.

5

 

      The total purchase consideration of approximately $127.3 million was allocated to the fair value of the net assets acquired as follows (in thousands):

         
Cash and restricted cash