Attached files
file | filename |
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EX-32.1 - Cyalume Technologies Holdings, Inc. | v166246_ex32-1.htm |
EX-31.2 - Cyalume Technologies Holdings, Inc. | v166246_ex31-2.htm |
EX-31.1 - Cyalume Technologies Holdings, Inc. | v166246_ex31-1.htm |
EX-10.3 - Cyalume Technologies Holdings, Inc. | v166246_ex10-3.htm |
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
|
ý
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
For
the quarterly period ended September 30,
2009
|
OR
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
For
the transition period
from to
|
Commission
File Number 000-52247
Cyalume Technologies
Holdings, Inc.
(Exact
name of registrant as specified in its charter)
Delaware
|
20-3200738
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
96
Windsor Street, West Springfield, Massachusetts
|
01089
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(413)
858-2500
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes ý No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o
(Do
not check if a smaller reporting company)
|
Smaller
reporting company ý
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No ý
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: As of November 18, 2009, there were
outstanding 15,420,925 shares of the registrant’s
Common Stock, par value $.001 per share.
Cyalume Technologies
Holdings, Inc.
FORM
10-Q
INDEX
PART
I—FINANCIAL INFORMATION
|
||||
Item 1.
|
Financial
Statements
|
|||
Condensed
Consolidated Statements of Operations (unaudited) for the three months
ended September 30, 2009 and 2008
|
4
|
|||
Condensed
Consolidated Statements of Operations (unaudited) for the nine months
ended September 30, 2009 and 2008
|
5
|
|||
Condensed
Consolidated Balance Sheets as of September 30, 2009 (unaudited) and
December 31, 2008
|
6
|
|||
Condensed
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Loss for the nine months ended September 30, 2009
(unaudited)
|
7
|
|||
Condensed
Consolidated Statements of Cash Flows (unaudited) for the nine months
ended September 30, 2009 and 2008
|
8
|
|||
Notes
to Condensed Consolidated Financial Statements (unaudited)
|
9
|
|||
Item 2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
18
|
||
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
22
|
||
Item 4T.
|
Controls
and Procedures
|
22
|
||
PART
II—OTHER INFORMATION
|
||||
Item 1.
|
Legal
Proceedings
|
22
|
||
Item 1A.
|
Risk
Factors
|
22
|
||
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
23
|
||
Item 3.
|
Defaults
Upon Senior Securities
|
23
|
||
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
24
|
||
Item 5.
|
Other
Information
|
24
|
||
Item 6.
|
Exhibits
|
24
|
||
Signatures
|
25
|
2
The
statements contained in this quarterly report on Form 10-Q, including under
the section titled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and other sections of this quarterly report, include
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including, without limitation, statements
regarding our or our management's expectations, hopes, beliefs, intentions or
strategies regarding the future. The words "believe," "may," "will," "estimate,"
"continue," "anticipate," "intend," "expect," "plan" and similar expressions may
identify forward-looking statements, but the absence of these words does not
mean that a statement is not forward-looking. The forward-looking statements
contained in this quarterly report are based on our current expectations and
beliefs concerning future developments and their potential effects on us. There
can be no assurance that future developments affecting us will be those that we
have anticipated. These forward-looking statements involve a number of risks,
uncertainties (some of which are beyond our control) or other assumptions that
may cause actual results or performance to be materially different from those
expressed or implied by these forward-looking statements. Should one or more of
these risks or uncertainties materialize, or should any of our assumptions prove
incorrect, actual results may vary in material respects from those projected in
these forward-looking statements. We undertake no obligation to update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise, except as may be required under applicable securities
laws. Unless the
content otherwise requires, all references to "we", "us", the “Company" or
“Cyalume" in this quarterly report on Form 10-Q refers to Cyalume
Technologies Holdings, Inc.
3
ITEM 1.
Financial Statements
Cyalume
Technologies Holdings, Inc.
Condensed
Consolidated Statements of Operations
(in
thousands, except shares and per share information)
(Unaudited)
Predecessor
|
||||||||||||
For the
Three
|
For
the Three
|
For
the Three
|
||||||||||
Months
Ended
|
Months
Ended
|
Months
Ended
|
||||||||||
September
30,
|
September
30,
|
September
30,
|
||||||||||
2009
|
2008
|
2008
|
||||||||||
Revenues
|
$ | 9,860 | $ | — | $ | 10,833 | ||||||
Cost
of goods sold
|
5,938 | — | 5,411 | |||||||||
Gross
profit
|
3,922 | — | 5,422 | |||||||||
Other
expenses (income):
|
||||||||||||
Sales
and marketing
|
791 | — | 738 | |||||||||
General
and administrative
|
887 | 225 | 1,210 | |||||||||
Research
and development
|
487 | — | 306 | |||||||||
Interest,
net
|
673 | (287 | ) | 1,221 | ||||||||
Interest
– related party
|
16 | 2 | — | |||||||||
Amortization
of intangible assets
|
878 | — | 659 | |||||||||
Other,
net
|
16 | — | 59 | |||||||||
Total
other expenses (income)
|
3,748 | (60 | ) | 4,193 | ||||||||
Income
before income taxes
|
174 | 60 | 1,229 | |||||||||
Provision
for (benefit from) income taxes
|
(151 | ) | 2 | 517 | ||||||||
Net
income
|
$ | 325 | $ | 58 | $ | 712 | ||||||
Net
income per common share:
|
||||||||||||
Basic
|
$ | 0.02 | $ | 0.01 | ||||||||
Diluted
|
$ | 0.02 | $ | — | ||||||||
Weighted
average shares used to compute net income per common
share:
|
||||||||||||
Basic
|
15,352,478 | 9,375,000 | ||||||||||
Diluted
|
15,418,949 | 11,944,844 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
4
Cyalume
Technologies Holdings, Inc.
Condensed
Consolidated Statements of Operations
(in
thousands, except shares and per share information)
(Unaudited)
Predecessor
|
||||||||||||
For the
Nine
|
For
the Nine
|
For
the Nine
|
||||||||||
Months
Ended
|
Months
Ended
|
Months
Ended
|
||||||||||
September
30,
|
September
30,
|
September
30,
|
||||||||||
2009
|
2008
|
2008
|
||||||||||
Revenues
|
$ | 24,443 | $ | — | $ | 31,686 | ||||||
Cost
of goods sold
|
14,374 | — | 15,201 | |||||||||
Gross
profit
|
10,069 | — | 16,485 | |||||||||
Other
expenses (income):
|
||||||||||||
Sales
and marketing
|
2,322 | — | 2,532 | |||||||||
General
and administrative
|
3,489 | 637 | 3,520 | |||||||||
Research
and development
|
1,295 | — | 984 | |||||||||
Interest,
net
|
1,925 | (899 | ) | 3,715 | ||||||||
Interest
– related party
|
45 | 4 | — | |||||||||
Amortization
of intangible assets
|
2,612 | — | 1,968 | |||||||||
Other,
net
|
79 | — | (1,038 | ) | ||||||||
Total
other expenses (income)
|
11,767 | (258 | ) | 11,681 | ||||||||
Income
(loss) before income taxes
|
(1,698 | ) | 258 | 4,804 | ||||||||
Provision
for (benefit from) income taxes
|
(755 | ) | (18 | ) | 1,754 | |||||||
Net
income (loss)
|
$ | (943 | ) | $ | 276 | $ | 3,050 | |||||
Net
income (loss) per common share:
|
||||||||||||
Basic
|
$ | (0.06 | ) | $ | 0.03 | |||||||
Diluted
|
$ | (0.06 | ) | $ | 0.02 | |||||||
Weighted
average shares used to compute net income (loss) per common
share:
|
||||||||||||
Basic
|
15,089,909 | 9,375,000 | ||||||||||
Diluted
|
15,089,909 | 11,896,460 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
5
Condensed Consolidated Balance
Sheets
(in
thousands, except shares and per share information)
September
30, 2009(unaudited)
|
December 31,
2008
|
|||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
|
$ | 1,831 | $ | 3,952 | ||||
Accounts
receivable, net of allowance for doubtful accounts of $217 and $452 at
September 30, 2009 and December 31, 2008, respectively
|
4,542 | 3,508 | ||||||
Inventories,
net
|
9,734 | 11,447 | ||||||
Income
taxes refundable
|
377 | 701 | ||||||
Deferred
income taxes
|
425 | 317 | ||||||
Prepaid
expenses and other current assets
|
204 | 195 | ||||||
Total
current assets
|
17,113 | 20,120 | ||||||
Property,
plant and equipment, net
|
8,250 | 7,882 | ||||||
Goodwill
|
58,452 | 60,896 | ||||||
Other
intangible assets, net
|
49,908 | 49,426 | ||||||
Other
noncurrent assets
|
138 | 188 | ||||||
Total
assets
|
$ | 132,861 | $ | 138,512 | ||||
Liabilities
and Stockholders’ Equity
|
||||||||
Current
liabilities:
|
||||||||
Lines
of credit
|
$ | 3,300 | $ | 3,500 | ||||
Current
portion of notes payable
|
4,120 | 3,621 | ||||||
Accounts
payable
|
3,450 | 3,230 | ||||||
Accrued
expenses and other current liabilities
|
2,451 | 2,550 | ||||||
Common
stock subject to mandatory redemption
|
— | 1,123 | ||||||
