Cyalume
Cyalume Technologies Holdings, Inc. (Form: 10-Q, Received: 11/23/2009 15:17:37)


UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
  Washington, D.C. 20549

FORM 10-Q
 
(Mark One)
 

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

For the quarterly period ended September 30, 2009

OR

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

For the transition period from                             to                              

Commission File Number 000-52247
 

 
Cyalume Technologies Holdings, Inc.
(Exact name of registrant as specified in its charter)

Delaware
 
20-3200738
(State or other jurisdiction of
 incorporation or organization)
 
(I.R.S. Employer
 Identification No.)

96 Windsor Street, West Springfield, Massachusetts
 
01089
(Address of principal executive offices)
 
(Zip Code)

(413) 858-2500
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  o
 
Accelerated filer  o
 
Non-accelerated filer  o
 (Do not check if a smaller reporting company)
 
Smaller reporting company  ý

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of November 18, 2009, there were outstanding 15,420,925   shares of the registrant’s Common Stock, par value $.001 per share.
 



 
Cyalume Technologies Holdings, Inc.

FORM 10-Q

INDEX
 
PART I—FINANCIAL INFORMATION
   
         
Item 1.
 
Financial Statements
   
         
   
Condensed Consolidated Statements of Operations (unaudited) for the three months ended September 30, 2009 and 2008
 
4
         
   
Condensed Consolidated Statements of Operations (unaudited) for the nine months ended September 30, 2009 and 2008
 
5
         
   
Condensed Consolidated Balance Sheets as of September 30, 2009 (unaudited) and December 31, 2008
 
6
         
   
Condensed Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Loss for the nine months ended September 30, 2009 (unaudited)
 
7
         
   
Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2009 and 2008
 
8
         
   
Notes to Condensed Consolidated Financial Statements (unaudited)
 
9
         
Item 2.
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
18
         
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
 
22
         
Item 4T.
 
Controls and Procedures
 
22
         
PART II—OTHER INFORMATION
   
         
Item 1.
 
Legal Proceedings
 
22
         
Item 1A.
 
Risk Factors
 
22
         
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
23
         
Item 3.
 
Defaults Upon Senior Securities
 
23
         
Item 4.
 
Submission of Matters to a Vote of Security Holders
 
24
         
Item 5.
 
Other Information
 
24
         
Item 6.
 
Exhibits
 
24
     
Signatures
 
25
 
2

 
PART I—FINANCIAL INFORMATION

The statements contained in this quarterly report on Form 10-Q, including under the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other sections of this quarterly report, include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, statements regarding our or our management's expectations, hopes, beliefs, intentions or strategies regarding the future. The words "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect," "plan" and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. The forward-looking statements contained in this quarterly report are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.  Unless the content otherwise requires, all references to "we", "us", the “Company" or “Cyalume" in this quarterly report on Form 10-Q refers to Cyalume Technologies Holdings, Inc.
 
3

 
ITEM 1. Financial Statements
 
Cyalume Technologies Holdings, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except shares and per share information)
(Unaudited)

               
Predecessor
 
   
For the Three
   
For the Three
   
For the Three
 
   
Months Ended
   
Months Ended
   
Months Ended
 
   
September 30,
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2008
 
Revenues
  $ 9,860     $     $ 10,833  
Cost of goods sold
    5,938             5,411  
Gross profit
    3,922             5,422  
                         
Other expenses (income):
                       
Sales and marketing
    791             738  
General and administrative
    887       225       1,210  
Research and development
    487             306  
Interest, net
    673       (287 )     1,221  
Interest – related party
    16       2        
Amortization of intangible assets
    878             659  
Other, net
    16             59  
Total other expenses (income)
    3,748       (60 )     4,193  
                         
Income before income taxes
    174       60       1,229  
Provision for (benefit from) income taxes
    (151 )     2       517  
Net income
  $ 325     $ 58     $ 712  
                         
Net income per common share:
                       
Basic
  $ 0.02     $ 0.01          
Diluted
  $ 0.02     $          
                         
Weighted average shares used to compute net income per common share:
                       
Basic
    15,352,478       9,375,000          
Diluted
    15,418,949       11,944,844          
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
4


Cyalume Technologies Holdings, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except shares and per share information)
(Unaudited)

               
Predecessor
 
   
For the Nine
   
For the Nine
   
For the Nine
 
   
Months Ended
   
Months Ended
   
Months Ended
 
   
September 30,
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2008
 
Revenues
  $ 24,443     $     $ 31,686  
Cost of goods sold
    14,374             15,201  
Gross profit
    10,069             16,485  
                         
Other expenses (income):
                       
Sales and marketing
    2,322             2,532  
General and administrative
    3,489       637       3,520  
Research and development
    1,295             984  
Interest, net
    1,925       (899 )     3,715  
Interest – related party
    45       4        
Amortization of intangible assets
    2,612             1,968  
Other, net
    79             (1,038 )
Total other expenses (income)
    11,767       (258 )     11,681  
                         
Income (loss) before income taxes
    (1,698 )     258       4,804  
Provision for (benefit from) income taxes
    (755 )     (18 )     1,754  
Net income (loss)
  $ (943 )   $ 276     $ 3,050  
                         
Net income (loss) per common share:
                       
Basic
  $ (0.06 )   $ 0.03          
Diluted
  $ (0.06 )   $ 0.02          
                         
Weighted average shares used to compute net income (loss) per common share:
                       
Basic
    15,089,909       9,375,000          
Diluted
    15,089,909       11,896,460          
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
5

 
Cyalume Technologies Holdings, Inc.
  Condensed   Consolidated Balance Sheets
(in thousands, except shares and per share information)
 
   
September 30,
2009
(unaudited)
   
December 31,
2008
 
Assets
           
Current assets:
           
Cash
  $ 1,831     $ 3,952  
Accounts receivable, net of allowance for doubtful accounts of $217 and $452 at September 30, 2009 and December 31, 2008, respectively
    4,542       3,508  
Inventories, net
    9,734       11,447  
Income taxes refundable
    377       701  
Deferred income taxes
    425       317  
Prepaid expenses and other current assets
    204       195  
Total current assets
    17,113       20,120  
                 
Property, plant and equipment, net
    8,250       7,882  
Goodwill
    58,452       60,896  
Other intangible assets, net
    49,908       49,426  
Other noncurrent assets
    138       188  
Total assets
  $ 132,861     $ 138,512  
                 
Liabilities and Stockholders’ Equity
               
Current liabilities:
               
Lines of credit
  $ 3,300     $ 3,500  
Current portion of notes payable
    4,120       3,621  
Accounts payable
    3,450       3,230  
Accrued expenses and other current liabilities
    2,451       2,550  
Common stock subject to mandatory redemption
          1,123  
Notes payable and advance due to related parties
    9       64  
Income taxes payable
    7       5  
Total current liabilities
    13,337       14,093  
                 
Notes payable, net of current portion
    22,626       25,581  
Notes payable due to related parties, net of current portion
    1,048       1,000  
Deferred income taxes
    7,801       9,237  
Derivatives
    127       163  
Asset retirement obligation, net of current portion
    156       128  
Total liabilities
    45,095       50,202  
                 
Commitments and contingencies
           
                 
Stockholders' equity:
               
Preferred stock, $0.001 par value; 1,000,000 shares authorized, no shares issued or outstanding
           
Common stock, $0.001 par value; 50,000,000 shares authorized; 15,360,925 and 13,719,035 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively
    15       14  
Additional paid-in capital
    87,410       87,348  
Retained earnings
    286       1,229  
Accumulated other comprehensive income (loss)
    55       (281 )
Total stockholders’ equity
    87,766       88,310  
Total liabilities and stockholders' equity
  $ 132,861     $ 138,512  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
6

 
Cyalume Technologies Holdings, Inc.
Condensed Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Loss
(in thousands, except shares)
(Unaudited)

   
Common Stock
   
Additional
         
Accumulated
Other
   
Total
       
   
Number
of  Shares
   
Amount
   
Paid-In
Capital
   
Retained
Earnings
   
Comprehensive Income (Loss)
   
Stockholders’ Equity
   
Comprehensive Income (Loss)
 
Balance at December 31, 2008
    13,719,035     $ 14     $ 87,348     $ 1,229     $ (281 )   $ 88,310     $  
Exercise of warrants
    5,500             27                   27        
Exercise of warrants - cashless
    1,630,143       1       (1 )                        
Common stock repurchased
    (32,903 )           (263 )                 (263 )      
Common stock awarded (not yet issued) for acquisition-related services
                180                   180        
Common stock issued for acquisition-related services
    15,000             45                   45        
Common stock issued to extinguish notes payable
    17,150             82                   82        
Share-based compensation expense - warrants awarded to director
                110                   110        
Share-based compensation expense - options awarded under the 2009 Omnibus Securities and Incentive Plan
                98                   98        
Share-based compensation expense - common stock issued to non-employee consultant
    7,000             25                   25        
Share-based compensation expense - common stock awarded (not yet issued) under the 2009 Omnibus Securities and Incentive Plan
                38                   38        
Stock registration costs
                (279 )                 (279 )      
Foreign currency translation adjustments
                            314       314       314  
Unrealized gain on cash flow hedges, net of taxes of $14
                            22       22       22  
Net loss
                      (943 )           (943 )     (943
Comprehensive loss
                                      $ (607 )
Balance at September 30, 2009
    15,360,925     $ 15     $ 87,410     $ 286     $ 55     $ 87,766          
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
7

 
Cyalume Technologies Holdings, Inc.
 Condensed Consolidated Statements of Cash Flows
(in thousands, except shares)
(Unaudited)
 
 
 
For the Nine
Months Ended
September 30,
2009
 
For the Nine
Months Ended
September 30,
2008
 
Predecessor
For the Nine
Months Ended
September 30,
2008
 
Cash flows from operating activities:
                   
Net income (loss)
 
$
(943
)
$
276
 
$
3,050
 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
                   
Depreciation of property, plant and equipment
   
479
   
   
651
 
Amortization
   
3,446
   
   
2,216
 
Provision for deferred income taxes
   
(1,009
)
 
