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TMCNet:  ALION SCIENCE & TECHNOLOGY CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

[August 14, 2014]

ALION SCIENCE & TECHNOLOGY CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis is intended to assist the reader's understanding of Alion's financial condition, results of operations, liquidity and capital resources. This discussion should be read together with the unaudited condensed consolidated financial statements and related notes in Item 1. This discussion updates the information contained in our Annual Report on Form 10-K for the year ended September 30, 2013 and presumes that readers have access to, and will have read, "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in that report.


Forward Looking Statements Information included and incorporated by reference in this Form 10-Q may contain forward-looking statements that involve risks and uncertainties. These statements relate to 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," "will," "pro forma," "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 refinance our debt structure on satisfactory terms, or at all; • Our ability to continue as a going concern; • Material changes to our capital structure; • Our ability to meet existing and future debt covenants; • U.S. government debt ceiling limitations, sequestration, continuing resolutions, or other similar federal government budgetary or funding issues; • U.S. government shutdowns and threatened shutdowns; • 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 Alion's effective tax rate; • ERISA law changes related to the KSOP; • Changes in SEC rules, and other corporate governance requirements; • Undertaking acquisitions that increase costs or liabilities or are disruptive; • Taking on additional debt to fund acquisitions; • Failing to adequately integrate acquired businesses; • Any future inability to maintain adequate internal control over financial reporting or covenant compliance measurement; • Risks from private securities litigation, regulatory proceedings or government enforcement actions relating to prior covenant compliance disclosures; • Material changes in laws or regulations affecting our businesses; 38 -------------------------------------------------------------------------------- Table of Contents • General volatility in the debt and securities market; and • Other risk factors discussed in Alion's annual report on Form 10-K for the year ended September 30, 2013 filed with the SEC on December 23, 2013 and any subsequent reports.

Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's view only as of August 14, 2014. We undertake no obligation to update any of the forward-looking statements made herein, whether as a result of new information, future events, changes in expectations or otherwise. This discussion addresses only continuing operations.

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 U.S. Department of Defense: or the "DoD," and other U.S. government agencies, and commercial customers.

Based in McLean, Virginia, we design, develop, integrate, deliver, maintain and upgrade scientific 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. We have more than 225 distinct customers, including Cabinet-level government departments and agencies and state and foreign governments, and approximately 330 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% of our revenue this year. Other federal civilian agencies and departments accounted for 4% of our revenue, 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 remainder of our revenue.

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.

Our common stock is 100% owned by the ESOP Trust. There is no established public trading market for our common stock. Consistent with its fiduciary responsibilities, the trustee of the ESOP, which we refer to as the "ESOP Trustee," retains an independent third party valuation firm to assist it in determining the fair market value (share price) 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 a net loss in at least our next four years of operation, fiscal 2014 through fiscal 2017. 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. As of June 30, 2014, we owe our lenders and bondholders approximately $572.5 million: approximately $337.5 million in Existing Secured Note principal and accrued PIK interest that matures in November 2014; $235 million in Unsecured Note principal that matures in February 2015; and approximately $15.7 million in accrued cash interest on these indebtedness. Moody's lowered our corporate family credit rating from Caal to Caa2 in September 2012 and Standard & Poor's lowered our corporate credit rating to CC from CCC+ in March 2014.

Management's cash flow projections indicate that absent a refinancing transaction or series of transactions, we will have insufficient cash flow from operations plus cash on hand to pay the principal and accumulated unpaid interest on the Existing Secured Notes and the Old Notes when those instruments mature in November 2014 and February 2015, respectively.

39-------------------------------------------------------------------------------- Table of Contents Our auditors noted in connection with their audit opinion of our 2013 fiscal year financial statements that our history of continuing losses, our excess of liabilities over our assets and our substantial financing needs raise substantial doubt about our ability to continue as a going concern. We believe these factors could make refinancing our existing indebtedness more difficult and expensive. Management is actively engaged in the process of refinancing our existing indebtedness. In July 2014, Alion executed an amended Refinancing Support Agreement with the holders of a majority of its outstanding Unsecured Notes regarding the following possible refinancing transactions that the parties contemplated might close as early as August 2014, but not later than September 30, 2014: • exchanging Unsecured Notes for, at the holders' option, either (a) new third lien notes maturing in five and one-half years, with a combination of interest payable in cash and in kind, and new penny warrants to purchase up to 27.5% of the Company's common stock or (b) a limited amount of cash at a price below par plus, in each case, accrued and unpaid interest, a 1.5% early tender cash payment, if applicable (the "Exchange Offer"), and obtaining certain consents from Unsecured Noteholders; • entering into a new first lien term loan facility consisting of a Term A loan for $110 million and a Term B loan for $175 million: • entering into a new $70.0 million second lien term loan facility with new penny warrants to purchase up to 12.5% of the Company's common stock; new preferred stock with voting control of the Company and control of the board of directors; • redeeming all of our outstanding Secured Notes prior to their November 2014 maturity with the proceeds of the new first and second lien term loan facilities; • replacing our existing revolving credit facility with a new revolving credit facility; and; • offering units consisting of the same new third lien notes and warrants being offered in the Exchange Offer to holders of the Unsecured Notes who tender into the Exchange Offer if any holder elects the cash option in the Exchange Offer (the "Unit Offering").

Management can provide no assurance that we will be able to conclude the Refinancing Transactions. If we do not conclude the refinancing transactions, we will need to invoke insolvency proceedings including a voluntary case under the U.S. Bankruptcy Code. Even if we consummate the Refinancing Transactions, management projects that we will need to refinance the debt arising from the those transactions prior to maturity.

President Obama indicated in January 2012 that the DoD is committed to ensuring that the U.S. military is agile, flexible and ready for a full range of contingencies. President Obama also indicated the DoD's strategy is to continue to invest in the capabilities critical to future success, including intelligence, surveillance, and reconnaissance, or "ISR;" counterterrorism; countering weapons of mass destruction; operating in anti-access environments; and prevailing in all domains, including cyberspace. We believe that the defense and homeland security markets continue to be excellent opportunities for us.

We believe that the current U.S. national defense strategy of sustaining defense and homeland security is driven by three realities: • the winding down of a decade of war in Iraq and Afghanistan; • a fiscal crisis demanding hundreds of billions of dollars in budget cuts; and • threats from Russia, China, Iran and North Korea and other adversaries.

As a result, we believe that the U.S. national defense strategy establishes three overarching priorities: • cyberspace defense and offense; • special operations forces; and • ISR.

We believe that each of the current U.S. military, defense and homeland security priorities is addressed by our key product and service offerings. As such, we expect that DoD's priorities will provide us with the opportunity to assist with situational decision support, expanded modeling, simulation and training, and increased agile manufacturing and prototyping projects needed to deter cyber terrorism, anti-access and area denial and countering weapons of mass destruction threats.

The sequestration cuts that took effect in early 2013 are expected to eliminate approximately $500 billion in government defense spending over the next decade.

Despite sequestration, federal spending outlays remained higher than expected in fiscal year 2013 as the broader U.S. economy began to show improvement. We see agile engineering and prototyping as a multi-billion dollar market focused on the need for redesigning components, systems and sub-systems that did not perform as intended in conflicts. In addition, agile engineering is used to address capability gaps or design components for various platforms including Unmanned Aerial Vehicles. We have been successful in entering this market by offering our depth 40 -------------------------------------------------------------------------------- Table of Contents of engineering knowledge in materials and manufacturing, delivering innovative solutions, and by providing cost-effective solutions to our customers at the point of need. We currently provide these services for the Army's Rapid Equipping Force, Special Operations Command and the U.S. Army Tank Automotive Research, Development and Engineering Center, among others.

We have responded to budgetary challenges posed by sequestration and changing customer priorities by reducing costs and employee headcount and striving to position us to serve our customers more effectively and efficiently. While we believe our customers will continue to seek our high-end engineering and technical expertise and solutions so they can improve their operating efficiency and effectivene ss, we are not unaffected by today's current market pressures and have experienced delays, funding reduction and delayed collections as a result of the government shutdown that occurred immediately after our fiscal 2013 year end.

On July 31, 2013, Secretary of Defense Chuck Hagel announced the findings of the Strategic Choices and Management Review, or "SCMR," that appears to frame the basis to address reducing military headquarters and military end-strength, eliminating select major procurements and retiring aging systems as well as curtailing research and development outlays and consolidating information technology data centers/networks as near and far term choices. The SCMR took into account the projected nearly $500 billion in federal budget cuts over the next ten years (in addition to the $37 billion cut in fiscal 2013) and targeted programs, people, infrastructure and processes. In addition, as outlined in the current Better Buying Power 2.0, or "BBP 2.0," Initiative, the DoD's future plan includes focusing on efficiency and productivity via rapid technology development and early prototyping to achieve reduced acquisition time and cost.

