##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
 For the quarterly period ended September 30, 2009.
 or
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
 For the transition period from  to.
 Commission File Number: 000-51639
 Argyle Security, Inc.
  Delaware
    
    20-3101079(State or Other Jurisdiction of 
Incorporation or Organization)
    
    (I.R.S. Employer
Identification No.)
 12903 Delivery Drive
San Antonio, TX 78247
 (210) 495-5245
 þ o
 o o
 *
    
    The registrant has not yet been phased into
the Interactive Data requirement.  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




---



##### 



Argyle Security, Inc. Index to Form 10-Q
 Part I. Financial Information
    
    
    1Item 1. Financial Statements
    
    
    1Consolidated Balance Sheets
    
    
    1Consolidated Statements of Operations
    
    
    2Consolidated Statement of Stockholders Equity
    
    
    4Consolidated Statement of Cash Flows
    
    
    5Notes to Unaudited Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    32Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    51Item 4T. Controls and Procedures
    
    
    51Part II. Other Information
    
    
    52Item 1. Legal Proceedings
    
    
    52Item 1A. Risk Factors
    
    
    52Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    53Item 3. Defaults Upon Senior Securities
    
    
    53Item 4. Submission of Matters to a Vote of Security Holders
    
    
    53Item 5. Other Information
    
    
    54Item 6. Exhibits
    
    
    54SIGNATURES
    
    
    55Exhibit 31.1Exhibit 31.2Exhibit 31.3Exhibit 31.4Exhibit 32Exhibit 99.1Exhibit 99.2Exhibit 99.3Exhibit 99.4




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1.
    
    CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 ARGYLE SECURITY, INC.
 
 CONSOLIDATED BALANCE SHEETS
  September 30,
    
    
    December 31,2009
    
    
    2008unauditedAssetsCurrent assets:Cash and cash equivalents
    
    $
    3,981
    
    
    $
    11,142Restricted cash
    
    
    5,000
    
    
    
    2,500Receivables:Contract  net of allowance for doubtful accounts of
$906 and $777 at September 30, 2009 December 31, 2008, respectively
    
    
    23,921
    
    
    
    28,815Contract receivables  related party
    
    
    2,312
    
    
    
    4,685Other receivables
    
    
    68
    
    
    
    335Costs and estimated earnings in excess of billings
on incomplete contracts
    
    
    7,973
    
    
    
    6,475Intangible assets
    
    
    
    
    
    
    184Refundable income taxes
    
    
    160
    
    
    
    168Inventory
    
    
    1,780
    
    
    
    2,146Other current assets
    
    
    834
    
    
    
    385Deferred income taxes, net
    
    
    134
    
    
    
    898Total current assets
    
    
    46,163
    
    
    
    57,733Property and equipment, net
    
    
    8,165
    
    
    
    9,033Goodwill
    
    
    
    
    
    
    2,844Intangible assets
    
    
    9,721
    
    
    
    12,111Deposits, deferred transaction costs, and other assets
    
    
    554
    
    
    
    591Total other assets
    
    
    18,440
    
    
    
    24,579Total assets
    
    $
    64,603
    
    
    $
    82,312Liabilities and Stockholders EquityCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    12,370
    
    
    $
    15,799Accounts payable  related party
    
    
    
    
    
    
    173Billings in excess of costs and estimated earnings
on incomplete contracts
    
    
    5,064
    
    
    
    7,633Interest payable to stockholders
    
    
    
    
    
    
    49Dividends payable
    
    
    397
    
    
    
    Current portion of capitalized lease obligations
    
    
    253
    
    
    
    239Current portion of long-term debt
    
    
    22,964
    
    
    
    3,235Total current liabilities
    
    
    41,048
    
    
    
    27,128Long-Term Liabilities:Deferred income taxes, net
    
    
    719
    
    
    
    1,577Long-term debt  less current portion
    
    
    2,619
    
    
    
    29,558Derivative, deferred rent and other long term liabilities (including dividends)
    
    
    744
    
    
    
    635Long-term capitalized lease obligations  less current portion
    
    
    3,197
    
    
    
    3,389Total long-term liabilities
    
    
    7,279
    
    
    
    35,159Total liabilities
    
    
    48,327
    
    
    
    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 September 30, 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; issued and outstanding 6,277,105
shares at September 30, 2009 and 5,969,342 shares at December 31, 2008
    
    
    1
    
    
    
    1Additional paid in capital
    
    
    55,718
    
    
    
    50,925Accumulated other comprehensive income (loss)
    
    
    (112
    )
    
    
    (116
    )Accumulated earnings (deficit)
    
    
    (39,331
    )
    
    
    (30,785
    )Total stockholders equity
    
    
    16,276
    
    
    
    20,025Total liabilities and stockholders equity
    
    $
    64,603
    
    
    $
    82,312
   1




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##### Table of Contents



ARGYLE SECURITY, INC.
 
 CONSOLIDATED STATEMENT OF OPERATIONS
 (unaudited)
  Three Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008Revenues:Contract revenues
    
    $
    19,334
    
    
    $
    23,598Contract revenues  related party
    
    
    1,062
    
    
    
    2,906Manufacturing revenues
    
    
    963
    
    
    
    1,880Service and other revenues
    
    
    3,172
    
    
    
    3,316Total revenues
    
    
    24,531
    
    
    
    31,700Cost of revenues:Contract costs
    
    
    18,702
    
    
    
    22,910Manufacturing costs
    
    
    699
    
    
    
    1,964Service and other costs, including $0 and $1,218 of amortization of intangibles in 2009 and 2008, respectively
    
    
    2,317
    
    
    
    3,308Total cost of revenues
    
    
    21,718
    
    
    
    28,182Gross profit
    
    
    2,813
    
    
    
    3,518Operating expenses:Salaries and related expense, including stock-based compensation of $63 and $226 in 2009 and 2008, respectively
    