   
1,056
 
Expense associated with share-based awards
   
271
   
   
 
Other non-cash expenses
   
357
   
   
254
 
Changes in operating assets and liabilities:
                   
Accounts receivable
   
(1,024
)
 
   
(1,091
)
Inventories
   
953
   
   
(2,183
)
Prepaid expenses and other current assets
   
(9
)
 
85
   
304
 
Deferred acquisition costs
   
   
(275
)
 
 
Accounts payable and accrued liabilities
   
(22
)
 
51
   
(620
)
Income taxes payable, net
   
329
   
(85
)
 
(2,270
)
Accrued interest on notes payable to related parties
   
   
14
   
 
Net cash provided by operating activities
   
2,828
   
66
   
1,367
 
                     
Cash flows from investing activities:
                   
Payments to trust account
   
   
(399
)
 
 
Purchases of long-lived assets
   
(449
)
 
   
(1,212
)
Net cash used in investing activities
   
(449
)
 
(399
)
 
(1,212
)
                     
Cash flows from financing activities:
                   
Repayment of advances from and notes payable to related parties
   
   
(150
)
 
 
Payments for common stock subject to redemption
   
(1,123
)
 
   
 
Net repayment of line of credit
   
(200
)
 
   
 
Payments of Predecessor notes payable
   
   
   
(2,428
)
Repayment of long-term notes payable
   
(2,633
)
 
   
 
Payments to reacquire and retire common stock
   
(263
)
 
   
 
Payment of stock registration costs
   
(279
)
 
   
 
Payment of deferred financing costs
   
(75
)
 
   
 
Refund of debt issue costs
   
10
   
   
 
Proceeds from exercises of warrants
   
27
   
   
 
Net cash used in financing activities
   
(4,536
)
 
(150
)
 
(2,428
)
                     
Effect of exchange rate changes on cash
   
36
   
   
30
 
Net decrease in cash
   
(2,121
)
 
(483
)
 
(2,243
)
Cash, beginning of period
   
3,952
   
570
   
5,743
 
Cash, end of period
 
$
1,831
 
$
87
 
$
3,500
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
8

 
BASIS OF PRESENTATION

We have prepared the accompanying unaudited interim condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these interim condensed consolidated financial statements do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements.
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period.

These accompanying unaudited interim condensed consolidated financial statements recognize the effects of all subsequent events that provide additional evidence about conditions that existed at September 30, 2009, including the estimates inherent in the process of preparing financial statements.  We have evaluated such subsequent events through November 23, 2009, which is the date the accompanying unaudited interim condensed consolidated financial statements were issued (see also Note 16). Additionally, a ll significant intercompany accounts and transactions have been eliminated in consolidation.
 
Certain amounts in prior periods have been reclassified to conform to the 2009 presentation. These reclassifications had no effect on operating results as previously reported.

We believe all adjustments (consisting of normal, recurring adjustments) considered necessary for a fair presentation have been included in these unaudited interim condensed consolidated financial statements. Operating results for the three and nine-month periods presented are not necessarily indicative of the results that may be expected for any other interim period or for the full year. The consolidated balance sheet at December 31, 2008 has been derived from the audited consolidated financial statements at that date. We suggest that these unaudited interim condensed consolidated financial statements be read in conjunction with the consolidated financial statements and footnotes thereto in our Annual Report on Form 10-K/A for the year ended December 31, 2008.

2.
BACKGROUND AND DESCRIPTION OF BUSINESS

Before December 19, 2008, we conducted business under the name Vector Intersect Security Acquisition Corporation (‘‘Vector’’). Vector was a blank check development stage company, as it had no business. Its objective was to acquire through merger, capital stock exchange, asset acquisition or otherwise one or more businesses in the homeland security, national security and/or command and control industries.

On December 19, 2008, Vector acquired all of the outstanding ownership units of Cyalume Technologies, Inc. (“CTI”) from GMS Acquisition Partners Holdings, LLC (“GMS”) (the “Acquisition”). GMS was the sole stockholder in CTI, which has a wholly-owned subsidiary (Cyalume Technologies, S.A.S. or “CTSAS”). At the Acquisition date, Vector changed its name to Cyalume Technologies Holdings, Inc. (“Cyalume”). In these interim condensed consolidated financial statements and footnotes, Cyalume’s operating results include the operations of the former Vector for 2008 and CTI’s operations after the Acquisition date. CTI’s operations prior to the Acquisition date are presented as Predecessor.

CTI manufactures and sells chemiluminescent products and reflective and photoluminescent materials to military, commercial and public safety markets. CTSAS is geographically located in France and represents us in certain international markets, primarily Europe and Asia.

3.
NEW ACCOUNTING PRONOUNCEMENTS

In June 2009, the Financial Accounting Standards Board (“FASB”) launched the FASB Accounting Standards Codification (“ASC”) as the single source of authoritative U.S. GAAP recognized by the FASB. The ASC reorganizes various U.S. GAAP pronouncements into accounting topics and displays them using a consistent structure. All existing accounting standards documents are superseded as described in Statement of Financial Accounting Standard (“SFAS”) No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles . All of the contents of the ASC carry the same level of authority, effectively superseding SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles , which identified and ranked the sources of accounting principles and the framework for selecting the principles used in preparing financial statements in conformity with U.S. GAAP. Also included in the ASC are rules and interpretive releases of the SEC, under authority of federal securities laws that are also sources of authoritative U.S. GAAP for SEC registrants. The ASC is effective for interim and annual periods ending after September 15, 2009. The adoption of the ASC as of July 1, 2009 had no impact on our financial statements other than changing the way specific accounting standards are referenced in our financial statements.
 
9


In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51 (“SFAS No. 160”), which is now codified within ASC 810 Consolidation . SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The objective of SFAS No. 160 is to improve the relevance, comparability and transparency of the financial information that a reporting entity provides in its consolidated financial statements. The adoption of SFAS No. 160 on January 1, 2009 did not have an impact on our condensed consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133 (“SFAS No. 161”), which is now codified within ASC 815 Derivatives and Hedging . SFAS No. 161 requires enhanced disclosures about an entity’s derivative instruments and hedging activities with a view toward improving the transparency of financial reporting and is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. SFAS No. 161 encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The adoption of SFAS No. 161 on January 1, 2009 resulted in additional disclosures in our condensed consolidated financial statements.

Effective January 1, 2009, we adopted Statement of Financial Accounting Standard No. 157, Fair Value Measurements , (“SFAS No. 157”), which is now codified within ASC 820 Fair Value Measurements and Disclosures , for our nonfinancial assets and liabilities that are measured at fair value on a non-recurring basis.  Previous to January 1, 2009, SFAS No. 157 did not apply to such assets and liabilities. The adoption of SFAS No. 157 on January 1, 2009 for such assets and liabilities did not have an impact on our condensed consolidated financial statements.

In April 2009, the FASB issued FASB Staff Position No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP No. 107-1”), which is now codified within ASC 825 Financial Instruments . FSP No. 107-1 requires summarized disclosure in interim periods of the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the financial statements . Previous to FSP No. 107-1, such disclosures were required only for annual periods. The adoption of FSP No. 107-1 on April 1, 2009 resulted in additional disclosures in our unaudited interim condensed consolidated financial statements.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS No. 165”), which is now codified within ASC 855 Subsequent Events . SFAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The adoption of SFAS No. 165 on June 30, 2009 required us to disclose the date through which we have evaluated subsequent events and whether that date is the date the financials were issued.

4.
INVENTORIES

Inventories consist of the following (all amounts in thousands):
 
   
September 30,
2009
   
December 31,
2008
 
Raw materials
  $ 4,945     $ 5,822  
Work-in-process
    2,874       3,484  
Finished goods
    1,915       2,141  
    $ 9,734     $ 11,447  
 
10

 
5.
GOODWILL

Goodwill represents the excess of the cost of acquiring CTI over the net fair value assigned to the assets acquired and liabilities assumed. Changes in the carrying amount of goodwill between December 31, 2008 and September 30, 2009 consist of the following (all amounts in thousands):

Balance on December 31, 2008
 
$
60,896
 
Finalization of the fair value of intangible assets
   
(2,024
)
Finalization of the fair value of property, plant & equipment
   
(372
)
Additional Acquisition costs recognized
   
435
 
Adjustments to deferred taxes associated with tangible and intangible asset valuations
   
(549
)
Changes due to foreign currency translation adjustments
   
66
 
Balance on September 30, 2009
 
$
58,452
 

6.
NOTES PAYABLE

Effective September 1, 2009, CTI, Cyalume and TD Bank, N.A. entered into a First Amendment to Credit Agreement and Limited Waiver (the “Loan Amendment”). The Loan Amendment was signed on September 11, 2009 and amends the Revolving Credit and Term Loan Agreement (the “Original Credit Agreement”) dated as of December 19, 2008 among CTI, Cyalume and TD Bank, N.A. The Loan Amendment was attributable to CTI not meeting two financial covenants that utilize non-GAAP measurements contained in our Original Credit Agreement. The Loan Amendment, among other things:

 
·
Waived the requirement that CTI be in compliance as of June 30, 2009 with certain financial covenants contained in the Original Credit Agreement;
     
 
·
Changed the maturity date of the line of credit from December 19, 2011 to December 31, 2010;
     
 
·
Increased the Base Rate charged on the line of credit by an Applicable Margin, which is defined in the Loan Amendment;
     
 
·
Reduced the maximum management fee that CTI may pay to Cyalume from $125,000 per quarter to $21,000 per month;
     
 
·
Increased the maximum allowable Leverage Ratios for the months of September 2009 through December 2009 and
     
 
·
Added a minimum quarterly EBITDA covenant.
 
