##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM
10-Q/A
 Amendment
No. 1
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended March 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: 000-51639
 Argyle Security, Inc.
  Delaware
(State or Other Jurisdiction of 
Incorporation or Organization)
    
    20-3101079
(I.R.S. Employer
Identification No.)
 12903 Delivery Drive
San Antonio, TX 78247
 (210) 495-5245
 Yes þ No o
 Yes o No þ
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 Yes o No þ




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##### Table of Contents



EXPLANATORY NOTE
   Unsecured Debt  Related Parties




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##### 



Argyle Security, Inc. Index to Form 10-Q
 Part I. Financial Information
    
    
    3Item 1. Financial Statements
    
    
    3Consolidated Balance Sheets
    
    
    3Consolidated Statements of Operations
    
    
    4Consolidated Statement of Stockholders Equity
    
    
    5Consolidated Statement of Cash Flows
    
    
    6Notes to Unaudited Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    31Part II. Other Information
    
    
    47Item 6. Exhibits
    
    
    48SIGNATURES
    
    
    49Exhibit 31.1Exhibit 31.2Exhibit 31.3Exhibit 31.4
   2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1  CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 ARGYLE SECURITY, INC.
 
 CONSOLIDATED BALANCE SHEETS
  March 31,
    
    
    December 31,2009
    
    
    2008unauditedAssetsCurrent assets:Cash and cash equivalents
    
    $
    9,367
    
    
    $
    11,142Restricted cash
    
    
    5,000
    
    
    
    2,500Receivables:Contract  net of allowance for doubtful accounts of
$787 and $777 at March 31, 2009 December 31, 2008, respectively
    
    
    27,959
    
    
    
    28,815Contract receivables  related party
    
    
    3,791
    
    
    
    4,685Other receivables
    
    
    7
    
    
    
    335Costs and estimated earnings in excess of billings
on incomplete contracts
    
    
    8,181
    
    
    
    6,475Intangible assets
    
    
    74
    
    
    
    184Refundable income taxes
    
    
    192
    
    
    
    168Inventory
    
    
    1,595
    
    
    
    2,146Other current assets
    
    
    15
    
    
    
    6Prepaids
    
    
    295
    
    
    
    379Deferred income taxes, net
    
    
    375
    
    
    
    898Total current assets
    
    
    56,851
    
    
    
    57,733Property and equipment, net
    
    
    8,856
    
    
    
    9,033Goodwill
    
    
    2,844
    
    
    
    2,844Intangible assets
    
    
    11,770
    
    
    
    12,111Deposits, deferred transaction costs, and other assets
    
    
    457
    
    
    
    591Total other assets
    
    
    23,927
    
    
    
    24,579Total assets
    
    $
    80,778
    
    
    $
    82,312Liabilities and Stockholders EquityCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    15,187
    
    
    $
    15,799Accounts payable  related party
    
    
    90
    
    
    
    173Billings in excess of costs and estimated earnings
on incomplete contracts
    
    
    9,055
    
    
    
    7,633Interest payable to stockholders
    
    
    
    
    
    
    49Current portion of capitalized lease obligations
    
    
    244
    
    
    
    239Current portion of long-term debt
    
    
    3,807
    
    
    
    3,235Deferred income taxes
    
    
    
    
    
    
    Total current liabilities
    
    
    28,383
    
    
    
    27,128Long-Term Liabilities:Deferred income taxes
    
    
    1,217
    
    
    
    1,577Long-term debt  less current portion
    
    
    22,611
    
    
    
    29,558Derivative, deferred rent and other long term liabilities (including dividends)
    
    
    831
    
    
    
    635Long-term capitalized lease obligations  less current portion
    
    
    3,326
    
    
    
    3,389Total long-term liabilities
    
    
    27,985
    
    
    
    35,159Total liabilities
    
    
    56,368
    
    
    
    62,287Stockholders EquityPreferred stock of Argyle Security, Inc.  $.0001 par value; 
1,000,000 shares authorized; 18,750 shares of Series A and 27,273 shares
of Series B at March 31, 2009 and 18,750 shares of Series A at
December 31, 2008 issued and outstanding
    
    
    
    
    
    
    Common stock of Argyle Security, Inc.  $.0001 par value; 
89,000,000 shares authorized; shares issued and outstanding 6,267,105
shares at March 31, 2009 and 5,969,342 shares at December 31, 2008
    
    
    1
    
    
    
    1Additional paid in capital
    
    
    55,685
    
    
    
    50,925Accumulated other comprehensive income (loss)
    
    
    (117
    )
    
    
    (116
    )Accumulated earnings (deficit)
    
    
    (31,159
    )
    
    
    (30,785
    )Total stockholders equity
    
    
    24,410
    
    
    
    20,025Total liabilities and stockholders equity
    
    $
    80,778
    
    
    $
    82,312
   3




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ARGYLE SECURITY, INC.
 
