Cyalume
Cyalume Technologies Holdings, Inc. (Form: 10-Q, Received: 08/10/2011 16:20:05)


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, 2011

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  o     No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:

Large accelerated filer  ¨
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 3, 2011, there were outstanding 17,458,448 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 Income for the three months ended June 30, 2011 and 2010 (unaudited)
 
4
       
 
Condensed Consolidated Statements of Income for the six months ended June 30, 2011 and 2010 (unaudited)
 
5
       
 
Condensed Consolidated Balance Sheets as of June 30, 2011 (unaudited) and December 31, 2010
 
6
       
 
Condensed Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income for the six months ended June 30, 2011 (unaudited)
 
7
       
 
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010 (unaudited)
 
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
 
19
       
Item 1A.
Risk Factors
 
19
       
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
19
       
Item 3.
Defaults Upon Senior Securities
 
20
       
Item 4.
[Removed and Reserved]
 
20
       
Item 5.
Other Information
 
20
       
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 Income
(in thousands, except shares and per share information)
(Unaudited)

   
For the Three
   
For the Three
 
   
Months Ended
   
Months Ended
 
   
June 30,
   
June 30,
 
   
2011
   
2010
 
Revenues
  $ 8,680     $ 9,404  
Cost of goods sold
    4,429       4,610  
Gross profit
    4,251       4,794  
                 
Other expenses (income):
               
Sales and marketing
    1,136       776  
General and administrative
    1,620       1,253  
Research and development
    439       351  
Interest, net
    609       635  
Interest – related party
    17       16  
Amortization of intangible assets
    403       456  
Other, net
    (269 )     (81 )
Total other expenses, net
    3,955       3,406  
                 
Income before income taxes
    296       1,388  
Provision for (benefit from) income taxes
    (648 )     357  
Net income
  $ 944     $ 1,031  
                 
Net income per common share:
               
Basic
  $ .06     $ .07  
Diluted
  $ .06     $ .07  
                 
Weighted average shares used to compute net income per common share:
               
Basic
    16,507,117       15,458,737  
Diluted
    19,518,504       15,505,764  

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

 
4

 

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

   
For the Six
   
For the Six
 
   
Months Ended
   
Months Ended
 
   
June 30,
   
June 30,
 
   
2011
   
2010
 
Revenues
  $ 17,754     $ 18,289  
Cost of goods sold
    8,984       9,212  
Gross profit
    8,770       9,077  
                 
Other expenses (income):
               
Sales and marketing
    2,198       1,564  
General and administrative
    3,054       2,766  
Research and development
    938       733  
Interest, net
    1,208       1,300  
Interest – related party
    34       32  
Amortization of intangible assets
    805       912  
Other, net
    (216 )     (91 )
Total other expenses, net
    8,021       7,216  
                 
Income before income taxes
    749       1,861  
Provision for (benefit from) income taxes
    (467 )     669  
Net income
  $ 1,216     $ 1,192  
                 
Net income per common share:
               
Basic
  $ .08     $ .08  
Diluted
  $ .07     $ .08  
                 
Weighted average shares used to compute net income per common share:
               
Basic
    16,126,735       15,443,234  
Diluted
    16,858,727       15,513,433  

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,
       
   
2011
(unaudited)
   
December 31,
2010
 
Assets
           
Current assets:
           
Cash
  $ 5,669     $ 4,086  
Accounts receivable, net of allowance for doubtful accounts of $80 and $62 at June 30, 2011 and December 31, 2010, respectively
    3,186       1,925  
Inventories, net
    10,885       9,920  
Deferred income taxes
    358       931  
Prepaid expenses and other current assets
    475       429  
Total current assets
    20,573       17,291  
                 
Property, plant and equipment, net
    8,755       8,509  
Goodwill
    51,244       51,244  
Other intangible assets, net
    20,291       20,912  
Due from related party
    3,629        
Other noncurrent assets
    216       286  
Total assets
  $ 104,708     $ 98,242  
                 
Liabilities and Stockholders’ Equity
               
Current liabilities:
               
Current portion of notes payable
  $ 3,818     $ 1,453  
Notes payable due to related parties
    1,165        
Accounts payable
    2,263       2,185  
Accrued expenses and other current liabilities
    2,095       2,362  
Income taxes payable
    22       700  
Total current liabilities
    9,363       6,700  
                 
Notes payable, net of current portion
    19,769       22,715  
Notes payable due to related parties
          1,131  
Deferred income taxes
    6,670       8,147  
Other noncurrent liabilities
    4,040       531  
Total liabilities
    39,842       39,224  
                 
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; 16,725,614 and 15,748,570 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively
    17       16  
Additional paid-in capital
    93,507       89,452  
Accumulated deficit
    (28,564 )     (29,780 )
Accumulated other comprehensive loss
    (94 )     (670 )
Total stockholders’ equity
    64,866       59,018  
Total liabilities and stockholders' equity
  $ 104,708     $ 98,242  

