Cyalume
Cyalume Technologies Holdings, Inc. (Form: 10-Q, Received: 08/11/2010 17:26:04)

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

FORM 10-Q
(Mark One)

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

For the quarterly period ended June 30, 2010

OR

¨
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    x     No    ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( § 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  ¨     No  ¨     

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  ¨
 
Accelerated filer  ¨
 
Non-accelerated filer  ¨
 (Do not check if a smaller
reporting company)
 
Smaller reporting company  x

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of August 2, 2010, there were outstanding 15,729,070 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 June 30, 2010 and 2009
 
4
         
   
Condensed Consolidated Statements of Operations (unaudited) for the six months ended June 30, 2010 and 2009
 
5
         
   
Condensed Consolidated Balance Sheets as of June 30, 2010 (unaudited) and December 31, 2009
 
6
         
   
Condensed Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income for the six months ended June 30, 2010 (unaudited)
 
7
         
   
Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2010 and 2009
 
8
         
   
Notes to Condensed Consolidated Financial Statements (unaudited)
 
9
         
Item 2.
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
15
         
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
 
18
         
Item 4.
 
Controls and Procedures
 
18
         
PART II—OTHER INFORMATION
   
     
Item 1.
 
Legal Proceedings
 
18
         
Item 1A.
 
Risk Factors
 
19
         
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
19
         
Item 3.
 
Defaults Upon Senior Securities
 
19
         
Item 4.
 
[Removed and Reserved]
 
19
         
Item 5.
 
Other Information
 
19
         
Item 6.
 
Exhibits
 
20
         
Signatures
 
21

 
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)

   
For the Three
   
For the Three
 
   
Months Ended
   
Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
 
Revenues
  $ 9,404     $ 7,959  
Cost of goods sold
    4,610       4,575  
Gross profit
    4,794       3,384  
                 
Other expenses (income):
               
Sales and marketing
    776       746  
General and administrative
    1,253       1,377  
Research and development
    351       415  
Interest, net
    635       625  
Interest – related party
    16       15  
Amortization of intangible assets
    456       739  
Other, net
    (81 )     19  
Total other expenses, net
    3,406       3,936  
                 
Income (loss) before income taxes
    1,388       (552 )
Provision for (benefit from) income taxes
    357       (57 )
Net income (loss)
  $ 1,031     $ (495 )
                 
Net income (loss) per common share:
               
Basic
  $ .07     $ (.03 )
Diluted
  $ .07     $ (.03 )
                 
Weighted average shares used to compute net income (loss) per common share:
               
Basic
    15,458,737       15,333,160  
Diluted
    15,505,764       15,333,160  

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)

   
For the Six
   
For the Six
 
   
Months Ended
   
Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
 
Revenues
  $ 18,289     $ 14,583  
Cost of goods sold
    9,212       8,436  
Gross profit
    9,077       6,147  
                 
Other expenses (income):
               
Sales and marketing
    1,564       1,531  
General and administrative
    2,766       2,602  
Research and development
    733       808  
Interest, net
    1,300       1,252  
Interest – related party
    32       29  
Amortization of intangible assets
    912       1,734  
Other, net
    (91 )     63  
Total other expenses, net
    7,216       8,019  
                 
Income (loss) before income taxes
    1,861       (1,872 )
Provision for (benefit from) income taxes
    669       (604 )
Net income (loss)
  $ 1,192     $ (1,268 )
                 
Net income (loss) per common share:
               
Basic
  $ .08     $ (.08 )
Diluted
  $ .08     $ (.08 )
                 
Weighted average shares used to compute net income (loss) per common share:
               
Basic
    15,443,234       14,956,448  
Diluted
    15,513,433       14,956,448  

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)

   
June 30,
       
   
2010
(unaudited)
   
December 31,
2009
 
Assets
           
Current assets:
           
Cash
  $ 2,580     $ 2,003  
Accounts receivable, net of allowance for doubtful accounts of $25 and $239 at June 30, 2010 and December 31, 2009, respectively
    3,145       3,319  
Inventories, net
    8,839       9,320  
Income taxes refundable
          294  
Deferred income taxes
    459       682  
Prepaid expenses and other current assets
    413       382  
Total current assets
    15,436       16,000  
                 
Property, plant and equipment, net
    8,632       8,384  
Goodwill
    51,244       51,244  
Other intangible assets, net
    21,498       22,548  
Other noncurrent assets
    113       67  
Total assets
  $ 96,923     $ 98,243  
                 
Liabilities and Stockholders’ Equity
               
Current liabilities:
               
Lines of credit
  $ 2,700     $ 3,200  
Current portion of notes payable
    8,468       6,940  
Accounts payable
    2,818       3,222  
Accrued expenses and other current liabilities
    2,377       2,069  
Advance due to related parties
    9       9  
Income taxes payable
    313        
Total current liabilities
    16,685       15,440  
                 
Notes payable, net of current portion
    15,469       18,874  
Notes payable due to related parties
    1,097       1,065  
Deferred income taxes
    6,997       7,105  
Derivatives
    310       69  
Asset retirement obligation, net of current portion
    162       158  
Total liabilities
    40,720       42,711  
                 
Commitments and contingencies (Note 8)
           
                 
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; 15,684,070 and 15,405,570 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively
    16       15  
Additional paid-in capital
    88,526       87,926  
Accumulated deficit
    (31,201 )     (32,393 )
Accumulated other comprehensive loss
    (1,138 )     (16 )
Total stockholders’ equity
    56,203       55,532  
Total liabilities and stockholders' equity
  $ 96,923     $ 98,243  

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 Income
(in thousands, except shares)
(Unaudited)

   
Common Stock
   
Additional
         
Accumulated
Other
   
Total
       
   
Number
of Shares
   
Amount
   
Paid-In
Capital
   
Accumulated
Deficit
   
Comprehensive
Loss
   
Stockholders’
Equity
   
Comprehensive
Income (Loss)
 
Balance at December 31, 2009
    15,405,570     $ 15     $ 87,926     $ (32,393 )   $ (16 )   $ 55,532     $  
Stock issued
    278,500       1       (1 )                        
Stock-based compensation expense
                601                   601        
Foreign currency translation adjustments
                            (971 )     (971 )     (971 )
Unrealized loss on cash flow hedges, net of taxes of $90
                            (151 )     (151 )     (151 )
Net income
                      1,192             1,192       1,192  
Comprehensive income
                                      $ 70  
Balance at June 30, 2010
    15,684,070     $ 16     $ 88,526     $ (31,201 )   $ (1,138 )   $ 56,203          

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)
(Unaudited)

   
For the Six
   
For the Six
 
   
Months Ended
   
Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
 
Cash flows from operating activities:
               
Net income (loss)
 
$
1,192
   
$
(1,268
)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
               
Depreciation of property, plant and equipment
   
329
     
320
 
Amortization
   
1,065
     
2,420
 
Provision for deferred income taxes
   
313
     
(869
)
Stock-based compensation expense
   
601
     
209
 
Other non-cash expenses
   
130
     
294
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
34
     
(1,127
)
Inventories
   
187
     
(166
)
Prepaid expenses and other current assets
   
(70
)
   
(101
)
Accounts payable and accrued liabilities
   
(15
)
   
229
 
Income taxes payable
   
615
     
532
 
Accrued interest on notes payable to related parties
   
     
(2)
 
Net cash provided by operating activities
   
4,381
     
471
 
                 
Cash flows from investing activities:
               