Notes
payable and advance due to related parties
|
9 | 64 | ||||||
Income
taxes payable
|
7 | 5 | ||||||
Total
current liabilities
|
13,337 | 14,093 | ||||||
Notes
payable, net of current portion
|
22,626 | 25,581 | ||||||
Notes
payable due to related parties, net of current portion
|
1,048 | 1,000 | ||||||
Deferred
income taxes
|
7,801 | 9,237 | ||||||
Derivatives
|
127 | 163 | ||||||
Asset
retirement obligation, net of current portion
|
156 | 128 | ||||||
Total
liabilities
|
45,095 | 50,202 | ||||||
Commitments
and contingencies
|
— | — | ||||||
Stockholders'
equity:
|
||||||||
Preferred
stock, $0.001 par value; 1,000,000 shares authorized, no shares issued or
outstanding
|
— | — | ||||||
Common
stock, $0.001 par value; 50,000,000 shares authorized; 15,360,925 and
13,719,035 shares issued and outstanding at September 30, 2009 and
December 31, 2008, respectively
|
15 | 14 | ||||||
Additional
paid-in capital
|
87,410 | 87,348 | ||||||
Retained
earnings
|
286 | 1,229 | ||||||
Accumulated
other comprehensive income (loss)
|
55 | (281 | ) | |||||
Total
stockholders’ equity
|
87,766 | 88,310 | ||||||
Total
liabilities and stockholders' equity
|
$ | 132,861 | $ | 138,512 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
6
Condensed
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive
Loss
(in
thousands, except shares)
(Unaudited)
Common
Stock
|
Additional
|
Accumulated
Other
|
Total
|
|||||||||||||||||||||||||
Number
of Shares
|
Amount
|
Paid-In
Capital
|
Retained
Earnings
|
Comprehensive
Income (Loss)
|
Stockholders’
Equity
|
Comprehensive
Income (Loss)
|
||||||||||||||||||||||
Balance
at December 31, 2008
|
13,719,035 | $ | 14 | $ | 87,348 | $ | 1,229 | $ | (281 | ) | $ | 88,310 | $ | — | ||||||||||||||
Exercise
of warrants
|
5,500 | — | 27 | — | — | 27 | — | |||||||||||||||||||||
Exercise
of warrants - cashless
|
1,630,143 | 1 | (1 | ) | — | — | — | — | ||||||||||||||||||||
Common
stock repurchased
|
(32,903 | ) | — | (263 | ) | — | — | (263 | ) | — | ||||||||||||||||||
Common
stock awarded (not yet issued) for acquisition-related
services
|
— | — | 180 | — | — | 180 | — | |||||||||||||||||||||
Common
stock issued for acquisition-related services
|
15,000 | — | 45 | — | — | 45 | — | |||||||||||||||||||||
Common
stock issued to extinguish notes payable
|
17,150 | — | 82 | — | — | 82 | — | |||||||||||||||||||||
Share-based
compensation expense - warrants awarded to director
|
— | — | 110 | — | — | 110 | — | |||||||||||||||||||||
Share-based
compensation expense - options awarded under the 2009 Omnibus Securities
and Incentive Plan
|
— | — | 98 | — | — | 98 | — | |||||||||||||||||||||
Share-based
compensation expense - common stock issued to non-employee
consultant
|
7,000 | — | 25 | — | — | 25 | — | |||||||||||||||||||||
Share-based
compensation expense - common stock awarded (not yet issued) under the
2009 Omnibus Securities and Incentive Plan
|
— | — | 38 | — | — | 38 | — | |||||||||||||||||||||
Stock
registration costs
|
— | — | (279 | ) | — | — | (279 | ) | — | |||||||||||||||||||
Foreign
currency translation adjustments
|
— | — | — | — | 314 | 314 | 314 | |||||||||||||||||||||
Unrealized
gain on cash flow hedges, net of taxes of $14
|
— | — | — | — | 22 | 22 | 22 | |||||||||||||||||||||
Net
loss
|
— | — | — | (943 | ) | — | (943 | ) | (943 | ) | ||||||||||||||||||
Comprehensive
loss
|
— | — | — | — | — | — | $ | (607 | ) | |||||||||||||||||||
Balance
at September 30, 2009
|
15,360,925 | $ | 15 | $ | 87,410 | $ | 286 | $ | 55 | $ | 87,766 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
7
Cyalume
Technologies Holdings, Inc.
Condensed
Consolidated Statements of Cash Flows
(in
thousands, except shares)
(Unaudited)
|
For
the Nine
Months
Ended
September
30,
2009
|
For
the Nine
Months
Ended
September
30,
2008
|
Predecessor
For
the Nine
Months
Ended
September
30,
2008
|
|||||||
Cash
flows from operating activities:
|
||||||||||
Net
income (loss)
|
$
|
(943
|
)
|
$
|
276
|
$
|
3,050
|
|||
Adjustments
to reconcile net income (loss) to net cash provided
by operating activities:
|
||||||||||
Depreciation
of property, plant and equipment
|
479
|
—
|
651
|
|||||||
Amortization
|
3,446
|
—
|
2,216
|
|||||||
Provision
for deferred income taxes
|
(1,009
|
)
|
—
|
1,056
|
||||||
Expense
associated with share-based awards
|
271
|
—
|
—
|
|||||||
Other
non-cash expenses
|
357
|
—
|
254
|
|||||||
Changes
in operating assets and liabilities:
|
||||||||||
Accounts
receivable
|
(1,024
|
)
|
—
|
(1,091
|
)
|
|||||
Inventories
|
953
|
—
|
(2,183
|
)
|
||||||
Prepaid
expenses and other current assets
|
(9
|
)
|
85
|
304
|
||||||
Deferred
acquisition costs
|
—
|
(275
|
)
|
—
|
||||||
Accounts
payable and accrued liabilities
|
(22
|
)
|
51
|
(620
|
)
|
|||||
Income
taxes payable, net
|
329
|
(85
|
)
|
(2,270
|
)
|
|||||
Accrued
interest on notes payable to related parties
|
—
|
14
|
—
|
|||||||
Net
cash provided by operating activities
|
2,828
|
66
|
1,367
|
|||||||
Cash
flows from investing activities:
|
||||||||||
Payments
to trust account
|
—
|
(399
|
)
|
—
|
||||||
Purchases
of long-lived assets
|
(449
|
)
|
—
|
(1,212
|
)
|
|||||
Net
cash used in investing activities
|
(449
|
)
|
(399
|
)
|
(1,212
|
)
|
||||
Cash
flows from financing activities:
|
||||||||||
Repayment
of advances from and notes payable to related parties
|
—
|
(150
|
)
|
—
|
||||||
Payments
for common stock subject to redemption
|
(1,123
|
)
|
—
|
—
|
||||||
Net
repayment of line of credit
|
(200
|
)
|
—
|
—
|
||||||
Payments
of Predecessor notes payable
|
—
|
—
|
(2,428
|
)
|
||||||
Repayment
of long-term notes payable
|
(2,633
|
)
|
—
|
—
|
||||||
Payments
to reacquire and retire common stock
|
(263
|
)
|
—
|
—
|
||||||
Payment
of stock registration costs
|
(279
|
)
|
—
|
—
|
||||||
Payment
of deferred financing costs
|
(75
|
)
|
—
|
—
|
||||||
Refund
of debt issue costs
|
10
|
—
|
—
|
|||||||
Proceeds
from exercises of warrants
|
27
|
—
|
—
|
|||||||
Net
cash used in financing activities
|
(4,536
|
)
|
(150
|
)
|
(2,428
|
)
|
||||
Effect
of exchange rate changes on cash
|
36
|
—
|
30
|
|||||||
Net
decrease in cash
|
(2,121
|
)
|
(483
|
)
|
(2,243
|
)
|
||||
Cash,
beginning of period
|
3,952
|
570
|
5,743
|
|||||||
Cash,
end of period
|
$
|
1,831
|
$
|
87
|
$
|
3,500
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
8
BASIS
OF PRESENTATION
|
We have
prepared the accompanying unaudited interim condensed consolidated financial
statements in accordance with accounting principles generally accepted in the
United States of America for interim financial information and the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these interim
condensed consolidated financial statements do not include all of the
information and disclosures required by accounting principles generally accepted
in the United States of America for complete financial statements.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the period.
These accompanying
unaudited interim condensed consolidated financial statements recognize
the effects of all subsequent events that provide additional evidence about
conditions that existed at September 30, 2009, including the estimates inherent
in the process of preparing financial statements. We have evaluated
such subsequent events through November 23, 2009, which is the date the
accompanying unaudited interim
condensed consolidated financial statements were issued (see also Note
16). Additionally, all significant
intercompany accounts and transactions have been eliminated in
consolidation.
Certain
amounts in prior periods have been reclassified to conform to the 2009
presentation. These reclassifications had no effect on operating results as
previously reported.
We
believe all adjustments (consisting of normal, recurring adjustments) considered
necessary for a fair presentation have been included in these unaudited interim
condensed consolidated financial statements. Operating results for the three and
nine-month periods presented are not necessarily indicative of the results that
may be expected for any other interim period or for the full year. The
consolidated balance sheet at December 31, 2008 has been derived from the
audited consolidated financial statements at that date. We suggest that these
unaudited interim condensed consolidated financial statements be read in
conjunction with the consolidated financial statements and footnotes thereto in
our Annual Report on Form 10-K/A for the year ended December 31,
2008.
2.
|
BACKGROUND
AND DESCRIPTION OF BUSINESS
|
Before
December 19, 2008, we conducted business under the name Vector Intersect
Security Acquisition Corporation (‘‘Vector’’). Vector was a blank check
development stage company, as it had no business. Its objective was to acquire
through merger, capital stock exchange, asset acquisition or otherwise one or
more businesses in the homeland security, national security and/or command and
control industries.