    
    3,012
    
    
    
    3,068Professional fees and outside services
    
    
    890
    
    
    
    916General and administrative expenses
    
    
    1,670
    
    
    
    1,965Depreciation
    
    
    408
    
    
    
    523Goodwill and intangible assets impairment charge
    
    
    4,213
    
    
    
    16,928Amortization of intangible assets
    
    
    340
    
    
    
    434Total operating expenses
    
    
    10,533
    
    
    
    23,834Operating income (loss)
    
    
    (7,720
    )
    
    
    (20,316
    )Other income (expense):Interest income
    
    
    2
    
    
    
    58Interest expense
    
    
    (887
    )
    
    
    (997
    )Total other income (expense)
    
    
    (885
    )
    
    
    (939
    )Income (loss) before provision for income taxes
    
    
    (8,605
    )
    
    
    (21,255
    )(Benefit) Provision for income taxes
    
    
    (407
    )
    
    
    (2,888
    )Net income (loss)
    
    
    (8,198
    )
    
    
    (18,367
    )Dividends on redeemable preferred stock
    
    
    (145
    )
    
    
    (114
    )Net income (loss) allocable to holders of common stock
    
    $
    (8,343
    )
    
    $
    (18,481
    )Weighted-average number of shares of common stock outstandingBasic
    
    
    6,038,772
    
    
    
    5,799,342Diluted
    
    
    6,038,772
    
    
    
    5,799,342Net income (loss) per share allocable to holders of common stockBasic
    
    $
    (1.38
    )
    
    $
    (3.19
    )Diluted
    
    $
    (1.38
    )
    
    $
    (3.19
    )
   2




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##### Table of Contents



ARGYLE SECURITY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
  Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008Revenues:Contract revenues
    
    $
    70,050
    
    
    $
    77,030Contract revenues  related party
    
    
    1,922
    
    
    
    15,131Manufacturing revenues
    
    
    4,733
    
    
    
    5,322Service and other revenues
    
    
    9,958
    
    
    
    8,320Total revenues
    
    
    86,663
    
    
    
    105,803Cost of revenues:Contract costs
    
    
    60,119
    
    
    
    76,579Manufacturing costs
    
    
    3,079
    
    
    
    3,770Service and other costs, including $184 and $3,748 of amortization of intangibles in 2009 and 2008, respectively
    
    
    7,013
    
    
    
    9,468Total cost of revenues
    
    
    70,211
    
    
    
    89,817Gross profit
    
    
    16,452
    
    
    
    15,986Operating expenses:Salaries and related expense, including stock-based compensation of $179 and $975 in 2009 and 2008, respectively
    
    
    8,983
    
    
    
    9,847Professional fees and outside services
    
    
    2,316
    
    
    
    2,498General and administrative expenses
    
    
    4,183
    
    
    
    5,224Depreciation
    
    
    1,270
    
    
    
    1,581Goodwill and intangible assets impairment charge
    
    
    4,213
    
    
    
    16,928Amortization of intangible assets
    
    
    1,021
    
    
    
    1,281Total operating expenses
    
    
    21,986
    
    
    
    37,359Operating income (loss)
    
    
    (5,534
    )
    
    
    (21,373
    )Other income (expense):Interest income
    
    
    33
    
    
    
    136Interest expense
    
    
    (2,590
    )
    
    
    (2,650
    )Total other income (expense)
    
    
    (2,557
    )
    
    
    (2,514
    )Income (loss) before provision for income taxes
    
    
    (8,091
    )
    
    
    (23,887
    )(Benefit) Provision for income taxes
    
    
    23
    
    
    
    (3,766
    )Net income (loss)
    
    
    (8,114
    )
    
    
    (20,121
    )Dividends on redeemable preferred stock
    
    
    (432
    )
    
    
    (201
    )Net income (loss) allocable to holders of common stock
    
    $
    (8,546
    )
    
    $
    (20,322
    )Weighted-average number of shares of common stock outstandingBasic
    
    
    6,032,417
    
    
    
    5,796,605Diluted
    
    
    6,032,417
    
    
    
    5,796,605Net income (loss) per share allocable to holders of common stockBasic
    
    $
    (1.42
    )
    
    $
    (3.51
    )Diluted
    
    $
    (1.42
    )
    
    $
    (3.51
    )
   3




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##### Table of Contents



ARGYLE SECURITY, INC.
 
 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
 DECEMBER 31, 2008 THROUGH SEPTEMBER 30, 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
    
    
    $
    1
    
    
    $
    50,925
    
    
    $
    (116
    )
    
    $
    (30,785
    )
    
    $
    20,025Net income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,114
    )
    
    
    (8,114
    )Deferred gain / (loss) on hedging activities, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    4ISI seller note conversion
    
    
    192,763
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,927
    
    
    
    
    
    
    
    
    
    
    
    1,927Stock-based compensation
    
    
    145,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    179
    
    
    
    
    
    
    
    
    
    
    
    179Forfeiture of stock-based compensation
    
    
    (30,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of preferred stock
    
    
    
    
    
    
    
    
    
    
    27,273
    
    
    
    0
    
    
    
    2,687
    
    
    
    
    
    
    
    
    
    
    
    2,687Dividends on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (432
    )
    
    
    (432
    )Balance at September 30, 2009
    
    
    6,277,105
    
    
    $
    1
    
    
    
    46,023
    
    
    $
    1
    
    
    $
    55,718
    
    
    $
    (112
    )
    
    $
    (39,331
    )
    
    $
    16,276
   4




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##### Table of Contents



ARGYLE SECURITY, INC.
 
