Annual Reports

  • 20-F (Jul 6, 2010)
  • 10-K (Jun 3, 2010)
  • 10-K (Apr 9, 2010)
  • 10-K (Apr 8, 2010)
  • 10-K (Apr 7, 2010)
  • 10-K (Apr 6, 2010)

 
Quarterly Reports

 
8-K

 
Other

Volkswagen 10-K 2010

  

  

 

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



 

FORM 10-K



 

 
x   Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 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)

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



 

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Title of class

Common Stock, $0.001 par value
Common Stock Purchase Warrants
Units consisting of one share of Common Stock and one Common Stock Purchase Warrant



 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.Yes o No x

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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 the 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 x

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

The aggregate market value of Common Stock held by non-affiliates of the registrant (5,724,474 shares) based on the last reported sale price of the registrant’s Common Stock on the OTCBB on June 30, 2009, which was the last business day of the registrant’s most recently completed second fiscal quarter, was $20,035,659. For purposes of this computation, all officers, directors, and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed to be an admission that such officers, directors, or 10% beneficial owners are, in fact, affiliates of the registrant.

As of March 11, 2010, there were outstanding 15,405,570 shares of the registrant’s Common Stock, par value $.001 per share.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Registrant’s proxy statement for the 2010 Annual Meeting of Shareholders, which is to be filed subsequent to the date hereof, are incorporated by reference into Items 10 through 13 of this Form 10-K.

 

 


 
 

TABLE OF CONTENTS

CYALUME TECHNOLOGIES HOLDINGS, INC.
  
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 2009
  
TABLE OF CONTENTS

 
  Page No.
PART I
 

Item 1.

Business

    1  

Item 1A.

Risk Factors

    8  

Item 1B.

Unresolved Staff Comments

    12  

Item 2.

Properties

    12  

Item 3.

Legal Proceedings

    13  

Item 4.

Reserved for Future Use by the Securities and Exchange Commission

    14  
PART II
 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

    14  

Item 6.

Selected Financial Data

    15  

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

    15  

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

    25  

Item 8.

Financial Statements and Supplementary Data

    25  

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

    25  

Item 9A(T).

Controls and Procedures

    25  

Item 9B.

Other Information

    26  
PART III
 

Item 10.

Directors, Executive Officers and Corporate Governance

    27  

Item 11.

Executive Compensation

    27  

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

    27  

Item 13.

Certain Relationships and Related Transactions, and Director Independence

    27  

Item 14.

Principal Accountant Fees and Services

    28  
PART IV
 

Item 15.

Exhibits and Financial Statement Schedules

    30  
Signatures
        

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PART I

The statements contained in this annual report on Form 10-K, including under the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other sections of this annual 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 annual 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. These risks and uncertainties include, but are not limited to, those factors described in the section titled “Risk Factors.” 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.

ITEM 1: BUSINESS

Current Business

We primarily produce products based on technologies whereby light is generated through a chemical reaction known as chemiluminescence. The base product is known as a “light stick” and is typically 6 inches in length. A light stick is a translucent flexible plastic tube that is partly filled with one chemical ingredient and also with a glass container (“ampoule”) that contains a complementary reactive chemical. When the tube is bent enough to break the glass ampoule, the chemicals contained within the plastic tube mix and light is generated. In addition, we also produce reflective (patches) and reflective plus photoluminescent (fire tape) products.

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

Light sticks come in lengths ranging from 1.5 inches to 15 inches. Durations for specified light output range from 5 minutes to 24 hours. Colors emitted include red, blue, white, yellow, green, orange and infrared.
Training ammunition that provides day/night marking and illumination as components of training ammunition.
Reflective products include patches that can reflect white light or infrared, and safety belts.

See Product Applications for a discussion of the many uses of these products.

We maintain our principal executive offices at 96 Windsor Street, West Springfield, Massachusetts 01089. Our telephone number is 413 858-2500. The various reports we file with the SEC, including our annual reports on Form 10-K, our proxy statements, our quarterly reports on Form 10-Q, and our current reports on Form 8-K are available on our website (www.cyalume.com) free of charge. Our website also contains the charters for our Audit, Nominating and Compensation Committees of the Board of Directors as well as our Code of Conduct and Ethics and our Insider Trading Policy. The documents are also available free of charge from our Corporate Secretary at our executive offices.

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

Our products are manufactured at both the West Springfield and Aix-en-Provence locations.

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Business Strategy

Overall Approach:  We have a four-pronged approach for ensuring long-term success.

Patent Protection.  We have and will continue to pursue patent protection of developed technology, and will continue to aggressively defend against violators of our patents. We do not believe that direct competitors in the chemiluminescent field commit significant resources to research and development. By conducting research and development, we expect to have a distinct competitive advantage in maintaining our market leading position.
Environmental Initiatives.  As evidenced by the news media, governments and the public are becoming more and more concerned with protecting the environment.
Federal law now bans the use of phthalates as a possible human health risk, so we have developed light sticks that are phthalate free.
Our recently signed contract with the U.S. military (discussed below in Customers) requires that we certify that none of the chemical components have any reporting requirements under SARA (Superfund Amendments and Reauthorization Act) and that none of the chemical components are defined as hazardous or have any release reporting requirements under CERCLA (Comprehensive Environmental Response Compensation and Liability Act). We believe our products are the only products that meet these standards.
We offer a bio-degradable light stick that meets the specifications that the NATO Maintenance and Supply Agency (“NAMSA”) developed in response to their member countries’ concerns over landfill capacity.
The U.S. military has environmental and operational concerns about the use of live ammunition in training exercises, so we have created a 40 mm training round for the military that is non pyrotechnic and does not contain heavy metals.
Product Diversification.  Over the next several years we intend to accelerate diversification into additional products and applications utilizing current technology and technology now under development. Product diversification will allow us to present a more complete line of products that meet current and projected user needs. As part of this process we seek to get customers, such as the many militaries we serve, to upgrade their specifications. Additionally, product diversification reduces our dependence on a relatively small number of products for financial and competitive success. Diversification also helps further distinguish us from competitors who do not make the investment in innovation that we do.
Strategic Partnering.  We actively seek partners who can help us advance our technologies or introduce our products to the market. For example, for the 40mm training ammunition, we partner with Rheinmetall Waffe Munition, GmbH, (“Rheinmetall”) a major global manufacturer of munitions and other products.

Markets

Our sales efforts are focused on three markets: military, ammunition, and commercial and public safety.

Military

The military market is the backbone of our business, accounting for 71% of our sales in 2009. We sell chemiluminescent devices, primarily light sticks in varying colors, lengths and durations of light output, as well as flat chemiluminescent disks and reflective patches and belts. Our primary customers are the U.S. Military and NAMSA, but we sell in over 45 countries world-wide.

Critical events, risks and uncertainties regarding the military market include the continued renewal of the U.S. and NATO contracts, the ability to remain on the cutting edge of chemical light technology, the ability to generate additional uses of our products by various militaries around the world, and managing costs to remain competitively priced. There are also uncertainties of future price increases customarily found in the renewal contracts which would affect revenues and results of operations.

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Ammunition

Ammunition is our fastest growing market with sales of 40mm training ammunition products providing an increasingly significant portion of our total revenues, representing 21% and 5% of our sales in 2009 and 2008, respectively. We sell our ammunition products to Rheinmetall, which incorporates our products into its 40mm shell base, and then sells the finished training round. We believe that the training ammunition market applicable to our products continues to offer an excellent opportunity for additional revenue growth. Furthermore, the development of additional calibers of training ammunition products over the next few years should contribute to future sales.

Critical events, risks and uncertainties regarding the ammunition market include the expansion and acceptance of the existing products to the United States military and with other foreign militaries. The introduction of additional calibers is perceived as a vital opportunity to increase revenues and improve our results of operations over the long-term.

Commercial and Public Safety

We sell our products in the commercial and public safety market to different industries and governmental agencies, including manufacturing companies, transportation companies, police, fire and EMS departments and hotels. These products provide emergency light in different ways to different buyers. For example, hotels use our light sticks in halls and stairwells for use in power outages while police departments use them in tactical operations and traffic control. In late 2009 we introduced the Flare Alternative which is used to alert oncoming traffic to a vehicle by the road side. This product can replace traditional pyrotechnic flares with a safer product. Management believes that the commercial and public safety market is currently under-served.

The critical risks and uncertainties in the commercial and public safety market include the need for the continued introduction and promotion of successful products to police, fire and homeland security departments. Our ability to generate demand from potential customers is the greatest factor in success or failure in this market. The commercial and public safety market is more sensitive to pricing than the military markets as customers may not choose to purchase the best available product, but may rather purchase lower quality, lower priced goods from our competitors.

The uncertainty of new products from competitors is always a risk that could dilute our existing military market share of chemical light products as well as ammunition and safety products.

For additional risks refer to Item 1A, Risk Factors.

Sales and Marketing

We define ourselves as a manufacturer. For the military market, the individual militaries in effect serve as both end-users and distributors for our products to the end-users (e.g., soldiers). We have found this to be an efficient and effective model and are using this model for the commercial and public safety markets as well. Accordingly, we are utilizing the abilities of distributors who have established key relations with end-users, rather than attempt to sell direct to consumers. The distributors take deliveries from us and then resell our products through their distribution networks to third-party customers, thereby expanding the market for our products at minimal cost to us.

Regulations prohibit companies from direct selling to soldiers, sailors, etc. to increase product consumption. Therefore, our personnel provide training on utilizing our products and thus are able to build demand by educating soldiers on how to best utilize the products, with the products, in effect, selling themselves based on their individual merit. By providing training, our personnel are able to get first-hand feedback on the value of the products and use information obtained to suggest enhancements to existing products or the creation of new ones.

Competitive Strengths

We believe we have many advantages as compared to our competition. For example, we:

Own more patents in the chemiluminescent light field than any competitor.
Have an active research and development function focused on improving existing technologies and developing new ones for which patent protection will be obtained.

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Have a wide assortment of products that helps meet the needs of major customers such as the U.S. and NATO country militaries. These products are continuously enhanced or modified to meet the needs of current users such as the military troops in Afghanistan and Iraq.
Focus on high quality, high performance products, while many of our competitors rely on lower pricing for lower quality products.
Have experienced personnel who have been active in the chemiluminescent field for a number of years and who have developed the necessary expertise to support the achievement of our objectives.

Customers

We sell our products for military, ammunition and commercial and public safety applications. We do not sell any of our products as novelties.

Military:  For 2009 and 2008, approximately 71% and 86%, respectively, of our net revenues were attributable to sales to military customers in the United States and in over 45 other countries, including the NATO member countries. Our business depends significantly on three key customers: the United States Department of Defense (“U.S. DOD”), NAMSA and LC Industries (“LCI”). These three key customers accounted for 52% of net revenue in 2009 and 68% of 2008 net revenue. We have contracts, discussed below, to sell directly to the U.S. DOD and NAMSA and indirectly to the U.S. DOD through LCI, with the U.S. DOD and LCI each accounting for more than 10% of our revenues in 2009 and each of these three customers accounting for more than 10% of total revenues in 2008.
U.S. DOD

In 2009 we had a direct contract with the U.S. DOD which was entered into on July 7, 2004. The contract had an initial term of two years with three one-year renewal terms. After the expiration of the initial two-year term, the contract was renewed in each of July 2006, 2007 and 2008. Pursuant to this contract we were required to supply an indefinite quantity of certain items to the United States military at a fixed price, subject to adjustment for certain economic factors. Pursuant to the contract, in July 2009 the U.S. DOD was required to rebid this contract.

In January 2010, we were awarded a direct contract with the U.S. DOD issued by the Defense Supply Center in Philadelphia to supply chemiluminescent light products which had previously been covered by the contract described above. The new contract is also an indefinite quantity fixed price contract that covers numerous products, each classified by a National Stock Number (“NSN”). A key feature of these products is that they are all phthalate free and covered by Cyalume’s intellectual property, making us currently the only potential supplier of these products to the U.S. DOD. The products under this contract have represented between $2.2 and $3.2 million in sales annually for the past three years. The contract is for a base period of two years plus three, one-year options to extend, exercisable by the U.S. DOD. The contract specifies product prices for the next two years and provides a 2.5% price increase over prices paid in 2009.

In conjunction with the solicitation by the U.S. DOD for awarding this contract, several products that had been part of the previous contract were transferred to a different supply center office and will be included in a separate contract solicitation. Cyalume continues to provide those products under a separate agreement.

LC Industries

We also supply the U.S. DOD through an agreement with LCI, a member of the National Industries for the Blind, under the program guidelines of “Ability One”, a federal program that creates jobs for the blind and severely disabled. Under this agreement, we sell item components to LCI, which assembles and packages the items and then sells them directly to the U.S. military under a contract between the U.S. DOD and LCI. Each of the items sold to the U.S. military is classified by a NSN and we believe that we are the only company to manufacture the products to the U.S. military’s specifications.

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Our contract with LCI was entered into June 1, 2004 and had an initial term of five years, followed by three automatic five-year renewal terms unless the agreement is cancelled. This contract was renewed in 2009 for another five year period and included a price escalation of 6.25%. The contract between LCI and the U.S. military is also a fixed price, indefinite quantity contract with economic price adjustments. Through negotiations with LCI, we share in price increases received by LCI.