 CONSOLIDATED STATEMENT OF OPERATIONS
 (unaudited)
  Three Months EndedMarch 31,
    
    
    March 31,2009
    
    
    2008Revenues:Contract revenues
    
    $
    25,326
    
    
    $
    26,860Contract revenues  related party
    
    
    860
    
    
    
    6,943Manufacturing revenues
    
    
    1,901
    
    
    
    1,518Service and other revenues
    
    
    3,657
    
    
    
    2,276Total revenues
    
    
    31,744
    
    
    
    37,597Cost of revenues:Contract costs
    
    
    21,332
    
    
    
    27,342Manufacturing costs
    
    
    1,258
    
    
    
    690Service and other costs, include $110 and $1,252 of
amortization of intangibles in 2009 and 2008 , respectively
    
    
    2,497
    
    
    
    3,161Total cost of revenues
    
    
    25,087
    
    
    
    31,193Gross profit
    
    
    6,657
    
    
    
    6,404Operating expenses:Salaries and related expense, including stock-based
compensation of $145 and $558 in 2009 and 2008,
respectively
    
    
    3,010
    
    
    
    3,369Professional fees and outside services
    
    
    880
    
    
    
    945General and administrative expenses
    
    
    1,226
    
    
    
    1,588Depreciation
    
    
    425
    
    
    
    459Amortization of intangible assets
    
    
    341
    
    
    
    421Total operating expenses
    
    
    5,882
    
    
    
    6,782Operating income (loss)
    
    
    775
    
    
    
    (378
    )Other income (expense):Interest income
    
    
    25
    
    
    
    26Interest expense
    
    
    (883
    )
    
    
    (799
    )Total other income (expense)
    
    
    (858
    )
    
    
    (773
    )Income (loss) before provision for income taxes
    
    
    (83
    )
    
    
    (1,151
    )(Benefit) Provision for income taxes
    
    
    148
    
    
    
    (417
    )Net income (loss)
    
    
    (231
    )
    
    
    (734
    )Dividends on redeemable preferred stock
    
    
    (143
    )
    
    
    Net income (loss) allocable to holders of non-redeemable common stock
    
    $
    (374
    )
    
    $
    (734
    )Weighted-average number of shares of common stock outstanding
exclusive of shares subject to possible redemption:Basic
    
    
    6,019,495
    
    
    
    5,749,342Diluted
    
    
    6,019,495
    
    
    
    5,749,342Net income (loss) per share allocable to holders of
non-redeemable common stock:Basic
    
    $
    (0.06
    )
    
    $
    (0.13
    )Diluted
    
    $
    (0.06
    )
    
    $
    (0.13
    )
   4




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ARGYLE SECURITY, INC.
 
 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
 DECEMBER 31, 2008 THROUGH MARCH 31, 2009
 (unaudited)
  AccumulatedAdditional
    
    
    Other
    
    
    Accumulated
    
    
    TotalCommon Stock
    
    
    Preferred Stock
    
    
    Paid in
    
    
    Comprehensive
    
    
    Earnings /
    
    
    StockholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Income (Loss)
    
    
    (Deficit)
    
    
    EquityBalance at December 31, 2008
    
    
    5,969,342
    
    
    $
    1
    
    
    
    18,750
    
    
    $
    0
    
    
    $
    50,925
    
    
    $
    (116
    )
    
    $
    (30,785
    )
    
    $
    20,025Net income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (231
    )
    
    
    (231
    )Deferred loss on hedging
activities, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )ISI seller note conversion
    
    
    192,763
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,928
    
    
    
    
    
    
    
    
    
    
    
    1,928Stock-based compensation
    
    
    135,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    145
    
    
    
    
    
    
    
    
    
    
    
    145Forfeiture
of stock-based compensation
    
    
    (30,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of preferred stock
    
    
    
    
    
    
    
    
    
    
    27,273
    
    
    
    0
    
    
    
    2,687
    
    
    
    
    
    
    
    
    
    
    
    2,687Dividends on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (143
    )
    
    
    (143
    )Common stock registration costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at March 31, 2009
    
    
    6,267,105
    
    
    $
    1
    
    
    
    46,023
    
    
    $
    0
    
    
    $
    55,685
    
    
    $
    (117
    )
    
    $
    (31,159
    )
    
    $
    24,410
   5




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ARGYLE SECURITY, INC.
 
 CONSOLIDATED STATEMENT OF CASH FLOWS
 (unaudited)
 Three Months EndedMarch 31,
    
    
    March 31,2009
    
    
    2008Cash flows from operating activities:Net income (loss)
    
    $
    (231
    )
    
    $
    (734
    )Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activitiesStock-based compensation
    
    
    145
    
    
    
    558Amortization
    
    
    451
    
    
    
    1,673Depreciation
    
    
    464
    
    
    
    488Gain (loss) on disposal of asset
    
    
    3
    
    
    
    Deferred interest on Merit debt
    
    
    115
    
    
    
    Decrease (increase) in contract receivables
    
    
    856
    
    
    
    (15,552
    )Decrease (increase) in related party contract receivables
    
    
    894
    
    
    
    684Decrease
(increase) in other receivables
    
    
    328
    
    
    
    (6
    )Decrease (increase) in costs and estimated earnings in excess of billings
    
    
    (1,706
    )
    
    
    2,702Decrease (increase) in other assets
    
    
    583
    
    
    
    237Increase (decrease) in accounts payable and accrued expenses
    
    
    (466
    )
    
    
    3,569Increase (decrease) in other long-term liabilities
    
    
    47
    
    
    
    18Increase (decrease) in deferred income taxes and refundable taxes
    
    
    139
    
    
    
    (392
    )Increase (decrease) in billings in excess of costs and estimated earnings
    
    
    1,422
    
    
    
    3,854Net cash provided by (used in) operating activities
    
    $
    3,044
    
    
    $
    (2,901
    )Cash flows from investing activities:Acquisition of PDI, Com-Tec, and Fire Quest in 2008, net of cash acquired
    
    
    
    
    
    
    (5,259
    )Purchase of property and equipment
    
    
    (291
    )
    
    
    (781
    )Transaction costs
    
    
    