On
December 19, 2008, Vector acquired all of the outstanding ownership units of
Cyalume Technologies, Inc. (“CTI”) from GMS Acquisition Partners Holdings, LLC
(“GMS”) (the “Acquisition”). GMS was the sole stockholder in CTI, which has a
wholly-owned subsidiary (Cyalume Technologies, S.A.S. or “CTSAS”). At the
Acquisition date, Vector changed its name to Cyalume Technologies Holdings, Inc.
(“Cyalume”). In these interim condensed consolidated financial statements and
footnotes, Cyalume’s operating results include the operations of the former
Vector for 2008 and CTI’s operations after the Acquisition date. CTI’s
operations prior to the Acquisition date are presented as
Predecessor.
CTI
manufactures and sells chemiluminescent products and reflective and
photoluminescent materials to military, commercial and public safety markets.
CTSAS is geographically located in France and represents us in certain
international markets, primarily Europe and Asia.
3.
|
NEW
ACCOUNTING PRONOUNCEMENTS
|
In June
2009, the Financial Accounting Standards Board (“FASB”) launched the FASB
Accounting Standards Codification (“ASC”) as the single source of authoritative
U.S. GAAP recognized by the FASB. The ASC reorganizes various U.S. GAAP
pronouncements into accounting topics and displays them using a consistent
structure. All existing accounting standards documents are superseded as
described in Statement of Financial Accounting Standard (“SFAS”) No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles. All of the contents of the ASC carry the same level of
authority, effectively superseding SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles, which identified and ranked the sources of
accounting principles and the framework for selecting the principles used in
preparing financial statements in conformity with U.S. GAAP. Also included in
the ASC are rules and interpretive releases of the SEC, under authority of
federal securities laws that are also sources of authoritative U.S. GAAP for SEC
registrants. The ASC is effective for interim and annual periods ending after
September 15, 2009. The adoption of the ASC as of July 1, 2009 had no impact on
our financial statements other than changing the way specific accounting
standards are referenced in our financial statements.
9
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51
(“SFAS No. 160”), which is now codified within ASC 810 Consolidation. SFAS No. 160
is effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. The objective of SFAS No. 160 is
to improve the relevance, comparability and transparency of the financial
information that a reporting entity provides in its consolidated financial
statements. The adoption of SFAS No. 160 on January 1, 2009 did not have an
impact on our condensed consolidated financial statements.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement No.
133 (“SFAS No. 161”), which is now codified within ASC 815 Derivatives and Hedging. SFAS
No. 161 requires enhanced disclosures about an entity’s derivative instruments
and hedging activities with a view toward improving the transparency of
financial reporting and is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, with early
application encouraged. SFAS No. 161 encourages, but does not require,
comparative disclosures for earlier periods at initial adoption. The adoption of
SFAS No. 161 on January 1, 2009 resulted in additional disclosures in our
condensed consolidated financial statements.
Effective
January 1, 2009, we adopted Statement of Financial Accounting Standard No. 157,
Fair Value
Measurements, (“SFAS No. 157”), which is now codified within ASC 820
Fair Value Measurements and
Disclosures, for our nonfinancial assets and liabilities that are
measured at fair value on a non-recurring basis. Previous to January 1,
2009, SFAS No. 157 did not apply to such assets and liabilities. The adoption of
SFAS No. 157 on January 1, 2009 for such assets and liabilities did not have an
impact on our condensed consolidated financial statements.
In April
2009, the FASB issued FASB Staff Position No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments (“FSP No. 107-1”), which is now codified within
ASC 825 Financial
Instruments. FSP No. 107-1 requires summarized disclosure in interim
periods of the fair value of all financial instruments for which it is
practicable to estimate that value, whether recognized or not recognized in the
financial statements.
Previous to FSP No. 107-1, such disclosures were required only for annual
periods. The adoption of FSP No. 107-1 on April 1, 2009 resulted in additional
disclosures in our unaudited interim condensed consolidated financial
statements.
In May
2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS No.
165”), which is now codified within ASC 855 Subsequent Events. SFAS No.
165 establishes
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. The adoption of SFAS No. 165 on June 30, 2009
required us to disclose the date through which we have evaluated subsequent
events and whether that date is the date the financials were
issued.
4.
|
INVENTORIES
|
Inventories
consist of the following (all amounts in thousands):
September
30,
2009
|
December
31,
2008
|
|||||||
Raw
materials
|
$ | 4,945 | $ | 5,822 | ||||
Work-in-process
|
2,874 | 3,484 | ||||||
Finished
goods
|
1,915 | 2,141 | ||||||
$ | 9,734 | $ | 11,447 |
10
5.
|
GOODWILL
|
Goodwill
represents the excess of the cost of acquiring CTI over the net fair value
assigned to the assets acquired and liabilities assumed. Changes in the carrying
amount of goodwill between December 31, 2008 and September 30, 2009 consist of
the following (all amounts in thousands):
Balance
on December 31, 2008
|
$
|
60,896
|
||
Finalization
of the fair value of intangible assets
|
(2,024
|
)
|
||
Finalization
of the fair value of property, plant & equipment
|
(372
|
)
|
||
Additional
Acquisition costs recognized
|
435
|
|||
Adjustments
to deferred taxes associated with tangible and intangible asset
valuations
|
(549
|
)
|
||
Changes
due to foreign currency translation adjustments
|
66
|
|||
Balance
on September 30, 2009
|
$
|
58,452
|
6.
|
NOTES
PAYABLE
|
Effective
September 1, 2009, CTI, Cyalume and TD Bank, N.A. entered into a First Amendment
to Credit Agreement and Limited Waiver (the “Loan Amendment”). The Loan
Amendment was signed on September 11, 2009 and amends the Revolving Credit and
Term Loan Agreement (the “Original Credit Agreement”) dated as of December 19,
2008 among CTI, Cyalume and TD Bank, N.A. The Loan Amendment was attributable to
CTI not meeting two financial covenants that utilize non-GAAP measurements
contained in our Original Credit Agreement. The Loan Amendment, among other
things:
|
·
|
Waived
the requirement that CTI be in compliance as of June 30, 2009 with certain
financial covenants contained in the Original Credit
Agreement;
|
|
·
|
Changed
the maturity date of the line of credit from December 19, 2011 to December
31, 2010;
|
|
·
|
Increased
the Base Rate charged on the line of credit by an Applicable Margin, which
is defined in the Loan Amendment;
|
|
·
|
Reduced
the maximum management fee that CTI may pay to Cyalume from $125,000 per
quarter to $21,000 per month;
|
|
·
|
Increased
the maximum allowable Leverage Ratios for the months of September 2009
through December 2009 and
|
|
·
|
Added
a minimum quarterly EBITDA
covenant.
|
As of September 30, 2009, CTI achieved
the required minimum
quarterly EBITDA covenant,
but did not achieve the
service coverage and
leverage ratio covenants in the Original Credit Agreement, as amended. Effective
November 20, 2009 CTI, Cyalume and TD Bank, N.A. reached an agreement that will
result in the following changes to the Original Credit Agreement, as amended:
|
·
|
Waived the requirement that CTI be
in compliance as of September 30, 2009 with the service coverage and leverage
ratio covenants
contained in the Original Credit Agreement, as amended by the Loan
Amendment;
|
|
·
|
Requires that all net proceeds
from any new subordinated debt or equity offerings be used to pay-down
senior debt;
|
|
·
|
Requires the Company to receive at
least $3.0 million in new subordinated debt or equity offering before
April 30, 2010;
|
|
·
|
Set new schedules of required
ratios for maximum senior leverage, minimum fixed charge coverage and
minimum total debt service coverage ratios and set new quarterly EBITDA
targets to take effective December 31, 2009 and
|
|
·
|
Requires the Company to maintain
$1.0 million cash on the consolidated balance
sheet.
|
We fully
expect to achieve the revised covenants of the Revolving Credit and Term Loan
Agreement and all subsequent amendments. There have been no principal or
interest payment defaults on these notes and we do not expect any such payment
defaults in the future.
7.
|
NOTES
PAYABLE AND ADVANCE DUE TO RELATED
PARTIES
|
In July
2009, $55,000 of the $64,000 notes payable due to related parties that existed
at December 31, 2008 was repaid in full, along with all accrued interest,
through the issuance of 17,150 restricted and unregistered shares of our common
stock.
11
8.
|
DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES
|
The
derivative liabilities as of September 30, 2009 in our condensed consolidated
balance sheet consist of the following (all amounts in thousands):
Derivative
Instrument
|
Balance
Sheet Location
|
Fair
Value
|
||||
Currency
forward contract
|
Accrued
expenses and other current liabilities (current
liabilities)
|
$
|
(3
|
)
|
||
Interest
rate swaps
|
Derivatives
(noncurrent liabilities)
|
(127
|
)
|
The
Predecessor did not hold any derivative instruments before the
Acquisition.
Interest
Rate Swaps
Simultaneous
with the Acquisition, we entered into two pay-fixed, receive-variable interest
rate swaps to reduce exposure to changes in cash payments caused by changes in
interest rates on certain senior long-term notes payable that were also entered
into on the date of the Acquisition. Both relationships are designated as cash
flow hedges and meet the criteria for the shortcut method for assessing hedge
effectiveness; therefore, the hedge is assumed to be 100% effective and all
changes in the fair value of the interest rate swaps are recorded in
consolidated accumulated other comprehensive income (loss). These changes in
fair value must be reclassified in whole or in part from consolidated
accumulated other comprehensive income (loss) into earnings if, and when, a
comparison of the swaps and the related hedged cash flows demonstrates that the
shortcut method is no longer applicable. We expect these hedges to meet the
criteria of the shortcut method for the duration of the hedging relationship and
therefore we do not expect to reclassify any portion of these unrealized losses
from consolidated accumulated other comprehensive income (loss) to earnings in
the future.
