1166568--12/14/2010--ALION_SCIENCE_&_TECHNOLOGY

related topics

{regulation, government, change}

{customer, product, revenue}

{debt, indebtedness, cash}

{tax, income, asset}

{cost, contract, operation}

{control, financial, internal}

{acquisition, growth, future}

{personnel, key, retain}

{cost, operation, labor}

{product, market, service}

{condition, economic, financial}

{cost, regulation, environmental}

{competitive, industry, competition}

{financial, litigation, operation}

{system, service, information}

Despite our current debt levels, we and our subsidiaries may still be able to incur more debt. This could further aggravate risks associated with our substantial leverage. Our First Indenture, the new revolving credit facility and the Second Indenture restrict our operations. We may not be able to obtain financing in the future, and the terms of any future financings may limit our ability to manage our business. Difficulties in obtaining financing on favorable terms would have a negative effect on our ability to execute our business strategy. If we breach our financial covenants, we could have to amend the financial covenants of the new revolving credit facility which could materially impact our ability to finance our future operations, future acquisitions or capital needs. Risks Related to Internal Controls We could incur adverse effects from our prior disclosures relating to our failures to comply with prior financial covenants. We discovered errors in our historic calculations of Consolidated EBITDA because of which we failed to comply with certain covenants in our previously existing Term B Senior Credit Agreement. Our prior disclosures relating to our compliance with our financial covenants could have material adverse effects on our business and financial condition. Risks Related to Our Business and Operations We expect to experience net losses in at least our next four years of operation. Our ability to meet our financial and other future obligations depends on our future operating results. We cannot be sure we will be able to meet these obligations as they come due. We face intense competition from many companies that have greater resources than we do. This could cause price reductions, reduced profitability, and loss of market share. Historically, a few contracts have provided most of our revenue. If we do not retain or replace these contracts our operations will suffer. If we are unable to manage our growth, our business could be adversely affected. Acquisitions could increase our costs or liabilities or be disruptive. We depend on key management and may not be able to retain those employees due to competition for their services. Our business could suffer if we fail to attract, train and retain skilled employees. In order to succeed, we will have to keep up with rapid technological changes in a number of industries. Various factors could affect our ability to keep pace with these changes. A continued economic downturn could harm our business. Adverse changes in market conditions, the stock market or the merger and acquisition environment in our industry could adversely affect the value of our goodwill which could cause us to recognize an impairment charge. Our employees may engage in misconduct or other improper activities, which could harm our business. The interests of the ESOP Trust may not be aligned with the interests of participants in the ESOP component of the KSOP. Environmental laws and regulations and our use of hazardous materials may subject us to significant liabilities. On March 22, 2010, our S corporation election automatically terminated and we became a C corporation for U.S. federal income tax purposes. As a C corporation we are subject to federal and state income tax at regular corporate rates. The increase in our effective tax rate could reduce cash available to pay our debt and other financial obligations and to invest in our operations. The Internal Revenue Service (IRS) could successfully challenge the validity of our S corporation election for tax periods prior to March 22, 2010, and we could possibly owe additional U.S. federal and state income tax. Risks Related to Our Industry We depend on U.S. government contracts for substantially all of our revenue. Changes in the contracting or fiscal policies of the U.S. government could adversely affect our business, financial condition or results of operations. Failure by Congress to timely approve budgets for the federal agencies we support could delay or reduce spending and cause us to lose revenue. We may not realize the full amount of our backlog, which could lower future revenue. Many of our U.S. government customers procure goods and services through ID/IQ, GWAC or GSA Schedule contracts under which we must compete for post-award orders. U.S. government contracts contain termination provisions that are unfavorable to us. If we do not accurately estimate the expenses, time and resources necessary to meet our contractual obligations, our contract profits will be lower than expected. Our operating margins and operating results may suffer if cost-reimbursement contracts increase in proportion to our total contract mix. If our fixed-price contract revenue declines in total or as a proportion of our total business, or if profit rates on these contracts deteriorate, our operating margins and operating results may suffer. Our subcontractors failure to perform contractual obligations could damage our reputation as a prime contractor and our ability to obtain future business. Because U.S. government contracts are subject to government audits, contract payments are subject to adjustment and repayment which may result in lower than expected contract revenue. If we fail to recover at- risk contract costs, we may have reduced fees or losses. Actual or perceived conflicts of interest may prevent us from being able to bid on or perform contracts. As a U.S. government contractor, we must comply with complex procurement laws and regulations and our failure to do so could have a negative impact upon our business.

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1166568--12/14/2010--ALION_SCIENCE_&_TECHNOLOGY_CORP