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

Alion Science and Technology Corporation

(Exact Name of Registrant as Specified in Its Charter)

DELAWARE (State or Other Jurisdiction of Incorporation of Organization)		54-2061691 (I.R.S. Employer Identification No.)

(Address, including Zip Code and Telephone Number with
Area Code, of Principal Executive Offices)

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. o Yes þ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer o		Accelerated Filer o		Non-Accelerated Filer þ		Smaller Reporting Company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares outstanding of Alion Science and Technology Corporation

Common Stock as of January 26, 2009, was: Common Stock 5,423,529

 

 

ALION SCIENCE AND TECHNOLOGY CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2009

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)			3
Condensed Consolidated Balance Sheets (unaudited)			3
Condensed Consolidated Statements of Operations (unaudited)			4
Condensed Consolidated Statements of Cash Flows (unaudited)			5
Notes to Condensed Consolidated Financial Statements (unaudited)			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			32
Item 3. Quantitative and Qualitative Disclosures About Market Risk			48
Item 4. Controls and Procedures			49
Item 4T. Controls and Procedures			49
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			50
Item 1A. Risk Factors			50
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			50
Item 3. Defaults Upon Senior Securities			50
Item 4. Submission of Matters to a Vote of Security Holders			50
Item 5. Other Information			50
Item 6. Exhibits			51
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

ALION SCIENCE AND TECHNOLOGY CORPORATION

		December 31,				September 30,
		2009				2009
		(In thousands, except share
		and per share information)
Current assets:
Cash and cash equivalents		$	—			$	11,185
Accounts receivable, net			185,144				180,157
Prepaid expenses and other current assets			4,616				3,795
Total current assets			189,760				195,137
Property, plant and equipment, net			13,881				14,474
Intangible assets, net			25,864				28,680
Goodwill			398,921				398,921
Other assets			10,620				10,286
Total assets		$	639,046			$	647,498
Current liabilities:
Book cash overdraft		$	5,074			$	—
Interest payable			15,419				9,039
Current portion, senior term loan payable			2,389				2,389
Current portion of subordinated note payable			6,000				3,000
Current portion, acquisition obligations			—				50
Trade accounts payable			49,188				60,707
Accrued liabilities			53,066				45,425
Accrued payroll and related liabilities			35,014				43,033
Billings in excess of revenue earned			3,438				3,661
Total current liabilities			169,588				167,304
Senior term loan payable, excluding current portion			226,969				229,221
Senior unsecured notes			245,462				245,241
Subordinated note payable			45,715				46,932
Accrued compensation, excluding current portion			6,058				5,740
Accrued postretirement benefit obligations			729				717
Non-current portion of lease obligations			7,594				7,286
Redeemable common stock warrants			32,557				32,717
Commitments 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				187,137
Accumulated 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.

ALION SCIENCE AND TECHNOLOGY CORPORATION

		Quarter Ended December 31,
		2009				2008
		(In thousands, except share
		and per share information)
Contract revenue		$	205,738			$	188,796
Direct contract expense			158,996				145,322
Gross profit			46,742				43,474
Operating expenses:
Indirect contract expense			9,286				9,124
Research and development			261				69
General and administrative			16,007				10,173
Rental and occupancy expense			7,986				7,738
Depreciation and amortization			4,231				4,806
Total operating expenses			37,771				31,910
Operating income			8,971				11,564
Other income (expense):
Interest income			45				23
Interest 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.

ALION SCIENCE AND TECHNOLOGY CORPORATION

		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				4,806
Bad debt expense			—				253
Loss on disposal of assets			19				—
Accretion of debt to face value			606				590
Amortization of debt issuance costs			966				683
Change 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			—				18
Changes 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				8,162
Other liabilities			1,333				2,219
Net 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				97,600
Revolver payments			(15,900	)			(97,600	)
Redeemable common stock purchased from ESOP Trust			(26	)			(9	)
Redeemable common stock sold to ESOP Trust			—				2,669
Net 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				16,287
Cash and cash equivalents at end of period		$	—			$	4,830
Supplemental disclosure of cash flow information:
Cash paid for interest		$	7,916			$	4,282
Cash (received) paid for taxes		$	(40	)		$	4

See accompanying notes to condensed consolidated financial statements.

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS

(1) Description and Formation of the Business

Alion Science and Technology Corporation and its subsidiaries (collectively, the Company or Alion) provide scientific, engineering and information technology expertise to research and develop technological solutions for problems relating to national defense, homeland security, and energy and environmental analysis. Alion provides services to departments and agencies of the federal government and, to a lesser extent, to commercial and international customers.

Alion is a for-profit S-Corporation formed in October 2001 to purchase substantially all of the assets and certain liabilities of IIT Research Institute (IITRI), a not-for-profit corporation controlled by Illinois Institute of Technology (IIT). In December 2002, Alion acquired substantially all of IITRI’s assets and liabilities except for its Life Sciences Operation, for $127.3 million. Prior to that, the Company’s activities were organizational in nature.

(2) Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements include the accounts of Alion Science and Technology Corporation (a Delaware corporation), and its wholly-owned subsidiaries and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in the annual financial statements, prepared in accordance with generally accepted accounting principles, have been omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. The statements are prepared on the accrual basis of accounting and include the accounts of Alion and its wholly-owned subsidiaries from their date of acquisition or formation. All inter-company accounts have been eliminated in consolidation. There were no changes to Alion’s subsidiaries in the current fiscal year.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments and reclassifications that are necessary for fair presentation of the periods presented. The results for the three months ended December 31, 2009 are not necessarily indicative of the results to be expected for the full fiscal year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s latest annual report on Form 10-K for the year ended September 30, 2009.

The Company has evaluated material events and transactions that have occurred after the balance sheet date and concluded that no subsequent events have occurred through January 26, 2010, that require adjustment to or disclosure in this Form 10-Q.

Fiscal, Quarter and Interim Periods

Alion’s fiscal year ends on September 30. The Company operates based on a three-month quarter, four-quarter fiscal year with quarters ending December 31, March 31, June 30, and September 30.

Use of Estimates

Preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts reported for assets and liabilities, disclosures of contingent assets and liabilities as of financial statement dates and amounts reported for operating results for each period presented. Actual results are likely to differ from those estimates, but the Company’s management does not believe such differences will materially affect Alion’s financial position, results of operations, or cash flows.

Revenue Recognition

Alion derives its revenue from delivering technology services under a variety of contracts. Some contracts provide for reimbursement of costs plus fees; others are fixed-price or time-and-material type contracts. The Company generally recognizes revenue when a contract has been executed, the contract price is fixed or determinable, delivery of services or products has occurred and collectibility of the contract price is considered reasonably assured.

ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS

Alion recognizes revenue on cost-reimbursement contracts as it incurs costs and includes estimated fees earned. The Company recognizes time-and-material contract revenue at negotiated, fixed, contractually billable rates as it delivers labor hours and incurs other direct expenses. Alion uses various performance measures under the percentage of completion method to recognize revenue for fixed-price contracts. Estimating contract costs at completion and recognizing revenue appropriately involve significant management estimates. Actual costs may differ from estimated costs and affect estimated profitability and timing of revenue recognition. From time to time, facts develop that require Alion to revise estimated total costs or expected revenue. Alion records the cumulative effect of revised estimates in the period in which the facts requiring revised estimates become known. Alion recognizes the full amount of anticipated losses on any type of contract in the period in which a loss becomes known. For each of the periods presented, the cumulative effects of revised estimates were immaterial to the Company’s financial performance.