Consistent with this BBP 2.0 Initiative, we believe that our scientific information core business competencies have expanded across the military departments, services, defense agencies and combatant commands with objective engineering analysis and early manufacturing expertise support. As such, we believe we are able to assist them in avoiding the unwarranted duplication of research and development investment efforts via increased prototyping emphasis to sustain warfighter capability over our adversaries.

The DoD plans to spend approximately $23 billion from fiscal 2014 to 2018 on defensive and offensive cyber capabilities, including $9.3 billion for information assurance systems and $8.9 billion for cyber operations and to add an additional 4,000 cyber specialists over the next four years, which provides future risks and opportunities for the Company. With intrusions into the U.S.

critical infrastructure increasing in recent years, cyber spending is also expected to remain strong across civilian federal agencies, despite broader budgetary pressures. We are currently engaged in the new DoD initiative for Joint Information Environment, an important part of which is a set of security protocols that would make it easier to detect intrusions and identify unauthorized "insiders" who might be accessing a network. The push for this integrated network comes from Chairman of the Joint Chiefs Army Gen. Martin Dempsey, who has made it a priority.

We believe that unresolved consensus over DoD's continuing priorities and the size of the DoD budget creates opportunities for fiscal 2014 and beyond. We believe that the continuing effects of sequestration, slow-down of customary spending rates, small program focus, and limited new-start major programs will yield significant opportunities associated with incorporating increased technology into existing platforms. In addition, we expect that the Obama Administration will continue to adhere to the priorities outlined in the President's January 2012 DoD Strategic Guidance. While both the SCMR and the legislatively mandated Quadrennial Defense Review of DoD strategy and priorities address how to cope with a more constrained budget reality, we do not believe there will be major changes in federal strategies or priorities. We believe that the focus of investment priorities and budget outlays will be for a few key capabilities, such as countering weapons of mass destruction threats, while protecting others at existing levels or making modest reductions, such as efforts to counter threats by unmanned systems, long-range strikes, undersea warfare, cyber and electronic warfare, ISR and missile defense. We believe that we are well positioned to continue to meet the changing needs and strategies of the U.S. military's defense and homeland security markets.

Alion is not exempt from federal government funding and budgetary constraints.

Alion's 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 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 Item 2. Our future financial performance could be materially adversely affected by the risk factors we have identified in our Annual Report on Form 10-K for fiscal year ended 2013. 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.

41 -------------------------------------------------------------------------------- Table of Contents Management's cash flow projections indicate that absent a refinancing transaction or series of transactions, the Company will be unable to pay the principal and accumulated unpaid interest on either the Secured Notes or Unsecured Notes when those instruments mature in November 2014 and February 2015 and will likely invoke insolvency proceedings including a voluntary case under the U.S. Bankruptcy Code. The Company needs to refinance all of its senior debt prior to their respective maturities. (See "Going Concern Assumption" in Note 2 to the unaudited condensed consolidated financial statements regarding management's substantial doubt as to the Company's ability to continue as a going concern.) On December 24, 2013, Alion entered into an agreement (the Refinancing Support Agreement) with the holders of a majority of its Unsecured Notes regarding certain possible refinancing transactions which was amended and restated on May 2, 2014 and further amended on July 22, 2014.

The proposed refinancing transactions involve: replacing the Wells Fargo Agreement; refinancing the Secured Notes with $350 million in new secured term loans; exchanging our Unsecured Notes for either new third lien notes and a series of new warrants, or a limited amount of cash for a portion of Unsecured Notes at a price below par; payment of accrued and unpaid interest; and obtaining certain consents from Unsecured Noteholders. However, management can provide no assurance that we will be able to enter into definitive agreements regarding the terms of the refinancing transactions or conclude a refinancing of our Unsecured Notes, or that additional financing will be available to retire or replace our Secured Notes, and if available, that terms of any transaction would be favorable or compliant with the conditions for such financing set forth in the Refinancing Support Agreement. For further information about the anticipated refinancing, see the discussion in the Liquidity and Capital Resources section.

The Company's high debt levels, of which $332.5 million matures on November 1, 2014 and Alion's recurring losses will likely make it more difficult for Alion to raise capital on favorable terms and could hinder its operations. Further, default under the Unsecured Note Indenture or the Secured Note Indenture could allow lenders to declare all amounts outstanding under the Wells Fargo Agreement, the Secured Notes and the Unsecured Notes to be immediately due and payable. Any event of default could have a material adverse effect on our business, financial condition and operating results if creditors were to exercise their rights, including proceeding against substantially all of our assets that secure the Wells Fargo Agreement and the Secured Notes, and will likely require us to invoke insolvency proceedings including, but not limited to, a voluntary case under the U.S. Bankruptcy Code.

Our Credit Agreement financial statement covenant required 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. In anticipation of a potential covenant breach resulting from an audit opinion including a "going concern" explanatory note, in December 2013 the Credit Agreement lenders agreed to waive this covenant. The Company paid no fee for this waiver. Absent the waiver, the Company would not have been able to access its revolving credit facility. At the date of the waiver, Alion had $10 million drawn under the Credit Agreement revolving credit facility, not including approximately $4.0 million outstanding in letters of credit. Had Credit Agreement lenders not granted the waiver, the lenders would have had the right to demand the Company immediately repay any amounts outstanding under the revolving credit facility. As set out in Note 21 to the unaudited condensed consolidated financial statements regarding subsequent events, the Company and Wells Fargo Bank entered into a new revolving credit agreement effective May 2, 2014 which amended and restated the existing Credit Agreement and substituted Wells Fargo as the sole lender and administrative agent. Under the Amended and Restated Revolving Credit Facility, the new lender excepted the "going concern" explanatory note in the December 2013 audit opinion from the Amended and Restated Revolving Credit Facility covenant concerning delivery of audit opinions to the new lender.

To extend the "going concern" waiver through March 31, 2014, Alion paid the Credit Agreement lenders $175,000. The Company paid an additional $175,000 fee because it had not refinanced the Credit Agreement by March 23, 2014. Alion paid the Credit Agreement lenders an additional $350,000 to further extend the "going concern" waiver through May 2, 2014. In all, the Company paid a total of $700,000 in fiscal 2014 for Credit Agreement covenant waivers. As discussed below, the Company and Wells Fargo Bank entered into a new revolving credit agreement effective May 2, 2014 which replaced the existing Credit Agreement.

Under the Wells Fargo Agreement, the new lender agreed to waive the requirement regarding the going concern qualification for fiscal 2013.

On May 2, 2014 the Company entered into the Wells Fargo Agreement with Wells Fargo Bank, National Association (Wells Fargo), as administrative agent and sole lender, to replace, amend and restate the Credit Agreement in its entirety.

Simultaneously, the lenders under the Credit Agreement assigned all of their interests under the Credit Agreement to Wells Fargo. Pursuant to the amendment: (i) the prior lenders under the Credit Agreement were replaced with Wells Fargo; (ii) the prior administrative agent was replaced with Wells Fargo; (iii) the aggregate revolving credit commitment was increased from $35 million to $45 million, subject to borrowing base limitations; (iv) the maturity date was modified from August 22, 2014 to August 1, 2014; (v) the interest rate spread applicable to Eurodollar loans was reduced from 600 basis points to 475 basis points (interest will also include a daily one-month LIBOR floor); and (vi) certain conforming changes were made. On 42-------------------------------------------------------------------------------- Table of Contents May 2, 2014, the Company and Wells Fargo Bank entered into a new four-year $45 million revolving credit agreement that runs through August 15, 2014. The Wells Fargo Agreement contains terms typical of such agreements, including covenants similar to those in the Company's prior Credit Agreement with Credit Suisse. On July 31, 2014 the Company and Wells Fargo executed an amendment to the Credit Agreement extending the maturity date to August 15, 2014.

Results of Operations Quarter Ended June 30, 2014, Compared to Quarter Ended June 30, 2013 Despite a challenging defense market, the Company continues to win new contracts and execute on our existing base of business although the pace of government contract awards has slowed down. In the third quarter of fiscal year 2014 we experienced delays in funding to our existing programs and contracts, as well as delays of new awards which were a result of the residual effects of the sequestration cuts that took effect in 2013, the fiscal 2014 first quarter U.S.

federal government shutdown, Congressional continuing resolution and the timing of the House-Senate conference on the government's FY2014 budget resolution, resulting in Bipartisan Budget Act of 2013 (BBA). The delays in funding and new awards resulted in a 6.1% decrease in our fiscal 2014 third quarter revenues over fiscal 2013 third quarter revenue. As with our decrease in overall revenue, our fiscal 2014 third quarter gross profit and operating income decreased as compared to last year's third quarter results. Gross margin for our fiscal 2014 third quarter as compared to fiscal 2013 third quarter increased approximately 60 basis points, while operating margins decreased due to cost of refinancing our debt. Revenues for our fiscal 2014 third quarter as compared to fiscal 2014 second quarter have increased approximately 7.5% and gross margin has also improved. Operating income and margin for our fiscal 2014 third quarter as compared to fiscal 2014 second quarter increased due to improved revenue performance, the increase in Alion direct labor, which garners higher profit than when we use subcontractors, and reductions in overhead and general and administrative expense, off-set in part by the cost of refinancing our debt.

