UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)



ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 2014



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 333-89756

Alion Science and Technology Corporation

(Exact name of registrant as specified in its charter)




Delaware		54-2061691
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1750 Tysons Boulevard, Suite 1300, McLean, VA 22101

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code (703) 918-4480

Securities registered pursuant to Section 12(b) of the Act:




Title of each class		Name of each exchange on which registered
None		N/A

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes ý No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ý Yes ¨ No

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. ¨ Yes ý 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý Yes ¨ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

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.

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter was: Not Applicable

The number of shares outstanding of Alion Science and Technology Corporation common stock as of December 29, 2014 was 13,103,912.

DOCUMENTS INCORPORATED BY REFERENCE: None

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ALION SCIENCE AND TECHNOLOGY CORPORATION

FORM 10-K

TABLE OF CONTENTS




	PART I

Item 1.	Business	1
Item 1A.	Risk Factors	14
Item 1B.	Unresolved Staff Comments	27
Item 2.	Properties	27
Item 3.	Legal Proceedings	27
Item 4.	Mine Safety Disclosures	28

	PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	29
Item 6.	Selected Financial Data	30
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	48
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	51
Item 8.	Financial Statements and Supplementary Data	53
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	93
Item 9A.	Controls and Procedures	93
Item 9B.	Other Information	94

	PART III

Item 10.	Directors, Executive Officers and Corporate Governance	95
Item 11.	Executive Compensation	101
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	116
Item 13.	Certain Relationships and Related Transactions, and Director Independence	117
Item 14.	Principal Accountant Fees and Services	118

	PART IV

Item 15.	Exhibits and Financial Statement Schedules	120

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PART I

Item 1. Business

Certain information included or incorporated by reference in this annual report on Form 10-K and in press releases, written statements or other documents filed with the United States (U.S.) Securities and Exchange Commission (SEC), and in our investor calls may not address historical fact and thus constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995 and other federal securities laws and involve certain known and unknown risks and uncertainties. All statements in this annual report on Form 10-K other than statements of historical fact are statements that could be deemed forward-looking statements, including projections of financial performance, assertions of strategies and objectives, comments on future development, statements concerning future economic performance and projections of our future performance under existing contracts as well as any assumptions underlying any of the foregoing. These forward-looking statements relate to our future plans, objectives, expectations and intentions and are for illustrative purposes only. These statements may be identified by the use of words such as “believe,” “expect,” “intend,” “plan,” “anticipate,” “likely,” “forecast,” “projections,” “could,” “estimate,” “may,” “potential,” “should,” “would” and similar expressions.

Factors that could cause actual results to differ materially from anticipated results include, but are not limited to:


•	Our ability to meet current and future debt obligations including covenants


•	U.S. government debt ceiling limitations, sequestration, continuing resolutions, or other similar federal government budgetary or funding issues;


•	Delays in payments from U.S. government customers;


•	U.S. government decisions to reduce funding for projects we support;


•	Failure to retain our existing government contracts, win new business and win re-competed contracts;


•	Failure of government customers to exercise contract options;


•	Limits on financial and operational flexibility given our substantial debt and debt covenants;


•	Government contract bid protest and termination risks;


•	Competitive factors such as pricing pressures and competition to hire and retain employees;


•	Results of current and future legal proceedings and government agency proceedings which may arise from operations and attendant risks of fines, liabilities, penalties, suspension and debarment;


•	Tax law changes that could affect tax liabilities or our effective tax rate;


•	ERISA law changes related to our employee stock ownership plan (ESOP);


•	Any inability to maintain adequate internal control over financial reporting or debt compliance metrics;


•	Changes in accounting standards and Generally Accepted Accounting Principles;


•	Material changes in laws or regulations affecting our businesses;


•	General volatility in the debt and securities markets; and


•	Other risks discussed elsewhere in this annual report, including all risk factors described in the section entitled “Risk Factors.”

Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s view only as of the date of filing of this annual report on Form 10-K. Any such forward-looking statements are not guarantees of future performance, and actual results, developments and business decisions may differ materially from those envisaged by such forward-looking statements. We undertake no obligation to update any of these factors or to publicly announce any change to our forward-looking statements in this annual report on Form 10-K, whether as a result of new information, future events, changes in expectations or otherwise, except as required by law.

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Overview

Alion Science and Technology Corporation and its subsidiaries (collectively, Alion, the Company, we, or our) is an employee-owned company on basis of its outstanding common stock. We provide advanced engineering, information technology, naval architecture and operational solutions to strengthen national security and drive business results. For customers in defense, civilian government, foreign governments and commercial industries worldwide, Alion’s engineered solutions support smarter decision-making and enhanced readiness in rapidly-changing environments.

Our fiscal 2014 revenue was $805 million, a 5.2% decrease over our fiscal year 2013 revenue of $849 million. For the past three fiscal years, U.S. government contracts accounted for more than 96% of our revenue, with approximately 94% of our revenue derived from Department of Defense contracts. The U.S. Navy is our largest single customer, generating more than 50% of our revenue in each of the last three fiscal years. Cost reimbursable contracts continue to be our predominant contracting method, with approximately 85% of revenue coming from this type of contract.

We provide professional engineering and program management services, and scientific expertise, in a range of specialized core business areas described below. In fiscal 2013, we reorganized our business areas to more closely align our services with the demands of the marketplace. Our revised core business areas track internal resource realignments and consolidations we made to foster greater collaboration across our company. We expect this will improve our efficiency and enhance our ability to provide complete customer solutions. Certain annual revenues for the fiscal years ended 2014, 2013 and 2012 disclosed below differ from amounts previously disclosed due to customers re-defining individual contracts, task orders and programs. While this re-classification may shift reported revenue from one classification to another, our total revenue for the period remains unchanged. Annual revenue by core business area for the past three fiscal years was:



	Revenue by Fiscal Year
Core Business Area	2014				2013				2012
	(In millions)
Naval Architecture and Marine Engineering	$	321.9	40.0	%	$	343.8	40.5	%	$	354.6	43.4	%
Systems Analysis, Design and Engineering	284.2		35.3	%	285.9		33.7	%	214.0		26.2	%
Modeling, Simulation, Training and Analysis	198.7		24.7	%	219.3		25.8	%	248.6		30.4	%
Total	$	804.8	100.0	%	849.0		100.0	%	$	817.2	100.0	%

Naval Architecture and Marine Engineering. We provide technical expertise for ship and systems design as well as acquisition and production supervision, testing, delivery and engineering support to commercial and naval markets, both domestically and internationally.


•	We provide systems engineering/design integration, including mission needs analysis and analysis of alternatives, threat and damage recovery analysis and concept through detail design. Our specialty skills include combat systems engineering, simulation-based design, and systems engineering.


•	We provide operational sustainment and life cycle support, encompassing in-service support as well as lifecycle logistics, including technical data development, contractor advisory services, and interim supply support. We also conduct availability planning, execution and control and provide schedule management and on-site logistics representatives at home ports.


•	We provide acquisition and production management for ships, systems and marine equipment. We also provide waterfront and field engineering support as well as post-shakedown availability planning and execution, damage control audits and shipboard completion inspections.

Systems Analysis, Design and Engineering. We provide services and technologies designed to reduce costs and enhance the performance and safety of complex systems and improve information flow across networks and organizations.


•	We support enterprise networking, databases, and healthcare-related information technologies. We provide requirements engineering, integration of commercial and government off the shelf products and architecture design and development. We also provide full software development lifecycle and help desk support as well as cyber security and information assurance services.

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•	We support testing and evaluation, including reliability, availability, maintainability, supportability and usability testing. This includes developing detailed plans and requirements and performing data collection and analysis.

•

Our research and development services encompass advanced hardware, software, materials and chemicals. We provide prototyping, initial production and limited fielding of systems. We also provide engineering and analysis services to optimize man-machine interfaces and manpower requirements. Alion develops, designs, prototypes and implements crew stations, floor plans, and virtual interfaces as well as workflow and ergonomic enhancements.


•	We support the planning, procurement, maintenance, distribution and replacement of people or equipment. This includes support to logistical reset, depot level support, tracking systems, Radio-frequency identification, barcoding and other technologies as well as predictive analysis.


•	We provide nuclear safety support to both domestic and international utilities in response to regulatory requirements for appropriate resolution of safety issues.


•	We provide support for environmental protection through risk assessments, organic and inorganic analysis, air quality monitoring and laboratory management.

Modeling, Simulation, Training and Analysis. We use our modeling and simulation expertise to examine event outcomes, identify operational risks, enhance training and predict and improve system operations.


•	We develop and integrate Live/Virtual/Constructive/Gaming technologies to support individual and group training. We produce interactive, immersive training tools and virtual environments using open-source and commercial video game engines. In addition, we develop geospatial databases and products for training and analysis.


•	We provide modeling capabilities for decision support, acquisition, strategy development, transportation systems, program management and production and provide human, social, cultural and behavioral modeling and analysis.


•	We produce training environments and manage the necessary infrastructure. This includes developing architectures and equipment and integrating training systems with command, control and communications systems. We also engage in instructional design and curriculum development, and develop and implement learning management systems.


•	We develop and deliver vulnerability and risk modeling tools and services for the security and protection of structures and vessels.


•	We perform modeling, analysis and management of wireless spectrum and satellite communications and technologies, and provide expertise to support wireless policy development.

We provide support to and analysis of strategic, tactical and weapons systems usage of the wireless spectrum, satellite communications and related technologies.

Corporate History

Alion was organized in October 2001 as a for-profit Delaware corporation to acquire substantially all the assets and liabilities of IIT Research Institute, a not-for-profit Illinois corporation (IITRI). In December 2002, some eligible IITRI employees directed funds from qualifying retirement account balances into an employee stock ownership plan which is now known as The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan (ESOP). In December 2002, State Street Bank and Trust Company (the then and current ESOP Trustee) used those proceeds to purchase Alion common stock on behalf of The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Trust (the ESOP Trust). In December 2002, Alion used those stock sale proceeds plus certain other indebtedness to purchase substantially all of IITRI’s assets. At all times since December 2002, the ESOP Trust has owned substantially all of Alion’s issued and outstanding common stock. Since December 2002, Alion has grown both organically and through acquisitions. From 2004 through 2007 Alion completed a number of levered and unlevered acquisitions. When Alion issued its secured notes in March 2010, the Company also issued common stock warrants constituting a second class of stock under the Internal Revenue Code. As a result, Alion no longer qualified to be treated as an S-corporation for U.S. federal income tax purposes and became a C-corporation.

Completion of Refinancing Transactions

On August 18, 2014, Alion completed a comprehensive refinancing of its outstanding indebtedness. The refinancing was made pursuant to an Amended and Restated Refinancing Support Agreement dated as of May 2, 2014, as amended, between the Company, ASOF II Investments, LLC (ASOF) and Phoenix Investment Adviser, LLC (Phoenix, and collectively, the Supporting Noteholders). The refinancing included the following transactions (the Refinancing Transactions):


•	We exchanged $210,986,000 in aggregate principal amount of our 10.25% Senior Notes due 2015 (the Unsecured Notes), representing 89.78% of the aggregate principal amount of the Unsecured Notes then-outstanding, for, in the aggregate, (i) $208,135,000 in aggregate principal amount of new Third-Lien Senior Secured Notes due 2020 (the

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Third Lien Notes), (ii) 208,135 warrants to purchase common stock at an exercise price of $0.01 (the “Penny Warrants”) and (iii) $1,710,600 in cash (the Exchange Offer).

•

The proposed amendments contained in the Second Supplemental Indenture relating to the Unsecured Notes, which was executed on May 29, 2014, became operative. The amendments eliminated substantially all of the negative covenants, certain events of default and the covenant restricting mergers and consolidations, modified certain provisions relating to defeasance, and made other technical and conforming changes to the indenture governing the Unsecured Notes.


•	We sold 10 units at a price of $600 per unit, for aggregate proceeds of $6,000 (the Unit Offering). The units in the aggregate consisted of $10,000 principal amount of Third Lien Notes and 10 Penny Warrants.


•	We entered into two new first lien term loan facilities consisting of a Term A Loan in the principal amount of $110.0 million, having a term of four years, and a Term B Loan in the principal amount of $175.0 million having a term of five years (the First Lien Term Loans).


•	We entered into a new $70.0 million second lien term facility having a term of five and one-half years (the Second Lien Term Loan).


•	With the proceeds of the First Lien Term Loans and the Second Lien Term Loan, on September 17, 2014, we redeemed our outstanding 12% Senior Secured Notes due 2014 (the Secured Notes) at a redemption price of 100% of principal amount, plus accrued and unpaid interest to, but not including, the date of redemption, for an aggregate payment of $351,667,904.


•	We replaced our $45.0 million revolving credit facility with a new $65.0 million revolving credit facility (the Revolving Credit Facility).


•	ASOF purchased from Alion in a private placement units consisting of $2,841,000 principal amount of Third Lien Notes and 2,841 Penny Warrants for an aggregate purchase price of $1,704,600 (the ASOF Cash Funding).

The indentures governing the Third Lien Notes and the Unsecured Notes and the agreements governing the First Lien Term Loans, the Second Lien Term Loan and the Revolving Credit Facility are referred to collectively as the “Debt Instruments.”

In addition, as consideration for their funding the Second Lien Term Loan, we issued in a private placement (i) all 70 shares of our new Series A Preferred Stock and (ii) Penny Warrants to purchase 12.5% of our then-outstanding common stock to ASOF and affiliates of Phoenix. The holders of the Series A Preferred Stock have consent rights over certain actions to be taken by Alion and its subsidiaries. With respect to any and all matters on which there is a stockholder vote, the affirmative vote of the majority of the shares of Series A Preferred Stock outstanding is both necessary and sufficient to approve all such matters for all or any classes or series of stockholders of Alion. As a result of its majority ownership of the Series A Preferred Stock, ASOF has the right to appoint a majority of the members of our board of directors, possesses voting control over all matters that require stockholder approval and controls decisions regarding consenting to certain specified actions.

Suspension of Duty to File SEC Reports

On October 30, 2014, Alion filed Forms 15 with the SEC notifying the SEC of the suspension of its duty to file reports under Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Alion’s duty to file periodic, current and other reports with the SEC under the Exchange Act was suspended effective upon filing of the Forms 15 with the SEC. Alion expects that this Annual Report on Form 10-K, including any necessary amendments thereto, will be the final report it files with the SEC.

Although Alion will no longer be filing current and periodic reports with the SEC, pursuant to the indenture governing the Third Lien Notes, Alion is required to post certain information on its website, including annual and quarterly financial statements, a Management’s Discussion and Analysis of Financial Condition and Results of Operations, and current information. Holders of the Debt Instruments will be able to review this information.

The reports, statements and other information the Company has previously submitted to the SEC, including this Annual Report on Form 10-K, may be read and copied at the Public Reference Room of the SEC at 100 F Street NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at (800) SEC-0330. The Company’s SEC filings are also available without charge at the SEC’s web site at http://www.sec.gov.

The Alion ESOP

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The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan (the Plan), is a KSOP — a qualified retirement plan that includes an ESOP invested in Alion common stock and a non-ESOP component invested in mutual funds. The ESOP Trust owns substantially all issued and outstanding shares of our common stock.

Formerly, eligible employees could use qualified retirement funds to purchase beneficial interests in Alion common. The ESOP Trust used the money employees invested in the ESOP to purchase Alion common stock and allocate ESOP interests to employee accounts according to the Plan’s terms. We make retirement plan contributions to the ESOP component for all eligible employee participants. We also make matching contributions to the ESOP for eligible employees based on their pre-tax salary deferrals.

Except in certain limited circumstances, the ESOP Trustee must vote its shares as directed by the ESOP committee. The ESOP committee consists of four members of Alion’s management team and three other Alion employees; it is responsible for financial management and administration of the ESOP.

By law, Alion is required to value the common stock held in the ESOP component at least once a year. Alion formerly had the ESOP Trustee value the common stock in the ESOP twice a year — as of March 31 and September 30. Beginning in fiscal 2015, the ESOP Trustee will only value the common stock annually as of September 30th. The terms of the KSOP permit the ESOP Trust to use employee-directed funds to purchase shares of Alion common stock at the lesser of the then-current or the immediate prior value of a share of Alion common stock. The ESOP plan administrator has suspended the option for employees to invest in Alion common stock. Currently, all ESOP transactions occur at the redemption value of a share of Alion common stock.

Business Strategy

We plan to grow further by retaining our existing customers, increasing our work for them and seeking out new customers to use our services. We expect to do this through targeted business development efforts and by capitalizing on our skilled work force and our solutions competencies. We have several key strategies.

Broaden existing core competencies. We plan to expand our expertise to keep pace with technological developments. We hire skilled employees, engage in business development initiatives and invest in projects to expand our employees’ skill sets. We work to extend our core capabilities to new markets and new customers and focus on enhancing our ability to serve existing customers. We increase our employees’ technological and program management skills through training, internally funded projects and mentoring. We offer our employees non-degree programs in information technology, business, and desktop applications through our “Alion University.” Our Alion University offers programs in engineering, program management, and finance and administration to maintain and enhance our employees’ skills and advance Alion’s reputation in the commercial technology solutions markets.

Expand market share by leveraging experience and reputation. We perform a variety of services for a broad base of more than 206 customers as of September 30, 2014, including Cabinet-level government departments and agencies, and state and foreign governments. We plan to use our advanced technological capabilities and our customer relationships to expand our market presence by offering a broader range of services to our existing customers and by delivering our solutions to new customers. We intend to use our customer relationships and our technology expertise to strategically expand our Department of Homeland Security (DHS) customer base. For over five years, Washington Technology, Defense News and Military Training Technology have continued to rank us among the top professional services government contractors. Additionally for the past four years, Military Times EDGE has voted us a “Best for Vets Employer.” Washington Business Journal continues to rank Alion in its top twenty technology government contractors and government contract awardees.

Improve financial performance and increase sales. Federal budget uncertainties and expected lower Department of Defense spending levels have challenged our ability to grow our revenue. Over the past five years our sales have fluctuated from a low of $787 million to a high of $849 million in fiscal 2013. We remain focused on growing our business and striving to achieve operating efficiencies. We intend to strengthen our financial performance by controlling operating costs and growing organically. We believe we can achieve an even more competitive cost structure than we currently have which will enhance our ability to win business and improve operating results. We believe Alion’s size and expertise position us to continue to bid on larger government programs and broaden our customer base.

Market and Industry Background

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Fiscal pressures on the federal government have prompted increased scrutiny of the Department of Defense’s (DoD’s) budget. Although funding decisions are usually made on an annual basis, near-term decisions about issues such as pay raises, health benefits for military retirees, and the acquisition of weapon systems can have effects on the composition and costs of the nation’s armed forces that last many years.

For fiscal year 2015, DoD requested appropriations totaling $555 billion. Of that amount, $496 billion is for the base budget and $59 billion is for what are termed overseas contingency operations (OCO). The base budget covers programs that constitute the department’s normal activities, such as the development and procurement of weapon systems and the day-to-day operations of the military and civilian workforce. Funding for OCO pays for U.S. involvement in the war in Afghanistan and other nonroutine military activities elsewhere.