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
 
Balance at December 31, 2010
    15,748,570     $ 16     $ 89,452     $ (29,780 )   $ (670 )   $ 59,018     $  
Shares issued – private placement
    871,823       1       3,431                   3,432        
Shares issued – cashless option exercise
    450                                      
Shares issued – cashless warrant exercise
    6,060                                      
Repurchase and retirement of common stock
    (24,539 )           (120 )                 (120 )      
Share-based compensation expense
    123,250             737                   737        
Adjustment to the accounting for warrants issued in July 2010 in conjunction with issuance of subordinated term loan
                7                   7        
Foreign currency translation adjustments
                            572       572       572  
Unrealized gain on cash flow hedges, net of taxes of $(2)
                            4       4       4  
Net income
                      1,216             1,216       1,216  
Comprehensive income
                                      $ 1,792  
Balance at June 30, 2011
    16,725,614     $ 17     $ 93,507     $ (28,564 )   $ (94 )   $ 64,866          
 
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,
 
   
2011
   
2010
 
Cash flows from operating activities:
           
Net income
  $ 1,216     $ 1,192  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Depreciation of property, plant and equipment
    522       329  
Amortization
    999       1,065  
Provision for deferred income taxes
    (990 )     313  
Stock-based compensation expense
    737       601  
Other non-cash expenses
    138       130  
Changes in operating assets and liabilities:
               
Accounts receivable
    (1,227 )     34  
Inventories
    (800 )     187  
Prepaid expenses and other current assets
    (37 )     (70 )
Accounts payable and accrued liabilities
    (329 )     (15 )
Income taxes payable
    (721 )     615  
Net cash provided by (used in) operating activities
    (492 )     4,381  
                 
Cash flows from investing activities:
               
Purchases of long-lived assets
    (686 )     (1,003 )
Net cash used in investing activities
    (686 )     (1,003 )
                 
Cash flows from financing activities:
               
Proceeds from issuance of common stock
    3,432        
Net repayment of line of credit
          (500 )
Repayment of long-term notes payable
    (803 )     (2,081 )
Payments to reacquire and retire common stock
    (120 )      
Refund (payment) of debt issuance costs
          (50 )
Net cash provided by (used in) financing activities
    2,509       (2,631 )
                 
Effect of exchange rate changes on cash
    252       (170 )
Net increase in cash
    1,583       577  
Cash, beginning of period
    4,086       2,003  
Cash, end of period
  $ 5,669     $ 2,580  

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 8-03 of Regulation S-X. Accordingly, these interim condensed consolidated financial statements do not include all of the information and disclosures required by U.S. GAAP for complete financial statements.
 
The preparation of financial statements in conformity with U.S. GAAP 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, 2011, 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 2011 presentation. These reclassifications had no effect on operating results or net income 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, 2010 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, 2010.

2.
DESCRIPTION OF BUSINESS

These condensed consolidated financial statements and footnotes include the financial position and results of operations of Cyalume Technologies Holdings, Inc. (“Cyalume”), a holding company that owns 100% of the stock of Cyalume Technologies, Inc. (“CTI”). CTI is the sole shareholder of Cyalume Technologies, SAS (“CTSAS”).

CTI and CTSAS manufacture and sell chemiluminescent products and reflective and photoluminescent materials to military, ammunition, commercial and public safety markets. CTSAS is located in Aix-en-Provence, France and represents us in certain international markets, primarily Europe and the Middle East. CTI sells to customers in all other geographic markets.

Our headquarters are located in West Springfield, MA. Our products are manufactured at both the West Springfield and Aix-en-Provence locations.

3.
NEW ACCOUNTING PRONOUNCEMENTS

In May 2011, the Financial Accounting Standards Board (”FASB”) issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs ("ASU 2011-04"), which amends ASC 820 Fair Value Measurement . ASU 2011-04 improves the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards. The amended guidance changes the wording used to describe many requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, the amendments clarify the FASB's intent about the application of existing fair value measurement and disclosure requirements. Although ASU 2011-04 is not expected to have a significant effect on practice, it changes some fair value measurement principles and disclosure requirements. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011 and must be applied prospectively. Early application is not permitted. We do not anticipate that the adoption of ASU 2011-04 will have a material impact on our financial position or the results of our operations.

In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”), which amends ASC 220 Comprehensive Income . ASU 2011-05 requires that comprehensive income be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 does not change the items that must be reported in comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 does not affect how earnings per share is calculated or presented. ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and must be applied retrospectively. Early application is permitted. Because we currently present comprehensive income within our consolidated statement of changes in stockholders' equity and comprehensive income, we will need to change our presentation of comprehensive income upon adopting ASU 2011-05.