Contracts with agencies of the federal government are subject to periodic funding by the contracting agency concerned. A contract may be fully funded at its inception or ratably throughout its period of performance as services are provided. If the Company determines contract funding is not probable, it defers revenue recognition until realization is probable. Federal government contract costs are subject to federal government audit and adjustment through negotiations with government representatives. The government considers Alion a major contractor and maintains an office on site to perform various audits. The government has audited the Company’s claimed costs through fiscal year 2004. Indirect rates have been negotiated and settled through fiscal year 2004. Settlement had no material adverse effect on the Company’s results of operations or cash flows. DCAA is currently auditing the Company’s indirect cost proposals for fiscal 2005 and 2006. The Company submitted its fiscal year 2008 and 2007 indirect cost proposals in March 2009 and 2008 and expects to submit its 2009 proposal in March 2010. The Company has recorded revenue on federal government contracts in amounts it expects to realize.

Alion recognizes revenue on unpriced change orders as it incurs expenses and only to the extent it is probable it will recover such costs. The Company recognizes revenue in excess of costs on unpriced change orders only when management can also estimate beyond a reasonable doubt the amount of excess and experience provides a sufficient basis for recognition. Alion recognizes revenue on claims as expenses are incurred only to the extent it is probable that it will recover such costs and can reliably estimate the amount it will recover.

The Company generates software-related revenue from licensing software and providing services. In general, professional services are essential to the functionality of the solution sold and the Company recognizes revenue by applying the percentage of completion method in accordance with ASC 605- Revenue Recognition.

Income Taxes

Alion is an S-corporation under the provisions of the Internal Revenue Code of 1986, as amended. For federal and certain state income tax purposes, the Company is not subject to tax on its income. Alion’s income is allocated to its shareholder, the Alion Science and Technology Corporation Employee Stock Ownership, Savings and Investment Trust (the ESOP Trust). Alion may be subject to state income taxes in those states that do not recognize S corporations. The Company is subject to franchise and business taxes. All of Alion’s wholly-owned operating subsidiaries are qualified subchapter S or disregarded entities which are included in the Company’s consolidated federal income tax returns. Alion’s Canadian subsidiary is subject to income taxation in Canada at the federal and provincial level.

Cash and Cash Equivalents

The Company considers cash in banks, and deposits with financial institutions with maturities of three months or less at time of purchase which it can liquidate without prior notice or penalty, to be cash and cash equivalents.

Accounts Receivable and Billings in Excess of Revenue Earned

Accounts receivable include billed accounts receivable, amounts currently billable and revenue in excess of billings on uncompleted contracts that represent accumulated project expenses and fees which have not been billed or are not currently billable as of the date of the consolidated balance sheet. Revenue in excess of billings on uncompleted contracts is stated at estimated realizable value. Unbilled accounts receivable include revenue recognized for customer-related work performed by Alion on new and existing contracts for which the Company had not received contracts or contract modifications. The allowance for doubtful accounts is Alion’s best estimate of the amount of probable losses in the Company’s existing billed and unbilled accounts receivable. The Company determines the allowance using specific identification and historical write-off experience based on age of receivables. Billings in excess of revenue and advance collections from customers represent amounts received from or billed to customers in excess of project revenue recognized to date.

ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS

Property, Plant and Equipment

Leasehold improvements, software and equipment are recorded at cost. Maintenance and repairs that do not add significant value or significantly lengthen an asset’s useful life are charged to current operations. Software and equipment are depreciated on the straight-line method over their estimated useful lives (typically 3 years for software and 5 years for equipment). Leasehold improvements are amortized on the straight-line method over the shorter of the asset’s estimated useful life or the life of the lease. Upon sale or retirement of an asset, costs and related accumulated depreciation are deducted from the accounts, and any gain or loss is recognized in the consolidated statements of operations.

Goodwill and Intangible Assets

Alion assigns the purchase price it pays to acquire the stock or assets of an entity to the net assets acquired based on the estimated fair value of the assets acquired. Goodwill is the purchase price in excess of the estimated fair value of the tangible net assets and separately identified intangible assets acquired. Purchase price allocations for acquisitions involve significant estimates and management judgments may be adjusted during the purchase price allocation period. There are no acquisitions with open measurement periods.

The Company accounts for goodwill and other intangible assets in accordance with the provisions of ASC 350- Intangibles, Goodwill and Other Assets. Alion is required to review goodwill at least annually for impairment or, more frequently if events and circumstances indicate goodwill might be impaired. The Company performs its annual review at the end of each fiscal year. Alion is required to recognize an impairment loss to the extent that its goodwill carrying amount exceeds fair value. Evaluating any impairment to goodwill involves significant management estimates. To date, these annual reviews have resulted in no adjustments.

The Company operates in one segment and tests goodwill at the reporting unit level. Management has identified three reporting units for the purpose of testing goodwill for impairment. The reporting units are based on administrative organizational structure and the availability of discrete financial information. Each reporting unit provides a similar range of scientific, engineering and analytical services to departments and agencies of the U.S. government and commercial customers. The Company employs a reasonable, supportable and consistent method to assign goodwill to reporting units expected to benefit from the synergies arising from acquisitions. Alion determines reporting unit goodwill in a manner similar to the way it determines goodwill in a purchase allocation by using fair value to determine reporting unit “purchase price”, assets, liabilities and goodwill. Reporting unit residual fair value after this allocation is the implied fair value of reporting unit goodwill. The Company’s reporting units remained consistent in structure for all periods presented. The Company allocated changes in goodwill carrying value to reporting units based on acquisitions attributable to each unit’s current structure.

The Company performs its own independent analysis to determine whether goodwill is potentially impaired. The Company performs discounted cash flow and market-multiple-based analyses to estimate the enterprise fair value of Alion and its reporting units and the fair value of reporting unit goodwill in order to test goodwill for potential impairment. Management independently determines the rates and assumptions it uses to perform its goodwill impairment analysis and assesses the probability of future contracts and revenue and to evaluate the recoverability of goodwill.

Alion’s cash flow analysis depends on several significant management inputs and assumptions. Management uses observable inputs, rates and assumptions generally consistent with those used by the independent third party to prepare the valuation report for the ESOP Trustee. Management’s cash flow analysis includes the following significant inputs and assumptions: estimated future revenue and revenue growth; estimated future operating margins and EBITDA; observable market multiples for comparable companies; and a discount rate consistent with a market-based weighted average cost of capital. Management includes EBITDA in its analysis in order to use publicly available valuation data.

ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS

In the Company’s most recent impairment testing, market multiples for trailing twelve month EBITDA for comparable companies (publicly traded professional services government contractors) ranged from a low of 9.0 to a high of 12.7, with a median value of 10.4. Market multiples for trailing twelve month revenue ranged from a low of 0.76 to a high of 1.22, with a median value of 0.99. Management used median market multiples and a weighted average cost of capital rate of 12.5% derived from market-based inputs, the tax-effected interest cost of Alion’s outstanding debt and a hypothetical market participant capital structure. Management estimates future years’ EBITDA based on Alion’s historical adjusted EBITDA as a percentage of revenue. Management estimated future revenue would grow 7%-10% annually. Prior year market multiples for trailing twelve month EBITDA for comparable professional services government contractors ranged from a low of 9.4 to a high of 16.7, with a median value of 12.4. Prior year market multiples for trailing twelve month revenue ranged from a low of 0.72 to a high of 1.75, with a median value of 1.02. The prior year weighted average cost of capital rate was 12.0% derived from market-based inputs, the tax-effected interest cost of Alion’s outstanding debt and a hypothetical market participant capital structure. There were no changes to the methods used in prior periods to evaluate goodwill. Changes in one or more inputs could materially alter the calculation of Alion’s enterprise fair value and thus the Company’s determination of whether its goodwill is potentially impaired. A hypothetical 10% increase or decrease in the weighted average cost of capital rate at September 30, 2009 would have produced a corresponding approximate 5% decrease or increase in estimated enterprise value. At September 30, 2009, market-multiple based enterprise value exceeded discounted cash flow enterprise value by approximately 7%.