 CONSOLIDATED STATEMENT OF CASH FLOWS
 (unaudited)
 Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008Cash flows from operating activities:Net income (loss)
    
    $
    (8,114
    )
    
    $
    (20,121
    )Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activitiesStock-based compensation
    
    
    179
    
    
    
    974Amortization
    
    
    1,206
    
    
    
    5,029Depreciation
    
    
    1,397
    
    
    
    1,657Goodwill and intangible asset impairment
    
    
    4,213
    
    
    
    16,928Gain (loss) on disposal of asset
    
    
    
    
    
    
    Deferred interest on Merit debt
    
    
    355
    
    
    
    327Decrease (increase) in contract receivables
    
    
    4,894
    
    
    
    (9,624
    )Decrease (increase) in related party contract receivables
    
    
    2,373
    
    
    
    3,535Decrease (increase) in other receivables
    
    
    267
    
    
    
    33Decrease (increase) in costs and estimated earnings in excess of billings
    
    
    (1,498
    )
    
    
    956Decrease (increase) in other assets
    
    
    (354
    )
    
    
    (1,468
    )Increase (decrease) in accounts payable and accrued expenses
    
    
    (3,209
    )
    
    
    2,324Increase (decrease) in other long-term liabilities
    
    
    87
    
    
    
    575Increase (decrease) in deferred income taxes and refundable taxes
    
    
    (86
    )
    
    
    (3,171
    )Increase (decrease) in billings in excess of costs and estimated earnings
    
    
    (2,569
    )
    
    
    543Net cash provided by (used in) operating activities
    
    $
    (859
    )
    
    $
    (1,503
    )Cash flows from investing activities:Acquisition of PDI, Com-Tec, and Fire Quest in 2008, net of cash acquired
    
    
    
    
    
    
    (5,264
    )Purchase of property and equipment
    
    
    (542
    )
    
    
    (2,484
    )Transaction costs
    
    
    
    
    
    
    (759
    )Net cash provided by (used in) investing activities
    
    $
    (542
    )
    
    $
    (8,507
    )Cash flows from financing activities:Issuance of preferred stock
    
    
    3,000
    
    
    
    15,000Restricted cash
    
    
    (2,500
    )
    
    
    (2,521
    )Offering costs and financing costs
    
    
    (443
    )
    
    
    (1,779
    )Repayment on borrowings
    
    
    (13,966
    )
    
    
    (31,117
    )Proceeds from borrowings
    
    
    8,327
    
    
    
    34,041Proceeds from notes payable
    
    
    
    
    
    
    5,000Payments on capital lease obligations
    
    
    (178
    )
    
    
    (116
    )Net cash provided by (used in) financing activities
    
    $
    (5,760
    )
    
    $
    18,508Net increase (decrease) in cash and cash equivalents
    
    $
    (7,161
    )
    
    $
    8,498Cash and cash equivalents at beginning of year
    
    
    11,142
    
    
    
    3,556Cash and cash equivalents at end of period
    
    $
    3,981
    
    
    $
    12,054
   5




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##### Table of Contents



ARGYLE SECURITY, INC.
 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2009
 Note 1  Basis of Presentation
          6




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ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
 Note 1  Basis of Presentation (continued)
               7




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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
 Note 1  Basis of Presentation (continued)
 Pro Forma Results of Operations
   Pro Forma Consolidated Statement of Operations Data
(unaudited)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Total revenues
    
    
    24,531
    
    
    
    31,700
    
    
    
    86,663
    
    
    
    107,522Net income (loss) allocable to holders of common stock
    
    $
    (8,343
    )
    
    $
    (18,481
    )
    
    $
    (8,546
    )
    
    $
    (20,335
    )Weighted-average number of shares of common stock outstandingBasic
    
    
    6,038,772
    
    
    
    5,799,342
    
    
    
    6,032,417
    
    
    
    5,796,605Diluted
    
    
    6,038,772
    
    
    
    5,799,342
    
    
    
    6,032,417
    
    
    
    5,796,605Net income (loss) per share allocable to holders of common stockBasic
    
    $
    (1.38
    )
    
    $
    (3.19
    )
    
    $
    (1.42
    )
    
    $
    (3.51
    )Diluted
    
    $
    (1.38
    )
    
    $
    (3.19
    )
    
    $
    (1.42
    )
    
    $
    (3.51
    )
  8




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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
 Note 2  Background, Formation, and Summary of Significant Accounting Policies
 Cash and Cash Equivalents
  Restricted Cash
  Contract Receivables
   Revenue Recognition
  Construction Contracts
 Revenue Recognition,
Construction-Type and Production-Type Contracts
    9




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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
 Note 2  Background, Formation, and Summary of Significant Accounting Policies (continued)
 Construction Contracts (continued)
   Service Sales
  Shipped Products
   Inventory
  Property and Equipment
    10




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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
 Note 2  Background, Formation, and Summary of Significant Accounting Policies (continued)
 Assets Held Under Capital Leases
  Goodwill and Other Intangible Assets
    Intangibles-Goodwill and Other, General
Intangibles Other than Goodwill
    Corrections
    
    
    Commercial
    
    
    TotalBalance December 31, 2008
    
    $
    2,845
    
    
    $
    
    
    
    $
    2,845Com-Tec Goodwill Impairment
    
    
    (2,845
    )
    
    
    
    
    
    
    (2,845
    )Balance September 30, 2009
    
    $
    
    
    
    $
    
    
    
    $
    
 Intangibles-Goodwill and Other, General Intangibles Other than Goodwill
 Software Costs
 Intangibles  Goodwill and
Other, Internal-Use Software
  11




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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
 Note 2  Background, Formation, and Summary of Significant Accounting Policies (continued)
 Self Insurance
  Warranty Reserve
  Fair Value of Financial Instruments
 Fair Value Measurements and Disclosures
  Income Taxes
 Accounting for Income Taxes  Interpretations of Topic 740 .
 Accounting for Taxes-Interpretations of Topic
740, Recognition
  Sales and Use Taxes
   12