NAMSA

We have direct contracts with NAMSA, the administrative services arm serving the non-U.S. NATO countries. NAMSA re-awarded these contracts to us in August 2008. The base contract period is three years and NAMSA has the option to extend for another two years. The contracts contain provisions for pricing escalations.

Ammunition:  Ammunition sales in 2009 to Rheinmetall comprised 21% of our net revenue, after being less than 10% in 2008. Sales are made to Rheinmetall under purchase orders awarded to us throughout the year as Rheinmetall receives orders from various militaries.
Commercial and public safety:  Sales in this category are made through a number of distributors to manufacturers, businesses and various municipalities’ police and fire departments, none of whom individually represent more than 10% of our sales.

Product Applications

Chemiluminescent Products:  Our chemiluminescent products are used in support of military operations in peacetime to support training and in live theater (i.e., wartime) to support battle engagements and troops in the field. Applications include: the nighttime marking of drop and landing zones, marking trails at night, triage marking of wounded soldiers and light for general illumination purposes.

The following are some of the unique product attributes that make our chemiluminescent products well suited for military use:

highly reliable for light production after periods of storage of up to four years,
provide up to a 360 degree field of illumination,
highly portable, waterproof and require no electrical source to work, and
safe to use and non-toxic.

We also use chemiluminescent technology to make products providing day/night marking and illumination as components of training ammunition. Day/night marking rounds used as training ammunition increases the effectiveness of weapons training by providing a night-time training ability where, in many cases, one did not exist before. Chemical light training munitions are preferable to traditional tracer or training rounds for two reasons. Traditional tracer or pyrotechnic training munitions contain fire-producing elements that often start range fires. Additionally, traditional tracer or pyrotechnic training munitions often experience “duds” or unexploded rounds. These unexploded rounds present future safety hazards and must be found and defused. Chemical light training munitions cannot start range fires and do not present future safety hazards from unexploded rounds.

In the commercial and public safety markets, our products provide sources of light in emergency situations and for general safety purposes. For example, a customer can purchase our product with assurance that it can sit on the shelf for up to four years and still work when needed in the event of a power outage. For marine and boating purposes, we manufacture two specific products to meet the safety needs of boaters. The first product is a base personal marker light (“PML”), which is a chemiluminescent light stick that is attachable to life jackets and can be easily illuminated in an emergency situation within the water. The second product is a SOLAS PML (Safety of Life at Sea certification) that can be used by boaters, workers on off-shore oil platforms and in other maritime situations outside U.S. coastal waters. The SOLAS PML contains a battery powered light emitting device that automatically activates when it hits the ocean waters and a light stick. Both the chemiluminescent light sticks used in the PML and SOLAS PML, and the electric light used in the SOLAS PML, provide a higher degree of assurance of being located for rescue purposes.

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Our reflective products assist the military by allowing soldiers to identify individuals as ‘friend or foe’ by employing infrared technology. These infrared products such as flag and general identification patches can only be seen with the proper night vision goggles. These products help prevent injuries and death due to friendly fire by providing the proper identification markings during night-time activities. We also produce safety belts that are worn, for example, by military police. These belts both reflect direct light back and retain light energy for a short period of time so they continue to “glow” after the light source is removed.

In the commercial and public safety markets, our reflective products primarily serve police, fire and EMS departments. Personnel of these public services wear our products such as safety belts and patches to adequately highlight themselves in the face of traffic and so they can be better seen in emergency situations such as in a burning building.

Competition

For chemiluminescent products for the U.S. and non-U.S. NATO member country military markets, we believe that we have no direct competitor. For these two markets we believe that our products are the only ones that currently meet official military specifications. There are several Asian manufacturers of novelty quality products that occasionally attempt to direct sell their products as military quality, including the fraudulent use of military stock numbers that are placed on the products which have not passed testing. In these cases we rely on the appropriate U.S. and NAMSA agency offices to inspect and reject such products as being non-compliant. We maintain an active program of monitoring such behavior and bringing any such actions to the attention of the appropriate agency personnel.

With other military products, such as the 40 mm training ammunition, the development period before final testing and acceptance by the military can be many years. We do not believe that any of our direct or indirect competitors are investing in the research and development necessary to bring a new product, such as the 40 mm training ammunition, successfully to market. It is more likely that these competitors will attempt to reverse engineer our products. We defend against this by continuing to invest in technology upgrades in order to stay ahead of the competitors. In addition, where appropriate, we file patents to protect newly developed technology. Also, we review all products submitted by competitors in military contract bidding processes to determine whether they meet specifications. With regard to reflective products, there are several businesses which have competed against us in the past and are expected to compete against us from time to time depending on the stringency of the product specifications.

In the commercial and public safety markets, we compete with manufacturers of novelty products and several other manufacturers. While these manufacturers appear to lack the quality, market presence and ability to upgrade existing products, customers in these markets may seek lower prices without consideration for these other factors. Competitors include: Lumica (Japan), Tianjin Dragon (China), Bandi (Korea), Jow Tung (China), Beijing Brite (China), and Ameriglo (U.S. based company purchasing Chinese products).

Employees

As of December 31, 2009 we had 166 employees, all permanent. We operate in local labor markets that provide an adequate supply of labor to compensate for any turnover. We are not party to any collective bargaining agreements, have not experienced any work stoppages and consider our relationship with employees to be sound.

Employee Benefits

CTI offers permanent employees wages and benefits that we consider to be competitive in the markets in which we operate. Benefits include medical, dental, life, and disability insurance coverage, paid vacations and holidays and an employee 401(k) savings plan. CTSAS offers its employees benefits consistent with French law and market conditions.

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Supply Chain

We purchase key raw materials, primarily chemicals, plastics, glass and packaging materials from a limited number of suppliers. We have long-term relationships with these suppliers, and maintain annual purchase orders or, in the case of major chemicals, have a ten year contract in place which does not expire until 2012. In the event of a disruption in the supply of any of the key items, we have identified alternative sources of supply. A stock of raw materials is kept on hand to continue production in the event of an extended supply disruption, providing us time to find alternative suppliers. Raw materials are not considered to be a scarce commodity and we have not experienced supply disruptions in the past.

The West Springfield facility purchases most of its chemicals from Chinese manufacturers. Nearly all other materials, including plastics and glass, are purchased domestically. The Aix-en-Provence facility purchases most of its chemicals from our West Springfield facility after they have been modified for specific applications. Glass, plastics and most other materials are purchased from within the European community.

Research and Development

We have an active research and development department that operates out of the West Springfield headquarters and has chemists and engineers on staff and consulting chemists under contractual arrangements that specialize in chemiluminescent and reflective light technology. Our research and development group is focused on maintaining the high level of quality of existing products; researching and developing improvements to existing products; and, researching and developing new technologies and products with viable commercial applications. We maintain an active program of soliciting feedback and ideas from end-users of products. This is especially true for military applications where we have developed several notable improvements to products being used by military personnel in live theater application based on ideas provided by the soldiers. We incurred research and development expense of $1.5 million and $1.3 million during the years ended December 31, 2009 and 2008, respectively. Additionally, we incurred $159,000 in capitalized costs for filing new patents in 2009.

Intellectual Property

We rely on the ability to develop patentable technology to help ensure the commercial success of products and technology. Once patents are issued, we follow an active program of monitoring competitors’ products to ensure that our intellectual property is not violated. We currently hold and maintain 22 active U.S. patents, many of which are also registered in various foreign countries. These patents include phthalate free formulations, formulas for creating a more consistent light for longer periods, a bio-degradable light stick, flat disks employing a translucent aluminum pouch instead of an ampoule, and reflective tape that not only reflects light but retains light energy and emits light after the initial light source is removed. We expect to file for additional patents during 2010 and regularly thereafter. Patents typically have a 20-year life from date of filing. While we have four patents expiring in 2010, there are no key patents that will expire in 2010, or that did expire in 2009. We do not anticipate a near-term decline in our sales as a result of any expiring patents.

Government Regulations

We are subject to the jurisdiction of the State Department of the United States under the International Traffic in Arms Regulations (“ITAR”). Specifically, our chemical light infrared products, which are exported from the West Springfield facility to foreign militaries, are subject to these regulations. We must periodically re-register with the State Department for exporting purposes and last did so in June 2009. The renewal, which was granted, expires June 30, 2010 and is subject to renewal again at that time. We are in good standing with the State Department and the ITAR. We must obtain approval from the State Department for each and every export shipment of chemical light infrared products.

Environmental

We are in compliance with all local, state and national environmental regulations under which we are subject to regulation. The cost of compliance with environmental regulations has been and is expected to continue to be negligible.

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Backlog

We do not maintain a meaningful backlog per se. A significant portion of our revenue is generated under indefinite quantity, fixed-price contracts whereby we fulfill orders as they are placed by customers. We typically have firm orders on hand at any one time for approximately 2 to 3 months’ revenues. Once orders are received they are typically fulfilled within 3 months.

Segments

We have only one segment for financial reporting purposes under accounting principles generally accepted in the United States.

ITEM 1A. RISK FACTORS

Budget constraints of the federal or foreign governments could reduce our revenue.

Contracts for which federal or foreign governments and militaries thereof are the ultimate customer, accounted for more than 90% of our business in 2009. Budget reductions or spending constraints affecting military spending could cause delays, reduce the scope of, or result in cancellations of orders for products, which could reduce our revenues.

Failure to obtain and/or maintain required export and other licenses could reduce our revenue.

A portion of our business depends upon obtaining and maintaining required export licenses. Failure to obtain or maintain required licenses could result in the termination of certain products being sold. In addition, CTI and/or our employees may be required in the future to maintain certain facility security clearances. If CTI or our employees were found not to be in compliance, we could be excluded from bidding on certain contracts, removed from projects and/or fined, all of which would adversely impact our financial condition and good standing.

We operate under fixed price contracts and failure to accurately control costs may reduce profitability.

Much of our revenues result from fixed price contracts. Unanticipated increases in the cost of raw materials, labor and overhead could result in less profitability on such contracts. Some of our raw materials are affected by the prices of other commodities that are not under our control. These include certain chemicals and plastics whose costs are a function of oil prices. Another example is the cost of electricity, which we need to operate manufacturing processes and over which we have no control.

Some of our contracts include provisions for annual price escalations, based on bench-marks such as the consumer price index or the producers’ price index. Annual escalations received may or may not correlate to the price changes in the materials and services that we purchase.

If we are unable to design, manufacture, and market product offerings in a timely and efficient manner, we may not remain competitive.

Some of our markets are characterized by continuing technological advancement, changes in customer requirements, and evolving product standards. Accordingly, we devote a substantial amount of resources to product development. To compete successfully, we must develop and market new products that provide increasingly higher levels of performance and reliability. Product development is highly uncertain and we cannot guarantee that we will successfully develop new products. Our inability to develop and market these products or to achieve customer acceptance of these products could limit our ability to compete in the market or to grow revenues at satisfactory rates of growth.

In addition, we offer a wide variety of products. If the design, manufacturing or marketing of a product, or products, is not successful and we must allocate more resources to ensure the products’ success, it could lower the profitability of the product, or products, or affect customer perceptions as to the quality of the products and services being offered.

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We purchase the majority of raw materials from a limited number of venders. A disruption in supply may cause delays in manufacturing.

The majority of chemicals, plastics and glass are purchased from a limited number of venders. A disruption in supply from any of these venders could affect our ability to manufacture finished goods for sale on a timely basis. We maintain a safety margin of inventory of these raw materials to rely on in the event of a disruption. However, our safety stock may not be adequate in the event of an extended disruption.

Changes in foreign currency exchange rates could affect our financial results.

CTI and CTSAS manufacture products in and sell products from the U.S. and France, respectively. Products sold by CTI are priced in U.S. dollars and most raw material components are purchased in U.S. dollars. Products sold by CTSAS are priced predominantly in euros and most of CTSAS’ raw material purchases from third parties are priced in euros, although some of CTSAS’ materials are purchased from CTI in U.S. dollars. Significant changes in foreign exchange rates will affect reported financial results. CTI enters into short-term financial hedges (less than six months in duration) against currency risk relating to the billing and collection of revenues from CTI’s sales to CTSAS.

We are subject to various government regulations that could cause delays in the delivery of new products and may subject us to audits or other similar review processes.

As a supplier to agencies of various federal, state, local, and foreign governments, we are obligated to comply with a variety of regulations governing operations and the workplace. Unforeseen problems may impact our ability to bring new products to market on a timely basis, secure new contracts or require us to make potentially costly changes to operations which could reduce profitability in order to obtain contracts. Furthermore, some of our new products have been developed in conjunction with the U.S. Military, which largely dictates the timing of the product development process and over which we have limited control.

Inability to effectively integrate future acquisitions could reduce profitability.

We plan to make a number of acquisitions in future years, which will require that we integrate operations and systems and personnel from those businesses. This process requires, among other things, that we continually evaluate operational and financial systems and controls and enhance those systems and controls as necessary. If we are unable to successfully integrate these acquisitions, it could reduce profitability and detract from future growth opportunities.

We are required to obtain $3 million in new subordinated debt or equity offering before April 30, 2010 per our credit agreement with our senior lender. Additionally, we may need additional financing for working capital, capital expenditures, and to finance future acquisitions. Any such additional financing may not be available on favorable terms.