The Five Year Defense Plan (FYDP) 2015-2019 describes DoD’s plans for its normal activities and therefore generally corresponds to the base budget. In an effort to reduce costs, the current FYDP includes sizable cuts in the number of military personnel, particularly in the Army.

The Evolution of Modern Warfare: Rising Concern and Pacific Rim Focus (threats from China, Iran and North Korea)

Admittedly, the rising concern associated with the Pacific Rim (and Africa) encompassed by Anti-Access/Area Denial (A2/AD) is not the only challenge U.S. forces face in the 21st Century, as the character of modern conflict is extraordinarily complex. While not a new concept, many current wars have recently been defined as “hybrid” in character, with adversaries effectively employing elements of regular and irregular warfare.

It is hybrid warfare, not state actors employing A2AD, which has become the focus of U.S. military efforts since the terrorist attacks of September 11, 2001. This has required creative approaches to address the challenges of fighting insurgents in foreign lands. Additionally, combating irregular warfare has been a top DoD priority since 2008. As such, it has driven the majority of contemporary thought on the conduct of operational warfare.

Many experts agree that hybrid warfare does not replace conventional warfare, or eliminate the need to prepare for it. The DoD advocates the need for balance between conventional and irregular capabilities and highlights the need for superior conventional forces. To successfully operate in the A2/AD environment, the U.S. military must prepare adequately for this evolution of modern warfare by understanding the operational implications presented by modern technology. Planners must use innovative joint planning concepts such as AirSea Battle and effective integration of joint forces to help achieve the desired end state. A2/AD not only increases the dangers of conventional war, but also offers non-state actors worldwide options to increase the effectiveness of irregular or hybrid warfare. The U.S. military continues to prepare for and execute combat operations against modern A2/AD systems that are employed in many places around the world. Similarly, we continue to align our services and solutions to support A2/AD solutions development, training, and operations.

Defense Initiatives

In early fiscal 2015, Secretary Hagel unveiled an ambitious new plan for maintaining the US military technological edge in a time of tightening budgets. Specifically, Secretary Hagel said the new “defense innovation initiative” aims to invest money in “cutting-edge technologies and systems - especially in the fields of robotics, autonomous systems, miniaturization, big data, and advanced manufacturing, including 3-D printing.” He further added that “...by focusing our investments (we) will sharpen our military edge even as we contend with fewer resources.” Hagel calls this initiative the “third offset strategy” and compared it in scale to two past “offset” initiatives, including the nuclear buildup of the 1950s that ultimately helped end the Cold War, as well as the 1970s-era effort that led to the development of precision-guided missiles, stealth aircraft and advanced intelligence, surveillance and reconnaissance platforms.

Additionally, Secretary Hagel and Deputy Secretary of Defense Bob Work will guide the development of this initiative by forming a new Advanced Capability and Deterrence Panel. Work and other Pentagon officials have signaled that the Defense Department is looking for new ways to partner with the defense industry and other institutions to share research and development costs. The new program is not limited to technology research and development. It also calls for a “reinvigorated wargaming (Modeling, Simulation and Experimentation) effort” to “develop and test alternative ways of achieving our strategic objectives and help us think more clearly about the future security environment,” as stated in a recent SECDEF memo. These defense initiatives align with our core competencies including our modeling, simulation, and rapid prototyping capabilities.

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Offsetting Sequestration

Given the challenges, the defense industrial market is working on how to (i) grow profitably from diminishing DoD budgets and (ii) slash costs for maintaining a satisfactory financial condition.

To that end, the defense contractors (primes and system integrators) are diversifying their businesses into other areas besides defense production to include expansion of professional engineering services. Meanwhile a continued focus on research and development is also helping these companies to develop next generation technologies essential in a climate of fewer programs and reduced budgets.

Defense companies will increasingly be required to come up with next generation intelligence, surveillance and reconnaissance (ISR) technologies. The contractors specializing in space systems will continue to gain from the Pentagon’s increasing focus on its space division to counter emerging security threats as embodied in A2/AD such as a “a day-without-space”.

Achieving new Technological Superior Military Capability: Industry-Government Collaboration

Today the U.S. Armed Forces and their allies possess a military capability advantage over any potential adversary, but that advantage is eroding as potential adversaries invest (with a keen eye on A2/AD) in advanced technology and increase their military force structure. The DoD will need to develop an approach to force planning and desired capabilities, while living within the budgetary caps established by the Budget Control Act of 2011. Enabling technologies that support the development and deployment of operational capabilities that align with the dynamic threat environment must be identified. These operational capabilities must take into account the rise of near-peer competitors and the persistent challenges presented by terrorists and violent extremists.

We are starting to see other nations pursue technological advances to counter U.S. advantages in electronic warfare, longer range air-to-air missiles, radars operating in non-conventional bandwidths, counter-space capabilities, longer range and more accurate ballistic and cruise missiles, improved undersea warfare capabilities, as well as cyber and information operations. This activity has caused DoD researchers and engineering planners to identify challenges known as “hard problems” that must be solved if U.S. Armed Forces are to retain the same overmatch capability that they have sustained in recent years.

The DoD Science and Technology program seeks to provide an appropriate balance between technical capabilities to win the current fight and technical capabilities to prepare for the uncertain future, preventing technological surprise, while ensuring freedom of movement and access for U.S. military forces. Technological superiority has been central to the strategy of the DoD for the past century. The preservation and advancement of technology superiority requires heightened levels of cooperation, coordination, and collaboration between all members of the DoD science & technology community, industry and academia.

Given the restrictions of the Budget Control Act of 2011, the DoD Research Development Test and Evaluation funds available are decreasing, while the complexity and depth of the national security challenges are growing. Finding solutions to these challenges that would prevent the U.S. Armed Forces from fulfilling our national security missions is essential. There is a host of enabling A2/AD technologies and capabilities being developed world-wide that could restrict the U.S. military’s ability to project its armed forces. Specific focus areas include technologies that will be enablers for Electronic warfare (Electronic Attack, Electronic Protection, and Electronic Support); cyber; conventional and non-conventional air and surface detection and tracking systems; flexible and in-depth air and missile defense; alternatives for space based capabilities; and penetrating weapons. Developing enabling technologies and the resulting capabilities will require government and industry collaboration. As such industry possesses an opportunity to present solutions they may already have under development with discretionary funds or Independent Research and Development (IRAD). Meanwhile, DoD will continue to maintain a robust level of funding for its science and technology program, and industry will augment that program through greater organic investment in research and development through its IRAD program. A coordinated effort between both government and industry will ensure the development and accelerated delivery of the right technologies and capabilities for the technological superiority of our Armed Forces.

We are primarily a government contractor.

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Our federal government contracts are normally multi-year contracts funded on an annual basis based on Congressional budget authorizations and appropriations. Each year Congress appropriates funds for authorized programs for the coming government fiscal year. Budget delays and uncertainties have continued to push the approval process later into the fiscal year. The annual Congressional appropriations process means a contract is usually only partially funded at the outset of a major program. Normally a procuring agency commits additional money to a contract only as Congress makes appropriations in future fiscal years. The government can modify or discontinue any contract at its discretion or due to contractor default. The government can terminate or modify a contract for any of a variety of reasons, including funding constraints, changing government priorities or changes in program requirements. If the government terminates one of our contracts at its discretion, it typically pays us for all the services we performed and costs we incurred prior to termination, our termination-related costs, and a negotiated contract fee.

As of September 30, 2014, the value of our executed contracts available for funding totaled $2.4 billion. This amount increased from our September 2013 total of $2.2 billion. The increase is due, in part, to the increase in new awards and funding in our Systems Analysis, Design and Engineering core business. Management’s estimated future or expected revenue from our executed contracts, which is discussed in the Backlog section of this report, differs from the value of our executed contracts. Additionally, as stated in the Backlog section of this report, there can be no assurance that our existing contracts will result in actual revenue in any particular period, or at all, or that any contract included in backlog will be profitable.

Contract Types. We have a diverse contract base including many task order and multiple-award contract vehicles (IDIQ—indefinite delivery, indefinite quantity type contracts). Many customers utilize our IDIQ contracts to hire us. Three of our five largest contracts are IDIQ delivery order contracts; they accounted for 53% of fiscal 2014 revenue. Our largest individual contract accounted for 8.5% of our fiscal 2014 revenue. We had a portfolio of 442 stand-alone contracts and delivery/task orders as of September 30, 2014.

We have three contract pricing structure types: cost-reimbursement, fixed-price and time-and-material. Cost-reimbursement contracts allow us to recover expenses for direct labor and materials, a share of indirect expenses, and a fixed or variable fee depending on contract terms. Government contract rules permit us to recover certain, though not all, of our operating expenses (indirect costs). Fixed-price contract customers pay a stated amount intended to cover all direct and indirect costs, and profit. We assume the risk of any cost overruns and receive the benefit of any cost savings on fixed price contracts. Time-and-material contracts have fixed hourly billing rates designed to cover our labor costs, indirect expenses and profit, with cost reimbursable provisions for materials and other direct costs. We have traditional closed-end contracts and multiple award contracts which require sustained post-award effort to realize revenue. The following table summarizes our revenue by contract type for the years ended September 30, 2014, 2013, and 2012.



	Revenue by Fiscal Year
Contract Type	2014				2013				2012
	(In millions)
Cost-reimbursement	$	684.0	84.9	%	$	723.1	85.2	%	$	675.3	82.6	%
Fixed-price	59.2		7.4	%	74.6		8.8	%	64.2		7.9	%
Time and material	61.6		7.7	%	51.3		6.0	%	77.7		9.5	%
Total	$	804.8	100.0	%	$	849.0	NaN		$	817.2	NaN

We sometimes begin providing services before a U.S. government agency has actually signed or funded a contract or task order. We are at risk for costs we incur before a new contract is executed or an existing contract is modified. The practice is customary in our industry, particularly where a company has oral notification of a contract award, but has not received required contract documents. We designed our internal procedures to provide services “at risk” only when we believe funding is highly probable and delays are administrative or technical in nature. In most cases, we get paid for all our costs when a contract is ultimately executed or modified. However, we cannot be certain, when we work at risk, that we will receive an executed contract or that we will be paid for all our costs. As of September 30, 2014, we had approximately $14.7 million in contract revenue at risk; nearly 39% of that amount represents award fees we believe we have earned where we had yet to receive authorization to bill our customers.

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We compete for key contracts from various U.S. government agencies. Our business development and technical personnel target contract opportunities and analyze each customer’s priorities and overall market dynamics. Depending upon whether a targeted contract is a renewal or a new opportunity, it can take as little as three months and up to three years to develop and execute our strategy before a customer ultimately issues a contract. When we decide to pursue a potential contract, we mobilize a core group of employees with the requisite expertise to lead our bidding and proposal preparation efforts. We supplement our internal capabilities with a network of consultants and other industry experts as necessary. To enhance our prospects of winning a contract, we team with other contractors, frequently our competitors, who have complementary technical strengths.

When we win a contract or task order, we assign a project manager and a task leader to ensure we timely deliver high-quality services. Program managers regularly interface with customers to evaluate our performance and customer satisfaction levels. Managers use our financial management and information systems to compare costs to funding ceilings and measure performance and profitability.

Government Oversight. Federal government auditors and technical specialists regularly review our administrative procedures and our cost accounting policies and practices. Costs on flexibly-priced federal government contracts are subject to Defense Contract Audit Agency (DCAA) and other audits and adjustments. An audit may reveal that some costs charged to a government contract are not allowable, either in whole or in part. In these circumstances, we must repay the federal government any money it paid us for unallowable costs, plus possible interest and possible penalties. The government considers Alion a major contractor and maintains an onsite audit office. The Company has settled indirect rates through 2007 based on completed DCAA audits. All subsequent years are open. We are disputing the government’s claim for penalties and interest for 2005, which in the aggregate are not material. We believe the statute of limitations has expired on any government contractual claims, including any claims for penalties and interest, on our 2005 indirect rate proposal.

We timely submitted our indirect cost proposals for all open fiscal years and expect to submit fiscal 2014 incurred cost proposal next March as required. We have recorded revenue on federal government contracts in amounts we expect to realize.

Backlog

As of September 30, 2014, management estimates the amount of future revenues to be recognized under our existing contracts to be approximately $1.8 billion, of which, approximately $634 million is funded. Of the $1.8 billion of backlog, the amount not reasonably expected to be filled in fiscal 2015 is approximately $0.9 billion.

All of our existing contracts may have funded backlog and unfunded backlog, each of which is described below. The contract values and management’s estimated revenues do not include any task orders or ceiling value under IDIQ contracts, including Governmentwide Acquisition Contracts (GWACs) and General Services Administration (GSA) schedules, except to the extent that task orders have been awarded to us under those contracts.


•	Funded Backlog. Funded backlog represents the estimated revenue value of orders for services under existing contracts for which funding is appropriated or otherwise authorized less revenue previously recognized on these contracts. We expect to recognize a substantial portion of our funded backlog as revenue within the next twelve months.



	As of September 30,
	2014		2013
	(In millions)
Funded	$	634.3	$	436.9


•	Unfunded Backlog. Unfunded backlog represents the estimated revenue value of orders for services under existing contracts for which funding has not been appropriated or otherwise authorized.



	As of September 30,
	2014		2013
	(In millions)
Unfunded	$	1,123.3	$	1,286.6

In fiscal 2013, management refined the methodology used to determine funded backlog and unfunded backlog, including only estimates of future revenues to be recognized under awarded contracts.

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There can be no assurance that our existing contracts will result in actual revenue in any particular period, or at all, or that any contract included in backlog will be profitable. There is a higher degree of risk in this regard with respect to unfunded backlog. The actual receipt and timing of any revenue is subject to various contingencies, many of which are beyond our control. The actual recognition of revenue on contracts included in our backlog may never occur or may change because a program schedule could change; the program could be canceled; a contract could be reduced, modified, or terminated early, whether for the convenience of the government or otherwise; or an option that we had assumed would be exercised could not be exercised. The primary risks that could affect our ability to recognize such revenue on a timely basis or at all include: schedule changes, contract modifications, and our ability to assimilate and deploy new staff against funded backlog; cost cutting initiatives and other efforts to reduce U.S. government spending, which could reduce or delay funding for orders for services; and delayed funding of our contracts due to delays in the completion of the U.S. government’s budgeting process and the use of continuing resolutions by the U.S. government to fund its operations, as described under Item 1A Risk Factors of this report. The estimates used to compile remaining contract backlog are based on our experience under our contracts, and we believe the estimates are reasonable.

Corporate Culture, Employees and Recruiting

We strive to create a culture that promotes performance excellence; respects colleagues’ ideas and judgments; and recognizes the value of our professional staff’s unique skills and capabilities. We seek to attract highly qualified and ambitious employees. We strive to establish an environment in which all employees can make their best personal contribution and have the satisfaction of being part of a unique team. We believe we have a track record of successfully attracting and retaining highly skilled employees because of the quality of our work environment, the professional challenges of our assignments, and the financial and career advancement opportunities we offer.

At September 30, 2014, we had 2,818 employees of whom 2,598 were full-time employees. Approximately 28% of our employees have Ph.D.’s or masters degrees, and approximately 73% of our employees have college degrees. Approximately 29% of our employees have Top Secret or higher level security clearances. We believe we have a good relationship with our employees. None of our employees are covered by a collective bargaining agreement.

We view our employees as our most valuable asset. Our success depends in large part on attracting and retaining talented, innovative, experienced professionals at all levels. As an employee owned company, employee ownership is an important aspect of our corporate culture and enhances our ability to attract and retain our employees. Employee ownership provides a platform for our employees to take exceptional pride in their work and supporting our customers that is unique to Alion. We rely on the availability of skilled technical and administrative employees to perform our research, development and technological services for our customers. The market for certain technical skills in our core business areas is at times extremely competitive. This makes employee recruiting and retention in these and other specialized areas extremely important. We believe our benefits package, work environment, incentive compensation, and employee-ownership culture will continue to be important in recruiting and retaining highly skilled employees.

Our Customers

We provide scientific, research and development, technical expertise, and operational support to a diverse group of U.S. government customers. We also serve commercial, state, local and international government customers. As of September 30, 2014, we had more than 206 distinct customers, including Cabinet-level government departments and agencies, and state and foreign governments. We have approximately 310 DoD contracts and delivery orders with the U.S. Navy, U.S. Army and U.S. Air Force; the Defense Information Systems Agency (DISA); the Defense Advanced Research Projects Agency (DARPA) and others. Other federal civilian agencies and departments included the National Institute of Environmental Health Sciences, the U.S. Department of Energy and the EPA. Commercial, state and local governments and international customers accounted for the remaining 2.6% of our fiscal 2014 revenue. The table below shows revenue by customer category for our past three fiscal years.

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	Revenue by Fiscal Year
	2014				2013				2012
	(In millions)
U.S. Department of Defense	$	753.7	93.7	%	$	790.9	93.2	%	$	755.6	92.4	%
Other Federal Civilian Agencies	29.8		3.7	%	31.4		3.7	%	43.2		5.3	%
Commercial and International	21.3		2.6	%	26.7		3.1	%	18.4		2.3	%
Total	$	804.8	100.0	%	$	849.0	100.0	%	$	817.2	100.0	%

The following five federal government contracts (IDIQ contract vehicles and stand-alone contracts) accounted for more than half of our revenue in fiscal years 2014, 2013 and 2012.


1.	Weapons System Technology Information Analysis Center for the Defense Technical and Information Center (26%, 28%, 17%) (IDIQ contract vehicle);


2.	Seaport-E Multiple Award Contract for the Naval Sea Systems Command (21%, 21%, 20%) (IDIQ contract vehicle);


3.	Technical and Analytical Support for the U.S. Air Force (9%, 8%, 10%) (stand-alone contract);


4.	Naval Sea Systems Command Surface Ships Life Cycle Program Management and Engineering Support (7%, 7%, 6%) (stand-alone contract); and


5.	Software, Networks, Information, Modeling and Simulation - Defense Technical and Information Center (6%, 2%, 0.2%) (IDIQ contract vehicle).

The Weapons System Technology Information Analysis Center for the Defense Technical and Information Center, Seaport-E Multiple Award Contract for the Naval Sea Systems Command and the Software, Networks, Information, Modeling and Simulation for the Defense Technical and Information Center are all IDIQ contract vehicles. Revenues from these IDIQ contract vehicles are comprised of numerous individual task orders. Each task order is separately funded, includes a unique statement of work, period of performance and in some cases, distinct contractual terms and conditions. Termination of these contracts or our inability to renew or replace them when they expire could cause our revenue to decrease and could have a material adverse effect on our business, financial condition, operating results or ability to meet our financial obligations.