Revenue The Company expected the Bipartisan Budget Act of 2013 to increase the level of new awards and the funding of our existing programs currently under contract for fiscal year 2014. This has not been the case thus far in fiscal 2014. Delays in appropriations and funding for specific directorates, organizations, contracts and programs has taken much longer than we anticipated. Delays in funding our existing programs and the delays of new contracts awards has greatly impacted the Company's revenue and overall financial performance. As a result, third quarter revenue in fiscal 2014 was $207.4 million, down $13.6 million (6.1%) over fiscal 2013 third quarter results. This decline was driven in part by our work in our Naval Architecture and Marine Engineering Core Business Area which declined approximately $7.6 million (8.4%) due to delays in funding, new awards and budget reductions, all of which impacted many of our U.S. Navy programs. Systems Analysis, Design and Engineering Core Business Area, decreased $4.1 million (5.4%) compared to third quarter of last year. The decrease in our Systems Analysis, Design and Engineering work was driven by declines in our high-end agile engineering, rapid prototyping and technology integration work, primarily due to funding delays on many of our task orders that had been previously awarded to the Company as well as delays with new awards. Our work in the Modeling and Simulation Core Business Area, which decreased by $1.9 million (3.5%) compared to third quarter of last year, posted declines in our decision and program support and our training work. These decreases were offset, in part, by continued increases in our serious gaming simulation development work.

Sources of Revenue The U.S. government continues to be our principal customer. As in the past, we expect the majority of our revenue will be derived from Department of Defense and other federal agency contracts. Although we are investing to expand our international and commercial business, we believe commercial and international revenue will continue to be a low percentage of our total revenue.

Funding delays and reductions, new contract award delays related to budget cuts, sequestration and the U.S. government shutdown earlier in the fiscal year led to declines in our third quarter fiscal 2014 revenue as compared to the third quarter of fiscal 2013. The $11.1 million decrease in our third quarter fiscal 2014 U.S. Army business as compared to the third quarter of last year is related to our Systems Analysis, Design and Engineering. Our work with the U.S. Navy decreased $1.5 million 43 -------------------------------------------------------------------------------- Table of Contents in our third quarter fiscal 2014 as compared to third quarter of last year as work on many of our Navy programs have been impacted by funding delays and cuts, and new award delays. These reductions were off-set by increased activity with the Navy's warfare centers. Third quarter fiscal 2014 revenue from Other Department of Defense customers increased $2.3 million compared to third quarter of last year as tasking in our agile engineering and rapid prototyping business has increased due to additional funding and new awards. The table below summarizes our revenue by customer for the third quarter of both fiscal 2014 and 2013.

Three Months Ended June 30, 2014 2014 2013 (Dollars in millions) % of % of Revenue by Customer revenue revenue U.S. Air Force $ 33.6 16.2 % $ 33.1 15.0 % U.S. Army 26.2 12.6 % 37.3 16.9 % U.S. Navy 113.0 54.5 % 114.5 51.8 % Other Department of Defense customers 21.8 10.5 % 19.5 8.8 % Sub-total Department of Defense customers 194.6 93.8 % 204.4 92.5 % Other Federal Agencies 7.4 3.6 % 8.3 3.8 % Sub-total U.S. Government customers 202.0 97.4 % 212.7 96.3 % Commercial and International customers 5.4 2.6 % 8.2 3.7 % Total Revenue $ 207.4 100.0 % $ 220.9 100.0 % Certain quarterly revenue by customer for the three months ended June 30, 2013 disclosed above 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.

We provide 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. We expect our internal resource allocations and cost reductions will continue to improve our efficiency and enhance our ability to provide cost-effective customer solutions. Reductions in our Naval Architecture and Marine Engineering core business area were driven by funding delays and reductions and budget cuts to many of our programs. Reductions to our Systems Analysis, Design and Engineering core business area were driven by funding delays to our existing programs, which impacted our agile engineering and rapid prototyping business. Decreases in our Modeling and Simulation core business area were due, in part, to award delays, slower than anticipated ramp-up periods on new contract awards, as well as sequestration and budget related reductions in our customers' training and travel budgets which decreased our level of support across many of our customers. Other factors reducing our core business area revenues are noted in the previous Revenue section. The table below summarizes our third quarter fiscal 2014 and 2013 revenue by core business area.

Three Months Ended June 30, Core Business Area Revenue 2014 2013 (Dollars in millions) Naval Architecture and Marine Engineering $ 82.8 39.9 % $ 90.4 40.9 % Systems Analysis, Design and Engineering 72.3 34.9 % 76.4 34.6 % Modeling, Simulation, Training and Analysis 52.3 25.2 % 54.1 24.5 % Total Revenue $ 207.4 100.0 % $ 220.9 100.0 % Certain quarterly revenue by core business area for the three months ended June 30, 2013 disclosed above 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.

44-------------------------------------------------------------------------------- Table of Contents Cost-reimbursement revenue decreased $12.3 million (6.5%) and provided 85.2% of 2014 third quarter revenue. Our customers continue to utilize this method of contracting with Alion. The decrease in our revenue for cost reimbursable contracts was primarily due to the residual effects of the sequestration cuts that took effect in 2013, the Congressional continuing resolution and the U.S.

federal government shutdown at the beginning of fiscal 2014. These events impacted funding on our existing programs and new contract awards. Fixed price contract revenue was down $4.5 million to 7.0% of third quarter revenue as a result of our training work for the U.S. Army and high-end nuclear engineering contracts. Time and material contract revenue increased $3.3 million to 7.8% of third quarter revenue on increased activity with our agile engineering and rapid prototyping business. The table below summarizes our third quarter fiscal 2014 and 2013 revenue by contract billing type.

Three Months Ended June 30, Revenue by Contract Billing Type 2014 2013 (Dollars in millions) Cost reimbursable contracts $ 176.7 85.2 % $ 189.0 85.6 % Fixed price contracts 14.6 7.0 % 19.1 8.6 % Time and material contracts 16.1 7.8 % 12.8 5.8 % Total Revenue $ 207.4 100.0 % $ 220.9 100.0 % Certain quarterly revenue by contract billing type for the three months ended June 30, 2013 disclosed above 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.

Our Prime contracts provided approximately 87.0% of our Revenue, as Alion continues to transition to a Prime Contractor role with more of our customers, and on larger, more complex programs. As a prime contractor, we deliver services to customers by deploying our own staff and managing the efforts of other contractors. We also procure additional materials to support our customers who utilize our agile engineering and rapid prototyping support services. Costs for companies that work for us as subcontractors on our prime contracts and costs for materials often generate lower contract fee percentages, which in turn, place downward pressure on our gross margins. Due to the impact of sequestration, the Congressional continuing resolution and the U.S. federal government shutdown at the beginning of fiscal 2014 our third quarter prime contract revenue was down $18.0 million, a 9.1% decrease compared to the third quarter of fiscal 2013. Revenue from our work as a subcontractor was up $4.5 million this quarter. The table below summarizes our third quarter fiscal 2014 and 2013 prime and subcontract revenue.

Three Months Ended June 30, Prime and Subcontract Revenue 2014 2013 (Dollars in millions) Prime contracts $ 180.4 87.0 % $ 198.4 89.8 % Subcontracts from other companies 27.0 13.0 % 22.5 10.2 % Total Revenue $ 207.4 100.0 % $ 220.9 100.0 % Certain quarterly revenue for prime and subcontracts for the three months ended June 30, 2013 disclosed above 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.

Although our customers continue to use IDIQ (Indefinite Delivery Indefinite Quantity) contract vehicles, our IDIQ contract revenue decline accounted for $8.6 million of our third quarter revenue decline as compared to the third quarter of fiscal year 2013. The table below summarizes our third quarter fiscal 2014 and 2013 revenue by contract vehicle type.

45-------------------------------------------------------------------------------- Table of Contents Three Months Ended June 30, Contract Vehicles 2014 2013 (Dollars in millions) IDIQ Contracts $ 136.5 65.8 % $ 145.1 65.7 % Individual contracts and delivery orders 70.9 34.2 % 75.8 34.3 % Total Revenue $ 207.4 100.0 % $ 220.9 100.0 % Certain quarterly revenue for IDIQ contracts for the three months ended June 30, 2013 disclosed above 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.

Selected Financial Information The table below summarizes our third quarter fiscal 2014 and 2013 revenues and income from operations. Third quarter revenue decreased by $13.6 million (6.1%) year over year and our gross profit decreased $1.6 million. Total third quarter operating expenses increased $2.3 million. General and administrative costs related to our refinancing activities were the principal driver of increased costs. Occupancy costs rose modestly, while depreciation and amortization expenses were down year over year. Third quarter operating income in 2014 was $3.9 million less than it was in fiscal 2013.