In order to meet debt covenants imposed by our senior lender TD Bank, N.A., we must raise $3 million before April 30, 2010 and use those funds to reduce our debt with them. Additionally, to operate and grow the business, we may need to obtain additional working capital, make significant capital expenditures, or finance an acquisition. Therefore, our ability to meet debt covenants, operate and grow is dependent upon, and may be limited by, among other things, the availability of financing arrangements. If we are not able to obtain the additional capital necessary to meet debt covenants, pursue new projects or maintain operations, we may not be able to remain in compliance with our lending agreement or grow as quickly as we plan. In addition, even if we are able to obtain additional financing, the additional financing may not be on terms which are favorable to us and could hamper profitability.

We are reliant upon key personnel and the loss of these key personnel could result in the deterioration or loss of relationships with certain customers or suppliers, which could result in a loss of business.

We depend on the expertise, experience and continued services of senior management and other key employees. Our operations and most decisions concerning the business will be made or significantly influenced by these individuals. The loss of members of senior management or other key employees could result in the deterioration or loss of relationships with certain customers or suppliers, which could result in a loss of business.

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Our quarterly revenue, operating results and profitability will fluctuate, which may lead to volatility in the market price of our common stock.

Our revenue, operating results and profitability will likely fluctuate. Changes in product mix sold and the timing of sales to customers, together or individually, may contribute to the material variability of our quarterly revenue, operating results or profitability. Such volatility may not meet the expectations of management, securities analysts or investors, which in turn may result in significant fluctuations in the market price of our common stock.

Our quarterly revenue, operating results and profitability may be reduced by any major redeployment of troops.

Many of our military products are used both for training and live theater purposes. Generally, per capita soldier consumption of these products is relatively consistent between the two purposes. The U.S. military is reducing the number of American military personnel in Iraq and increasing the number of American military personnel in Afghanistan. Any major troop realignments/reductions, if significant enough in number, could result in a temporary reduction in overall product consumption until troops are redeployed for training or another live theater application.

We operate in increasingly competitive market segments, which may make it more difficult to successfully bid on future contracts.

We expect competition to increase in the future. We also expect that some competitors, or potential competitors, will feel increasing pressure to underbid government and commercial projects, in order to deploy their workforces and maintain or step up their activity levels. This may make it more difficult to prevail on competitive bids for projects to the degree we have historically enjoyed, to increase revenue, and to maintain profitability.

Most new contracts will likely be subject to competitive bidding, which adds difficulty to accurately predicting the timing of sales and the allocation of resources.

Most governmental agencies and many commercial customers require that their significant contracts be competitively bid. Typically they utilize the “Request for Proposal” (“RFP”) method where several competitors submit their sealed proposals for a particular project, or the “Request for Qualifications” (“RFQ”) process where competitors submit their qualifications for consideration by the customer. Some contracts open for bidding utilize the standard “Straight Bid” process where the detailed specifications for products are published and lenders submit a “Bid” or fixed price, for the contract. Other competitive bidding processes are also utilized. Our success in responding to an RFP, RFQ, Straight Bid, or other competitive bidding process is dependent upon the quality of our estimating process, knowledge of the industry, knowledge of our customers and other factors requiring significant judgment and expertise. Because of the nature of the bidding process, we cannot know if we will be successful on any given bid, which adds difficulty to accurately predicting the timing of sales and the allocation of resources.

Our ability to win new contracts depends on factors outside our control, which could limit our growth.

Our growth is generally dependent upon the ability to win new contracts. This depends on a number of factors we cannot control, including substitution of our products with products based on an alternative technology. For example, currently, certain battery or electrically powered products may be used as alternatives to some of our products.

Governmental agencies may investigate and audit our contracts and, if any improprieties are found, we may be required to refund revenues, pay unexpected taxes, forego anticipated revenues and/or may be subject to penalties and sanctions, including prohibitions on bidding in competitive bidding processes.

Governmental agencies generally have the authority to audit and investigate our contracts with them. As part of that process, some governmental agencies may review our performance on the contract, pricing practices, change orders, and compliance with the terms of the contracts, and applicable laws, regulations and standards. If the agency determines that we have improperly billed the governmental entity, we could be

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required to refund revenues, or forgo anticipated revenues. If a government audit uncovers improper or illegal activities, or otherwise determines that these activities have occurred, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeitures of profits, suspension of payments, fines and suspension or disqualification from doing business with the government.

If we fail to satisfy contractual obligations, our ability to compete for future contracts could be limited.

Our failure to comply with contract requirements or to meet customer’s performance expectations when fulfilling a contract could injure our reputation, which, in turn, could impact our ability to compete for new contracts. Our failure to meet contractual obligations could also result in substantial lost revenues.

We may be unsuccessful in resolving pending litigation relating to contractual disputes with Omniglow, LLC, which could result in having to pay damages to Omniglow, LLC. Omniglow, LLC purchased the novelty business of CTI’s predecessor on January 23, 2006. Omniglow, LLC is a separate entity from the organization of former stockholders of Omniglow Corporation and this litigation is distinct from the litigation that was settled in January 2008.

CTI is in the process of resolving pending litigation relating to several contractual disputes arising from the separation of our businesses from Omniglow, LLC. If CTI is not successful in settling the litigation and if CTI does not prevail on the merits of the case, then a judgment may be entered against CTI, which could require it to pay damages to Omniglow, LLC. Omniglow, LLC seeks compensatory damages of $1.4 million, to be trebled, and, recovery of costs and legal fees. CTI believes Omniglow, LLC’s claims to be without merit. CTI has filed for damages of $368,000.

Because we do not intend to pay dividends on common stock, stockholders will benefit from an investment in our common stock only if it appreciates in value.

We have never declared or paid any cash dividends on common stock. We currently intend to retain all future earnings, if any, for use in the operations and expansion of the business. As a result, we do not anticipate paying cash dividends in the foreseeable future. Any future determination as to the declaration and payment of cash dividends will be at the discretion of our Board of Directors and will depend on factors our Board of Directors deems relevant, including among others, our results of operations, financial condition and cash requirements, business prospects, and the terms of our credit facilities and other financing arrangements. The debt financing arrangements put into place in connection with the acquisition of CTI prohibit CTI from providing us with funds to pay a dividend. Accordingly, realization of a gain on stockholders’ investments will depend on the appreciation of the price of our common stock. There is no guarantee that our common stock will appreciate in value.

Our securities are quoted on the Over-the-Counter Bulletin Board, which may limit the liquidity and price of our securities more than if the securities were quoted or listed on the NASDAQ market.

Our securities are quoted on the Over-the-Counter Bulletin Board, a NASD-sponsored and operated inter-dealer automated quotation system. Quotation of our securities on the Over-the-Counter Bulletin Board will limit the liquidity and price of securities more than if the securities were quoted or listed on NASDAQ.

We currently have a small number of beneficial holders, which may result in limited trading and also limit the liquidity and price of securities. Furthermore, this may result in unexpected price volatility.

If we fail to meet financial covenants with our senior lender, the lender would be able to declare an event of default.

If we were unable to meet the financial covenants specified in the senior loan documents, the senior lender would be able to declare an event of default. If an event of default were declared, all of our debts to the senior lender could become due and payable immediately, which could result in our ceasing operations unless new arrangements were made. The terms of our loan with our senior lender are described more fully in the Section titled “Management’s Discussion & Analysis of Financial Condition and Results of Operations.”

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We may choose to redeem outstanding warrants at a time that is disadvantageous to the warrant holders.

Subject to there being a current prospectus under the Securities Act of 1933, we may redeem all outstanding warrants at any time after they become exercisable at a price of $.01 per warrant, upon a minimum of 30 days prior written notice of redemption, if and only if, the last sale price of our common stock equals or exceeds $11.50 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. Calling all of our outstanding warrants for redemption could force the warrant holders:

To exercise the warrants and pay the exercise price for such warrants at a time when it may be disadvantageous for the holders to do so;
To sell the warrants at the then current market price when they might otherwise wish to hold the warrants; or
To accept the nominal redemption price which, at the time the warrants are called for redemption, is likely to be substantially less than the market value of the warrants.

Our warrant holders may not be able to exercise their warrants, which may create liability for us.

Holders of the warrants we issued in our initial public offering and private placement will be able to receive shares upon exercise of the warrants only if (i) a current registration statement under the Securities Act of 1933 relating to the shares of common stock underlying the warrants is then effective and (ii) such shares are qualified for sale or exempt from qualification under the applicable securities laws of the states in which the various holders of warrants reside. Although we have agreed to use our best efforts to maintain a current registration statement covering the shares underlying the warrants to the extent required by federal securities laws, and we intend to comply with such agreement, we cannot assure that we will be able to do so. In addition, some states may not permit us to register the shares issuable upon exercise of warrants for sale. The value of the warrants will be greatly reduced if a registration statement covering the shares issuable upon the exercise of the warrants is not kept current or if the securities are not qualified, or exempt from qualification, in the states in which the holders of warrants reside. Holders of warrants who reside in jurisdictions in which the shares underlying the warrants are not qualified and in which there is no exemption will be unable to exercise their warrants and would either have to sell their warrants in the open market or allow them to expire unexercised. If and when the warrants become redeemable by us, we may exercise our redemption right even if we are unable to qualify the underlying securities for sale under all applicable state securities laws. Since our obligations in this regard are subject to a “best efforts” standard, it is possible that, even if we are able to successfully assert a defense to a claim by warrant holders due to the impossibility of registration, a court may impose monetary damages on us to compensate warrant holders due to the change in circumstances that led to our being unable to fulfill obligations.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

We own the West Springfield, MA facility which houses all corporate functions, including research and development. The facility is located on ten acres of land in an industrial area and has 200,000 square feet of office, manufacturing and warehousing space. There is adequate space available in the facility to accommodate an increase in operations and staffing. There are no known matters of ground contamination or air quality discharges that exceed acceptable limits. The facility is older and contains asbestos, which is consistent with buildings of its era, but there is no known damaged asbestos requiring remediation. The facility is subject to inspections by various environmental agencies from time to time and no significant violations of any environmental standards have been noted during the period of ownership by the current or predecessor owners. Environmental violations are not believed to represent a material risk. The facility is subject to a mortgage.

The facility in Aix-en-Provence, France is also owned by us and houses all foreign operations. The facility has 10,000 square feet of office and manufacturing space sitting on two acres and is in good condition. There are no known environmental violations pertaining to the facility and environmental violations are not believed to represent a material risk.

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ITEM 3. 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 the 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 2010.

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PART II

ITEM 4: Reserved For Future Use by The Securities and Exchange Commission

ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock, common stock purchase warrants and units, are quoted on the Over-the-Counter Bulletin Board under the symbols “CYLU,” “CYLUW,” and “CYLUU,” respectively. The following table sets forth the high and low sales information for our common stock, common stock purchase warrants and units for the period from January 1, 2008 through March 11, 2010. The Over-the-Counter Bulletin Board quotations reflect inter-dealer prices, are without retail markup, markdowns or commissions, and may not represent actual transactions.

           
  Common Stock   Warrants   Units
     High   Low   High   Low   High   Low
First quarter 2008   $ 7.55     $ 7.40     $ 0.68     $ 0.23     $ 8.10     $ 7.70  
Second quarter 2008   $ 7.58     $ 7.39     $ 0.91     $ 0.26     $ 8.47     $ 7.65  
Third quarter 2008   $ 7.95     $ 7.39     $ 1.49     $ 0.57     $ 9.30     $ 8.00  
Fourth quarter 2008   $ 7.88     $ 6.50     $ 1.80     $ 0.45     $ 9.24     $ 7.60  
First quarter 2009   $ 14.15     $ 2.50     $ 2.30     $ 0.32     $ 15.00     $ 3.50  
Second quarter 2009   $ 4.11     $ 3.00     $ 1.10     $ 0.15     $ 3.50     $ 3.50  
Third quarter 2009   $ 3.93     $ 3.10     $ 1.25     $ 0.20     $ 3.50     $ 3.50  
Fourth quarter 2009   $ 6.00     $ 3.30     $ 0.50     $ 0.29     $ 3.50     $ 3.50  
First quarter 2010 through March 11, 2010   $ 3.85     $ 3.35     $ 0.50     $ 0.30     $ 3.50     $ 3.50  

Holders of Common Stock

As of March 11, 2010, there were of record 42 holders of common stock, one holder of warrants and one holder of units.

Dividends

We have never declared or paid cash dividends on our capital stock and do not anticipate declaring or paying cash dividends on our common stock in the foreseeable future. Payments of future dividends on our common stock, if any, will be at the discretion of our Board of Directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs, plans for expansion and other factors that our Board of Directors may deem relevant. The debt financing arrangements put into place in connection with the acquisition of CTI prohibit CTI from providing us with funds to pay a dividend.

Securities Authorized for Issuance under Equity Compensation Plans

Information about our equity incentive plans can be found in Part III, Item 12 of this Annual Report on Form 10-K and in Note 17 to our consolidated financial statements contained within this Annual Report on Form 10-K.

Performance Graph

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

Recent Sales of Unregistered Securities

None.