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ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
 Note 2  Background, Formation, and Summary of Significant Accounting Policies (continued)
 Reclassifications
  Recently Issued Accounting Pronouncements
 Generally Accepted Accounting Principle
 Consolidation
 Fair Value Measurements and Disclosures
 Subsequent Events
 Transition Related to FSP FAS 107-1 and APB 28-1, Interim Disclosures
about Fair Value of Financial Instruments, Financial
Instruments Interim
Reporting
  13




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ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
 Note 2  Background, Formation, and Summary of Significant Accounting Policies (continued)
 Use of Estimates
  Accounting Changes and Error Corrections
   Contingencies
     14




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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
 Note 2  Background, Formation, and Summary of Significant Accounting Policies (continued)
 Net Income / (Loss) Per Share
 Earnings per Share Earnings per Share, Other
Presentation
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Weighted average common shares outstanding  basic
    
    
    6,038,772
    
    
    
    5,799,342
    
    
    
    6,032,417
    
    
    
    5,796,605Effect of convertible securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average common shares outstanding  diluted
    
    
    6,038,772
    
    
    
    5,799,342
    
    
    
    6,032,417
    
    
    
    5,796,605
    Note 3  Contract Receivables
  September 30,
    
    
    December 31,2009
    
    
    2008Completed contracts and contracts in progress (net of allowance)
    
    $
    18,741
    
    
    $
    24,494Retainage
    
    
    5,180
    
    
    
    4,321Completed contracts and contracts in progress  related parties
    
    
    1,305
    
    
    
    2,938Retainage  related parties
    
    
    1,007
    
    
    
    1,747Contract receivables
    
    $
    26,233
    
    
    $
    33,500
  15




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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
 Note 4  Contract Backlog Information
  Total
    
    
    TotalSeptember 30,
    
    
    December 31,2009
    
    
    2008Contract backlog by segment:Corrections
    
    $
    42,959
    
    
    $
    59,068Commercial
    
    
    9,795
    
    
    
    14,394Total
    
    $
    52,754
    
    
    $
    73,462
     16




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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
 Note 5  Long-Term Debt
  September 30, 2009
    
    
    December 31, 2008Collateral
    
    Book Value
    
    
    Fair Value
    
    
    Book Value
    
    
    Fair ValueNotes payable:Vehicles, equipment and insurance
    
    $
    964
    
    
    $
    964
    
    
    $
    418
    
    
    $
    418Unsecured debt  related party
    
    
    11,748
    
    
    
    11,748
    
    
    
    11,393
    
    
    
    11,393Unsecured convertible debt  stockholders
    
    
    
    
    
    
    
    
    
    
    1,925
    
    
    
    1,925Seller notes
    
    
    4,871
    
    
    
    4,871
    
    
    
    6,106
    
    
    
    6,106Line of credit and senior term debt
    
    
    8,000
    
    
    
    8,000
    
    
    
    12,951
    
    
    
    12,951$
    25,583
    
    
    $
    25,583
    
    
    $
    32,793
    
    
    $
    32,793Less  current maturities
    
    
    22,964
    
    
    
    22,964
    
    
    
    3,235
    
    
    
    3,235Long term debt
    
    $
    2,619
    
    
    $
    2,619
    
    
    $
    29,558
    
    
    $
    29,558
  Vehicles and Equipment
  Unsecured Debt  Related Parties
      17




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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
 Note 5  Long-Term Debt (continued)
 Unsecured Convertible Debt  Stockholders
   Seller Notes
     18




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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
 Note 5  Long-Term Debt (continued)
 Senior Secured Credit Facility
       19




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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
 Note 5  Long-Term Debt (continued)
 Interest Rate Risk Management
 Derivatives and Hedging
  Fair ValueBalance Sheet Location
    
    September 30, 2009
    
    
    December 31, 2008Derivatives designated as hedging
instrument under ACS Topic 815
(formerly Statement No. FASB 133)Derivative Liabilities:Interest Rate ContractsDerivative, deferred rent and other long term liabilities (including dividends)
    
    $
    182,712
    
    
    $
    188,001
     20




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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
 Note 6  Fair Value Measurement
 Fair Value
Measurements and Disclosures
        September 30, 2009
    
    
    December 31, 2008LiabilityInterest Rate Swap (included in
Derivative, deferred rent and
other long term liabilities
(including dividends))
    
    $
    182,712
    
    
    $
    188,001
  21




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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
 Note 7  Commitments
         Note 8  Common Stock Reserved for Issuance
    22




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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
 Note 9  Preferred Stock
     Note 10  Stockholders Equity and Stock-Based Compensation
 Compensation-Stock Compensation
 2005  2006 Options
     23




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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
 Note 10  Stockholders Equity and Stock-Based Compensation (continued)
 Underwriter Options
   2007 Incentive Plan
    24




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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
 Note 10  Stockholders Equity and Stock-Based Compensation (continued)
 Restricted Stock
       Performance Unit Awards
     25




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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
 Note 10  Stockholders Equity and Stock-Based Compensation (continued)
 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
SEPTEMBER 30, 2009
 Note 12  Other Comprehensive Income (Loss)
 Comprehensive Income
 Three Months Ended
    
    
    Three Months Ended
    
    
    Nine Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income / (loss)
    
    $
    (8,198
    )
    
    $
    (18,367
    )
    
    $
    (8,114
    )
    
    $
    (20,121
    )Net unrealized gain (loss) on cash flow hedge
    
    
    27
    
    
    
    0
    
    
    
    104
    
    
    
    0Reclassification adjustment for gain /
(loss) included in income, net of taxes
    
    
    (43
    )
    
    
    0
    
    
    
    (100
    )
    
    
    0Other comprehensive income (loss)
    
    $
    (16
    )
    
    $
    0
    
    
    $
    4
    
    
    $
    0Total comprehensive income (loss)
    