The fair
values of the swaps are determined by discounting the estimated cash flows to be
received and paid due to the swaps over the swaps’ contractual lives using an
estimated risk-free interest rate for each swap settlement date.
Currency
Forward Contracts
CTSAS’
functional currency is the Euro. Periodically, CTSAS purchases inventory from
CTI, which requires payment in U.S. dollars. Beginning in 2009 and only under
certain circumstances, we use currency forward contracts to mitigate CTSAS’
exposure to changes in the Euro-to-U.S.-dollar exchange rate upon CTSAS’ payment
to CTI for these inventory purchases. Such currency forward contracts
typically have durations of less than six months. We report these currency
forward contracts at their fair value. This relationship has not been designated
as a hedge and therefore all changes in these currency forward contracts’ fair
value are recorded in other expenses (income) on our condensed consolidated
statement of operations. The fair value of these
contracts are determined by taking the difference between (a) the U.S. dollar
amount due on the contract at maturity and (b) the present value of estimated
cash flows developed using, among other data, expectations of future currency
exchange rates over the remaining term of the contract discounted at an
estimated risk-free interest rate. At September 30, 2009, we held one
such currency forward contract.
Effect
of Derivatives on Statement of Operations
The
effect of derivative instruments (a) designated as cash flow hedges and (b) not
designated as hedging instruments on our condensed consolidated statement of
operations for the three months ended September 30, 2009 was as follows (all
amounts in thousands):
Gain
(Loss)
|
Gain
(Loss)
|
Gain
(Loss)
|
||||||||||
In
AOCI (1)
|
Reclassified
(2)
|
in
Earnings (3)
|
||||||||||
Derivatives
designated as cash flow hedges:
|
||||||||||||
Interest
rate swaps
|
$ | (96 | ) | $ | — | $ | — | |||||
Derivatives
not designated as hedging instruments:
|
||||||||||||
Currency
forward contracts
|
$ | — | $ | — | $ | (3 | ) |
(1)
|
Amount
recognized in accumulated other comprehensive income (loss) (AOCI)
(effective portion and net of taxes) during the three months ended
September 30, 2009.
|
(2)
|
Amount
of gain (loss) originally recorded in AOCI but reclassified from AOCI into
earnings during the three months ended September 30,
2009.
|
(3)
|
Amount
of gain (loss) recognized in earnings on the derivative (ineffective
portion and amount excluded from effectiveness testing) reported in other
expenses (income) on the condensed consolidated statement of operations
for the three months ended September 30,
2009.
|
12
The
effect of derivative instruments (a) designated as cash flow hedges and (b) not
designated as hedging instruments on our condensed consolidated statement of
operations for the nine months ended September 30, 2009 was as follows (all
amounts in thousands):
Gain
(Loss)
|
Gain
(Loss)
|
Gain
(Loss)
|
||||||||||
In
AOCI (1)
|
Reclassified
(2)
|
in
Earnings (3)
|
||||||||||
Derivatives
designated as cash flow hedges: relationships:
|
||||||||||||
Interest
rate swaps
|
$ | 22 | $ | — | $ | — | ||||||
Derivatives
not designated as hedging instruments:
|
||||||||||||
Currency
forward contracts
|
$ | — | $ | — | $ | (3 | ) |
(1)
|
Amount
recognized in accumulated other comprehensive income (loss) (AOCI)
(effective portion and net of taxes) during the nine months ended
September 30, 2009.
|
(2)
|
Amount
of gain (loss) originally recorded in AOCI but reclassified from AOCI into
earnings during the nine months ended September 30,
2009.
|
(3)
|
Amount
of gain (loss) recognized in earnings on the derivative (ineffective
portion and amount excluded from effectiveness testing) reported in other
expenses (income) on the condensed consolidated statement of operations
for the nine months ended September 30,
2009.
|
9.
|
SHARE-BASED
AWARDS
|
On March
3, 2009, our Board of Directors adopted the Cyalume Technologies Holdings, Inc.
2009 Omnibus Securities and Incentive Plan (the “Plan”). The Plan was approved
during our Annual Meeting of the Stockholders on June 18, 2009. The purpose of
the Plan is to benefit our stockholders by assisting us to attract, retain and
provide incentives to key management employees and non-employee directors of,
and non-employee consultants to, Cyalume Technologies Holdings, Inc. and its
subsidiaries, and to align the interests of such employees, non-employee
directors and non-employee consultants with those of our stockholders.
Accordingly, the Plan provides for the granting of Distribution Equivalent
Rights, Incentive Stock Options, Non-Qualified Stock Options, Performance Share
Awards, Performance Unit Awards, Restricted Stock Awards, Stock Appreciation
Rights, Tandem Stock Appreciation Rights, Unrestricted Stock Awards or any
combination of the foregoing, as may be best suited to the circumstances of the
particular employee, director or consultant as provided herein. Two million
shares have been reserved under the Plan.
Also on
March 3, 2009, the Board of Directors authorized under the Plan the following
awards: (i) 75,000 restricted shares of common stock to non-employee
consultants; (ii) 119,333 restricted shares of common stock and 200,000
restricted options to our executive officers and other management; and, (iii) a
total of 82,500 options to directors. Details on these awards are as
follows:
|
·
|
The
75,000 restricted common shares to non-employee consultants (including
45,000 earned by our current Chief Executive Officer as a consultant to
Vector prior to becoming our Chief Executive Officer) are to be issued as
payment for services rendered in conjunction with the Acquisition. The
fair value of this award was determined to be $225,000 using the quoted
market price of the common stock on March 3, 2009 of $3. This is recorded
as an increase to goodwill related to the Acquisition on the accompanying
condensed consolidated balance sheet as of September 30, 2009. These
restricted shares will vest over a 3-year period with no provision
requiring continued employment or
service.
|
|
·
|
The
100,333 restricted common shares to officers and other management are (i)
compensation for their services in 2009, (ii) earned based on meeting
board-determined performance goals and (iii) require continued employment
over the 3-year vesting period. The fair value of the award was determined
to be $151,000 using the quoted market price of the common stock on March
3, 2009 of $3 and applying appropriate estimated forfeiture
rates.
|
|
·
|
The
9,000 restricted common shares to our executive officers and other
management are (i) compensation for their services during 2008, (ii) were
earned based on meeting board-determined goals and (iii) require continued
employment over the 3-year vesting period. The fair value of the award was
determined to be $27,000, using the quoted market price of the common
stock on March 3, 2009 of $3.
|
13
|
·
|
Remaining
restricted common shares totaling 10,000 have been reserved for future
awards.
|
|
·
|
The
200,000 restricted options to our Chief Executive Officer are (i)
compensation for his services in 2009, (ii) earned based on meeting
board-determined performance goals and (iii) require continued employment
over the 3-year vesting period. The 82,500 options to directors are
compensation for their services as directors that will vest immediately.
The award’s fair value of $386,000 was determined using the Black-Scholes
pricing model. The following assumptions were used to value the
award:
|
Risk-free
interest rate
|
2.93
|
%
|
||
Expected
term
|
10
years
|
|||
Expected
volatility (1)
|
34.11
|
%
|
||
Expected
forfeitures for options to our chief executive officer
|
50
|
%
|
||
Expected
forfeitures for options to our directors
|
0
|
%
|
||
Dividend
yield
|
0
|
%
|
On April
24, 2009, the Board of Directors awarded to one director warrants to purchase
150,000 shares of our common stock at $3.50 per share under the Plan. The
warrants are for compensation for services as director that vested immediately.
The award’s fair value of $110,000 was determined using the Black-Scholes
pricing model. The following assumptions were used to value the
award:
Risk-free
interest rate
|
1.87
|
%
|
||
Expected
term
|
5
years
|
|||
Expected
volatility (1)
|
25.98
|
%
|
||
Expected
forfeitures for options to our directors
|
0
|
%
|
||
Dividend
yield
|
0
|
%
|
On July
17, 2009, the Board of Directors granted 40,000 restricted shares of common
stock and 110,000 restricted options to one of our executive officers under the
Plan. These restricted shares and options are (i) compensation for
his services in 2009, (ii) earned based on meeting board-determined performance
goals and (iii) require continued employment over the 4-year vesting period. The
fair value of the stock award was determined to be $157,000 using the quoted
market price of the common stock on July 17, 2009 of $3.93 and applying
appropriate estimated forfeiture rates. The fair value of the option award was
determined to be $223,000 using was determined using the Black-Scholes pricing
model. The following assumptions were used to value the award:
Risk-free
interest rate
|
3.67
|
%
|
||
Expected
term
|
10
years
|
|||
Expected
volatility (1)
|
33.99
|
%
|
||
Expected
forfeitures
|
50
|
%
|
||
Dividend
yield
|
0
|
%
|
|
(1)
|
Because
our common stock did not have a trading history that was representative of
an operating company as of the date of the award, the expected volatility
assumption was derived using historical data of another public company
operating in our industry. We believe the volatility estimate calculated
from that company is a reasonable benchmark to use in estimating the
expected volatility of our common stock; however, that estimated
volatility may not necessarily be representative of the volatility of the
underlying securities in the
future.
|
On May
16, 2009, the Board of Directors awarded 7,000 common shares to a non-employee
consultant as payment for investor relations-related services performed. The
fair value of this award was determined to be $25,000 using the quoted market
price of the common stock on May 16, 2009 of $3.50 per share. These
7,000 shares are not registered and were not issued under the Cyalume
Technologies Holdings, Inc. 2009 Omnibus Securities and Incentive
Plan.