Competition

The U.S. government engineering and technology services industries consist of a large number of enterprises ranging from small, niche-oriented companies to multi-billion dollar corporations that serve many U.S. government customers. Competitors frequently form teams to pursue contract opportunities because large contracting initiatives are highly competitive and government customers have diverse requirements. Prime contractors leading large proposal efforts typically select team members based on particular capabilities and experience relevant to each opportunity. Companies that compete on one opportunity may be team members on another opportunity.

We frequently compete against well-known firms in the industry as a prime contractor. Our competitors include Booz Allen Hamilton, BAE, CACI International Inc., SAIC, Leidos Holdings, Inc., Engility Corporation, CSC, ITT, TASC, QinetiQ, ManTech International, URS Corporation, CGI Group Inc. and the services divisions of Lockheed Martin Corporation, General Dynamics Corporation and Northrop Grumman Corporation.

We also compete at the task order level, where knowledge of the customer, its procurement requirements and its environment is often the key to winning business. We have been successful in ensuring our presence on numerous contracts and GSA Schedules, and in competing for tasks under those contracts. The variety of contract vehicles at our disposal, as a prime contractor or subcontractor, allows us to market our services to any U.S. government agency. We have experience providing services to a diverse array of U.S. government departments and agencies. We have first-hand knowledge of our customers and their goals, problems and challenges. Most government contracts we seek are competitive awards. We believe our customers typically consider the following key factors in awarding contracts: technical capabilities and approach; personnel quality and management capabilities; previous successful contract performance; and price.

In our experience, price and technical capabilities are a customer’s two most important considerations in contracts for complex technological programs. We believe our customer knowledge, our government contracting and technical capabilities, and our pricing policies enable us to compete effectively.

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Business Development and Promotional Activities

We promote our contract research services by meeting face-to-face with current and potential customers, obtaining new work from satisfied customers, and responding to requests for proposals (RFPs) and international tenders. We use our knowledge of and experience with U.S. government procurement procedures, and our relationships with government personnel, to try to maximize our ability to respond timely to RFPs and customer requests. We bid on contracts in our core business areas and related areas where we believe we have a good chance of being awarded the contract. When we bid on a potential contract, we draw on our core business area expertise to display the technical skills we can bring to a particular contract.

Our business developers work face-to-face with customers, are experienced in marketing to government customers, know the services and products they represent, and understand each particular customer’s organization, mission and culture. These professionals possess a working knowledge of rules governing the marketing limitations that are unique to the government arena. They understand government funding systems, conflict of interest restrictions, procurement integrity directives, and the procedural requirements designed to establish a level competitive playing field to ensure appropriate use of public funds.

Our technical staff is an integral part of our promotional efforts. The customer relationships they develop through their work often lead to additional business and new research opportunities. We hold weekly company-wide business development meetings to review proposal opportunities and determine strategy in pursuing these opportunities. We also use independent consultants for promoting business, developing proposal strategies and preparing proposals as necessary.

We focus most of our substantial research and development activities on customer-funded projects and internally-developed capital assets. We believe actively fostering an environment of innovation is critical to our ability to grow our business, allowing us to proactively address issues of national concern in public health, safety and national defense.

Resources

Most of our work relies on computer and laboratory equipment and other supplies readily available from multiple vendors. Disruption in availability from any particular vendor is not likely to materially affect our ability to perform our contracts. Some of our specialized laboratory work depends on special materials and equipment whose unavailability could adversely affect experimental laboratory tasks. However, we believe these kinds of delays or disruptions are not likely to materially affect our overall operations or financial condition.

Patents and Proprietary Information

As a normal course of business, we perform research and development, and engineering activities in support of our customers. Typically these services do not depend on patent protection. In accordance with applicable law, our U.S. government contracts often provide government agencies certain license rights to our inventions and copyright works. Government agencies, and other contractors including our competitors, can obtain the right to utilize our inventions. Similarly, our U.S. government contracts often license to us patents and copyright works owned by third parties. We maintain an active program to track and protect our intellectual property. We routinely enter into intellectual property assignment agreements with our employees to protect our rights to any patents or technologies they develop while employed by us. Costs for internal research and development, patents and intellectual property activities are not material to our financial statements.

We maintain a number of trade secrets that contribute to our success and competitive distinction and endeavor to accord such trade secrets protection adequate to ensure their continuing availability to us. While retaining protection of our trade secrets and vital confidential information is important, we are not materially dependent on maintenance of a specific trade secret.

Seasonality

Although our business is not seasonal, it does fluctuate with the number of working days in each quarter. The first and fourth quarters each year generally have fewer working days for our employees to generate revenue. In the weeks before the federal government’s September fiscal year end, it is not uncommon for government agencies to award additional tasks or complete contract actions to avoid losing unexpended fiscal year funds.

Foreign Operations

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In each of the past three fiscal years, nearly all our revenue came from contracts with U.S.-based customers. We treat sales to U.S. government customers as domestic sales regardless of where we perform our services. We have seen a modest increase in work for foreign customers which we perform in the U.S.

Company Information Available on the Internet

Our internet address is www.alionscience.com. Information on the Company’s website is not incorporated by reference into this report.

Regulatory Matters

Federal Acquisition Regulation

We are heavily regulated in most of the fields in which we operate. We provide services and products to numerous U.S. government agencies and entities, including the DoD, U.S. Navy, U.S. Army, U.S. Air Force and DHS. When working with these and other U.S. government agencies and entities, we must comply with various laws and regulations relating to the formation, administration and performance of contracts. U.S. government contracts generally are subject to the Federal Acquisition Regulation (FAR), which sets forth policies, procedures and requirements for the acquisition of goods and services by the U.S. government, agency-specific regulations that implement or supplement FAR, such as the DoD’s Defense Federal Acquisition Regulation Supplement (DFARS) and other applicable laws and regulations. These regulations impose a broad range of requirements, many of which are unique to government contracting, including various procurement, import and export, security, contract pricing and cost, contract termination and adjustment, and audit requirements. Among other things, these laws and regulations:


•	require certification and disclosure of all cost and pricing data in connection with certain contract negotiations;


•	define allowable and unallowable costs and otherwise govern our right to reimbursement under various cost-based U.S. government contracts;


•	require reviews by the DCAA, Defense Contract Management Agency (DCMA) and other U.S. government agencies of compliance with government standards for a contractor’s business systems;


•	restrict the use and dissemination of information classified for national security purposes and the export of certain products and technical data; and


•	require us not to compete for work if an organizational conflict of interest, as defined by these laws and regulations, related to such work exists and/or cannot be appropriately mitigated.

The U.S. government may revise its procurement practices or adopt new contract rules and regulations at any time. In order to help ensure compliance with these complex laws and regulations, all of our employees are required to complete ethics training and other compliance training relevant to their position.

Internationally, we are subject to special U.S. government laws and regulations, local government laws and regulations and procurement policies and practices (including laws and regulations relating to bribery of foreign government officials, import-export control, investments, exchange controls and repatriation of earnings) and varying currency, political and economic risks.

Environmental Matters

We are subject to federal, state, local and foreign laws and regulations relating to, among other things, emissions and discharges into the environment, handling and disposal of regulated substances, and contamination by regulated substances and wastes. Some of our operations may require environmental permits and/or controls to prevent or reduce air and water pollution. Issuing authorities can renew, modify, or revoke these permits.

Operating and maintenance costs associated with environmental compliance and preventing contamination at our facilities are a normal, recurring part of our operations. These costs have not been material in the past and are not material to our total operating costs or cash flows. Such costs are usually allowable under government contracts. Based on information presently available to us and on current U.S. government environmental policies relating to allowable costs, all of which are subject to change, we do not expect environmental compliance to materially affect us. We also believe our facilities’ environmental compliance costs will continue to be allowable.

Under existing U.S. environmental laws, potentially responsible parties can be held jointly and severally liable. We could be potentially liable to the government or third parties for the full cost of investigating or remediating contamination at

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our sites or at third-party sites in the event contamination is identified and remediation is required. In the unlikely event that we were required to fully fund remediation of a site, the statutory framework might allow us to pursue rights of contribution from other potentially responsible parties.

Item 1A. Risk Factors

Risks Related to Our Business and Operations

As a highly‑leveraged company, we expect to experience net losses in at least our next four years of operation.

We have had a net loss every year since our inception in late 2002. We expect to incur net losses for the foreseeable future. Interest expense on existing debt and future deferred income tax expense are among the most significant factors contributing to our estimated future net losses. The size of future losses and achieving profitability depend on achieving significant revenue growth and controlling expenses. We may not become profitable if revenue grows more slowly than we anticipate, or if operating expenses exceed our expectations. Even if we become profitable, we may not be able to sustain our profitability.

As a highly leveraged company, our ability to meet our financial and other future obligations depends on our future operating results and our ability to service our debt.

Our ability to pay our debt, to comply with financial covenants, and to fund working capital and planned capital expenditures depends on our ability to generate cash flow currently and in the future. We cannot be certain our business strategy will succeed or that we will achieve our anticipated financial results. Our financial and operational performance depends upon a number of factors, many of which are beyond our control. Risk factors include:


•	when and how much of our contract backlog our customers fund;


•	how long our customers take to pay us;


•	when and whether we win new contracts and how we perform on our contracts;


•	whether we can increase our annual revenue and/or operating income;


•	how much we have to spend to repurchase our stock from current and former employees;


•	current economic conditions and conditions in the defense contracting industry;


•	U.S. government spending levels, both generally and by our particular customers;


•	failure by Congress to timely approve budgets for federal departments and agencies we support;


•	operating difficulties, operating costs or pricing pressures;


•	new legislation or regulatory developments that adversely affect us; and


•	any delays in implementing strategic projects.

These factors will also affect our ability to meet future ESOP re‑purchase obligations and to pay interest and principal on our outstanding debt as and when amounts come due.

Budget issues have been magnified by the 2011 Budget Control Act (the Budget Control Act) which requires billions in automatic cuts in government funding levels. To the extent that federal government spending is delayed or curtailed by government actions, including sequestration and future government shutdowns, our revenues and operating results may be adversely affected.

We face intense competition from many companies that have greater resources than we do. This could cause price reductions, reduced contract profitability, and loss of market share.

We operate in highly competitive markets and often encounter intense competition to win contracts. If we are unable to successfully compete for new business, our revenue may not grow and operating margins may decline. Many of our competitors have greater financial, technical, marketing, and public relations resources; have larger client bases; and have greater brand or name recognition than we do. Larger competitors include, but are not limited to, U.S. federal systems integrators such as Booz Allen Hamilton, CSC, CACI International Inc., Leidos, SAIC, Engility Corporation, TASC, URS Corporation, CGI Group Inc., ManTech International, and the services divisions of large defense contractors such as Lockheed Martin Corporation, General Dynamics Corporation and Northrop Grumman Corporation.

Our larger competitors may be able to vie more effectively for very large‑ scale government contracts. Our larger competitors also may be able to provide clients with different or greater capabilities or benefits than we can provide in areas

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such as technical qualifications, past performance on large‑scale contracts, geographic presence, price, and availability of key professional personnel. Our competitors have established relationships among themselves or with third parties, including through mergers and acquisitions, to increase their ability to address client needs. They may establish new relationships; new competitors or competitive alliances may emerge.

Our ability to compete for desirable contracts will depend on: the effectiveness of our internal and customer‑funded research and development programs; our ability to offer better performance than our competitors at lower or comparable cost; the readiness of our facilities, equipment and personnel to perform the programs for which we compete; and our ability to attract and retain key personnel. If we do not continue to compete effectively and win contracts, our future business, financial condition, results of operations and our ability to meet our financial obligations may be materially compromised.

Historically, a few contracts have provided most of our revenue. If we do not retain or replace these contracts our operations and financial condition will suffer.

The following five federal government contracts (contract vehicles and stand‑ alone contracts) accounted for more than half of our revenue in fiscal years 2014, 2013 and 2012.


1.	Weapons System Technology Information Analysis Center for the Defense Technical and Information Center (26%, 28%, 17%) (IDIQ contract vehicle);


2.	Seaport‑E Multiple Award Contract for the Naval Sea Systems Command (21%, 21%, 20%) (IDIQ contract vehicle);


3.	Technical and Analytical Support for the U.S. Air Force (9%, 8%, 10%) (stand‑alone contract);


4.	Naval Sea Systems Command Surface Ships Life Cycle Program Management and Engineering Support (7%, 7%, 6%) (stand‑alone contract); and


5.	Software, Networks, Information, Modeling and Simulation for the Defense Technical and Information Center (6%, 2%, 0.2%) (IDIQ contract vehicle).

Termination of these contracts or our inability to renew or replace them when they expire could cause our revenue to decrease and could have a material adverse effect on our business, financial condition, operating results or ability to meet our financial obligations.

As a highly‑leveraged company, if we are unable to achieve or manage growth, our business could be adversely affected.

Attempting to achieve long‑term growth has placed significant demands on our management, and on our administrative, operational and financial resources. To achieve and manage growth, we must improve operational, financial and management information systems, and expand, motivate and manage our workforce. If we are unable to achieve and manage growth without compromising our quality of service and our profit margins, or if systems we implement to aid in managing our growth do not produce expected benefits, our business, prospects, financial condition, operating results and ability to meet our financial obligations could be materially adversely affected.

We may lose one or more members of our senior management team or fail to develop new leaders, which could cause the disruption of the management of our business.

We believe that the future success of our business and our ability to operate profitably depends on the continued contributions of the members of our senior management and the continued development of new members of senior management. We rely on our senior management to generate business and execute programs successfully. In addition, the relationships and reputation that many members of our senior management team have established and maintain with our clients are important to our business and our ability to identify new business opportunities. The loss of any member of our senior management or our failure to continue to develop new members could impair our ability to identify and secure new contracts, to maintain good client relations, and to otherwise manage our business. We do not maintain key man life insurance policies on any members of management.

Our business could suffer if we fail to attract, train and retain skilled employees.

Availability of highly trained and skilled professional, administrative and technical personnel is critical to our future growth and profitability. Even in the current economic climate, competition in our industry for scientists, engineers, technicians, management and professional personnel is intense and competitors aggressively recruit key employees. Competition for experienced personnel, particularly in highly specialized areas, has made it more difficult for us to timely meet all our staffing needs. We cannot be certain we will be able to attract and retain required staff on acceptable terms. Also, due to our highly leveraged capital structure, we may face challenges to recruiting and retaining personnel. Any failure to do so could

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have a material adverse effect on our business, financial condition, operating results and our ability to meet our financial obligations. Failure to recruit and retain a sufficient number of these employees could adversely affect our ability to maintain or grow our business. Some of our contracts require us to staff a program with personnel the customer considers key to successful performance. If we cannot provide these key personnel or acceptable substitutes, the customer may terminate the contract, and we may not be able to recover our costs.

In order to succeed, we will have to keep up with a variety of rapidly changing technologies. Various factors could affect our ability to keep pace with these changes.

Our success will depend on our ability to keep pace with changing technologies in our core business areas. These technologies can change rapidly. Even if we keep up with the latest developments and available technology, newer services or technologies could negatively affect our business. Integrating our research services’ diverse technologies is complex and often has not been previously attempted. Our success will depend significantly on our ability to develop, integrate and deliver technologically advanced services and solutions at the same or faster pace as our competitors, many of which have greater resources than we do. Our new debt agreements from the Refinancing Transactions limit how much we may spend annually on capital expenditures. Those limitations could restrict our ability to invest in new and developing technologies in one or more of our core business areas. Failure to make the appropriate investment could materially affect our business, financial condition and operating results and ability to meet our financial obligations.

An economic downturn could harm our business.

Our business, financial condition, operating results and ability to meet our financial obligations may be affected by various economic factors. Continued unfavorable economic conditions may make it more difficult for us to achieve or maintain revenue growth. In an economic recession, or under other adverse economic conditions which may arise from natural or man‑made events, customers and vendors may be less likely to meet contractual terms and payment or delivery obligations. Continued weakness or further deterioration of economic conditions may have a material adverse effect on our business, financial condition, operating results and ability to meet our financial obligations. We believe that it is possible that an economic downturn could affect our fiscal 2015 results, as well as our results in future periods, due to the combination of a significant reduction in governmental spending as a result of sequestration.

Further adverse changes in market conditions, the stock market, the merger and acquisition environment in our industry or federal government budget constraints could adversely affect the value of our business which could cause us to recognize a goodwill impairment charge in the future.

If market conditions were to become more unfavorable, if merger and acquisition activity in our industry were to occur at significantly lower valuations, or we are unable to increase revenue and operating profit, the value of our reporting units could be adversely affected and we might have to recognize an impairment charge to the significant goodwill we have from acquisitions. An impairment charge could have a material adverse effect on our operating results.

Our employees may engage in misconduct or other improper activities, which could harm our business.

We are exposed to the risk of employee fraud or other misconduct. Employee misconduct could include intentional failures to comply with U.S. government procurement regulations, unauthorized activities, attempts to obtain reimbursement for improper expenses, or submission of falsified time records. Employee misconduct could also involve improper use of our customers’ sensitive or classified information, which could result in regulatory sanctions against us and serious harm to our reputation. It is not always possible to deter employee misconduct, and the precautions we take to prevent and detect this activity may not be effective in controlling unknown or unmanaged risks or losses, which could harm our business, financial condition, operating results and our ability to meet our financial obligations.

Environmental laws and regulations and our use of hazardous materials may subject us to significant liabilities.

Our operations are subject to U.S. federal, state and local environmental laws and regulations, as well as environmental laws and regulations in the various countries in which we operate. We are also subject to environmental laws and regulations relating to the discharge, storage, treatment, handling, disposal and remediation of regulated substances and waste products, such as radioactive, biochemical or other hazardous materials and explosives. We may incur substantial costs in the future because of: modifications to current laws and regulations; new laws and regulations; new guidance or new interpretation of existing laws or regulations; violations of environmental laws or required operating permits; or discovery of previously unknown contamination.

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Our operations involve several risks and hazards, including potential dangers to our employees and to third parties that are inherent in aspects of our business. If we do not adequately insure against these risks, unanticipated losses could materially and adversely affect our financial condition and operating results.

We maintain insurance against risk and potential liabilities related to our operations. We believe we maintain reasonable levels of insurance that limit our likely exposure to unanticipated losses. Our insurance coverage may not be adequate to cover claims or liabilities, and we could be forced to bear significant costs from an accident or incident. Substantial claims in excess of our related insurance coverage could cause our actual results to differ materially and adversely from those anticipated. Due to future claims or liabilities, or to market conditions, our insurance premiums could increase.

Internal system or service failures could disrupt our business and impair our ability to effectively provide our services and products to our customers, which could damage our reputation and adversely affect our revenue, profitability and operating results.

Our information technology systems are subject to systems failures, including network, software or hardware failures, whether caused by us, third‑party service providers, intruders or hackers, computer viruses, natural disasters, power shortages or terrorist attacks. Any such failures could cause loss of data and interruptions or delays in our business, negatively affect our ability to service our clients and perform our contracts, cause us to incur remediation costs, subject us to claims and damage our reputation. Failure or disruption of our communications or utilities could cause us to interrupt or suspend our operations or otherwise adversely affect our business. Any system or service disruptions if not anticipated and appropriately mitigated, could have a material adverse effect on our business including, among other things, an adverse effect on our ability to bill our customers for work performed on our contracts, collect the amounts that have been billed and produce accurate financial statements in a timely manner. Our property and business interruption insurance may be inadequate to compensate us for all losses that may occur as a result of any system or operational failure or disruption and, as a result, our results of operations could be materially and adversely affected.