    $
    (8,214
    )
    
    $
    (18,367
    )
    
    $
    (8,110
    )
    
    $
    (20,121
    )
 Note 13  Related-Party Transactions
     27




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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
 Note 13  Related-Party Transactions (continued)
       28




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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
 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.
   29




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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
 Note 14  Segment Information (continued)
 Summary Segment Information
 Three Months Ended
    
    
    Three Months Ended
    
    
    Nine Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Industry Segment (in thousands)Revenues:Corrections
    
    $
    15,972
    
    
    $
    22,551
    
    
    $
    58,970
    
    
    $
    81,432Commercial
    
    
    8,559
    
    
    
    9,149
    
    
    
    27,693
    
    
    
    24,371Corporate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Eliminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    24,531
    
    
    $
    31,700
    
    
    $
    86,663
    
    
    $
    105,803Operating income (loss):Corrections
    
    $
    (6,169
    )
    
    $
    (12,639
    )
    
    $
    (3,573
    )
    
    $
    (10,926
    )Commercial
    
    $
    (264
    )
    
    
    (6,551
    )
    
    
    1,491
    
    
    
    (6,164
    )Corporate
    
    $
    (1,287
    )
    
    
    (1,126
    )
    
    
    (3,452
    )
    
    
    (4,283
    )Eliminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    (7,720
    )
    
    $
    (20,316
    )
    
    $
    (5,534
    )
    
    $
    (21,373
    )Capital expenditures:Corrections
    
    $
    26
    
    
    $
    605
    
    
    $
    374
    
    
    $
    3,611Commercial
    
    
    76
    
    
    
    237
    
    
    
    155
    
    
    
    549Corporate
    
    
    1
    
    
    
    55
    
    
    
    6
    
    
    
    142Total
    
    $
    103
    
    
    $
    897
    
    
    $
    535
    
    
    $
    4,302Total assets:Corrections
    
    $
    47,143
    
    
    $
    85,530
    
    
    $
    47,143
    
    
    $
    85,530Commercial
    
    
    9,327
    
    
    
    494
    
    
    
    9,327
    
    
    
    494Corporate
    
    
    17,589
    
    
    
    48,126
    
    
    
    17,589
    
    
    
    48,126Eliminations
    
    
    (9,456
    )
    
    
    (35,755
    )
    
    
    (9,456
    )
    
    
    (35,755
    )Total
    
    $
    64,603
    
    
    $
    98,395
    
    
    $
    64,603
    
    
    $
    98,395
  30




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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
 Note 15  Supplemental Disclosures of Cash Flow Information (in thousands)
 Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008Cash paid for interest
    
    $
    2,075
    
    
    $
    2,175Cash paid for income taxes
    
    
    2
    
    
    
    544Supplemental schedule of non-cash investing activities:Issuance of common stock to retire notes with related parties
    
    $
    1,925
    
    
    $
    Accrual for deferred transaction costs
    
    
    132
    
    
    
    Supplemental schedule of non-cash financing activities:Notes issued for acquisitions
    
    $
    
    
    
    $
    6,765Dividends accrued
    
    
    432
    
    
    
    201
 Note 16  Subsequent Events
 Subsequent Events
     (i)
    
    the conversion of $250,000 of the outstanding principal of the respective PDI
Promissory Note into the Companys common stock at a conversion price equal to 95% of
the average closing price of the Companys common stock for the 20 trading days
preceding delivery of the Election Notice; or
 (ii)
    
    payment to the respective holder of $7,500 in exchange for which the payment schedule of the
respective PDI Promissory Note shall be amended such that $250,000 of the principal due
in 2010 shall be due and payable on Monday, January 3, 2011, with interest continuing
to accrue on all unpaid principal amounts.
      i.
    
    The Senior Debt to EBITDA ratio covenant will be (a) 2.00 to 1.00 for fiscal
quarter ending December 31, 2009, (b) 2.00 to 1.00 for fiscal quarter ending March 31,
2010, (c) 2.70 to 1.00 for fiscal quarter ending June 30, 2010, and (d) 2.00 to 1.00 for
each fiscal quarter ending thereafter.
 ii.
    
    The Total Debt to EBITDA ratio covenant will be (a) 4.25 to 1.00 for fiscal
quarter ending December 31, 2009, (b) 5.25 to 1.00 for fiscal quarter ending March 31,
2010, (c) 7.50 to 1.00 for each fiscal quarter ending June 30, 2010, and (d) 3.50 to
1.00 for each fiscal quarter thereafter.
 iii.
    
    The Fixed Charge Coverage ratio covenant will be (a) 1.00 to 1.00 for the fiscal
quarters ending December 31, 2009 and March 3, 2010 and (b) 1.10 to 1.00 for the fiscal
quarter thereafter; provided that, for fiscal quarters commencing with the fiscal
quarter ending December 31, 2009 through the fiscal quarter ending June 30, 2010, the
Fixed Charge Coverage Ratio shall be based on cumulative reporting
beginning October 1, 2009 for such periods, and
for the fiscal quarters ending September 30, 2010 and thereafter, the Fixed Charge Coverage
Ratio shall be measured on a trailing twelve (12) month basis.
 iv.
    
    The limitation on capital expenditures will be $250,000 per fiscal quarter.
 
  i.
    
    The Senior Debt to EBITDA ratio covenant will be (a) 2.20 to 1.00 for fiscal
quarter ending December 31, 2009, (b) 2.20 to 1.00 for fiscal quarter ending March 31,
2010, (c) 2.97 to 1.00 for fiscal quarter ending June 30, 2010, and (d) 2.20 to 1.00 for
each fiscal quarter ending thereafter.
 ii.
    