Purchases of long-lived assets
   
(1,003
)
   
(283
)
Net cash used in investing activities
   
(1,003
)
   
(283
)
                 
Cash flows from financing activities:
               
Payments for common stock subject to redemption
   
     
(1,123
)
Net repayment of line of credit
   
(500
)
   
(200
)
Repayment of long-term notes payable
   
(2,081
)
   
(1,646
)
Payments to reacquire and retire common stock
   
     
(263
)
Refund (payment) of debt issuance costs
   
(50
)
   
10
 
Proceeds from exercises of warrants
   
     
27
 
Net cash used in financing activities
   
(2,631
)
   
(3,195
)
                 
Effect of exchange rate changes on cash
   
(170
)
   
57
 
Net increase (decrease) in cash
   
577
     
(2,950
)
Cash, beginning of period
   
2,003
     
3,952
 
Cash, end of period
 
$
2,580
   
$
1,002
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 
8

 

Cyalume Technologies Holdings, Inc.
Notes to Condensed Consolidated Financial Statements

1.
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 (“U.S. GAAP”) 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 footnotes 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 June 30, 2010, including the estimates inherent in the process of preparing financial statements. Additionally, all significant intercompany accounts and transactions have been eliminated in consolidation.
 
Certain amounts in prior periods have been reclassified to conform to the 2010 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 interim condensed consolidated financial statements. Operating results for the three and six-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, 2009 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 for the year ended December 31, 2009.

2.
DESCRIPTION OF BUSINESS

We have one subsidiary: Cyalume Technologies, Inc. (“CTI”), whose headquarters are also located in West Springfield, MA. CTI has one subsidiary, Cyalume Technologies, SAS (“CTSAS”), located in Aix-en-Provence, France. Our products are manufactured at both the West Springfield and Aix-en-Provence locations.

We primarily produce products based on technologies whereby light is generated through a chemical reaction known as chemiluminescence. CTI manufactures and sells such chemiluminescent products, in addition to reflective and photoluminescent products, to military, commercial and public safety markets.  Our base product is known as a ‘‘light stick’’ and is typically 6 inches in length. A light stick is a translucent flexible plastic tube that is partly filled with one chemical ingredient and also with a glass container (‘‘ampoule’’) that contains a complementary reactive chemical. When the tube is bent enough to break the glass ampoule, the chemicals contained within the plastic tube and ampoule mix and light is generated. Additionally, we manufacture and sell a component of 40mm training ammunition; sales of these components have been an increasing source of our revenues in recent years.  Also, we produce reflective (patches) and reflective plus photoluminescent (fire tape) products. Based on our customers’ specifications, our products are manufactured in varying shapes, sizes and functions, and provide light in different colors, intensity and durations.

3.
NEW ACCOUNTING PRONOUNCEMENTS

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06, Improving Disclosures about Fair Value Measurements , to amend existing guidance in FASB Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures , to expand and clarify existing disclosures regarding recurring and nonrecurring fair value measurements. The amendments in this ASU were effective on January 1, 2010 for our interim and annual reporting. The adoption of this ASU did not have an impact on these unaudited interim condensed consolidated financial statements.

 
9

 

Cyalume Technologies Holdings, Inc.
Notes to Condensed Consolidated Financial Statements

In February 2010, the FASB issued ASU No. 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. The amendments in this ASU remove the requirement for an SEC filer (such as us) to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. All of the amendments in this ASU were effective for us upon the FASB’s issuance of ASU No. 2010-09.  The only effect of our adoption of this ASU on these unaudited interim condensed consolidated financial statements was to not disclose the date through which subsequent events have been evaluated in preparing these consolidated financial statements; for SEC filers, that evaluation date must be the date of issuance of the financial statements.

4.
INVENTORIES

Inventories consist of the following (all amounts in thousands):
 
   
June 30,
2010
   
December 31,
2009
 
Raw materials
  $ 4,568     $ 4,548  
Work-in-process
    3,277       2,973  
Finished goods
    994       1,799  
    $ 8,839     $ 9,320  

5.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The derivative liabilities as of June 30, 2010 in our condensed consolidated balance sheet consist of the following (all amounts in thousands):

Derivative Instrument
 
Balance Sheet Location
 
Fair Value
 
Interest rate swaps
 
Derivatives (non-current liabilities)
 
$
(310
)

Interest Rate Swaps

In December 2008, 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 our notes payable with TD Bank, N.A. 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 comprehensive income. These unrealized gains and losses must be reclassified in whole or in part 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 comprehensive income 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 swap’s 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 loss (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 June 30, 2010, we held no such currency forward contracts.

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 June 30, 2010 was as follows (all amounts in thousands):

 
10

 

Cyalume Technologies Holdings, Inc.
Notes to Condensed Consolidated Financial Statements

   
Gain (Loss)
   
Gain (Loss)
   
Gain (Loss)
 
   
In AOCL  (1)
   
Reclassified  (2)
   
in Earnings  (3)
 
Derivatives in cash flow hedging relationships:
                 
Interest rate swaps
  $ (76 )   $     $  
Derivatives not designated as hedging instruments:
                       
Forward currency contracts
  $     $     $ 2  

 
(1)
Amount recognized in accumulated other comprehensive loss (AOCL) (effective portion and net of taxes) during the three months ended June 30, 2010.
 
(2)
Amount of gain (loss) originally recorded in AOCL but reclassified from AOCL into earnings during the three months ended June 30, 2010.
 
(3)
Amount of gain (loss) recognized in earnings on the derivative (ineffective portion and amount excluded from effectiveness testing) reported in other loss (income) on the condensed consolidated statement of operations for the three months ended June 30, 2010.

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 six months ended June 30, 2010 was as follows (all amounts in thousands):
 
   
Gain (Loss)
   
Gain (Loss)
   
Gain (Loss)
 
   
In AOCL  (1)
   
Reclassified  (2)
   
in Earnings  (3)
 
Derivatives in cash flow hedging relationships:
                 
Interest rate swaps
  $ (151 )   $     $  
Derivatives not designated as hedging instruments:
                       
Forward currency contracts
  $     $     $ (22 )

 
(1)
Amount recognized in accumulated other comprehensive loss (AOCL) (effective portion and net of taxes) during the six months ended June 30, 2010.
 
(2)
Amount of gain (loss) originally recorded in AOCL but reclassified from AOCL into earnings during the six months ended June 30, 2010.
 
(3)
Amount of gain (loss) recognized in earnings on the derivative (ineffective portion and amount excluded from effectiveness testing) reported in other loss (income) on the condensed consolidated statement of operations for the six months ended June 30, 2010.

6.
INCOME TAXES

For the three months ended June 30, 2010, the effective tax rate of 26% differed from the statutory rate of 34% due to true-ups including changes in repatriated earnings from CTSAS and valuation allowances against foreign tax credits. For the three months ended June 30, 2009, the effective tax rate of 10% differed from the statutory rate of 34% primarily due to the true-ups associated with the purchase price allocation of tangible and intangible assets.

The effective tax rates for the six months ended June 30, 2010 and six months ended June 30, 2009 were not significantly different from the statutory rate of 34%.

7.
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 per common share is computed by dividing net income by the weighted average number of common shares and dilutive potential common share equivalents then outstanding. Potential common shares consist of (i) shares issuable upon the exercise of warrants and options and (ii) unvested restricted stock awards (using the treasury stock method).