    
    
    
    (223
    )Net cash provided by (used in) investing activities
    
    $
    (291
    )
    
    $
    (6,263
    )Cash flows from financing activities:Issuance of preferred stock
    
    
    3,000
    
    
    
    Restricted cash
    
    
    (2,500
    )
    
    
    Offering costs and financing costs
    
    
    (406
    )
    
    
    (7
    )Repayment on borrowings
    
    
    (10,884
    )
    
    
    (12,071
    )Proceeds from borrowings
    
    
    6,320
    
    
    
    15,136Proceeds from notes payable
    
    
    
    
    
    
    5,105Payments on capital lease obligations
    
    
    (58
    )
    
    
    (23
    )Net cash provided by (used in) financing activities
    
    $
    (4,528
    )
    
    $
    8,140Net increase (decrease) in cash and cash equivalents
    
    $
    (1,775
    )
    
    $
    (1,024
    )Cash and cash equivalents at beginning of year
    
    
    11,142
    
    
    
    3,556Cash and cash equivalents at end of period
    
    $
    9,367
    
    
    $
    2,532
   6




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ARGYLE SECURITY, INC.
 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31, 2009
 Note 1  Basis of Presentation
          7




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ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 Note 1  Basis of Presentation (continued)
 Pro Forma Results of Operations
   Pro Forma Consolidated Statement of Operations Data
(unaudited)
  Three Months EndedMarch 31,
    
    
    March 31,2009
    
    
    2008Total revenues
    
    
    31,744
    
    
    
    39,315Net income (loss) allocable to holders of non-redeemable common stock
    
    $
    (374
    )
    
    $
    (748
    )Weighted-average number of shares of common stock outstanding exclusive
of shares subject to possible redemption:Basic
    
    
    6,019,495
    
    
    
    5,749,342Diluted
    
    
    6,019,495
    
    
    
    5,749,342Net income (loss) per share allocable to holders of
non-redeemable common stock:Basic
    
    $
    (0.06
    )
    
    $
    (0.13
    )Diluted
    
    $
    (0.06
    )
    
    $
    (0.13
    )
  8




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ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 Note 2  Background, Formation, and Summary of Significant Accounting Policies
 Cash and Cash Equivalents
  Restricted Cash
  Contract Receivables
   Revenue Recognition
  Construction Contracts
 Accounting for Performance of
Construction-Type and Certain Production-Type Contracts
      9




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ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 Note 2  Background, Formation, and Summary of Significant Accounting Policies (continued)
 Service Sales
  Shipped Products
   Inventory
  Property and Equipment
   Assets Held Under Capital Leases
   10




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ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 Note 2  Background, Formation, and Summary of Significant Accounting Policies (continued)
 Goodwill and Other Intangible Assets
     Goodwill and Other
Intangible Assets Clarification of Reporting Unit Guidance in
Paragraph 30 of FASB Statement No. 142
 Software Costs
 Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use
 Self Insurance
  Warranty Reserve
   11




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ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 Note 2  Background, Formation, and Summary of Significant Accounting Policies (continued)
 Fair Value of Financial Instruments
   Income Taxes
 Accounting for Income Taxes
 Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109
  Sales and Use Taxes
  Reclassifications
   12




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ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 Note 2  Background, Formation, and Summary of Significant Accounting Policies (continued)
 Recently Issued Accounting Pronouncements
 Interim Disclosures About Fair
Value of Financial Instruments Disclosures about Fair Value of Financial Instruments Interim
Financial Reporting
 Recently Adopted Accounting Pronouncements
 Accounting for Assets
Acquired and Liabilities Assumed in a Business Combination that Arise from Contingencies Business Combinations Fair Value Measurements
 Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)
 Fair Value Measurements Effective Date of FASB Statement No. 157
   13




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ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 Note 2  Background, Formation, and Summary of Significant Accounting Policies (continued)
 Recently Adopted Accounting Pronouncements (continued)
    Disclosures about Derivative Instruments and
Hedging Activities an Amendment of FASB Statement No. 133
 Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities.
  14




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ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 Note 2  Background, Formation, and Summary of Significant Accounting Policies (continued)
 Use of Estimates
  Accounting Changes and Error Corrections
  Contingencies
    Concentrations of Credit Risk
 Disclosure of Information about Financial Instruments with Off-Balance
Sheet Risk and Financial Instruments with Concentrations of Credit Risk
  15




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ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 Note 2  Background, Formation, and Summary of Significant Accounting Policies (continued)
 Net Income / (Loss) Per Share
 Earnings Per Share Participating Securities and the Two-Class Method under FASB Statement No. 128
   Three Months EndedMarch 31,
    
    
    March 31,2009
    
    
    2008Weighted average common shares outstanding  basicCommon
    
    
    6,019,495
    
    
    
    5,749,342Common stock equivalents
    
    
    
    
    
    
    Number of
shares used in per share computations  basic
    
    
    6,019,495
    
    
    
    5,749,342
  Note 3  Contract Receivables
  March 31,
    
    
    December 31,2009
    
    
    2008Completed contracts and contracts in progress (net of allowance)
    
    $
    23,351
    
    
    $
    24,494Retainage
    
    
    4,608
    
    
    
    4,321Completed contracts and contracts in progress  related parties
    
    
    2,240
    
    
    
    2,938Retainage  related parties
    
    
    1,551
    
    
    
    1,747Contract receivables
    
    $
    31,750
    
    
    $
    33,500
  16




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ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 Note 4  Costs and Estimated Earnings on Incomplete Contracts and Backlog Information
  Total
    