Three Months Ended June 30, 2014 2013 (Dollars in thousands) % of % of Selected Financial Information revenue revenue Total contract revenue $ 207,377 $ 220,947 Total direct contract expense 162,330 78.3 % 174,314 78.9 % Direct labor costs 62,968 30.4 % 64,642 29.3 % Materials and subcontracts 93,927 45.3 % 106,350 48.1 % Other direct costs 5,435 2.6 % 3,322 1.5 % Gross profit 45,047 21.7 % 46,633 21.1 % Total operating expense 37,212 17.9 % 34,946 15.8 % Major components of operating expense: Overhead and G&A expenses 28,302 13.6 % 26,077 11.8 % Rental and occupancy expense 7,763 3.7 % 7,554 3.4 % Depreciation and amortization 1,147 0.6 % 1,315 0.6 % Operating income $ 7,835 3.8 % $ 11,687 5.3 % Direct Contract Expense and Gross Profit Third quarter 2014 direct contract expenses were $12.0 million lower, down 6.9% to $162.3 million compared to last year's direct costs of $174.3 million. This decrease is consistent with lower third quarter revenue as noted in the Sources of Revenue section of this report. Direct labor costs decreased $1.7 million to $63.0 million (30.4% of revenue) as compared to last year as a result of sequestration, the Congressional continuing resolution and the U.S. federal government shutdown at the beginning of fiscal 2014. Year over year reductions due to funding delays, budget cuts, and delays in new awards related to work in our agile engineering, rapid prototyping and high-end engineering businesses impacted our direct costs and also drove the $12.4 million decrease in purchased materials and subcontractor costs. Our other direct contract costs were up $2.1 million because many of our customers increased travel budgets in the third quarter of fiscal year 2014 as compared to fiscal year 2013.

Our third quarter 2014 gross profit was $45.0 million, down by approximately $1.6 million compared to 2013 as a result of sequestration, the Congressional continuing resolution and the U.S. federal government shutdown at the beginning of fiscal 2014. Our gross profit margins increased to 21.7% of revenue as compared to the 21.1% of revenue reported last year.

46-------------------------------------------------------------------------------- Table of Contents Reduced use of subcontractors by Alion on our larger, more complex prime contracts and lower levels of purchased materials used in our agile engineering and rapid prototyping work contributed to the increased gross margins as we typically will garner less profit on subcontractor work and on purchased materials as compared to higher profits on Alion direct labor.

Operating and General and Administrative Expenses Third quarter fiscal 2014 operating expenses increased $2.3 million (6.5%) compared to the same period last year. Overhead expenses decreased approximately $1.4 million due to cost reductions and cost avoidance measures the Company has implemented over the course of the past several fiscal years.

Occupancy costs were stable year over year. Reductions in our general and administrative expenses in the third quarter of fiscal year 2014 as compared to last fiscal year were off-set by the cost related to the refinancing transactions. Depreciation and amortization charges declined by $168 thousand compared to last year as amortization charges for contracts we obtained when we acquired JJMA in 2005 continue to decrease over time.

Operating Income Third quarter fiscal 2014 operating income was $7.8 million, as compared to $11.7 million in the third quarter of last year. The decrease was due to lower revenue, stable gross margin percentage and higher operating expenses which were driven, in part, by costs related to the refinancing of our debt. The decrease in third quarter revenue, coupled with higher third quarter operating expenses resulted in lower operating income margin at 3.8% of revenue, which was a decrease of 150 basis points from the third quarter of fiscal 2013.

Other Expense Third quarter fiscal 2014 aggregate interest income and interest and other expense was approximately $363 thousand higher than it was last year. This is largely because we used our revolving credit facility more this year than last year and this quarter we paid fees to amend the Credit Agreement and extend its maturity date.

Three Months Ended June 30, 2014 2013 (In thousands) Cash Pay Interest Revolver $ 238 $ 201 Secured Notes 8,383 8,217 Unsecured Notes 6,022 6,261 Other cash pay interest and fees 34 14 Sub-total cash pay interest 14,677 14,963 Deferred and Non-cash Interest Secured Notes PIK interest 1,676 1,644 Debt issue costs and other non-cash items 2,967 2,645 Sub-total non-cash interest 4,643 4,289 Total interest expense $ 19,320 $ 18,982 Income Tax Expense Third quarter deferred income tax expense was $1.7 million both this year and last year. Deferred tax expense relates to tax-deductible goodwill. We also have modest current tax expense for our Indian subsidiary's business development activities We continue to record a full valuation allowance for any tax benefit we are entitled to recognize because our history of losses makes it unlikely we will be able to realize the full benefit of our deferred tax assets.

Net Loss Our net loss for the third quarter totaled $13.3 million. The increase in our net loss was driven by lower third quarter revenue due, in part, to the impact of sequestration, the Congressional continuing resolution and the U.S. federal government shutdown at the beginning of fiscal 2014 resulting in funding delays to our existing programs and new award delays. In addition, operating income declined $3.9 million as a result of lower revenues and costs incurred in connection with the refinancing of our debt.

47-------------------------------------------------------------------------------- Table of Contents Results of Operations Nine Months Ended June 30, 2014, Compared to Nine Months Ended June 30, 2013 Despite a challenging defense market, the Company continues to win new contracts and execute on our existing base of business. In the first nine months of fiscal year 2014 we experienced delays in funding to our existing programs and contracts, as well as delays of new awards which were a result of the residual effects of the sequestration cuts that took effect in 2013, the fiscal 2014 first quarter U.S. federal government shutdown, Congressional continuing resolution and the timing of the House-Senate conference on the government's FY2014 budget resolution, resulting in Bipartisan Budget Act of 2013 (BBA). Our fiscal 2014 year-to-date revenues decreased 9.4% over fiscal 2013 year-to-date revenue. As with our decrease in overall revenue, our fiscal 2014 year-to-date gross profit and operating income decreased as compared to last year's year-to-date results.

The decrease in year-to-date third quarter fiscal 2014 revenue, gross profit and operating income is primarily attributed to the impact of sequestration, the Congressional continuing resolution and the U.S. federal government shutdown at the beginning of fiscal 2014. These matters have affected funding to a number of our programs, caused delays in new awards and driven slower than anticipated ramp-up of new programs. Revenue decreases adversely affected our Core Business Areas of Naval Architecture and Marine Engineering, Systems Analysis and Design and Modeling, Simulation, Training and Analysis.

Revenue The Company expected the Bipartisan Budget Act of 2013 to increase the level of new awards and the funding of our existing programs currently under contract for fiscal 2014. This has not been the case thus far in fiscal 2014. Delays in appropriations and funding for specific directorates, organizations, contracts and programs has taken much longer than we anticipated. Delays in funding our existing programs and the delays of new contracts awards has greatly impacted the Company's revenue and overall financial performance. As a result, fiscal 2014 year-to-date revenue was $585.7 million, down $60.9 million (9.4%) over fiscal 2013 year-to-date revenue. This decline was driven in part by our work in our Systems Analysis, Design and Engineering Core Business Area, which decreased $35.1 million (15.9%) compared to last year. The decrease in our Systems Analysis, Design and Engineering work was driven by declines in our high-end agile engineering, rapid prototyping and technology integration work, primarily due to funding delays on many of our task orders that had been previously awarded to the Company as well as delays with new awards. Our work in the Modeling and Simulation Core Business Area, which decreased by $13.8 million (8.3%) compared to third quarter of last year, posted declines in our decision and program support work and our training work. These decreases were offset, in part, by continued increases in our serious gaming simulation development work.

Naval Architecture and Marine Engineering Core Business Area which declined approximately $12.0 million (4.6%) due to delays in funding, new awards and budget reductions, all of which impacted many of our U.S. Navy programs.

Sources of Revenue The U.S. government continues to be our principal customer. As in the past, we expect the majority of our revenue will be derived from Department of Defense and other federal agency contracts. Although we are investing to expand our international and commercial business, we believe commercial and international revenue will continue to be a low percentage of our total revenue.

Funding delays and reductions, new contract award delays related to budget cuts, sequestration and the U.S. government shutdown earlier in the fiscal year led to declines in our fiscal 2014 year-to-date revenue compared to the year-to-date fiscal 2013 results. The $44.5 million decrease in our year-to-date fiscal 2014 U.S. Army business as compared to the third quarter of last year is related to our Systems Analysis, Design and Engineering work. Funding reductions and budget cuts also impacted our acquisition and analysis support, and modeling and simulation work with the U.S. Air Force as revenues declined $7.2 million. Our work with the U.S. Navy decreased $5.6 million in fiscal 2014 as compared to last year as work on many of our Navy programs were impacted by funding delays and cuts, and new award delays. These reductions were off-set by increased activity with the Navy's warfare centers. Fiscal 2014 year-to-date revenue from Other Department of Defense customers increased $6.3 million compared to last year as tasking in our agile engineering and rapid prototyping business has increased. Fiscal 2014 year-to-date revenue from Other Federal 48-------------------------------------------------------------------------------- Table of Contents Agencies declined $5.5 million compared to fiscal 2013 as tasking in our high-end consulting business has decreased due to budgetary pressures and the impact of the U.S federal government shutdown. The table below summarizes our year-to-date revenue by customer for fiscal 2014 and 2013.