 
11

 

Cyalume Technologies Holdings, Inc.
Notes to Condensed Consolidated Financial Statements

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Basic:
                       
Net income (loss) (in thousands)
  $ 1,031     $ (495 )   $ 1,192     $ (1,268 )
Weighted average shares
    15,458,737       15,333,160       15,443,234       14,956,448  
Basic income (loss) per common share
  $ 0.07     $ (0.03 )   $ 0.08     $ (0.08 )
Diluted:
                               
Net income (loss) (in thousands)
  $ 1,031     $ (495 )   $ 1,192     $ (1,268 )
Weighted average shares
    15,458,737       15,333,160       15,443,234       14,956,448  
Effect of dilutive securities
    47,027       (1)     70,199       (1)
Weighted average shares, as adjusted
    15,505,764       15,333,160       15,513,433       14,956,448  
Diluted income (loss) per common share
  $ 0.07     $ (0.03 )     0.08     $ (0.08 )

 
(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.

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:

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Warrants
    4,250,756       4,370,256       4,250,756       4,370,256  
Restricted stock awards
    87,333             4,000        
Options
    2,330,000       1,745,000       2,330,000       1,745,000  

8.
COMMITMENTS AND CONTINGENCIES

Civil Action No. 06-706 in Superior Court of the Commonwealth of Massachusetts

On January 23, 2006, before we owned CTI, the former owners of CTI (from whom we purchased CTI) (the “Former Owners”) acquired all of the outstanding capital stock of Omniglow Corporation (the “Transaction”) and changed the name of the company to Cyalume Technologies, Inc. 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 sought compensatory damages of $1.4 million, to be trebled, and recovery of costs and legal fees. CTI filed for damages of $368,000 against the Omniglow Buyers.  These proceedings are known as Civil Action No. 06-706 in Superior Court of the Commonwealth of Massachusetts.

On December 19, 2008, while Civil Action 06-706 was still unresolved, we acquired CTI (the “Acquisition”). According to the Acquisition’s Stock Purchase Agreement between the Former Owners and us, the Former Owners retained the responsibility for paying for all costs and liabilities associated with Civil Action 06-706.

On June 11, 2010, CTI received preliminary Findings of Fact, Rulings of Law and Order for Judgment (the “Findings”) regarding Civil Action No. 06-706.  Pursuant to the Findings, the court found in favor of the Omniglow Buyers and ruled that the Omniglow Buyers were entitled to calculable damages of approximately $828,000 from CTI, in addition to damages for certain lost profits that have not been calculated, costs and attorney’s fees. These additional damages, costs and fees have not yet been calculated or determined by the court.

CTI is considering its alternatives relating to the suit in light of the Findings. No amounts have been reported in these interim condensed consolidated financial statements since  payment of damages or loss is not yet deemed to be probable since all of our legal remedies have not been exhausted.

 
12

 

Cyalume Technologies Holdings, Inc.
Notes to Condensed Consolidated Financial Statements

Management Agreement with Board Member

On October 1, 2009, we entered into 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:

 
·
Strategic development and implementation as well as consultation with our chief executive officer on a regular basis as per his reasonable requests;
 
·
Identifying strategic partnerships with companies with which Selway has relationships and access, including building partnerships with companies in Israel, Singapore, India and Europe. The focus will be on the expansion of our munitions business;
 
·
Advise and support us on our investor relations strategy;
 
·
Advise and support our future fund raising, including identifying sources of capital in the United States; and
 
·
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 August 1, 2009, expires on October 1, 2012 and can be 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. Through July 2010, Selway’s compensation for these services was $41,667 per month. However, we were only required to pay $16,000 per month, with the balance of $25,667 per month remaining unpaid until our senior lender consented to such payment. 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 that may be incurred while carrying out its obligations under the management agreement.

On July 29, 2010 we amended our management agreement (the “Amended Management Agreement”) with Selway. Pursuant to the Amended Management Agreement, (i) the monthly compensation payable to Selway was reduced to $11,666.67 and (ii) we must issue to Selway 45,000 shares of our common stock in full satisfaction of all accrued and unpaid liabilities (including all management fees) we owe to Selway pursuant to this management agreement through July 2010.

9.
FAIR VALUE

Under U.S. GAAP, we are required to record certain financial assets and liabilities at fair value and may choose to record other financial assets and financial liabilities at fair value as well. Also under U.S. GAAP, we are required to record nonfinancial assets and liabilities at fair value due to events that may or may not recur in the future, such as an impairment event. When we are required to record such assets and liabilities at fair value, that fair value is estimated using an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. That fair value is determined based on significant inputs contained in a fair value hierarchy 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 June 30, 2010, our only assets and liabilities required to be reported at fair value on a recurring basis were the interest rate swaps and currency forward contracts described in Note 5, both 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.

 
13

 

Cyalume Technologies Holdings, Inc.
Notes to Condensed Consolidated Financial Statements

10.
COLLABORATIVE ARRANGEMENT

To increase the use of our technologies in the ammunitions market, we have entered into a Strategic Alliance Agreement with General Dynamics Ordnance and Tactical Systems to develop and market training, illumination and marking payloads for the U.S. military that use our chemiluminescent technology. This Strategic Alliance Agreement does not define specific projects to be completed; before such a project begins, the Strategic Alliance Agreement will be supplemented by additional agreements that define the project and each party’s role and responsibilities. Such supplemental agreements will dictate how related costs and revenues will be shares by the parties and how those costs and revenues, if any, would be reported by us. As of June 30, 2010, no such specific projects have begun.

11.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash Paid for Interest and Income Taxes (all amounts in thousands):

 
Six Months Ended June 30,
 
 
2010
 
2009
 
Interest
  $ 1,174     $ 970  
Income taxes
    194       395  

Non-Cash Investing and Financing Activities (all amounts in thousands):

   
Six Months Ended June 30,
 
   
2010
   
2009
 
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 )

12.
SUBSEQUENT EVENTS
 
In June 2010, TD Bank, N.A. agreed to extend a deadline from June 30, 2010 to July 31, 2010 for our requirement to receive at least $3.0 million in new subordinated debt or from an equity offering and to use the net proceeds from that subordinated debt or equity offering to reduce the outstanding principal balance on our senior debt held by TD Bank, N.A.
 
On July 29, 2010 we issued $8.5 million in convertible notes due in 2014. The convertible notes require monthly interest payments starting on September 1, 2010 at a rate of 11% per annum and mature on March 19, 2014, unless earlier repurchased or converted. No principal payments are required on these convertible notes until maturity. We have the right to prepay the loan in whole or in part at any time without penalty. The notes are convertible at any time into 2,666,667 shares of our common stock at a conversion price of approximately $3.19 per share.  In addition, the lenders received 160,000 warrants for our common stock, exercisable at the lenders’ option for $2.00 per share. The warrants have a five-year term. The convertible notes are senior secured obligations and rank junior to all senior debt held by TD Bank, N.A. but senior to all other remaining long-term debt including existing and future subordinated debt.