 
9

 

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

4.
INVENTORIES

Inventories consist of the following (all amounts in thousands):

   
June 30,
2011
   
December 31,
2010
 
Raw materials
  $ 5,811     $ 5,539  
Work-in-process
    3,684       3,356  
Finished goods
    1,513       1,227  
      11,008       10,122  
Less: Reserve for obsolescence
    (123 )     (202 )
    $ 10,885     $ 9,920  

5.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The derivative liabilities as of June 30, 2011 in our condensed consolidated balance sheet consist of the following (all amounts in thousands):

Derivative Instrument
   
Balance Sheet Location
   
Fair Value
 
Interest rate swaps
   
Other noncurrent liabilities
   
$
(331
)

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, which ends upon maturity of the notes payable, 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 swaps’ contractual lives using an estimated risk-free interest rate for each swap settlement date.

Currency Forward Contracts

CTSAS’ functional currency is the Euro. Periodically, CTSAS purchases inventory from CTI, which requires payment in U.S. dollars. For such transactions of $50,000 or more, 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, net in our condensed consolidated statements of income. 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, 2011, we held no such currency forward contracts.

 
10

 

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

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 income for the three months ended June 30, 2011 was as follows (all amounts in thousands):

   
Gain (Loss)
   
Gain (Loss)
   
Gain (Loss)
 
   
In AOCL  (1)
   
Reclassified  (2)
   
in Earnings  (3)
 
Derivatives designated as cash flow hedging relationships:
                 
Interest rate swaps, net of taxes of $17
  $ (30 )   $     $  
Derivatives not designated as hedging instruments:
                       
Forward currency contracts
  $     $     $ 14  

 
(1)
Amount recognized in accumulated other comprehensive loss (AOCL) (effective portion and net of taxes) during the three months ended June 30, 2011.
 
(2)
Amount of gain (loss) originally recorded in AOCL but reclassified from AOCL into earnings during the three months ended June 30, 2011.
 
(3)
Amount of gain (loss) recognized in earnings on the derivative (ineffective portion and amount excluded from effectiveness testing) reported in other, net in the condensed consolidated statement of income for the three months ended June 30, 2011.

The effect of derivative instruments (a) designated as cash flow hedges and (b) not designated as hedging instruments on our condensed consolidated statement of income for the six months ended June 30, 2011 was as follows (all amounts in thousands):

   
Gain (Loss)
   
Gain (Loss)
   
Gain (Loss)
 
   
In AOCL  (1)
   
Reclassified  (2)
   
in Earnings  (3)
 
Derivatives designated as cash flow hedging relationships:
                 
Interest rate swaps, net of taxes of $(2)
  $ 4     $     $  
Derivatives not designated as hedging instruments:
                       
Forward currency contracts
  $     $     $ 28  

 
(1)
Amount recognized in accumulated other comprehensive loss (AOCL) (effective portion and net of taxes) during the six months ended June 30, 2011.
 
(2)
Amount of gain (loss) originally recorded in AOCL but reclassified from AOCL into earnings during the six months ended June 30, 2011.
 
(3)
Amount of gain (loss) recognized in earnings on the derivative (ineffective portion and amount excluded from effectiveness testing) reported in other, net in the condensed consolidated statement of income for the six months ended June 30, 2011.

6.
INCOME TAXES

For the three months ended June 30, 2011, the effective tax rate of (219)% differed from the statutory rate of 34% primarily due to the following: (i) foreign tax credits created during 2011 as a result of the recently declared dividend from CTSAS, (ii) a reduction in the valuation allowance against foreign tax credits which is based on changes to our anticipated future use of those credits in the near-term to offset future current U.S. federal income taxes; and (iii) changes in repatriated earnings from CTSAS as a result of current year-to-date earnings of CTSAS. 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 six months ended June 30, 2011, the effective tax rate of (62)% differed from the statutory rate of 34% primarily due to the following: (i) foreign tax credits created during 2011 as a result of the recently declared dividend from CTSAS, (ii) a reduction in the valuation allowance against foreign tax credits which is based on changes to our anticipated future use of those credits in the near-term to offset future current U.S. federal income taxes; and (iii) changes in repatriated earnings from CTSAS as a result of current year-to-date earnings of CTSAS. The effective tax rate for the six months ended June 30, 2010 was not significantly different from the statutory rate of 34%.

 
11

 
 
Cyalume Technologies Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
 
7.
NET INCOME PER COMMON SHARE

Basic net income per common share is computed by dividing net income 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 share equivalents consist of (i) shares issuable upon the exercise of warrants and options (using the “treasury stock” method), (ii) unvested restricted stock awards (using the “treasury stock” method) and (iii) shares issuable upon conversion of convertible notes using the “if-converted” method.