Nine Months Ended June 30, 2014 2013 (Dollars in millions) % of % of Revenue by Customer revenue revenue U.S. Air Force $ 96.2 16.4 % $ 103.4 16.0 % U.S. Army 73.3 12.5 % 117.8 18.2 % U.S. Navy 325.1 55.5 % 330.7 51.1 % Other Department of Defense customers 53.8 9.2 % 47.5 7.3 % Sub-total Department of Defense customers 548.4 93.6 % 599.4 92.6 % Other Federal Agencies 20.0 3.4 % 25.5 3.9 % Sub-total U.S. Government customers 568.4 97.0 % 624.9 96.5 % Commercial and International customers 17.3 3.0 % 21.7 3.5 % Total Revenue $ 585.7 100.0 % $ 646.6 100.0 % Certain quarterly revenue by customer for the nine months ended June 30, 2013 disclosed above 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.

We provide 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. We expect our internal resource allocations and cost reductions will continue to improve our efficiency and enhance our ability to provide cost-effective customer solutions. The $35.1 million revenue reductions to our fiscal year year-to-date 2014 Systems Analysis, Design and Engineering core business area were driven by funding delays to our existing programs, which impacted our agile engineering and rapid prototyping business. Decreases of $13.8 million in our Modeling and Simulation core business area revenues were due, in part, to award delays, slower than anticipated ramp-up periods on new contract awards, as well as sequestration and budget related reductions in our customers' training and travel budgets which decreased our level of support across many of our customers. Revenue reductions of $12.0 million in our Naval Architecture and Marine Engineering core business area were driven by funding delays and reductions and budget cuts to many of our programs. Other factors reducing our core business area revenues are noted in the previous Revenue section. The table below summarizes our year-to-date fiscal 2014 and 2013 revenue by core business area.

Nine Months Ended June 30, Core Business Area Revenue 2014 2013 (Dollars in millions) Naval Architecture and Marine Engineering $ 248.4 42.4 % $ 260.4 40.3 % Systems Analysis, Design and Engineering 185.7 31.7 % 220.8 34.1 % Modeling, Simulation, Training and Analysis 151.6 25.9 % 165.4 25.6 % Total Revenue $ 585.7 100.0 % $ 646.6 100.0 % Certain quarterly revenue by core business area for the nine months ended June 30, 2013 disclosed above 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.

49-------------------------------------------------------------------------------- Table of Contents Cost-reimbursement revenue decreased $55.5 million (10.1%) and provided 84.1% of fiscal 2014 revenue primarily due to the impact of sequestration, the Congressional continuing resolution and the U.S. federal government shutdown at the beginning of fiscal 2014. Our customers, including the Naval Sea Systems Command and the Defense Technical Information Center's Information Analysis Center (IAC) contracts, continue to utilize this method of contracting with Alion, however, funding delays and decreases due to sequestration and U.S.

government budgetary constraint, have caused delays in awards and work authorizations. Fixed price contract revenue was down $12.2 million to 8.0% of fiscal 2014 revenue as a result of our work for the U.S. Army and high-end nuclear engineering contracts. Time and material contract revenue was up $6.8 million to 7.9% of fiscal 2014 revenue. The table below summarizes our fiscal 2014 and 2013 revenue by contract billing type.

Nine Months Ended June 30, Revenue by Contract Billing Type 2014 2013 (Dollars in millions) Cost reimbursable contracts $ 492.8 84.1 % $ 548.3 84.8 % Fixed price contracts 46.9 8.0 % 59.1 9.1 % Time and material contracts 46.0 7.9 % 39.2 6.1 % Total Revenue $ 585.7 100.0 % $ 646.6 100.0 % Certain quarterly revenue by contract billing type for the nine months ended June 30, 2013 disclosed above 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.

Our Prime contracts provided approximately 86.9% of our Revenue, as Alion continues to transition to a Prime Contractor role with more of our customers, and on larger, more complex programs. As a prime contractor, we deliver services to customers by deploying our own staff and managing the efforts of other contractors. We also procure additional materials to support our customers who utilize our agile engineering and rapid prototyping support services. Costs for companies that work for us as subcontractors on our prime contracts and costs for materials often generate lower contract fee percentages, which in turn, place downward pressure on our gross margins. Due to the impact of sequestration, the Congressional continuing resolution and the U.S. federal government shutdown at the beginning of fiscal 2014 our year-to-date prime contract revenue was down $68.1 million, a 11.8% decrease compared to last fiscal year. Revenue from our work as a subcontractor was up $7.2 million. The table below summarizes our fiscal 2014 and 2013 prime and subcontract revenue.

Nine Months Ended June 30, Prime and Subcontract Revenue 2014 2013 (Dollars in millions) Prime contracts $ 509.0 86.9 % $ 577.1 89.3 % Subcontracts from other companies 76.7 13.1 % 69.5 10.7 % Total Revenue $ 585.7 100.0 % $ 646.6 100.0 % Certain quarterly revenue for prime and subcontracts for the nine months ended June 30, 2013 disclosed above 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.

Although our customers continue to use IDIQ (Indefinite Delivery Indefinite Quantity) contract vehicles, our IDIQ contract revenue decline accounted for $45.9 million (10.9%) of our fiscal 2014 revenue decline. The table below summarizes our fiscal 2014 and 2013 revenue by contract vehicle type.

Nine Months Ended June 30, Contract Vehicles 2014 2013 (Dollars in millions) IDIQ Contracts $ 375.1 64.0 % $ 421.0 65.1 % Individual contracts and delivery orders 210.6 36.0 % 225.6 34.9 % Total Revenue $ 585.7 100.0 % $ 646.6 100.0 % Certain quarterly revenue for IDIQ contracts for the nine months ended June, 2013 disclosed above 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.

50-------------------------------------------------------------------------------- Table of Contents Revenue for IDIQ contracts for the nine months ended June 30, 2013 disclosed above may 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.

Selected Financial Information The table below summarizes our fiscal 2014 and 2013 revenues and income from operations. Fiscal 2014 revenue decreased by $60.8 million (9.4%) and gross profit decreased $7.5 million compared to last year. Fiscal 2014 operating expenses increased $10.5 million. General and administrative costs increased $11.9 million; refinancing activities were the principal driver of increased costs. Occupancy costs rose modestly, while depreciation and amortization expenses were down year over year. Fiscal 2014 operating income was $18.0 million less than it was in fiscal 2013.

Nine Months Ended June 30, 2014 2013 (Dollars in thousands) % of % of Selected Financial Information revenue revenue Total contract revenue $ 585,723 $ 646,557 Total direct contract expense 456,624 78.0 % 509,911 78.9 % Direct labor costs 183,090 31.3 % 187,448 29.0 % Materials and subcontracts 257,026 43.9 % 308,801 47.8 % Other direct costs 16,508 2.8 % 13,662 2.1 % Gross profit 129,099 22.0 % 136,646 21.1 % Total operating expense 114,343 19.5 % 103,866 16.1 % Major components of operating expense: Overhead and G&A expenses 86,973 14.8 % 75,064 11.6 % Rental and occupancy expense 23,711 4.0 % 22,878 3.5 % Depreciation and amortization 3,659 0.6 % 5,924 0.9 % Operating income $ 14,756 2.5 % $ 32,780 5.1 % Direct Contract Expense and Gross Profit Fiscal 2014 year-to-date direct contract expenses were $53.3 million lower, down 10.5% to $456.6 million compared to last year's direct costs of $509.9 million.

This decrease is consistent with lower fiscal 2014 year-to-date revenue as noted in the Sources of Revenue section of this report. Direct labor costs decreased $4.4 million to $183.1 million (31.3% of revenue) as compared to last year as a result of sequestration, the Congressional continuing resolution and the U.S.

federal government shutdown at the beginning of fiscal 2014. Year over year reductions in work in our agile engineering, rapid prototyping and high-end engineering businesses also drove the $51.8 million decrease in purchased materials and subcontractor costs. Other direct contract costs were up $2.8 million.

Fiscal 2014 gross profit was $129.1 million, down by approximately $7.5 million compared to fiscal 2013 as a result of sequestration, the Congressional continuing resolution and the U.S. federal government shutdown at the beginning of fiscal 2014. Our gross profit margins increased to 22.0% of revenue as compared to the 21.1% of revenue reported last year. Reduced use of subcontractors by Alion on our larger, more complex prime contracts and lower levels of purchased materials used in our agile engineering and rapid prototyping work contributed to reduced gross margins.

Operating and General and Administrative Expenses Fiscal 2014 year-to-date operating expenses increased $10.5 million (10.1%) compared to the same period last year. Overhead expenses decreased approximately $4.3 million due to cost reductions and cost avoidance measures the Company has implemented over the course of the past several fiscal years.