Security breaches in sensitive U.S. government systems could result in the loss of clients and negative publicity.

Many of the systems we develop, install and maintain involve managing and protecting information involved in intelligence, national security and other sensitive or classified U.S. government functions. A security breach in one of these systems could cause serious harm to our business, damage our reputation and prevent us from being eligible for further work on sensitive or classified systems for U.S. government clients. We could incur losses from such a security breach that could exceed the policy limits under our errors and omissions and product liability insurance. Damage to our reputation or limitations on our eligibility for additional work resulting from a security breach in one of the systems we develop, install and maintain could cause us to incur remediation costs and could materially reduce our revenue. Costs we incur to address security breaches could be material and materially reduce our operating margin.

Our business could be negatively impacted by security threats, including cybersecurity threats, and other disruptions.

As a defense contractor, we face various security threats, including cybersecurity threats to gain unauthorized access to sensitive information; threats to the safety of our employees; threats to the security of our facilities and infrastructure; and threats from terrorist acts. Cybersecurity experts believe that attacks are evolving and include, but are not limited to, malicious software; attempts to gain unauthorized access to data; and other electronic security breaches that could lead to disruptions in mission critical systems, unauthorized release of confidential or otherwise protected information and corruption of data. As a federal government contractor, we are a potential target to those who want to gain unauthorized access to sensitive and classified information of the United States, including officially and non‑officially sponsored acts of other countries and political organizations.

We utilize various procedures and controls to monitor these threats and mitigate our exposure to such threats. We are subject to frequent and increasingly sophisticated attempts by unauthorized individuals and/or entities to obtain access to sensitive, protected, and even classified data. We regularly review our systems and cybersecurity protocols. We do not outsource our cybersecurity functions.

Several years ago, an unauthorized party was able to gain access to our computer network. Management retained an independent third‑party expert data security firm to assess the nature and extent of unauthorized access, and to recommend remedial actions. We also asked the outside data security expert to recommend additional steps we could take to further enhance our ability to detect, monitor and defend against cybersecurity incidents. We notified government authorities and outside parties based on information obtained from the data security expert’s investigation.

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We undertook remedial actions based on the data security expert’s recommendations. We continue to consider additional enhancements to our network security. Our insurance carrier covered our investigation costs subject to our $250,000 policy deductible.

There can be no assurance that our remedial actions will be effective against future attacks or that future security breaches will be prevented. Any future security breach could have a material adverse effect on our business, financial condition and results of operations.

Holders of our securities will have limited access to information regarding our business because we have suspended our obligation to file periodic reports with the SEC.

On October 30, 2014, Alion filed a Forms 15 with the SEC, notifying the SEC of the suspension of its duty to file reports under Section 15(d) of the Exchange Act. Alion’s duty to file periodic, current and other reports with the SEC under the Exchange Act was suspended effective upon filing of the Forms 15 with the SEC. Alion expects that this Annual Report on Form 10-K, including any necessary amendments thereto, will be the final report it files with the SEC. Although Alion is required to post certain information on its website, including annual and quarterly financial statements, a Management’s Discussion and Analysis of Financial Condition and Results of Operations, and current information, only holders of the Debt Instruments will be able to review this information. Further, such information is limited and will not include all the information that is required in the reports had Alion been subject to Section 13(a) or Section 15(d) of the Exchange Act. As a result, access to information regarding our business will be limited.

Risks Related to Our Industry

We depend on U.S. government contracts for substantially all of our revenue. Changes in the contracting or fiscal policies of the U.S. government could adversely affect our business, financial condition, results of operations and ability to satisfy our financial obligations.

For the past three fiscal years, U.S. government contracts accounted for more than 96% of our revenue, with approximately 94% of our revenue derived from Department of Defense contracts. The U.S. Navy is our largest single customer, generating more than 50% of our revenue each of the last three fiscal years. Changes in U.S. government contracting policies could directly affect our financial performance. Factors that could materially adversely affect our U.S. government contracting business include:


•	budgetary constraints affecting U.S. government spending generally, or specific departments or agencies in particular;


•	changes in U.S. government fiscal policies or available funding;


•	changes in U.S. government defense and homeland security priorities;


•	changes in U.S. government programs or requirements;


•	U.S. government curtailment of its use of technology services firms;


•	adoption of new laws or regulations;


•	technological developments;


•	U.S. government shutdowns, threatened shutdowns or budget delays;


•	competition and consolidation in our industry; and


•	general economic conditions.

These or other factors could cause U.S. government departments or agencies to reduce their purchases under contracts, to exercise their right to terminate contracts or fail to exercise options to renew contracts, any of which could have a material adverse effect on our business, financial condition, operating results and ability to meet our financial obligations.

Many of our U.S. government customers are subject to increasing constraints. We have substantial contracts in place with many U.S. government departments and agencies. Our continuing performance under these contracts, or the possibility of new contracts from these agencies, could be materially adversely affected by agency spending reductions or budget cutbacks. Such reductions or cutbacks could materially adversely affect our business, financial condition, operating results and ability to meet our financial obligations.

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The Budget Control Act of 2011 caused significant delays or reductions in federal government appropriations for our current and future programs and may negatively affect our revenue and materially and adversely affect our financial condition, operating results, cash flows and ability to satisfy our financial obligations. Government shutdowns can delay collection of our accounts receivable.

In August 2011, Congress enacted the Budget Control Act intended to significantly reduce the federal deficit over ten years. The Budget Control Act established discretionary spending caps through 2021 and a Joint Committee of Congress to identify additional deficit reductions. The law’s passage also signaled the end of a decade of defense spending growth. The Joint Committee failed to agree on deficit reductions which triggered the sequestration provision of the Budget Control Act. Sequestration mandates substantial automatic spending cuts to defense and non‑defense programs. The sequestration began on March 1, 2013.

At this time, we cannot predict the effect that either identified or automatic cuts will have on funding for our individual programs. Long‑term funding for certain programs in which we participate is likely to be reduced, delayed or cancelled. These cuts could materially and adversely affect the viability of our prime contractors and our subcontractors, and lead to further revenue reductions.

Although we believe that we may be well‑positioned in areas the DoD has indicated are the focus for future defense spending, the impact of the Budget Control Act remains uncertain and our business and industry could be materially and adversely affected by it. Sequestration could also materially and adversely affect the business of our prime contractors and those with whom we team. Because we derive a material portion of our total revenue from the performance of subcontracts and teaming agreements, sequestration could have not only a direct effect, but also an indirect effect, on our business, financial condition and results of operation were the contracts we perform with prime contractors and teammates reduced.

Management cannot forecast whether sequestration will adversely affect timing of collection of our receivables in the future, but we did experience significant payment delays as a result of the government shutdown that occurred immediately after our fiscal year ended. Earlier in fiscal 2013, the federal government altered some of its accelerated payment practices which affected the overall payment cycle of our invoices. It took us until the fourth quarter of fiscal 2013 to recover from most of the effects of these changes.

We depend heavily on federal government contracts. Delays in the federal budget process, including actions related to the need to raise the debt ceiling, sequestration and any future federal government shutdown, could delay procurement of, and payment for, the products, services and solutions we provide and materially and adversely affect our revenue, gross margin, operating results and cash flow.

We derive a significant portion of our revenue from the federal government and from prime contractors to the federal government. We expect to continue to do so. Funding under those contracts is conditioned upon the continuing availability of Congressional appropriations and agency budgets. Congress usually appropriates funds on a fiscal year basis even though contract performance may extend over many years. The programs in which we participate must compete with other federal government programs and policies for funding during the budget and appropriation process. Concerns about increased deficit spending, along with continued economic challenges, continue to place pressure on federal customer budgets. While we believe that our programs are well aligned with national defense and other priorities, shifts in domestic spending and tax policy, changes in security, defense, and intelligence priorities, the affordability of our products and services, general economic conditions and developments, and other factors may affect a decision to fund or the level of funding for existing programs under which we perform contracts or proposed programs under which we might bid for future work. Even if our contracts are fully funded, full or partial furloughs of government employees may result in delays in our customers approving or paying our invoices.

Congress’s failure to agree on deficit reduction goals and disputes on whether to increase the debt ceiling create constraints on and uncertainties about the level of future federal spending. While specific budgetary decisions for the federal government’s next fiscal year are not yet known, such constraints could delay or cancel key programs in which we are involved and could materially and adversely affect our cash flows, liquidity and operating results. If the federal budget process were to result in a prolonged federal government shutdown, we could incur substantial unreimbursed labor or other costs, or it could delay or cancel key programs, which could materially and adversely affect our operating results, cash flow and liquidity.

In addition, when the U.S. government requires supplemental appropriations to operate or fund specific programs, and legislation to approve any supplemental appropriation bill is delayed, credit markets can react adversely to the uncertainty. In September 2012, Moody’s downgraded our corporate family credit rating from Caa1 to Caa2. Budgetary uncertainties and our

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lower credit rating could materially and adversely affect our access to credit and our overall liquidity. If we were to use our Revolving Credit Facility to a greater extent and for greater amounts than we have in the recent past, this could also increase the cost of credit to us if our floating interest rates were to rise.

Failure by Congress to timely approve budgets for the federal agencies we support could delay or reduce spending and cause us to lose revenue.

Each year, Congress must approve budgets for each of the U.S. government departments and agencies we support. When Congress is unable to agree on budget priorities, and is unable to pass the annual budget on a timely basis, it typically enacts a continuing resolution. A continuing resolution allows U.S. government agencies to operate at spending levels equal to or less than levels approved in the prior budget cycle. This can delay funding we expect to receive from clients for work we are already performing. A continuing resolution can delay or even cancel new initiatives which could adversely affect our business, financial condition, operating results, cash flows and our ability to meet our financial obligations.

We may not realize the full amount of our backlog, which could lower future revenue.

The maximum contract value identified in a U.S. government contract does not necessarily determine the revenue we will realize from that contract. Congress normally appropriates funds for a given program each fiscal year, even when actual contract performance may take many years. As a result, U.S. government contracts ordinarily are only partially funded at the time of award. Normally a procuring agency commits additional money to a contract only as Congress makes subsequent year appropriations. Estimates of future revenue attributed to backlog are not necessarily precise. Receipt and timing of any of this revenue is subject to various contingencies such as changed U.S. government spending priorities and government decisions not to exercise existing contract options. Many contingencies are beyond our control. The backlog on a given contract may not ultimately be funded or may only be partially funded, which may cause our revenue to be lower than anticipated, and adversely affect our business, financial condition, operating results, cash flows and our ability to meet our financial obligations.

Many of our U.S. government customers procure goods and services through multiple delivery order type contracts under which we must compete for post‑ award orders.

Budgetary pressures and reforms in the procurement process have caused many U.S. government customers to purchase goods and services through IDIQ, GSA Schedule contracts and other multiple award and/or GWAC contract vehicles. These contract vehicles increase competition and pricing pressure requiring us to make sustained post‑award efforts to obtain awards and realize revenue. There can be no assurance that we will maintain or increase revenue or otherwise sell successfully under these contract vehicles. Our failure to compete effectively after an award under any of these types of contracts could harm our business, financial condition, operating results, cash flows and our ability to meet our financial obligations.

U.S. government contracts contain termination provisions that are unfavorable to us.

U.S. government agencies can generally terminate contracts with suppliers at any time without cause under a termination for convenience clause. If a government agency terminates one of our contracts without cause, we are likely to be compensated for services we have provided and costs we have incurred through the termination date, and we may receive payment for termination‑related costs and a negotiated contract fee. However, if the U.S. government terminates a contract because we defaulted under the terms of the contract, we may be liable for any extra costs the U.S. government incurs to procure undelivered services from another company and other potential damages. Termination of any of our large U.S. government contracts could negatively impact our revenue and our ability to win future contracts and adversely affect our business, financial condition, operating results, cash flows and our ability to meet our financial obligations.

If we do not accurately estimate the expenses, time and resources necessary to meet our contractual obligations, our contract profits will be lower than expected.

The total price on a cost‑reimbursement contract is primarily based on allowable costs incurred subject to a contract funding limit. U.S. government regulations require us to notify our customers of any cost overruns or underruns on a cost‑reimbursement contract. We may not be able to recover cost overruns in excess of a contract’s funding limit and may not earn the profit we anticipated from the contract.

In a fixed‑price contract, we estimate project costs and agree to perform services for a predetermined price regardless of our actual costs. We pay for any cost overruns. If we fail to anticipate technical problems, or accurately estimate or control costs, we may face a lower fixed‑price contract profit margin or even a loss. Provisions in our financial statements for estimated contract losses may not be adequate to cover all our actual losses.

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Our operating margins and operating results may suffer if cost‑reimbursement contracts increase in proportion to our total contract mix.

Based on profit as a percentage of estimated standard costs, cost‑reimbursement contracts are our least profitable type of contract because government regulations limit cost‑reimbursement contract fee levels. Our U.S. government customers typically choose the type of contract they issue. To the extent that in the future cost‑reimbursement contracts increase as a percentage of our contract mix, operating margins and results may suffer.

If our fixed‑price contract revenue were to continue to decline in total or as a proportion of our total business, or if profit rates on these contracts deteriorate, our operating margins and operating results may suffer.

We have historically earned higher profit margins on fixed‑price contracts. If fixed‑price contract revenue were to significantly decrease, or customers shift to other types of contracts, our operating margins and operating results may suffer. We cannot ensure we will be able to maintain our historic profitability levels on fixed‑price contracts overall nor can we ensure that our percentage of total revenue generated from fixed‑price contracts will remain the same or improve.

Our subcontractors’ failure to perform contractual obligations could damage our reputation as a prime contractor and our ability to obtain future business.

As a prime contractor, we often rely significantly upon other companies as subcontractors to perform work we are obligated to deliver to our customers. A failure by one or more of our subcontractors to timely perform services satisfactorily could cause us to be unable to perform our duties as a prime contractor. We have limited involvement in the work our subcontractors perform, and as a result, we may have exposure to problems our subcontractors cause. Subcontractor performance deficiencies could result in a government customer terminating our contract for default. A default termination could make us liable for customer re‑procurement costs, and other breach of contract damages, damage our reputation, and hurt our ability to compete for future contracts. Subcontractor work has accounted, and we expect it will continue to account for, a material portion of our work. In fiscal 2014, subcontractor expense, as a percentage of revenue, was 39%.

Because U.S. government contracts are subject to government audits, contract payments are subject to adjustment and repayment which may result in lower than expected or reported contract revenue.

U.S. government contract payments we receive are subject to adjustment and repayment after the government audits our contract costs to the extent that our costs exceed allowable costs and/or obligated contract funding. DCAA is currently auditing our 2007 claimed indirect costs. We have settled our indirect rates through 2005. All subsequent years are open. We are disputing the government’s claim for penalties and interest for 2005. It is our position that the statute of limitations has expired on any government contractual claims, including claims for penalties and interest, on our 2005 indirect rate proposal. We timely submitted our indirect cost proposals for all open fiscal years and expect to submit fiscal 2014 incurred cost proposal next March as required. We have recorded revenue on federal government contracts in amounts we expect to realize. If the estimated reserves in our financial statements are not adequate, future government contract revenue may be lower than expected.

If we fail to recover at‑risk contract revenue, we may have reduced fees or losses.

We are at risk for any revenue we incur before a contract is executed, modified or renewed. A customer may choose not to pay us for these costs. At September 30, 2014 we had approximately $14.7 million in at‑risk revenue. While such revenue is associated with specific anticipated contracts and funding modifications, we cannot be certain that our customers will execute these contracts or contract renewals or that they will pay us for all our related at‑risk costs.

Actual or perceived conflicts of interest may prevent us from being able to bid on or perform contracts.

U.S. government agencies have conflict of interest policies that may prevent us from bidding on or performing certain contracts. When dealing with U.S. government agencies, we must decide, at times with insufficient information, whether to participate in the design process and lose the chance of performing the contract or to turn down the design opportunity for the chance of performing the future contract. We have, on occasion, declined to bid on particular projects because of actual or perceived conflicts of interest. We are likely to continue encountering such conflicts of interest in the future. Future conflicts of interest could cause us to be unable to secure key contracts with U.S. government customers.

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As a U.S. government contractor, we must comply with complex procurement laws and regulations and our failure to do so could have a negative impact upon our business.

We must comply with and are affected by laws and regulations relating to the formation, administration and performance of U.S. government contracts, which may impose added costs on our business. If a government review or investigation uncovers improper or illegal activities, we may be subject to civil and/or criminal penalties and administrative sanctions, including contract termination, fines, forfeiture of fees, suspension of payment and suspension or debarment from doing business with U.S. government agencies, any of which could materially and adversely affect our ability to conduct our business.

We derive significant revenue from U.S. government contracts awarded through competitive bidding which is an inherently unpredictable process.

We obtain most of our U.S. government contracts through competitive bidding, including (in many cases) contracts and renewals. We face risks associated with:


•	the frequent need to bid on programs in advance of the completion of their design, which can result in unforeseen technological difficulties and/or cost overruns;


•	the substantial time and effort, including design, development and promotional activities, required to prepare bids and proposals for contracts we may not win;


•	the rapid rate of technological advancement and design complexity of most of our research offerings; and


•	the risk of an adverse resolution of bid protest or other award controversy challenging a contract award, a solicitation’s terms and conditions, or the award of significant additional work under an existing contract.

We may not succeed in winning new contract awards or renewals in the future. Our failure to renew or replace existing contracts when they expire or win new contracts, would negatively affect our business, financial condition, operating results, cash flows and our ability to meet our financial obligations.

U.S. government contracts are subject to bid protests by other interested parties that compete with us for new contracts and in re‑competitions. A contract award or a solicitation’s terms and conditions are subject to protest for a variety of reasons, including that a solicitation or competitive bidding process violates law or regulation, or that the government agency has failed to comply with the terms of a solicitation in conducting a procurement. Moreover, changes to an existing contract are subject to protest on the basis that they involve a cardinal change which exceeds the scope of the contract. A bid protest may result in a decision by a Court, the Government Accountability Office, or by the cognizant government agency to cancel a contract award or to take other action that may result in the loss of a contract or in delay in a contract’s start date. Even a bid protest that does not result in such a decision or action may delay the start of contract during the pendency of the protest. Accordingly, bid protests may negatively affect our business, financial condition, operating results, cash flows and our ability to meet our financial obligations.

Our failure to obtain and maintain necessary security clearances may limit our ability to carry out confidential work for U.S. government customers, which could cause our revenue to decline.