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Basic:
                       
Net income (in thousands)
  $ 944     $ 1,031     $ 1,216     $ 1,192  
Weighted average shares
    16,507,117       15,458,737       16,126,735       15,443,234  
Basic income per common share
  $ 0.06     $ 0.07     $ 0.08     $ 0.08  
Diluted:
                               
Net income (in thousands)
  $ 944     $ 1,031     $ 1,216     $ 1,192  
Adjustments to net income assuming convertible notes payable are converted to common stock:
                               
Reversal of interest expense on convertible notes payable (in thousands)
    236                    
Adjustment’s estimated effect on provision for income taxes (in thousands)
    (93 )                  
Income available to common stockholders for diluted net income per common share (in thousands)
  $ 1,087     $ 1,031     $ 1,216     $ 1,192  
Weighted average shares
    16,507,117       15,458,737       16,126,735       15,443,234  
Effect of dilutive securities
    3,011,387       47,027       731,992       70,199  
Weighted average shares, as adjusted
    19,518,504       15,505,764       16,858,727       15,513,433  
Diluted net income per common share
  $ 0.06     $ 0.07     $ 0.07     $ 0.08  

The following common shares issuable upon exercise of convertible securities were excluded from the calculation of diluted net income per common share because their effect was antidilutive for each of the periods presented:

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2011
 
2010
 
2011
 
2010
 
Options and warrants
  4,821,588     6,580,756     7,380,255     6,580,756  
Restricted stock awards
      87,333         4,000  

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.  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 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 No. 06-706.

 
12

 

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

On July 18, 2011, CTI received an Order for Entry of Final Judgment in Civil Action No. 06-706 in which the Court awarded approximately $2.6 million in damages to Omniglow, LLC. Prejudgment interest at the rate of twelve (12%) percent per annum since the filing of the complaint in 2006 will accrue on approximately $1.3 million of the damages. The Court also awarded Omniglow, LLC reimbursement of attorney fees and costs of approximately $235,000, on which interest at the rate of twelve (12%) percent per annum will accrue beginning with the date of the final ruling.
 
Although we have appealed the final judgment and do not believe the awards in the final judgment will stand upon appeal, we have recorded a litigation award payable in the amount of approximately $3.5 million on our condensed consolidated balance sheet (included in “other noncurrent liabilities”) as of June 30, 2011. Since the Former Owners (i) retained the responsibility for paying the costs and liabilities associated with Civil Action No. 06-706 and (ii) are related parties under U.S. GAAP due to their ownership interest in us and their membership on our board of directors, we have recorded approximately $3.6 million, which includes the $3.5 million litigation award payable and other costs we have incurred while litigating Civil Action No. 06-706, as due from related party on our condensed consolidated balance sheet as of June 30, 2011. We believe that the related party receivable is collectible. CTI has filed motions for reconsideration and amendment of findings. In addition, CTI has filed an appeal of the final decision with the Massachusetts appellate court.

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 to our chief executive officer on a regular basis as per his reasonable requests;
 
·
Identifying strategic partners with companies with which Selway has relationships and access. In this connection, Selway will focus on building partnerships with companies in Israel, Singapore, India and Europe. The focus will be on the expansion of our munitions business;
 
·
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 would be performed by Yaron Eitan, an employee of Selway and a member of our Board of Directors, with assistance, as needed, from other employees of Selway.  The management agreement 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. Under the management agreement, we indemnified Selway and Selway indemnified us against certain losses that could have been incurred while carrying out its obligations under the management agreement. Per the management agreement and subsequent amendments thereto, Selway’s compensation for these services is $11,667 per month. We also reimburse Selway for costs incurred specifically on our behalf for these services.

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, 2011, our only assets and liabilities required to be reported at fair value on a recurring basis were the interest rate swaps described in Note 5, which are measured at fair value using level 2 inputs.

 
13

 

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

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

10.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

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

 
Six Months Ended June 30,
 
 
2011
 
2010
 
Interest
$ 941   $ 1,174  
Income taxes
  1,219     194  

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

   
Six Months Ended June 30,
 
   
2011
   
2010
 
Adjustment to the accounting for warrants issued in July 2010 in conjunction with issuance of subordinated term loan
  $ 7     $  

11.
SUBSEQUENT EVENTS

As described in more detail in Note 11 of our Annual Report on Form 10-K for the year ended December 31, 2010, we have a note payable that was entered into in December 2008 with Rodman & Renshaw, LLC (“Rodman”). Principal and accrued interest payable on this note payable totaled $2.2 million as of June 30, 2011. On June 30, 2011, we entered into a securities exchange agreement with Rodman in which Rodman agreed to accept, subject to certain conditions being met, 483,046 shares of our common stock as payment in full of all principal and accrued interest on this note. The transaction closed in July 2011.