We used $7.2 million of the net proceeds of the convertible notes to reduce, but not eliminate, the outstanding principal balance on our senior debt held by TD Bank, N.A. Also, we used $500,000 of the net proceeds of the convertible notes to reduce the outstanding principal balance on our line of credit with TD Bank, N.A. As part of this transaction, the remaining unpaid TD Bank, N.A. senior debt was modified to have reduced principal payments but a higher interest rate.  Because the convertible notes and the modified TD Bank, N.A. senior debt charge a higher interest rate than the pre-modified TD Bank, N.A. senior debt, we expect that our interest expense will be higher than it would have been had we not partially repaid and modified the TD Bank, N.A. senior debt. Because the convertible notes and the modified TD Bank, N.A. senior debt require lower monthly principal payments than the pre-modified TD Bank, N.A. senior debt, we expect our future debt levels to be higher than they would have been had we not partially repaid and modified the TD Bank, N.A. senior debt. We do expect the lower monthly principal payments to significantly improve our short-term cash flows.

Simultaneous with the repayment of a portion of the TD Bank, N.A. senior debt, our interest rate swaps (see Note 5) were modified to incorporate this repayment since it was not anticipated in the original swap agreement. This allows us to continue to assume that these hedges meet the criteria for the shortcut method for assessing hedge effectiveness; therefore, the hedge is assumed to still be 100% effective.

Simultaneous with the issuance of the convertible notes, we amended our management agreement with Selway Capital, LLC (see Note 8) .

 
14

 

ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations in conjunction with our interim condensed consolidated financial statements and the accompanying notes to those financial statements included elsewhere in this Quarterly Report on Form 10-Q. 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.

Company Overview

We primarily produce products based on technologies whereby light is generated through a chemical reaction known as chemiluminescence. CTI manufactures and sells such chemiluminescent products, in addition to reflective and photoluminescent products, to military, commercial and public safety markets.  Our base product is known as a ‘‘light stick’’ and is typically 6 inches in length. A light stick is a translucent flexible plastic tube that is partly filled with one chemical ingredient and also with a glass container (‘‘ampoule’’) that contains a complementary reactive chemical. When the tube is bent enough to break the glass ampoule, the chemicals contained within the plastic tube mix and light is generated. Additionally, we manufacture and sell a component of 40mm training ammunition; sales of these components have been an increasing source of our revenues in recent years.  Also, we produce reflective (patches) and reflective plus photoluminescent (fire tape) products. Based on our customers’ specifications, our products are manufactured in varying shapes, sizes and functions, and provide light in different colors, intensity and durations.

We have one subsidiary: Cyalume Technologies, Inc. (“CTI”), whose headquarters are also located in West Springfield, MA. CTI has one subsidiary, Cyalume Technologies, SAS (“CTSAS”), located in Aix-en-Provence, France. Our products are manufactured at both the West Springfield and Aix-en-Provence locations.

Material Changes in Results of Operations – 3 Months Ended June 30, 2010 versus the 3 Months Ended June 30, 2009
 
Revenues :   For the three-month period ended June 30, 2010, sales were higher than for the comparable period in 2009 due primarily to the volume of units sold. Price increases in the fourth quarter of 2009 provided some of the additional revenues for the most recent 3-month period.
 
Cost of goods sold: For the three-months ended June 30, 2010, cost of goods sold was consistent with the comparable period in 2009 despite the increase in units sold discussed above.  Gross margin for the quarter was 50.9% compared to a 42.5% gross margin for the comparable prior-year period. 2010 margin improved partially due to price increases implemented in late 2009. Gross margin in the three months ended June 30, 2009 was depressed due to lower-than-normal sales of high margin chemical light sticks and the amortization of the inventory step-up to fair market value arising from our acquisition of CTI in December 2008.
 
Expenses: General and administrative expenses decreased 9.0% primarily due to expenses related to (i) the accrual of share-based awards in the second quarter of 2009 that did not recur in the second quarter of 2010 and (ii) lower fees related to SEC filings and other professional services, partially offset by management fees relating to our management agreement with Selway Capital, LLC, which had not yet been entered into as of June 30, 2009. Research and development expenses decreased primarily due to lower patent defense fees incurred.
 
Amortization of intangible assets: In December 2009, we recorded impairments on our trademark and customer relationship intangible assets that significantly reduced our amortization of intangible assets in the three months ended June 30, 2010 compared to same period in the prior year.
 
Provision for (benefit from) income taxes increased significantly for the three months ended June 30, 2010 as compared to the three months ended June 30, 2009 due to our generation of net income in 2010 and operating losses in 2009.

Other loss (income), net, consists primarily of the effects of changes in foreign exchange rates.

Material Changes in Results of Operations – 6 Months Ended June 30, 2010 versus the 6 Months Ended June 30, 2009
 
Revenues :   For the six-month period ended June 30, 2010, sales were higher than for the comparable period in 2009 due primarily to the volume of units sold. Price increases in the fourth quarter of 2009 provided some of the additional revenues for the 2010 period.
 
Cost of goods sold: For the six-months ended June 30, 2010, cost of goods sold was 9.2% higher than the comparable period in 2009 due to the increase in units sold discussed above.  Gross margin for the period was 49.6% compared to a 42.2% gross margin for the comparable prior-year period. 2010 margin improved partially due to price increases implemented in late 2009. Gross margin in the six months ended June 30, 2009 was depressed due to lower-than-normal sales of high margin chemical light sticks and the amortization of the inventory step-up to fair market value arising from our acquisition of CTI in December 2008.

 
15

 
 
Expenses: General and administrative expenses increased 6.3% primarily due to expenses related to (i) the accrual of share-based awards in 2010, which were not accrued in 2009 and (ii) management fees relating to our management agreement with Selway Capital, LLC, which had not yet been entered into as of June 30, 2009, partially offset by lower legal fees related to SEC filings. Research and development expenses decreased primarily due to lower patent defense fees incurred.
 
Amortization of intangible assets: In December 2009, we recorded impairments on our trademark and customer relationship intangible assets that significantly reduced our amortization of intangible assets in the six months ended June 30, 2010 compared to same period in the prior year.
 
Provision for (benefit from) income taxes increased significantly for the six months ended June 30, 2010 as compared to the six months ended June 30, 2009 due to our generation of net income in 2010 and operating losses in 2009.

Other loss (income), net, consists primarily of the effects of changes in foreign exchange rates.

Material Changes in Financial Condition – June 30, 2010 versus December 31, 2009

Assets, other than cash : Assets, other than cash, were $94.3 million at June 30, 2010 compared to $96.2 million at December 31, 2009. The decrease is primarily due to intangible assets amortization combined with a decrease in inventories resulting from increased sales activity. The remaining changes in asset values are the result of normal business activities.

Liabilities: Liabilities were $40.7 million at June 30, 2010, compared to $42.7 million at December 31, 2009. The decrease is due to payments made on notes payable. Our derivatives liability increased since December 31, 2009 primarily due to a decrease in estimated future LIBOR rates used to estimate the fair value of our pay fixed/receive LIBOR interest rate swaps. The remaining changes are the result of normal business activities.

Liquidity and Capital Resources

Cash on hand was $2.6 million at June 30, 2010 and $2.0 million at December 31, 2009. The increase since December 31, 2009 resulted primarily improved sales levels offset by payments on debt and for property, plant and equipment.

During the six months ended June 30, 2010, we did not sell any shares of our common stock. However 278,500 common shares were issued for stock-based compensation awards.