    
    Corrections
    
    
    CommercialMarch 31,
    
    
    March 31,
    
    
    March 31,2009
    
    
    2009
    
    
    2009Amended contract amount
    
    $
    292,201
    
    
    $
    236,443
    
    
    $
    55,758Revenues recognized to date
    
    
    232,387
    
    
    
    187,854
    
    
    
    44,533Unearned contract amount  backlog
    
    $
    59,814
    
    
    $
    48,589
    
    
    $
    11,225Costs incurred to date
    
    
    192,617
    
    
    
    159,194
    
    
    
    33,423Estimated costs to complete
    
    
    50,784
    
    
    
    40,994
    
    
    
    9,790Estimated total cost
    
    $
    243,401
    
    
    $
    200,188
    
    
    $
    43,213Billings to date
    
    $
    230,667
    
    
    $
    187,281
    
    
    $
    43,386Costs and estimated earnings in excess of billings on incomplete contracts
    
    $
    8,181
    
    
    $
    5,585
    
    
    $
    2,597Billing in excess of costs and estimated earnings on incomplete contracts
    
    $
    9,055
    
    
    $
    6,847
    
    
    $
    2,207
 Total
    
    
    Corrections
    
    
    CommercialDecember 31,
    
    
    December 31,
    
    
    December 31,2008
    
    
    2008
    
    
    2008Amended contract amount
    
    $
    310,588
    
    
    $
    237,456
    
    
    $
    73,132Revenues recognized to date
    
    
    237,126
    
    
    
    178,388
    
    
    
    58,738Unearned contract amount  backlog
    
    $
    73,462
    
    
    $
    59,068
    
    
    $
    14,394Costs incurred to date
    
    $
    196,576
    
    
    $
    151,107
    
    
    $
    45,469Estimated costs to complete
    
    
    60,737
    
    
    
    48,923
    
    
    
    11,814Estimated total cost
    
    $
    257,313
    
    
    $
    200,030
    
    
    $
    57,283Billings to date
    
    $
    238,450
    
    
    $
    179,999
    
    
    $
    58,451Costs and estimated earnings in excess of billings on incomplete
contracts
    
    $
    6,475
    
    
    $
    4,277
    
    
    $
    2,198Billing in excess of costs and estimated earnings on incomplete contracts
    
    $
    7,633
    
    
    $
    5,605
    
    
    $
    2,028
 *
    
    Backlog associated with PDI is not included in the table above for Total Company and
Corrections Segment as the associated Revenues are not accounted for under the Percentage of
Completion Method as defined in SOP 81-1.     17




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ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 Note 5  Long-Term Debt
  March 31,
    
    
    December 31,Collateral
    
    2009
    
    
    2008Notes payable:Vehicles and equipment
    
    $
    377
    
    
    $
    418Unsecured debt  related party
    
    
    11,508
    
    
    
    11,393Unsecured
convertible debt  stockholders
    
    
    
    
    
    
    1,925Seller notes
    
    
    5,533
    
    
    
    6,106Line of credit and senior term debt
    
    
    9,000
    
    
    
    12,951$
    26,418
    
    
    $
    32,793Less  current maturities
    
    
    3,807
    
    
    
    3,235Long term debt
    
    $
    22,611
    
    
    $
    29,558
 Vehicles and Equipment
  Unsecured Debt  Related Parties
     18




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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 Note 5  Long-Term Debt (continued)
 Unsecured Convertible Debt  Stockholders
   Seller Notes
     19




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ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 Note 5  Long-Term Debt (continued)
 Senior Secured Credit Facility
      20




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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 Note 5  Long-Term Debt (continued)
 Interest Rate Risk Management
 Accounting for Derivative Instruments and Hedging Activities
  Fair ValueBalance Sheet Location
    
    
    March 31, 2009
    
    
    December 31, 2008Derivative Liabilities:Interest Rate Contracts
    
    Other long term liabilities
    
    
    $
    189,973
    
    
    $
    188,001
    21




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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 Note 6  Fair Value Measurement
         Significant Other Observable Inputs (Level 2)March 31, 2009
    
    
    December 31, 2008LiabilityInterest Rate Swap (included in Other long term liabilities)
    
    $
    189,973
    
    
    $
    188,001
  22




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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 Note 7  Commitments
        Note 8  Common Stock Reserved for Issuance
    23




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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 Note 9  Preferred Stock
    Note 10  Stockholders Equity and Stock-Based Compensation
 Share Based Payment
 2005  2006 Options
     24




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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 Note 10  Stockholders Equity and Stock-Based Compensation (continued)
 Underwriter Options
   2007 Incentive Plan
   Restricted Stock
       25




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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 Note 10  Stockholders Equity and Stock-Based Compensation (continued)
 Performance Unit Awards
   Incentive and Nonqualified Stock Options
       Note 11  Income Taxes
   26




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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 Note 12  Other Comprehensive Income (Loss)
  Three Months Ended
    
    
    Three Months EndedMarch 31,
    
    
    March 31,2009
    
    
    2008Net
income (loss)
    
    $
    (231
    )
    
    $
    (734
    )Net unrealized gain (loss) on cash flow hedge
    
    
    25
    
    
    
    0Reclassification adjustment for gain (loss) included in income, net of taxes
    
    
    (26
    )
    
    
    0Other
comprehensive income (loss)
    
    $
    (1
    )
    
    $
    0Total comprehensive income (loss)
    
    $
    (232
    )
    
    $
    (734
    )
 Note 13  Related-Party Transactions
       27




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ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 Note 13  Related-Party Transactions (continued)
    Note 14  Segment Information
    