As of September 30, 2009, CTI achieved the required mi nimum quarterly EBITDA covenant , but did not achieve the service coverage and leverage ratio covenants in the Original Credit Agreement, as amended. Effective November 20, 2009 CTI, Cyalume and TD Bank, N.A. reached an agreement that will result in the following changes to the Original Credit Agreement , as amended:
 
 
·
Waived the requirement that CTI be in compliance as of September 30, 2009 with the service coverage and leverage ratio covenants contained in the Original Credit Agreement, as amended by the Loan Amendment;
     
 
·
Requires that all net proceeds from any new subordinated debt or equity offerings be used to pay-down senior debt;
     
 
·
Requires the Company to receive at least $3.0 million in new subordinated debt or equity offering before April 30, 2010;
     
 
·
Set new schedules of required ratios for maximum senior leverage, minimum fixed charge coverage and minimum total debt service coverage ratios and set new quarterly EBITDA targets to take effective December 31, 2009 and
     
 
·
Requires the Company to maintain $1.0 million cash on the consolidated balance sheet.
 
We fully expect to achieve the revised covenants of the Revolving Credit and Term Loan Agreement and all subsequent amendments. There have been no principal or interest payment defaults on these notes and we do not expect any such payment defaults in the future.

7.
NOTES PAYABLE AND ADVANCE DUE TO RELATED PARTIES

In July 2009, $55,000 of the $64,000 notes payable due to related parties that existed at December 31, 2008 was repaid in full, along with all accrued interest, through the issuance of 17,150 restricted and unregistered shares of our common stock.
 
11


8.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The derivative liabilities as of September 30, 2009 in our condensed consolidated balance sheet consist of the following (all amounts in thousands):
 
Derivative Instrument
 
Balance Sheet Location
 
Fair Value
 
Currency forward contract
 
Accrued expenses and other current liabilities (current liabilities)
 
$
(3
)
Interest rate swaps
 
Derivatives (noncurrent liabilities)
   
(127
)

The Predecessor did not hold any derivative instruments before the Acquisition.

Interest Rate Swaps

Simultaneous with the Acquisition, we entered into two pay-fixed, receive-variable interest rate swaps to reduce exposure to changes in cash payments caused by changes in interest rates on certain senior long-term notes payable that were also entered into on the date of the Acquisition. Both relationships are designated as cash flow hedges and meet the criteria for the shortcut method for assessing hedge effectiveness; therefore, the hedge is assumed to be 100% effective and all changes in the fair value of the interest rate swaps are recorded in consolidated accumulated other comprehensive income (loss). These changes in fair value must be reclassified in whole or in part from consolidated accumulated other comprehensive income (loss) into earnings if, and when, a comparison of the swaps and the related hedged cash flows demonstrates that the shortcut method is no longer applicable. We expect these hedges to meet the criteria of the shortcut method for the duration of the hedging relationship and therefore we do not expect to reclassify any portion of these unrealized losses from consolidated accumulated other comprehensive income (loss) to earnings in the future.

The fair values of the swaps are determined by discounting the estimated cash flows to be received and paid due to the swaps over the swaps’ contractual lives using an estimated risk-free interest rate for each swap settlement date.

Currency Forward Contracts

CTSAS’ functional currency is the Euro. Periodically, CTSAS purchases inventory from CTI, which requires payment in U.S. dollars. Beginning in 2009 and only under certain circumstances, we use currency forward contracts to mitigate CTSAS’ exposure to changes in the Euro-to-U.S.-dollar exchange rate upon CTSAS’ payment to CTI for these inventory purchases.  Such currency forward contracts typically have durations of less than six months. We report these currency forward contracts at their fair value. This relationship has not been designated as a hedge and therefore all changes in these currency forward contracts’ fair value are recorded in other expenses (income) on our condensed consolidated statement of operations. The fair value of these contracts are determined by taking the difference between (a) the U.S. dollar amount due on the contract at maturity and (b) the present value of estimated cash flows developed using, among other data, expectations of future currency exchange rates over the remaining term of the contract discounted at an estimated risk-free interest rate. At September 30, 2009, we held one such currency forward contract.

Effect of Derivatives on Statement of Operations

The effect of derivative instruments (a) designated as cash flow hedges and (b) not designated as hedging instruments on our condensed consolidated statement of operations for the three months ended September 30, 2009 was as follows (all amounts in thousands):
 
   
Gain (Loss)
   
Gain (Loss)
   
Gain (Loss)
 
   
In AOCI (1)
   
Reclassified (2)
   
in Earnings (3)
 
Derivatives designated as cash flow hedges:
                 
Interest rate swaps
  $ (96 )   $     $  
Derivatives not designated as hedging instruments:
                       
Currency forward contracts
  $     $     $ (3 )
 
(1)
Amount recognized in accumulated other comprehensive income (loss) (AOCI) (effective portion and net of taxes) during the three months ended September 30, 2009.
   
(2)
Amount of gain (loss) originally recorded in AOCI but reclassified from AOCI into earnings during the three months ended September 30, 2009.
   
(3)
Amount of gain (loss) recognized in earnings on the derivative (ineffective portion and amount excluded from effectiveness testing) reported in other expenses (income) on the condensed consolidated statement of operations for the three months ended September 30, 2009.
 
12

 
The effect of derivative instruments (a) designated as cash flow hedges and (b) not designated as hedging instruments on our condensed consolidated statement of operations for the nine months ended September 30, 2009 was as follows (all amounts in thousands):
 
   
Gain (Loss)
   
Gain (Loss)
   
Gain (Loss)
 
   
In AOCI (1)
   
Reclassified (2)
   
in Earnings (3)
 
Derivatives designated as cash flow hedges: relationships:
                 
Interest rate swaps
  $ 22     $     $  
Derivatives not designated as hedging instruments:
                       
Currency forward contracts
  $     $     $ (3 )
 
(1)
Amount recognized in accumulated other comprehensive income (loss) (AOCI) (effective portion and net of taxes) during the nine months ended September 30, 2009.
   
(2)
Amount of gain (loss) originally recorded in AOCI but reclassified from AOCI into earnings during the nine months ended September 30, 2009.
   
(3)
Amount of gain (loss) recognized in earnings on the derivative (ineffective portion and amount excluded from effectiveness testing) reported in other expenses (income) on the condensed consolidated statement of operations for the nine months ended September 30, 2009.

9.
SHARE-BASED AWARDS

On March 3, 2009, our Board of Directors adopted the Cyalume Technologies Holdings, Inc. 2009 Omnibus Securities and Incentive Plan (the “Plan”). The Plan was approved during our Annual Meeting of the Stockholders on June 18, 2009. The purpose of the Plan is to benefit our stockholders by assisting us to attract, retain and provide incentives to key management employees and non-employee directors of, and non-employee consultants to, Cyalume Technologies Holdings, Inc. and its subsidiaries, and to align the interests of such employees, non-employee directors and non-employee consultants with those of our stockholders. Accordingly, the Plan provides for the granting of Distribution Equivalent Rights, Incentive Stock Options, Non-Qualified Stock Options, Performance Share Awards, Performance Unit Awards, Restricted Stock Awards, Stock Appreciation Rights, Tandem Stock Appreciation Rights, Unrestricted Stock Awards or any combination of the foregoing, as may be best suited to the circumstances of the particular employee, director or consultant as provided herein. Two million shares have been reserved under the Plan.

Also on March 3, 2009, the Board of Directors authorized under the Plan the following awards: (i) 75,000 restricted shares of common stock to non-employee consultants; (ii) 119,333 restricted shares of common stock and 200,000 restricted options to our executive officers and other management; and, (iii) a total of 82,500 options to directors.  Details on these awards are as follows:

 
·
The 75,000 restricted common shares to non-employee consultants (including 45,000 earned by our current Chief Executive Officer as a consultant to Vector prior to becoming our Chief Executive Officer) are to be issued as payment for services rendered in conjunction with the Acquisition. The fair value of this award was determined to be $225,000 using the quoted market price of the common stock on March 3, 2009 of $3. This is recorded as an increase to goodwill related to the Acquisition on the accompanying condensed consolidated balance sheet as of September 30, 2009. These restricted shares will vest over a 3-year period with no provision requiring continued employment or service.

 
·
The 100,333 restricted common shares to officers and other management are (i) compensation for their services in 2009, (ii) earned based on meeting board-determined performance goals and (iii) require continued employment over the 3-year vesting period. The fair value of the award was determined to be $151,000 using the quoted market price of the common stock on March 3, 2009 of $3 and applying appropriate estimated forfeiture rates.

 
·
The 9,000 restricted common shares to our executive officers and other management are (i) compensation for their services during 2008, (ii) were earned based on meeting board-determined goals and (iii) require continued employment over the 3-year vesting period. The fair value of the award was determined to be $27,000, using the quoted market price of the common stock on March 3, 2009 of $3.
 
13

 
 
·
Remaining restricted common shares totaling 10,000 have been reserved for future awards.

 
·
The 200,000 restricted options to our Chief Executive Officer are (i) compensation for his services in 2009, (ii) earned based on meeting board-determined performance goals and (iii) require continued employment over the 3-year vesting period. The 82,500 options to directors are compensation for their services as directors that will vest immediately. The award’s fair value of $386,000 was determined using the Black-Scholes pricing model. The following assumptions were used to value the award:

Risk-free interest rate
   
2.93
%
Expected term
 
10 years
Expected volatility   (1)
   
34.11
%
Expected forfeitures for options to our chief executive officer
   
50
%
Expected forfeitures for options to our directors
   
0
%
Dividend yield
   
0
%

On April 24, 2009, the Board of Directors awarded to one director warrants to purchase 150,000 shares of our common stock at $3.50 per share under the Plan. The warrants are for compensation for services as director that vested immediately. The award’s fair value of $110,000 was determined using the Black-Scholes pricing model. The following assumptions were used to value the award:

Risk-free interest rate
   
1.87
%
Expected term
 
5 years
Expected volatility   (1)
   
25.98
%
Expected forfeitures for options to our directors
   
0
%
Dividend yield
   
0
%

On July 17, 2009, the Board of Directors granted 40,000 restricted shares of common stock and 110,000 restricted options to one of our executive officers under the Plan.  These restricted shares and options are (i) compensation for his services in 2009, (ii) earned based on meeting board-determined performance goals and (iii) require continued employment over the 4-year vesting period. The fair value of the stock award was determined to be $157,000 using the quoted market price of the common stock on July 17, 2009 of $3.93 and applying appropriate estimated forfeiture rates. The fair value of the option award was determined to be $223,000 using was determined using the Black-Scholes pricing model. The following assumptions were used to value the award:

Risk-free interest rate
   
3.67
%
Expected term
 
10 years
Expected volatility   (1)
   
33.99
%
Expected forfeitures
   
50
%
Dividend yield
   
0
%
 
 
 (1)
Because our common stock did not have a trading history that was representative of an operating company as of the date of the award, the expected volatility assumption was derived using historical data of another public company operating in our industry. We believe the volatility estimate calculated from that company is a reasonable benchmark to use in estimating the expected volatility of our common stock; however, that estimated volatility may not necessarily be representative of the volatility of the underlying securities in the future.