On July 29, 2010 we issued $8.5 million in convertible notes due in 2014. The convertible notes require monthly interest payments starting on September 1, 2010 at a rate of 11% per annum and will mature on March 19, 2014, unless earlier repurchased or converted. No principal payments are required on these convertible notes until maturity. We have the right to prepay the loan in whole or in part at any time without penalty. The notes are convertible at any time into 2,666,667 shares of our common stock at a conversion price of approximately $3.19 per share.  In addition, the lenders received 160,000 warrants for our common stock, exercisable at the lenders’ option for $2.00 per share. The warrants have a five-year term. The convertible notes are senior secured obligations and rank junior to all senior debt held by TD Bank, N.A. but senior to all other remaining long-term debt including existing and future subordinated debt.

We used $7.2 million of the net proceeds of the convertible notes to reduce, but not eliminate, the outstanding principal balance on our senior debt held by TD Bank, N.A. Also, we used $500,000 of the net proceeds of the convertible notes to reduce the outstanding principal balance on our line of credit with TD Bank, N.A. As part of this transaction, the remaining unpaid TD Bank, N.A. senior debt was modified to have reduced principal payments but a higher interest rate.  Because the convertible notes and the modified TD Bank, N.A. senior debt charge a higher interest rate than the pre-modified TD Bank, N.A. senior debt, we expect that our interest expense will be higher than it would have been had we not partially repaid and modified the TD Bank, N.A. senior debt. Because the convertible notes and the modified TD Bank, N.A. senior debt require lower monthly principal payments than the pre-modified TD Bank, N.A. senior debt, we expect our future debt levels to be higher than they would have been had we not partially repaid and modified the TD Bank, N.A. senior debt. We do expect the lower monthly principal payments to significantly improve our short-term cash flows.

We own interest rate swaps on a majority of our senior debt with TD Bank, N.A. in order to minimize the effect of variable interest rates charged on that TD Bank, N.A. debt.

Forecasted principal and interest payments on debt for the next 12 months are $10.8 million and will be funded from operating cash flows and the net proceeds of the convertible notes issued on July 29, 2010.  All operating and capital expenditures are expected to be funded completely from operating cash flows.

 
16

 

Off-Balance Sheet Arrangements

Other than immaterial operating leases, we did not have any off-balance sheet arrangements during 2010 or 2009.

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.

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, 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 benefit 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 an annual impairment review, and, if conditions warrant, an interim impairment review.  Impairment charges, if any, are recorded in the period in which the impairment is determined.

Intangible Assets

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

 
17

 

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 recorded and reserves 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 write-offs to be materially different than reported inventory reserve balances.

Foreign Operations and Currency

Accounts of our foreign subsidiary are recorded using its local currency (the euro) as the functional currency. For consolidation purposes, income statement accounts are converted to U.S. dollars using the average exchange rate for the monthly period being reported. 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 a component of accumulated other comprehensive income or loss. Gains and losses resulting from transactions which are denominated in other than the functional currencies are reported as other income or expenses in the statement of operations in the period the gain or loss occurred.

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 4.
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 June 30, 2010. 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 June 30, 2010.

Changes in Internal Control over Financial Reporting

During the three months ended June 30, 2010, we finished validation of and began using a new enterprise resource planning (“ERP”) system that significantly changed the manner in which we capture and record much of the accounting-related information and transactions throughout our organization. This new ERP system was not implemented as a result of a weakness or deficiency in internal controls in our previous ERP system. There were no other changes in our internal control over financial reporting that occurred during the three months ended June 30, 2010 that materially affected, or are 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.

 
18

 
 
On January 23, 2006, before we owned CTI, the former owners of CTI (from whom we purchased CTI) (the “Former Owners”) acquired all of the outstanding capital stock of Omniglow Corporation (the “Transaction”) and changed the name of the company to Cyalume Technologies, Inc. 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 sought compensatory damages of $1.4 million, to be trebled, and recovery of costs and legal fees. CTI filed for damages of $368,000 against the Omniglow Buyers.  These proceedings are known as Civil Action No. 06-706 in Superior Court of the Commonwealth of Massachusetts.

On December 19, 2008, while Civil Action 06-706 was still unresolved, we acquired CTI (“the Acquisition”). According to the Acquisition’s Stock Purchase Agreement between the Former Owners and us, the Former Owners retained the responsibility for paying for all costs and liabilities associated with Civil Action 06-706.

On June 11, 2010, CTI received preliminary Findings of Fact, Rulings of Law and Order for Judgment (the “Findings”) regarding Civil Action No. 06-706.  Pursuant to the Findings, the court found in favor of the Omniglow Buyers and ruled that the Omniglow Buyers were entitled to calculable damages of approximately $828,000 from CTI, in addition to damages for certain lost profits that have not been calculated, costs and attorney’s fees. These additional damages, costs and fees have not yet been calculated or determined by the court.

CTI is considering its alternatives relating to the suit in light of the Findings. We have not recorded or reported any amounts since  payment of damages or loss is not yet deemed to be probable since all of our legal remedies have not been exhausted.

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

Recent Sales of Unregistered Securities and Use of Proceeds from Registered Securities

None.

Purchases of Equity Securities by the Company and Affiliated Purchasers

None.

ITEM 3.
DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.
[REMOVED AND RESERVED]

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 June 30, 2010.

There is no information to report under this Item in lieu of reporting that information on Form 8-K.
 
 
19

 

 
ITEM 6.    EXHIBITS

Exhibit
Number
 
Description
10.1
 
Extension of deadline contained in the Second Amendment to the Credit Agreement and Limited Waiver with TD Bank, N.A. (1)
10.2
 
Extension of deadline contained in the Second Amendment to the Credit Agreement and Limited Waiver with TD Bank, N.A. (2)
10.3
 
Subordinated Loan Agreement dated as of July 29, 2010 among Cyalume Technologies, Inc., Cyalume Technologies Holdings, Inc., the Lenders and other financial institutions or other entities from time to time parties thereto and Granite Creek Partners Agent, LLC as Agent. (3)
10.4
 
Subordinated Security and Pledge Agreement dated as of July 29, 2010 between Cyalume Technologies, Inc. and Granite Creek Partners Agent, LLC. (3)
10.5
 
Subordinated Guaranty Agreement dated as of July 29, 2010 entered into by Cyalume Technologies Holdings, Inc. for the benefit of Granite Creek Partners Agent, LLC. (3)
10.6
 
Subordinated Stock Pledge Agreement dated as of July 29, 2010 entered into by Cyalume Technologies Holdings, Inc.  (3)
10.7
 
Amended and Restated Revolving Credit and Term Loan Agreement dated as of July 29, 2010 among Cyalume Technologies, Inc., Cyalume Technologies Holdings, Inc., the Lenders and the other financial institutions or other entities from time to time parties thereto and TD Bank, N.A., a national banking association, as Agent and as Lender. (3)
10.8
 
Form of Warrant issued to Granite Creek FlexCap I, L.P. (3)
10.9
 
Form of Warrant issued to Patriot Capital II, LP. (3)
10.10
 
Registration Rights Agreement between CTHI and Granite Creek FlexCap I, L.P. (3)
10.11
 
Registration Rights Agreement between CTHI and Patriot Capital II, LP. (3)
10.12
 
Amended Management Agreement with Selway Capital, LLC. (3)
10.13
*
Employment agreement of Monte Pickens, Executive Vice President, Cyalume Technologies, Inc.
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 April 30, 2010 and filed with the Commission May 6, 2010.
(2)
Incorporated by reference to the Current Report on Form 8-K dated June 30, 2010 and filed with the Commission July 8, 2010.
(3)
Incorporated by reference to the Current Report on Form 8-K dated July 29, 2010 and filed with the Commission August 3, 2010.
 