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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
October 1 to October 31, 2009                        
November 1 to November 30, 2009                        
December 1 to December 31, 2009                        

ITEM 6: SELECTED FINANCIAL DATA

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

ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Our Business Prior to the Acquisition of CTI

Previously, our legal name was Vector Intersect Security Acquisition Corporation (“Vector”), a Delaware corporation incorporated on July 19, 2005 in order to serve as a vehicle for the acquisition of an operating business (through a merger, capital stock exchange, asset acquisition or other similar business combination). Vector did not engage in any substantive commercial business until the acquisition of Cyalume Technologies, Inc. (“CTI”), as described below.

On December 19, 2008, we completed the purchase of the issued and outstanding capital stock of CTI, located in West Springfield, MA, for a total consideration of $125.2 million (the “Acquisition”). In connection with the closing of the Acquisition, we changed our name from Vector Intersect Security Acquisition Corporation to Cyalume Technologies Holdings, Inc. (“Cyalume”).

Our Business Subsequent to the Acquisition of Cyalume Technologies, Inc.

In the following discussion of our operating business, unless the context otherwise requires, references to Cyalume, we, us, our, etc., include Cyalume, Cyalume Technologies, Inc. and Cyalume Technologies, S.A.S; references to CTI include only Cyalume Technologies, Inc. and its wholly-owned subsidiary Cyalume Technologies, S.A.S. (“CTSAS”).

We are a global, technology-based manufacturer primarily producing products where light is generated through a chemical reaction known as chemiluminescence. Our most popular product is a 6 inch light stick. We also use chemiluminescent technology to make products providing day/night marking and illumination as components of training ammunition. In addition, a variety of reflective products are produced that both reflect direct light back and retain energy for a short period of time so they continue to glow after the light source is removed. Reflective products include a variety of patches and safety belts. Both chemiluminescent and reflective products may employ infrared technology that allows observation of the product with proper night vision goggles.

The majority of our revenues are derived from sales to the U.S. Military and various other militaries around the globe, most significantly to three key customers: the United States Department of Defense (“U.S. DOD”), NAMSA and LC Industries, which accounted for 52% of net revenues in 2009. Additional revenues are derived from sales to other militaries and sales into the commercial markets, including police, fire and EMS departments. In the military market there are longer-term fixed price, indefinite quantity contracts of generally three to five years that provide higher margins because the products are more technologically advanced than those of competitors. In the commercial markets advanced technology is generally not as important and therefore competition is greater, resulting in lower margins.

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Although sales are made into several markets and manufacturing plants are operated in both the U.S. and Europe, the business is managed and financial results are reported as one segment. Senior management focuses on consolidated results to make strategic and tactical decisions. There are several reasons for this. Products are similar in each market and based on the same technologies. Thus management pays attention to individual products as well as individual customers and contracts in terms of pricing and costing. For the largest selling product line, the 6 inch light stick (in its various permutations of color and duration), the manufacturing processes are similar and both the U.S. and European plants make these products. Therefore, the 6-inch light sticks can be and are made at both plants and can be produced and shipped from one plant to the other to help meet peak periods of demand. In addition, important functions such as marketing and research and development (R&D) manage their activities and allocate their resources from a strategic viewpoint and generally not on the basis of where a product is made or who it might be sold to.

Overall financial performance is evaluated based on: revenues; gross profit and gross margin; selling/ research and development/administrative expenses; and cash flow. EBITDA (earnings before interest, taxes, depreciation and amortization) is used as a performance measure of operational cash flows. Product performance is evaluated based on unit cost of production and number of units produced and sold. All of these measures are evaluated against results for prior periods and against budgets.

Cyalume is currently a smaller reporting company based on outstanding equity held by non-affiliates having a market value under $75 million as of our most recently completed second quarter. Therefore, only two years of audited financial statements are presented.

Critical Accounting Policies

Use of Estimates

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

Revenue Recognition

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

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

Income Taxes

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

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, it is more likely than not

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that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefit associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

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

Goodwill

Goodwill is deemed to have an indefinite life and accordingly, is not subject to annual amortization. Goodwill is subject to 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.

Intangible Assets

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

Inventories

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

Foreign Operations and Currency

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

Results of Operations

This section discusses our 2009 and 2008 financial results prepared under U.S. GAAP. See the section entitled “Results of Operations — GAAP 2009 versus Non-GAAP Combined 2008” that appears later in this Item for a discussion of our 2009 and 2008 financial results that are prepared on a non-GAAP basis that we believe investors will find helpful in understanding the changes in our business in those years.

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Years Ended December 31, 2009 and 2008, in thousands

The information below is summarized from the audited financial statements for the years ended December 31, 2009 and 2008.

   
  Year Ended December 31,
     2009   2008
Revenues   $ 32,201     $ 316  
Cost of goods sold     18,817       89  
Gross profit     13,384       227  
Other expenses (income):
                 
Sales and marketing, general and administrative expenses and research and development     9,552       1,057  
Other loss (income), net     52       23  
Amortization of intangible assets and impairment losses     41,577       131  
Interest expense (income), net     2,705       (960 ) 
Benefit from income taxes     (6,880 )      (600 ) 
Net income (loss)   $ (33,622 )    $ 576  

Revenues:  We did not engage in any substantive commercial business until the Acquisition of CTI on December 19, 2008, and as such there were no sales prior to that date. The only revenues recorded in 2008 were CTI sales during the period December 20, 2008 through December 31, 2008. 2009 revenues are for the full year and are therefore not meaningful to compare to the 2008 results.

Expenses:  Sales, general and administrative expenses increased due to the full year of operations of CTI in 2009 compared to only the last 12 days of CTI’s operations in 2008 being included in 2008.

Amortization of intangible assets and impairment losses:  Intangible assets were recorded at the Acquisition date to reflect the value of our patents, trademarks/tradenames, customer relationships and non-compete agreements. During 2009, we amortized $3.5 million of these assets into amortization expense, compared to $131,000 in 2008. The increase is caused by 2008 containing only 12 days of amortization while 2009 contains a full year of amortization.

Additionally, in 2009 we recorded impairment losses of $12.5 million and $25.6 million on our goodwill and our identified intangible assets, respectively.

Goodwill is reviewed for impairment utilizing a two-step process. The first step of the impairment test requires the identification of the reporting units and comparison of the fair value of each of these reporting units to the respective carrying value. We have only one reporting unit: the consolidated company as a whole. If the carrying value of the reporting unit is less than its fair value, no impairment exists and the second step is not performed. If the carrying value of the reporting unit is higher than its fair value, the second step must be performed to compute the amount of the goodwill impairment, if any. In the second step, the impairment is computed by comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized for the excess. We estimated our fair value using the average market price of our common stock during the last 20 trading days of 2009. Based upon a comparison of our fair value and carrying value, our carrying value was higher than our fair value and, accordingly, we performed the second and final step of the impairment analysis. The results of that final step indicated that goodwill was impaired by $12.5 million for the year ending December 31, 2009, including the 100% impairment of CTSAS’ goodwill of €3.8 million. The goodwill impairment was caused by two main factors: (i) a significant decrease in the market price of our common stock and (ii) a decrease in revenues forecasted as of December 31, 2009 versus revenues forecasted as of the Acquisition date.

As part of the goodwill impairment test described in the preceding paragraph, we also performed impairment tests on our identified intangible assets. Intangible assets that are not amortized, such as our trademarks and trade names, are reviewed for impairment by comparing the fair value of the intangible asset with its carrying amount. If the carrying amount of the intangible asset exceeds its fair value, an impairment loss is

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recognized in an amount equal to that excess. We estimated the fair value of our trademarks and trade names using the relief from royalty method, a variation of the income approach. The underlying assumption of this method is that in lieu of ownership, an entity would be willing to pay a royalty in order to exploit the related benefits of our trademarks and trade names. The present value of this royalty stream provides a useful indication of the fair value of our trademarks and trade names. Intangible assets that are amortized, such as our purchased customer relationships, are reviewed for impairment by a two-step process. The first step is to determine if the intangible asset’s carrying amount is not recoverable. The carrying amount is not considered recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the intangible asset. If the carrying amount is not considered to be recoverable, then the carrying value is compared to the intangible asset’s fair value. If the carrying value exceeds the fair value, then an impairment loss is recognized in an amount equal to that excess. We estimated the fair value of our purchased customer relationship using an income approach utilizing a discounted cash flow methodology, specifically the multi-period excess earnings method (also know as the residual cash flow method). Since the cash flows attributable to our purchased customer relationship asset stem from sales to a customer base that existed at the Acquisition date, a forecast of cash flows consisting of only those customers was utilized.

Interest expense (income), net:  Interest expense (income), net increased in 2009 due to the $34.8 million in debt taken on in December 2008 to acquire CTI. Prior to the Acquisition, we had funds invested in trust that provided interest income. These funds were used in the Acquisition and did not provide interest income in 2009.

Benefit from income taxes:  The change in this account occurred primarily due to the recognition of deferred tax benefits resulting from our net operating loss.

Balance Sheet

Inventories decreased $2.1 million in 2009 due primarily to a $741,000 decrease in inventory stock, a $366,000 increase in reserves for slow-moving and obsolete inventory and the amortization of the $698,000 step-up to fair market value recorded December 19, 2008 at the closing date of the Acquisition.

Property, plant and equipment increased $502,000 primarily due to asset acquisitions of $773,000 and a $372,000 adjustment to the fair market valuation of the West Springfield facility at the Acquisition date, offset by depreciation expense. The market value adjustment was recorded in 2009 upon completing the purchase price allocation related to accounting for the Acquisition.

In connection with the Acquisition of CTI, we recorded certain intangible assets at their fair market value and also recorded goodwill for the excess of purchase price over identified assets and liabilities. Costs incurred to renew or extend the term of our intangible assets are expensed when incurred. We do not consider any of our intangible assets to have a residual value. Our trademarks can be renewed without substantial cost. On average, our trademarks renew in approximately 6 years. As discussed above in Results of Operations, we tested intangible assets and goodwill for impairment at December 31, 2009 and found that goodwill and certain intangible assets were impaired. Impairment losses were recorded to reduce the book value of these assets to their fair market value.

Common stock subject to redemption after the Acquisition on December 19, 2008 was $1.1 million at December 31, 2008. These redemptions were finalized in the first quarter of 2009.

Net non-current deferred income tax liabilities decreased from $9.2 million in 2008 to $7.1 million in 2009 primarily as a result of the following:

Net decreases to the carrying value of various identified intangible assets as a result of purchase price adjustments, annual amortization expense and year-end impairment losses;
Net increases to the carrying value of fixed assets as a result of purchase price adjustments and annual depreciation expense differences;
Decreased by the amortization of the inventory step-up balance;

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Increased by the reversal of the assertion that the earnings of CTSAS would be reinvested indefinitely;
Increased by the utilization of net operating losses during 2009 and the allocation of net operating losses to current.

In assessing the realization of our long-term deferred income tax assets, we consider whether it is more likely than not that the deferred income tax assets will be realized. The realization of our deferred income tax assets depends upon future taxable income in years before our net operating loss carryforwards expire. We evaluate the recoverability of our deferred income tax assets on a quarterly basis. If we determine that it is more likely than not that our deferred income tax assets will not be recovered, we establish a valuation allowance against some or all of our deferred income tax assets. Recording a valuation allowance or reversing a valuation allowance could have a significant effect on our future results of operations and financial position.

A valuation allowance of approximately $5.6 million was provided on our deferred federal tax assets for the carryforward of foreign tax credits, which we do not anticipate using in the near-term. The utilization of this asset is dependent upon our generation of significant revenues from sources outside the U.S. We also have a valuation allowance of approximately $0.4 million on our deferred state tax assets for net operating loss carryforwards, which we do not anticipate using prior to their expiration.

We had federal net operating loss carryforwards amounting to $9.5 million and $10.3 million at December 31, 2009 and 2008, respectively. The net operating loss carryforward at December 31, 2009 expires in fiscal years 2025 through 2029. Internal Revenue Code Section 382 limits utilization of these losses to $3.2 million per year. It is possible that future changes in our ownership could result in changes to the amounts allowed by IRC Section 382. State net operating loss carryforwards amounted to $11.7 million and $7.2 million as of December 31, 2009 and 2008, respectively.

Liquidity and Capital Resources

As of December 31, 2009 and 2008, we had $2.0 million and $4.0 million, respectively, in cash. Of the cash held at December 31, 2008, $1.1 million was for the redemption of 139,850 shares of common stock subject to redemption from stockholders who voted against the Acquisition, which redemption was completed in January 2009.

Concurrent with the Acquisition in December 2008, we borrowed $32.0 million from TD Bank N.A. (“TD Bank”), consisting of two notes payable, a $25.5 million Term A Note and a $2.5 million Term B Note, and a $4.0 million line of credit. At December 31, 2009 and 2008, $22.0 million and $25.5 million of the Term A Note and $2.4 million and $2.5 million of the Term B Note were outstanding, respectively. $3.2 million and $3.5 million were outstanding on the line of credit at December 31, 2009 and 2008, respectively.

In 2008 we also borrowed $1.0 million from SCP, which owns stock in Cyalume and of which four of our Directors are members. Interest on this obligation is capitalized into principal, and at December 31, 2009 $1.1 million was outstanding.