    The Total Debt to EBITDA ratio covenant will be (a) 4.68 to 1.00 for fiscal
quarter ending December 31, 2009, (b) 5.78 to 1.00 for fiscal quarter ending March 31,
2010, (c) 8.25 to 1.00 for each fiscal quarter ending June 30, 2010, and (d) 3.85 to
1.00 for each fiscal quarter thereafter.
 iii.
    
    The Fixed Charge Coverage ratio covenant will be (a) 0.90 to 1.00 for the fiscal
quarter ending on December 31, 2009 and March 31, 2010 and (b) 1.00 to 1.00 for the
fiscal quarter thereafter; provided that, for fiscal quarters commencing with the fiscal
quarter ending December 31, 2009 through the fiscal quarter ending June 30, 2010, the
Fixed Charge Coverage Ratio shall be based on cumulative reporting beginning October 1, 2009 for such periods, and
for the fiscal quarters ending September 30, 2010 and thereafter, the Fixed Charge Coverage Ratio shall be measured on a trailing twelve (12)
month basis.
    31




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
      32




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##### Table of Contents




    
    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.
   
  33




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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 ASC Subtopic
605-35, Revenue Recognition, Construction-Type and Production-Type
Contracts(formerly Statement of Position 81-1). We recognize revenues
on signed letters of intent, contracts and change orders. We generally
recognize revenues on unsigned change orders where we have 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.
  34




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##### Table of Contents



Revenue Recognition for Shipped Products
  35




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##### Table of Contents



Service Sales 
 IBNR Estimates for Health Insurance
 Sales and Use Taxes
 Deferred Income Taxes
 Allowance for Doubtful Accounts
 Impairment of Long-lived Intangible Assets
   Goodwill
    36




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##### Table of Contents



Intangibles-Goodwill and Other, General
Intangibles Other than Goodwill
   Intangibles-Goodwill and Other, General Intangibles Other than Goodwill
     Non Cash Compensation Expense Compensation-Stock Compensation
       37




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##### Table of Contents



Explanatory Note Relating to Pro Forma Financial Information
   Three Months Ended September 30, 2009
    
    
    Three Months Ended September 30, 2008
    
    
    Percent Increase (Decrease)Corrections
    
    
    Commercial
    
    
    Total
    
    
    Corrections
    
    
    Commercial
    
    
    Total
    
    
    Corrections
    
    
    Commercial
    
    
    TotalNet revenuesContract revenues and contract revenues  related party
    
    $
    13,995
    
    
    $
    6,401
    
    
    $
    20,396
    
    
    $
    19,746
    
    
    $
    6,758
    
    
    $
    26,504
    
    
    
    (29.1
    %)
    
    
    (5.3
    %)
    
    
    (23.0
    %)Manufacturing revenues
    
    
    963
    
    
    
    
    
    
    
    963
    
    
    
    1,880
    
    
    
    
    
    
    
    1,880
    
    
    
    (48.8
    %)
    
    
    0.0
    %
    
    
    (48.8
    %)Service and other revenues
    
    
    1,014
    
    
    
    2,158
    
    
    
    3,172
    
    
    
    925
    
    
    
    2,391
    
    
    
    3,316
    
    
    
    9.6
    %
    
    
    (9.7
    %)
    
    
    (4.3
    %)Total net revenues
    
    $
    15,972
    
    
    $
    8,559
    
    
    $
    24,531
    
    
    $
    22,551
    
    
    $
    9,149
    
    
    $
    31,700
    
    
    
    (29.2
    %)
    
    
    (6.4
    %)
    
    
    (22.6
    %)% of total
    
    
    65.1
    %
    
    
    34.9
    %
    
    
    
    
    
    
    71.1
    %
    
    
    28.9
    %Cost of revenuesContract costs and contract costs  related party
    
    $
    13,328
    
    
    $
    5,374
    
    
    $
    18,702
    
    
    $
    17,758
    
    
    $
    5,209
    
    
    $
    22,967
    
    
    
    (24.9
    %)
    
    
    3.2
    %
    
    
    (18.6
    %)Manufacturing costs
    
    
    699
    
    
    
    
    
    
    
    699
    
    
    
    1,907
    
    
    
    
    
    
    
    1,907
    
    
    
    (63.3
    %)
    
    
    0.0
    %
    
    
    (63.3
    %)Service and other costs
    
    
    724
    
    
    
    1,593
    
    
    
    2,317
    
    
    
    1,612
    
    
    
    1,696
    
    
    
    3,308
    
    
    
    (55.1
    %)
    
    
    (6.1
    %)
    
    
    (30.0
    %)Total cost of revenues
    
    $
    14,751
    
    
    $
    6,967
    
    
    $
    21,718
    
    
    $
    21,277
    
    
    $
    6,905
    
    
    $
    28,182
    
    
    
    (30.7
    %)
    
    
    0.9
    %
    
    
    (22.9
    %)Gross marginContract margins and contract margins  related party
    
    $
    667
    
    
    $
    1,027
    
    
    $
    1,694
    
    
    $
    1,988
    
    
    $
    1,549
    
    
    $
    3,537
    
    
    
    (66.4
    %)
    
    
    (33.7
    %)
    
    
    (52.1
    %)Manufacturing margins
    
    $
    264
    
    
    $
    
    
    
    $
    264
    
    
    $
    (27
    )
    
    $
    
    
    
    $
    (27
    )
    
    
    (1077.8
    %)
    
    
    0.0
    %
    
    
    (1077.8
    %)Service and other margins
    
    
    290
    
    
    
    565
    
    
    
    855
    
    
    
    (687
    )
    
    
    695
    
    
    
    8
    
    
    
    142.2
    %
    
    
    (18.7
    %)
    
    
    10587.5
    %Total gross margin
    
    $
    1,221
    
    
    $
    1,592
    
    
    $
    2,813
    
    
    $
    1,274
    
    
    $
    2,244
    
    
    $
    3,518
    
    
    