As described in more detail in Note 12 of our Annual Report on Form 10-K for the year ended December 31, 2010, we have notes payable to three stockholders. Principal and accrued interest payable on these notes payable totaled $1.2 million as of June 30, 2011. On July 7, 2011, these stockholders each entered into a securities exchange agreement in which they agreed to accept, subject to certain conditions being met, an aggregate of 253,288 shares of our common stock as payment in full of all principal and accrued interest on these notes. These transactions closed in July 2011.

 
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. 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. In addition, we also produce reflective (patches) and reflective plus photoluminescent (fire tape) products.

Chemiluminescent products come in varying shapes, sizes and functions, and provide light in different colors, intensity and durations.

We maintain principal executive offices at 96 Windsor Street, West Springfield, Massachusetts 01089. We have one direct subsidiary: Cyalume Technologies, Inc. (“CTI”). CTI is a Delaware corporation formed on March 27, 1997 with headquarters also located in West Springfield, MA. CTI has one subsidiary, Cyalume Technologies, SAS (“CTSAS”), located in Aix-en-Provence, France.

We manufacture products at both the West Springfield and Aix-en-Provence locations.

Material Changes in Results of Operations – 3 Months Ended June 30, 2011 versus the 3 Months Ended June 30, 2010

Revenues in 2011 were lower than for the comparable period in 2010 primarily due to a decrease in units sold, offset by price increases. Approximately $764,000 of the decrease in revenues is due to a decrease in units sold. Many products are sold under indefinite quantity type contracts whereby we fulfill orders as they are placed by customers. We do not have insight into why military customers order at the times or in the quantities that they do. However, we see no indication that the underlying usage of our products has diminished. We believe that the global recession and constraints on budgets worldwide negatively affected revenues in both 2011 and 2010.
  
Cost of goods sold in 2011 was 3.9% lower than the comparable period in 2010. That decrease is due primarily to the decrease in units sold as discussed above.  Price increases offset by changes in product mix sold accounted for the change in gross margin from 51.0% in 2010 to 49.0% in 2011.

Sales and marketing expenses increased primarily due to increases in payroll costs caused by the hiring of additional sales personnel.

General and administrative expenses increased primarily due to increases in depreciation expense, payroll costs and board-related expenses, offset by a decrease in management fees. Depreciation expense has increased since 2010 primarily due to the implementation of a new information system in July 2010. Payroll costs have increased due to annual raises and accrued bonuses. Board-related compensation increased because board compensation was determined in the first quarter of 2010, while in 2011 board compensation was determined in the second quarter. Management fees decreased as a result of an amendment, effective July 2010, to our management agreement with Selway Capital, LLC.

Research and development expenses increased primarily due to increases in payroll costs and non-capitalizable patent and trademark-related costs.

Provision for (benefit from) income taxes decreased in 2011 primarily due to (i) the creation of foreign tax credits through our France-based subsidiary CTSAS, (ii) a reduction in the valuation allowance against accumulated foreign tax credits and (iii) changes in repatriated earnings from CTSAS. The reduction in the valuation allowance against foreign tax credits is due to changes in our anticipated future use of those credits in the near term to offset future income taxes.

Other, net increased in 2011 due to our earning reimbursement of certain product development costs from one of our customers and one potential customer. Such transactions did not occur in 2010. This income was partially offset by the effects of changes in foreign exchange rates.

 
15

 

Material Changes in Results of Operations – 6 Months Ended June 30, 2011 versus the 6 Months Ended June 30, 2010

Revenues in 2011 were lower than for the comparable period in 2010 primarily due to a decrease in units sold, offset by price increases. Approximately $709,000 of the decrease in revenues is due to a decrease in units sold. Many products are sold under indefinite quantity type contracts whereby we fulfill orders as they are placed by customers. We do not have insight into why military customers order at the times or in the quantities that they do. However, we see no indication that the underlying usage of our products has diminished. We believe that the global recession and constraints on budgets worldwide negatively affected revenues in both 2011 and 2010.

Cost of goods sold in 2011 was 2.5% lower than the comparable period in 2010. That decrease is due primarily to the decrease in units sold as discussed above.  Price increases and changes in product mix sold offset each other, resulting in minimal change in gross margin from 49.6% in 2010 to 49.4% in 2011.

Sales and marketing expenses increased primarily due to increases in payroll costs, share-based compensation awards and consultant costs. Payroll costs have increased mainly due to the hiring of additional sales personnel. Expense relating to share-based compensation awards to employees increased in part due to awards to these new employees, and also due to other share-based awards in the first quarter of 2011. We also incurred consulting costs related to the selling of new and existing products to military customers.

General and administrative expenses increased primarily due to increases in depreciation expense and payroll costs, offset by a decrease in management fees. Depreciation expense has increased since 2010 primarily due to the implementation of a new information system in July 2010. Payroll costs have increased due to annual raises and accrued bonuses. Management fees decreased as a result of an amendment, effective July 2010, to our management agreement with Selway Capital, LLC.