 
20

 

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: August 11, 2010
By:
/s/  DEREK DUNAWAY
     
   
Derek Dunaway, Chief Executive Officer
   
 (Principal Executive Officer)

Date: August 11, 2010
By:
/s/  MICHAEL BIELONKO
     
   
Michael Bielonko, Chief Financial Officer
   
 (Principal Financial Officer)
 
 
21

 
 
Exhibit 10.13

EMPLOYMENT AGREEMENT
 
This Employment Agreement (the “Agreement”) is made and entered into between Cyalume Technologies, Inc., a Delaware Corporation (the “Company”), and Monte L. Pickens, (the “Employee”).
 
WHEREAS, the Company desires to employ Employee as Executive Vice President of the Company, and Employee desires to accept such employment upon the terms and conditions set forth herein.
 
NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the parties hereto agree as follows:
 
1.
TERM .  This Agreement shall be for an initial term of three years, beginning on August 1, 2010. The Agreement shall continue unless and until terminated by either party upon thirty days’ written notice prior to the Agreement’s anniversary/expiration date, or until terminated pursuant to Section 8 of this Agreement.
 
2.
DUTIES OF EMPLOYEE .
 
(a)
Duties . Employee shall be employed as Executive Vice President.  Employee’s duties shall be such executive, managerial, administrative, and professional duties as are commensurate with the position of Executive Vice President, and as shall be assigned by the President and Chief Operating Officer or the Board of Directors of the Company, or by their authorized designees. The Employee may delegate duties to other employees of the Company as he reasonably determines is in the best interest of the Company, consistent with the general authority and power given to him hereunder.  The principal place of employment of Employee shall be in the Leesburg, VA area.
 
(b)
Exclusive Employment . Employee shall devote the whole of his business time, attention and abilities to carrying out his duties hereunder.
 
(c)
Loyal and Conscientious Performance . Employee agrees that to the best of his ability and experience, and in compliance with all applicable laws and the Company’s policies, Certificate of Incorporation and Bylaws, as they may be amended from time to time, he will at all times loyally and conscientiously perform all the duties and obligations required of him by the terms of this Agreement. Employee further agrees he shall use his best efforts to promote the interests and reputation of the Company and its affiliates and not do anything which is to the detriment of the Company or its affiliates.
 
3.
COMPENSATION AND BENEFITS .
 
(a)
Salary . For all the services to be rendered by Employee in any capacity hereunder, the Company shall pay Employee, in equal installments consistent with the Company’s practices for its employees, salary and compensation as set forth in Schedule 1 attached to this Agreement and incorporated herein. The Company shall have the ability to withhold from the compensation otherwise due to Employee under this Agreement any amounts required to be withheld from compensation from time to time under applicable law.
 
 
 

 
 
 
(b)
Severance Benefits .
 
 
(i)
In the event Employee’s employment with the Company is terminated by the Company other than as a result of death, disability (as defined in Section 8(a)(ii)), retirement or for “cause” (as defined in Section 8(a)(iii)), or if Employee’s employment with the Company is terminated by Employee for the reason set forth in Section 8(d), and upon execution by Employee of a separation agreement prepared by the Company, the Company will pay Employee, at normal payroll intervals for twelve (12) months, a sum equal to the Employee’s annual Base Salary in effect at the time of termination hereunder, less applicable deductions and withholdings.
 
 
(ii)
In the event that Employee elects to terminate this Agreement for any reason other than that set forth in Sections 3(b)(ii)(C) or  8(d), or in the event that this Agreement is terminated due to Employee’s death or disability, the Company shall not be obligated to pay to Employee any severance payments whatsoever and Employee shall be entitled only to that Base Salary and those benefits which he has earned through the date of such termination.
 
(c)
Fringe Benefits . So long as Employee remains in the employ of the Company, Employee shall be provided those benefits set forth in Schedule 1 to this Agreement. Employee shall also receive such additional benefits as may be authorized from time to time by the Company’s Board of Directors.
 
4.
NONCOMPETITION BY EMPLOYEE .
 
 
(a)
During the term of this Agreement and for a period of two (2) years after Employee has ceased to be employed by Company for any reason, Employee shall not, without the prior written consent of a duly authorized officer of Company, directly or indirectly (i) engage in the business of, or (ii) assist or have an interest in (whether as proprietor, partner, investor, stockholders, officer, director or any type of principal whatsoever), or (iii) enter the employment of or act as an agent, advisor, or consultant to any person, firm, partnership, association, corporation, business organization, entity or enterprise that is, or is to become, directly or indirectly, engaged in any business actually or potentially competitive with that of Company in any area or territory in which Company offers its services or products.
 
 
(b)
During the term of this Agreement, and for a period of two (2) years after Employee has ceased to be employed by Company for any reason, Employee shall not, without the prior written consent of a duly authorized officer of Company, solicit from any person, company, firm or organization, or any affiliate of the foregoing, which was or is a client or associated firm of Company or which Company was soliciting as a client or associated firm of Company during any of the twelve (12) months immediately preceding the termination or expiration of the Agreement, any business substantially similar to that done by Company, including but not limited to any business Employee was soliciting or on which he worked while employed by Company.
 
 
2

 
 
5.
CONFIDENTIALITY . Employee acknowledges, understands and agrees that all trade secrets and information relating to the business of the Company and/or its affiliates, including without limitation, procedures, product information, manufacturing techniques or processes, expertise, records, customer or prospect lists and information, vendor lists and information, supplier lists and information, internal operating forms, financial information or accounting methods, systems, books, manuals, employee information, any confidential information concerning the business, the Company, its affiliates, or the business, policies or operations of the business, the Company or its affiliates which Employee may have learned, possessed or controlled on or prior to the date hereof or which Employee may learn, possess or control during the term of Employee’s continued employment by the Company or any of its affiliates (as an employee, consultant, agent or otherwise) (collectively, “Trade Secrets”) are confidential and shall remain the sole and exclusive property of the Company and its affiliates. Trade Secrets include both written information and information not reduced to writing. Except as may be required pursuant to any law or the order of a court, or except as may be public knowledge (which shall not have become public knowledge as a result of any action of Employee), Employee shall not, at any time, retain, duplicate, remove from the business premises of Company or any of its affiliates, make use of, other than in the ordinary course of fulfilling his duties as an employee of the Company, divulge or otherwise disclose, directly or indirectly, any Trade Secrets. Employee shall not publish or disclose, and shall exercise his best efforts to prevent others from publishing or disclosing, any Trade Secrets and he shall not use or attempt to use any such knowledge or information which he may have or acquire in any manner which may injure or cause loss, whether directly or indirectly, to the Company or its affiliates or use his personal knowledge or influence over any customers, clients, suppliers or contractors of the Company or its affiliates so as to take advantage of the Company’s or its affiliate’s trade or business connections or utilize information confidentially obtained by him.
 
6.
NON-SOLICITATION . Employee hereby covenants and agrees that, at all times during his employment with the Company and for a period of two (2) years immediately following his termination for any reason, Employee shall not employ or seek to employ any person employed at the time by the Company or any of its affiliates, or otherwise engage or entice, either directly or indirectly, such person to leave such employment.
 
7.
VIOLATION OF AGREEMENT .
 
 
(a)
The restrictions set forth in Sections 4, 5 and 6 shall extend to any and all activities of the Employee, whether alone or together with or on behalf of or through any other person or entity.
 