    
    MCS-Detention, which designs, engineers, supplies, installs and
maintains complex, customized physical and software security solutions, access control,
video and electronic security control system solutions at correctional and government
facilities;
 
    
    ISI -Detention, which designs, engineers, supplies, installs and
maintains a full array of detention systems and equipment, targeting correctional
facilities throughout the United States;
 
    
    PDI, which is a full-service, turnkey solutions provider that
manufactures high security metal barriers, high security observation window systems,
detention furniture and accessories; and
 
    
    Com-Tec, which is an industry leader in the custom design and
manufacture of electronic security and communications systems at federal, state and private
correctional facilities, city and county jails and police stations.
   28




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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 Note 14  Segment Information (continued)
 Summary Segment Information
 Three Months Ended
    
    
    Three Months EndedMarch 31,
    
    
    March 31,Industry Segment (in thousands)
    
    2009
    
    
    2008Revenues:Corrections
    
    $
    21,873
    
    
    $
    30,038Commercial
    
    
    9,871
    
    
    
    7,559Corporate
    
    
    
    
    
    
    Eliminations
    
    
    
    
    
    
    Total
    
    $
    31,744
    
    
    $
    37,597Operating income (loss):Corrections
    
    $
    1,102
    
    
    $
    1,610Commercial
    
    
    915
    
    
    
    (136
    )Corporate
    
    
    (1,242
    )
    
    
    (1,852
    )Eliminations
    
    
    
    
    
    
    Total
    
    $
    775
    
    
    $
    (378
    )Capital expenditures:Corrections
    
    $
    243
    
    
    $
    650Commercial
    
    
    45
    
    
    
    121Corporate
    
    
    3
    
    
    
    10Total
    
    $
    291
    
    
    $
    781Total assets:Corrections
    
    $
    58,880
    
    
    $
    99,920Commercial
    
    
    11,153
    
    
    
    5,752Corporate
    
    
    24,137
    
    
    
    37,353Eliminations
    
    
    (13,392
    )
    
    
    (34,158
    )Total
    
    $
    80,778
    
    
    $
    108,867
  29




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ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 Note 15  Supplemental Disclosures of Cash Flow Information (in thousands)
 Three Months EndedMarch 31,
    
    
    March 31,2009
    
    
    2008Cash paid for interest
    
    $
    309
    
    
    $
    489Cash paid for income taxes
    
    
    2
    
    
    
    300Supplemental schedule of non-cash investing activities:Financed purchases of property and equipment
    
    $
    
    
    
    $
    Issuance of
stock to retire notes with related parties
    
    
    1,925
    
    
    
    Accrual for transaction costs
    
    
    
    
    
    
    405Supplemental schedule of non-cash financing activities:Notes issued for acquisitions
    
    $
    
    
    
    $
    6,765Dividends accrued
    
    
    143
    
    
    
    Accrual of offering costs
    
    
    
    
    
    
    302
 Note 16  Subsequent Events
  th
  30




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
      
    
    MCS (also referred to as MCS-Detention), which designs, engineers,
supplies, installs and maintains complex, customized physical and software security
solutions, access control, video and electronic security control system solutions at
correctional and government facilities;
 
    
    ISI-Detention, which designs, engineers, supplies, installs and
maintains a full array of detention systems and equipment, targeting correctional
facilities throughout the United States;
 
    
    PDI, which is a full-service, turnkey solutions provider that
manufactures high-security metal barriers, high-security observation window systems,
detention furniture and accessories; and
 
    
    Com-Tec, which is an industry leader in the custom design and
manufacture of electronic security and communications systems at federal, state and private
correctional facilities, city and county jails and police stations.
  31




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32




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##### Table of Contents



Critical Accounting Policies
  Percentage-of-Completion Estimates
 
    
    The contract amount and all contract estimates are input into a job cost accounting system with detail of all significant
estimates of purchases by vendor type, subcontractor and labor.
 
    
    As the project is performed and purchases and costs are incurred, these are recorded in the same detail as the original estimate.
 
    
    The contract amount and estimated contract costs are updated monthly to record the effect of any contract change order received.
 
    
    On a monthly basis, management, along with project managers who are overseeing the contracts, review these estimated costs to
complete the project and compare them to the original estimate and the estimate that was used in the prior month to determine
the percentage-of-completion. If the cost to complete, determined by management and the project managers for the current month,
confirms that the estimate used in the prior month is correct, then no action is taken to change the estimate and/or the
percentage complete in that current month. However, if the current cost-to-complete estimate calculated by the management and
the project managers differ, then adjustments are made. If the costs are in excess of the estimate used in the prior month, then
a decrease in the percentage complete on the project through the current month in the accounting period is made. If the costs
are less than the estimate used in the prior accounting period, then the new estimate increases the percentage complete on the
project.
 
