UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2010

OR

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

For the transition period from                             to                              

      Commission File Number 000-52247     

Cyalume Technologies Holdings, Inc.

(Exact name of registrant as specified in its charter)

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

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

(413) 858-2500

(Registrant's telephone number, including area code)

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

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

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

Large accelerated filer ¨

Accelerated filer ¨

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

Smaller reporting company x

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of August 2, 2010, there were outstanding 15,729,070 shares of the registrant’s Common Stock, par value $.001 per share.

 

---

 

 

Cyalume Technologies Holdings, Inc.

FORM 10-Q

 

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

 

2

---

 

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

8.	COMMITMENTS AND CONTINGENCIES

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

On January 23, 2006, before we owned CTI, the former owners of CTI (from whom we purchased CTI) (the “Former Owners”) acquired all of the outstanding capital stock of Omniglow Corporation (the “Transaction”) and changed the name of the company to Cyalume Technologies, Inc. Prior to, or substantially simultaneously with, the Transaction, CTI sold certain assets and liabilities related to Omniglow Corporation’s novelty and retail business to certain former Omniglow Corporation stockholders and management (“the Omniglow Buyers”).  This was done because CTI sought to retain only the Omniglow Corporation assets and current liabilities associated with its government, military and safety business. During 2006, CTI and the Omniglow Buyers commenced litigation and arbitration proceedings against one another. Claims include breaches of a lease and breaches of various other agreements between CTI and the Omniglow Buyers.  The Omniglow Buyers sought compensatory damages of $1.4 million, to be trebled, and recovery of costs and legal fees. CTI filed for damages of $368,000 against the Omniglow Buyers.  These proceedings are known as Civil Action No. 06-706 in Superior Court of the Commonwealth of Massachusetts.

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

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

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

 

12

---

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

Management Agreement with Board Member

On October 1, 2009, we entered into a management agreement with Selway Capital, LLC (“Selway”) that provides for (but is not limited to) the following services to be performed by Selway on our behalf:

·

Strategic development and implementation as well as consultation with our chief executive officer on a regular basis as per his reasonable requests;

·

Identifying strategic partnerships with companies with which Selway has relationships and access, including building partnerships with companies in Israel, Singapore, India and Europe. The focus will be on the expansion of our munitions business;

·

Advise and support us on our investor relations strategy;

·

Advise and support our future fund raising, including identifying sources of capital in the United States; and

·

Support our mergers and acquisitions strategy and play an active role in our due diligence and analysis.

The management agreement stipulates that these services will be performed by Yaron Eitan, a member of our Board of Directors and an employee of Selway, with the assistance as needed from other employees of Selway.  The management agreement is retroactive to August 1, 2009, expires on October 1, 2012 and can be terminated by either us or Selway upon 30-days’ written notice or upon our default in payment or Selway’s failure to perform services under the management agreement. Through July 2010, Selway’s compensation for these services was $41,667 per month. However, we were only required to pay $16,000 per month, with the balance of $25,667 per month remaining unpaid until our senior lender consented to such payment. We will also reimburse Selway for costs incurred specifically on our behalf for these services. Under the management agreement, we indemnify Selway and Selway indemnifies us against certain losses that may be incurred while carrying out its obligations under the management agreement.

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

9.	FAIR VALUE

Under U.S. GAAP, we are required to record certain financial assets and liabilities at fair value and may choose to record other financial assets and financial liabilities at fair value as well. Also under U.S. GAAP, we are required to record nonfinancial assets and liabilities at fair value due to events that may or may not recur in the future, such as an impairment event. When we are required to record such assets and liabilities at fair value, that fair value is estimated using an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. That fair value is determined based on significant inputs contained in a fair value hierarchy as follows:

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

The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

As of June 30, 2010, our only assets and liabilities required to be reported at fair value on a recurring basis were the interest rate swaps and currency forward contracts described in Note 5, both of which are measured at fair value using level 2 inputs.

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

 

13

---

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

10.	COLLABORATIVE ARRANGEMENT

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

11.	SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

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

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

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

		Six Months Ended June 30,
		2010				2009
Increase in the Acquisition date fair value of intangible assets (a reduction of goodwill)		$	—				2,024
Increase in the Acquisition date fair value of property, plant & equipment (a reduction of goodwill)			—				372
Accrual of costs directly related to the Acquisition (an increase to goodwill)			—				435
Reduction of goodwill resulting from subsequent recognition of deferred taxes			—				(549	)