    (4.2
    %)
    
    
    (29.1
    %)
    
    
    (20.0
    %)Gross margin percentageContract revenues and contract revenues  related party
    
    
    4.8
    %
    
    
    16.0
    %
    
    
    8.3
    %
    
    
    10.1
    %
    
    
    22.9
    %
    
    
    13.3
    %
    
    
    (52.5
    %)
    
    
    (30.1
    %)
    
    
    (37.6
    %)Manufacturing margins
    
    
    27.4
    %
    
    
    0.0
    %
    
    
    27.4
    %
    
    
    (1.4
    %)
    
    
    0.0
    %
    
    
    (1.4
    %)
    
    
    (2057.1
    %)
    
    
    0.0
    %
    
    
    (2057.1
    %)Service and other revenues
    
    
    28.6
    %
    
    
    26.2
    %
    
    
    27.0
    %
    
    
    (74.3
    %)
    
    
    29.1
    %
    
    
    0.2
    %
    
    
    138.5
    %
    
    
    (10.0
    %)
    
    
    13400.0
    %Total gross margin percentage
    
    
    7.6
    %
    
    
    18.6
    %
    
    
    11.5
    %
    
    
    5.6
    %
    
    
    24.5
    %
    
    
    11.1
    %
    
    
    35.7
    %
    
    
    (24.1
    %)
    
    
    3.6
    %
  Nine Months Ended September 30, 2009
    
    
    Nine Months Ended September 30, 2008
    
    
    Percent Increase (Decrease)Corrections
    
    
    Commercial
    
    
    Total
    
    
    Corrections
    
    
    Commercial
    
    
    Total
    
    
    Corrections
    
    
    Commercial
    
    
    TotalNet revenuesContract revenues and contract revenues  related party
    
    $
    50,891
    
    
    $
    21,081
    
    
    $
    71,972
    
    
    $
    74,322
    
    
    $
    17,839
    
    
    $
    92,161
    
    
    
    (31.5
    %)
    
    
    18.2
    %
    
    
    (21.9
    %)Manufacturing revenues
    
    
    4,733
    
    
    
    
    
    
    
    4,733
    
    
    
    5,322
    
    
    
    
    
    
    
    5,322
    
    
    
    (11.1
    %)
    
    
    0.0
    %
    
    
    (11.1
    %)Service and other revenues
    
    
    3,346
    
    
    
    6,612
    
    
    
    9,958
    
    
    
    1,788
    
    
    
    6,532
    
    
    
    8,320
    
    
    
    87.1
    %
    
    
    1.2
    %
    
    
    19.7
    %Total net revenues
    
    $
    58,970
    
    
    $
    27,693
    
    
    $
    86,663
    
    
    $
    81,432
    
    
    $
    24,371
    
    
    $
    105,803
    
    
    
    (27.6
    %)
    
    
    13.6
    %
    
    
    (18.1
    %)% of total
    
    
    68.0
    %
    
    
    32.0
    %
    
    
    
    
    
    
    77.0
    %
    
    
    23.0
    %Cost of revenuesContract costs and contract costs  related party
    
    $
    43,090
    
    
    $
    17,029
    
    
    $
    60,119
    
    
    $
    62,746
    
    
    $
    13,847
    
    
    $
    76,593
    
    
    
    (31.3
    %)
    
    
    23.0
    %
    
    
    (21.5
    %)Manufacturing costs
    
    
    3,079
    
    
    
    
    
    
    
    3,079
    
    
    
    3,756
    
    
    
    
    
    
    
    3,756
    
    
    
    (18.0
    %)
    
    
    0.0
    %
    
    
    (18.0
    %)Service and other costs
    
    
    2,437
    
    
    
    4,576
    
    
    
    7,013
    
    
    
    4,489
    
    
    
    4,979
    
    
    
    9,468
    
    
    
    (45.7
    %)
    
    
    (8.1
    %)
    
    
    (25.9
    %)Total cost of revenues
    
    $
    48,606
    
    
    $
    21,605
    
    
    $
    70,211
    
    
    $
    70,991
    
    
    $
    18,826
    
    
    $
    89,817
    
    
    
    (31.5
    %)
    
    
    14.8
    %
    
    
    (21.8
    %)Gross marginContract margins and contract margins  related party
    
    $
    7,801
    
    
    $
    4,052
    
    
    $
    11,853
    
    
    $
    11,576
    
    
    $
    3,992
    
    
    $
    15,568
    
    
    
    (32.6
    %)
    
    
    1.5
    %
    
    
    (23.9
    %)Manufacturing margins
    
    $
    1,654
    
    
    $
    
    
    
    $
    1,654
    
    
    $
    1,566
    
    
    $
    
    
    
    $
    1,566
    
    
    
    5.6
    %
    
    
    0.0
    %
    
    
    5.6
    %Service and other margins
    
    
    909
    
    
    
    2,036
    
    
    
    2,945
    
    
    
    (2,701
    )
    
    
    1,553
    
    
    
    (1,148
    )
    
    
    133.7
    %
    
    
    31.1
    %
    
    
    (356.5
    %)Total gross margin
    
    $
    10,364
    
    
    $
    6,088
    
    
    $
    16,452
    
    
    $
    10,441
    
    
    $
    5,545
    
    
    $
    15,986
    
    
    
    (0.7
    %)
    
    
    9.8
    %
    
    
    2.9
    %Gross margin percentageContract revenues and contract revenues  related party
    
    
    15.3
    %
    
    
    19.2
    %
    
    
    16.5
    %
    
    
    15.6
    %
    
    
    22.4
    %
    
    
    16.9
    %
    
    
    (1.9
    %)
    
    
    (14.3
    %)
    