As of September 30, 2014, we had an aggregate of approximately 310 DoD stand‑alone contracts and delivery/task orders and we had facility security clearances at 22 sites. As of September 30, 2014, approximately 80% of our employees held security clearances. Each cleared facility has a Facility Security Officer and Key Management Personnel whom the U.S. Department of Defense-Defense Security Service requires to be cleared to the level of the facility security clearance. Individual employees are selected to be cleared, based on specific classified contract task requirements and each employee’s technical, administrative or management expertise. Once an employee is cleared, he or she may access classified contract information, based on clearance level and a “need‑to‑know.”

Protecting classified information is paramount. Loss of a facility clearance, or an employee’s failure to obtain or maintain a security clearance, could result in a U.S. government customer terminating an existing contract or choosing not to renew a contract. If we cannot maintain or obtain the required security clearances for our facilities and our employees, or cannot obtain these clearances in a timely manner, we may be unable to perform certain U.S. government contracts. Lack of required clearances could also impede our ability to bid on or win new government contracts, which might result in terminating current research activities. This could damage our reputation and our revenue would likely decline, which could materially and adversely affect our business, financial condition, operating results and ability to meet our financial obligations.

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If we fail to establish and maintain important relationships with government entities and agencies, our ability to successfully bid for new business and retain existing business may be adversely affected.

To bid on new business, we rely in part on establishing and maintaining relationships with various government officials. These government relationships help us to better understand government agencies’ needs before we develop a formal proposal. Due to change in personnel at the customer or within our company, we may be unable to maintain our relationships with government entities and agencies; any failure to do so could adversely affect our ability to bid successfully for new business or to retain existing business. This could adversely affect our operating results, cash flow and financial condition and our ability to meet our financial obligations.

Failure to maintain strong relationships with other contractors could result in a decline in our revenue.

Approximately 13% of our fiscal 2014 revenue resulted from our work as a subcontractor and from teaming arrangements with other contractors. As a subcontractor or teammate, we cannot control performance by our prime contractor or other teammates. Poor performance on a given contract could impact our customer relationship, even when we perform as required. We expect to continue to depend on relationships with other contractors for a portion of our revenue for the foreseeable future. Our revenue, operating results, financial position and cash flows could differ materially and adversely from what we anticipate if one or more of our prime contractors or teammates were to rely on one of our competitors or were to directly provide our customers the kind of services we provide.

The federal government’s appropriation process and other factors may delay the collection of our receivables, and our business may be adversely affected if we cannot collect our receivables in a timely manner.

We must collect our receivables to generate cash flow, provide working capital, pay interest and principal on our debt and continue our business operations. If the federal government, or any of our prime contractors fails to pay or delays paying our invoices for any reason, our business and financial condition may be materially and adversely affected. The government may fail to pay outstanding invoices and DCAA could revoke our direct billing privileges, which would adversely affect our ability to timely collect our receivables. Contracting officers can also withhold payment of some portion or all of an outstanding invoice which could also adversely affect our ability to collect our receivables timely.

Government rules could limit our ability to get paid for the work we perform.

Government rules require DoD contracting officers to impose contractual withholdings at no less than certain minimum levels if a contracting officer determines that one or more of a contractor’s business systems have one or more significant deficiencies. If a contracting officer were to impose such a withholding on us or even one of our prime contractors, it would increase the risk we would not be paid in full or paid timely. If we experience difficulties collecting receivables, it could materially and adversely affect our operating results, cash flow and financial condition and our ability to meet our obligations.

The U.S. government may adopt new contract rules and regulations or revise its procurement practices in a manner adverse to us at any time.

The U.S. government may face restrictions or pressure regarding the type and amount of services it may obtain from private contractors. Legislation, regulations and initiatives dealing with procurement reform, environmental responsibility or sustainability, and mitigation of potential conflicts of interest, as well as any resulting shifts in the buying practices of U.S. government agencies could adversely affect us. Such changes could impair our ability to obtain new contracts or win a recompete of an existing contract. Any new contracting requirements or procurement methods could be costly or administratively difficult for us to implement and could materially and adversely affect our operating results, cash flow and financial condition and our ability to meet our obligations.

The U.S. government may prefer minority‑owned, small and small disadvantaged businesses; therefore, we may not win certain contracts on which we bid.

As a result of the Small Business Administration set‑aside program, the U.S. government may decide to restrict certain procurements only to bidders that qualify as minority‑owned, small, or small disadvantaged businesses. As a result, we would not be eligible to perform as a prime contractor on those programs and would be restricted to a maximum of 49% of the work as a subcontractor on those programs. An increase in the amount of procurements under the Small Business

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Administration set‑aside program may impact our ability to bid on new procurements as a prime contractor or restrict our ability to recomplete on incumbent work that is placed in the set‑aside program.

Many of our contracts with the U.S. government are classified or subject to other security restrictions, which may limit investor insight into portions of our business.

For fiscal 2014, we derived a substantial portion of our revenue from contracts with the U.S. government that are classified or subject to security restrictions that preclude the dissemination of certain information. In addition, a significant number of our employees have security clearances which preclude them from providing information regarding certain of our clients and services provided to such clients to other of our employees without security clearances and investors. Because we are limited in our ability to provide information about these contracts and services, the various risks associated with these contracts or services or any dispute or claims relating to such contracts or services, you may not have important information concerning our business, which will limit your insight into a substantial portion of our business and therefore may be less able to fully evaluate the risks related to that portion of our business.

Risks Related to our Debt Structure

We have incurred a significant amount of debt; our debt load may limit our financial and operational flexibility which could prevent us from fulfilling our obligations under the Credit Agreement, the First and Second Term Loans, the Third Lien Notes and our other obligations.

Our substantial debt has and could continue to:


•	make it more difficult for us to satisfy our debt‑related obligations; any failure to comply with any of our debt instrument obligations, including restrictive and financial covenants, could result in an event of default under our debt agreements, which, if not cured, could permit the holders of that indebtedness to accelerate our indebtedness;


•	make it more difficult for us to satisfy our repurchase obligations to ESOP participants;


•	increase our vulnerability to general adverse economic and industry conditions and make it more difficult for us to react to changing conditions;


•	limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions, other business opportunities, new technologies or other general corporate requirements;


•	require a substantial portion of our operating cash flow to pay interest on our debt and thus reduce our ability to use our cash flow for future business needs;


•	limit our ability to execute on our business plans;


•	limit our flexibility to plan for, or react to changes in our business and the government contracting industry; and


•	place us at a competitive disadvantage compared to less leveraged companies.

We may not be able to obtain financing in the future, and the terms of any future financings may limit our ability to manage our business. Difficulties in obtaining financing on favorable terms would have a negative effect on our ability to execute our business strategy.

We will need to seek additional capital in the future to refinance or replace existing long‑term debt. We may also need to seek additional capital in the future to meet current or future business plans, meet working capital needs or for other reasons. Based on the significant amount of our existing indebtedness and current market conditions, the availability of financing is, and may continue to be, limited. There can be no assurance that we will be able to obtain future financings on acceptable terms, if at all. If we are unable to obtain alternative or additional financing arrangements in the future, or if we cannot obtain financing on acceptable terms, we may not be able to execute our business strategies. Moreover, the terms of any such additional financing may restrict our financial flexibility, including the debt we may incur in the future, or may restrict our ability to manage our business as we had intended.

After the Refinancing Transaction, Standard & Poor’s raised our corporate family credit rating to B- and Moody’s raised our rating to Caa1 from Caa2. Any future ratings downgrade could increase our cost of capital, or limit any attempt to obtain additional financing in the future. An increase in our cost of capital would adversely affect our results of operations and our financial position.

If we breach our covenants, including financial covenants, we could have to amend the covenants in the Credit Agreement and/or the First and Second Lien Term Loans and Third Lien Notes which could materially affect our ability to finance our future operations, meet our capital needs or satisfy obligations to repurchase our common stock.

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The Debt Instruments we executed as part of the August 2014 Refinancing Transactions include a number of covenants, including financial covenants that are tested on a periodic basis. Our Debt Instruments impose other minimum financial performance requirements including a fixed charge coverage test and minimum consolidated EBITDA levels.

Events beyond our control can affect our ability to meet these financial performance requirements; we cannot guarantee that we will meet these tests. We have been required to seek waivers of covenants under our debt agreements in the past. For example, various debt agreements contain a financial statement covenant requiring an audit opinion without a “going concern” explanatory note or any similar qualification or exception and without any qualification or exception as to the scope of such audit. If we were to default under any covenants, we could pursue an amendment or waiver with our current lenders, but there can be no assurance that lenders would grant an amendment or waiver.

The August 2014 Debt Instruments restrict our operations.

The August 2014 Debt Instruments contain, and our future debt agreements may contain, covenants that may restrict our ability to engage in activities that may be in our long‑term best interest, including financing future operations or capital needs or engaging in other business activities. The Credit Agreement, the First and Second Lien Term Loans and Third Lien Notes restrict, among other things, our ability and the ability of our subsidiaries to:


•	incur additional debt other than permitted additional debt;


•	pay dividends or distributions on our capital stock;


•	purchase, redeem or retire capital stock or warrants to purchase capital stock other than to satisfy ESOP repurchase obligations;


•	prepay or repurchase certain debt, including the Third‑Lien Notes;


•	pay certain amounts required under our equity‑based and incentive compensation plans;


•	spend amounts on capital assets;


•	make acquisitions and investments other than permitted acquisitions and permitted investments;


•	issue or sell preferred stock of subsidiaries;


•	create liens on our assets;


•	enter into certain transactions with affiliates;


•	merge or consolidate with another company; or


•	transfer or sell assets outside the ordinary course of business.

The Credit Agreement and the First and Second Lien Term Loans and Third Lien Notes and related indentures include negative, affirmative and financial covenants that are in some cases more restrictive than our former debt covenants were.

From time to time we may require consents or waivers from our lenders or note holders to permit actions prohibited by one or more of the August 2014 Debt Instruments. If, in the future, lenders or note holders refuse to waive restrictive covenants and/or financial level requirements, we could be in default. We could be prohibited from undertaking actions necessary or desirable to maintain or expand our business. There is no guarantee we will be able to obtain additional consents or waivers from our lenders or note holders.

The restrictions set forth in our Series A Preferred Stock limit our operations.

Our Series A Preferred Stock contains a number of restrictions in our ability to engage in activities absent the consent of the holders of a majority of the Series A Preferred Stock (which is currently ASOF), including, among other things, our ability to do the following:


•	change the nature of our business;


•	amend our charter, by laws or other organizational documents or those of our Subsidiaries;


•	approve our annual budget;


•	create liens on our assets;


•	transfer or sell assets outside the ordinary course of our business;


•	make any acquisitions and investments other than in the ordinary course of our business;


•	enter into or amend any transaction with affiliates;


•	merge or consolidate with another company;


•	make or pay any dividends or other distributions on account of our common stock (other than ESOP distributions and those permitted under our new Stockholders’ Agreement);


•	authorize certain capital expenditures;

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•	make optional prepayments on certain of our debt;


•	incur additional debt other than certain permitted debt; and


•	amend our ESOP.

From time to time we may require consents from the holders of a majority of the Series A Preferred Stock to permit actions that require their affirmative consent. If, in the future, the holders refuse to grant requested consent, we could be prohibited from undertaking actions necessary or desirable to maintain or expand our business. There is no guarantee we will be able to obtain consents from the holders of the Series A Preferred Stock.

As the holder of 78.6% of the Series A Preferred Stock, ASOF has the right to appoint a majority of the members of our board of directors and possesses voting control over all matters that require stockholder approval.

All shares of the Series A Preferred Stock are held by the Supporting Noteholders and ASOF owns approximately 78.6% of the Series A Preferred Stock. As a result, ASOF has the right to appoint a majority of the members of our board of directors, possesses voting control over all matters that require stockholder approval and controls decisions regarding consenting to certain specified actions. As of the date of this Annual Report on Form 10-K, ASOF has appointed two members of our board of directors, Lawrence A. First and Daniel H. Clare, both of whom are affiliated with ASOF.

Despite our current debt levels, we and our subsidiaries may still be able to incur more debt. This could further increase risks associated with our substantial leverage.

Following the Refinancing Transactions, we have the ability to incur additional debt, subject to limitations imposed by covenants in the Debt Instruments and the Series A Preferred Stock. These agreements do not completely prohibit us from incurring additional debt. The more we borrow, the more we, and in turn our security holders, become exposed to the risks described above. We have incurred a significant amount of debt and our debt load may limit our financial and operational flexibility which could prevent us from fulfilling our obligations under our debt agreements. See Note 11-“Long‑Term Debt” in the Notes to the Audited Financial Statements, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Discussion of Debt Structure” for additional information.

Risks Related to our Warrants and Common Stock

Future issuances of equity securities, or securities convertible into common stock, including warrants, issued in connection with a refinancing of our indebtedness, will dilute existing ESOP participants’ beneficial ownership interest in our common stock and could decrease the price of our common stock.

Our financing activities have required us to issue warrants related to our debt, and our future financing activities may require us to issue warrants or other securities convertible into our common stock, which may have a dilutive effect on the ownership interest of ESOP participants and existing warrant holders, and could substantially decrease the price of our common stock. This would dilute the beneficial ownership interests of our existing ESOP participants and could decrease the price of our common stock.

In the Refinancing Transactions we issued penny warrants to purchase 40.0% of our common stock that include anti-dilution protections that could materially dilute the ownership interests of the participants in our ESOP and holders of existing common stock warrants.

Future issuances of our common stock to the ESOP may have a dilutive effect on the beneficial ownership interests of existing participants in the Alion KSOP and could further decrease the price of our common stock.

Issuances of our common stock to the ESOP for employer 401(k) matching and profit sharing contributions will have a dilutive effect on the ownership interests of existing participants in the Alion KSOP and could decrease the price of our common stock. To the extent our stock price declines further, dilution would be greater, as we will be required to issue more shares to satisfy our obligations to the ESOP. The redemption value of our stock has declined over the past four valuations and recently declined from $8.10 as of September 30, 2013 to $2.45 as of August 2014 and September 30, 2014.

The value of our common stock is not based on trading activity in a well-established market. We could conclude a transaction at a stock price that differs from the value of a share of Alion common stock as most recently determined by the ESOP Trustee.

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As of each September 30 valuation date, the ESOP Trustee receives a valuation report from an independent third party valuation firm. The ESOP Trustee uses the information in the valuation report to determine the price at which the ESOP Trust is willing to buy or sell shares of Alion common stock. The independent third party valuation firm uses various valuation methodologies in assisting the ESOP Trustee to determine the redemption value of a share of Alion common stock. It is possible that we could conclude a transaction with a third party, such as an investment, a merger, a sale of substantially all of our assets, or a change of control transaction, at a stock price that differs from the value ascribed to a share of Alion common stock as of its most recent prior valuation.

If we were to engage in such a transaction, the price per share for Alion common stock in that transaction could be less than the most recent redemption price per share for transactions with the ESOP Trust. There can be no assurance that, with respect to future valuations, the valuation firm, or any other financial adviser that the ESOP Trustee might choose, would utilize the same processes or methodologies in future valuations of our common stock or that such advisor(s) would reach conclusions similar to those contained in the most recent valuation report.

There is no established trading market for warrants Alion has issued.

None of our common stock or warrants has a trading market and we cannot assure you that an active trading market will develop. The inability to trade our common stock or warrants may adversely affect their value. We do not intend to apply to list our common stock or warrants on any securities exchange. If no active trading market develops, you may not be able to resell our common stock or warrants at their fair market value or at all. Your lenders may be reluctant to accept common stock or warrants as collateral for loans.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Our headquarters in McLean, Virginia consists of 23,823 square feet of leased office space. We also lease approximately 64 additional office facilities totaling 859,713 square feet. Our largest offices are located in Washington, DC; Fairfax, Alexandria, Vienna, Arlington, Norfolk, Portsmouth, and Newport News, Virginia; Pittsburgh and West Conshohocken, Pennsylvania; Huntsville, Alabama; New London, Connecticut; Annapolis, Annapolis Junction and Lanham, Maryland; Orlando, Florida; Rome, New York; Pascagoula, Mississippi; Fairborn, Ohio; Mt. Clemens, Michigan; Boulder, Colorado; Durham, North Carolina; Bath, Maine; San Diego, California; Albuquerque, New Mexico; and Burr Ridge, Illinois. We lease 18 facilities that contain laboratory space totaling approximately 103,867 square feet, for contract-related research. Our largest laboratories are located in Durham, North Carolina; Chicago and Geneva, Illinois; Annapolis Junction and Lanham, Maryland; West Conshohocken, Pennsylvania;Warren, Michigan and Louisville, Colorado. Lease terms vary in length from one to twelve years, and are generally at market rates.

Aggregate average monthly base rental expense for fiscal 2014, 2013 and 2012 was approximately $1.9 million, $1.8 million and $1.7 million, respectively. We periodically enter into other lease agreements that are, in most cases, directly chargeable to current contracts. Lease obligations are usually either covered by currently available contract funds or cancelable upon termination of the related contracts. We consider our leased space to be adequate for our current and our reasonable anticipated future operations. If sequestration further adversely affects the Company, we may find we have excess leased space. We cannot ensure that if we have excess capacity we will be able to sublease a portion of or assign our leases on terms and conditions favorable to us or at all.

Item 3. Legal Proceedings

We are involved in routine legal proceedings occurring in the ordinary course of business that we believe are not material to our financial condition, operating results, or cash flows. As a government contractor, from time to time we may be subject to DCAA audits and federal government inquiries. The federal government may suspend or debar for a period of time any federal contractor it finds has violated the False Claims Act, and any contractor indicted or convicted of violations of other federal laws. The federal government could also impose fines or penalties.

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Alion depends on federal government contracts; suspension or debarment could have a material, adverse effect on our business, financial condition, operating results, cash flows and our ability to meet our financial obligations. We are not aware of any such pending federal government claims or investigations.

Item 4. Mine Safety Disclosures

Not applicable.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

There is no established public trading market for Alion’s common stock.

Holders

As of September 30, 2014, the ESOP Trust held 99.96% of our outstanding common stock. The ESOP Trustee is independent of Alion and its management. Consistent with its fiduciary responsibilities, the ESOP Trustee retains an independent third party valuation firm to assist it in determining the redemption value (share price) at which the Trustee may acquire or dispose of investments in Alion common stock. The last valuation was performed as of September 30, 2014.

Alion’s transactions with the ESOP Trust during the past two years were based on the share prices and dates set out below. The Company did not sell any shares to the ESOP Trust in September 2014.



Valuation Date	Share Price

September 30, 2014	$	2.45
August 20, 2014	$	2.45
September 30, 2013	$	8.10
March 31, 2013	$	16.25

Dividends

Alion has never declared any cash dividends. We do not expect to pay any dividends in the future, and the terms of our existing debt instruments limit our ability to do so. Although we do not expect to become profitable for the foreseeable future, we currently intend to retain future earnings, if any, to use in operating our business. Any determination to pay dividends in the future will be at the discretion of our Board of Directors and will depend on our operating results, our financial condition, contractual restrictions, applicable law and other factors our Board of Directors determines to be relevant.