Research and development expenses increased primarily due to increases in payroll costs and non-capitalizable patent and trademark-related costs.

A benefit from income taxes was recorded in 2011 primarily due to (i) the creation of foreign tax credits through our France-based subsidiary CTSAS, (ii) a reduction in the valuation allowance against accumulated foreign tax credits and (iii) changes in repatriated earnings from CTSAS. The reduction in the valuation allowance against foreign tax credits is due to changes in our anticipated future use of those credits in the near term to offset future income taxes.

Other, net increased in 2011 due to our earning reimbursement of certain product development costs from one of our customers and one potential customer. Such transactions did not occur in 2010. This income was partially offset by the effects of changes in foreign exchange rates.

Material Changes in Financial Condition – June 30, 2011 versus December 31, 2010

Our accounts receivable increased due to higher sales in the month of June 2011 versus the month of December 2010.  We have no significant collection problems. Our inventory balance is typically  higher  in June than in December due to lower levels of production in the fourth quarter.

We have recorded an approximately $3.5 million litigation award payable and a related approximately $3.6 million receivable from a related party. This payable and receivable are based on a July 2011 ruling against CTI under Civil Action No. 06-706.See Part II. Item 1 “Legal Proceedings” for additional information..

Our deferred tax asset decreased primarily due to the anticipated use of net operating losses in 2011 and changes in repatriated earnings from our France-based subsidiary, CTSAS.  Our deferred tax liability decreased since December 31, 2010 primarily due to the following items: (i) non-deductible amortization of intangible assets, (ii) additional temporarily non-deductible stock-based compensation, (iii) a net decrease in repatriated earnings from CTSAS primarily resulting from the recently declared dividend and offset by the increase in current year-to-date earnings of CTSAS and (iv) changes in the carrying balance of foreign tax credits which increased as a result of foreign tax credits being created during 2011, anticipated usage during 2011 and further reduced by the reduction in the valuation allowance against foreign tax credits which is based on changes to our anticipated future use of those credits in the near-term to offset future current U.S. federal income taxes.
  
Income taxes payable decreased due to payments to federal and state tax authorities during 2011.

Liquidity and Capital Resources

As of June 30, 2011 and December 31, 2010, we had $5.7 million and $4.1 million, respectively, of cash on hand. The major sources and uses of cash during the three months ended June 30, 2011 were all in the normal course of business.
 
 
16

 
 
In June 2011 we entered into securities exchange agreements with several note holders in which they agreed to accept an aggregate of 736,344 shares of our common stock as payment in full of all principal and accrued interest on $3.4 million of notes payable and accrued interest. These transactions closed in July 2011. Accordingly, we moved $1.2 million in notes payable to notes payable due to related parties and another $2.2 million to current portion of notes payable. Settling these notes payable and accrued interest using our common stock, rather than cash, avoids a significant cash outlay in 2014.

Forecasted principal and interest payments on debt for the next 12 months are $3.7 million. All operating and capital expenditures are expected to be funded completely from operating cash flows and the $3.4 million of cash received from the sale of 871,823 shares of common stock to institutional investors in a private placement in March 2011.

As further described in Part II. Item 1 “Legal Proceedings”, we have recorded an approximately $3.5 million payable for ongoing litigation for which a related party has retained the responsibility of paying. Assuming (i) our appeal of these findings is not successful and (ii) our related party is unable to reimburse us for these findings (and the related legal costs we incur), our liquidity and capital resources could be adversely affected. We believe that the related party receivable is collectible.

Off-Balance Sheet Arrangements

Other than immaterial operating leases, we did not have any off-balance sheet arrangements during 2011 or 2010.

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. Depending on the terms of the individual sales arrangement with our customer, sales are recognized at either the shipping point or upon receipt by 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.

 
17

 

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 amortization.  Goodwill is subject to an annual impairment review, and, if conditions warrant, interim impairment reviews.  Impairment charges, if any, are recorded in the period in which the impairment is determined.

Intangible Assets

Intangible assets include developed technologies and patents and customer relationships, 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 register new patents or defend existing patents are capitalized while costs to renew or extend the term of intangible assets are expensed when incurred.

Inventories

Inventories are stated at the lower of cost (on a first-in first-out (“FIFO”) method) or net realizable value.  We periodically review the realizability of our inventory. Provisions are 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 their local currency (the euro) as the functional currency. For consolidation, 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 (expense) income in the statement of income 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, 2011. 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, 2011.

 
18

 
 
Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the three  months ended June 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION
 
ITEM 1.
LEGAL PROCEEDINGS

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

CTI is currently named a defendant in Civil Action No. 06-706 in Superior Court of the State of Massachusetts. Filing suit against CTI is Omniglow, LLC (the former novelty business of CTI which was sold on January 23, 2006). CTI sold certain assets and liabilities related to the novelty and retail business to certain former shareholders and management (the “Omniglow Buyers”).  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.