Management reviews the Company’s internally computed enterprise fair value to confirm the reasonableness of the Company’s analysis and compares the results of its independent analysis with the results of the independent third party valuation report prepared for the ESOP Trustee. Management compares each reporting unit’s carrying amount to its estimated fair value. If a reporting unit’s carrying value exceeds its estimated fair value, the Company compares the reporting unit’s goodwill carrying amount with the corresponding implied fair value of its goodwill. If the carrying amount of reporting unit goodwill exceeds its fair value, the Company recognizes an impairment loss to the extent that the carrying amount of goodwill exceeds implied fair value.

Alion completed its most recent goodwill impairment analysis in the fourth quarter of fiscal year 2009 and concluded no goodwill impairment existed as of September 30, 2009. The estimated fair value of each reporting unit substantially exceeded its September 2009 carrying value. A hypothetical 10% decrease in fair value would not have resulted in impairment to goodwill for any reporting unit or triggered the need to perform additional step two analyses for any reporting unit. There were no changes to goodwill in the quarter ended December 31, 2009 nor were there any significant events in the quarter that indicated impairment to goodwill as of December 31, 2009.

Alion amortizes intangible assets as economic benefits are consumed over estimated useful lives. As of December 31, 2009, the Company had a recorded net intangible asset balance of approximately $25.9 million, composed primarily of purchased contracts from the JJMA and Anteon contract acquisitions. The Company amortizes intangible assets as it consumes the economic benefits over the assets’ estimated useful lives.

Purchased contracts		1 – 13 years
Internal use software and engineering designs		2 – 3 years
Non-compete agreements		3 – 6 years

Redeemable Common Stock

There is no public market for Alion’s common stock and therefore no observable price for its equity, individually or in the aggregate. The ESOP Trust holds all the Company’s outstanding common stock. Under certain circumstances, ESOP beneficiaries can require the ESOP Trust to distribute the value of their beneficial interests. The ESOP Trustee can distribute cash or shares of Alion common stock. The Internal Revenue Code (IRC) and ERISA require the Company to offer ESOP participants who receive Alion common stock a liquidity put right which requires the Company to purchase distributed shares at fair market value. Eventual redemption of shares of Alion common stock is outside the Company’s control; therefore, Alion classifies its outstanding shares of redeemable common stock as a liability.

At each reporting date Alion is required to increase or decrease the reported value of its outstanding common stock to reflect its estimated redemption value. Management estimates the value of this liability in part by considering the most recent price at which the Company was able to sell shares to the ESOP Trust (current share price times total shares issued and outstanding). In its fiduciary capacity the ESOP Trustee is independent of the Company and its management. Consistent with its fiduciary responsibilities, the ESOP Trustee retains an independent third party valuation firm to assist it in determining the fair market value (share price) at which the Trustee may acquire or dispose of investments in Alion common stock. The Audit and Finance Committee of Alion’s Board of Directors reviews the reasonableness of the liability Management has determined is appropriate for the Company to recognize in its financial statements for outstanding redeemable common stock. The Audit and Finance Committee considers various factors in its review, including, in part, the most recent valuation report and the share price selected by the ESOP Trustee.

Alion records changes in the reported value of its outstanding common stock through an offsetting charge or credit to accumulated deficit. There were no fair value adjustments to redeemable common stock in the current quarter. The accumulated deficit at December 31, 2009 included $90.2 million for changes in the Company’s share redemption liability. Outstanding redeemable common stock had an aggregate fair value of approximately $187.1 million as of December 31, 2009.

ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS

Concentration of Credit Risk

Alion is subject to credit risk for its cash equivalents and accounts receivable. The Company believes the high credit quality of its cash equivalent investments limits its credit risk with respect to such investments. Alion believes its concentration of credit risk with respect to accounts receivable is limited as the receivables are principally due from the federal government.

Fair Value of Financial Instruments

The Company used the following methods and assumptions to estimate the fair value of each class of financial instruments for which it is practicable to estimate fair value. For each of the following items, the fair value is not materially different than the carrying value.

Cash, cash equivalents, accounts payable and accounts receivable. Carrying amounts approximate fair value because of the short maturity of those instruments.

Senior long-term debt. The carrying amount of the Company’s senior debt approximates fair value, estimated based on current rates offered to the Company for debt of the same remaining maturities, and reflects amounts Alion is contractually required to pay.

Subordinated notes and redeemable common stock warrants. Alion uses an option pricing model to estimate the fair value of its redeemable common stock warrants. In estimating the Company’s aggregate redeemable common stock warrant liability, Management considers factors such as risk free interest rates, share price volatility of comparable publicly traded companies, information in the valuation report prepared for and the share price selected by the ESOP Trustee. The only market for the Company’s subordinated debt consists of principal to principal transactions. Alion carries the subordinated notes at amortized cost.

Redeemable Alion common stock. Management estimates the fair value price per share of Alion common stock by considering in part the most recent price at which the Company was able to sell shares to the ESOP Trust as well as information contained in the most recent valuation report that an independent, third-party firm prepares for the ESOP Trustee.

Recently Issued Accounting Pronouncements

Accounting Standards Update 2009-13 Revenue Recognition — Multiple Deliverable Revenue Arrangements (ASU 2009-13) was issued in October 2009 and updates Accounting Standards Codification (ASC) 605 — Revenue Recognition. ASU 2009-13 removes the objective-and-reliable-evidence-of-fair-value criterion from the separation criteria used to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting; replaces references to “fair value” with “selling price” to distinguish from the fair value measurements required under the “Fair Value Measurements and Disclosures” guidance; provides a hierarchy that entities must use to estimate the selling price; eliminates the use of the residual method for allocation; and expands the ongoing disclosure requirements. ASU 2009-13 is effective for fiscal years beginning on or after June 15, 2010, and can be applied prospectively or retrospectively. The Company is currently evaluating the effect, if any, that adopting ASU 2009-13 will have on its consolidated financial position and results of operations.

Accounting Standards Update 2009-14 Certain Revenue Arrangements That Include Software Elements (ASU 2009-14) was issued in October 2009 and updates ASC 985 — Software — Revenue Recognition. ASU 2009-14 clarifies which accounting guidance should be used to measure and allocate revenue for arrangements that contain both tangible products and software, where the software is more than incidental to the tangible product as a whole. ASU 2009-14 is effective for fiscal years beginning on or after June 15, 2010 and applies to arrangements entered into or materially modified on or after that date. The Company is currently evaluating the effect, if any, that adopting ASU 2009-14 will have on its consolidated financial position and results of operations.

ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS

(3) Employee Stock Ownership Plan (ESOP) and ESOP Trust

In December 2001, the Company adopted the Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan (the Plan) and the ESOP Trust. The Plan, a tax qualified retirement plan, includes ESOP and non-ESOP components. In August 2005, the Internal Revenue Service (IRS) issued a determination letter that the ESOP Trust and the Plan, as amended through the Plan’s Ninth Amendment, qualify under Sections 401(a) and 501(a) of the Internal Revenue Code of 1986 as amended (the IRC). In January 2007, Alion amended and restated the Plan effective as of October 1, 2006, and filed a determination letter request with the IRS. In July and September 2007, the Company adopted the first and second amendments to the amended and restated Plan. In August 2008, Alion amended the Trust Agreement between the Company and the ESOP Trust. Alion believes that the Plan and the ESOP Trust have been designed and are being operated in compliance with the applicable IRC requirements.

(4) Earnings (Loss) Per Share

Basic and diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding excluding the impact of warrants as this impact would be anti-dilutive for all periods presented. The Company had 1,630,437 warrants outstanding for 2010 and 2009.

(5) Redeemable Common Stock Owned by ESOP Trust

The ESOP Trust owns all of the Company’s issued and outstanding common stock, for the benefit of current and former employee participants in the Alion KSOP. Participants and beneficiaries are entitled to a distribution of the fair value of their vested ESOP account balance upon death, disability, retirement or termination of employment. The Plan permits distributions to be paid over a five year period commencing the year after a participant’s retirement at age 65, death or disability. Alion can delay distributions to other terminating participants for five years before commencing payment over a subsequent five year period.