During
the three and nine months ended September 30, 2009, total expense recorded for
all awards described above was $62,000 and $271,000, respectively.
14
10.
|
RESTRUCTURING
COSTS
|
During
nine months ended September 30, 2008, the Predecessor underwent a corporate
restructuring pursuant to which the CEO and two Vice-Presidents left CTI,
resulting in a restructuring charge of $1.1 million. The following
table summarizes the restructuring cost liability’s activity from December 31,
2008 through September 30, 2009 (all amounts in thousands):
Balance
on December 31, 2008
|
$
|
229
|
||
Cash
payments
|
(229
|
)
|
||
Balance
on September 30, 2009
|
$
|
—
|
The $1.1
million of restructuring charges is included in the Predecessor’s condensed
consolidated statement of operations as an other expense for the nine
months ended September 30, 2008.
11.
|
INCOME
TAXES
|
For the
nine months ended September 30, 2009 and for the Predecessor’s nine months ended
September 30, 2008, effective tax rates of 44% and 37%, respectively, differed
from the statutory rate of 34% due to state and foreign taxes. For the nine
months ended September 30, 2008, the effective tax rate of (7)% differed from
the statutory rate of 34% due to tax-exempt interest income, state taxes and an
increase in the valuation allowance on deferred income tax assets.
For the
three months ended September 30, 2009 and for the Predecessor’s three months
ended September 30, 2008, effective tax rates of (87)% and 42%, respectively,
differed from the statutory rate of 34% due to state and foreign taxes. For the
three months ended September 30, 2008, the effective tax rate of 3% differed
from the statutory rate of 34% due to tax-exempt interest income, state taxes
and an increase in the valuation allowance on deferred income tax
assets.
12.
|
NET
INCOME (LOSS) PER COMMON SHARE
|
Basic net
income (loss) per common share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding. Diluted net income (loss)
per common share is computed by dividing net income (loss) by the weighted
average number of common shares and dilutive potential common share equivalents
then outstanding. Potential common shares consist of shares issuable upon the
exercise of warrants and options (using the treasury stock method).
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|||||||||||||||
Basic:
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Net
income (loss) (in thousands)
|
$ | 325 | $ | 58 | $ | (943 | ) | $ | 276 | |||||||
Weighted
average shares
|
15,352,478 | 9,375,000 | 15,089,909 | 9,375,000 | ||||||||||||
Basic
income (loss) per common share
|
$ | 0.02 | $ | 0.01 | $ | (0.06 | ) | $ | 0.03 | |||||||
Diluted:
|
||||||||||||||||
Net
income (loss) (in thousands)
|
$ | 325 | $ | 58 | $ | (943 | ) | $ | 276 | |||||||
Weighted
average shares
|
15,352,478 | 9,375,000 | 15,089,909 | 9,375,000 | ||||||||||||
Effect
of dilutive securities
|
66,471 | 2,569,844 | — | (1) | 2,521,460 | |||||||||||
Weighted
average shares, as adjusted
|
15,418,949 | 11,944,844 | 15,089,909 | 11,896,460 | ||||||||||||
Diluted
income (loss) per common share
|
$ | 0.02 | $ | — | $ | (0.06 | ) | $ | 0.02 |
(1)
|
Since
we experienced a loss during this period, common shares issuable upon
exercise of convertible securities were excluded from the loss per share
calculation because the effect would be
antidilutive.
|
15
The
following common shares issuable upon exercise of convertible securities were
excluded from the calculation of diluted net income (loss) per common share
because their effect was antidilutive for each of the periods
presented:
For
The Periods Ended September 30,
|
||||||||
2009
|
2008
|
|||||||
Warrants
|
4,370,256 | — | ||||||
Options
|
1,855,000 | 1,462,500 |
13.
|
COMMITMENTS
AND CONTINGENCIES
|
Legal
We do not
expect that the various legal proceedings we are involved in, including those
discussed in the following paragraph, will have a material adverse effect on our
future financial position, operating results, or cash flows.
As
discussed in Note 2, we acquired CTI on December 19, 2008. As part of the
Acquisition, we acquired CTI’s exposure to litigation that existed at the
acquisition date. On January 23, 2006, GMS acquired all of the outstanding
capital stock of Omniglow Corporation (the “Transaction”) and changed the name
of the company to CTI. Prior to, or substantially simultaneously with, the
Transaction, CTI sold certain assets and liabilities related to Omniglow
Corporation’s novelty and retail business to certain former Omniglow Corporation
stockholders and management (the “Omniglow Buyers”). This was done
because CTI sought to retain only the Omniglow Corporation assets and current
liabilities associated with its government, military and safety business. During
2006, CTI and the Omniglow Buyers commenced litigation and arbitration
proceedings against one another. Claims include breaches of a lease and breaches
of various other agreements between CTI and the Omniglow Buyers. The
Omniglow Buyers seek compensatory damages of $1.4 million, to be trebled, and
recovery of costs and legal fees. We have filed for damages of $368,000 against
the Omniglow Buyers. We continue to rigorously defend our position on
these matters, as we believe the Omniglow Buyers’ claims to be without
merit.
During
2006, CTI and the former stockholders of Omniglow (“Sellers”) commenced
arbitration proceedings against one another that are separate and distinct from
those discussed in the previous paragraph. These arbitration proceedings
included claims with respect to certain representations, warranties, contracts,
covenants and other agreements in connection with the Transaction and a number
of other unrelated items. In January 2008, CTI reached settlement with the
Sellers on all matters, which resulted in CTI receiving $3.0 million in cash.
The terms of the settlement, which was reached to minimize the parties' risk,
time and cost of further litigation, gave no explicit consideration as to
whether the disputes being resolved arose in the purchase process or pursuant to
subsequent events. Consequently, CTI presented the settlement as a gain in 2008,
rather than an adjustment to the purchase price. The net gain of $2.8 million is
included in other income on the accompanying condensed consolidated financial
statements of the Predecessor for the nine months ended September 30,
2008.
14.
|
FAIR
VALUE
|
Fair
value is an exit price that represents the amount that would be received upon
sale of an asset or paid to transfer a liability in an orderly transaction
between market participants. We group all assets and liabilities reported at
fair value based on significant levels of inputs as follows:
Level
1
|
Quoted
prices for identical assets or liabilities in active markets to which we
have access at the measurement date.
|
Level
2
|
Inputs
other than quoted prices included within Level 1 that are observable for
the asset or liability, either directly or indirectly.
|
Level
3
|
Unobservable
inputs for the asset or liability.
|
The
determination of where assets and liabilities fall within this hierarchy is
based upon the lowest level of input that is significant to the fair value
measurement. As of September 30, 2009, the only assets and liabilities required
to be measured at fair value on a recurring basis were the interest rate swaps
and the currency forward contract described in Note 8, all of which are measured
at fair value using Level 2 inputs.
We have
other non-derivative financial instruments, such as cash, accounts receivable,
accounts payable, accrued expenses and long-term debt, whose carrying amounts
approximate fair value.
16
15.
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
Cash Paid for Interest and Income
Taxes (all amounts in thousands):
Nine
Months Ended September 30,
|
Predecessor
For
the Nine Months Ended September 30,
|
|||||||||||
2009
|
2008
|
2008
|
||||||||||
Interest
|
$ | 1,495 | $ | — | $ | 3,207 | ||||||
Income
taxes
|
608 | — | 2,046 |
Non-Cash Investing and Financing
Activities (all amounts in thousands):
Nine
Months Ended September 30,
|
Predecessor
For
the Nine Months Ended September 30,
|
|||||||||||
2009
|
2008
|
2008
|
||||||||||
Increase
in the Acquisition date fair value of intangible assets (a reduction of
goodwill)
|
$ | 2,024 | $ | — | $ | — | ||||||
Increase
in the Acquisition date fair value of property, plant & equipment (a
reduction of goodwill)
|
372 | — | — | |||||||||
Accrual
of costs directly related to the Acquisition (an increase to
goodwill)
|
435 | — | — | |||||||||
Reduction
of goodwill resulting from subsequent recognition of deferred
taxes
|
549 | — | — | |||||||||
Remeasurement
of asset retirement obligation
|
26 | — | — | |||||||||
Extinguishment
of notes payable due to related parties by issuing common
stock
|
82 | — | — |
16.
|
SUBSEQUENT
EVENTS
|
See Note 6 for a discussion of an
agreement with our senior lender that was reached on November 23,
2009.
On November 18, 2009, we entered
to a Management Agreement with Selway Capital, LLC (“Selway”) that provides for
(but is not limited to) the following services to be performed by Selway on our
behalf:
|
1)
|
Strategic
development and implementation as well as consultation to our chief
executive officer on a regular basis as per his reasonable
requests;
|
|
2)
|
Identifying
strategic partners with companies with which Selway has relationships and
access. In this connection, Selway will focus on building partnerships
with companies in Israel, Singapore, India and Europe. The focus will be
on the expansion of our munitions
business;
|
|
3)
|
Advise
and support us on our investor relations
strategy;
|
|
4)
|
Advise
and support our future fund raising, including identifying sources of
capital in the United States; and
|
|
5)
|
Support
our mergers and acquisitions strategy and play an active role in our due
diligence and analysis.
|
The
Management Agreement stipulates that these services will be performed by Yaron
Eitan, a member of our board of directors and an employee of Selway, with the
assistance as needed from other employees of Selway. The Management
Agreement is retroactive to October 1, 2009, expires on October 1, 2012 and can
terminated by either us or Selway upon 30-days’ written notice or upon our
default in payment or Selway’s failure to perform services under the Management
Agreement. Selway’s compensation for these services will be $41,666.67 per month
for the duration of the Management Agreement. However, we are only required to
pay $11,000 per month through January 31, 2010 with the balance of $31,666.67
per month remaining unpaid until our senior lender consents to such payment.
