Alion Science and Technology begins exchange offer for 10¼% notes

By Angela McDaniels

Tacoma, Wash., May 13 - Alion Science and Technology Corp. began an exchange offer and consent solicitation for its 10¼% senior notes due Feb. 1, 2015, according to a company news release.

The transactions are part of the company's previously announced plan to refinance its existing debt.

The company is offering to exchange all of the notes and the related guarantees for, at the election of the noteholders, either the new securities option; subject to proration, the cash option; or, for holders wishing to participate in the unit offering, the new securities plus unit offering option.

The company will apply the proceeds generated from the units offering to finance the purchase of a portion of the notes accepted for exchange under the cash option.

In addition, the company is soliciting consents to some proposed amendments to the indenture governing the notes that would eliminate substantially all of the affirmative and negative covenants and eliminate some events of default.

Holders of 71.1% of the outstanding principal amount of notes have committed to tender their notes and deliver related consents into the exchange offer and consent solicitation for the new securities option.

New securities option

Under the new securities option, holders may elect to receive the following for each $1,000 principal amount of notes accepted for exchange:

• $1,000 principal amount of the company's third-lien senior secured notes due 5.5 years after the settlement date and the related guarantees.

The cash interest rate for the new third-lien notes will be 8% for the first 30 months following the closing and will step up to 10% for months 31 through 36 and to 12% for the remaining term of the notes.

The payment-in-kind interest rate on the third-lien notes will be 5.5% in year one, 6.5% in year two, 7.5% in months 25 through 30, 5.5% in months 31 through 36, 4.5% in months 37 through 48, 5.5% in months 49 through 60 and 6.5% in months 61 through 66;

• One immediately exercisable warrant to purchase no less than 5.9701768 shares of the company's common stock at an exercise price of $0.01 per share (the "Penny warrant"); and

• Three warrants, each to purchase no less than 2.3880707 shares of the company's common stock (the "cash warrants").

The cash warrants are exercisable and have exercise prices as follows:

• One of the cash warrants will be exercisable on the date on which its exercise price is set at an exercise price equal to the lesser of (a) $8.10 per share, (b) to the extent a valuation is delivered by the employee ownership, savings and investment plan trustee to the company prior to the settlement date or that relates to the period ended March 31, the value per share of the common stock as set forth in that valuation and (c) the value per share of the common stock as set forth in a valuation to be conducted within two months of the closing date;

• One of the cash warrants will be exercisable at any time following the first anniversary of the settlement date at an exercise price equal to the then-current per-share valuation for the purpose of valuing the common stock in connection with the employee ownership, savings and investment plan; and

• One of the cash warrants will be exercisable at any time following the second anniversary of the settlement date at an exercise price equal to the then-current per-share valuation for the purpose of valuing the common stock in connection with the employee ownership, savings and investment plan.

The cash option

Under the cash option, holders will receive $600 for each $1,000 principal amount of notes accepted for exchange.

If the cash required to purchase all notes tendered under the cash option (excluding accrued interest and the early tender payment) exceeds $20,000,400, each holder who elected the cash option will have the amount of notes accepted for exchange into the cash option prorated, and the balance of the notes will be exchanged into new securities as if that holder had elected the new securities option.

Securities plus units option

Under the new securities plus unit offering option, holders may elect to receive the same securities offered in the new securities option plus purchase units in the unit offering.

Depending on the principal amount of notes held, noteholders may be able to purchase units in the unit offering at a purchase price equal to $600 per unit.

Each unit consists of the same package of new securities being offered under to the new securities option in the exchange offer per $1,000 principal amount of notes tendered.

In order to purchase a unit, a noteholder must

• Validly tender all notes held under the new securities plus unit offering option by the early tender date;

• Irrevocably agree to purchase the maximum number of units as to which the holder is entitled to purchase (which assumes that the cash required to purchase all notes accepted for exchange under the cash option is at least $10,000,200); and

• Make a cash payment at the time of tender in an amount equal to $600 times the maximum number of units that the holder is entitled to purchase.

In the case of all three options, for each $1,000 principal amount of notes accepted for exchange in the exchange offer that are tendered by 5 p.m. ET on May 28, the early tender date, holders will receive an additional $15.00 in cash.

In order to participate in the exchange offer, holders must tender all of their notes.

The exchange offer and consent solicitation will expire at 9 a.m. ET on June 12.

The unit offering will expire at 5 p.m. ET on May 28.

The completion of the transactions is subject to the receipt of tenders for at least 95% of the notes.

Goldman Sachs & Co. is the dealer manager and solicitation agent. The information and exchange agent is Global Bondholder Services (866 470-3900).

Alion, a research and development company whose primary customer is the U.S. government, is based in McLean, Va.

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