The Company can choose whether to distribute cash or shares of Alion common stock. If Alion distributes common stock to a participant or beneficiary, the IRC and ERISA require that it provide a put option to permit a recipient to sell the stock to the Company at the estimated fair value price per share based on the most recent price at which the Company was able to sell shares to the ESOP Trust ($34.50 at September 30, 2009). Consistent with its duty of independence from Alion Management and its fiduciary responsibilities, the ESOP Trustee retains an independent third party valuation firm to assist it in determining the fair market value (share price) at which the Trustee may acquire or dispose of investments in Alion common stock. The Audit and Finance Committee of Alion’s Board of Directors reviews the reasonableness of the liability for outstanding redeemable common stock that Management has determined is appropriate for the Company to recognize in its financial statements. The Audit and Finance Committee considers various factors in its review, including in part, the valuation report and the share price selected by the ESOP Trustee. Management considers the share price selected by the ESOP Trustee along with other factors, to assist in estimating Alion’s aggregate liability for outstanding redeemable common stock owned by the ESOP Trust. Certain participants who beneficially acquired shares of Alion common stock on December 20, 2002, have the right to sell such shares distributed from their accounts at the greater of the then current estimated fair value per share or the original $10.00 purchase price.

Although the Company and the ESOP retain the right to delay distributions consistent with the terms of the Plan, and to control the circumstances of future distributions, eventual redemption of shares of Alion common stock is deemed to be outside the Company’s control.

The Company makes 401(k) matching contributions in shares of Alion common stock and discretionary profit-sharing contributions in a combination of Alion common stock and cash. The Company matches the first 3% and one-half of the next 2% of eligible employee salary deferrals by contributing shares of Alion common stock to the ESOP Trust on March 31 and September 30 each year. The Company also makes a profit sharing contribution of Alion common stock to the ESOP Trust on the same dates equal to 1% of eligible employee compensation. Each pay period the Company makes a cash contribution to the non-ESOP component of the KSOP equal to 1.5% of eligible employee compensation. Alion recognized $3.4 million in compensation expense for the KSOP this quarter and $3.3 million for the first quarter of 2009.

ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS

(6) Accounts Receivable

Accounts receivable at December 31, 2009 and September 30, 2009 consisted of the following:

		December 31,				September 30,
		2009				2009
		(In thousands)
Billed receivables		$	105,043			$	108,566
Unbilled receivables:
Amounts currently billable			35,240				22,954
Revenues recorded in excess of milestone billings on fixed price contracts			3,380				3,757
Revenues recorded in excess of estimated contract value or funding			32,259				36,327
Retainages and other amounts billable upon contract completion			13,218				12,972
Allowance for doubtful accounts			(3,996	)			(4,419	)
Total Accounts Receivable		$	185,144			$	180,157

Revenue recorded in excess of milestone billings on fixed price contracts is not yet contractually billable. Amounts currently billable consist principally of amounts to be billed within the next year. Any remaining unbilled balance including retainage is billable upon contract completion or completion of Defense Contract Audit Agency audits. Revenue recorded in excess of contract value or funding is billable upon receipt of contractual amendments or other modifications. Contract revenue recognized in excess of billings totaled approximately $84.1 million as of December 31, 2009 and included approximately $32.3 million for customer-requested work for which the Company had not received contracts or contract modifications. In keeping with industry practice, Alion classifies all contract-related accounts receivable as current assets based on contractual operating cycles which frequently exceed one year. Unbilled receivables are expected to be billed and collected within one year except for $13.2 million at December 31, 2009.

(7) Property, Plant and Equipment

		December 31,				September 30,
		2009				2009
		(In thousands)
Leasehold improvements		$	10,208			$	10,214
Equipment and software			33,564				32,807
Total cost			43,771				43,021
Less: accumulated depreciation and amortization			(29,890	)			(28,547	)
Net Property, Plant and Equipment		$	13,881			$	14,474

Depreciation and leasehold amortization expense for fixed assets was approximately $1.4 million for the quarters ended December 31, 2009 and 2008.

(8) Goodwill and Intangible Assets

As of December 31, 2009, Alion had approximately $398.9 million in goodwill. There were no changes in the goodwill carrying amount during the current quarter.

Intangible assets consist primarily of contracts acquired through the Anteon and JJMA transactions. The table below shows intangible assets as of December 31, 2009 and September 30, 2009.

		December 31, 2009												September 30, 2009
						Accumulated												Accumulated
		Gross				Amortization				Net				Gross				Amortization				Net
Purchased contracts		$	111,635			$	(86,276	)		$	25,359			$	111,635			$	(83,563	)		$	28,072
Internal use software and engineering designs			2,155				(1,665	)			490				2,155				(1,568	)			587
Non-compete agreements			725				(710	)			15				725				(704	)			21
Total		$	114,515			$	(88,651	)		$	25,864			$	114,515			$	(85,835	)		$	28,680

ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS

The weighted-average remaining amortization period of intangible assets was approximately six years at December 31, 2009 and September 30, 2009. Amortization expense was approximately $2.8 million and $3.4 million for the quarters ended December 31, 2009 and 2008. Estimated aggregate amortization expense for the next five years and thereafter is as follows.

		(In thousands)
For the remaining nine months:
2010		$	8,169
For the year ending September 30:
2011			6,843
2012			5,766
2013			3,246
2014			879
2015			737
Thereafter			224
		$	25,864

(9) Long-Term Debt

Term B Senior Credit Agreement

Alion entered into various debt agreements (Senior Credit Agreement, Mezzanine Note, and Subordinated Note) on December 20, 2002 to fund its acquisition of substantially all of IITRI’s assets. In August 2004, Alion entered into a Term B senior secured credit facility (the Term B Senior Credit Agreement) with a syndicate of financial institutions for which Credit Suisse serves as arranger, administrative agent and collateral agent, and for which Bank of America serves as syndication agent. The following amendments were made to the Term B Senior Credit Agreement since August 2004.

•

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.

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.

As of December 31, 2009, the Term B Senior Credit Agreement consisted of:

•

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.

The Term B Senior Credit Agreement requires the Company to repay one percent of the principal balance of the senior term loan during each of the next four fiscal years (December 2009 through December 2012) in equal quarterly installments and to repay the remaining outstanding balance in February 2013. Through December 31, 2012, the Company is currently obligated to make quarterly principal installments of approximately $0.6 million. On February 6, 2013, the senior term loan maturity date, the Company is obligated to pay approximately $229.3 million.

Under the senior revolving credit facility, the Company may request up to $20.0 million in letters of credit and may borrow up to $5.0 million in swing line loans for short-term borrowing needs. The Company must pay all principal obligations under the senior revolving credit facility in full no later than September 30, 2010.

The Company may prepay all or any portion of its senior term loan in minimum increments of $1.0 million, generally without penalty or premium, except for customary breakage costs associated with pre-payment of Eurodollar-based loans. If the Company issues certain permitted debt, or sells, transfers or disposes of certain assets, it must use all net proceeds to repay any Term B loan amounts outstanding. If the Company has excess cash flow (as defined in the Term B Senior Credit Agreement) for any fiscal year, it must use all net proceeds or excess cash flow to repay senior term loan principal.

If the Company enters into an additional term loan, or incremental term loan, and certain terms in that loan are more favorable to the new lenders than existing Senior Credit Facility terms, the applicable interest rate spread on the senior term loans could increase. As a result, additional term loans could increase the Company’s interest expense under its existing term loans. Most of the Company’s domestic subsidiaries (HFA, CATI, METI, JJMA, BMH, WCI, WCGS and MA&D) have guaranteed the Company’s obligations under the Company’s Term B Senior Credit Agreement.

Use of Proceeds. In March 2006, the Company borrowed $32.0 million, used approximately $16.5 million to pay part of the WCI acquisition price, and paid approximately $13.6 million to redeem mezzanine warrants held by IIT and the Company’s Chief Executive Officer. In May 2006, the Company borrowed $15.0 million to pay for part of the MA&D acquisition. On June 30, 2006, the Company borrowed $71.0 million to pay part of the Anteon Contracts acquisition price. In January 2008, the Company borrowed $15.0 million and in July 2008, another $25.0 million to pay down part of the Revolver balance.

ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS

The Term B Senior Credit Agreement permits the Company to use the Revolver for working capital, general corporate purposes, and permitted acquisitions; and to use proceeds from the uncommitted incremental term loan facility for permitted acquisitions and any other purpose permitted by any future incremental term loan.

Security. The Term B Senior Credit Agreement is secured by a security interest in all the current and future tangible and intangible property of Alion and many of its subsidiaries.

Interest and Fees. Under the Term B Senior Credit Agreement, the senior term loan and the Revolver can each bear interest at either of two floating rates.

Senior Term Loan. The Company is entitled to elect to pay interest on the senior term loan at an annual rate equal to either: 1) the sum of: (a) the greater of 450 basis points or the applicable alternate base interest rate charged by Credit Suisse; plus (b) a 500 basis point spread or 2) the sum of: (a) the greater of 350 basis points or the Eurodollar rate; plus a 600 basis point spread.

Revolver. The Company is also entitled to elect that the Revolver bear interest at an annual rate dependent on whether the Company made a Eurodollar or an alternate base borrowing at the same rates as for senior term loans. As of September 30, 2009, the minimum interest rate on Alion’s term loan and Revolver is 9.50%.

On April 1, 2005, the Company chose to have the senior term loan bear interest at the Eurodollar rate and the Revolver bear interest at the ABR rate based on Credit Suisse’s prime rate. Since September 30, 2009, the Eurodollar and alternate base rates have been 9.5%, including applicable spreads.

Other Fees and Expenses. Each quarter, Alion is required to pay a commitment fee of 50 basis points per year on the prior quarter’s daily, unused revolving credit facility and senior term loan commitment. As of December 31, 2009, only the $182 thousand allocated to letters of credit was outstanding on the Revolver; the senior term loan was fully utilized. The Company paid $32 thousand and $53 thousand in commitment fees for the quarters ended December 31, 2009 and 2008.

Alion is required to pay issuance and administrative fees plus a fronting fee not to exceed 25 basis points for each letter of credit issued. Each quarter Alion is required to pay interest in arrears at the Revolver rate for all outstanding letter of credit. The Term B Senior Credit Agreement also requires the Company to pay an annual agent’s fee.

Financial Covenants and Waiver Agreement. The Term B Senior Credit Agreement covenants require the Company to achieve certain senior secured leverage and interest coverage ratios which compare Alion’s senior secured debt and interest expense to Consolidated EBITDA, and require the Company to maintain certain minimum thresholds. In December 2009, Alion discovered it had not calculated Consolidated EBITDA in accordance with the definition in the Term B Senior Credit Agreement. The Term B Senior Credit Agreement requires Alion to deduct from Consolidated EBITDA cash payments made in a current accounting period on account of reserves, restructuring charges and other non-cash charges that the Company had added to its Consolidated EBITDA in a prior accounting period as permitted by the definition. Alion failed to reduce Consolidated EBITDA by cash payments made on account of non-cash charges added back in prior periods for SAR and phantom stock plans. As a result of this error, the Company failed to meet required senior secured leverage and interest coverage ratios throughout fiscal 2009 and consequently breached a number of Term B Senior Credit Agreement affirmative and negative covenants.

On December 14, 2009, the requisite lenders waived Alion’s financial, affirmative and negative covenant defaults and its breach of certain related representations and warranties for all affected periods including the fiscal year and quarter ended September 30, 2009 (the Waiver). The Company paid a 25 basis point fee to each lender granting the Waiver and an additional arrangement fee to the Administrative Agent. The Waiver does not change any of the terms or definitions of the Term B Senior Credit Agreement.

Alion has also promised to pay on March 1, 2010 each lender granting the waiver a future fee equal to 1.0% of the aggregate principal amount of the term loans and revolving credit commitments of such lender outstanding on March 1, 2010 unless such lender shall have assigned all or a portion of such lender’s holdings, in which case such lender’s assignee (unless otherwise agreed) shall be entitled to the future and supplemental 1.0% fee payable by Alion.

ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS

As of December 31, 2009, Alion was in compliance with the Term B Senior Credit Agreement financial covenants. The Company expects to be able to meet its existing financial and other debt covenants for at least the next 12 months.

Senior Unsecured Notes

On February 8, 2008, the Company issued and sold $250.0 million of private 10.25% senior unsecured notes due February 1, 2015 (Senior Unsecured Notes) to Credit Suisse, which informed Alion that it resold most of the notes to qualified institutional buyers. On June 20, 2008, Alion exchanged the private Senior Unsecured Notes for publicly tradable Senior Unsecured Notes with the same terms.

Use of Proceeds. The proceeds of the Senior Unsecured Notes were used to pay off all outstanding amounts under the Bridge Loan Agreement and approximately $72.0 million of the amounts outstanding under the Term B Senior Credit Agreement.

Security. The Senior Unsecured Notes are currently guaranteed by HFA, CATI, METI, JJMA, BMH, WCI and MA&D and will be guaranteed by certain of the Company’s future subsidiaries.

Ranking. The Senior Unsecured Notes are senior unsecured obligations of the Company and rank the same in right of payment with all existing and future senior indebtedness of the Company including future indebtedness under the Term B Senior Credit Agreement. However, all of the Company’s secured debt and other obligations in effect from time to time, including the amounts outstanding under the Term B Senior Credit Agreement, are effectively senior to the Senior Unsecured Notes to the extent of the value of the assets securing such debt or other obligations. The Senior Unsecured Notes rank senior in right of payment to all existing and future subordinated indebtedness, including the Subordinated Notes.

Interest and Fees. The Senior Unsecured Notes bear interest at 10.25% per year, payable semi-annually in arrears on February 1 and August 1, starting on August 1, 2007. The Company pays interest to holders of record as of the immediately preceding January 15 and July 15. The Company must pay interest on overdue principal at 11.25% per annum and, to the extent lawful, will pay interest on overdue semi-annual interest installments at 11.25% per annum.

Optional Redemption. Prior to February 1, 2010, subject to certain conditions, the Company may use the proceeds of a qualified equity offering to redeem up to $87.5 million of Senior Unsecured Notes for 110.25% of the principal of the notes actually redeemed, plus unpaid interest accrued to the redemption date.

Prior to February 1, 2011, the Company may redeem all, but not less than all, of the Senior Unsecured Notes for 100% of the principal, all unpaid interest accrued to the redemption date, plus an applicable make-whole premium as of the redemption date. From February 1, 2011 through January 31, 2012, the Company may redeem all or a portion of the Senior Unsecured Notes at 105.125% of the principal amount on the redemption date, plus unpaid interest accrued to the redemption date. From February 1, 2012 through January 31, 2013, the redemption price declines to 102.563% of the principal redeemed, plus unpaid interest accrued to the redemption date. There is no redemption premium after January 31, 2013.

Covenants. The Indenture governing the Senior Unsecured Notes contains covenants that, among other things, limit the Company’s ability and the ability of certain of its subsidiaries to incur additional indebtedness and to make certain types of payments.

Exchange Offer; Registration Rights. The Company filed a registration statement with the SEC offering to exchange the Senior Unsecured Notes for publicly registered notes. The registration statement was declared effective May 10, 2008; the exchange offer closed June 20, 2008; all outstanding notes were exchanged for publicly registered notes.