On July 18, 2011, CTI received an Order for Entry of Final Judgment in Civil Action No. 06-706 in which the Court awarded approximately $2.6 million in damages to Omniglow, LLC. Prejudgment interest at the rate of twelve (12%) percent per annum since the filing of the complaint in 2006 will accrue on approximately $1.3 million of the damages. The Court also awarded Omniglow, LLC reimbursement of attorney fees and costs of approximately $235,000, on which interest at the rate of twelve (12%) percent per annum will accrue beginning with the date of the final ruling.

CTI has filed motions for reconsideration and amendment of findings. In addition, CTI has filed an appeal of the final decision with the Massachusetts appellate court. According to the stock purchase agreement with CTI’s former owners (from whom we purchased CTI in 2008 and who is also a party related to us), the former owners have indemnified CTI for all costs and liabilities associated with Civil Action No. 06-706, therefore we recorded the receivable from them for (i) damages awarded in the Order for Entry of Final Judgment and (ii) related costs that CTI has incurred through June 30, 2011.

Since CTI is appealing these findings, we cannot estimate at this time the final amounts that will be paid and collected under Civil Action No. 06-706, but expect them to be significantly less than those in the July 2011 ruling.

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

Period
 
Total Number
of Shares
Purchased
   
Average
Price
Paid per
Share
   
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
   
Maximum
Number (or
Approximate
Dollar Value) of
Shares that May
yet be Purchased
under the Plans
or Programs
 
                         
April 1 to April 30
        $           $  
May 1 to May 31
                       
June 1 to June 30
    17,939 (1)   $ 5.19              

 
(1)
17,939 shares of our common stock were repurchased from employees of CTI. These shares were a portion of the shares that these employees received relating to stock awards that recently vested. These shares were purchased to provide these employees with cash to pay personal income taxes arising from the stock awards.

 
19

 

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, 2011.

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

ITEM 6. 
EXHIBITS

Exhibit
Number
 
Description
10.1
*
Amendment No. 1 to the Employee Agreement of Derek Dunaway dated May 9, 2011.
10.2
*
Amendment No. 1 to the Employee Agreement of Edgar E. Cranor dated May 9, 2011.
10.3
 
Securities Exchange Agreement between Cyalume Technologies Holdings, Inc. and Rodman Principal Investments, LLC dated June 30, 2011. (1) (10.1)
10.4
 
Securities Exchange Agreement between Cyalume Technologies Holdings, Inc. and Winston Churchill dated July 7, 2011. (1) (10.2)
10.5
 
Securities Exchange Agreement between Cyalume Technologies Holdings, Inc. and Thomas Rebar dated July 7, 2011. (1) (10.3)
10.6
 
Securities Exchange Agreement between Cyalume Technologies Holdings, Inc. and Wayne Weisman dated July 7, 2011. (1) (10.4)
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 June 30, 2011 and filed with the Commission July 7, 2011. The number given in parenthesis indicates the corresponding exhibit number in such Form 8-K.

 
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 10, 2011
By:
/s/  DEREK DUNAWAY
   
Derek Dunaway, Chief Executive Officer
   
(Principal Executive Officer)
     
Date: August 10, 2011
By:
/s/  MICHAEL BIELONKO
   
Michael Bielonko, Chief Financial Officer
   
(Principal Financial Officer)
 
21

 

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 10, 2011
/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 10, 2011
/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 10, 2011
/s/  DEREK DUNAWAY
 
 
Derek Dunaway, Chief Executive Officer
 
 
(the Principal Executive Officer)
 
     
Date: August 10, 2011
/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.

 
 

 
Amendment No. 1 to the
Employee Agreement of Derek Dunaway

 
This Amendment No. 1 (this “Amendment”) dated May 9, 2011, to the Employment Agreement (as defined below) is made by and among Cyalume Technologies Holdings, Inc., a Delaware corporation (the “ Company ”) and Derek Dunaway (the “ Employee ”).  Any capitalized term not defined herein shall have the meaning for such term specified in the Employment Agreement.
 
WHEREAS , the Company and the Employee entered into an Employment Agreement dated June 2, 2009, (the “ Employment Agreement ”), pursuant to which the Employee may earn a certain equity bonus; and
 
WHEREAS , the Company and the Employee desire to amend the terms of the equity bonus in the Employment Agreement; and
 
WHEREAS , the Compensation Committee of the Board of Directors of the Company has authorized the Company’s Chief Financial Officer to enter into this Amendment.
 