On May 16, 2009, the Board of Directors awarded 7,000 common shares to a non-employee consultant as payment for investor relations-related services performed. The fair value of this award was determined to be $25,000 using the quoted market price of the common stock on May 16, 2009 of $3.50 per share.  These 7,000 shares are not registered and were not issued under the Cyalume Technologies Holdings, Inc. 2009 Omnibus Securities and Incentive Plan.

During the three and nine months ended September 30, 2009, total expense recorded for all awards described above was $62,000 and $271,000, respectively.
 
14

 
10.
RESTRUCTURING COSTS

During nine months ended September 30, 2008, the Predecessor underwent a corporate restructuring pursuant to which the CEO and two Vice-Presidents left CTI, resulting in a restructuring charge of $1.1 million.  The following table summarizes the restructuring cost liability’s activity from December 31, 2008 through September 30, 2009 (all amounts in thousands):

Balance on December 31, 2008
 
$
229
 
Cash payments
   
(229
)
Balance on September 30, 2009
 
$
 

The $1.1 million of restructuring charges is included in the Predecessor’s condensed consolidated statement of operations as an other expense for the nine months ended September 30, 2008.

11.
INCOME TAXES

For the nine months ended September 30, 2009 and for the Predecessor’s nine months ended September 30, 2008, effective tax rates of 44% and 37%, respectively, differed from the statutory rate of 34% due to state and foreign taxes. For the nine months ended September 30, 2008, the effective tax rate of (7)% differed from the statutory rate of 34% due to tax-exempt interest income, state taxes and an increase in the valuation allowance on deferred income tax assets.

For the three months ended September 30, 2009 and for the Predecessor’s three months ended September 30, 2008, effective tax rates of (87)% and 42%, respectively, differed from the statutory rate of 34% due to state and foreign taxes. For the three months ended September 30, 2008, the effective tax rate of 3% differed from the statutory rate of 34% due to tax-exempt interest income, state taxes and an increase in the valuation allowance on deferred income tax assets.

12.
NET INCOME (LOSS) PER COMMON SHARE

Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares and dilutive potential common share equivalents then outstanding. Potential common shares consist of shares issuable upon the exercise of warrants and options (using the treasury stock method).
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
Basic:
 
2009
   
2008
   
2009
   
2008
 
Net income (loss) (in thousands)
  $ 325     $ 58     $ (943 )   $ 276  
Weighted average shares
    15,352,478       9,375,000       15,089,909       9,375,000  
Basic income (loss) per common share
  $ 0.02     $ 0.01     $ (0.06 )   $ 0.03  
Diluted:
                               
Net income (loss) (in thousands)
  $ 325     $ 58     $ (943 )   $ 276  
Weighted average shares
    15,352,478       9,375,000       15,089,909       9,375,000  
Effect of dilutive securities
    66,471       2,569,844       (1)     2,521,460  
Weighted average shares, as adjusted
    15,418,949       11,944,844       15,089,909       11,896,460  
Diluted income (loss) per common share
  $ 0.02     $     $ (0.06 )   $ 0.02  
 
(1)
Since we experienced a loss during this period, common shares issuable upon exercise of convertible securities were excluded from the loss per share calculation because the effect would be antidilutive.
 
15

 
The following common shares issuable upon exercise of convertible securities were excluded from the calculation of diluted net income (loss) per common share because their effect was antidilutive for each of the periods presented:
 
     
For The Periods Ended September 30,
 
     
2009
     
2008
 
Warrants
    4,370,256        
Options
    1,855,000       1,462,500  

13.
COMMITMENTS AND CONTINGENCIES

Legal

We do not expect that the various legal proceedings we are involved in, including those discussed in the following paragraph, will have a material adverse effect on our future financial position, operating results, or cash flows.

As discussed in Note 2, we acquired CTI on December 19, 2008. As part of the Acquisition, we acquired CTI’s exposure to litigation that existed at the acquisition date. On January 23, 2006, GMS acquired all of the outstanding capital stock of Omniglow Corporation (the “Transaction”) and changed the name of the company to CTI. Prior to, or substantially simultaneously with, the Transaction, CTI sold certain assets and liabilities related to Omniglow Corporation’s novelty and retail business to certain former Omniglow Corporation stockholders and management (the “Omniglow Buyers”).  This was done because CTI sought to retain only the Omniglow Corporation assets and current liabilities associated with its government, military and safety business. During 2006, CTI and the Omniglow Buyers commenced litigation and arbitration proceedings against one another. Claims include breaches of a lease and breaches of various other agreements between CTI and the Omniglow Buyers.  The Omniglow Buyers seek compensatory damages of $1.4 million, to be trebled, and recovery of costs and legal fees. We have filed for damages of $368,000 against the Omniglow Buyers.  We continue to rigorously defend our position on these matters, as we believe the Omniglow Buyers’ claims to be without merit.

During 2006, CTI and the former stockholders of Omniglow (“Sellers”) commenced arbitration proceedings against one another that are separate and distinct from those discussed in the previous paragraph. These arbitration proceedings included claims with respect to certain representations, warranties, contracts, covenants and other agreements in connection with the Transaction and a number of other unrelated items.  In January 2008, CTI reached settlement with the Sellers on all matters, which resulted in CTI receiving $3.0 million in cash. The terms of the settlement, which was reached to minimize the parties' risk, time and cost of further litigation, gave no explicit consideration as to whether the disputes being resolved arose in the purchase process or pursuant to subsequent events. Consequently, CTI presented the settlement as a gain in 2008, rather than an adjustment to the purchase price. The net gain of $2.8 million is included in other income on the accompanying condensed consolidated financial statements of the Predecessor for the nine months ended September 30, 2008.

14.
FAIR VALUE

Fair value is an exit price that represents the amount that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants. We group all assets and liabilities reported at fair value based on significant levels of inputs as follows:

Level 1
Quoted prices for identical assets or liabilities in active markets to which we have access at the measurement date.
   
Level 2
Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
   
Level 3
Unobservable inputs for the asset or liability.

The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement. As of September 30, 2009, the only assets and liabilities required to be measured at fair value on a recurring basis were the interest rate swaps and the currency forward contract described in Note 8, all of which are measured at fair value using Level 2 inputs.

We have other non-derivative financial instruments, such as cash, accounts receivable, accounts payable, accrued expenses and long-term debt, whose carrying amounts approximate fair value.
 
16

 
15.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash Paid for Interest and Income Taxes (all amounts in thousands):
 
 
Nine Months Ended September 30,
   
Predecessor
For the Nine Months Ended September 30,
 
 
2009
 
2008
   
2008
 
Interest
  $ 1,495     $     $ 3,207  
Income taxes
    608             2,046  

Non-Cash Investing and Financing Activities (all amounts in thousands):
 
   
Nine Months Ended September 30,
   
Predecessor
For the Nine Months Ended September 30,
 
   
2009
   
2008
   
2008
 
Increase in the Acquisition date fair value of intangible assets (a reduction of goodwill)
  $ 2,024     $     $  
Increase in the Acquisition date fair value of property, plant & equipment (a reduction of goodwill)
    372              
Accrual of costs directly related to the Acquisition (an increase to goodwill)
    435              
Reduction of goodwill resulting from subsequent recognition of deferred taxes
    549              
Remeasurement of asset retirement obligation
    26              
Extinguishment of notes payable due to related parties by issuing common stock
    82              

16.
SUBSEQUENT EVENTS
 
See Note 6 for a discussion of an agreement with our senior lender that was reached   on November 23, 2009.

On November 18, 2009 , we entered to a Management Agreement with Selway Capital, LLC (“Selway”) that provides for (but is not limited to) the following services to be performed by Selway on our behalf:
 
 
1)
Strategic development and implementation as well as consultation to our chief executive officer on a regular basis as per his reasonable requests;
 
 
2)
Identifying strategic partners with companies with which Selway has relationships and access. In this connection, Selway will focus on building partnerships with companies in Israel, Singapore, India and Europe. The focus will be on the expansion of our munitions business;
 
 
3)
Advise and support us on our investor relations strategy;
 
 
4)
Advise and support our future fund raising, including identifying sources of capital in the United States; and
 
 
5)
Support our mergers and acquisitions strategy and play an active role in our due diligence and analysis.

The Management Agreement stipulates that these services will be performed by Yaron Eitan, a member of our board of directors and an employee of Selway, with the assistance as needed from other employees of Selway.  The Management Agreement is retroactive to October 1, 2009, expires on October 1, 2012 and can terminated by either us or Selway upon 30-days’ written notice or upon our default in payment or Selway’s failure to perform services under the Management Agreement. Selway’s compensation for these services will be $41,666.67 per month for the duration of the Management Agreement. However, we are only required to pay $11,000 per month through January 31, 2010 with the balance of $31,666.67 per month remaining unpaid until our senior lender consents to such payment. Additionally, Selway can earn a $210,000 bonus, payable in cash or our common stock at the discretion of our board of directors. We will also reimburse Selway for costs incurred specifically on our behalf for these services. Under the Management Agreement, we indemnify Selway and Selway indemnifies us against certain losses incurred while carrying out its obligations under the Management Agreement.
 
17

 
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
This discussion and analysis should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements that are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (the Annual Report), as well as the consolidated financial statements (unaudited) and notes to the condensed consolidated financial statements (unaudited) and accompanying notes contained in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Unless the content otherwise requires, all references to "we", "us", the “Company" or “Cyalume" in this Quarterly Report on Form 10-Q refers to Cyalume Technologies Holdings, Inc.
 