On December 19, 2008, we acquired CTI and a deferred underwriting fee became payable in full. Before December 19, 2008, as full payment of these costs, the underwriter agreed to accept a cash payment of $250,000 and 93,750 shares of our common stock with the rest of the fee ($1.1 million) remaining as deferred underwriting fees. On December 30, 2008, the underwriter exchanged the deferred underwriting fee obligation and the 93,750 shares in exchange for a $1.8 million note payable. Interest on this obligation is capitalized into principal, and at December 31, 2009 $2.0 million was outstanding.

Forecast principal and interest payments on long-term debt for 2010 are $9.1 million, compared to $5.5 million in 2009. Included in the 2010 forecasted payments is a $3.0 million payment required by our senior lender in loan amendment documents signed in December 2009. We are required by TD Bank to fund this payment by raising additional equity through private placements of our common stock. All other principal and interest payments will be funded from operating cash flows.

On December 10, 2008, Vector Investment Fund LLC (“VIF”), an entity controlled by Yaron Eitan, currently the Vice Chairman of the Board and at that time our Chief Executive Officer, President and Vice Chairman of the Board, entered into a note purchase agreement by and among VIF, Cyalume and Centurion

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Credit Group Master Fund L.P. (“Centurion”) pursuant to which Centurion agreed to provide a loan to VIF in the principal amount of up to $12 million. Pursuant to the note purchase agreement, the proceeds of the loan were to be utilized to purchase shares of Cyalume’s common stock from a limited number of its public stockholders, at a price per share not exceeding the liquidation value of each public share, determined upon amounts held in Cyalume’s trust account.

In connection with the loan from Centurion, Cyalume agreed to purchase from VIF the shares of Cyalume common stock that VIF purchased using the proceeds of the loan, concurrent with the closing of Cyalume’s Acquisition of CTI, at a purchase price equal to the aggregate purchase price that VIF paid for the shares. The proceeds from the sale of the shares were applied by VIF to repay the loan. Interest on the loan accrued at a rate of 18% per annum. On the closing of the Acquisition of CTI, Cyalume paid accrued interest due on the senior promissory note issued by VIF. In connection with the loan, CTI paid the Lender a $200,000 commitment fee, $20,000 of prepaid interest on the note and $50,000 of Centurion’s legal fees. Centurion also received 40,000 shares of Cyalume’s common stock and three-year warrants to purchase 100,000 shares of common stock exercisable at an exercise price of $8.00 per share, subject to adjustment in certain events, and has been granted certain demand and piggyback registration rights with respect to the 40,000 shares and the shares issuable upon exercise of the warrants. All amounts due and owing under the loan were paid in full to Centurion on December 19, 2008.

In connection with the note purchase agreement, as security for the repayment of the loan, Centurion had been granted a security interest in the shares and Mr. Eitan’s interest in VIF, as its sole member, pursuant to the terms of the stock pledge agreement and security agreement, respectively. The shares were released from escrow after the closing of the Acquisition of CTI and the repayment of the loan.

At December 31, 2008, there were seven unsecured notes payable to six stockholders. Four of these notes totaling $1.0 million were payable to 4 partners of SCP, bore interest at 6% and are payable in one combined installment on June 19, 2014. Interest on these notes is capitalized into principal and the total principal balance at December 31, 2009 is $1.1 million. The remaining notes at December 31, 2008 totaled $55,000, were payable to two stockholders, paid interest at 4% and had an indeterminate maturity. In July 2009, these notes payable to related parties that existed at December 31, 2008 were repaid in full, along with all accrued interest, through the issuance of 17,150 restricted and unregistered shares of our common stock.

On March 3, 2009, our Board of Directors adopted the Cyalume Technologies Holdings, Inc. 2009 Omnibus Securities and Incentive Plan (the “Plan”). Under the Plan, two million shares have been reserved for potential issuance as incentives to certain employees and non-employees. See Note 17 in the Notes to Consolidated Financial Statements for further discussion of the Plan and awards made under the Plan. Subsequent to approval by shareholders at the 2009 Annual Meeting of Shareholders, we filed Form S-8 with the SEC to register the shares under the Plan. Issuance of shares under the Plan will not provide capital and will cause dilution of earnings per share.

The 2010 capital expenditures budget will be funded completely from operating cash flows.

Off-Balance Sheet Arrangements

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.

Results of Operations — GAAP 2009 versus Non-GAAP Combined 2008

The consolidated statements of operations included in Part IV of this Form 10-K include the consolidated statements of operations of Cyalume for 2009 and 2008. For 2008, this includes the operations of Vector (now Cyalume) for the period from January 1, 2008 to December 19, 2008 as a special-purpose acquisition company with no business operations, plus the operations of Cyalume for the period from December 20, 2008 to December 31, 2008 as a manufacturer and seller of chemiluminescent products. The 2009 statement includes a full year of operations. The required Results of Operations discussion above discusses the changes in those

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financial statements from 2008 to 2009. Since the significant changes all relate to our transition from a special-purpose acquisition company to a manufacturer, we do not feel that the above disclosure is by itself adequate for investors in understanding the business.

To assist investors in better understanding the changes in our business for the year ended December 31, 2009, we are presenting here an additional Results of Operations prepared on a combined basis in which the 2008 operations of CTI for the period from January 1, 2008 to December 19, 2008 are combined with the 2008 results of Cyalume (which include the operations of CTI for the period from December 20, 2008 to December 31, 2008) to show a full year of manufacturing and selling activity. We then compare this combined basis 2008 statement to the 2009 results, which also contain 12 months of CTI’s manufacturing and selling activities. The following combined statement of operations for 2008 is the mathematical addition of our 2008 audited financial statements and the audited financial statements of the Predecessor for the period from January 1, 2008 to December 19, 2008, both of which appear in the Part IV audited financial statements:

     
  (GAAP)   (non-GAAP)
     For the Year
Ended
December 31,
2008
  Predecessor
For the Period
January 1,
2008 to
December 19,
2008
  For the Year
Ended
December 31, 2008
Revenues   $ 316     $ 40,441     $ 40,757  
Cost of goods sold     89       20,389       20,478  
Gross profit     227       20,052       20,279  
Other expenses (income):
                          
Sales and marketing     72       2,922       2,994  
General and administrative     942       4,072       5,014  
Research and development     43       1,251       1,294  
Interest expense (income), net     (968 )      4,788       3,820  
Interest expense – related party     8             8  
Amortization of intangible assets     131       2,543       2,674  
Goodwill impairment loss                  
Other intangible asset impairment losses                  
Other loss (income), net     23       (1,146 )      (1,123 ) 
Income (loss) before income taxes     (24 )      5,622       5,598  
Provision for (benefit from) income taxes     (600 )      2,216       1,616  
Net income   $ 576     $ 3,406        
Non-GAAP combined net income               $ 3,982  

We stress that the combined statement of operations for 2008 is a non-GAAP financial statement and, therefore, has limits in its usefulness to investors. Due to its non-standardized definition, it will not be comparable with the calculation of similar measures for other companies. The non-GAAP combined basis statement of operations is presented solely to permit investors to more fully understand our business in the way that management sees it.

We are presenting a Management’s Discussion and Analysis section below based on the combined statements of operations for 2008 as described above. This discussion provides insight for the full year that is not available in the GAAP discussion presented above. Except for results occurring after the date of the Acquisition, combining our and the Predecessor’s 2008 results in this manner does not reflect (a) purchase accounting resulting from the Acquisition or (b) other pro forma adjustments that could have been used to show how results may have appeared if that purchase accounting was applied as of January 1, 2008. Where appropriate, the effect of the Acquisition is discussed below. Combined basis information is useful as it assists management in understanding our performance over the last two years, which is not possible from reviewing the

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U.S. GAAP information. Investors may find it useful for this purpose as well. The combined basis information should not be considered an alternative to, or more meaningful than, the financial information presented in accordance with U.S. GAAP.

Cyalume Technologies Holdings, Inc.
Combined Basis Consolidated Statements of Operations
(in thousands)

     
  Year Ended December 31,
     2009
(GAAP)
  2008
(non-GAAP)
  Favorable
(Unfavorable)
Change
Revenues   $ 32,201     $ 40,757     $ (8,556 ) 
Cost of goods sold     18,817       20,478       1,661  
Gross profit     13,384       20,279       (6,895 ) 
Other expenses (income):
                          
Sales and marketing     3,171       2,994       (177 ) 
General and administrative     4,917       5,014       97  
Research and development     1,464       1,294       (170 ) 
Interest expense, net     2,644       3,820       1,176  
Interest expense – related party     61       8       (53 ) 
Amortization of intangible assets     3,497       2,674       (823 ) 
Goodwill impairment loss     12,456             (12,456 ) 
Other intangible assets impairment loss     25,624             (25,624 ) 
Other loss (income), net     52       (1,123 )      (1,175 ) 
Income (loss) before income taxes     (40,502 )      5,598       (46,100 ) 
Provision for (benefit from) income taxes     (6,880 )      1,616       8,496  
Net loss   $ (33,622 )             
Non-GAAP combined net income         $ 3,982     $ (37,604 ) 

Combined Basis Results of Operations

Revenues:  We experienced a significant decline in sales volumes in 2009, leading to an $8.6 million decrease in revenue. Many of our products are sold under indefinite quantity type contracts whereby we fulfill orders as they are placed by customers. Price changes did not have a significant impact on revenue. We do not have insight into why our military customers order at the times or quantities that they do, however we see no indication that the underlying usage of our products has diminished. Sales of our ammunition products increased $4.5 million driven by a significant increase in unit sales. We believe that the global recession and constraints on budgets worldwide have negatively affected our revenues.

Gross profit:  Our gross profit declined $6.9 million in 2009 compared to 2008. 90% of this decline is attributable to the decline in sales volumes experienced with the remaining portion caused by a change in the product mix sold. Price changes had an insignificant impact on gross profit.

Expenses:  Sales and marketing expenses increased primarily due to higher commissions paid to distributors. General and administrative expenses declined primarily due to lower professional fee expenses. Research and development expense increased primarily due to expanding our research and development department.

Interest expense, net:  Interest expense declined in 2009 due to lower outstanding debt levels and generally lower interest rates on those debt levels. Interest expense, net for 2008 included $1.0 million in interest income earned by funds that we held in trust prior to completing the Acquisition. CTI entered 2008 paying interest on $40.9 million in debt. We entered 2009 with $33.7 million, a decline of $7.2 million, due to regular principal payments by CTI during 2008 and the retirement of CTI’s existing debt and acquiring of lower amounts of new debt during the Acquisition.

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Amortization of intangible assets:  Prior to the Acquisition, CTI had intangible assets (patents, trademarks/tradenames, customer relations and non-compete agreements) recorded as a result of a previous transaction and recorded amortization expense related to those assets. Those assets were revalued at the Acquisition date in accordance with U.S. GAAP, resulting in a higher valuation, and, therefore, a higher amortization expense in 2009.

Goodwill impairment loss and Intangible assets impairment loss:  In 2009 we recorded impairment losses of $12.5 million and $25.6 million on our goodwill and our identified intangible assets, respectively.

Goodwill is reviewed for impairment utilizing a two-step process. The first step of the impairment test requires the identification of the reporting units and comparison of the fair value of each of these reporting units to the respective carrying value. We have only one reporting unit: the consolidated company as a whole. If the carrying value of the reporting unit is less than its fair value, no impairment exists and the second step is not performed. If the carrying value of the reporting unit is higher than its fair value, the second step must be performed to compute the amount of the goodwill impairment, if any. In the second step, the impairment is computed by comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized for the excess. We estimated our fair value using the average market price of our common stock during the last 20 trading days of 2009. Based upon a comparison of our fair value and carrying value, our carrying value was higher than our fair value and, accordingly, we performed the second and final step of the impairment analysis. The results of that final step indicated that goodwill was impaired by $12.5 million for the year ending December 31, 2009, including the 100% impairment of CTSAS’ goodwill of €3.8 million. The goodwill impairment was caused by two main factors: (i) a significant decrease in the market price of our common stock and (ii) a decrease in revenues forecasted as of December 31, 2009 versus revenues forecasted as of the Acquisition date.

As part of the goodwill impairment test described in the preceding paragraph, we also performed impairment tests on our identified intangible assets. Intangible assets that are not amortized, such as our trademarks and trade names, are reviewed for impairment by comparing the fair value of the intangible asset with its carrying amount. If the carrying amount of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. We estimated the fair value of our trademarks and trade names using the relief from royalty method, a variation of the income approach. The underlying assumption of this method is that in lieu of ownership, an entity would be willing to pay a royalty in order to exploit the related benefits of our trademarks and trade names. The present value of this royalty stream provides a useful indication of the fair value of our trademarks and trade names. Intangible assets that are amortized, such as our purchased customer relationships, are reviewed for impairment by a two-step process. The first step is to determine if the intangible asset’s carrying amount is not recoverable. The carrying amount is not considered recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the intangible asset. If the carrying amount is not considered to be recoverable, then the carrying value is compared to the intangible asset’s fair value. If the carrying value exceeds the fair value, then an impairment loss is recognized in an amount equal to that excess. We estimated the fair value of our purchased customer relationship using an income approach utilizing a discounted cash flow methodology, specifically the multi-period excess earnings method (also know as the residual cash flow method). Since the cash flows attributable to our purchased customer relationship asset stem from sales to a customer base that existed at the Acquisition date, a forecast of cash flows consisting of only those customers was utilized.