Occupancy costs were stable year over year. Reductions in our 51-------------------------------------------------------------------------------- Table of Contents general and administrative expenses in year-to-date fiscal 2014 as compared to year-to-date fiscal 2013 were off-set by the costs related to the refinancing transactions. Depreciation and amortization charges declined by $2.3 million compared to last year as amortization charges for contracts we obtained when we acquired JJMA in 2005 continue to decrease over time. Operating expenses, excluding refinancing related charges, continue to trend downward as they have since last year.

Operating Income Fiscal 2014 year-to-date operating income was $14.8 million, as compared to $32.8 million for fiscal 2013. The decrease was due to lower revenue, and higher operating expenses which were largely driven, by refinancing-related costs. In fiscal 2014 operating income margin was 2.5% of revenue, which was a 260 basis point decline compared to fiscal 2013.

Other Expense Fiscal 2014 year-to-date aggregate interest income and interest expense and other expense was approximately $1.2 million higher than fiscal 2013 year- to- date expense largely because we used our revolving credit facility more this year than last year and Secured Note PIK interest was higher. Our increasing Secured Note balance increased our debt issue cost amortization.

Nine Months Ended June 30, 2014 2013 (In thousands) Cash Pay Interest Revolver $ 1,508 $ 602 Secured Notes 25,009 24,517 Unsecured Notes 18,066 18,817 Other cash pay interest and fees 76 56 Sub-total cash pay interest 44,659 43,992 Deferred and Non-cash Interest Secured Notes PIK interest 5,002 4,902 Debt issue costs and other non-cash items 8,317 7,920 Sub-total non-cash interest 13,319 12,822 Total interest expense $ 57,978 $ 56,814 Income Tax Expense Year-to-date income tax expense was $5.2 million both this year and last year.

Deferred tax expense relates to tax-deductible goodwill. We also have modest current income tax expense for our Indian subsidiary's business development activities We continue to record a full valuation allowance for any tax benefit we are entitled to recognize because our history of losses makes it unlikely we will be able to realize the full benefit of our deferred tax assets.

Net Loss Our net loss for the fiscal 2014 totaled $48.5 million driven by lower year-to-date revenue and higher operating expenses. Operating income declined $18.0 million in large part because of refinancing costs.

Backlog As of June 30, 2014, management estimates the amount of future revenues to be recognized under our existing contracts to be approximately $1.4 billion, of which, approximately $404 million is funded.

All of our existing contracts are categorized as 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 ID/IQ contracts, including GWACs and GSA schedules, except to the extent that task orders have been awarded to us under those contracts.

52-------------------------------------------------------------------------------- Table of Contents • 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 June 30, Backlog: 2014 2013 (In millions) Funded $ 403.5 $ 309.0 • 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 June 30, Backlog: 2014 2013 (In millions) Unfunded $ 1,032.2 $ 1,091.0 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 timing and recognition of backlog-related contract revenue include: schedule changes, contract modifications, and our ability to assimilate and deploy new staff against funded backlog; U.S. government cost cutting initiatives and other efforts to reduce 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 our annual report on Form 10-K for the fiscal year ended September 30, 2013. We estimate remaining contract backlog based on our experience under our contracts, we believe our estimates are reasonable.

Liquidity and Capital Resources We use cash primarily to fund operations and service our debt. We had $19.0 million in cash and cash equivalents at June 30, 2014. This is $649 thousand less than our March 2014 balance but $14.3 million more than we had at December 31, 2013. However our June 2014 cash balance is still $6.6 million less than we had available nine months ago at the end of September 2013. As of June 30, 2014, we had no borrowings outstanding under our $45 million revolving credit facility but we were contingently liable under $3.9 million in outstanding letters of credit. The letters of credit reduced our maximum available credit facility borrowing capacity to approximately $41.1 million at June 30, 2014. The Credit Agreement expires on August 15, 2014.

At June 30, 2014, we had $336.4 million in outstanding Secured Notes due November 2014 and $235.0 million in outstanding Unsecured Notes due February 2015. For additional information concerning our Credit Agreement, our Secured Notes and our Unsecured Notes, see Note 10 to our unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q.

In general, our operating activities provide adequate cash to fund our operations, including quarterly interest payments for our Secured and Unsecured Notes. When the Secured Notes mature on November 1, 2014, we will have to pay out $339.8 million in principal and $16.8 million in interest. In February 2015, we will have to pay out $235.0 million in principal and $12.0 million in interest when the Unsecured Notes mature. Our current liabilities materially exceed our current assets and will continue to do so unless and until we can obtain new long term financing.

Our operating activities cannot provide sufficient cash for us to repay the Secured and Unsecured Notes when they mature. Our history of continuing losses, our financial position, and the substantial liquidity needs we face raise substantial doubt about Alion's ability to continue as a going concern. See Note 2 to our unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q.

53 -------------------------------------------------------------------------------- Table of Contents In July 2014, Alion executed an amended Refinancing Support Agreement with the holders of a majority of its outstanding Unsecured Notes regarding the following possible refinancing transactions that the parties contemplated might close as early as August 2014, but not later than September 30, 2014: • exchanging Unsecured Notes for, at the holders' option, either (a) new third lien notes maturing in five and one-half years, with a combination of interest payable in cash and in kind, and new penny warrants to purchase up to 27.5% of the Company's common stock or (b) a limited amount of cash at a price below par plus, in each case, accrued and unpaid interest, a 1.5% early tender cash payment, if applicable , and obtaining certain consents from Unsecured Noteholders; • entering into a new first lien term loan facility consisting of a Term A loan for $110 million and a Term B loan for $175 million: • entering into a new $70.0 million second lien term loan facility with new penny warrants to purchase up to 12.5% of the Company's common stock; new preferred stock with voting control of the Company and control of the board of directors; • redeeming all of our outstanding Secured Notes prior to their November 2014 maturity with the proceeds of the new first and second lien term loan facilities; • replacing our existing revolving credit facility with a new revolving credit facility; and; • offering units consisting of the same new third lien notes and warrants being offered in the Exchange Offer to holders of the Unsecured Notes who tender into the Exchange Offer if any holder elects the cash option in the Exchange Offer.

In February 2014, we filed a registration statement on Form S-1 with the U.S.

Securities and Exchange Commission to register the Exchange Offer and the Unit Offering. We amended our S-1 in March, April and May 2014. On May 2, 2014 the parties to the Refinancing Support Agreement entered into an amended and restated Refinancing Support Agreement to, among other things, extend the date by which the refinancing transactions must be completed from April 28, 2014 to July 31, 2014. On May 9, 2014, the SEC declared our registration statement effective. The exchange offer commenced May 13, 2014.

As a result of the July 2014 amendment to the Refinancing Support Agreement and based on agreements in principle with other lenders, the Company filed a new registration statement on Form S-1 with the SEC on July 29, 2014 to modify the terms of the exchange offer. The company amended the July 29th S-1 on August 7, 2014 and August 11, 2014. The SEC declared the amended registration statement effective on August 11, 2014. The exchange offer cannot be completed until all conditions precedent have been satisfied. The amended Refinancing Support Agreement extended the refinancing completion date to September 30, 2014.

Although we have entered into the Refinancing Support Agreement, there can be no assurance Alion will enter into definitive agreements regarding the terms of the refinancing transactions; that enough other Unsecured Note holders will agree to participate in the Exchange Offer; that we will be to obtain a new revolving credit facility or refinance the Secured Notes; or that any transaction will occur on all or any of the terms described above. We can offer no assurance that if any transaction does occur, the terms concluded will be favorable to the Company's existing investors.

We continue to work on refinancing our existing debt. We may engage from time to time in discussions with Alion's other creditors, other holders of the Unsecured Notes, and holders of the Senior Secured Notes as well as with advisors to such creditors and notes holders.

The terms of the agreements the Company is seeking to negotiate are expected to materially affect Alion's short- and long-term cash obligations and the company's interest expense. Future interest expense on the agreements to be negotiated may include interest payable in cash, PIK interest and warrants. If our refinancing efforts succeed, Alion's future cash flow demands are likely to differ materially from what is in this Quarterly Report on Form 10-Q.

Cash flows used in operating activities Nine months ended June 30, 2014 2013 (In thousands) Net cash used in operating activities $ (4,386 ) $ 1,200 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. In the three 54-------------------------------------------------------------------------------- Table of Contents months ended June 30, 2014, we used $1.3 million to fund operations compared to the $16.8 million we generated in the prior quarter and $19.1 million we used in our first quarter this year. Our fiscal 2014 operations consumed a total of $4.4 million so far this year. Refinancing efforts have cost Alion $17.1 million in fiscal 2014.