Overview
 
On December 19, 2008, we purchased Cyalume Technologies, Inc. (“CTI”). Prior to the acquisition of CTI, we did not engage in any substantive commercial business. The Results of Cyalume Operations section below compares the financial results from our financial statements for the three-month and nine-month periods ended September 30, 2009 to the comparable periods in 2008, which did not include the operations of CTI, and also to the operating results of CTI (the “Predecessor”) for the comparable periods in 2008.
 
Results of Cyalume Operations
 
Revenues :  For the three months ended September 30, 2009, our revenues were $9.9 million, compared to same period 2008 revenues for us of $0 and for the Predecessor of $10.8 million.  For the nine months ended September 30, 2009, our revenues were $24.4 million, compared to same period 2008 revenues for us of $0 and for the Predecessor of $31.7 million. We did not engage in any substantive business operations in the first three quarters of 2008, and as such we recorded no sales during those quarters. For the three-month and nine-month periods ended September 30, 2009, our sales were significantly lower than the Predecessor’s sales for the comparable periods in 2008 due to a reduction in units of both chemical light and reflective products sold to the U.S. Military and foreign militaries. We believe this reduced demand for our products is temporary as we are not aware of any material changes in the protocol for the use of our products. Beginning in May 2009, orders from the U.S. Military for chemical light products increased to more normal levels, which supports our belief that the sales reduction is temporary. Primarily as a result of the increased military orders for the chemical light products and ammunition products, revenues for the three-month period ending September 30, 2009 were 24% higher than revenues for the second quarter of 2009 and 49% higher than revenues for the first quarter of 2009, although still below revenues for the same period a year ago. Military-related revenues from our chemical light products during the three-month period ending September 30, 2009 were 39% higher than revenues for the second quarter of 2009 and 59% higher than revenues for the first quarter of 2009. Revenues from our ammunition products of $4.7 million for the nine-month period ended September 30, 2009 were approximately 162% higher than for the same period in 2008, meeting our growth expectations and partially offsetting declines in the other areas of our business. Sales of reflective products have remained stable throughout 2009.
 
Gross profit :  For the three months ended September 30, 2009, our gross profit was $3.9 million, compared to same period 2008 gross profit for us of $0 and for the Predecessor of $5.4 million.  For the nine months ended September 30, 2009, our gross profit was $10.1 million, compared to same period 2008 gross profit for us of $0 and for the Predecessor of $16.5 million. We did not engage in any substantive business operations in the first three quarters of 2008, and as such we recorded no cost of sales during those quarters. For the nine-month period ended September 30, 2009, our cost of sales was significantly lower than the Predecessor’s cost of sales for the comparable period in 2008 due to the reduction in units sold during the first two quarters of 2009 discussed above.  For the three-month period ended September 30, 2009, our cost of sales were $527,000 higher than the Predecessor’s cost of sales for the comparable period in 2008 due to the increase in ammunition products sales discussed above.  Our gross margin for the nine-months ended September 30, 2009 was 41.2% compared to 52.0% for the Predecessor in 2008. The decline in gross margin is attributable to the decline in sales of higher-margin chemical light sticks to the U.S. Military and the amortization of $655,000 of the inventory step-up to fair market value arising from the acquisition of CTI included in cost of goods sold. We anticipate the amortization of the remaining $67,000 step-up in the fourth quarter of 2009.
 
Sales and marketing expenses:  For the three months ended September 30, 2009, our sales and marketing expenses were $791,000, compared to same period 2008 sales and marketing expenses for us of $0 and for the Predecessor of $738,000. For the nine months ended September 30, 2009, our sales and marketing expenses were $2.3 million, compared to same period 2008 sales and marketing expenses for us of $0 and for the Predecessor of $2.5 million. We did not engage in any substantive business operations in the first three quarters of 2008, and as such we recorded no sales and marketing expense during those quarters. The reduction compared to the Predecessor is due to the change in commercial sales strategies to make more extensive use of distributors who have established key relations with end-users, rather than trying to sell direct to consumers, thus reducing direct selling expenses.
 
General and administrative expenses:  For the three months ended September 30, 2009, our general and administrative expenses were $887,000, compared to same period 2008 general and administrative expenses for us of $225,000 and for the Predecessor of $1.2 million. For the nine months ended September 30, 2009, our general and administrative expenses were $3.5 million, compared to same period 2008 general and administrative expenses for us of $637,000 and for the Predecessor of $3.5 million.  We did not engage in any substantive business operations in the first three quarters of 2008, and as such the only general and administrative expenses incurred were those related to the efforts to consummate a business acquisition and fulfilling our obligations as a publicly traded company. The business acquisition-related expenses ended in 2008 with the acquisition of CTI. Our general and administrative expenses for the three-months ended September 30, 2009 are less than the Predecessor’s for the comparable period in 2008 due to a decrease in legal expenses.
 
18

 
Interest expense (income), net:  For the three months ended September 30, 2009, our interest expense was $673,000, compared to same period 2008 interest income for us of $287,000 and interest expense for the Predecessor of $1.2 million. For the nine months ended September 30, 2009, our interest expense was $1.9 million, compared to same period 2008 interest income for us of $899,000 and interest expense for the Predecessor of $3.7 million. In 2008, we earned interest income on cash held in trust pending the completion of an acquisition. In December 2008, this cash was used to purchase CTI, and therefore, our interest income in 2009 has been minimal. Additionally, we borrowed $33.0 million in notes payable to complete the acquisition of CTI, which resulted in our recording interest expense in 2009. Interest expense has decreased compared to the Predecessor due to our having less debt and paying lower average interest rates than the Predecessor.
 
Amortization of intangible assets:  For the three months ended September 30, 2009, our amortization of intangible asset expense was $878,000, compared to same period 2008 amortization of intangible asset expense for us of $0 and for the Predecessor of $659,000. For the nine months ended September 30, 2009, our amortization of intangible asset expense was $2.6 million, compared to same period 2008 amortization of intangible asset expense for us of $0 and for the Predecessor of $2.0 million. As a result of the acquisition of CTI, we recorded significant intangible assets in December 2008. We are amortizing intangible assets into expense in 2009, after having no amortization expense in the comparable periods in 2008. The Predecessor had intangible assets as a result of a prior acquisition, and related amortization of intangible assets expense in 2008.
 
Other loss (income), net:  For the three months ended September 30, 2009, our other loss expense was $16,000, compared to same period 2008 other loss (income) for us of $0 and other loss for the Predecessor of $59,000. For the nine months ended September 30, 2009, our other loss expense was $79,000, compared to same period 2008 other loss (income) for us of $0 and other income for the Predecessor of $1.0 million. In the first quarter of 2008, the Predecessor reached a settlement with the pre-2006 owners of CTI in connection with litigation. The Predecessor received $3.0 million in cash, resulting in a net gain of $2.8 million on the settlement. Several one-time expenses partially offset this net gain. The most significant was a restructuring charge of $1.1 million. The Predecessor implemented a restructuring to facilitate its sale to us, pursuant to which the chief executive officer and two vice-presidents left. In addition, the Predecessor incurred approximately $0.6 million of costs related to the acquisition, primarily legal and accounting fees.
 
Provision for (benefit from) income taxes: The benefit from income taxes increased for the three-month and nine-month periods ended September 30, 2009 as compared to the same periods in 2008 due to net operating losses generated by CTI.
 
Balance Sheet
 
Assets, other than cash : Assets, other than cash, were $131.0 million at September 30, 2009 compared to $134.6 million at December 31, 2008. The decrease is partly due to the amortization of the inventory step up to fair market values recorded at the date we acquired CTI and intangible assets amortization during the first nine months of 2009. In addition, $2.0 million was moved from goodwill into other intangible assets in the second quarter of 2009 and is now being amortized. The remaining changes in asset values are the result of normal business activities.
 
Liabilities: Liabilities were $45.1 million at September 30, 2009, compared to $50.2 million at December 31, 2008. The decrease is due to: a) common stock subject to mandatory redemption declining $1.1 million after the redemption of 139,850 shares of common stock held by stockholders who voted against the acquisition of CTI and which was finalized in the first quarter of 2009, and b) payments made on notes payable. The remaining changes are the result of normal business activities.
 
Liquidity and Capital Resources
 
Cash on hand was $1.8 million at September 30, 2009 and $4.0 million at December 31, 2008. The decrease since December 31, 2008 resulted primarily from paying $1.1 million to complete the redemption of common stock as part of the acquisition of CTI, $2.8 million in payments on the line of credit and notes payable, purchases of long-lived assets of $449,000 and $263,000 to purchase shares of our common stock from certain members of CTI management, partially offset by positive cash flows from our operations.

As a result of lower than anticipated sales, we did not meet two financial covenants contained in our Revolving Credit and Term Loan Agreement as of June 30, 2009. The Revolving Credit and Term Loan Agreement governs our notes payable, line of credit and derivative transactions with our senior lender. Effective September 1, 2009, CTI, Cyalume and TD Bank, N.A. entered into a First Amendment to Credit Agreement and Limited Waiver (the “Loan Amendment”). The Loan Amendment was signed on September 11, 2009 and amends the Revolving Credit and Term Loan Agreement (the “Original Credit Agreement”) dated as of December 19, 2008 among CTI, Cyalume and TD Bank, N.A. The Loan Amendment was attributable to CTI not meeting two financial covenants that utilize non-GAAP measurements contained in our Original Credit Agreement. The Loan Amendment, among other things:

 
·
Waived the requirement that CTI be in compliance as of June 30, 2009 with certain financial covenants contained in the Original Credit Agreement;
 
19

 
 
·
Changed the maturity date of the line of credit from December 19, 2011 to December 31, 2010;
     
 
·
Increased the Base Rate charged on the line of credit by an Applicable Margin, which is defined in the Loan Amendment;
     
 
·
Reduced the maximum management fee that CTI may pay to Cyalume from $125,000 per quarter to $21,000 per month;
     
 
·
Increased the maximum allowable Leverage Ratios for the months of September 2009 through December 2009 and
     
 
·
Added a minimum quarterly EBITDA covenant.
 