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Item 6. Selected Financial Data

The following table presents selected historical consolidated financial data for Alion for each of the last five fiscal years through September 30, 2014. This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes in this annual report. We derived our consolidated operating data for the years ended September 30, 2014, 2013 and 2012 and our September 2014 and 2013 consolidated balance sheet data from our audited consolidated financial statements included in this annual report. We derived our consolidated operating data for the years ended September 30, 2011 and 2010 and our September 2012, 2011 and 2010 consolidated balance sheet data from our consolidated financial statements not included in this annual report. Our historical consolidated financial information may not be indicative of our future performance.



	Alion Science and Technology Corporation Selected Financial Data Fiscal Years Ended September 30,
	2014			2013			2012			2011			2010
	(In thousands)
Consolidated Operating Data:
Contract revenue	$	804,809		$	848,972		$	817,204		$	787,314		$	833,988
Direct contract expense	629,311			669,504			632,831			603,481			638,000
Total operating expense	129,220			137,267			143,935			148,340			157,068
Operating income	46,278			42,201			40,438			35,493			38,920
Interest expense (a)	(81,662		)	(75,700		)	(74,934		)	(73,919		)	(67,613		)
Net loss	$	(43,996	)	$	(36,592	)	$	(41,447	)	$	(44,384	)	$	(15,232	)
Basic and diluted loss per share	$	(0.01	)	$	(5.39	)	$	(6.74	)	$	(7.83	)	$	(2.81	)
Basic and diluted weighted-average common shares outstanding	7,952,248			6,787,660			6,148,438			5,671,977			5,427,979
Consolidated Balance Sheet
Data at End of Period:
Net accounts receivable	$	171,495		$	172,604		$	175,293		$	180,364		$	174,032
Total assets	604,269			624,626			635,296			644,888			646,302
Working capital	1,412			42,569			51,594			46,596			59,796
Current portion of long-term debt and interest (b)	44,597			17,758			17,658			17,392			17,217
Long-term debt, excluding current portion (b)	527,407			556,118			549,425			533,067			521,957
Common stock warrant, second lien term loans and third lien notes	6,518			—			—			—			—
Redeemable common stock	32,120			61,895			110,740			126,560			150,792
Series A preferred stock	2,339			—			—			—			—
Common stock warrants, secured notes	20,785			20,785			20,785			20,785			20,785
Accumulated deficit	(253,475		)	(252,050		)	(272,433		)	(258,125		)	(246,270		)
Other Data:
Depreciation and amortization	$	4,794		$	7,363		$	11,741		$	11,409		$	16,777
Cash flows provided by (used in):
Operating activities	$	(23,277	)	$	10,783		$	12,681		$	5,721		$	2,396
Investing activities	414			(1,869		)	(2,731		)	(6,291		)	(2,147		)
Financing activities	7,982			(10,528		)	(3,541		)	(5,307		)	15,261


(a)	Interest expense includes interest payable in cash, non-cash expenses for amortizing original issue discount and debt issue costs, and interest accrued for paid-in-kind (PIK) notes to be issued in lieu of cash interest.


(b)	Debt, current and long-term, includes senior and subordinated debt and accrued PIK interest and is net of unamortized debt issue costs and original issue discount.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is intended to assist the reader understand Alion’s business, financial condition, results of operations and liquidity and capital resources. You should read the following discussion in conjunction with the consolidated financial statements and related notes included in this annual report. This discussion contains forward-looking statements about our business and operations that involve risks and uncertainties. Future results may differ materially from those we currently anticipate because of the “Risk Factors” described beginning on page 12 and elsewhere in this annual report.

About This Management’s Discussion and Analysis

Our discussion provides an overview of our business and critical accounting policies, explains year-over-year changes in operating results, describes our liquidity, capital resources and certain other obligations, and discloses certain market and other risks that could affect us.

Overview

With a 75-year legacy, we are an experienced technology solutions company delivering scientific, research and development, engineering and technology expertise and operational support primarily to the DoD, and other U.S. government agencies, and commercial customers. Based in McLean, Virginia, we design, develop, integrate, deliver, maintain and upgrade science and technology solutions, products and tools for national defense, homeland security and other U.S. government programs and to a lesser degree, commercial customers. For example, we design and engineer complete naval vessels and components for naval vessels for the U.S. Navy; we manage and support the implementation of major U.S. Air Force programs by providing financial, procurement and logistics services; we develop and conduct battle simulations for the U.S. Army to prepare soldiers for combat environments; and we assist the DoD in managing the use of the wireless communications spectrum to optimize the efficient transmission of sensitive data. We also provide research and development and engineering support for the DoD and the U.S. Department of Energy and other power generators.

We provide scientific, research and development, technical expertise, and operational support to a diverse group of U.S. government customers. We serve customers in all branches of the U.S. military, a number of Cabinet-level U.S. government agencies, the White House and, to a lesser degree, state and non-U.S. governments. As of September 30, 2014 we had more than 200 distinct customers, including Cabinet-level government departments and agencies and state and foreign governments. As of September 30, 2014, we had approximately 310 DoD stand-alone contracts and delivery/task orders with the U.S. Navy, U.S. Army and U.S. Air Force, the Defense Information Systems Agency, the Defense Advanced Research Projects Agency and others representing approximately 93.7% of our revenue for fiscal 2014. Other federal civilian agencies and departments accounted for 3.7% of our revenue for fiscal 2014, including the National Institute of Environmental Health Sciences, the U.S. Department of Energy and the Environmental Protection Agency. Commercial, state and local governments and international customers accounted for the remaining 2.6% of our revenue for fiscal 2014.

We deliver solutions in the following three core business areas:


•	Naval Architecture and Marine Engineering;


•	Systems Analysis, Design and Engineering; and


•	Modeling, Simulation, Training and Analysis.

Substantially all of our outstanding common stock is owned by the ESOP Trust. There is no established public trading market for our common stock. Consistent with its fiduciary responsibilities, the ESOP Trustee, retains an independent third party valuation firm to assist it in determining the fair market value of our common stock at which the ESOP Trustee may acquire or dispose of investments in our common stock. To assist the ESOP Trustee in determining the fair market value of our common stock, the ESOP Trustee considers such valuation report and its knowledge of our business and the market.

We have had a net loss every year since our inception in December 2002. We expect to incur losses for the foreseeable future. We are a highly leveraged company. Our historic cash interest expense and increasing principal indebtedness through PIK interest on existing debt and future deferred income tax expense are among the most significant factors contributing to our historic net losses and are projected to be among the most significant factors contributing to our estimated future net losses. After we concluded the Refinancing Transactions, Moody's raised our corporate family credit rating to Caal from Caa2 and Standard & Poor's raised our corporate credit rating to B-1 from CC.

We are not exempt from federal government funding and budgetary constraints. Our customers may face constraints on their ability to add funding, or maintain current funding levels to existing contracts and to execute new contracts. As with

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others in the defense contracting sector, there may be the possibility of significant funding reductions on a number of our contracts and programs.

We have experienced funding delays on several of our programs which has materially adversely affected those programs, which we describe below in our Results of Operations section of this report. Our future financial performance could be materially adversely affected by the risk factors we have identified under "Risk Factors-Risks Related to our Business and Operations elsewhere in this report. Any one of more of these risks could reduce our future revenue and operating income below current or prior year levels and have a material adverse effect on our business, financial condition, results of operations, cash flows and ability to satisfy our financial obligations.

Results of Operations

Year Ended September 30, 2014 Compared to Year Ended September 30, 2013

Despite a challenging U.S. federal government defense market, the Company continues to win new contracts and execute on its existing base of business. Fiscal 2014 year-end revenues decreased 5.2% over fiscal 2013 year-end revenue however, fiscal 2014 operating income increased by 9.7% as compared to fiscal 2013.

The decline in revenue was driven by a number of factors including reductions in defense spending, sequestration, the U.S. Federal Government shutdown and delays in new awards and funding on our existing contracts. Notwithstanding these over-arching market issues, the Company ended fiscal 2014 with the largest funded backlog in the Company’s history and fourth quarter fiscal 2014 revenues that posted an 8.2% increase over fourth quarter fiscal 2013.

The increase in our fiscal 2014 operating income of 9.7% was primarily driven by the Company’s focus to improve contract execution and performance, which produced an increase in contract profitability. In addition, company initiatives to drive efficiencies throughout the business and have reduced overhead expenses by approximately $5.1 million and general and administrative expense reductions of $1.8 million in fiscal 2014 as compared to fiscal 2013.

In fiscal 2014 the Company’s net loss grew by 20.2% as compared to fiscal 2013 as increases in interest expense and costs related to refinancing our debt out-paced our improvements in operating income.

Risks related to sequestration, budget reductions, the 2013 government shutdown and other market factors disclosed in this Annual Report on Form 10-K have affected the revenue growth we have experienced in fiscal 2013. In the future these factors could have a material, adverse effect on our business, financial condition, results of operations and cash flows.



	Fiscal Years Ended September 30,
	2014			2013
	(In thousands)
Revenue	$	804,809		$	848,972
Net loss	$	(43,996	)	$	(36,592	)

Revenue

Fiscal 2014 revenue was $804.8 million, down $44.2 million (5.2%) as compared to fiscal 2013 results. This decline was driven primarily by a $37.2 million overall decrease in Department of Defense fiscal 2014 revenue due to funding and award delays. These funding and award delays drove declines of $21.9 million (6.4%) in our fiscal 2014 Naval Architecture and Marine Engineering revenue which led to a $6.7 million (1.5%) decline in our fiscal 2014 U.S. Navy revenue. In addition, our Modeling, Simulation, Training and Analysis decreased $20.6 million (9.4%) as we realized lower revenues with our U.S. Army and U.S. Air Force customers. The Systems Analysis, Design and Engineering core business area also decreased $1.7 million (0.6%) compared to fiscal 2013 due to funding and new award delays.

The $5.4 million revenue decrease from our commercial and international customers in fiscal 2014 over fiscal 2013 is related to the completed naval architecture and marine engineering work in India. In addition, we also completed several high-end nuclear engineering projects at several international nuclear power plants which also contributed to the decrease in our Commercial and International revenue. Fiscal 2014 other federal agencies revenue also declined $1.6 million compared to fiscal 2013 as tasking in our high-end consulting revenue has decreased due to Federal Government budgetary pressures.

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Sources of Revenue

The U.S. government continues to be our principal customer. For fiscal years 2014 and 2013, U.S. government contracts accounted for more than 96% of our revenue, with approximately 94% of our revenue derived from Department of Defense contracts. The U.S. Navy is our largest single customer, generating more than 50% of our revenue each of the last two fiscal years. Certain annual revenues for fiscal years 2014 and 2013 disclosed below differ from amounts previously disclosed due to customers re-defining individual contracts, task orders and programs. While this re-classification may shift reported revenue from one classification to another, our total revenue for the period remains unchanged. The table below summarizes our revenue by principal customer for fiscal years 2014 and 2013.



	Fiscal Years Ended September 30,
Revenue by Customer	2014				2013
	(In millions)
U.S. Air Force	$	123.8	15.4	%	136.4		16.1	%
U.S. Army	122.1		15.2	%	152.7		18.0	%
U.S. Navy	444.9		55.3	%	451.6		53.2	%
Other Department of Defense Customers	62.9		7.8	%	50.2		5.9	%
Sub–total Department of Defense Customers	$	753.7	93.7	%	$	790.9	93.2	%
Other Federal Agencies	29.8		3.7	%	31.4		3.7	%
Sub-total U.S. government customers	$	783.5	97.4	%	$	822.3	96.9	%
Commercial and International customers	21.3		2.6	%	26.7		3.1	%
Total Revenue	$	804.8	100.0	%	$	849.0	100.0	%

We provide professional engineering, program management and information technology services and scientific expertise in a range of specialized core business areas. Our core business areas closely align our services with the demands of the marketplace. We expect our internal resource allocations and cost reductions will improve our efficiency and enhance our ability to provide cost-effective customer solutions. Factors reducing our Naval Architecture and Marine Engineering, Modeling, Simulation, Training and Analysis and Systems Analysis, Design and Engineering core business area revenue are noted in the Revenue section above. The table below summarizes our revenue by core business area for fiscal years 2014 and 2013.



	Fiscal Years Ended September 30,
Core Business Area Revenue	2014				2013
	(In millions)
Naval Architecture and Marine Engineering	$	321.9	40.0	%	$	343.8	40.5	%
Systems Analysis, Design and Engineering	284.2		35.3	%	285.9		33.7	%
Modeling, Simulation, Training and Analysis	198.7		24.7	%	219.3		25.8	%
Total Revenue	$	804.8	100.0	%	$	849.0	100.0	%

Cost-reimbursement contract revenue decreased $39.1 million (5.4%) in fiscal 2014 versus fiscal 2013 and represented 85.0% of fiscal 2014 revenue. Customers, including the Naval Sea Systems Command and the Defense Technical Information Center continued to issue this type of tasking on our IDIQ contract vehicles. Fiscal 2014, fixed price contract revenue was down $15.4 million to 7.3% of annual revenue as compared to fiscal 2013 due, in part, to a decline in our Naval Architecture and Marine Engineering international work and our high-end nuclear engineering and consulting services contracts. Fiscal 2014 time and material contract revenue was up $10.3 million to 7.7% of annual revenue as compared to fiscal 2013. The increase in time and material contract revenue is due, in part, to growth in several core business areas in our U.S. defense and civilian agencies customer base. The table below summarizes our revenue by contract billing type for the fiscal years 2014 and 2013.

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	Fiscal Years Ended September 30,
Revenue by Contract Billing Type	2014				2013
	(In millions)
Cost Reimbursable contracts	$	684.0	85.0	%	$	723.1	85.2	%
Fixed Price contracts	59.2		7.3	%	74.6		8.8	%
Time and Material contracts	61.6		7.7	%	51.3		6.0	%
Total Revenue	$	804.8	100.0	%	$	849.0	100.0	%

In fiscal 2014, our prime contract revenue decreased by $55.2 million, a 7.3% decrease compared to fiscal 2013. This decline was attributed to delays in new awards and funding on existing programs. Revenue from our work as a subcontractor to other prime contractors was up $11.0 million or 12.0% in fiscal 2014 compared to fiscal 2013. Alion continues to look to increase its presence as a prime contractor on larger, more complex programs where we deliver services to customers by deploying our own staff and by managing the efforts of other contractors.

The table below summarizes our prime and subcontract revenue for fiscal years 2014 and 2013.



	Fiscal Years Ended September 30,
Prime and Subcontract Revenue	2014				2013
	(In millions)
Prime contracts	$	702.4	87.3	%	$	757.6	89.2	%
Subcontracts from other companies	102.4		12.7	%	91.4		10.8	%
Total Revenue	$	804.8	100.0	%	$	849.0	100.0	%

The trend by our customers to access our services through IDIQ contract vehicles continued in fiscal 2014. Our customers used our Weapons System Information Analysis Center and Seaport-E contracts as well as other IDIQ contract vehicles to obtain Alion’s services. Fiscal 2014, IDIQ contract revenue decreased by 5.3% compared to fiscal 2013. This decline was attributed, in part, to delays in new task orders awards and funding on existing task orders. The table below summarizes our revenue by contract vehicle type for fiscal years 2014 and 2013.



	Fiscal Years Ended September 30,
Contract Vehicles	2014				2013
	(In millions)
IDIQ Contracts	$	526.7	65.4	%	$	555.9	65.5	%
Individual contracts	278.1		34.6	%	293.1		34.5	%
Total Revenue	$	804.8	100.0	%	$	849.0	100.0	%

Selected Financial Information

The table below summarizes our fiscal 2014 and 2013 revenue and income from operations. Fiscal 2014 full year revenue decreased by $44.2 million and total operating expenses declined by $8.0 million compared to fiscal 2013. The Company benefited from continuing efforts to reduce our cost structure by trimming overhead expenses, general and administrative costs. Our declining contract amortization charges also contributed to the lower fiscal 2014 operating expense. Costs associated with the Company’s refinancing efforts eroded the cost reductions in our general and administrative expenses. The table below presents selected comparative financial information for fiscal years ended September 30, 2014 and 2013. Our discussion and analysis refers to financial information in this table and to Alion’s consolidated financial statements in this Annual Report on Form 10-K.

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Selected Financial Information	Fiscal Years Ended September 30,
	2014				2013
			% Revenue				% Revenue
	(In thousands)
Total contract revenue	$	804,809			$	848,972
Total direct contract costs	629,311		78.2	%	669,504		78.9	%
Direct labor costs	245,068		30.5	%	248,934		29.3	%
Material and subcontract costs	362,408		45.0	%	402,171		47.4	%
Other direct costs	21,835		2.7	%	18,399		2.2	%
Gross profit	175,498		21.8	%	179,468		21.1	%
Total operating expense	129,220		16.1	%	137,267		16.2	%
Major components of operating expense:
Overhead and G&A expenses	92,256		11.5	%	99,381		11.7	%
Rental and occupancy expense	32,176		4.0	%	30,538		3.6	%
Depreciation and amortization	4,788		0.6	%	7,348		0.9	%
Operating income	46,278		5.8	%	42,201		5.0	%

Direct Contract Expense and Gross Profit.

Fiscal 2014 direct contract costs were down $40.2 million (6.0%) compared to fiscal 2013, which is in line with lower revenue. As compared to fiscal 2013, fiscal 2014 direct labor costs decreased $3.9 million (1.6%) and third-party costs for materials and subcontracts decreased by $39.8 million (9.9%). Direct labor and Material and subcontract costs decreased, in part, as a result of sequestration, the Congressional continuing resolution and the U.S. federal government shutdown at the beginning of fiscal 2014. Fiscal 2014 other direct costs increased by $3.4 million (18.7%) over fiscal 2013 as the Company required more non-labor goods and travel related costs to service our customers.

Gross profit was down by $4.0 million this year as compared to fiscal 2013 due to the decline in revenue. Our fiscal 2014 gross profit margins increased to 21.8% of revenue as compared to 21.1% of revenue in fiscal 2013. The increase in gross margins, was due, in part, to the Company’s focus to improve contract execution and performance, which produced an increase in contract profitability.

Operating and General and Administrative Expenses.

Fiscal 2014 operating expenses were $8.0 million lower than they were in fiscal 2013. Fiscal 2014, overhead and G&A expenses decreased approximately $7.2 million compared to fiscal 2013 due to ongoing cost reductions and cost avoidance measures. Fiscal 2014 occupancy costs were up $1.6 million over fiscal 2013 due, in part, to opening new office facilities to better serve our new and existing customers. Fiscal 2014 depreciation and amortization expense declined $2.6 million compared to fiscal 2013. Amortization charges for contracts from our 2005 JJMA acquisition continue to decrease over time. Operating expenses continue to trend downward as they have since fiscal 2013.

Operating Income.

Fiscal 2014 operating income rose to $46.3 million for the year, which was a $4.1 million (9.7%) increase over $42.2 million in fiscal 2013. Fiscal 2014 higher operating income was due, in part, to the Company’s focus to improve contract execution and performance, which produced an increase in contract profitability, as well as reductions in overhead and core general and administrative costs. Fiscal 2014 operating income margin was 5.8% up from 5.0% in fiscal 2013.