Cash flows declined from March 2014 to June 2014. Interest expense eroded available cash flows but careful management of receivables and payables helped to increase quarterly cash flows. Fiscal 2014 operating cash flows were less than the comparable period in fiscal 2013 and were affected by: • more than a $21 million year over year increase in net losses • lower revenue and billings to customers • improvements in collecting receivables • timing of vendor payments; and • approximately $1.5 million less in non-cash expenses for depreciation and amortization, asset retirements, and incentive compensation In the three months ended June 30, 2014, we collected approximately $210.7 million in receivables, $3.3 million more than the $207.4 million in revenue we recognized this quarter. In the third quarter of fiscal 2013, we collected $239 million which was $18 million more than the $221 million in revenue recognized that quarter. Even as collections continued to outpace revenue this quarter, we continue to feel the effects of government payment process changes and the cost of funding our refinancing efforts.

We compute accounts receivable days' sales outstanding (DSO) based on trailing twelve-month revenue. Lower trailing twelve month revenue increased DSO by 1.4 days this quarter. That increase was offset by lower receivables balances and improved collections which reduced DSO by 2.1 days from March 2014 levels. DSO has remained stable in fiscal 2014. DSO was 74.4 days at June 30, 2014 and 74.2 days at September 30, 2013.

This quarter, there were further delays in obtaining contract funding for customer-requested work performed in advance of receiving executed contract documents. At September 30, 2013, we had $14.6 million in unfunded contract receivables for customer-requested work. As of June 30, 2014 this had grown by $4.5 million to $19.1 million. We are experiencing a significant year over year decline in revenue.

Cash provided by / (used in) investing activities Nine months ended June 30, 2014 2013 (In thousands) Net cash provided by / (used in) investing activities $ 928 $ (952 ) We use some of our cash to invest in equipment and software, leasehold improvements and internally-developed software. During the nine months ended June 30, 2014 and 2013, we spent $597 thousand and $952 thousand for these types of capital expenditures. In fiscal 2014, we also recognized $1.5 million from selling off one of our underutilized contract vehicles.

We expect our investing activities and capital expenditures to continue at comparable levels for the balance of the current fiscal year. Our Credit Agreement limits the amount we may spend on capital expenditures.

Cash used in financing activities Nine months ended June 30, 2014 2013 (In thousands) Net cash used in financing activities $ (3,158 ) $ (7,499 ) Last quarter we indicated we would likely have to pay additional Refinancing Support Agreement fees. In the three months ended June 30, 2014, we paid $794 thousand in fees in addition to the $1.5 million in fees we paid earlier this year. We expect to pay additional refinancing related fees beyond these at or before closing of the transactions contemplated in the Refinancing Support Agreement.

55 -------------------------------------------------------------------------------- Table of Contents In fiscal 2014, we sold $934 thousand worth of Alion common stock to the ESOP Trust for employee purchases from April 1, 2013 through September 30, 2013. In several subsequent transactions, we repurchased approximately $1.8 million worth of Alion common stock from the ESOP from Plan beneficiaries and former employees. Last quarter, the ESOP Trust borrowed and repaid $855 thousand to meet statutory diversification requirements.

We delayed our mid-year ESOP Trust common stock valuation until after we complete our refinancing efforts. As a result, we have not sold any shares of Alion common to the ESOP Trust since December 2013. We do not know whether we will sell any additional shares to the ESOP Trust prior to September 2014.

In fiscal 2013, over the nine months ended June 30, 2013, we spent $6.7 million to repurchase ESOP shares from former employees. In fiscal 2013, the ESOP Trust borrowed and repaid a $1.9 million loan to fund statutory diversification of ESOP participant investments. Fiscal 2013 outflows were offset in part by $2.2 million in proceeds received from ESOP Trust purchases of Alion common stock through employee salary deferrals for the period from April 1 through March 2013.

Operating demands and fluctuations in our collections occasionally make it necessary for us to use the revolving credit facility. In May 2014, we made our scheduled interest payment without accessing our revolving credit facility.

However, we subsequently borrowed $10 million to fund our operations through the end of the month. We repaid $5.0 million at the end of May 2014 and $5.0 million the first week in June 2014.

Our highest revolving credit facility balance (excluding letters of credit) for the timeframes over which we borrowed funds was $10.3 million. Our fiscal 2014 weighted average loan balance was approximately $7.2 million.

Discussion of Debt Structure As of June 30, 2014, Alion's current debt structure includes the $45 million Credit Agreement revolving credit facility, $336.4 million in Secured Notes ($310 million in initial face value plus $26.4 million in PIK interest notes issued), and $235.0 million in Unsecured Notes. Our credit arrangements, including our Secured and Unsecured Note Indentures and our Credit Agreement, include a number of covenants. We expect to be able to comply with our indenture covenants and our credit facility covenants, at least until the current agreement with Wells Fargo Bank expires August 15, 2014. The Company is in compliance with each of the affirmative, negative and financial covenants in its existing debt agreements. See Note 10 to our unaudited condensed consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q for a detailed discussion of Alion's current debt structure and a list of relevant terms and limitations in our Credit Agreement, Secured Note Indenture and Unsecured Note Indenture.

Credit Agreement - Covenant Compliance In December 2013, in anticipation of a potential covenant breach resulting from an audit opinion including a "going concern" explanatory note, our Credit Agreement lenders agreed to waive this covenant. We paid no fee for the initial waiver. Absent the waiver, we would not have been able to access our revolving credit facility once our auditors issued their fiscal 2013 audit opinion. We have since negotiated three extensions of this "going concern" waiver for an aggregate total of $700 thousand. From January through March 2014 we paid $350 thousand to extend this covenant waiver. In early April we paid an additional $350 thousand to further extend the waiver through May 2, 2014. Under the amended and restated Credit Agreement, Wells Fargo Bank, the new lender agreed to except the requirement regarding the going concern qualification for fiscal 2013.

On May 2, 2014, Alion amended and restated the Credit Agreement with Wells Fargo Bank as the sole lender and an underlying $45 million revolving credit facility.

On July 31, 2014, Wells Fargo extended the maturity date from August 1 to August 15, 2014. The Credit Agreement contains a borrowing base requirement/limitation but no EBITDA covenant. It also requires Alion to maintain a minimum fixed charge coverage ratio of 1.00 to 1.00. We expect we will be able to comply with the Credit Agreement covenants and further extend its maturity date or replace it with a new credit facility once we are able to close a refinancing transaction.

Secured Note Indenture and Unsecured Note Indenture There are no financial covenants in either the Secured Note Indenture or the Unsecured Note Indenture. Certain provisions in the Secured Note Indenture and the Unsecured Note Indenture limit our ability to incur additional debt or pay dividends if our ratio of Adjusted EBITDA to Consolidated Interest Expense is not greater than 2.0 to 1.0. The Secured and Unsecured Note Indentures define Adjusted EBITDA and Consolidated Interest Expense. Set out below are our actual ratios of Adjusted EBITDA to Consolidated Interest Expense as of June 30, 2014 and September 30, 2013.

56 -------------------------------------------------------------------------------- Table of Contents June 30, 2014 September 30, 2013 Trailing twelve-month Adjusted EBITDA $ 63.3 million $ 69.0 million Trailing twelve-month Consolidated Interest Expense $ 76.9 million $ 75.7 million Ratio 0.82 to 1.0 0.92 to 1.0 Capital Resources June 30, 2014 June 30, 2013 Available Liquidity (In thousands) Cash and cash equivalents $ 18,997 $ 19,976 Revolving credit facility 45,000 35,000 Less: Letters of Credit (3,935 ) (4,000 ) Net available liquidity $ 60,062 $ 50,976 We believe we have adequate capital resources available to us from our cash on hand, future collections and our $41 million revolving credit facility capacity under our Credit Agreement to fund our anticipated operating cash requirements so long as we can timely complete the refinancing transactions. We also believe that our cash on hand and cash from operations are adequate to make our quarterly interest payments for our Secured and Unsecured Notes. We believe our cash flows will be sufficient to meet ESOP repurchase and diversification demands and support our modest level of capital expenditures. Although our operating cash flows have been adequate to meet our financial commitments in the past, unless we are able to refinance our existing debt agreements, we will be unable to repay either the Secured Notes or the Unsecured Notes when they become due in November 2014 and February 2015.

At June 30, 2014, we had no outstanding borrowings under our revolving credit facility, and we had $4 million in outstanding letters of credit. For additional information concerning our Credit Agreement, see Note 10 to our unaudited condensed consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q.

We believe Alion can meet the borrowing base requirements in the Credit Agreement with Wells Fargo Bank to maintain access to our revolving credit facility until we complete our refinancing transactions or the Credit Agreement expires. Our borrowing base could be adversely affected by our declining revenue. This could be aggravated by delays in contract awards that could adversely affect our ability to increase our revenue on the timeline we seek to achieve. We believe Alion will be able to use the Credit Agreement revolving credit facility to borrow funds as and when necessary through the agreement's August 15, 2014 maturity date.