As of September 30, 2009, CTI achieved the required mi nimum quarterly EBITDA covenant , but did not achieve the service coverage and leverage ratio covenants in the Original Credit Agreement, as amended. Effective November 20, 2009 CTI, Cyalume and TD Bank, N.A. reached an agreement that will result in the following changes to the Original Credit Agreement , as amended:
 
 
·
Waived the requirement that CTI be in compliance as of September 30, 2009 with the service coverage and leverage ratio covenants contained in the Original Credit Agreement, as amended by the Loan Amendment;
     
 
·
Requires that all net proceeds from any new subordinated debt or equity offerings be used to pay-down senior debt;
     
 
·
Requires the Company to receive at least $3.0 million in new subordinated debt or equity offering before April 30, 2010;
     
 
·
Set new schedules of required ratios for maximum senior leverage, minimum fixed charge coverage and minimum total debt service coverage ratios and set new quarterly EBITDA targets to take effective December 31, 2009 and
     
 
·
Requires the Company to maintain $1.0 million cash on the consolidated balance sheet.
 
We fully expect to achieve the revised covenants of the Revolving Credit and Term Loan Agreement and all subsequent amendments. There have been no principal or interest payment defaults on these notes and we do not expect any such payment defaults in the future.

During the nine months ended September 30, 2009, 1,635,643 shares of common stock were issued due to the exercise of common stock warrants. The impact on liquidity was negligible as most warrants were exercised on a cashless basis.

Forecasted principal and interest payments on bank debt for the next 12 months are $6.3 million and will be funded from operating cash flows. In 2008, we made $500,000 in bank debt payments, exclusive of the debt payments made at the acquisition of CTI. CTI made principal and interest payments of $7.8 million in 2008 prior to being acquired by us.

The 2009 capital expenditures budget is expected to be funded from operating cash flows. In the second quarter of 2009 we began the implementation of a new company-wide computer system to improve our operations and financial information. It is anticipated that this implementation, when completed in 2010, will cost $600,000 to complete, with $134,000 incurred in the third quarter of 2009.

W e believe that we will generate sufficient cash from operations to continue operations for the next twelve months .   W e are considering financing alternatives to comply with the above described agreement with TD Bank .
 
Off-Balance Sheet Arrangements

Other than immaterial operating leases, we did not have any off-balance sheet arrangements during 2009 or 2008.

Contractual Obligations

As a smaller reporting company, we are not required to provide information typically disclosed under this item.

Critical Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.  Estimates are used when accounting for certain items such as reserves for inventory, accounts receivable and deferred tax assets; assessing the carrying value of intangible assets including goodwill; determining the useful lives of property, plant and equipment and intangible assets; and in determining asset retirement obligations.  Estimates are based on historical experience, where applicable, and assumptions that we believe are reasonable under the circumstances.  Due to the inherent uncertainty involved with estimates, actual results may differ.

20

 
Revenue Recognition

Revenue from the sale of products is recognized when the earnings process is complete and the risks and rewards of ownership have transferred to the customer. Costs and related expenses to manufacture the products are recorded as costs of goods sold when the related revenue is recognized.

We have several significant contracts providing for the sale of indefinite quantities of items at fixed per unit prices, subject to adjustment for certain economic factors. Revenue under these contracts is recognized when goods ordered under the contracts are received by the customer. Whenever costs change, we review the pricing under these contracts to determine whether they require the sale of products at a loss. To date, we have no loss contracts which would require the accrual of future losses in the current financial statements.

Income Taxes

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse.  Deferred tax assets are recognized when, based upon available evidence, realization of the assets is more likely than not.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

We classify interest on tax deficiencies as interest expense and income tax penalties as other miscellaneous expenses.  

Goodwill

Goodwill is deemed to have an indefinite life and accordingly, is not subject to annual amortization.  Goodwill is subject to annual impairment reviews, and, if conditions warrant, interim reviews based upon its estimated fair value.  Impairment charges, if any, are recorded in the period in which the impairment is determined. No such charges have been recorded in the three or nine month periods ended September 30, 2009 and 2008.

Intangible Assets

Intangible assets include developed technologies and patents, trademarks and trade names, customer relationships and non-compete agreements, which are amortized over their estimated useful lives (with the exception of trademarks and trade names, which are considered to have indefinite useful lives and therefore are not amortized). The carrying amounts of amortized intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that those carrying amounts may not be recoverable. The carrying amounts of non-amortizing intangible assets are reviewed for impairment annually. Costs incurred to renew or extend the term of our intangible assets are expensed when incurred.

Inventories

Inventories are stated at the lower of cost (on a first-in first-out (“FIFO”) method) or net realizable value.  We periodically review the realizability of our inventory. Provisions are established for potential obsolescence. Determining adequate reserves for inventory obsolescence requires management’s judgment. Conditions impacting the realizability of our inventory could cause actual asset write-offs to be materially different than reported inventory reserve balances.

Foreign Operations and Currency

Accounts of our foreign subsidiary are maintained in their local and functional currency, the Euro. Monthly income statement account balances are converted to U.S. dollars using that month’s average exchange rate. Assets and liabilities are converted to U.S. dollars using the exchange rate in effect as of the balance sheet date. Equity transactions are converted to U.S. dollars using the exchange rate in effect as of the date of the transaction. Translation gains and losses are reported as component of accumulated other comprehensive income (loss). Gains and losses resulting from transactions which are denominated in other than the functional currencies are reported as other income or loss in the statement of operations in the period the gain or loss occurred.

21

 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, we are not required to provide information typically disclosed under this item.
 
ITEM 4T.
CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls include, without limitation, controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to management, including principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

Our management carried out an evaluation, under the supervision of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of September 30, 2009. Based upon that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that the design and operation of our disclosure controls and procedures were effective as of September 30, 2009.

Changes in internal control over financial reporting

There was no change in our internal control over financial reporting that occurred during the three months ended September 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION
 
ITEM 1.
LEGAL PROCEEDINGS

Cyalume is not currently a named party in any legal proceedings.

CTI is currently named a defendant in Civil Action No. 06-706 in Superior Court of the State of Massachusetts. Filing suit against CTI is Omniglow, LLC (the former novelty business of CTI which was sold on January 23, 2006). CTI sold certain assets and liabilities related to the novelty and retail business to certain former shareholders and management (the “Omniglow Buyers”).  This was done because CTI sought to retain only the Omniglow Corporation business activities associated with government, military and safety business. During 2006, CTI and the Omniglow Buyers commenced litigation and arbitration proceedings against one another. Claims include breaches of a lease and breaches of various other agreements between CTI and the Omniglow Buyers.  The Omniglow Buyers seek compensatory damages of $1.4 million, to be trebled, and recovery of costs and legal fees. CTI has filed for damages of $368,000 against the Omniglow Buyers.  CTI continues to rigorously defend our position on these matters, as we believe the Omniglow Buyers’ claims to be without merit. Court hearings were held and completed in October 2008. A decision is expected in late 2009.
 
ITEM 1A.
RISK FACTORS

As a smaller reporting company, we are not required to provide information typically disclosed under this item.

 
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Purchases of Equity Securities by the Company and Affiliated Purchasers
 
Period
 
Total Number of Shares Purchased
   
 
Average Price Paid per Share
   
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
   
Maximum Number (or Approximate Dollar Value) of Shares that May yet be Purchased under the Plans or Programs
 
January 1 to January  31
    32,903
(1)
  $ 7.97           $  
February 1 to February 28
                       
March 1 to March 31
                       
April 1 to April 30
                       
May 1 to May 31
                       
June 1 to June 30
                       
July 1 to July 31
                       
August 1 to August 31
                       
September 1 to September 30
                       

(1)
The shares were repurchased from members of management. These shares were a portion of the shares that certain members of CTI’s management received relating to the December 19, 2008 acquisition of CTI. Our Board of Directors voted at its January 13, 2009 meeting to honor a pre-Acquisition verbal commitment to repurchase 20% (or 32,903) of such shares to provide the holders of those shares with cash to pay personal income taxes arising from exchanging their shares of GMS Acquisition Partners for Cyalume common stock during the acquisition of CTI.

ITEM 3.
DEFAULTS UPON SENIOR SECURITIES

As a result of lower than anticipated sales, we did not meet two financial covenants contained in our Revolving Credit and Term Loan Agreement as of June 30, 2009. The Revolving Credit and Term Loan Agreement governs our notes payable, line of credit and derivative transactions with our senior lender. Effective September 1, 2009, CTI, Cyalume and TD Bank, N.A. entered into a First Amendment to Credit Agreement and Limited Waiver (the “Loan Amendment”). The Loan Amendment was signed on September 11, 2009 and amends the Revolving Credit and Term Loan Agreement (the “Original Credit Agreement”) dated as of December 19, 2008 among CTI, Cyalume and TD Bank, N.A. The Loan Amendment was attributable to CTI not meeting two financial covenants that utilize non-GAAP measurements contained in our Original Credit Agreement. The Loan Amendment, among other things:

 
·
Waived the requirement that CTI be in compliance as of June 30, 2009 with certain financial covenants contained in the Original Credit Agreement;
     
 
·
Changed the maturity date of the line of credit from December 19, 2011 to December 31, 2010;
     
 
·
Increased the Base Rate charged on the line of credit by an Applicable Margin, which is defined in the Loan Amendment;
     
 
·
Reduced the maximum management fee that CTI may pay to Cyalume from $125,000 per quarter to $21,000 per month;
     
 
·
Increased the maximum allowable Leverage Ratios for the months of September 2009 through December 2009 and
     
 
·
Added a minimum quarterly EBITDA covenant.
 