Other Expense.

Fiscal 2014, total interest expense was approximately $6.0 million higher than fiscal 2013. This increase was a result of our Refinancing Transaction, interest expense on our revolver increased while interest on our Secured and Unsecured notes declined modestly because we retired most of the interest-bearing principal prior to fiscal 2014 year end. Interest expense for our new debt instruments issued in August 2014 also contributed to the increase in total interest expense in fiscal 2014 as compared to fiscal 2013.

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	Interest Expense Fiscal Years Ended September 30,
	2014		2013
	(In thousands)
Cash Pay Interest
Revolver	$	1,866	$	887
First lien term loan, Tranche A	1,051		—
First lien term loan, Tranche B	2,299		—
Third lien note	1,386		—
Secured Notes	32,111		32,761
Unsecured Notes	21,504		24,861
Other cash pay interest and fees	102		69
Sub-total cash pay interest	60,319		58,578
Deferred and Non-cash Interest
Secured Notes PIK interest	6,423		6,551
Second lien term loan	1,191		—
Third lien note	2,457		—
Debt issue costs and other non-cash items	11,272		10,571
Sub-total non-cash interest	21,343		17,122
Total interest expense	$	81,662	$	75,700

Debt Extinguishment and Fair Value Adjustment.

In August 2014, we refinanced our existing debt and recognized a loss of $11.5 million. We extinguished our Secured Notes and exchanged new Third Lien Notes for approximately 90% of our Unsecured Notes. We paid $3.2 million to Unsecured Note holders who participated in the exchange or sold their notes at a discount. We paid ASOF and Phoenix $7.1 million to facilitate the Refinancing Transactions. We recognized a $1.1 million gain for the notes we repurchased. We recognized a loss of $2.1 million in unamortized debt issue costs. In September 2014, we recognized a $9.9 million benefit from the decline in value of the Penny Warrants we issued in the Refinancing Transactions.

Income Tax Expense.

We recognized $7.0 million in income tax expense both fiscal 2014 and fiscal 2013. In fiscal 2014, our deferred tax assets increased by $21.4 million as compared to fiscal 2013. Changes in deferred tax assets which reduce income tax expense were entirely offset by corresponding increases in valuation allowances. Our fiscal 2014 and 2013 income tax expense came almost exclusively from recognizing changes in our deferred tax liability arising from amortizing tax-deductible goodwill.

Net Loss.

The Company posted a net loss of $44.0 million in fiscal 2014 which was a $7.4 million increase over fiscal 2013. Revenue, gross profit and operating expense were all lower while operating income was higher in fiscal 2014 as compared to fiscal 2013. In addition, increased levels of interest expense in fiscal 2014 versus fiscal 2013 led to an increase to our fiscal 2014 net loss.

Results of Operations

Year ended September 30, 2013 Compared to Year ended September 30, 2012

Despite a challenging U.S. federal government defense market, the Company continued to win new contracts and execute on its existing base of business. Fiscal 2013 year-end revenues increased 3.9% over fiscal 2012, and our fiscal 2013 operating income increased by 4.4% compared to fiscal 2012.

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Fiscal 2013 revenue increases of 3.9% over fiscal 2012 were attributed to growth of our existing base of business with the U.S. Army and other Department of Defense customers related to our Systems Analysis, Design and Engineering core business area.

Increases in fiscal 2013 operating income of 4.4% as compared to fiscal 2012 were impacted by Company initiatives that drove efficiencies throughout the business and reduced overhead expenses by approximately $2.5 million and occupancy costs by $548 thousand as compared to fiscal 2012. Contract amortization charges also declined in fiscal 2013 versus fiscal 2012. Refinancing related expenses off-set other cost reductions in our general and administrative costs and drove an overall increase of $698 thousand in fiscal 2013 compared to fiscal 2012.

The reduction of our fiscal 2013 net loss as compared to fiscal 2012 was due, in part, to the increase in our fiscal 2013 operating income and a fiscal 2013 gain related to the extinguishment of debt.



	Fiscal Years Ended September 30,
	2013			2012
	(In thousands)
Revenue	$	848,972		$	817,204
Net loss	$	(36,592	)	$	(41,447	)

Revenue

Fiscal 2013 revenue was $849.0 million, up $31.8 million (3.9%) over fiscal 2012 results. The Systems Analysis, Design and Engineering core business area provided support for new and existing customers and drove a $35.3 million (4.7%) overall increase in Department of Defense fiscal 2013 revenue. Fiscal 2013 growth was driven primarily by our work in the Systems Analysis, Design and Engineering core business area, which increased $71.9 million (33.6%) compared to fiscal 2012. Reductions in the Modeling, Simulation, Training and Analysis from fiscal 2012 to fiscal 2013 totaling $29.3 million (11.8%) were due, in part to award and funding delays, as well as sequestration related reductions in our customers’ training and travel budgets. Funding delays and reductions related to sequestration and budget reductions led to a $10.8 million (3.0%) decline in our fiscal 2013 Naval Architecture and Marine Engineering revenue. Fiscal 2013 other federal agencies revenue also declined $11.8 million compared to fiscal 2012 as tasking in our high-end consulting revenue has decreased due to Federal Government budgetary pressures.

The $8.3 million revenue increase from our commercial and international customers in fiscal 2013 over fiscal 2012 is related to the Naval Architecture and Marine Engineering work we are performing in India as well as our nuclear engineering work at several international nuclear power plants also contributed to the increase from our Commercial and International revenue.

Sources of Revenue

The U.S. government continued to be our principal customer. For fiscal 2013 and 2012, U.S. government contracts accounted for more than 96% of our revenue, with approximately 92% of our revenue derived from Department of Defense contracts. The U.S. Navy is our largest single customer, generating more than 53% of our revenue in each of fiscal 2013 and 2012. Certain annual revenue for the fiscal years ended 2013 and 2012 disclosed below differs from amounts previously disclosed due to customers re-defining individual contracts, task orders and programs. While this re-classification may shift reported revenue from one classification to another, our total revenue for the period remains unchanged. The table below summarizes our revenue by principal customer for each of the past two fiscal years.

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	Fiscal Years Ended September 30,
Revenue by Customer	2013				2012
	(In millions)
U.S. Air Force	$	136.4	16.1	%	$	138.4	16.9	%
U.S. Army	152.7		18.0	%	119.9		14.7	%
U.S. Navy	451.6		53.2	%	450.9		55.1	%
Other Department of Defense Customers	50.2		5.9	%	46.4		5.7	%
Sub–total Department of Defense Customers	$	790.9	93.2	%	$	755.6	92.4	%
Other Federal Agencies	31.4		3.7	%	43.2		5.3	%
Sub-total U.S. government customers	$	822.3	96.9	%	$	798.8	97.7	%
Commercial and International customers	26.7		3.1	%	18.4		2.3	%
Total Revenue	$	849.0	100.0	%	$	817.2	100.0	%

We provided professional engineering, program management and information technology services and scientific expertise in a range of specialized core business areas. Our business areas closely align our services with the demands of the marketplace. As expected our internal resource allocations and cost reductions will improve our efficiency and enhance our ability to provide cost-effective customer solutions. Factors that impacted our core business revenue are noted in the Revenue section above. The table below summarizes our revenue by core business area for fiscal 2013 and 2012.



	Fiscal Years Ended September 30,
Core Business Area Revenue	2013				2012
	(In millions)
Naval Architecture and Marine Engineering	$	343.8	40.5	%	$	354.6	43.4	%
Systems Analysis, Design and Engineering	285.9		33.7	%	214.0		26.2	%
Modeling, Simulation, Training and Analysis	219.3		25.8	%	248.6		30.4	%
Total Revenue	$	849.0	100.0	%	$	817.2	100.0	%

Cost-reimbursement contract revenue increased $47.8 million (7.1%) in fiscal 2013 versus fiscal 2012 and represented 85.2% of fiscal 2013 revenue. Customers, including the Naval Sea Systems Command and the Defense Technical Information Center continued to issue this type of tasking on our IDIQ contract vehicles. Fiscal 2013 fixed price contract revenue was up $10.4 million to 8.8% of annual revenue as compared to fiscal 2012 from expanded international work in Naval Architecture and Marine Engineering work and high-end nuclear engineering services contracts. Fiscal 2013 time and material contract revenue fell $26.4 million to 6.0% of annual revenue as compared to fiscal 2012, as this reduction in Time and Material contract revenue occurred due to the reduction of our Commercial work within the Washington Consulting group. The table below summarizes our revenue by contract billing type for the past two fiscal years.



	Fiscal Years Ended September 30,
Revenue by Contract Billing Type	2013				2012
	(In millions)
Cost Reimbursable contracts	$	723.1	85.2	%	$	675.3	82.6	%
Fixed Price contracts	74.6		8.8	%	64.2		7.9	%
Time and Material contracts	51.3		6.0	%	77.7		9.5	%
Total Revenue	$	849.0	100.0	%	$	817.2	100.0	%

In fiscal 2013, our prime contract revenue grew by $58.5 million, an 8.4% increase compared to fiscal 2012. Revenue from our work as a subcontractor to other prime contractors was down $26.7 million or 22.6% in fiscal 2013 compared to fiscal 2012. Alion continued to increase its presence as a prime contractor on larger, more complex programs where we deliver services to customers by deploying our own staff and by managing the efforts of other contractors. Fiscal 2013 prime contract revenue also grew as of a result of increased material procurement activity to support a number of Department of Defense customers that utilized our agile engineering and rapid prototyping support services within our Systems Analysis, Design and Engineering Core Business Area.

Costs for companies that work for us on our prime contracts and costs for materials often generate lower contract fee percentages, which in turn, place downward pressure on our gross margins. The table below summarizes our prime and subcontract revenue for fiscal years 2013 and 2012.

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	Fiscal Years Ended September 30,
Prime and Subcontract Revenue	2013				2012
	(In millions)
Prime contracts	$	757.6	89.2	%	$	699.1	85.5	%
Subcontracts from other companies	91.4		10.8	%	118.1		14.5	%
Total Revenue	$	849.0	100.0	%	$	817.2	100.0	%

The trend by our customers to use our services through IDIQ contract vehicles continued in fiscal 2013. IDIQ contract revenue increased by 11.2% compared to fiscal 2012. Our customers used our Weapons System Information Analysis Center and Seaport-E contracts as well as other IDIQ contract vehicles to obtain Alion’s services. The table below summarizes our revenue by contract vehicle type for the past two fiscal years.



	Fiscal Years Ended September 30,
Contract Vehicles	2013				2012
	(In millions)
IDIQ Contracts	$	555.9	65.5	%	$	499.7	61.1	%
Individual contracts and delivery orders	293.1		34.5	%	317.5		38.9	%
Total Revenue	$	849.0	100.0	%	$	817.2	100.0	%

The table below presents selected comparative financial information for fiscal years ended September 30, 2012 and 2011. Our discussion and analysis refers to financial information in this table and to Alion’s consolidated financial statements in this Annual Report on Form 10-K.



Selected Financial Information	Fiscal Years Ended September 30,
	2013				2012
			% Revenue				% Revenue
	(In thousands)
Total contract revenue	$	848,972			$	817,204
Total direct contract costs	669,504		78.9	%	632,831		77.4	%
Direct labor costs	248,934		29.3	%	254,949		31.2	%
Material and subcontract costs	402,171		47.4	%	361,367		44.2	%
Other direct costs	18,399		2.2	%	16,515		2.0	%
Gross profit	179,468		21.1	%	184,373		22.6	%
Total operating expense	137,267		16.2	%	143,935		17.6	%
Major components of operating expense:
Overhead and G&A expense	99,381		11.7	%	101,133		12.4	%
Rental and occupancy expense	30,538		3.6	%	31,086		3.8	%
Depreciation and amortization	7,348		0.9	%	11,716		1.4	%
Operating income	$	42,201	5.0	%	$	40,438	4.9	%

Direct Contract Expense and Gross Profit.

Direct contract costs increased by $36.7 million (5.8%) in fiscal 2013 compared to fiscal 2012 in line with higher fiscal 2013 revenue. Fiscal 2013 direct labor costs decreased $6.0 million (2.4%) year over year while third-party costs for materials and subcontracts grew by $40.8 million (11.3%) compared to fiscal 2012. The decrease in direct labor was driven by reduced level of effort on a number of our contracts. Fiscal 2013 increase in material and subcontractor costs are the result of Alion winning larger, more complex contracts as a prime contractor, that require us to hire and manage other contractors. Fiscal 2013 other direct costs increased by $1.9 million from fiscal 2012. Gross profit was down by $4.9 million in fiscal 2013. The decline in gross profit was due, in part, to the increase in material and subcontractor costs which typically garnered lower contract fees, coupled with the year over year decrease in Alion direct labor.

Operating and General and Administrative Expenses.

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In fiscal 2013, operating expenses were $6.7 million lower than they were in fiscal 2012, declining by 1.4% to 16.2% of revenue. In fiscal 2013, the Company realized $2.5 million in overhead savings as a result of staffing reductions and other non-labor cost reductions and cost avoidance measures. Depreciation expense in fiscal 2013 was down $1.1 million compared to fiscal 2012 as Alion continued to utilize its fully-expensed assets without a charge to operations.

In fiscal 2013, amortization expense for intangibles was down $3.3 million compared to fiscal 2012. Charges for purchased contracts continue to decline over time as the acquired JJMA contract portfolio reaches the end of its useful life for accounting purposes. The useful life was initially established in 2005. As of September 30, 2013, the JJMA contract portfolio had an unamortized carrying value of $1.8 million.

Offsetting some of the benefits from lower fiscal 2013 operating expenses, our general and administrative expenses were up year over year by approximately $698 thousand. This was primarily because of costs associated with Alion’s refinancing efforts.

Operating Income.

Operating income rose to $42.2 million for fiscal 2013, which was a 4.4% increase over fiscal 2012 $40.4 million. The increase in operating income was due, in part, to the increase in revenue as noted in the Sources of Revenue section above. Lower fiscal 2013 operating expenses as compared to fiscal 2012 were due to reductions in overhead and core general and administrative costs that propel the increase and offset lower gross profit margins. This operating income was 5.0% of revenue in fiscal 2013 up from 4.9% in fiscal 2012.

Other Expense.

Fiscal 2013 interest expense was stable compared to fiscal 2012. Secured Note interest was higher in fiscal 2013 because more interest-bearing PIK notes were outstanding. Fiscal 2013 Unsecured Note interest was lower because our outstanding principal was lower. Our fiscal 2013 revolver interest costs were higher as we accessed the revolver more frequently in fiscal 2013 and also had a higher balance of outstanding letters of credit. PIK interest and debt issue cost amortization was also higher in fiscal 2013 than fiscal 2012 because the principal balance increased.



	Interest Expense Fiscal Years Ended September 30,
	2013		2012
	(In thousands)
Cash Pay Interest
Revolver	$	887	$	793
Secured Notes	32,761		32,116
Unsecured Notes	24,861		25,112
Other cash pay interest and fees	69		69
Sub-total cash pay interest	58,578		58,090
Deferred and Non- cash Interest
Secured Notes PIK interest	6,551		6,423
Debt issue costs and other non-cash items	10,571		10,421
Sub-total non-cash interest	17,122		16,844
Total interest expense	$	75,700	$	74,934

Debt Extinguishment.

In fiscal 2013, we repurchased $10 million worth of Unsecured Notes at a discount to face value in a series of open market transactions. We recognized a $3.9 million debt extinguishment gain on these debt repurchase transactions.

Income Tax Expense.

We recognized $7.0 million in income tax expense both in fiscal 2013 and fiscal 2012. In fiscal 2013, our deferred tax assets increased by $18.6 million. Changes in deferred tax assets which reduce income tax expense were entirely offset by corresponding increases in valuation allowances. Our fiscal 2013 and 2012 income tax expense came almost exclusively from recognizing changes in our deferred tax liability arising from amortizing tax-deductible goodwill.

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Net Loss.

The Company posted a net loss of $36.6 million in fiscal 2013 which was a $4.9 million improvement from fiscal 2012. Fiscal 2013 revenue, gross margin and operating income were all higher and operating expenses were lower in fiscal 2013. We benefited from a debt extinguishment gain in fiscal 2013, although continued high levels of interest expense partially offset these improvements.

Liquidity and Capital Resources

The Company is highly leveraged, before and after the refinancing completed in August 2014. As of September 30, 2014, the Company had approximately $629 million of long-term debt outstanding. Over the next year, the interest and principal payments due under our various debt agreements are approximately $43.5 million and $43.2 million, respectively. As of September 30, 2014, the Company has $17.3 million available on its revolving credit facility and has the ability to borrow an additional $6.5 million under that facility.

The Company's high level of debt could have adverse effects on its business and financial condition. Specifically, the Company's high level of debt could have important consequences, including the following:


•	making it more difficult for the Company to satisfy obligations including our repurchase obligations to ESOP participants;


•	limiting the Company's ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements;


•	requiring a substantial portion of the Company's cash flows to be dedicated to debt service payments instead of other purposes;


•	increasing the Company's vulnerability to general adverse economic and industry conditions;


•	limiting the Company's ability to execute on its business plans and flexibility in planning for and reacting to changes in the industry in which the Company competes;


•	placing the Company at a disadvantage compared to other, less leveraged competitors; and


•	increasing the Company's cost of borrowing.

The Company's ability to continue as a going concern and make our scheduled payments depends on and is subject to its financial and operating performance, which in turn is affected by general economic, financial, competitive, business and other factors beyond the Company's control, including the availability of financing in the international banking and capital markets.

The Company has several initiatives designed to increase revenue and profitability through improvement in program execution, cost reductions and avoidance initiatives, improvements that will reduce the Company’s DSO, reductions in our unbilled receivables, and moving in to more profitable business sectors. There can be no assurance, however, that these actions will be successful. If we are unable to generate sufficient funds from operations or raise additional capital, there could be material adverse effects on our liquidity.

Although the Company is significantly leveraged, it expects that the current cash balances, liquidity from its revolver, deferring expenditures, reducing overhead, securing rent abatements, collecting approved award fees related to past periods and cash generated from operations will be sufficient to meet working capital, capital expenditure, debt service, and other cash needs for the next year; however, there can be no assurances that the Company will be able to generate sufficient cash flows to fund its operations and service its debt for the next year.

We use cash primarily to fund operations and service our debt. We had $10.7 million in cash and cash equivalents at September 30, 2014 and had $43 million outstanding under our $65 million revolving credit facility. We were also contingently liable under $3.9 million in outstanding letters of credit which reduced our borrowing capacity. After taking borrowing base limitations into account, the maximum available borrowing capacity under our credit facility at September 30, 2014 was $18.1 million. Our credit facility includes a provision that stipulates a cash dominion condition would occur if our borrowing availability falls below $13 million, including any letters of credit outstanding. A cash dominion condition would not limit the Company’s ability to access the full capacity of the credit facility, but rather require mandatory repayments if the drawn amount on the credit facility exceeds $52 million. In fiscal year 2014 the Company did not meet the conditions requiring cash dominion.