 
(b)
Employee’s obligations under Sections 4, 5 and 6 shall survive termination of this Agreement and of Employee’s employment with the Company.
 
 
3

 
 
 
(c)
Employee acknowledges that the restrictions contained in Sections 4, 5 and 6, in view of the nature of the business in which Company is engaged, are reasonable and necessary to protect the legitimate interests of Company.  Employee understands that the remedies at law for his violation of any of the covenants or provisions of Sections 4, 5 and 6 will be inadequate, that such violations will cause irreparable injury within a short period of time, and that Company shall be entitled to preliminary injunctive relief and other injunctive relief against such violation.  Such injunctive relief shall be in addition to, and in no way in limitation of, any and all other remedies that Company shall have in law and equity for the enforcement of those covenants and provisions.  Employee further acknowledges that should he violate any of the covenants or provisions of Sections 4, 5 and 6, he will reimburse Company for its reasonable costs and attorneys’ fees incurred to enforce the terms of this Agreement.
 
8.
TERMINATION .
 
 
(a)
The Employee’s employment hereunder may be terminated by the Company immediately upon the occurrence of any of the following events, and the Company shall have no obligations to the Employee for any period after the effective date of such termination, except vested benefits or as otherwise provided in Section 3 herein:
 
 
(i)
The death of Employee.
 
 
(ii)
A mental or physical illness or injury that prevents Employee from performing his duties hereunder for a period of 90 consecutive days or for 120 days in any 360 day period, or the Employee has been declared by a court of competent jurisdiction to be mentally incompetent or incapable of managing his affairs.
 
 
(iii)
For “cause” which, for the purposes of this Section, shall mean:
 
 
(A)
Continued neglect or failure to perform his duties and responsibilities; or
 
 
(B)
Formally being charged, either criminally or civilly, with committing fraud, misappropriation or embezzlement, whether or not in the performance of Employee’s duties as an employee of the Company; or
 
 
(C)
Violations of any law which violation materially affects the Employee’s performance of his duties to the Company; or
 
 
(D)
The conviction of, or plea of guilty or nolo contendere to, a felony or crime involving moral turpitude; or
 
 
(E)
Willfully engaging in conduct materially injurious to the Company or its affiliates; or
 
 
(F)
Diverting any business opportunity of the Company or its affiliates for Employee’s direct or indirect personal gain; or
 
 
(G)
Failure to observe or perform the covenants and agreements contained in this Agreement, including but not limited to those contained in Sections 4, 5 and 6 of this Agreement.
 
 
4

 
 
 
(b)
The Employee’s employment hereunder may be terminated at any time after August 1, 2012 by either party.
 
 
(c)
The Employee’s employment hereunder may be terminated by either party with thirty (30) days of written notice thereof.  Notwithstanding the foregoing, if Employee’s employment hereunder is terminated without “cause” during the initial term of this Agreement, Employee shall be paid any applicable severance benefits as set forth in Section 3(b) less applicable deductions and withholdings.
 
 
(d)
The Employee may terminate his employment hereunder for Good Reason as defined in Section 3(b)(ii)(c) or   upon any breach by the Company of any material provision of this Agreement not cured within sixty (60) days of written notice thereof.
 
 
(e)
Except as may otherwise be set forth herein, in the event of termination of the Employee’s employment by the Company as permitted under clause (a) of this Section, Employee shall be entitled only to his Base Salary and other compensation and benefits earned through the date of termination.
 
 
(f)
Upon the termination of his employment hereunder for any reason whatsoever, Employee shall immediately deliver to the Company all documents, statistics, accounts, records, programs and other items of whatever nature or description (the “Documents”) which may be in his possession or under his control which relate in any way to the Trade Secrets or the business or affairs of the Company or of any of its affiliates, and no copies of any such Documents or any part thereof shall be retained by him.
 
 
(g)
In the event of the termination of Employee’s employment under this Agreement, Employee shall be deemed to have resigned from all positions held in the Company. Upon request of the Company, Employee shall promptly sign any and all documents reflecting such resignations as of the date of termination of his employment.
 
9.
REPRESENTATIONS . Employee hereby represents and warrants that this Agreement constitutes his valid and binding obligation enforceable in accordance with its terms and the execution, delivery and performance of this Agreement does not violate any agreement, arrangement or restriction of any kind to which Employee is a party or by which he is bound.
 
10.
MISREPRESENTATION . Neither party hereto shall knowingly at any time make any untrue statement in relation to the other or any of their affiliates and in particular Employee shall not after the termination of his employment hereunder wrongfully represent himself as being employed by or connected with the Company or any affiliate of the Company.
 
11.
REIMBURSEMENT OF EXPENSES . The Company shall reimburse Employee for all ordinary and necessary out-of-pocket expenses reasonably incurred by Employee on behalf of the business of the Company. Employee agrees that expense reports must be submitted to obtain reimbursement of expenses as well as presentation of such supporting documentation as the Company may reasonably require. Employee further agrees to submit with expense reports such records and logs as may be required by the relevant taxing authorities for the substantiation of each such business expense as a deduction on the Company’s income tax returns.
 
 
5

 
 
12.
INVENTIONS, ETC .
 
 
(a)
It shall be part of the normal duties of Employee at all times to consider in what manner and by what new methods or devices the products, services, processes, equipment or systems of the Company or any of its affiliates with which he is concerned or for which he is responsible might be improved, and promptly to give to the President of the Company or Board of Directors full details of any invention or improvement which he may from time to time make or discover in the course of his duties, and to further the interests of the Company with regard thereto. Subject only to any contrary provisions of the laws of the United States or the Commonwealth of Massachusetts, all such materials, inventions, improvements, methods, products, services, equipment or systems shall be deemed to be “works made for hire”, and to the extent such items are not works made for hire, the Employee hereby irrevocably grants and assigns such materials, inventions, improvements, methods, products, services, equipment or systems to the Company which shall be entitled, free of charge, to the sole ownership of any such invention or improvement.
 
 
(b)
Employee shall, if and when required so to do by the Company, at the expense of the Company, apply or join with the Company in applying for patents or other protection in any part of the world for any such discovery, invention or process as aforesaid and shall at the expense of the Company, execute and do or cause to be done all instruments and things reasonably necessary for vesting the said patent or other protection when obtained and all right, title and interest to and in the same in the Company or in such other person as the Company may designate.
 
 
(c)
For the purpose of this clause Employee hereby irrevocably authorizes the company as his attorney in his name to execute any documents or take any actions which are required in, order to give effect to the provisions of this Section and the Company is hereby empowered to appoint and remove at its pleasure any person as agent and substitute for and on behalf of the Company in respect of all or any of the matters aforesaid.
 
13.
NOTICES . Any notices to be given hereunder by either party to the other may be effectuated either by personal delivery in writing, by electronic facsimile transmission, by commercial overnight courier or by mail, postage prepaid, with return receipt requested. Notices shall be addressed to the parties as follows:
 
If to the Company:

Cyalume Technologies, Inc.
96 Windsor Street
West Springfield, MA, 01089
Attention: President

with a copy to:
 
 
6

 
 
Bowditch & Dewey, LLP
311 Main Street, P.O. Box 15156
Worcester, MA 01615-0156
Attention: David M. Felper, Esquire

If to Employee:

Monte L. Pickens
16593 Ferriers Court
Leesburg, VA  20176

or to such other addresses as either the Company or Employee may designate by written notice to each other. Notices delivered personally shall be deemed duly given on the date of actual receipt; mailed notices shall be deemed duly given as of the fifth (5 th ) day after the date so mailed. Notices hereunder may be delivered by electronic facsimile transmission (fax) if confirmation by sender is made within three (3) business days by mail or personal delivery.