NOW THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows:
 
1.   The Employment Agreement is hereby amended as follows:
 
The text underneath the heading “Equity Bonus” in Section 2 of Schedule 1 shall be deleted in its entirety and replaced with the following:
 
“Subject to approval by the Compensation Committee of the Board of Directors of Cyalume Technologies Holdings, Inc. (the “Parent”), the Employee shall be entitled to participate in the Parent’s 2009 Omnibus Securities and Incentive Plan (the “2009 Plan”), or any similar plan adopted by the Parent in the future, in accordance with the eligibility requirements for participation therein.  Nothing herein shall be construed so as to prevent the Parent from modifying or terminating the 2009 Plan.
 
Employee shall be entitled to receive annual equity compensation of up to 50% of base salary in the form of restricted stock.  Such restricted stock shall vest over a period of three years.
 
The restricted stock award will be based on specific objectives relating to:
 
·   Achieving business plan objectives.”
 
 
 

 
2.   The amendments set forth herein are limited precisely as written and shall not be deemed to be an amendment of any other term or condition of the Employment Agreement or any of the documents referred to therein.
 
3.   Whenever the Employment Agreement is referred to in any agreement, document or instrument, such reference shall be to the Employment Agreement as amended hereby.  Except as expressly amended hereby, the terms and conditions of the Employment Agreement shall continue in full force and effect.
 
4.   This Amendment may be signed in any number of counterparts, each of which shall be an original and all of which shall be deemed to be one and the same instrument, with the same effect as if the signatures thereto and hereto were upon the same instrument.  A facsimile signature shall be deemed to be an original signature for purposes of this Amendment.
 
 
 
 
[ Signature page follows ]

 
 
 

 
IN WITNESS WHEREOF , the parties hereto have duly executed this Amendment No. 1 to the Employment Agreement as of the day and year first above written.
 
CYALUME TECHNOLOGIES HOLDINGS, INC.
 
EMPLOYEE
     
/s/ Michael Bielonko, CFO
 
/s/ Derek Dunaway
     
Michael Bielonko, CFO
 
Derek Dunaway
 

Amendment No. 1 to the
Employee Agreement of Edgar E. Cranor

 
This Amendment No. 1 (this “Amendment”) dated May 9, 2011, to the Employment Agreement (as defined below) is made by and among Cyalume Technologies Holdings, Inc., a Delaware corporation (the “ Company ”) and Edgar E. Cranor (the “ Employee ”).  Any capitalized term not defined herein shall have the meaning for such term specified in the Employment Agreement.
 
WHEREAS , the Company and the Employee entered into an Employment Agreement dated July 17, 2009, (the “ Employment Agreement ”), pursuant to which the Employee may earn a certain equity bonus; and
 
WHEREAS , the Company and the Employee desire to amend the terms of the equity bonus in the Employment Agreement; and
 
WHEREAS , the Compensation Committee of the Board of Directors of the Company has authorized the Company’s Chief Financial Officer to enter into this Amendment.
 
NOW THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows:
 
1.   The Employment Agreement is hereby amended as follows:
 
The text underneath the heading “Equity Bonus” in Section 2 of Schedule 1 shall be deleted in its entirety and replaced with the following:
 
“Subject to approval by the Compensation Committee of the Board of Directors of Cyalume Technologies Holdings, Inc. (the “Parent”), the Employee shall be entitled to participate in the Parent’s 2009 Omnibus Securities and Incentive Plan (the “2009 Plan”), or any similar plan adopted by the Parent in the future, in accordance with the eligibility requirements for participation therein.  Nothing herein shall be construed so as to prevent the Parent from modifying or terminating the 2009 Plan.
 
Employee shall be entitled to receive annual equity compensation of up to 50% of base salary in the form of restricted stock.  Such restricted stock shall vest over a period of three years.
 
The restricted stock award will be based on specific objectives relating to:
 
·   Achieving objectives defined and agreed upon annually by the Employee, the CEO, and the Parent’s Compensation Committee.”
 
 
 

 
2.   The amendments set forth herein are limited precisely as written and shall not be deemed to be an amendment of any other term or condition of the Employment Agreement or any of the documents referred to therein.
 
3.   Whenever the Employment Agreement is referred to in any agreement, document or instrument, such reference shall be to the Employment Agreement as amended hereby.  Except as expressly amended hereby, the terms and conditions of the Employment Agreement shall continue in full force and effect.
 
4.   This Amendment may be signed in any number of counterparts, each of which shall be an original and all of which shall be deemed to be one and the same instrument, with the same effect as if the signatures thereto and hereto were upon the same instrument.  A facsimile signature shall be deemed to be an original signature for purposes of this Amendment.
 
 
 
 
[ Signature page follows ]

 
 

 
 
IN WITNESS WHEREOF , the parties hereto have duly executed this Amendment No. 1 to the Employment Agreement as of the day and year first above written.
 
CYALUME TECHNOLOGIES HOLDINGS, INC.
 
EMPLOYEE
     
/s/ Michael Bielonko
 
/s/ Edgar E. Cranor
     
Michael Bielonko, CFO