Additionally, Selway can earn a $210,000 bonus, payable in cash or our common
stock at the discretion of our board of directors. We will also reimburse Selway
for costs incurred specifically on our behalf for these services. Under the
Management Agreement, we indemnify Selway and Selway indemnifies us against
certain losses incurred while carrying out its obligations under the Management
Agreement.
17
ITEM 2.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
This
discussion and analysis should be read in conjunction with the consolidated
financial statements and notes to the consolidated financial statements that are
included in our Annual Report on Form 10-K for the fiscal year ended December
31, 2008 (the Annual Report), as well as the consolidated financial statements
(unaudited) and notes to the condensed consolidated financial statements
(unaudited) and accompanying notes contained in this report. This discussion
contains forward-looking statements that involve risks and uncertainties. Unless
the content otherwise requires, all references to "we", "us", the “Company" or
“Cyalume" in this Quarterly Report on Form 10-Q refers to Cyalume
Technologies Holdings, Inc.
Overview
On
December 19, 2008, we purchased Cyalume Technologies, Inc. (“CTI”). Prior to the
acquisition of CTI, we did not engage in any substantive commercial business.
The Results of Cyalume Operations section below compares the financial results
from our financial statements for the three-month and nine-month periods ended
September 30, 2009 to the comparable periods in 2008, which did not include the
operations of CTI, and also to the operating results of CTI (the “Predecessor”)
for the comparable periods in 2008.
Results
of Cyalume Operations
Revenues: For the three
months ended September 30, 2009, our revenues were $9.9 million, compared to
same period 2008 revenues for us of $0 and for the Predecessor of $10.8
million. For the nine months ended September 30, 2009, our revenues
were $24.4 million, compared to same period 2008 revenues for us of $0 and for
the Predecessor of $31.7 million. We did not engage in any substantive business
operations in the first three quarters of 2008, and as such we recorded no sales
during those quarters. For the three-month and nine-month periods ended
September 30, 2009, our sales were significantly lower than the Predecessor’s
sales for the comparable periods in 2008 due to a reduction in units of
both chemical light and reflective products sold to the U.S. Military and
foreign militaries. We believe this reduced demand for our products is
temporary as we are not aware of any material changes in the protocol for
the use of our products. Beginning in May 2009, orders from the U.S. Military
for chemical light products increased to more normal levels, which supports our
belief that the sales reduction is temporary. Primarily as a result of the
increased military orders for the chemical light products and ammunition
products, revenues for the three-month period ending September 30, 2009 were 24%
higher than revenues for the second quarter of 2009 and 49% higher than revenues
for the first quarter of 2009, although still below revenues for the same period
a year ago. Military-related revenues from our chemical light products during
the three-month period ending September 30, 2009 were 39% higher than revenues
for the second quarter of 2009 and 59% higher than revenues for the first
quarter of 2009. Revenues from our ammunition products of $4.7 million for the
nine-month period ended September 30, 2009 were approximately 162% higher than
for the same period in 2008, meeting our growth expectations and partially
offsetting declines in the other areas of our business. Sales of reflective
products have remained stable throughout 2009.
Gross profit: For the
three months ended September 30, 2009, our gross profit was $3.9 million,
compared to same period 2008 gross profit for us of $0 and for the Predecessor
of $5.4 million. For the nine months ended September 30, 2009, our
gross profit was $10.1 million, compared to same period 2008 gross profit for us
of $0 and for the Predecessor of $16.5 million. We did not engage in any
substantive business operations in the first three quarters of 2008, and as such
we recorded no cost of sales during those quarters. For the nine-month period
ended September 30, 2009, our cost of sales was significantly lower than the
Predecessor’s cost of sales for the comparable period in 2008 due to the
reduction in units sold during the first two quarters of 2009 discussed
above. For the three-month period ended September 30, 2009, our cost
of sales were $527,000 higher than the Predecessor’s cost of sales for the
comparable period in 2008 due to the increase in ammunition products sales
discussed above. Our gross margin for the nine-months ended September
30, 2009 was 41.2% compared to 52.0% for the Predecessor in 2008. The decline in
gross margin is attributable to the decline in sales of higher-margin chemical
light sticks to the U.S. Military and the amortization of $655,000 of the
inventory step-up to fair market value arising from the acquisition of CTI
included in cost of goods sold. We anticipate the amortization of the remaining
$67,000 step-up in the fourth quarter of 2009.
Sales and marketing expenses:
For the three months ended September 30, 2009, our sales and marketing
expenses were $791,000, compared to same period 2008 sales and marketing
expenses for us of $0 and for the Predecessor of $738,000. For the nine months
ended September 30, 2009, our sales and marketing expenses were $2.3 million,
compared to same period 2008 sales and marketing expenses for us of $0 and for
the Predecessor of $2.5 million. We did not engage in any substantive business
operations in the first three quarters of 2008, and as such we recorded no sales
and marketing expense during those quarters. The reduction compared to the
Predecessor is due to the change in commercial sales strategies to make more
extensive use of distributors who have established key relations with end-users,
rather than trying to sell direct to consumers, thus reducing direct selling
expenses.
General and administrative
expenses: For the three months ended September 30, 2009, our
general and administrative expenses were $887,000, compared to same period 2008
general and administrative expenses for us of $225,000 and for the Predecessor
of $1.2 million. For the nine months ended September 30, 2009, our general and
administrative expenses were $3.5 million, compared to same period 2008 general
and administrative expenses for us of $637,000 and for the Predecessor of $3.5
million. We did not engage in any substantive business operations in
the first three quarters of 2008, and as such the only general and
administrative expenses incurred were those related to the efforts to consummate
a business acquisition and fulfilling our obligations as a publicly traded
company. The business acquisition-related expenses ended in 2008 with the
acquisition of CTI. Our general and administrative expenses for the three-months
ended September 30, 2009 are less than the Predecessor’s for the comparable
period in 2008 due to a decrease in legal expenses.
18
Interest expense (income),
net: For the three months ended September 30, 2009, our interest
expense was $673,000, compared to same period 2008 interest income for us of
$287,000 and interest expense for the Predecessor of $1.2 million. For the nine
months ended September 30, 2009, our interest expense was $1.9 million, compared
to same period 2008 interest income for us of $899,000 and interest expense for
the Predecessor of $3.7 million. In 2008, we earned interest income on cash held
in trust pending the completion of an acquisition. In December 2008, this cash
was used to purchase CTI, and therefore, our interest income in 2009 has been
minimal. Additionally, we borrowed $33.0 million in notes payable to complete
the acquisition of CTI, which resulted in our recording interest expense in
2009. Interest expense has decreased compared to the Predecessor due to our
having less debt and paying lower average interest rates than the
Predecessor.
Amortization of intangible
assets: For the three months ended September 30, 2009, our
amortization of intangible asset expense was $878,000, compared to same period
2008 amortization of intangible asset expense for us of $0 and for the
Predecessor of $659,000. For the nine months ended September 30, 2009, our
amortization of intangible asset expense was $2.6 million, compared to same
period 2008 amortization of intangible asset expense for us of $0 and for the
Predecessor of $2.0 million. As a result of the acquisition of CTI, we recorded
significant intangible assets in December 2008. We are amortizing intangible
assets into expense in 2009, after having no amortization expense in the
comparable periods in 2008. The Predecessor had intangible assets as a result of
a prior acquisition, and related amortization of intangible assets expense in
2008.
Other loss (income), net:
For the three months ended September 30, 2009, our other loss expense was
$16,000, compared to same period 2008 other loss (income) for us of $0 and other
loss for the Predecessor of $59,000. For the nine months ended September 30,
2009, our other loss expense was $79,000, compared to same period 2008 other
loss (income) for us of $0 and other income for the Predecessor of $1.0 million.
In the first quarter of 2008, the Predecessor reached a settlement with the
pre-2006 owners of CTI in connection with litigation. The Predecessor received
$3.0 million in cash, resulting in a net gain of $2.8 million on the settlement.
Several one-time expenses partially offset this net gain. The most significant
was a restructuring charge of $1.1 million. The Predecessor implemented a
restructuring to facilitate its sale to us, pursuant to which the chief
executive officer and two vice-presidents left. In addition, the Predecessor
incurred approximately $0.6 million of costs related to the acquisition,
primarily legal and accounting fees.
Provision for (benefit from) income
taxes: The benefit from income taxes increased for the three-month and
nine-month periods ended September 30, 2009 as compared to the same periods
in 2008 due to net operating losses generated by CTI.
Balance
Sheet
Assets, other than cash:
Assets, other than cash, were $131.0 million at September 30, 2009 compared to
$134.6 million at December 31, 2008. The decrease is partly due to the
amortization of the inventory step up to fair market values recorded at the date
we acquired CTI and intangible assets amortization during the first nine months
of 2009. In addition, $2.0 million was moved from goodwill into other intangible
assets in the second quarter of 2009 and is now being amortized. The remaining
changes in asset values are the result of normal business
activities.
Liabilities: Liabilities were
$45.1 million at September 30, 2009, compared to $50.2 million at December 31,
2008. The decrease is due to: a) common stock subject to mandatory redemption
declining $1.1 million after the redemption of 139,850 shares of common stock
held by stockholders who voted against the acquisition of CTI and which was
finalized in the first quarter of 2009, and b) payments made on notes payable.