Other loss (income), net:  During 2008, a restructuring was implemented to facilitate the sale of CTI to Cyalume pursuant to which the CEO and two Vice-Presidents left CTI, resulting in a restructuring charge of $1.1 million. Cash payments of restructuring charges were primarily made in 2008 with $229,000 paid in 2009. In 2008, before the Acquisition, CTI reached settlement with the previous owners of CTI on all matters being disputed under arbitration and relating to disputes or representations and warranties made by the previous owners. CTI received $3.0 million in cash, resulting in a net gain of $2.8 million on the settlement. Other loss (income) in 2009 primarily reflects the impact of changing foreign exchange rates on our operations.

Provision for (benefit from) income taxes:  The significant pre-tax net loss, as described above, is the primary factor in the $8.4 million change in the 2009 benefit from income taxes over the 2008 provision for

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income taxes. The effective tax rate for 2009 of 17% is lower than the 2008 rate of 29% due to the goodwill impairment loss recorded in 2009, which is a permanent difference between U.S. GAAP income and taxable income, as well as the increase in the valuation allowance on our deferred tax assets and prior year income tax true-up adjustments.

Foreign exchange rates:  If 2009 operations in foreign currencies had been translated using the foreign exchange rate in effect at the end of 2008, revenues would have been $264,000 higher than reported and gross margin would have increased $133,000. Net income (loss) would have been $22,000 lower than reported.

ITEM 7A. 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Selected Quarterly Financial Data

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

Financial Statements

The information required by this item may be found beginning on page F-1 of this Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A(T). CONTROLS AND PROCEDURES

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.

Prior to our Acquisition of CTI on December 19, 2008, our disclosure controls and procedures were designed and reviewed by our Chief Executive Officer and Chief Financial Officer, with the assistance of a third party accounting service provider. As of the Acquisition date, our current Chief Executive Officer and Chief Financial Officer assumed responsibility for all disclosure controls and procedures and terminated the engagement of such third party.

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 December 31, 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 December 31, 2009.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in the Securities Exchange Act of 1934, as amended. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any

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evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2009. In making this assessment, we used the criteria set forth by Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment using those criteria, our management concluded that our internal control over financial reporting was effective as of December 31, 2009.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

Changes in Internal Control over Financial Reporting

We have had no changes in internal control over financial reporting during our last fiscal quarter of 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2010 Annual Meeting of Shareholders.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2010 Annual Meeting of Shareholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Securities Authorized for Issuance under Equity Compensation Plans

     
Equity Compensation Plan Information
Plan category   Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
(a)
  Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
  Number of securities
remaining available for
future issuance under equity
compensation plans
(excluding securities
reflected in column (a))
(c)
Equity compensation plans approved by security holders     716,600 (1)      3.55 (2)      1,283,400  
Equity compensation plans not approved by security holders     100,000       8.00        
Total     816,600       4.32 (2)      1,283,400  

(1) Includes 239,100 shares of restricted stock awards granted under the Cyalume Technologies Holdings, Inc. 2009 Omnibus Securities and Incentive Plan. The remaining balance consists of outstanding stock option and warrant grants.
(2) The weighted average exercise price does not take into account the shares issuable upon vesting of outstanding restricted stock awards which have no exercise price.

Security Ownership of Certain Beneficial Owners

The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2010 Annual Meeting of Shareholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2010 Annual Meeting of Shareholders.

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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

CCR LLP audited our consolidated financial statements for the years ended December 31, 2009 and 2008. CCR LLP also audited the Predecessor (CTI) for the period from January 1, 2008 to December 19, 2008. CCR LLP is our principal accountant as of December 31, 2009. Miller, Ellin and Company LLP was our principal accountant in 2008 until December 19, 2008.

Audit Fees

Fees billed within the past two years by CCR LLP included:

$260,000 related to our financial statement audits for December 31, 2009, related quarterly reviews and review of various SEC Forms filed during 2009.
$350,000 related to CTI financial statement audits for December 19, 2008 and December 31, 2008, related quarterly reviews and review of the SEC Schedule 14A filed December 4, 2008.
$32,000 related to Cyalume financial statement audits for December 31, 2008.

Fees billed within the past two years by Miller, Ellin and Company for 2008 audit services included:

$13,000 related to review of 2008 Form 10-Q filings and review of the SEC Schedule 14A filed December 4, 2008.

Audit-Related Fees

Fees for audit-related services provided by CCR LLP totaled $0 in 2009 and $3,000 in 2008. Audit-related services principally include advice on compliance with Sarbanes-Oxley.

Tax Fees

There were no fees for tax related services from CCR LLP in 2009 or 2008.

All Other Fees

There were no fees for other professional services from CCR LLP during 2009 or 2008.

Audit Committee Pre-Approval Policies and Procedures

At December 31, 2008 we did not have an audit committee. As a result, our entire Board of Directors performed the duties of an audit committee during the fiscal year ended December 31, 2008. Our Board of Directors evaluates and approves in advance the scope and cost of the engagement of an auditor before the auditor provides audit and non-audit services.

On January 13, 2009, following the December 19, 2008 Acquisition of CTI, the Board of Directors formed an Audit Committee in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, and elected the following members to serve on this committee: Thomas Rebar (Chairman), Yair Shamir, Joseph Gorman and Daniel Gaspar. Thomas Rebar is an “audit committee financial expert”. Mr. Rebar has been a partner of SCP Private Equity Management, LLC since 1996. Mr. Rebar is currently a director of several companies, including Magnolia Broadband, and Pentech Financial Services, Inc. Prior to joining SCP, Mr. Rebar was a Senior Vice President at Charterhouse Inc. from 1989 to 1996, the U.S. investment banking arm of Charterhouse PLC, a U.K. merchant bank. Before joining Charterhouse, Mr. Rebar was a member of the corporate finance department at Bankers Trust Company from 1987 to 1989. Mr. Rebar received his B.S. summa cum laude from the University of Scranton and an M.B.A. from New York University Graduate School of Business Administration.

The Board of Directors has determined that each member of the Audit Committee is independent as defined in Rule 5605(a)(2) of the NASDAQ Listing Rules. On August 20, 2009, Daniel Gaspar resigned from the Board of Directors and the Audit Committee.

The Audit Committee recommends to the Board of Directors the annual engagement of a firm of independent accountants and reviews with the independent accountants the scope and results of audits, our internal accounting controls and audit practices and professional services rendered to us by our independent accountants. The Audit Committee has adopted a written charter which is available on our website,

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www.cyalume.com. The Audit Committee may form and delegate authority to subcommittees consisting of one or more Audit Committee members when appropriate, including the authority to grant pre-approvals of audit and permitted non-audit services provided that the decisions of such subcommittee to grant preapprovals are presented to the full Audit Committee at its next scheduled meeting.

On December 19, 2008, the Board of Directors appointed CCR LLP to be principal accountant for Cyalume and engaged them to perform the 2008 audit for Cyalume. In February 2009, the newly formed Audit Committee met with CCR LLP, to discuss the audit and reporting process for preparing the audited financial statements and the Annual Report on Form 10-K. CCR LLP had been CTI’s principal accountant prior to the Acquisition and it had been engaged by CTI to perform the 2008 audit of CTI’s financial statements prior to the Acquisition. In April 2009 the Board of Directors engaged CCR LLP to perform the 2009 audit of Cyalume. The Audit Committee periodically meets with our management and CCR LLP to discuss audit and accounting topics and to review quarterly and annual financial reports.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 
Financial statement schedules filed as part of this report   Page
Schedule II — Valuation and Qualifying Accounts     S-3  

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Exhibits

 
Exhibit
Number
  Description
 2.1     Stock Purchase Agreement dated February 14, 2008 by and among Vector Intersect Acquisition Corporation, as the Parent, Cyalume Acquisition Corp., a Delaware corporation, as the Purchaser, Cyalume Technologies, Inc. and GMS Acquisition Partners Holdings, LLC.(1)
 2.2     Amendment No. 1 to Stock Purchase Agreement, dated October 22, 2008.(2)
 2.3     Amendment No. 2 to Stock Purchase Agreement, dated December 17, 2008.(3)
 2.4     Amendment No. 3 to Stock Purchase Agreement, dated December 18, 2008.(3)
 3.1     Fifth Amended and Restated Certificate of Incorporation.(3)
 3.2     By-laws.(4)
 4.1     Specimen Common Stock Certificate.(4)
 4.2     Specimen Unit Certificate.(4)
 4.3     Specimen Warrant Certificate.(4)
 4.4     Form of Unit Purchase Option to be granted to the representative.(4)
10.1     Form of Stock Escrow Agreement among the Registrant, American Stock Transfer & Trust Company and the Initial Stockholders.(4)
10.2     Form of Registration Rights Agreement among the Registrant, the Initial Stockholders and the Private Placement Purchasers.(4)
10.3     Centurion Credit Group Master Fund L.P. Note Purchase Agreement dated December 10, 2008.(5)
10.4     Centurion Credit Group Master Fund L.P. Letter Agreement dated December 10, 2008.(5)
10.5     Centurion Credit Group Master Fund L.P. Escrow Agreement dated December 10, 2008.(5)
10.6     Warrant issued to Centurion Credit Group Master Fund L.P. dated December 10, 2008.(5)
10.7     Subscription Agreement with Catalyst Equity Management dated September 5, 2008.(5)
10.8     Form of Warrant Agreement in favor of Catalyst Private Equity Partners (Israel) II, LP.(6)
10.9     Letter Agreement by and between the Registrant and Vector Investment Fund LLC dated December 10, 2008.(5)
10.10    Employment Agreement with Derek Dunaway dated June 2, 2009.(7)
10.11    Employment Agreement with Michael Bielonko dated June 2, 2009.(7)
10.12    Employment Agreement with Thomas McCarthy dated June 2, 2009.(7)
10.13    Employment Agreement with Tomas Ogas dated May 14, 2009.(7)
10.14    Employment Agreement with Earl Cranor dated July 17, 2009.(8)
10.15    TD Bank Revolving Credit and Term Loan Agreement dated December 19, 2008.(9) (Exhibit 10.14)
10.16    TD Bank Security and Pledge Agreement dated December 19, 2008.(9) (Exhibit 10.15)
10.17    TD Bank Mortgage, Assignment of Leases and Rents and Security Agreement dated December 19, 2008.(9) (Exhibit 10.16).
10.18    Rodman Principal Investments, LLC Unsecured Promissory Note dated December 31, 2008.(10)
10.19    TD Bank First Amendment to Credit Agreement and Limited Waiver dated September 11, 2009.(11)
10.20    TD Bank Second Amendment to Credit Agreement and Limited Waiver dated December 7, 2009.(12)
10.21*   Supply Agreement between Cyalume Technologies, Inc. (f/k/a Omniglow Corporation) and LC Ind., Inc., dated June 2004 (confidential treatment has been requested for certain portions of this agreement which have been redacted).

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Exhibit
Number
  Description
10.22*   Supply Agreement between Cyalume Technologies S.A. and NATO Maintenance and Supply Agency dated July 28, 2008 (confidential treatment has been requested for certain portions of this agreement which have been redacted).
10.23*   Supplemental Agreement No. 1, dated July 28, 2008, to the Supply Agreement between Cyalume Technologies S.A. and NATO Maintenance and Supply Agency dated July 28, 2008 (confidential treatment has been requested for certain portions of this agreement which have been redacted).
10.24*   Supply Agreement between Cyalume Technologies S.A. and NATO Maintenance and Supply Agency dated August 20, 2008 (confidential treatment has been requested for certain portions of this agreement which have been redacted).
10.25*   Supplemental Agreement No. 2, dated October 6, 2008, to the Supply Agreement between Cyalume Technologies S.A. and NATO Maintenance and Supply Agency dated July 28, 2008 (confidential treatment has been requested for certain portions of this agreement which have been redacted).
10.26*   Supplemental Agreement No. 3, dated October 6, 2008, to the Supply Agreement between Cyalume Technologies S.A. and NATO Maintenance and Supply Agency dated July 28, 2008 (confidential treatment has been requested for certain portions of this agreement which have been redacted).
10.27*   Supply Agreement between Cyalume Technologies, Inc. and the U.S. Department of Defense, dated January 22, 2010 (confidential treatment has been requested for certain portions of this agreement which have been redacted).
21.1*    Subsidiaries of the Registrant.
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.

(1) Incorporated by reference to the Current Report on Form 8-K dated February 14, 2008 and filed with the Commission February 21, 2008.
(2) Incorporated by reference to the Current Report on Form 8-K dated October 22, 2008 and filed with the Commission November 4, 2008.
(3) Incorporated by reference to the Current Report on Form 8-K dated December 17, 2008 and filed with the Commission December 23, 2008.
(4) Incorporated by reference to the Registration Statement on Form S-1 (File No. 333-127644) filed August 18, 2005.
(5) Incorporated by reference to the Current Report on Form 8-K dated December 10, 2008 and filed with the Commission on December 16, 2008.
(6) Incorporated by reference to the Registration Statement on Form S-1 (File No. 333-157827) filed March 11, 2009
(7) Incorporated by reference to the Current Report on Form 8-K dated May 14, 2009 and filed with the Commission June 4, 2009.
(8) Incorporated by reference to the Current Report on Form 8-K dated July 17, 2009 and filed with the Commission July 22, 2009.
(9) Incorporated herein by reference to the exhibits to the Registrant’s Annual Report on Form 10-K for the period ended December 31, 2008 filed on March 30, 2009. The number given in parenthesis indicates the corresponding exhibit number in such Form 10-K.
(10) Incorporated by reference to the Current Report on Form 8-K dated December 31, 2008 and filed with the Commission January 7, 2009.