    
    Revenues from construction contracts are recognized on the percentage-of-completion method in accordance with SOP 81-1. We
recognize revenues on signed letters of intent, contracts and change orders. We generally recognize revenues on unsigned change orders where it has
written notices to proceed from the customer and where collection is deemed probable. Percentage-of-completion for construction
contracts is measured principally by the percentage of costs incurred and accrued to date for each contract to the estimated
total costs for each contract at completion. We generally consider contracts to be substantially complete upon departure from
the work site and acceptance by the customer. If any jobs are identified during the review process which are estimated to be a
loss job (where estimated costs exceed contract price), the entire estimated loss is recorded in full, without regard to the
computed percentage-of-completion.
   33




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##### Table of Contents



Revenue Recognition for Shipped Products
 Service
Sales 
 IBNR Estimates for Health Insurance
 Sales and Use Taxes
 Deferred Income Taxes
 Allowance for Doubtful Accounts
  34




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Impairment of Long-lived Intangible Assets
   Goodwill
       35




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##### Table of Contents



Non Cash Compensation Expense Share Based Payment
       36




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##### Table of Contents



Explanatory Note Relating to Pro Forma Financial Information
  Non-GAAP Presentation
  The presentation of EBITDA is not
intended to be considered in isolation or as a substitute for the financial information prepared
and presented in accordance with GAAP.
 Reconciliation of GAAP Net Income (Loss) to EBITDA
(unaudited)
  Three Months EndedMarch 31,
    
    
    March 31,2009
    
    
    2008GAAP net income (loss)
    
    $
    (231
    )
    
    $
    (734
    )Interest, net
    
    
    858
    
    
    
    773Depreciation
    
    
    464
    
    
    
    490Amortization
    
    
    451
    
    
    
    1,731Taxes, net
    
    
    148
    
    
    
    (417
    )EBITDA
    
    $
    1,690
    
    
    $
    1,843Weighted average common shares outstanding  basic
    
    
    6,019,495
    
    
    
    5,749,342Weighted average common shares outstanding  diluted
    
    
    6,019,495
    
    
    
    5,749,342
  37




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##### Table of Contents



Three Months Ended March 31, 2009
    
    
    Three Months Ended March 31, 2008
    
    
    Percent Increase (Decrease)Corrections
    
    
    Commercial
    
    
    Total
    
    
    Corrections
    
    
    Commercial
    
    
    Total
    
    
    Corrections
    
    
    Commercial
    
    
    TotalNet revenuesContract
revenues and
contract revenues 
related party
    
    $
    18,352
    
    
    $
    7,834
    
    
    $
    26,186
    
    
    $
    28,205
    
    
    $
    5,598
    
    
    $
    33,803
    
    
    
    (34.9
    %)
    
    
    39.9
    %
    
    
    (22.5
    %)Manufacturing revenues
    
    
    1,901
    
    
    
    
    
    
    
    1,901
    
    
    
    1,518
    
    
    
    
    
    
    
    1,518
    
    
    
    25.2
    %
    
    
    0.0
    %
    
    
    25.2
    %Service and other revenues
    
    
    1,620
    
    
    
    2,037
    
    
    
    3,657
    
    
    
    316
    
    
    
    1,960
    
    
    
    2,276
    
    
    
    412.7
    %
    
    
    3.9
    %
    
    
    60.7
    %Total net revenues
    
    $
    21,873
    
    
    $
    9,871
    
    
    $
    31,744
    
    
    $
    30,039
    
    
    $
    7,558
    
    
    $
    37,597
    
    
    
    (27.2
    %)
    
    
    30.6
    %
    
    
    (15.6
    %)% of total
    
    
    68.9
    %
    
    
    31.1
    %
    
    
    
    
    
    
    79.9
    %
    
    
    20.1
    %Cost of revenuesContract
costs and contract
costs  related party
    
    $
    15,217
    
    
    $
    6,115
    
    
    $
    21,332
    
    
    $
    22,897
    
    
    $
    4,445
    
    
    $
    27,342
    
    
    
    (33.5
    %)
    
    
    37.6
    %
    
    
    (22.0
    %)Manufacturing costs
    
    
    1,258
    
    
    
    
    
    
    
    1,258
    
    
    
    690
    
    
    
    
    
    
    
    690
    
    
    
    82.3
    %
    
    
    0.0
    %
    
    
    82.3
    %Service and other costs
    
    
    1,046
    
    
    
    1,451
    
    
    
    2,497
    
    
    
    1,398
    
    
    
    1,763
    
    
    
    3,161
    
    
    
    (25.2
    %)
    
    
    (17.7
    %)
    
    
    (21.0
    %)Total cost of revenues
    
    $
    17,521
    
    
    $
    7,566
    
    
    $
    25,087
    
    
    $
    24,985
    
    
    $
    6,208
    
    
    $
    31,193
    
    
    
    (29.9
    %)
    
    
    21.9
    %
    
    
    (19.6
    %)Gross marginContract
margins and
contract margins  related party
    
    $
    3,135
    
    
    $
    1,719
    
    
    $
    4,854
    
    
    $
    5,308
    
    
    $
    1,153
    
    
    $
    6,461
    
    
    
    (40.9
    %)
    
    
    49.1
    %
    
    
    (24.9
    %)Manufacturing margins
    
    $
    643
    
    
    $
    
    
    
    $
    643
    
    
    $
    828
    
    
    $
    
    
    
    $
    828
    
    
    
    (22.3
    %)
    
    
    0.0
    %
    
    
    (22.3
    %)Service and other margins
    
    
    574
    
    
    
    586
    
    
    
    1,160
    
    
    
    (1,082
    )
    
    
    197
    
    
    
    (885
    )
    
    
    153.0
    %
    
    
    197.5
    %
    
    
    (231.1
    %)Total gross margin
    
    $
    4,352
    
    
    $
    2,305
    
    
    $
    6,657
    
    
    $
    5,054
    
    
    $
    1,350
    
    
    $
    6,404
    
    
    
    (13.9
    %)
    
    
    70.7
    %
    
    
    4.0
    %Gross margin percentageContract
revenues and
contract revenues 
related party
    