Interest Payable

Interest Payable consisted of the following balances:

		December 31,				September 30,
		2009				2009
		(In thousands)
Senior Unsecured Notes		$	10,677			$	4,271
Term B Senior Credit Agreement Note Payable			3,950				3,975
Subordinated Note Payable			793				793
Total		$	15,419			$	9,039

ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS

Subordinated Note

In December 2002, Alion issued a $39.9 million Subordinated Note to IITRI as part of the purchase price for substantially all of IITRI’s assets. In July 2004, IIT acquired the Subordinated Note and related warrant agreement from IITRI. In June 2006, the Company and IIT agreed to increase the interest rate on the Subordinated Note for two years from December 2006 through December 2008. In August 2008, the Company and IIT amended the Subordinated Note to: extend the maturity date of the Subordinated Note to August 2013; require Alion to re-pay $3.0 million in principal in November 2008, 2009 and 2010, and $2.0 million in November 2011; and require Alion to pay cash interest at 6% rather than 16%, along with 10% in non-cash interest to be added to principal. The amended Subordinated Note agreement prohibits Alion from redeeming vested phantom stock held by the Chief Executive Officer and Chief Operating Officer unless the Company timely makes its scheduled principal payment each year. The Company paid IIT a $0.5 million amendment fee.

Up to and including December 2008, interest on the Subordinated Note was payable quarterly in arrears by issuing paid-in-kind (PIK) notes maturing at the same time as the Subordinated Note. The interest rate was 6.0% from December 2002 through December 2006; approximately 6.4% from December 2006 to December 2007; and approximately 6.7% from December 2007 to December 2008. After December 2008, interest is still payable quarterly in arrears, 6% to be paid in cash and 10% to be paid in PIK notes due August 2013. Existing and future PIK notes defer related cash interest expense on the Subordinated Note. Over the term of the Subordinated Note, Alion will be required to issue approximately $41.4 million in PIK notes. In addition to the principal payments required each November from 2008 through 2011, Alion is required to pay a total of $70.3 million in principal and PIK notes in August 2013.

On December 21, 2009, the Company and IIT modified the terms of the Subordinated Note to defer payment of interest due in January 2010 to April 2010. Subject to certain future events and conditions, IIT agreed to sell its warrants and Subordinated Note to Alion for $25 million. 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.

As of December 31, 2009, the remaining fiscal year principal repayments (at face amount before debt discount) for outstanding indebtedness are as follows:

		2010				2011				2012				2013				2014				2015				Total
		(In thousands)
Senior Secured Term B Loan(1)		$	1,825			$	2,433			$	2,433			$	229,297			$	—			$				$	235,988
Senior Unsecured Notes(2)			—				—				—				—				—				250,000				250,000
Subordinated Seller Note(3)			3,000				3,000				2,000				70,311				—								78,311
Total Principal Payments		$	4,825			$	5,433			$	4,433			$	299,608			$	—			$	250,000			$	564,299

ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS

(10) Fair Value Measurement

The Company adopted ASC 805 — Fair Value Disclosures in fiscal year 2009 for all financial assets and liabilities recognized or disclosed at fair value in the financial statements. The Company adopted the provisions of ASC 805 for nonfinancial assets and liabilities recognized or disclosed at fair value in the financial statements on a recurring basis; no such assets or liabilities exist at the balance sheet date. The Company implemented ASC 805 this year for all nonfinancial assets and liabilities recognized or disclosed at fair value in the financial statements on a nonrecurring basis. Adopting ASC 805 for items such as goodwill and long lived assets measured at fair value if impaired, did not materially affect the Company’s consolidated financial statements or results of operations.

ASC 805 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. It establishes a fair value hierarchy and a framework which requires categorizing assets and liabilities into one of three levels based on the assumptions (inputs) used in valuing the asset or liability. Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment. Level 1 inputs are unadjusted, quoted market prices in active markets for identical assets or liabilities. Level 2 inputs are observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets. Level 3 inputs include unobservable inputs that are supported by little, infrequent, or no market activity and reflect management’s own assumptions about inputs used in pricing the asset or liability. The Company uses the following valuation techniques to measure fair value.

Level 1 primarily consists of financial instruments, such as overnight bank re-purchase agreements or money market mutual funds whose value is based on quoted market prices published by a financial institution, an exchange fund, exchange-traded instruments and listed equities.

Level 2 assets include U.S. Government and agency securities whose valuations are based on market prices from a variety of industry-standard data providers or pricing that considers various assumptions, including time value, yield curve, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for the underlying instruments, and broker and dealer quotes. All are observable in the market or can be derived principally from or corroborated by observable market data for which the Company can obtain independent external valuation information.

Level 3 consists of unobservable inputs. The Company’s warrants are classified as a Level 3 liability. Assets and liabilities are considered Level 3 when their fair value inputs are unobservable or not available, including situations involving limited market activity, where determination of fair value requires significant judgment or estimation. At December 31, 2009, the Company measured outstanding warrants at fair value based on the underlying estimated fair value of a share of Alion common stock as of September 30, 2009, the valuation most recently performed for the ESOP Trustee and approved by the Board of Directors ($34.50 per share), a risk-free U.S. Treasury interest rate for a comparable investment period (2.04% and 1.85% at December 31 and September 30, 2009) and a 36% equity volatility factor based on the historical volatility of the common stock of publicly-traded companies considered to be comparable to Alion. Valuation techniques utilized in the fair value measurement of assets and liabilities presented on the Company’s balance sheet were unchanged from previous practice during the reporting period.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents information about the Company’s financial assets and financial liabilities that are measured at fair value on a recurring basis as of December and September 2009, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.

		Level 1				Level 2				Level 3
Liabilities: Redeemable common stock warrants
As of December 31, 2009		$	—			$	—			$	(32,557	)
As of September 30, 2009										$	(32,717	)

ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS

The table below provides a summary of the changes in fair value of all financial liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for December 31, 2009 and December 31, 2008.

		Quarter Ended
		December 31, 2009 and 2008
		Redeemable Common Stock Warrants
Balance, beginning of period		$	(32,717	)		$	(39,996	)
Total realized and unrealized gains and (losses)
Included in interest expense			160				1,454
Issuances and settlements			—				—
Balance, end of period		$	(32,557	)		$	(38,542	)

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The Company’s cost-method investment in VectorCommand is tested annually for impairment and is not adjusted to market value at the end of each reporting period. Fair value would only be determined on a nonrecurring basis if this investment were deemed to be other-than-temporarily impaired. The Company has not recorded any other-than-temporary impairments to its VectorCommand investment during the reporting period.

(11) Interest Rate Swap

In January 2008, Alion executed an interest rate swap with one of its lenders’ affiliates to convert floating rate interest payable on a portion of its Term B senior term loan to a fixed rate, and to effectively shift timing of some Term B senior term loan net interest payments. The swap agreement had a notional amount of $240 million and expired in November 2008. The Company made its final semi-annual interest payment of $4.6 million on November 1, 2008. Under the swap Alion received quarterly floating rate interest payments on February 1, May 1, August 1 and November 1, 2008, at the London Interbank Offering Rate plus 250 basis points. The floating rate was 7.32% for the six months ended May 1, 2008 and 5.49% for the six months ended November 1, 2008. Alion paid interest at 6.52%. All swap payments were net cash settled. Alion was exposed to credit risk for net settlements under the swap agreement, but not for the notional amount.

(12) Redeemable Common Stock Warrants

Alion uses an option pricing model to estimate the fair value of its redeemable common stock warrants. Management considers the share price selected by the ESOP Trustee along with other factors, to assist in estimating the Company’s aggregate liability for outstanding redeemable common stock warrants. The Audit and Finance Committee of Alion’s Board of Directors reviews the reasonableness of the redeemable common stock warrant liability Management has determined is appropriate for the Company to recognize. The Audit and Finance Committee considers various factors in its review, including risk free interest rates, volatility of the common stock of comparable publicly traded companies, and in part, the valuation report prepared for and the share price selected by the ESOP Trustee.

In December 2002, the Company issued 1,080,437 detachable, redeemable common stock warrants at an exercise price of $10.00 per share. Alion issued the warrants to IITRI in connection with the Subordinated Note. The Company recognized approximately $7.1 million for the initial fair value of the warrants as original issue debt discount to the $39.9 million face value of the Subordinated Note. The Subordinated Note warrants were originally exercisable until December 2010. In June 2004, IITRI transferred the warrants to IIT.