Short-term Borrowings From time-to-time, we have borrowed funds under our revolving credit facility for working capital requirements, to fund operations. In the past we have also used our revolving credit facility to repurchase our Unsecured Notes in open market transactions. Revolving credit facility loans used to bear interest at a variable rate (8.5%) based on LIBOR. The current Wells Fargo rate is 4.9%. It is based on daily one month LIBOR plus 475 basis points.

We may use our Credit Agreement revolving credit facility or additional sources of borrowings, as needed, to fund our anticipated cash requirements through August 15, 2014. Although we currently forecast that until we close our refinancing transactions we will not have a material balance drawn on the revolving credit facility, the current Credit Agreement terms require us to pay a minimum of $75 thousand each month in interest.

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 Credit Agreement revolving credit facility to a more significant extent than we currently forecast. Despite payment delays arising from the October 2013 government shut down, we did not have to draw on our revolving credit facility to make our first or second quarter interest payments. However, we have accessed our revolving credit facility intermittently for up to $10.0 million at a time. Continued 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 more often or at higher levels than we have in the past or currently plan to do in the future.

57-------------------------------------------------------------------------------- Table of Contents The following table summarizes the activity under our revolving credit facility for the nine months ended June 30, 2014 and 2013, not including issued and outstanding letters of credit.

Nine Months Ended June 30, 2014 2013 Short-term borrowings (In thousands) Aggregate revolving credit facility borrowings $ 35,000 $ 3,201 Aggregate revolving credit facility repayments (35,000 ) (3,201 ) Net change in revolving credit facility balance payable $ - $ - Cash Management 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 Warrants and Stock-based Compensation Changes in the price of a share of Alion common stock do not affect warrant-related interest expense. Our outstanding Secured Note 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 little, if any, intrinsic value and the related liability is minimal. Management is unable to forecast the share price the ESOP Trustee will determine in future valuations and thus cannot predict future SAR-related cash flow demands. Certain SAR grantees can choose to defer future 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. 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.

ESOP Share Redemptions Typically our mid-year ESOP valuation period ends on March 31st. We amended the Plan to delay the mid-year valuation and report until after Alion concludes its pending refinancing transaction. Interest rates, market-based factors and volatility, the effects of Alion's refinancing, along with Alion's current fiscal year financial results will affect the future value of a share of our common stock.

After each year-end and mid-year valuation, the Plan permits beneficiaries and former employees to request distribution of their vested ESOP account balances.

Consistent with the terms of the Plan, IRC requirements, and our established 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.

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. We use these forecasts to avoid, to the extent practicable, surges in redemption-related demands on Alion's future cash flows.

Even with these models, 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 may increase. Although these demands could rise if the price of a share of Alion common stock were to increase, the most recent decline in our share price materially reduced the value of each individual Plan participant's beneficial interest. Price declines like those we have experienced over the past five valuations can lead to an upturn in the number of individuals making diversification demands. However, even if greater numbers of individuals sought to diversify their ESOP investments, lower values for individual account balances make it unlikely their elections would materially increase the aggregate value of near-term demands on our cash to fund ESOP-related transactions.

58-------------------------------------------------------------------------------- Table of Contents 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. 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 June 30, 2014, based on our current $8.10 share price, we estimate we will have to pay out the amounts listed below later this year and over the next four fiscal years. Any future changes in our share price would impact the estimated share redemption payouts.

Estimated Share Redemption Payouts Amounts Fiscal Year Ending September 30, (in thousands) Remainder of 2014 $ 1,164 2015 1,731 2016 1,388 2017 960 2018 192 Total estimated payouts $ 5,435 Cash flow demands from existing debt agreement obligations We expect we will have to make the estimated interest and principal payments set forth below for Alion's existing debt over the balance of fiscal 2014 and through February 2015. Although the Credit Agreement expires on August 15, 2014, we expect it will continue to be extended until we conclude a refinancing transaction. The minimum interest expense under the Credit Agreement is $75 thousand per month, including interest expense and letter of credit fees.

We do not expect Alion will have any material 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.

We believe the Company will be unable to generate sufficient cash flow from operations to retire its debt as it comes due. We can offer no assurance that Alion will be able to obtain new financing at sufficient levels and on acceptable terms, if at all. The following table discloses the estimated interest and principal payments the Company expects to pay on its existing current debt during the remainder of its fiscal year 2014 and in its fiscal year 2015 and does not reflect the effects of any potential refinancing transaction.

Fiscal Year Estimated Minimum Payments-Existing Debt Agreements 2014 2015 (Amounts in thousands) Revolving credit facility (1) Interest $ 225 $ - Secured Notes (2) Interest - 16,821 Principal and PIK Interest Notes - 339,788 Unsecured Notes (3) Interest 12,044 12,044 Principal - 235,000 Total interest paid in cash $ 12,269 28,865 Total principal and PIK Interest paid in cash - 574,788 Total estimated minimum debt payments $ 12,269 603,653 (1) Minimum monthly interest expense based on the assumption that, if necessary, the Credit Agreement will be extended through the end of fiscal 2014.

(2) The Secured Notes bear interest at 10% in cash and 2% in PIK. The outstanding principal will increase over time for the 2% compounding PIK interest added to the initial $310 million in principal. The Secured Notes, including $29.8 million in PIK interest, mature November 1, 2014.

(3) The Unsecured Notes bear interest at 10.25% and mature February 1, 2015. Up through March 31, 2013, the Company had repurchased $15 million worth of Unsecured Notes: $2 million in November 2010; $3 million in June 2011; $5 million in June 2013; and $5 million in July 2013. On August 1, 2014, the Company made its scheduled Unsecured Note interest payment.

59 -------------------------------------------------------------------------------- Table of Contents Cash flow demands from debt agreement obligations anticipated to arise from proposed refinancing transactions The pending refinancing transactions contemplated in the Company's July 29th registration statement would materially alter Alion's debt-related cash flow obligations. We have included below a forecast of the estimated interest and principal repayment obligations the Company anticipates will arise from concluding the pending refinancing transactions. Management can offer no assurance that the Company will be able to conclude the proposed transactions, or if it is able to do so, when closing will occur.

The forecast below is predicated on the transactions closing by the end of fiscal 2014 and therefore do not include anticipated cash flows related to existing debt expected to be refinanced. Management expects that up to 10% of the face value of the Unsecured Notes will remain outstanding until maturity in February 2015.

Estimated FuturePrincipal and Interest Payments Based on Pending Refinancing Transactions Fiscal Year 2015 2016 2017 2018 2019 2020 Total (Amounts in thousands) Unsecured Notes not exchanged (1) Principal $ 23,500 $ - $ - $ - $ - $ - $ 23,500 Interest $ 1,204 $ - $ - $ - $ - $ - $ 1,204 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 $ 15,000 $ 25,000 $ 25,000 $ 45,000 $ - $ - $ 110,000 Interest $ 8,800 $ 7,600 $ 5,600 $ 3,600 $ - $ - $ 25,600 First Lien - Term B (4) Principal $ 1,750 $ 1,733 $ 1,715 $ 1,698 $ 168,104 $ - $ 175,000 Interest $ 19,250 $ 19,058 $ 18,867 $ 18,679 $ 18,491 $ - $ 94,345 Second Lien (5) Principal $ - $ - $ - $ - $ - $ 70,000 $ 70,000 PIK $ - $ - $ - $ - $ - $ 77,674 $ 77,674 Third Lien (6) Principal $ - $ - $ - $ - $ - $ 211,500 $ 211,500 PIK $ - $ - $ - $ - $ - $ 142,119 $ 142,119 Interest $ 11,633 $ 12,767 $ 14,011 $ 15,378 $ 16,954 $ 6,259 $ 77,002 Total interest $ 42,847 $ 41,385 $ 40,438 $ 39,617 $ 35,445 $ 6,259 $ 205,991 Total principal and PIK $ 40,250 $ 26,733 $ 26,715 $ 46,698 $ 208,104 $ 501,293 $ 849,793 Total estimated future payments $ 83,097 $ 68,118 $ 67,153 $ 86,315 $ 243,549 $ 507,552 $ 1,055,784 (1) Holders of 90% of existing Unsecured Notes are expected to exchange their notes for Third Lien notes. The other 10% will mature February 2015.

Interest is payable at 10.25% in arrears.

(2) Alion expects to execute a new four-year $65 million revolving credit facility. The Company forecasts the average drawn balance will be $40 million. Interest is estimated at 4.9% per year.

(3) The $110 million First Lien Term A is expected to have 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 is expected to have 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 Note is expected to have a five-and-a-half year life with PIK interest at 14.25% per year compounded quarterly.

60 -------------------------------------------------------------------------------- Table of Contents (6) The $211.5 million Third Lien Notes are expected to have a five-and-a-half year life with cash interest at 5.5% per year. The Third Lien Note will have 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 June 2014, Alion had spent a cumulative total of $100.0 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.

Shares Share Total Value Date Repurchased Price Purchased (In thousands) 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 115,252 $ 8.10 933 March 2014 106,757 $ 8.10 865 628,614 $ 8,454

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