14.
ATTORNEYS’ FEES . If any party shall bring an action to enforce this Agreement, each party will bear her/his/its own attorneys’ fees and costs.
 
15.
WAIVER OF BREACH . The waiver by any party to a breach of any provision in this Agreement cannot operate or be construed as a waiver of any subsequent breach by a party.
 
16.
SEVERABILITY . The invalidity or unenforceability of any particular provision in this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed in all respects as if the invalid or unenforceable provision were omitted.
 
17.
ENTIRE AGREEMENT . Except as otherwise provided herein, this Agreement covers the entire understanding of the parties as to the employment of Employee, superseding all prior understandings and agreements, and no modification or amendment of its terms and conditions shall be effective unless in writing and signed by the parties or their respective duly authorized agents.
 
18.
GOVERNING LAW . This Agreement shall be interpreted, construed and governed according to the laws of Delaware, without giving effect to principles of conflicts or choice of laws of Delaware or of any other jurisdiction.
 
19.
CONSENT TO JURISDICTION . Employee hereby irrevocably submits to the jurisdiction of any court of Delaware or any federal court sitting in the State of Delaware over any suit, action or proceeding arising out of or relating to this Agreement. Employee hereby agrees that a final judgment in any such suit, action or proceeding brought in any such court, after all appropriate appeals, shall be conclusive and binding upon him.
 
20.
SUCCESSORS AND ASSIGNS . This Agreement shall be binding upon and inure to the benefit of the parties hereto and their successors, permitted assigns, legal representatives and heirs, but neither this Agreement nor any rights hereunder shall be assignable by any of its parties except as permitted by this Section. Employee agrees that this Agreement may be assigned or transferred by operation of law by the Company upon a sale, merger, reorganization or other business combination of or involving the Company; provided, however, that (i) such assignee or other successor to the Company shall assume all obligations of the Company hereunder and (ii) that Employee shall perform all services required pursuant to this Agreement for any such assignee or successor.
 
 
7

 
 
21.
MISCELLANEOUS . The Section headings of this Agreement are for convenience of reference only and do not form a part hereof and do not in any way modify, interpret, or construe the intentions of the parties. This Agreement may be executed in one or more counterparts and all such counterparts shall constitute one and the same instrument.
 
22.
RIGHT OF SET-OFF . The Company may at any time offset against any compensation or other remuneration due or to become due to the Employee, or anyone claiming through or under the Employee, any debt or debts due or to become due from the Employee to the Company.
 
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.
 
   
[COMPANY]
 
By:
/s/ Derek Dunaway
 
Name: 
Derek Dunaway
 
Title:
Chief Executive Officer
     
   
/s/ Monte Pickens
 
 
8

 

SCHEDULE 1

TO EMPLOYMENT AGREEMENT OF
Monte L. Pickens
 
1.
Salary   . The Company shall pay Employee an annual base salary (“Base Salary”) of Two-hundred fifty thousand ($250,000.00), at normal payroll intervals and less applicable deductions and withholdings, which shall be subject to annual adjustments at the sole discretion of the Board of Directors of the Company.
 
2.
Signing Bonus.   Upon signing Employment Agreement, Employee will be given 15,000 options.  Such options will be vested over a period of 3 years.
 
3.
Cash Bonus and Equity Bonus Awards
 
Cash Bonus . For purposes of this Section, cash bonuses shall include all payments under all bonus, incentive or other similar programs maintained by the Company for which the Employee qualifies.
 
Cash Bonus (Up to 35% of Base Pay)
Criteria
 
Maximum % of
Total Award
 
Award
Revenue goals
 
25
 
100% if the Company achieves 100% of Revenue goal; 80% if the Company achieves 80% of Revenue goal.  If the Company achieves percentages of its budgeted Revenue between the limits above, the bonus will be awarded pro rata.
         
EBITDA goals
 
25
 
100% if the Company achieves 100% of EBITDA goal; 80% if the Company achieves 80% of EBITDA goal.  If the Company achieves percentages of its budgeted EBITDA between the limits above, the bonus will be awarded pro rata.
         
Specific objectives
  
50
  
Percentage determined by CEO based on specific objective accomplishments
 
 
25% of the bonus will be based on the Company achieving overall Revenue targets
 
 
25% of the bonus will be based on the Company achieving overall EBITDA targets
 
The remaining 50% of bonus will be based on specific objectives relating to:
 
 
§
Development and execution of international military sales strategy
 
 
9

 
 
 
§
Development and execution of business plan for ammunition
 
 
§
Development and execution of the European military business plan
 
If the Employee’s employment is terminated by the Employer other than for “cause”, the Employee shall be entitled to receive a prorated bonus for the calendar year in which the Employee terminated employment and, if applicable, the prior calendar year, based on the number of full calendar months such Employee was employed by the Employer during such calendar year.
 
Equity Bonus . Employee shall be entitled to participate in the Company’s Restricted Stock Plan in accordance with the eligibility requirements for participation therein.  Nothing herein shall be construed so as to prevent the Company modifying or terminating the Restricted Stock Plan.
 
 
Employee shall be entitled to receive equity compensation of up to 40% of base salary in the form of restricted stock.  Such restricted stock shall be vested over a period of three years.
 
Equity Bonus (Up to 40% of Base Pay)
Criteria
 
Maximum % of
Total Award
 
Award
Revenue goals
 
25
 
100% if the Company achieves 100% of Revenue goal; 80% if the Company achieves 80% of Revenue goal.  If the Company achieves percentages of its budgeted Revenue between the limits above, the bonus will be awarded pro rata.
         
EBITDA goals
 
25
 
100% if the Company achieves 100% of EBITDA goal; 80% if the Company achieves 80% of EBITDA goal.  If the Company achieves percentages of its budgeted EBITDA between the limits above, the bonus will be awarded pro rata.
         
Specific objectives
  
50
  
Percentage determined by CEO based on specific objective accomplishments
  
The restricted stock award will be based on specific objectives relating to:
 
 
§
Development and execution of international military sales strategy
 
 
§
Development and execution of business plan for ammunition
 
 
§
Development and execution of the European military business plan
 
 
10

 
 
4.
Benefits . Employee shall be provided with health, life, and disability insurance coverages and other similar benefits substantially equivalent to those provided to employees of the Company from time to time, all in accordance with the standard policies of the Company.  Employee shall be permitted to participate in the Company’s 401(k) Retirement Plan.
 
5.
Paid Time Off/Sick Days . Employee shall be provided with three (3) weeks of PTO, accrued on a monthly basis, and with sick days in accordance with the standard policies of the Company. Employee shall be permitted to carry over any unused PTO into any subsequent period. Upon termination of employment, Employee shall not be paid for unused sick days, but will be paid for accrued, unused PTO.
 
 
11

 

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: August 11, 2010
/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: August 11, 2010
/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: August 11, 2010
/s/  DEREK DUNAWAY
   
 
Derek Dunaway, Chief Executive Officer
 
(the Principal Executive Officer)
 
Date: August 11, 2010
/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.