The remaining changes are the result of normal business activities.
Liquidity
and Capital Resources
Cash on
hand was $1.8 million at September 30, 2009 and $4.0 million at December 31,
2008. The decrease since December 31, 2008 resulted primarily from paying $1.1
million to complete the redemption of common stock as part of the acquisition of
CTI, $2.8 million in payments on the line of credit and notes payable, purchases
of long-lived assets of $449,000 and $263,000 to purchase shares of our common
stock from certain members of CTI management, partially offset by positive cash
flows from our operations.
As a
result of lower than anticipated sales, we did not meet two financial covenants
contained in our Revolving Credit and Term Loan Agreement as of June 30, 2009.
The Revolving Credit and Term Loan Agreement governs our notes payable, line of
credit and derivative transactions with our senior lender. Effective September
1, 2009, CTI, Cyalume and TD Bank, N.A. entered into a First Amendment to Credit
Agreement and Limited Waiver (the “Loan Amendment”). The Loan Amendment was
signed on September 11, 2009 and amends the Revolving Credit and Term Loan
Agreement (the “Original Credit Agreement”) dated as of December 19, 2008 among
CTI, Cyalume and TD Bank, N.A. The Loan Amendment was attributable to CTI not
meeting two financial covenants that utilize non-GAAP measurements contained in
our Original Credit Agreement. The Loan Amendment, among other
things:
|
·
|
Waived
the requirement that CTI be in compliance as of June 30, 2009 with certain
financial covenants contained in the Original Credit
Agreement;
|
19
|
·
|
Changed
the maturity date of the line of credit from December 19, 2011 to December
31, 2010;
|
|
·
|
Increased
the Base Rate charged on the line of credit by an Applicable Margin, which
is defined in the Loan Amendment;
|
|
·
|
Reduced
the maximum management fee that CTI may pay to Cyalume from $125,000 per
quarter to $21,000 per month;
|
|
·
|
Increased
the maximum allowable Leverage Ratios for the months of September 2009
through December 2009 and
|
|
·
|
Added
a minimum quarterly EBITDA
covenant.
|
As of September 30, 2009, CTI achieved
the required minimum
quarterly EBITDA covenant,
but did not achieve the
service coverage and
leverage ratio covenants in the Original Credit Agreement, as amended. Effective
November 20, 2009 CTI, Cyalume and TD Bank, N.A. reached an agreement that will
result in the following changes to the Original Credit Agreement, as amended:
|
·
|
Waived the requirement that CTI be
in compliance as of September 30, 2009 with the service coverage and leverage
ratio covenants
contained in the Original Credit Agreement, as amended by the Loan
Amendment;
|
|
·
|
Requires that all net proceeds
from any new subordinated debt or equity offerings be used to pay-down
senior debt;
|
|
·
|
Requires the Company to receive at
least $3.0 million in new subordinated debt or equity offering before
April 30, 2010;
|
|
·
|
Set new schedules of required
ratios for maximum senior leverage, minimum fixed charge coverage and
minimum total debt service coverage ratios and set new quarterly EBITDA
targets to take effective December 31, 2009 and
|
|
·
|
Requires the Company to maintain
$1.0 million cash on the consolidated balance
sheet.
|
We fully
expect to achieve the revised covenants of the Revolving Credit and Term Loan
Agreement and all subsequent amendments. There have been no principal or
interest payment defaults on these notes and we do not expect any such payment
defaults in the future.
During
the nine months ended September 30, 2009, 1,635,643 shares of common stock were
issued due to the exercise of common stock warrants. The impact on liquidity was
negligible as most warrants were exercised on a cashless basis.
Forecasted
principal and interest payments on bank debt for the next 12 months are $6.3
million and will be funded from operating cash flows. In 2008, we made $500,000
in bank debt payments, exclusive of the debt payments made at the acquisition of
CTI. CTI made principal and interest payments of $7.8 million in 2008 prior to
being acquired by us.
The 2009
capital expenditures budget is expected to be funded from operating cash flows.
In the second quarter of 2009 we began the implementation of a new company-wide
computer system to improve our operations and financial information. It is
anticipated that this implementation, when completed in 2010, will cost $600,000
to complete, with $134,000 incurred in the third quarter of 2009.
We believe that we will generate sufficient cash from operations to
continue operations for the next twelve months. We are considering financing alternatives
to comply with the above
described agreement with TD Bank.
Off-Balance
Sheet Arrangements
Other
than immaterial operating leases, we did not have any off-balance sheet
arrangements during 2009 or 2008.
Contractual
Obligations
As a
smaller reporting company, we are not required to provide information typically
disclosed under this item.
Critical
Accounting Policies
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Estimates are used when accounting for certain
items such as reserves for inventory, accounts receivable and deferred tax
assets; assessing the carrying value of intangible assets including goodwill;
determining the useful lives of property, plant and equipment and intangible
assets; and in determining asset retirement obligations. Estimates
are based on historical experience, where applicable, and assumptions that we
believe are reasonable under the circumstances. Due to the inherent
uncertainty involved with estimates, actual results may differ.
20
Revenue
Recognition
Revenue
from the sale of products is recognized when the earnings process is complete
and the risks and rewards of ownership have transferred to the customer. Costs
and related expenses to manufacture the products are recorded as costs of goods
sold when the related revenue is recognized.
We have
several significant contracts providing for the sale of indefinite quantities of
items at fixed per unit prices, subject to adjustment for certain economic
factors. Revenue under these contracts is recognized when goods ordered under
the contracts are received by the customer. Whenever costs change, we review the
pricing under these contracts to determine whether they require the sale of
products at a loss. To date, we have no loss contracts which would require the
accrual of future losses in the current financial statements.
Income
Taxes
Deferred
tax assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using enacted
tax rates and laws that will be in effect when the differences are expected to
reverse. Deferred tax assets are recognized when, based upon
available evidence, realization of the assets is more likely than
not.
When tax
returns are filed, it is highly certain that some positions taken would be
sustained upon examination by the taxing authorities, while others are subject
to uncertainty about the merits of the position taken or the amount of the
position that would be ultimately sustained. The benefit of a tax position is
recognized in the financial statements in the period during which, based on all
available evidence, management believes it is more likely than not that the
position will be sustained upon examination, including the resolution of appeals
or litigation processes, if any. Tax positions taken are not offset or
aggregated with other positions. Tax positions that meet the
more-likely-than-not recognition threshold are measured as the largest amount of
tax benefit that is more than 50 percent likely of being realized upon
settlement with the applicable taxing authority. The portion of the benefits
associated with tax positions taken that exceeds the amount measured as
described above is reflected as a liability for unrecognized tax benefits in the
accompanying balance sheet along with any associated interest and penalties that
would be payable to the taxing authorities upon examination.
We
classify interest on tax deficiencies as interest expense and income tax
penalties as other miscellaneous expenses.
Goodwill
Goodwill
is deemed to have an indefinite life and accordingly, is not subject to annual
amortization. Goodwill is subject to annual impairment reviews, and,
if conditions warrant, interim reviews based upon its estimated fair
value. Impairment charges, if any, are recorded in the period in
which the impairment is determined. No such charges have been recorded in the
three or nine month periods ended September 30, 2009 and 2008.
Intangible
Assets
Intangible
assets include developed technologies and patents, trademarks and trade names,
customer relationships and non-compete agreements, which are amortized over
their estimated useful lives (with the exception of trademarks and trade names,
which are considered to have indefinite useful lives and therefore are not
amortized). The carrying amounts of amortized intangible assets are reviewed for
impairment whenever events or changes in circumstances indicate that those
carrying amounts may not be recoverable. The carrying amounts of non-amortizing
intangible assets are reviewed for impairment annually. Costs incurred to renew
or extend the term of our intangible assets are expensed when
incurred.
Inventories
Inventories
are stated at the lower of cost (on a first-in first-out (“FIFO”) method) or net
realizable value. We periodically review the realizability of our
inventory. Provisions are established for potential obsolescence. Determining
adequate reserves for inventory obsolescence requires management’s judgment.
Conditions impacting the realizability of our inventory could cause actual asset
write-offs to be materially different than reported inventory reserve
balances.
Foreign
Operations and Currency
Accounts
of our foreign subsidiary are maintained in their local and functional currency,
the Euro. Monthly income statement account balances are converted to U.S.
dollars using that month’s average exchange rate. Assets and liabilities are
converted to U.S. dollars using the exchange rate in effect as of the balance
sheet date. Equity transactions are converted to U.S. dollars using the exchange
rate in effect as of the date of the transaction. Translation gains and losses
are reported as component of accumulated other comprehensive income (loss).
Gains and losses resulting from transactions which are denominated in other than
the functional currencies are reported as other income or loss in the statement
of operations in the period the gain or loss occurred.
21
ITEM 3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
As a
smaller reporting company, we are not required to provide information typically
disclosed under this item.
ITEM 4T.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of disclosure controls and procedures
Disclosure
controls and procedures are designed to ensure that information required to be
disclosed by us in reports filed or submitted under the Securities Exchange Act
of 1934 (“Exchange Act”) is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms. Disclosure controls
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed under the Exchange Act is accumulated and
communicated to management, including principal executive and financial
officers, as appropriate to allow timely decisions regarding required
disclosure. There are inherent limitations to the effectiveness of any system of
disclosure controls and procedures, including the possibility of human error and
the circumvention or overriding of the controls and procedures. Accordingly,
even effective disclosure controls and procedures can only provide reasonable
assurance of achieving their control objectives.