As of September 30, 2009, CTI achieved the required mi nimum quarterly EBITDA covenant , but did not achieve the service coverage and leverage ratio covenants in the Original Credit Agreement, as amended. Effective November 20, 2009 CTI, Cyalume and TD Bank, N.A. reached an agreement that will result in the following changes to the Original Credit Agreement , as amended:
 
 
·
Waived the requirement that CTI be in compliance as of September 30, 2009 with the service coverage and leverage ratio covenants contained in the Original Credit Agreement, as amended by the Loan Amendment;
     
 
·
Requires that all net proceeds from any new subordinated debt or equity offerings be used to pay-down senior debt;
     
 
·
Requires the Company to receive at least $3.0 million in new subordinated debt or equity offering before April 30, 2010;
     
 
·
Set new schedules of required ratios for maximum senior leverage, minimum fixed charge coverage and minimum total debt service coverage ratios and set new quarterly EBITDA targets to take effective December 31, 2009 and
     
 
·
Requires the Company to maintain $1.0 million cash on the consolidated balance sheet.
 
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We fully expect to achieve the revised covenants of the Revolving Credit and Term Loan Agreement and all subsequent amendments. There have been no principal or interest payment defaults on these notes and we do not expect any such payment defaults in the future.

ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5.
OTHER INFORMATION

There were no changes to the procedures by which security holders may recommend nominees to our Board of Directors during the three months ended September 30, 2009.
 
There is no information to report under this item in lieu of reporting that information on Form 8-K except for the following discussion .
 
On November 18, 2009 , we entered to a Management Agreement with Selway Capital, LLC (“Selway”) that provides for (but is not limited to) the following services to be performed by Selway on our behalf:
 
 
1)
Strategic development and implementation as well as consultation to our chief executive officer on a regular basis as per his reasonable requests;
 
 
2)
Identifying strategic partners with companies with which Selway has relationships and access. In this connection, Selway will focus on building partnerships with companies in Israel, Singapore, India and Europe. The focus will be on the expansion of our munitions business;
 
 
3)
Advise and support us on our investor relations strategy;
 
 
4)
Advise and support our future fund raising, including identifying sources of capital in the United States; and
 
 
5)
Support our mergers and acquisitions strategy and play an active role in our due diligence and analysis.

The Management Agreement stipulates that these services will be performed by Yaron Eitan, a member of our board of directors and an employee of Selway, with the assistance as needed from other employees of Selway.  The Management Agreement is retroactive to October 1, 2009, expires on October 1, 2012 and can terminated by either us or Selway upon 30-days’ written notice or upon our default in payment or Selway’s failure to perform services under the Management Agreement. Selway’s compensation for these services will be $41,666.67 per month for the duration of the Management Agreement. However, we are only required to pay $11,000 per month through January 31, 2010 with the balance of $31,666.67 per month remaining unpaid until our senior lender consents to such payment. Additionally, Selway can earn a $210,000 bonus, payable in cash or our common stock at the discretion of our board of directors. We will also reimburse Selway for costs incurred specifically on our behalf for these services. Under the Management Agreement, we indemnify Selway and Selway indemnifies us against certain losses incurred while carrying out its obligations under the Management Agreement.

The foregoing description of the terms of the Management Agreement is not complete and is qualified in its entirety by reference to the Management Agreement , a copy of which is attached as Exhibit 10. 3 to this Form 10-Q.
 
ITEM 6.    EXHIBITS

Exhibit
Number
 
Description
10.1
 
Employment agreement of Edgar Cranor, Technology Vice President, Cyalume Technologies, Inc. (1)
     
10.2
 
First Amendment to Credit Agreement and Limited Waiver, effective September 1, 2009, among CTI, Cyalume and TD Bank, N.A. under the Revolving Credit and Term Loan Agreement dated as of December 19, 2008. (2)
     
10.3
*
Management Agreement between Cyalume Technologies Holdings, Inc. and Selway Capital, LLC.
     
31.1
*
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2
*
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1
*
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*
Filed herewith.
   
(1)
Incorporated by reference to the Current Report on Form 8-K dated July 17, 2009 and filed with the Commission July 22, 2009.
   
(2)
Incorporated by reference to the Current Report on Form 8-K dated September 11, 2009 and filed with the Commission September 23, 2009.

24

 
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
Cyalume Technologies Holdings, Inc.
 
       
Date: November 23, 2009
By:
/s/  DEREK DUNAWAY
 
   
Derek Dunaway, Chief Executive Officer
 
   
(Principal Executive Officer)
 
 
       
Date: November 23, 2009
By:
/s/  MICHAEL BIELONKO
 
   
Michael Bielonko, Chief Financial Officer
 
   
(Principal Financial Officer)
 
 
25

 
 
THIS MANAGEMENT AGREEMENT, (the “ Agreement ”) dated as of October 1, 2009 (the “ Effective Date ”), is hereby executed by Cyalume Technologies Holdings, Inc., a Delaware corporation having its principal place of business at 96 Windsor Street, West Springfield, MA 01089 (the “ Company ”) and Selway Capital, LLC, a Delaware limited liability corporation having its principal place of business at 74 Grand Avenue, 2 nd Floor, Englewood, NJ 07631 (the “ Manager ”).
 
W I T N E S S E T H:
 
WHEREAS, the Company desires that the Manager provide certain services as described herein in order for the Company to conduct its business, as more fully described in the Company’s filings made with the United States Securities and Exchange Commission (the “ Business ”); and
 
WHEREAS, the Manager desires to provide certain other services as described herein to the Company, subject to the terms and conditions of this Agreement.
 
NOW, THEREFORE, in consideration of the mutual covenants herein, the Company and the Manager agree as follows:
 
Section 1.   Administrative Services .  In consideration for value received, receipt of which is hereby acknowledged by the Manager, the Manager hereby agrees to provide services to the Company including but not limited to those listed below. It is understood that Yaron Eitan shall be personally available to perform such services to the Company.  Also, other staff of Selway Management shall also be available at Mr. Eitan’s request to assist him in performing these tasks.
 
1.   Strategic development and implementation as well as consultation to the chief executive officer of the Company on a regular basis as per his reasonable requests;
 
2.   Identifying strategic partners with companies with which the Manager has relationships and access. In this connection, the Manager will focus on building partnerships with companies in Israel, Singapore, India and throughout Europe. The focus will be on the rapid expansion of the Company’s munitions business;
 
3.   Advise and support the Company with respect to its investor relations strategy;
 
4.   Advise and support the Company on future fund raising, including identifying sources of capital in the United States; and
 
5.   Support the Company mergers and acquisitions strategy and play an active role in due diligence and analysis.
 
 
 

 
 
Section 2.   Term .  The term of this Agreement shall commence on the Effective Date and terminate on the third (3rd) anniversary of the Effective Date.  Either party may terminate this Agreement at any time upon written notice to the other party received thirty (30) days prior to the effective time of such termination. This agreement is terminable for Cyalume’s default in payment or for Selway’s failure to perform services, each after written notice and a reasonable time to cure.
 
Section 3.   Manager’s Compensation and Expenses .
 
(a)   As compensation for its services in acting as Manager hereunder, the Company shall pay to the Manager a management fee in the amount of $41,666.67 (the “ Management Fee ”), payable monthly in arrears the 15 th day of each month.  If the Company is not able to pay the Management Fee for a month or months, the Manager may elect to not terminate the agreement and to continue providing the services as long as the Company accrues the unpaid Management Fee as a liability to the Manager.  Notwithstanding the foregoing, (i) the Company shall only pay $11,000 per month between August 1, 2009 and January 31, 2010, with the balance of $31,666.67, accruing as an unpaid Management Fee to the Manager; (ii) Company shall not pay unpaid Management Fee until TD Bank provides consent to execute payment.
 
(b)   The Company’s Board of Directors, at a meeting held after December 31, 2009, will consider awarding the Manager a bonus of up to $210,000 for services performed by the Manager in 2009, to be paid in either cash or stock at the discretion of the Board of Directors.
 
(c)   The Manager shall bear the following ordinary day-to-day expenses incidental to the services provided by it hereunder as follows: (i) all costs and expenses of its office space, facilities, utility service and necessary administrative and clerical functions connected with the Manager’s operations; and (ii) compensation of all its employees (collectively, “ Manager Expenses ”); provided , however , that any costs and expenses incurred specifically on behalf of the Company and no other clients or other business of the Manager shall be paid for by the Company or its subsidiary.  These expenses, except as defined in Section 3(d) below, shall be approved in advance by the Company in writing.
 
(d)   Company Expenses .  Except as provided in Section 3(c) above, the Company, or its subsidiary, shall bear and be charged with all other reasonable costs and expenses of the Manager whether incurred before or after the date hereof, in connection with the services rendered by the Manager to or on behalf of the Company, or any subsidiary, including, without limitation, any travel, legal and accounting expenses and other professional fees to third parties and out of pocket costs related thereto.
 
Section 4.   The Manager’s Liability .  The Manager and its affiliated persons who provide services to the Company assume under this Agreement no liability for anything other than to render or stand ready to render the services specifically called for herein and neither the Manager nor any of its directors, managers, officers, employees, subsidiaries or affiliates shall by reason of this Agreement be responsible for any action of the Company under this Agreement.
 
 
 

 
 
Section 5.   Indemnity .  (a) The Company shall indemnify the Manager and its managers, directors, officers, employees and agents (each such person, an “ Indemnified Party ”) against all losses, claims, actions, suits, damages, penalties, judgments, liabilities and expenses (including, without limitation, reasonable attorneys’ fees but excluding lost profits, consequential damages and other indirect or special damages and any costs and expenses attributable solely to administrative overheads) (collectively, “ Losses ”) which any of them may pay or incur arising out of or relating this Agreement or the services called for herein; provided , however , that such indemnity shall not apply to any such loss, claim, damage, penalty, judgment, liability or expense attributable to the Manager or any other Indemnified Party as a result of the Indemnified Party’s gross negligence, willful misconduct or material breach of its obligations under this Agreement.  If any action, suit or proceeding arising from any of the foregoing is brought against any Indemnified Party, the Company will resist and defend such action, suit or proceeding or cause the same to be resisted and defended by its counsel (which counsel shall be reasonably satisfactory to the affected Indemnified Party) and shall pay all costs of defense as incurred; provided , however , that if it is finally determined by a court of competent jurisdiction that such Indemnified Party is not entitled to indemnification hereunder, the Indemnified Party shall immediately reimburse the Company all amounts spent by the Company in defense of such Indemnified Party.  Each Indemnified Party shall immediately notify the Company of any damage, loss, liability, cost or expense which the Indemnified Party has determined has given or would give rise to a right of indemnification under this Agreement and the Company shall have the exclusive right to compromise or defend any such liability or claim at its own expense, which decision shall be binding and conclusive upon the Indemnified Party.  Failure to give such notice shall not relieve the Company of its indemnity under this Agreement; provided , that the Company shall not be held responsible for any damage, loss, liability, cost or expense resulting from the failure to give such notice or if such failure results in the forfeiture of substantive rights.  The Company’s obligations under this Section 5(a) shall survive any termination of this Agreement.
 