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(11) Incorporated by reference to the Current Report on Form 8-K dated September 11, 2009 and filed with the Commission September 23, 2009.
(12) Incorporated by reference to the Current Report on Form 8-K dated December 17, 2009 and filed with the Commission December 18, 2009.
* Filed herewith.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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: March 17, 2010  

By:

/s/ Derek Dunaway

Derek Dunaway, Chief Executive Officer
(Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

   
Name   Title   Date
/s/ Derek Dunaway

Derek Dunaway
  President and Chief Executive Officer
(Principal Executive Officer)
  March 17, 2010
/s/ Michael Bielonko

Michael Bielonko
  Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
  March 17, 2010
/s/ Winston Churchill

Winston Churchill
  Director and Chairman   March 17, 2010
/s/ Yaron Eitan

Yaron Eitan
  Director and Vice Chairman   March 17, 2010
/s/ Archie Clemins

Archie Clemins
  Director   March 17, 2010
/s/ Doron Cohen

Doron Cohen
  Director   March 22, 2010
/s/ Andrew Intrater

Andrew Intrater
  Director   March 17, 2010
/s/ Jason Epstein

Jason Epstein
  Director   March 17, 2010
/s/ Joseph T. Gorman

Joseph T. Gorman
  Director   March 17, 2010
/s/ General (Ret.) Jack Keane

General (Ret.) Jack Keane
  Director   March 16, 2010
/s/ Frank Kline

Frank Kline
  Director   March 17, 2010
/s/ Thomas G. Rebar

Thomas G. Rebar
  Director   March 17, 2010
/s/ Yair Shamir

Yair Shamir
  Director   March 17, 2010

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INDEX TO FINANCIAL STATEMENTS

Cyalume Technologies Holdings, Inc.
Years ended December 31, 2009 and 2008

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders of Cyalume Technologies Holdings, Inc.

We have audited the accompanying consolidated balance sheets of Cyalume Technologies Holdings, Inc. and Subsidiary (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in stockholders’ equity and comprehensive income (loss), and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cyalume Technologies Holdings, Inc. and Subsidiary as of December 31, 2009 and 2008, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 11 to the consolidated financial statements, the Company’s amended loan covenants contain a provision that requires the Company to receive at least $3.0 million in new subordinated debt or equity before April 30, 2010 and to use the proceeds thereof to pay down its senior debt. Failure to comply with this covenant could have a materially adverse impact on the Company.

/s/ CCR LLP

Glastonbury, Connecticut
March 19, 2010

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholder of Cyalume Technologies, Inc. and Subsidiary

We have audited the consolidated statements of operations and cash flows of Cyalume Technologies, Inc. and Subsidiary (“CTI”) for the period January 1, 2008 to December 19, 2008. These financial statements are the responsibility of the CTI’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. CTI is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the CTI’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Cyalume Technologies, Inc. and Subsidiary for the period January 1, 2008 to December 19, 2008 in conformity with accounting principles generally accepted in the United States of America.

/s/ CCR LLP

Glastonbury, Connecticut
March 27, 2009

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

     
  For the
Year Ended
December 31,
2009
  For the
Year Ended
December 31,
2008
  Predecessor
For the Period January 1,
2008 to
December 19,
2008
Revenues   $ 32,201     $ 316     $ 40,441  
Cost of goods sold     18,817       89       20,389  
Gross profit     13,384       227       20,052  
Other expenses (income):
                          
Sales and marketing     3,171       72       2,922  
General and administrative     4,917       942       4,072  
Research and development     1,464       43       1,251  
Interest expense (income), net     2,644       (968 )      4,788  
Interest expense – related party     61       8        
Amortization of intangible assets     3,497       131       2,543  
Goodwill impairment loss     12,456              
Other intangible asset impairment losses     25,624              
Other losses (income), net     52       23       (1,146 ) 
Total other expenses     53,886       251       14,430  
Income (loss) before income taxes     (40,502 )      (24 )      5,622  
Provision for (benefit from) income taxes     (6,880 )      (600 )      2,216  
Net income (loss)   $ (33,622 )    $ 576     $ 3,406  
Net income (loss) per common share:
                          
Basic   $ (2.21 )    $ 0.06           
Diluted   $ (2.21 )    $ 0.05           
Weighted average shares used to compute net income (loss) per common share:
                          
Basic     15,241,416       9,550,362           
Diluted     15,241,416       12,001,471           

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

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Cyalume Technologies Holdings, Inc.
  
Consolidated Balance Sheets
(in thousands, except shares and per share information)

   
  December 31, 2009   December 31,
2008
Assets
                 
Current assets:
                 
Cash   $ 2,003     $ 3,952  
Accounts receivable, net of allowance for doubtful accounts of $239 and $452 at December 31, 2009 and 2008, respectively     3,319       3,508  
Inventories, net     9,320       11,447  
Income taxes refundable     294       701  
Deferred income taxes     682       317  
Prepaid expenses and other current assets     382       248  
Total current assets     16,000       20,173  
Property, plant and equipment, net     8,384       7,882  
Goodwill     51,244       60,896  
Other intangible assets, net     22,548       49,426  
Other noncurrent assets     67       135  
Total assets   $ 98,243     $ 138,512  
Liabilities and Stockholders’ Equity
                 
Current liabilities:
                 
Lines of credit   $ 3,200     $ 3,500  
Current portion of notes payable     6,940       3,391  
Accounts payable     3,222       3,230  
Accrued expenses     2,069       2,550  
Common stock subject to mandatory redemption           1,123  
Notes payable and advance due to related parties     9       64  
Income tax payable           5  
Total current liabilities     15,440       13,863  
Notes payable, net of current portion     18,874       25,811  
Notes payable due to related parties, net of current portion     1,065       1,000  
Deferred income taxes     7,105       9,237  
Derivatives     69       163  
Asset retirement obligation, net of current portion     158       128  
Total liabilities     42,711       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; 15,405,570 and 13,719,035 issued and outstanding at December 31, 2009 and 2008, respectively     15       14  
Additional paid-in capital     87,926       87,348  
Retained earnings (accumulated deficit)     (32,393 )      1,229  
Accumulated other comprehensive loss     (16 )      (281 ) 
Total stockholders’ equity     55,532       88,310  
Total liabilities and stockholders’ equity   $ 98,243     $ 138,512  

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

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

             
             
  Common Stock   Additional Paid-In
Capital
  Retained
Earnings
(Accumulated
Deficit)
  Accumulated
Other
Comprehensive Loss
  Total
Stockholders’
Equity
  Comprehensive
Income (Loss)
     Number of
Shares
  Amount
Balance at December 31, 2007     9,375,000     $ 9     $ 44,440     $ 653     $     $ 45,102     $  
Adjustment of common stock subject to redemption                 11,144                   11,144        
Issuance of common stock     7,308,428       8       56,114                   56,122        
Issuance of warrants in conjunction with Acquisition                 33                   33        
Exchange of note payable for common stock     (93,750 )            (750 )                  (750 )       
Estimated Acquisition purchase price adjustment     138,165             1,056                   1,056        
Exercise of warrants – cashless     79,839                                      
Common stock repurchased     (2,948,797 )      (3 )      (23,566 )                  (23,569 )       
Common stock mandatorily redeemable due to the Acquisition     (139,850 )            (1,123 )                  (1,123 )       
Foreign currency translation adjustments                             (179 )      (179 )      (179 ) 
Unrealized loss on cash flow hedges, net of taxes of $61                             (102 )      (102 )      (102 ) 
Net income                       576             576       576  
Comprehensive income                                       $ 295  
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     1,614,788       1       (1 )                         
Common stock repurchased     (32,903 )            (263 )                  (263 )       
Common stock awarded and issued for Acquisition-related services     75,000             225                   225        
Common stock issued to extinguish notes payable     17,150             82                   82        
Stock-based compensation expense – no shares issued                 500                   500        
Stock-based compensation expense – common stock issued to non-employee consultant     7,000             25                   25        
Stock registration costs                 (17 )                  (17 )       
Foreign currency translation adjustments                             206       206       206  
Unrealized gain on cash flow hedges, net of taxes of $35                             59       59       59  
Net loss                       (33,622 )            (33,622 )      (33,622 ) 
Comprehensive loss                                       $ (33,357 ) 
Balance at December 31, 2009     15,405,570     $ 15     $ 87,926     $ (32,393 )    $ (16 )    $ 55,532        

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

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Cyalume Technologies Holdings, Inc.
  
Consolidated Statements of Cash Flows
(in thousands)

     
  For the
Year Ended
December 31,
2009
  For the
Year Ended
December 31,
2008
  Predecessor
January 1,
2008 to
December 19,
2008
Cash flows for operating activities:
                          
Net income (loss)   $ (33,622 )    $ 576     $ 3,406  
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
                          
Goodwill impairment loss     12,456              
Other intangible asset impairment losses     25,624              
Depreciation of property, plant and equipment     645       23       848  
Amortization     4,503       147       2,865  
Provision for deferred income taxes     (7,211 )      (592 )      1,370  
Stock-based compensation expense     525              
Provision for inventory obsolescence     473       (2 )      71  
Other non-cash expenses     246       63       738  
Changes in operating assets and liabilities, net of effect of acquisition:
                          
Accounts receivable     178       936       (1,201 ) 
Inventories     961       (309 )      (1,526 ) 
Prepaid expenses and other current assets     (130 )      113       224  
Due from Vector                 (995 ) 
Accounts payable and accrued liabilities     (588 )      (226 )      (1,901 ) 
Income taxes payable, net     401       (87 )      (2,028 ) 
Accrued interest on notes payable to stockholders           18        
Net cash provided by operating activities     4,461       660       1,871  
Cash flows for investing activities:
                          
Payments from trust account           58,309        
Purchases of long-lived assets     (958 )      (11 )      (1,508 ) 
Purchase of CTI common stock, net of cash purchased     (43 )      (28,668 )       
Net cash provided by (used in) investing activities     (1,001 )      29,630       (1,508 ) 
Cash flows from financing activities:
                          
Repayment of advances from and notes payable to related parties           (150 )       
Net activity of line of credit     (300 )      3,500        
Payments of Predecessor notes payable           (40,346 )      (3,495 ) 
Proceeds from long-term notes payable           28,000        
Payments on long-term notes payable     (3,621 )             
Proceeds from related party notes payable           1,000        
Proceeds from issuance of common stock           4,750        
Payments to reacquire and retire common stock     (1,386 )      (23,569 )       
Net payments of debt issue costs     (140 )             
Stock registration costs     (17 )             
Proceeds from exercises of warrants     27              
Net cash used in financing activities     (5,437 )      (26,815 )      (3,495 ) 
Effect of exchange rate changes on cash     28       (93 )      26  
Net increase (decrease) in cash     (1,949 )      3,382       (3,106 ) 
Cash, beginning of period     3,952       570       5,743  
Cash, end of period   $ 2,003     $ 3,952     $ 2,637  

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

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Cyalume Technologies Holdings, Inc.
  
Notes to Consolidated Financial Statements

1. 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 principal operations. 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”) (see Note 2). GMS was the sole stockholder in CTI, which also has a wholly-owned subsidiary (Cyalume Technologies, SAS or “CTSAS”). At the Acquisition date, Vector changed its name to Cyalume Technologies Holdings, Inc. (“Cyalume”). In these financial statements and footnotes, Cyalume’s operating results include the operations of the former Vector for 2008 and CTI’s operations (including CTSAS) after the Acquisition date. CTI’s operations (including CTSAS) prior to the Acquisition date are presented as Predecessor.

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

The accompanying consolidated financial statements include the accounts of Cyalume, CTI and CTSAS and are prepared in accordance with accounting principles generally accepted in the United States of America. All significant intercompany balances and transactions have been eliminated in consolidation.

2. ACQUISITION

Accounting for the Acquisition under accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires that purchase accounting treatment of the Acquisition be reflected as a new basis of accounting, resulting in the adjustment of all assets and liabilities to their respective fair values as of the acquisition date. That adjustment to fair value requires the purchase price, including assumed liabilities, deferred financing and other transaction costs, to be allocated to the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed, with the excess allocated to goodwill. The factors that contributed to a purchase price that resulted in the recognition of goodwill include (a) CTI’s strong core business position, (b) CTI’s long-term contracts with significant customers (c) the considerable upside of CTI’s ammunition business and (d) valuation analyses and metrics compiled independently by consultants.

The consideration for the Acquisition consisted of the following (all amounts in thousands):

     
  Consideration   Cash
Acquired
  Cash Paid,
Net of Cash
Acquired
Cyalume equity issued to acquire CTI equity   $ 52,685                    
Cash paid for CTI equity and closing costs     31,348     $ 2,637     $ 28,711  
Assumption of debt     40,346                    
Liabilities incurred for closing costs     1,225              
Total consideration   $ 125,604              

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Cyalume Technologies Holdings, Inc.
  