    
    17.1
    %
    
    
    21.9
    %
    
    
    18.5
    %
    
    
    18.8
    %
    
    
    20.6
    %
    
    
    19.1
    %
    
    
    (9.0
    %)
    
    
    6.3
    %
    
    
    (3.1
    %)Manufacturing margins
    
    
    33.8
    %
    
    
    0.0
    %
    
    
    33.8
    %
    
    
    54.5
    %
    
    
    0.0
    %
    
    
    54.5
    %
    
    
    (38.0
    %)
    
    
    0.0
    %
    
    
    (38.0
    %)Service and other revenues
    
    
    35.4
    %
    
    
    28.8
    %
    
    
    31.7
    %
    
    
    (342.4
    %)
    
    
    10.1
    %
    
    
    (38.9
    %)
    
    
    110.3
    %
    
    
    185.1
    %
    
    
    (181.5
    %)Total gross margin percentage
    
    
    19.9
    %
    
    
    23.4
    %
    
    
    21.0
    %
    
    
    16.8
    %
    
    
    17.9
    %
    
    
    17.0
    %
    
    
    18.5
    %
    
    
    30.7
    %
    
    
    23.5
    %
  38




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Results of Operations for the Three Months Ended March 31, 2009 and 2008
  Three Months
    
    
    Three Months
    
    
    Year to YearMarch 31, 2009
    
    
    March 31, 2008
    
    
    Increase (Decrease)% of
    
    
    
    
    
    
    % ofAmount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    Amount
    
    
    %Revenues:Contract revenues
    
    $
    25,326
    
    
    
    79.8
    %
    
    $
    26,860
    
    
    
    71.4
    %
    
    $
    (1,534
    )
    
    
    (5.7
    %)Contract revenues  related
party
    
    
    860
    
    
    
    2.7
    %
    
    
    6,943
    
    
    
    18.5
    %
    
    
    (6,083
    )
    
    
    (87.6
    %)Manufacturing revenues
    
    
    1,901
    
    
    
    6.0
    %
    
    
    1,518
    
    
    
    4.0
    %
    
    
    383
    
    
    
    25.2
    %Service and other revenues
    
    
    3,657
    
    
    
    11.5
    %
    
    
    2,276
    
    
    
    6.1
    %
    
    
    1,381
    
    
    
    60.7
    %Total revenues
    
    $
    31,744
    
    
    
    100.0
    %
    
    $
    37,597
    
    
    
    100.0
    %
    
    $
    (5,853
    )
    
    
    (15.6
    %)Cost of Revenues:Contract costs
    
    $
    21,332
    
    
    
    67.2
    %
    
    $
    27,342
    
    
    
    72.7
    %
    
    $
    (6,010
    )
    
    
    (22.0
    %)Manufacturing costs
    
    
    1,258
    
    
    
    4.0
    %
    
    
    690
    
    
    
    1.8
    %
    
    
    568
    
    
    
    82.3
    %Service and other costs,
including
amortization of intangibles
    
    
    2,497
    
    
    
    7.9
    %
    
    
    3,161
    
    
    
    8.4
    %
    
    
    (664
    )
    
    
    (21.0
    %)Cost of revenues
    
    $
    25,087
    
    
    
    79.0
    %
    
    $
    31,193
    
    
    
    83.0
    %
    
    $
    (6,106
    )
    
    
    (19.6
    %)Gross
profit
    
    $
    6,657
    
    
    
    21.0
    %
    
    $
    6,404
    
    
    
    17.0
    %
    
    $
    253
    
    
    
    4.0
    %Total operating expenses
    
    $
    5,882
    
    
    
    18.5
    %
    
    $
    6,782
    
    
    
    18.0
    %
    
    $
    (900
    )
    
    
    (13.3
    %)Other income (expense):Interest income
    
    $
    25
    
    
    
    0.1
    %
    
    $
    26
    
    
    
    0.1
    %
    
    $
    (1
    )
    
    
    (3.8
    %)Interest expense
    
    
    (883
    )
    
    
    (2.8
    %)
    
    
    (799
    )
    
    
    (2.1
    %)
    
    
    (84
    )
    
    
    10.5
    %Total other income (expense)
    
    $
    (858
    )
    
    
    (2.7
    %)
    
    $
    (773
    )
    
    
    (2.1
    %)
    
    $
    (85
    )
    
    
    11.0
    %Net income (loss)
    
    $
    (231
    )
    
    
    (0.7
    %)
    
    $
    (734
    )
    
    
    (2.0
    %)
    
    $
    503
    
    
    
    (68.5
    %)EBITDA
    
    $
    1,690
    
    
    
    5.3
    %
    
    $
    1,843
    
    
    
    4.9
    %
    
    $
    (153
    )
    
    
    (8.3
    %)
 Revenues
     39




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##### Table of Contents



Cost of Revenues
    40




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##### Table of Contents



Gross Margin
  Operating Expenses
   Other Income / Expense
  Net Income / (Loss)
  Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA)
  Liquidity and Capital Resources
    41




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##### Table of Contents



Long-Term Debt
  March 31,
    
    
    December 31,Collateral
    
    2009
    
    
    2008Notes payable:Vehicles and equipment
    
    $
    377
    
    
    $
    418Unsecured debt  related party
    
    
    11,508
    
    
    
    11,393Unsecured convertible debt 
stockholders
    
    
    
    
    
    
    1,925Seller notes
    
    
    5,533
    
    
    
    6,106Line of credit and senior term debt
    
    
    9,000
    
    
    