Our
management carried out an evaluation, under the supervision of our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures as of September 30, 2009. Based upon that
evaluation, our management, including our Chief Executive Officer and Chief
Financial Officer, concluded that the design and operation of our disclosure
controls and procedures were effective as of September 30, 2009.
Changes
in internal control over financial reporting
There was
no change in our internal control over financial reporting that occurred during
the three months ended September 30, 2009 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART II
– OTHER INFORMATION
ITEM 1.
|
LEGAL
PROCEEDINGS
|
Cyalume
is not currently a named party in any legal proceedings.
CTI is
currently named a defendant in Civil Action No. 06-706 in Superior Court of the
State of Massachusetts. Filing suit against CTI is Omniglow, LLC (the former
novelty business of CTI which was sold on January 23, 2006). CTI sold certain
assets and liabilities related to the novelty and retail business to certain
former shareholders and management (the “Omniglow Buyers”). This was
done because CTI sought to retain only the Omniglow Corporation business
activities associated with government, military and safety business. During
2006, CTI and the Omniglow Buyers commenced litigation and arbitration
proceedings against one another. Claims include breaches of a lease and breaches
of various other agreements between CTI and the Omniglow Buyers. The
Omniglow Buyers seek compensatory damages of $1.4 million, to be trebled, and
recovery of costs and legal fees. CTI has filed for damages of $368,000 against
the Omniglow Buyers. CTI continues to rigorously defend our position
on these matters, as we believe the Omniglow Buyers’ claims to be without merit.
Court hearings were held and completed in October 2008. A decision is expected
in late 2009.
As a
smaller reporting company, we are not required to provide information typically
disclosed under this item.
22
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
Purchases
of Equity Securities by the Company and Affiliated Purchasers
Period
|
Total
Number of Shares Purchased
|
Average
Price Paid per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
Maximum
Number (or Approximate Dollar Value) of Shares that May yet be
Purchased under the Plans or Programs
|
||||||||||||
January
1 to January 31
|
32,903 |
(1)
|
$ | 7.97 | — | $ | — | |||||||||
February
1 to February 28
|
— | — | — | — | ||||||||||||
March
1 to March 31
|
— | — | — | — | ||||||||||||
April
1 to April 30
|
— | — | — | — | ||||||||||||
May
1 to May 31
|
— | — | — | — | ||||||||||||
June
1 to June 30
|
— | — | — | — | ||||||||||||
July
1 to July 31
|
— | — | — | — | ||||||||||||
August
1 to August 31
|
— | — | — | — | ||||||||||||
September
1 to September 30
|
— | — | — | — |
(1)
|
The
shares were repurchased from members of management. These shares were a
portion of the shares that certain members of CTI’s management received
relating to the December 19, 2008 acquisition of CTI. Our Board of
Directors voted at its January 13, 2009 meeting to honor a pre-Acquisition
verbal commitment to repurchase 20% (or 32,903) of such shares to provide
the holders of those shares with cash to pay personal income taxes arising
from exchanging their shares of GMS Acquisition Partners for Cyalume
common stock during the acquisition of
CTI.
|
ITEM 3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
As a
result of lower than anticipated sales, we did not meet two financial covenants
contained in our Revolving Credit and Term Loan Agreement as of June 30, 2009.
The Revolving Credit and Term Loan Agreement governs our notes payable, line of
credit and derivative transactions with our senior lender. Effective September
1, 2009, CTI, Cyalume and TD Bank, N.A. entered into a First Amendment to Credit
Agreement and Limited Waiver (the “Loan Amendment”). The Loan Amendment was
signed on September 11, 2009 and amends the Revolving Credit and Term Loan
Agreement (the “Original Credit Agreement”) dated as of December 19, 2008 among
CTI, Cyalume and TD Bank, N.A. The Loan Amendment was attributable to CTI not
meeting two financial covenants that utilize non-GAAP measurements contained in
our Original Credit Agreement. The Loan Amendment, among other
things:
|
·
|
Waived
the requirement that CTI be in compliance as of June 30, 2009 with certain
financial covenants contained in the Original Credit
Agreement;
|
|
·
|
Changed
the maturity date of the line of credit from December 19, 2011 to December
31, 2010;
|
|
·
|
Increased
the Base Rate charged on the line of credit by an Applicable Margin, which
is defined in the Loan Amendment;
|
|
·
|
Reduced
the maximum management fee that CTI may pay to Cyalume from $125,000 per
quarter to $21,000 per month;
|
|
·
|
Increased
the maximum allowable Leverage Ratios for the months of September 2009
through December 2009 and
|
|
·
|
Added
a minimum quarterly EBITDA
covenant.
|
As of September 30, 2009, CTI achieved
the required minimum
quarterly EBITDA covenant,
but did not achieve the
service coverage and
leverage ratio covenants in the Original Credit Agreement, as amended. Effective
November 20, 2009 CTI, Cyalume and TD Bank, N.A. reached an agreement that will
result in the following changes to the Original Credit Agreement, as amended:
|
·
|
Waived the requirement that CTI be
in compliance as of September 30, 2009 with the service coverage and leverage
ratio covenants
contained in the Original Credit Agreement, as amended by the Loan
Amendment;
|
|
·
|
Requires that all net proceeds
from any new subordinated debt or equity offerings be used to pay-down
senior debt;
|
|
·
|
Requires the Company to receive at
least $3.0 million in new subordinated debt or equity offering before
April 30, 2010;
|
|
·
|
Set new schedules of required
ratios for maximum senior leverage, minimum fixed charge coverage and
minimum total debt service coverage ratios and set new quarterly EBITDA
targets to take effective December 31, 2009 and
|
|
·
|
Requires the Company to maintain
$1.0 million cash on the consolidated balance
sheet.
|
23
We fully
expect to achieve the revised covenants of the Revolving Credit and Term Loan
Agreement and all subsequent amendments. There have been no principal or
interest payment defaults on these notes and we do not expect any such payment
defaults in the future.
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
None.
ITEM 5.
|
OTHER
INFORMATION
|
There
were no changes to the procedures by which security holders may recommend
nominees to our Board of Directors during the three months ended September 30,
2009.
There is no information to report under this item in
lieu of reporting that information on Form 8-K except for the following
discussion.
On November 18, 2009, we entered
to a Management Agreement with Selway Capital, LLC (“Selway”) that provides for
(but is not limited to) the following services to be performed by Selway on our
behalf:
|
1)
|
Strategic
development and implementation as well as consultation to our chief
executive officer on a regular basis as per his reasonable
requests;
|
|
2)
|
Identifying
strategic partners with companies with which Selway has relationships and
access. In this connection, Selway will focus on building partnerships
with companies in Israel, Singapore, India and Europe. The focus will be
on the expansion of our munitions
business;
|
|
3)
|
Advise
and support us on our investor relations
strategy;
|
|
4)
|
Advise
and support our future fund raising, including identifying sources of
capital in the United States; and
|
|
5)
|
Support
our mergers and acquisitions strategy and play an active role in our due
diligence and analysis.
|
The
Management Agreement stipulates that these services will be performed by Yaron
Eitan, a member of our board of directors and an employee of Selway, with the
assistance as needed from other employees of Selway. The Management
Agreement is retroactive to October 1, 2009, expires on October 1, 2012 and can
terminated by either us or Selway upon 30-days’ written notice or upon our
default in payment or Selway’s failure to perform services under the Management
Agreement. Selway’s compensation for these services will be $41,666.67 per month
for the duration of the Management Agreement. However, we are only required to
pay $11,000 per month through January 31, 2010 with the balance of $31,666.67
per month remaining unpaid until our senior lender consents to such payment.
Additionally, Selway can earn a $210,000 bonus, payable in cash or our common
stock at the discretion of our board of directors. We will also reimburse Selway
for costs incurred specifically on our behalf for these services. Under the
Management Agreement, we indemnify Selway and Selway indemnifies us against
certain losses incurred while carrying out its obligations under the Management
Agreement.
The foregoing description of the terms
of the Management Agreement
is not complete and is qualified in its entirety by reference to the
Management
Agreement, a copy of which
is attached as Exhibit 10.3 to this Form 10-Q.
ITEM 6. EXHIBITS
Exhibit
Number
|
Description
|
|
10.1
|
Employment
agreement of Edgar Cranor, Technology Vice President, Cyalume
Technologies, Inc. (1)
|
|
10.2
|
First
Amendment to Credit Agreement and Limited Waiver, effective September 1,
2009, among CTI, Cyalume and TD Bank, N.A. under the Revolving Credit and
Term Loan Agreement dated as of December 19, 2008. (2)
|
|
10.3
|
*
|
Management Agreement between Cyalume
Technologies Holdings, Inc. and Selway Capital,
LLC.
|
31.1
|
*
|
Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
31.2
|
*
|
Certification
of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
32.1
|
*
|
Certification
of Principal Executive Officer and Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
|
*
|
Filed
herewith.
|
(1)
|
Incorporated
by reference to the Current Report on Form 8-K dated July 17, 2009 and
filed with the Commission July 22, 2009.
|
(2)
|
Incorporated
by reference to the Current Report on Form 8-K dated September 11, 2009
and filed with the Commission September 23,
2009.
|
24
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Cyalume
Technologies Holdings, Inc.
|
|||
Date:
November 23, 2009
|
By:
|
/s/ DEREK
DUNAWAY
|
|
Derek
Dunaway, Chief Executive Officer
|
|||
(Principal
Executive Officer)
|
Date:
November 23, 2009
|
By:
|
/s/ MICHAEL
BIELONKO
|
|
Michael
Bielonko, Chief Financial Officer
|
|||
(Principal
Financial Officer)
|
25