In August 2008, Alion issued an additional 550,000 redeemable common stock warrants at an exercise price of $36.95 per share. The Company issued the second set of warrants to IIT in connection with the Subordinated Note amendment. Both sets of warrants are exercisable at the current fair value per share of Alion common stock, less the exercise price. The Company recognized approximately $10.3 million in debt issue costs for the fair value of the August 2008 warrants and the amendment to the December 2002 warrants.

In accordance with ASC 815 — Derivatives, Alion has classified the warrants as debt instruments indexed to and potentially settled in the Company’s own stock and not as equity. The Company recognizes interest expense for changes in the fair value of the warrants which had an aggregate estimated fair value of $32.6 million as of December 31, 2009.

ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS

(13) Leases

Future minimum lease payments under non-cancelable operating leases for buildings, equipment and automobiles at December 31, 2009 are set out below. Under these operating leases, Alion subleased some excess capacity to subtenants under non-cancelable operating leases. In connection with certain acquisitions, Alion assumed operating leases at above-market rates; recorded loss accruals of approximately $4.9 million based on the estimated fair value of the lease liabilities assumed; and is amortizing these amounts over the lease terms. The remaining unamortized loss related to these acquisitions was $339 thousand at December 31, 2009. Alion also acquired a related sublease pursuant to which it receives above-market rates. Based on the estimated fair value of the sublease, Alion recognized an asset of $586 thousand and fully amortized it over the lease term.

Lease Payments for Fiscal Years Ending		(In thousands)
2010 (for the remainder of fiscal year)		$	21,210
2011			25,984
2012			22,198
2013			20,634
2014			14,231
2015			14,253
And thereafter			24,180
Gross lease payments		$	142,690
Less: 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			$	6,183
Less: Sublease rental income			(467	)			(743	)
Total rent expense, net		$	5,489			$	5,440

(14) Long Term Incentive Compensation Plan

In December 2008, Alion adopted a long-term incentive compensation plan to provide cash compensation to certain executives. Grants under the plan to individuals contain specific financial and other performance goals and vest over varying time periods. Some grants are for a fixed amount; others contain provisions that provide for a range of compensation from a minimum of 50% to a maximum of 150% of an initial grant amount. The Company periodically evaluates the probability of individuals meeting the financial and other performance goals in grant agreements. Management estimates long term incentive compensation expense based on the stated amounts of outstanding grants, estimated probability of achieving stated performance goals and estimated probable future grant value. The Company recognized $603 thousand and $924 thousand in long term incentive compensation expense for the quarters ended December 31, 2009 and 2008.

(15) Stock Appreciation Rights (SAR)

As of December 31, 2009, Alion had granted 1,240,110 SARs to employees under the 2004 SAR plan. Compensation expense for the SAR plan was $14 thousand and $84 thousand for the quarters ended December 31, 2009 and 2008.

The ESOP Trustee, consistent with its duty of independence from Alion management and its fiduciary responsibilities, retains an independent third party valuation firm to assist it in determining the fair market value (share price) at which the Trustee may acquire or dispose of investments in Alion common stock. Management considers the share price selected by the ESOP Trustee along with other factors such as risk free interest rates and volatility, to assist in estimating Alion’s aggregate liability for outstanding stock appreciation rights. The Audit and Finance Committee of Alion’s Board of Directors reviews the reasonableness of the liability for outstanding stock appreciation rights that Management has determined is appropriate for the Company to recognize in its financial statements. The Audit and Finance Committee considers risk free interest rates, volatility and various other factors in its review, including in part, the most recent valuation report and the related share price selected by the ESOP Trustee.

ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS

The table below sets out the disclosures required by ASC 718 — Stock Compensation and the assumptions used to value a share of Alion common stock and the Company’s SAR grants as of December 31, 2009. Alion uses a Black-Scholes-Merton option pricing model to recognize compensation expense. Alion uses the fair market value of a share of its common stock to recognize expense for all grants. There is no established public trading market for Alion’s common stock. The ESOP Trust is the only holder of our common stock. Alion does not expect to pay any dividends on its common stock and intends to retain future earnings, if any, for use in the operation of its business.

Stock-based Compensation Disclosure per ASC 718
Stock Appreciation Rights
As of December 31, 2009

		Shares
		Granted to				Exercise				Outstanding at
Date of Grant		Employees				Price				9/30/09
February 2005			165,000			$	19.94				71,150
March 2005			2,000			$	19.94				2,000
April 2005			33,000			$	29.81				18,000
June 2005			2,000			$	29.81				2,000
December 2005			276,675			$	35.89				175,284
February 2006			13,000			$	35.89				7,750
February 2006			7,500			$	35.89				2,500
May 2006			7,000			$	37.06				6,000
July 2006			15,000			$	37.06				10,000
October 2006			2,500			$	41.02				2,500
December 2006			238,350			$	41.02				171,500
February 2007			33,450			$	41.02				21,700
May 2007			2,000			$	43.37				2,000
September 2007			2,000			$	43.37				2,000
December 2007			232,385			$	40.05				187,740
April 2008			2,000			$	41.00				2,000
September 2008			2,000			$	41.00				2,000
December 2008			203,250			$	38.35				189,875
April 2009			1,000			$	34.30				1,000
Total			1,240,110								876,999
Weighted Average Exercise Price		$	35.95							$	37.07

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				Exercisable
Date of Grant		at 12/31/09				Forfeited				Exercised				Expired				12/31/09				at 12/31/09
February 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			$	—

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 Life
Date 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			1.3
February 2006		4.20% – 4.20%			40	%		4 yrs			1.8
May 2006		4.82% – 4.83%			35	%		4 yrs			4.6
July 2006		4.82% – 4.83%			35	%		4 yrs			6.0
October 2006		4.82% – 4.83%			35	%		4 yrs			9.8
December 2006		4.54% – 4.58%			35	%		4 yrs			11.7
February 2007		4.54% – 4.58%			35	%		4 yrs			13.7
May 2007		4.54% – 4.58%			35	%		4 yrs			16.6
September 2007		4.54% – 4.54%			35	%		4 yrs			20.1
December 2007		4.23% – 4.23%			35	%		4 yrs			23.7
April 2008		4.23% – 4.23%			35	%		4 yrs			27.9
September 2008		4.23% – 4.23%			35	%		4 yrs			32.5
December 2008		4.23% – 4.23%			35	%		4 yrs			35.7
April 2009		4.23% – 4.23%			35	%		4 yrs			39.4
Weighted Average Remaining Life (months)											15.8

(16) Phantom Stock Plans

As of December 31, 2009, Alion had granted 223,685 shares of phantom stock under the Initial Phantom Stock Plan. Under the Second Phantom Stock Plan, Alion had granted 340,312 shares of retention phantom stock and 213,215 shares of performance phantom stock. Under the Director Phantom Stock Plan, Alion had granted 20,779 shares of phantom stock. The Company recognized a $12 thousand credit to compensation expense for director phantom stock this quarter. As a result of executives forfeiting their outstanding phantom stock grants last year, the Company recognized a $4.7 million credit to compensation expense for the quarter ended December 31, 2008.

The ESOP Trustee, consistent with its duty of independence from Alion management and its fiduciary responsibilities, retains an independent third party valuation firm to assist it in determining the fair market value (share price) at which the Trustee may acquire or dispose of investments in Alion common stock. Management independently estimates the value of a share of common stock by considering, in part, the most recent price at which the Company was able to sell shares to the ESOP Trust. In addition to the share price selected by the ESOP Trustee, Management considers other factors such as risk free interest rates and volatility, to assist in estimating Alion’s aggregate liability for outstanding phantom stock grants that remain subject to share price fluctuations. Certain vested grants have fixed values based on the share price in effect on the date on which such grants became fully vested. Only phantom stock grants to non-employee members of Alion’s Board of Directors remain outstanding. No grants to executives remain outstanding.