(b)   The Manager shall indemnify the Company and its directors, officers, employees and agents (each such person, a “ Company Indemnified Party ”) against all Losses which any of them may pay or incur arising out of or relating to or as a result of the Manager’s gross negligence, willful misconduct or material breach of its obligations under this Agreement; provided , however , that such indemnity shall not apply to any such loss, claim, damage, penalty, judgment, liability or expense attributable to the Company or any other Company Indemnified Party   as a result of the Company’s gross negligence, willful misconduct or material breach of its obligations under this Agreement.  If any action, suit or proceeding arising from any of the foregoing is brought against any Company Indemnified Party, the Manager will resist and defend such action, suit or proceeding or cause the same to be resisted and defended by its counsel (which counsel shall be reasonably satisfactory to the affected Company Indemnified Party) and shall pay all costs of defense as incurred; provided , however , that if it is finally determined by a court of competent jurisdiction that such Company Indemnified Party is not entitled to indemnification hereunder, the Company Indemnified Party shall immediately reimburse the Manager all amounts spent by the Manager in defense of such Company Indemnified Party.  Each Company Indemnified Party shall immediately notify the Manager of any damage, loss, liability, cost or expense which the Company Indemnified Party has determined has given or would give rise to a right of indemnification under this Agreement and the Manager shall have the exclusive right to compromise or defend any such liability or claim at its own expense, which decision shall be binding and conclusive upon the Company Indemnified Party.  Failure to give such notice shall not relieve the Manager of its indemnity under this Agreement; provided , that the Manager shall not be held responsible for any damage, loss, liability, cost or expense resulting from the failure to give such notice or if such failure results in the forfeiture of substantive rights.  The Manager’s obligations under this Section 5(b) shall survive any termination of this Agreement.
 
 
 

 
 
Section 6.   Notices .  Any notice or other communication (collectively, “ Notice ”) to be given to the Company or the Manager in connection with this Agreement shall be in writing and will be deemed to have been given and received (a) on the date delivered if by courier or other means of personal delivery, (b) on the date sent by telecopy with automatic confirmation by the transmitting machine showing the proper number of pages were transmitted without error, (c) on the next business day after being sent by a nationally recognized overnight mail service in time for and specifying next day or next business day delivery, or (d) on the fifth (5 th ) day after mailing by U.S. Postal Service certified or registered mail, in each case postage prepaid and with any other costs necessary for delivery paid by the sender.  Any party may by notice pursuant to this Section 6 designate another address as the new address to which notice must be given.
 
Section 7.   No Restrictions .  Nothing in this Agreement shall limit or restrict the right of any director, officer or employee of the Manager or any director, officer, employee, member or partner of any of its subsidiaries or its Affiliates to engage in any other business or to devote his time and attention to the management or other aspects of any other business, whether of a similar or dissimilar nature, or limit or restrict the right of the Manager or of any of its Affiliates to engage in any other business or to render services of any kind to any other corporation, firm, individual or association.
 
Section 8.   Status of Manager as Independent Contractor .  The Manager shall for all purposes herein be deemed to be an independent contractor and shall, unless otherwise expressly provided herein or authorized by the Company from time to time, have no authority to act for or represent the Company in any way or otherwise be deemed an agent of the Company.
 
Section 9.   Arbitration .
 
(a)   General .  Except as otherwise expressly provided herein, in the event of any dispute, claim or controversy (collectively “ dispute ”) among the parties arising out of or relating to this Agreement, whether in contract, tort, equity or otherwise, and whether relating to the meaning, interpretation, effect, validity, performance or enforcement of this Agreement that cannot be resolved by the parties, such dispute shall be resolved by and through an arbitration proceeding conducted under the auspices of the commercial arbitration rules of the American Arbitration Association (or any like organization successor thereto) in New York, New York.  The arbitrability of a dispute shall likewise be determined by arbitration.
 
 
 

 
 
(b)   Procedure .  The arbitration proceeding shall be conducted in as expedited a manner as is then permitted by the commercial arbitration rules (formal or informal) of the American Arbitration Association.  Both the foregoing agreement of the parties to arbitrate any and all such disputes, and the results, determinations, findings, judgments and/or awards rendered through any such arbitration shall be final and binding on the parties and may be specifically enforced by legal proceedings in any court of competent jurisdiction.
 
(c)   Costs of Arbitration .  The cost of the arbitration proceeding and any proceeding in court to confirm or to vacate any arbitration award, as applicable (including each party’s attorneys’ fees and costs), shall be borne by the unsuccessful party or, at the discretion of the arbitrator(s), may be prorated between the parties in such proportion as the arbitrator(s) determine(s) to be equitable and shall be awarded as part of the arbitrators’ award.
 
Section 10.   GOVERNING LAW .  THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE SUBSTANTIVE LAWS OF THE STATE OF NEW YORK  (WITHOUT REGARD TO CHOICE OF LAW PRINCIPLES).
 
Section 11.   Submission to Jurisdiction .  With respect to any claim or action arising hereunder, the parties (a) irrevocably submit to the nonexclusive jurisdiction of the courts of the State of New York and the United States District Court located in the State of New York and appellate courts from any thereof, and (b) irrevocably waive any objection which such party may have at any time to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement brought in any such court, and irrevocably waive any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum.  The terms of this Section 11 shall survive any termination of this Agreement.
 
Section 12.   Waiver of Jury Trial .  THE PARTIES TO THIS AGREEMENT KNOWINGLY, VOLUNTARILY AND EXPRESSLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ENFORCING OR DEFENDING ANY RIGHTS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.  THE PARTIES THERETO ACKNOWLEDGE THAT THE PROVISIONS OF THIS SECTION 12 HAVE BEEN BARGAINED FOR AND THAT EACH SUCH PARTY HAS BEEN REPRESENTED BY COUNSEL IN CONNECTION HEREWITH.  THE TERMS OF THIS SECTION 12 SHALL SURVIVE ANY TERMINATION OF THIS AGREEMENT.
 
 
 

 
 
Section 13.   Entire Agreement .  This Agreement constitutes the entire agreement among the parties hereto with respect to the matters covered hereby and supersedes all prior agreements and understandings among the parties.
 
Section 14.   Counterparts .  This Agreement may be executed by the parties hereto in separate counterparts, each of which counterparts, when executed and delivered, shall be deemed to be an original and all of which counterparts, taken together, shall constitute one and the same agreement.
 
Section 15.   Amendments .  This Agreement may be supplemented, modified or amended by written instrument signed on behalf of each party hereto.
 
Section 16.   Severability of Provisions .  Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability, without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction.
 
Section 17.   Successors, Assignment .  This Agreement (a) shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, and (b) may not be assigned by any party hereto without the prior written consent of the other parties hereto.
 
Section 18.   Headings .  The headings contained in this Agreement are for convenience of reference only and shall not affect the construction or interpretation of any provision of this Agreement.
 
Section 19.   Scope of Performance .  In acting with respect to this Agreement, the Manager shall be required to perform only such duties as are specifically set forth in (a) this Agreement and (b) applicable law as in effect from time to time.  The Manager undertakes to perform only such duties as are specifically set forth in this Agreement.
 
Section 20.   Additional Parties .   Schedule A shall be updated from time to time, as mutually agreed by the parties hereto to add an additional Company in connection with the Business.  Each such party added to Schedule A shall be bound by the terms and conditions hereof and shall execute a Joinder Agreement in the form reasonably satisfactory to the Manager and the Company.
 
 
 

 
 
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written.
 
 
CYALUME TECHNOLOGIES HOLDINGS, INC.
 
       
By:
/s/ Derek Dunaway
 
 
Name:  
Derek Dunaway
 
 
Title:
Chief Executive Officer
 
 
 
 
SELWAY CAPITAL, LLC
 
       
By:
/s/ Yaron Eitan
 
 
Name:  
Yaron Eitan
 
 
 
 

 
Exhibit 31.1

CERTIFICATION

I, Derek Dunaway, certify that:

1.
I have reviewed this Quarterly Report on Form 10-Q of Cyalume Technologies Holdings, Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
       
Date: November 23, 2009
/s/  DEREK DUNAWAY      
 
   
Derek Dunaway, Chief Executive Officer
 
 

 
Exhibit 31.2
 
CERTIFICATION

I, Michael Bielonko, certify that:

1.
I have reviewed this Quarterly Report on Form 10-Q of Cyalume Technologies Holdings, Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
       
Date: November 23, 2009
/s/  MICHAEL BIELONKO      
 
   
Michael Bielonko, Chief Financial Officer
 
 

 
Exhibit 32.1
 
CERTIFICATION

Each of the undersigned officers of Cyalume Technologies Holdings, Inc. (the "Company") hereby certifies that, to his knowledge, the Company's Quarterly Report on Form 10-Q to which this certification is attached (the "Report"), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
       
Date: November 23, 2009
/s/  DEREK DUNAWAY      
 
   
Derek Dunaway, Chief Executive Officer
 
   
(the Principal Executive Officer)
 
 
Date: November 23, 2009
/s/  MICHAEL BIELONKO
 
   
Michael Bielonko, Chief Financial Officer
 
   
(the Principal Financial Officer)
 
 
This certification is being furnished and not filed, and shall not be incorporated into any document for any purpose, under the Securities Exchange Act of 1934 or the Securities Act of 1933.