    12,951$
    26,418
    
    
    $
    32,793Less  current maturities
    
    
    3,807
    
    
    
    3,235Long term debt
    
    $
    22,611
    
    
    $
    29,558
  42




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##### Table of Contents



Vehicles and Equipment
  Unsecured Debt  Related Parties
    Unsecured Convertible Debt  Stockholders
   Seller Notes
   43




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##### Table of Contents



Senior Secured Credit Facility
      Year Ending December 31:2009 (remaining nine months)
    
    $
    2,5852010
    
    
    4,9592011
    
    
    18,7382012
    
    
    662013
    
    
    70Thereafter
    
    
    $
    26,418
  44




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##### Table of Contents



Interest Rate Risk Management
 Accounting for Derivative Instruments and
Hedging Activities
    Commitments
        Off Balance Sheet Arrangements
   45




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##### Table of Contents



Contractual Obligations
  Total
    
    
    < 1 Year
    
    
    1 < 3 Years
    
    
    3 < 5 Years
    
    
    > 5 YearsPrincipal on Long Term Debt Obligations
    
    $
    26,418
    
    
    $
    3,807
    
    
    $
    22,491
    
    
    $
    120
    
    
    $
    Capital Lease Obligations
    
    
    5,248
    
    
    
    516
    
    
    
    1,024
    
    
    
    986
    
    
    
    2,722Operating Lease Obligations
    
    
    3,502
    
    
    
    923
    
    
    
    1,671
    
    
    
    835
    
    
    
    73Interest on Long Term Debt Obligations
    
    
    9,542
    
    
    
    2,616
    
    
    
    4,710
    
    
    
    2,216
    
    
    
    Total
    
    $
    44,710
    
    
    $
    7,862
    
    
    $
    29,896
    
    
    $
    4,157
    
    
    $
    2,795
 Subsequent Events
  th
  46




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 6. EXHIBITS
 Exhibit No.
    
    Description10.1
    
    
    Allonge to Guaranteed Convertible Promissory Note (M) dated April 24, 2009 by and between ISI
Detention Contracting Group, Inc. and Peterson Detention Inc.*10.2
    
    
    Allonge to Guaranteed Convertible Promissory Note (L) dated April 24, 2009 by and between ISI
Detention Contracting Group, Inc. and Peterson Detention Inc.*10.3
    
    
    Lease Agreement dated April 30, 2009 between Park Ridge International, Inc. and Argyle Security, Inc.*31.1
    
    
    Certification of the Chief Executive Officer (Principal Executive Officer) pursuant to Rule
13a-14(a) of the Securities Exchange Act, as amended, filed herewith.31.2
    
    
    Certification of the President and Chief Operating Officer (Principal Executive Officer) pursuant to
Rule 13a-14(a) of the Securities Exchange Act, as amended, filed herewith.31.3
    
    
    Certification of the Executive Vice President and Chief Financial Officer (Principal Financial
Officer) pursuant to Rule 13a-14(a) of the Securities Exchange Act, as amended, filed herewith.31.4
    
    
    Certification of the Vice President and Corporate Controller (Principal Accounting Officer) pursuant
to Rule 13a-14(a) of the Securities Exchange Act, as amended, filed herewith.32
    
    
    Certification of the Chief Executive Officer, President and Chief Operating Officer, Executive Vice
President and Chief Financial Officer and Vice President and Corporate Controller pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
 
 *
    
    Previously furnished.  47




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##### Table of Contents



SIGNATURES
  ARGYLE SECURITY, INCMay 19, 2009
    By:
    /s/ Bob MarbutBob MarbutChief Executive Officer
(Principal Executive Officer)May 19, 2009
    By:
    /s/ Sam YoungbloodSam YoungbloodPresident and Chief Operating Officer
(Principal Executive Officer)May 19, 2009
    By:
    /s/ Donald F. NevilleDonald F. NevilleExecutive Vice President and Chief Financial Officer
(Principal Financial Officer)May 19, 2009
    By:
    /s/ Dean A. DresserDean A. DresserVice President and Corporate Controller
(Principal Accounting Officer)  48




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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description10.1
    
    
    Allonge to Guaranteed Convertible Promissory Note (M) dated April 24, 2009 by and between ISI
Detention Contracting Group, Inc. and Peterson Detention Inc.*10.2
    
    
    Allonge to Guaranteed Convertible Promissory Note (L) dated April 24, 2009 by and between ISI
Detention Contracting Group, Inc. and Peterson Detention Inc.*10.3
    
    

Lease Agreement dated April 30, 2009 between Park Ridge International, Inc. and Argyle Security, Inc.*31.1
    
    
    Certification of the Chief Executive Officer (Principal Executive Officer) pursuant to Rule
13a-14(a) of the Securities Exchange Act, as amended, filed herewith.31.2
    
    
    Certification of the President and Chief Operating Officer (Principal Executive Officer) pursuant to
Rule 13a-14(a) of the Securities Exchange Act, as amended, filed herewith.31.3
    
    
    Certification of the Executive Vice President and Chief Financial Officer (Principal Financial
Officer) pursuant to Rule 13a-14(a) of the Securities Exchange Act, as amended, filed herewith.31.4
    
    
    Certification of the Vice President and Corporate Controller (Principal Accounting Officer) pursuant
to Rule 13a-14(a) of the Securities Exchange Act, as amended, filed herewith.32
    
    
    Certification of the Chief Executive Officer, President and Chief Operating Officer, Executive Vice
President and Chief Financial Officer and Vice President and Corporate Controller pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
 
 *
    
    Previously furnished.  49