Notes to Consolidated Financial Statements

2. ACQUISITION  – (continued)

The final allocation of the fair value of the assets acquired and liabilities assumed in the Acquisition are as follows (all amounts in thousands):

       
  Cyalume
Technologies,
Inc. (“CTI”)
  Cyalume
Technologies,
S.A.S.
(“CTSAS”)
  Eliminations   Total
Cash   $ 2,567     $ 70     $     $ 2,637  
Accounts receivable, net     3,730       1,272       (450 )      4,552  
Inventories, net     9,246       2,053             11,299  
Other current assets     126       91             217  
Deferred income taxes     281       707             988  
Property, plant and equipment     6,586       1,715             8,301  
Developed technologies, including patents     12,503                   12,503  
Trade name / trademarks     11,187                   11,187  
Customer relationships     25,430       2,246             27,676  
Non-compete agreements     267                   267  
Investment in CTSAS     11,420             (11,420 )       
Debt issue costs, net     808                   808  
Goodwill     58,127       5,412             63,539  
Total assets     142,278       13,566       (11,870 )      143,974  
Accounts payable     1,615       919       (450 )      2,084  
Accrued expenses     1,232       350             1,582  
Deferred income taxes     13,652       877             14,529  
Asset retirement obligation     175                   175  
Total liabilities     16,674       2,146       (450 )      18,370  
Net assets   $ 125,604     $ 11,420     $ (11,420 )    $ 125,604  

Pro Forma Financial Summary (Unaudited)

The following unaudited pro forma financial summary is presented as if the Acquisition was completed as of January 1, 2008. The pro forma combined results are not necessarily indicative of the actual results that would have occurred had the Acquisition been consummated on that date, or of the future operations of the combined entities. The pro forma results include adjustments for depreciation, intangible asset amortization, inventory step-up amortization, interest expense, interest income and certain allowable restructuring costs. The pro-forma results do not exclude significant nonrecurring items such as the $1.1 million restructuring charge incurred by the Predecessor in 2008 (see Note 19) and the $2.8 million net arbitration award received by the Predecessor in 2008 (see Note 16).

 
  Year Ended
December 31, 2008
Revenues (in thousands)   $ 40,757  
Net income (in thousands)   $ 4,882  
Net income per common share:
        
Basic   $ 0.51  
Diluted   $ 0.41  
Weighted average shares used to compute net income per common share:
        
Basic     9,550,362  
Diluted     12,001,471  

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Cyalume Technologies Holdings, Inc.
  
Notes to Consolidated Financial Statements

3. SIGNIFICANT ACCOUNTING POLICIES

Foreign Operations

The accounting records of CTSAS are maintained in Euros, their local and functional currency. Revenue and expense transactions are translated to U.S. dollars using the average exchange rate of the month in which the transaction took place. Assets and liabilities are translated to U.S. dollars using the exchange rate in effect as of the balance sheet date. Equity transactions are translated to U.S. dollars using the exchange rate in effect as of the date of the equity transaction. Translation gains and losses are reported as a component of accumulated other comprehensive income or loss within stockholders’ equity. 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.

Comprehensive Income (Loss)

Comprehensive income (loss)accounts for changes in stockholders’ equity resulting from non-stockholder sources. All transactions that would cause comprehensive income (loss) to differ from net income (loss) have been recorded and disclosed and relate to (i) the translation of the accounts of our foreign subsidiary and (ii) the effective portion of activities designated as hedges for hedge accounting purposes.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP 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.

Fair Value Measurements

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 using inputs based on a fair value hierarchy that is 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.

See Note 21 for more detailed fair value information, including a listing of our assets and liabilities required to be measured at fair value and where they are classified within the hierarchy. We have other financial instruments, such as cash, accounts receivable, accounts payable, accrued expenses and long-term debt, whose carrying amounts approximate fair value.

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Cyalume Technologies Holdings, Inc.
  
Notes to Consolidated Financial Statements

3. SIGNIFICANT ACCOUNTING POLICIES  – (continued)

Accounts Receivable

Accounts receivable are recorded at the aggregate unpaid amount less any allowance for doubtful accounts. The allowance is based on historical bad debt experience and the specific identification of accounts deemed uncollectible. We determine an account receivable’s delinquency status based on its contractual terms. Interest is not charged on outstanding balances. Accounts are written-off only when all methods of recovery have been exhausted. We control credit risk through initial credit evaluations and approvals, credit limits, and monitoring procedures. We perform ongoing credit evaluations of our customers, but do not require collateral to secure accounts receivable.

Inventories

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

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Depreciation is computed under the straight-line method over the estimated useful lives of four to eight years for equipment and 30 years for buildings and improvements.

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. See Note 7 for a description of our goodwill impairment analysis.

Debt Issue Costs

Costs paid to lenders to obtain financing are presented as discounts on the related debt and are amortized to interest expense over the term of the related financing, using the effective interest method (unless the financing is a line of credit, in which case the straight-line method is used). Such costs paid to third parties are presented as assets and are amortized to interest expense in the same manner as costs paid to lenders.

Intangible Assets

Intangible assets are amortized over their estimated useful lives. Costs associated with renewing or extending the terms associated with the intangible assets are expensed as incurred. Costs to third parties that are related to internally developing or successfully defending an intangible asset are capitalized as part of the intangible asset developed or defended and amortized over that asset’s useful life. Such costs to third parties that are related to patent applications that are ultimately rejected by the relevant government authority are expensed upon rejection. The useful lives used for amortization of our intangible assets are as follows:

 
  Useful life (in years)
Patents and developed technologies     See(1)  
Purchased customer relationships     13  
Trademarks and trade names     Indefinite life  
Non-compete agreements     2  

(1) Each patent has its own expiration date. Patents recorded as of December 31, 2009 will expire in years 2010 through 2027. We begin amortizing patent costs incurred when the relevant government authority approves the related patent. Generally, our patent’s useful and legal life begins when the related patent application is filed with the relevant government authority and ends 20 years thereafter.

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Cyalume Technologies Holdings, Inc.
  
Notes to Consolidated Financial Statements

3. SIGNIFICANT ACCOUNTING POLICIES  – (continued)

The Predecessor had similar intangible assets and amortized them over useful lives ranging from 10 – 18 years.

Long-Lived Assets

Long-lived assets, such as intangible assets and property, plant and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Such reviews are based on a comparison of the asset’s undiscounted cash flows to the recorded carrying value for the asset. If the asset’s recorded carrying value exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset, the asset is written-down to its estimated fair value. To estimate that fair value, we will use the most appropriate valuation technique for the circumstances and for which sufficient data is available.

Impairment charges, if any, are recorded in the period in which the impairment is determined. In the event of an impairment charge, the identifiable assets’ post-impairment carrying value will continue to be amortized or depreciated over their useful lives and be reviewed periodically for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.

Derivatives

Derivatives are recorded at their fair value as of the balance sheet date. On the consolidated statement of cash flows, cash flows from derivative instruments accounted for as cash flow hedges are classified in the same category as the cash flows from the items being hedged.

Common Stock Purchase Warrants

Common stock purchase warrants issued by us and currently outstanding are recorded at their initial fair value and reported in stockholders’ equity as increases to additional paid-in capital. These warrants are reported as equity, rather than liabilities, since (i) the warrants may not be net-cash settled, (ii) the warrant contract limits the number of shares to be delivered in a net-share settlement and (iii) we have sufficient unissued common shares available to settle outstanding warrants. Subsequent changes in fair value from the warrants’ initial fair value are not recognized as long as the warrants continue to merit classification as equity.

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.

Taxes Collected from Customers

Sales taxes collected from customers are not considered revenue and are included in accounts payable and accrued liabilities until remitted to the taxing authorities.

Shipping and Handling Costs

Outbound shipping and handling costs are included in selling expenses in the accompanying consolidated statements of operations. These costs were $361,000 and $5,000 for the years ended December 31, 2009 and 2008, respectively. The Predecessor’s shipping and handling costs for the period ended December 19, 2008 were $514,000.

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Cyalume Technologies Holdings, Inc.
  
Notes to Consolidated Financial Statements

3. SIGNIFICANT ACCOUNTING POLICIES  – (continued)

Advertising Costs

Advertising costs are expensed as incurred and are primarily included in selling expenses in the accompanying consolidated statements of operations. Advertising expense was $37,000 and $2,000 for the years ended December 31, 2009 and 2008, respectively. The Predecessor’s advertising costs for the period ended December 19, 2008 were $83,000.

Stock-Based Compensation

We incur stock-based compensation related to awards of common stock, restricted common stock and options to employees and non-employees. Those awards are measured at their fair value on the date the award is granted and are recognized in our consolidated financial statements over the period the grantee is required to provide services in exchange for the award. When recognized as an expense, the fair value of the award, less estimated forfeitures, is recognized on a straight-line basis over the award service period; if there is no such service period, then the entire fair value of the award is recognized as expense on the grant date. See Note 17 for further information regarding our stock-based compensation awards and related valuation assumptions and expenses.

Income Taxes

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

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

Our 2006 through 2009 tax years remain subject to examination by federal, Massachusetts and New Jersey tax authorities. CTI’s tax years 2006 through 2009 remain subject to examination by federal and various state tax jurisdictions. CTSAS’ tax years 2006 through 2009 remain subject to examination as the French tax authorities have completed audits of CTSAS’ 2004 and 2005 tax years.

We classify interest on tax deficiencies as interest expense and income tax penalties as other miscellaneous expenses. For the years ended December 31, 2009 and 2008, interest expense and penalties relating to tax deficiencies were not significant.

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Cyalume Technologies Holdings, Inc.
  
Notes to Consolidated Financial Statements

3. SIGNIFICANT ACCOUNTING POLICIES  – (continued)

Net Income (Loss) per Common Share

Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted net income per common share is computed by dividing net income by the weighted average number of common shares and dilutive potential common share equivalents then outstanding. Potential common shares consist of shares issuable upon the exercise of warrants and options (using the treasury stock method).

   
  Year Ended December 31,
     2009   2008
Basic:
                 
Net income (loss) (in thousands)   $ (33,622 )    $ 576  
Weighted average shares     15,241,416       9,550,362  
Basic income (loss) per common share   $ (2.21 )    $ 0.06  
Diluted:
                 
Net income (loss) (in thousands)   $ (33,622 )    $ 576  
Weighted average shares     15,241,416       9,550,362  
Effect of dilutive warrants     (1)       2,451,109  
Weighted average shares, as adjusted     15,241,416       12,001,471  
Diluted income (loss) per common share   $ (2.21 )    $ 0.05  

(1) Since we experienced a loss during this period, common shares issuable upon exercise of convertible securities were excluded from the loss per share calculation because the effect would be antidilutive.

The following potentially dilutive common shares were excluded from the calculation of diluted net income per common share because their effect was antidilutive for each of the periods presented:

   
  Year Ended December 31,
     2009   2008
Warrants     4,250,756       218,750  
Options     1,940,000       1,462,500  

Segments

We operate in a single segment as defined under U.S. GAAP.

Reclassifications

Certain prior year amounts have been reclassified to conform to the 2009 presentation.

Recent Accounting Pronouncements

The following are recent accounting pronouncements that have affected our consolidated financial statements or may affect them in the future.

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 reorganized various U.S. GAAP pronouncements into accounting topics and displays them using a consistent structure. Although the ASC was not intended to change U.S. GAAP, it superseded all previously existing accounting standards. Also included in the ASC are rules and interpretive releases of the SEC, which are also sources of authoritative U.S. GAAP for SEC registrants. The ASC is effective for interim and annual

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Cyalume Technologies Holdings, Inc.
  
Notes to Consolidated Financial Statements

3. SIGNIFICANT ACCOUNTING POLICIES  – (continued)

periods ending after September 15, 2009. The adoption of the ASC as of July 1, 2009 had no impact on these consolidated financial statements other than changing the way specific accounting standards are referenced herein.

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 these 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. Adoption of SFAS No. 161 on January 1, 2009 required additional disclosures in these 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 did not have an impact on these 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. The FASB has issued Accounting Standards Update (ASU) No. 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. The amendments in this ASU remove the requirement for an SEC filer (such as us) to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. All of the amendments in this ASU were effective for us upon issuance (February 24, 2010). The only effect of our adoption of this ASU was to not disclose the date through which subsequent events have been evaluated in preparing these consolidated financial statements; for SEC filers, that evaluation date must be the date of issuance of the financial statements.

In April 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 142-3, Determination of the Useful Life of Intangible Assets, which is now codified into ASC 350 Intangibles — Goodwill and Other. This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under U.S. GAAP. The objective of this FSP is to improve the consistency between the useful life used to amortize a recognized intangible asset to expense and the period of expected cash flows used to measure the fair value of the asset. This FSP applies to all recognized intangible assets, whether acquired in a business combination or otherwise. The adoption of this FSP on January 1, 2009 did not have an impact on these consolidated financial statements.

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Cyalume Technologies Holdings, Inc.
  
Notes to Consolidated Financial Statements

4. INVENTORIES