The Audit and Finance Committee of Alion’s Board of Directors reviews the reasonableness of the liability for outstanding phantom stock grants rights that Management has determined is appropriate for the Company to recognize in its financial statements. The Audit and Finance Committee considers various factors in its review, including in part, the most recent valuation report and the related share price selected by the ESOP Trustee.

ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS

The table below sets out the disclosures required by ASC 718 — Stock Compensation and the assumptions used to value a share of Alion common stock and the Company’s phantom stock grants as of December 31, 2009 and September 30, 2009. The Company uses intrinsic value to recognize phantom stock plan compensation expense for grants prior to October 2006. For all subsequent grants, Alion uses a Black Scholes Merton option pricing model to recognize compensation expense. Alion uses the fair market value of a share of its common stock to recognize expense for all grants; therefore no additional disclosures are required for these grants. There is no established public trading market for Alion’s common stock. The ESOP Trust is the only holder of our common stock. Alion does not expect to pay any dividends on its common stock and intends to retain future earnings, if any, for use in the operation of its business.

Stock-based Compensation Disclosure per ASC 718
Phantom Stock
as of December 31, 2009

		Shares Granted				Shares Granted				Total Shares				Grant Date				Outstanding at
Date of Grant		to Employees				to Directors				Granted				Share Price				9/30/09
November 2006			—				5,978				5,978			$	41.02				4,839
November 2007			—				6,993				6,993			$	40.05				5,994
Total			—				12,971				12,971								10,833
Weighted 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				Exercisable
Date of Grant		12/31/09				Forfeited				Exercised				Expired				12/31/09				at 12/31/09
November 2006			4,839				—				—				—				4,839				4,839
November 2007			5,994				—				—				—				3,663				3,663
Total			10,833								—				—				8,502				8,502
Weighted 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 Life

Date of Grant

Rate

Volatility

Life

(months)

November 2006

4.54% – 4.58%

35

%

3 yrs

—

November 2007

4.23% – 4.23%

35

%

3 yrs

10.4

Weighted Average Remaining Life

5.8

(17) Segment Information and Customer Concentration

The Company operates in one segment, delivering a broad array of scientific, engineering and information technology expertise to research and develop technological solutions for problems relating to national defense, homeland security, and energy and environmental analysis. Alion provides services to departments and agencies of the federal government and, to a lesser extent, to commercial and international customers. The Company’s federal government customers typically exercise independent contracting authority. Offices or divisions within an agency or department may directly, or through a prime contractor, use the Company’s services as a separate customer so long as that customer has independent decision-making and contracting authority within its organization.

Contract receivables from agencies of the federal government represented approximately $184.7 million, or 97.9%, and $179.7 million, or 97.4%, of accounts receivable for December 31, 2009 and September 30, 2009. Contract revenue from departments and agencies of the federal government represented approximately 97.0% and 95.5%, of total contract revenue for the quarters ended December 31, 2009 and 2008.

ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS

(18) Guarantor/Non-guarantor Condensed Consolidated Financial Information

Alion’s Senior Unsecured Notes are unsecured general obligations of the Company. Certain of Alion’s 100% owned domestic subsidiaries have jointly, severally, fully and unconditionally guaranteed the Senior Unsecured Notes. The following information presents condensed consolidating balance sheets as of December 31, 2009 and September 30, 2009, condensed consolidating statements of operations for the quarters ended December 31, 2009 and 2008; and condensed consolidating statements of cash flows for the three months ended December 31, 2009 and 2008 of the parent company issuer, the guarantor subsidiaries and the non-guarantor subsidiaries. Investments include investments in subsidiaries held by the parent company issuer presented using the equity method of accounting.

ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS

Condensed Consolidating Balance Sheet Information at December 31, 2009
(In thousands)

										Non-
						Guarantor				Guarantor
		Parent				Companies				Companies				Eliminations				Consolidated
Current assets:
Cash and cash equivalents		$	93			$	(47	)		$	(46	)		$	—			$	—
Accounts receivable			178,569				3,491				3,084				—				185,144
Prepaid expenses and other current assets			4,526				67				23				—				4,616
Total current assets			183,188				3,511				3,061				—				189,760
Property, plant and equipment, net			13,751				77				53								13,881
Intangible assets, net			25,864																25,864
Goodwill			398,921																398,921
Investment in subsidiaries			18,863												(18,863	)			—
Intercompany receivables			774				13,401				3,193				(17,368	)			—
Other assets			10,604				13				3								10,620
Total assets		$	651,965			$	17,002			$	6,310			$	(36,321	)		$	639,046
Current liabilities:
Book cash overdraft		$	5,074			$	—			$	—			$	—			$	5,074
Interest payable			15,419				—				—				—				15,419
Current portion, senior term loan payable			2,389				—				—				—				2,389
Current portion, subordinated note payable			6,000				—				—				—				6,000
Trade accounts payable			48,407				277				504				—				49,188
Accrued liabilities			51,495				1,072				499				—				53,066
Accrued payroll and related liabilities			33,753				786				475				—				35,014
Billings in excess of costs revenue earned			3,438				—				—				—				3,438
Total current liabilities			165,975				2,135				1,478				—				169,588
Intercompany payables			16,594				—				774				(17,368	)			—
Senior term loan payable, excluding current portion			226,969				—				—				—				226,969
Senior unsecured notes			245,462				—				—				—				245,462
Subordinated note payable			45,715				—				—				—				45,715
Accrued compensation, excluding current portion			6,058				—				—				—				6,058
Accrued postretirement benefit obligations			729				—				—				—				729
Non-current portion of lease obligations			7,530				45				19				—				7,594
Redeemable common stock warrants			32,557				—				—				—				32,557
Common stock of subsidiaries			—				2,799				1				(2,800	)
Redeemable common stock			187,112				—				—				—				187,112
Accumulated 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

ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS

Condensed Consolidating Balance Sheet
as of September 30, 2009

										Non-
						Guarantor				Guarantor
		Parent				Companies				Companies				Eliminations				Consolidated
Current assets:
Cash and cash equivalents		$	11,404			$	(143	)		$	(76	)		$	—			$	11,185
Accounts receivable, net			174,456				3,421				2,280				—				180,157
Prepaid expenses and other current assets			3,659				107				29				—				3,795
Total current assets			189,519				3,385				2,233				—				195,137
Property, plant and equipment, net			14,346				68				60				—				14,474
Intangible assets, net			28,680				—				—				—				28,680
Goodwill			398,921				—				—				—				398,921
Investment in subsidiaries			17,132				—				—				(17,132	)			—
Intercompany receivables			702				12,534				3,405				(16,641	)			—
Other assets			10,270				13				3				—				10,286
Total assets		$	659,570			$	16,000			$	5,701			$	(33,773	)		$	647,498
Current liabilities:
Interest payable			9,039			$	—				—			$	—				9,039
Current portion, senior term loan payable			2,389				—				—				—				2,389
Current portion, subordinated note payable			3,000				—				—				—				3,000
Current portion, acquisition obligations			50				—				—				—				50
Trade accounts payable			59,742				300				665				—				60,707
Accrued liabilities			43,984				1,135				306				—				45,425
Accrued payroll and related liabilities			41,642				832				559				—				43,033
Billings in excess of revenue earned			3,661				—				—				—				3,661
Total current liabilities			163,507				2,267				1,530				—				167,304
Intercompany payables			15,939				—				702				(16,641	)			—
Senior term loan payable, excluding current portion			229,221				—				—				—				229,221
Senior unsecured notes			245,241				—				—				—				245,241
Subordinated note payable			46,932				—				—				—				46,932
Accrued compensation, excluding current portion			5,740				—				—				—				5,740
Accrued postretirement benefit obligations			717				—				—				—				717
Non-current portion of lease obligations			7,216				51				19				—				7,286
Redeemable common stock warrants			32,717				—				—				—				32,717
Common stock of subsidiaries			—				2,799				1				(2,800	)			—
Redeemable common stock			187,137				—				—				—				187,137
Accumulated 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