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At September 30, 2014, we had approximately $631.7 million in outstanding current and noncurrent debt. Please see Note 11to our audited consolidated financial statements in Item 8 to this Annual Report on Form 10-K for detail about our debt instruments. In fiscal year 2015, we are required to make principal payments on Tranche A and Tranche B of our First Lien term loans and to repay $24.0 million in remaining Unsecured Notes. We are also obligated to pay cash interest on outstanding credit agreement balances and our First Lien term loan and Third Lien Notes.

The terms of the new Debt Instruments the Company negotiated in the Refinancing Transactions materially affected Alion’s short and long-term cash obligations and the Company’s interest expense. Current and future interest expense for Alion's Debt Instruments include interest payable in cash, PIK interest, amortization of debt issue costs, amortization of original issue discount and amortization of the fair value of warrants issued to lenders. Fluctuations in our cash flows and liquidity demands required by operations make it necessary for Alion to periodically access the revolving credit facility to meet cash demands.

Cash flows used in operating activities



	Fiscal Years Ended September 30,
	2014			2013
	(In thousands)
Net cash flow (used in) provided by operating activities	$	(23,277	)	$	10,783

Our operating cash flows are primarily affected by our ability to invoice and collect from our clients in a timely manner, our ability to manage our vendor payments, and the overall profitability of our contracts. We bill most of our customers monthly after services are rendered. Some contracts permit us to bill our customers twice monthly. We used $13.2 million to fund our operations in fiscal 2014 compared to the $10.8 million we generated in fiscal 2013. The $24.0 million year over year change largely explains the revolving credit agreement draw when we closed our refinancing. Current year operating cash flows were affected by:

•increased interest payments

•timing of collecting receivables

•timing of vendor payments

•a higher net loss with lower non-cash expenses

We collected approximately $804 million in receivables during the year ended September 30, 2014. In 2013, we collected $857 million. Although we were able to keep collections on pace with revenue, lower current year collections were consistent with reduced fiscal 2014 overall revenue. Revenue and collections were both adversely affected by the government shut down and contract delays earlier in the year.

We compute days’ sales outstanding (DSO) based on trailing twelve-month revenue. Accounts receivable DSO stood at 77.8 days at September 30, 2014 and 74.2 days at September 2013. From July to September 2014, our increasing revenue run rate reduced DSO by almost two days. However, growing receivable balances increased DSO by more than five days, for a net 3.3 day increase in DSO. Year over year our DSO increased by 3.6 days.

Even though Alion was affected by sequestration-related funding delays in fiscal 2014, contract funding outpaced revenue and unfunded contract receivables were stable year over year.

Cash used in investing activities



	Fiscal Years Ended September 30,
	2014		2013
	(In thousands)
Net cash provided by (used in) investing activities	$	414	$	(1,869	)

We use some of our cash to invest in equipment and software, leasehold improvements and internal projects. Fiscal 2014 expense is net of $1.5 million we received from selling a contract. In fiscal 2013, we invested $1.9 million in capital projects. We expect future investing activities and capital expenditures to continue at comparable levels. Alion’s Debt Instruments limit our capital expenditures.

Cash used in financing activities

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	Fiscal Years Ended September 30,
	2014		2013
	(In thousands)
Net cash provided by (used in) financing activities	$	7,982	$	(10,528	)

The Company’s major cash flow events in fiscal 2014 centered on its financing and refinancing activities. Alion received $348.0 million from issuing new debt instruments and another $25.0 million from its revolving credit facility. The Company also exchanged $208.1 million Unsecured Notes for new Third Lien Notes. As part of the Refinancing Transactions we paid $3.2 million to induce Unsecured Note holders to tender their notes for Third Lien Notes or accept less than face value in cash. We also paid $7.1 million in transaction fees to ASOF and Phoenix to facilitate the Refinancing Transactions.

The Company used the majority of its refinancing proceeds to retire its Secured Notes and used $30.5 million to fund debt issue and refinancing transaction costs. This was in addition to the $10.3 million we paid to ASOF, Phoenix and tendering Unsecured Note holders. In the fourth quarter of fiscal 2014, Alion made $4.2 million in First Lien term loan amortization payments as required.

In fiscal 2014, the Company sold $935 thousand of Alion common stock to the ESOP Trust. Alion also repurchased $2.3 million of its common stock from the ESOP Trust to satisfy liquidity demands from former employees. We lent the ESOP Trust $935 thousand for it to fund statutorily required diversification of ESOP participant investments. The ESOP Trust repaid the loan in full.

In fiscal 2013 we used $10.5 million for financing activities. ESOP transactions accounted for $4.5 million of our financing activities and debt repurchases accounted for the remaining $6.0 million of net cash used. In the fourth quarter of fiscal 2013, we also borrowed and repaid an additional $10.0 million on our revolving credit facility to fund operations before our collections recovered from government payment delays. The $10.0 million we borrowed and repaid in the fourth quarter of fiscal 2013 was the highest outstanding revolver balance at any point in fiscal 2013.

In fiscal 2013, we paid out $6.7 million to redeem ESOP shares from former employees. We received $2.2 million for ESOP Trust purchases of Alion common stock from employee salary deferrals for the second half fiscal 2012 and the first half of fiscal 2013. In fiscal 2013, we lent the ESOP Trust $1.9 million for it to fund statutorily required diversification of ESOP participant investments. The ESOP Trust repaid the loan in full prior to March 31, 2013.

In fiscal 2013, as permitted by our debt agreements, we used our swing line facility to borrow and repay the $6.0 million we used to repurchase, at a discount, the $10.0 million of Unsecured Notes we retired. We repurchased the retired Unsecured Notes in a series of open market transactions and prepaid the interest on the notes we repurchased through the date of repurchase. We repaid all borrowed funds we borrowed to purchase Unsecured Notes by July 16, 2013, and the largest repurchase related loan balance outstanding was $3.3 million.

In fiscal 2014, our weighted average revolving credit loan balance increased because of refinancing expenses as well as operating demands. At September 30, 2014 our drawn balance reached $43 million, the maximum for the year. Our weighted average loan balance was $11.5 million for the periods over which we borrowed funds. Our fiscal 2013 weighted average loan balance for the period over which we borrowed funds was $323 thousand. Neither balance includes letters of credit.

Discussion of Debt Structure and Covenant Compliance

See Note 11 to our audited consolidated financial statements in Item 8 of this Annual Report on Form 10-K for a detailed discussion of Alion’s current debt structure and a list of relevant terms and limitations in existing long-term debt agreements.

Alion’s Credit Agreement defines Consolidated EBITDA. Each quarter the Company must achieve $50 million in minimum Consolidated EBITDA (on a trailing twelve-month basis) in order to maintain access to the revolving credit facility and avoid potential cross default under Alion's other debt instruments. Neither EBITDA nor Consolidated EBITDA is a measure of financial performance in accordance with generally accepted accounting principles. The Credit Agreement permits Alion to exclude certain expenses and requires it to exclude certain one-time gains when computing Consolidated EBITDA. Alion had approximately $68.0 million in Consolidated EBITDA for fiscal 2014, and exceeded the requirement by approximately $18.0 million.

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The Credit Agreement also requires Alion to achieve a one-to-one fixed charge coverage ratio of Adjusted Net Cash Flow (based on Consolidated EBITDA) to fixed charges as defined in the Credit Agreement. Fixed Charges are defined as cash interest and principal payments plus all fees paid to equity sponsors (the Second Lien lenders). The numerator for the Fixed Charge Coverage ratio is Consolidated EBITDA minus: capital expenditures; cash paid for income taxes; and non-recurring charges included in Consolidated EBITDA (Adjusted Net Cash Flow). The Credit Agreement permits certain adjustments related to refinancing transactions. As of September 30, 2014, Alion's fixed charge coverage ratio was $65.2 million in adjusted net cash flow to $64.8 million in adjusted total fixed charges. The company was in compliance with all debt covenants as of fiscal year end.

Capital Resources



	September 30, 2014			September 30, 2013
	(In thousands)
Available Liquidity
Cash and cash equivalents	$	10,732		$	25,613
Revolving credit facility	65,000			35,000
Less: Outstanding borrowings	(43,000		)	—
Less: Letters of Credit	(3,935		)	(4,000		)
Net available liquidity	$	28,797		$	56,613

We believe our cash balances, investment securities, operating cash flows, and funds available under our credit agreement or from other public or private financing sources, taken together, provide adequate resources to fund ongoing operating and regulatory requirements, acquisitions, future expansion opportunities, and capital expenditures for at least the next twelve months, as well as to meet debt covenants in our existing debt, refinance or repay debt, and repurchase shares pursuant to our obligations under the ESOP.

Short-term Borrowings

From time-to-time, we borrow funds against our revolving credit facility for working capital requirements, to fund operations and for other permitted corporate purposes. Our revolving credit agreement borrowings bear interest at the one-month Eurodollar rate plus 475 basis points (currently 4.90%). The current rate for an alternate base rate loan would be 500 basis points over the 3.5% base rate (8.50%).

Over the Credit Agreement’s life we may use our revolving credit facility or additional sources of borrowings, as needed, to fund our anticipated cash requirements. We currently forecast that we will maintain a balance on the revolving credit facility for extended periods and may need to increase that balance for short periods of time based on collections cycles subject to government payment delays.

If the federal government were to implement further changes to its current payment practices, as a result of sequestration, budget cuts, policy changes, government shut downs, or otherwise, we might have to use our revolving credit facility to a more significant extent than we currently forecast. Delays in the government payment cycle could adversely affect our short-term cash flows and increase our interest expense if we need to use our credit facility to borrow larger amounts more frequently than we have in the past or currently plan to do in the future.

The following table summarizes the activity under our revolving credit facility for fiscal 2014 and fiscal 2013, not including issued and outstanding letters of credit.



	Fiscal Years Ended September 30,
	2014			2013
	(In thousands)
Short-term borrowings
Aggregate revolving credit facility borrowings	78,000			16,461
Aggregate revolving credit facility repayments	(35,000		)	(16,461		)
Net change in revolving credit facility balance payable	$	43,000		$	—

Cash Management

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To the extent possible, we invest our available cash in short-term, investment grade securities with the priorities of maintaining the safety of our principal, maintaining the liquidity of our investments, maximizing the yield on our investments and investing our cash to the fullest extent possible. Cash and cash equivalents include cash on hand, amounts due from banks and short term investments with maturity dates of three months or less at the date of purchase.

Cash flow effects and risks associated with equity-related obligations

We cannot accurately predict the extent to which ESOP repurchases and diversification demands may increase in future years. As more employees meet statutory and Plan-specific age and length of service requirements, potential diversification demands are likely to increase. These demands can increase further with any increase in the price of a share of Alion common stock. Declines in our share price, like those we have experienced over the past several years reduce the value of each individual Plan participant’s beneficial interest. Given our current share price it is unlikely increased diversification demands could mitigate or offset the effects of share price declines and give rise to increased demands on Alion's cash flows.

We monitor future potential repurchase liability cash flow demands by relying in part on internal and external financial models that incorporate Plan census data and financial inputs intended to simulate changes in Alion’s share price. Our most recent share price declines have reduced forecast ESOP cash flow demands. We forecast that fiscal 2015 demands will not differ materially from amounts Alion paid out in fiscal 2014.

Changes in the price of a share of Alion common stock do not affect warrant-related interest expense. All outstanding common stock warrants are permanent equity. The warrants have a one penny exercise price and are in the money. They do not have a cash liquidation option and therefore Alion only recognizes interest expense for the debt issue cost associated with the initial fair value of these warrants.

Alion faces no significant stock-based compensation liabilities. Outstanding Stock Appreciation Rights (SARs) have no intrinsic value. Management is unable to forecast the share price the ESOP Trustee will determine in future valuations and therefore cannot predict future cash flow demands that might arise from existing SARs.

Although current financial information includes the effects of the most recent ESOP Trust transactions, future expenses for stock-based compensation are likely to differ from estimates as the price of a share of Alion common stock changes. Our next regularly scheduled ESOP valuation period ends in September 2015. Interest rates, market-based factors and volatility, as well as Alion’s financial results will affect the future value of a share of our common stock. Certain stock-based compensation grantees can choose to defer their payments by having us deposit funds in a rabbi trust we own. Any such deferrals will not materially affect planned payments or overall anticipated cash outflows.

After each valuation period, the Plan permits former employees and beneficiaries to request distribution of their vested ESOP account balances. Consistent with the terms of the Plan, IRC requirements, and our recent business practice, we intend to pay distribution requests in five annual installments and to defer initial payments as permitted. The Plan allows Alion to defer initial installment distributions for six years for former employees who are not disabled, deceased or retired. We plan to meet future distribution demands through operating cash flows, and if necessary, access to Alion’s revolving credit facility.

As a result of the declines in the price of a share of Alion common stock, our existing analyses do not forecast material increases in the level of estimated future share redemption cash outflows as compared with recent years. While we are able to determine the current value of existing demands for future share redemptions based on the current price of a share of Alion common stock, we are only able to forecast cash flow demands for participants who have already commenced redeeming their shares and only for the four years subsequent to their initial share redemption payout. As of September 30, 2014, based on our current $2.45 share price, we estimate we will have to pay out the amounts listed below over the next four fiscal years. This amount declined from prior estimates due to the decline in Alion's share price. We do not yet know the extent to which eligible Plan participants who have yet to request diversification or distribution will place additional demands on the Company's cash flows. Such elections along with any future changes in our share price would impact estimated share redemption payouts.

Estimated Share Redemption Payouts

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Fiscal Year Ending September 30,		Amounts (in thousands)
2015	$	524
2016		420
2017		290
2018		58
Total estimated pay outs	$	1,292

Cash flow demands from existing debt agreement obligations

From fiscal 2015 through fiscal 2020, we expect we will have to make the estimated interest and principal payments set forth below for Alion’s existing current and long-term debt.

We do not expect Alion will have any tax-related cash obligations for the foreseeable future. We have significant net operating loss deductions available. We do not forecast having taxable income for at least the next five years.

Through December 2015, we believe the Company will be able to generate sufficient operating cash flow to fund business needs and to make interest and principal payments as and when they come due. The following table discloses the estimated interest and principal payments the Company expects to pay on its long term indebtedness in its fiscal years 2015 through 2020.



	Estimated Future Principal and Interest Payments
	Fiscal Year
	2015		2016		2017		2018		2019		2020		Total
	(Amounts in thousands)
Unsecured Notes not exchanged ⁽¹⁾
Principal	$	24,014	$	—	$	—	$	—	$	—	$	—	$	24,014
Interest	$	1,235	$	—	$	—	$	—	$	—	$	—	$	1,235
Credit Agreement ⁽²⁾
Principal	$	—	$	—	$	—	$	—	$	40,000	$	—	$	40,000
Interest	$	1,960	$	1,960	$	1,960	$	1,960	$	—	$	—	$	7,840
First Lien - Term A ⁽³⁾
Principal	$	17,500	$	25,000	$	30,000	$	33,750	$	—	$	—	$	106,250
Interest	$	8,161	$	6,456	$	4,410	$	2,191	$	—	$	—	$	21,218
First Lien - Term B ⁽⁴⁾
Principal	$	1,750	$	1,750	$	1,750	$	1,750	$	167,563	$	—	$	174,563
Interest	$	19,395	$	19,253	$	19,005	$	18,810	$	16,430	$	—	$	92,893
Second Lien ⁽⁵⁾
Principal	$	—	$	—	$	—	$	—	$	—	$	70,000	$	70,000
PIK	$	—	$	—	$	—	$	—	$	—	$	82,603	$	82,603
Third Lien ⁽⁶⁾
Principal	$	—	$	—	$	—	$	—	$	—	$	210,986	$	210,986
PIK	$	—	$	—	$	—	$	—	$	—	$	159,223	$	159,223
Interest	$	12,702	$	13,589	$	14,948	$	16,485	$	18,219	$	9,211	$	85,154

Total interest	$	43,453	$	41,258	$	40,323	$	39,446	$	34,649	$	9,211	$	208,340
Total principal and PIK	$	43,264	$	26,750	$	31,750	$	35,500	$	207,563	$	522,812	$	867,639
Total estimated future payments	$	86,717	$	68,008	$	72,073	$	74,946	$	242,212	$	532,023	$	1,075,979


(1)	Unsecured Notes mature February 2015. Interest is payable at 10.25% in arrears.

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(2)	The Company forecasts the average drawn balance on our revolving credit facility will be $40 million. Interest is at 4.9% per year.


(3)	The $110 million First Lien Term A has a four-year life with quarterly amortization of principal and interest payable in cash at 8.0% per year.


(4)	The $175 million First Lien Term B has a five-year life with quarterly amortization of principal at 1.0% per year and interest payable in cash at 11.0% per year.


(5)	The $70 million Second Lien Term Loan has a five-and-a-half year life with PIK interest at 14.25% per year compounded quarterly.


(6)	The $211.0 million Third Lien Notes has a five-and-a-half year life with cash interest at 5.5% per year. The Third Lien Note has increasing PIK interest that compounds annually accretes quarterly and is due at maturity.

Contingent Obligations

Other Contingent obligations which will impact the Company’s cash flow

Management forecasts that continuing net operating losses for income tax purposes will permit Alion to avoid significant cash outflows for income taxes. Other contingent obligations which will impact our cash flow include:


•	ESOP share repurchase and diversification obligations; and


•	Long-term incentive compensation plan obligations.

From December 2002 to September 2014, Alion had spent a cumulative total of $100.5 million to repurchase shares of its common stock to satisfy ESOP distribution and diversification requests from former employees and Plan beneficiaries. Beginning in March 2008, we stopped making lump sum distributions and began paying ESOP beneficiaries over the five-year distribution period permitted by ERISA and the terms of the Plan. Alion intends to continue this practice for the foreseeable future in part to offset the cash flow effects of annual employee diversification requests which are expected to continue for the foreseeable future. Our debt agreements limit our ability to fund certain discretionary ESOP diversification demands on our cash flow. The table below lists current and prior year share repurchases.



Date	Number of Shares Repurchased	Share Price		Total Value Purchased
				(In thousands)
November 2012	485	$	16.45	$	8
December 2012	119,555	$	16.45	$	1,967
January 2013	759	$	16.45	$	12
February 2013	5,593	$	16.45	$	92
March 2013	115,933	$	16.45	$	1,907
June 2013	164,548	$	16.25	$	2,674
July 2013	106	$	16.25	$	2
September 2013	111	$	16.25	$	2
December 2013	238	$	8.10	$	2
December 2013	107,717	$	8.10	$	873
December 2013	7,298	$	8.10	$	59
March 2014	106,757	$	8.10	$	864
September 2014	197,737	$	2.45	$	484
September 2014	256	$	10.00	$	3
Total	827,093

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ALION SCIENCE & TECHNOLOGY CORP 10-K