    
    (2.4
    %)Manufacturing margins
    
    
    34.9
    %
    
    
    0.0
    %
    
    
    34.9
    %
    
    
    29.4
    %
    
    
    0.0
    %
    
    
    29.4
    %
    
    
    18.7
    %
    
    
    0.0
    %
    
    
    18.7
    %Service and other revenues
    
    
    27.2
    %
    
    
    30.8
    %
    
    
    29.6
    %
    
    
    (151.1
    %)
    
    
    23.8
    %
    
    
    (13.8
    %)
    
    
    118.0
    %
    
    
    29.4
    %
    
    
    (314.5
    %)Total gross margin percentage
    
    
    17.6
    %
    
    
    22.0
    %
    
    
    19.0
    %
    
    
    12.8
    %
    
    
    22.8
    %
    
    
    15.1
    %
    
    
    37.5
    %
    
    
    (3.5
    %)
    
    
    25.8
    %
  38




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##### Table of Contents



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 Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008GAAP net income (loss)
    
    $
    (8,198
    )
    
    $
    (18,367
    )
    
    $
    (8,114
    )
    
    $
    (20,121
    )Interest, net
    
    
    875
    
    
    
    939
    
    
    
    2,541
    
    
    
    2,514Depreciation
    
    
    453
    
    
    
    543
    
    
    
    1,397
    
    
    
    1,657Amortization
    
    
    340
    
    
    
    1,653
    
    
    
    1,206
    
    
    
    5,029Taxes, net
    
    
    (407
    )
    
    
    (2,888
    )
    
    
    23
    
    
    
    (3,766
    )EBITDA
    
    $
    (6,937
    )
    
    $
    (18,120
    )
    
    $
    (2,947
    )
    
    $
    (14,687
    )
  39




---



##### Table of Contents



Results of Operations for the Three Months Ended September 30, 2009 and 2008
  Three Months
    
    
    Three Months
    
    
    Year to YearSeptember 30, 2009
    
    
    September 30, 2008
    
    
    Increase (Decrease)% of
    
    
    
    
    
    
    % ofAmount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    Amount
    
    
    %Revenues:Contract revenues
    
    $
    19,334
    
    
    
    78.8
    %
    
    $
    23,598
    
    
    
    74.4
    %
    
    $
    (4,264
    )
    
    
    (18.1
    %)Contract revenues  related party
    
    
    1,062
    
    
    
    4.3
    %
    
    
    2,906
    
    
    
    9.2
    %
    
    
    (1,844
    )
    
    
    (63.5
    %)Manufacturing revenues
    
    
    963
    
    
    
    3.9
    %
    
    
    1,880
    
    
    
    5.9
    %
    
    
    (917
    )
    
    
    (48.8
    %)Service and other revenues
    
    
    3,172
    
    
    
    12.9
    %
    
    
    3,316
    
    
    
    10.5
    %
    
    
    (144
    )
    
    
    (4.3
    %)Total revenues
    
    $
    24,531
    
    
    
    100.0
    %
    
    $
    31,700
    
    
    
    100.0
    %
    
    $
    (7,169
    )
    
    
    (22.6
    %)Cost of Revenues:Contract costs
    
    $
    18,702
    
    
    
    76.2
    %
    
    $
    22,910
    
    
    
    72.3
    %
    
    $
    (4,208
    )
    
    
    (18.4
    %)Manufacturing costs
    
    
    699
    
    
    
    2.8
    %
    
    
    1,964
    
    
    
    6.2
    %
    
    
    (1,265
    )
    
    
    (64.4
    %)Service and other costs, including
amortization of intangibles
    
    
    2,317
    
    
    
    9.4
    %
    
    
    3,308
    
    
    
    10.4
    %
    
    
    (991
    )
    
    
    (30.0
    %)Cost of revenues
    
    $
    21,718
    
    
    
    88.5
    %
    
    $
    28,182
    
    
    
    88.9
    %
    
    $
    (6,464
    )
    
    
    (22.9
    %)Gross profit
    
    $
    2,813
    
    
    
    11.5
    %
    
    $
    3,518
    
    
    
    11.1
    %
    
    $
    (705
    )
    
    
    (20.0
    %)Total operating expenses
    
    $
    10,533
    
    
    
    42.9
    %
    
    $
    23,834
    
    
    
    75.2
    %
    
    $
    (13,301
    )
    
    
    (55.8
    %)Other income (expense):Interest income
    
    $
    2
    
    
    
    0.0
    %
    
    $
    58
    
    
    
    0.2
    %
    
    $
    (56
    )
    
    
    (96.6
    %)Interest expense
    
    
    (887
    )
    
    
    (3.6
    %)
    
    
    (997
    )
    
    
    (3.1
    %)
    
    
    110
    
    
    
    (11.0
    %)Total other income (expense)
    
    $
    (885
    )
    
    
    (3.6
    %)
    
    $
    (939
    )
    
    
    (3.0
    %)
    
    $
    54
    
    
    
    (5.8
    %)Net income (loss)
    
    $
    (8,198
    )
    
    
    (33.4
    %)
    
    $
    (18,367
    )
    
    
    (57.9
    %)
    
    $
    10,169
    
    
    
    (55.4
    %)EBITDA
    
    $
    (6,937
    )
    
    
    (28.3
    %)
    
    $
    (18,120
    )
    
    
    (57.2
    %)
    
    $
    11,183
    
    
    
    (61.7
    %)
 Revenues
    40




---



##### Table of Contents



Cost of Revenues
   41




---



##### Table of Contents



Gross Margin
  Operating Expenses
    Other Income / Expense
  Net Income / (Loss)
   42




---



##### Table of Contents



Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA)
  Results of Operations for the Nine Months Ended September 30, 2009 and 2008
  Nine Months
    
    
    Nine Months
    
    
    Year to YearSeptember 30, 2009
    
    
    September 30, 2008
    
    
    Increase (Decrease)% of
    
    
    
    
    
    
    % ofAmount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    Amount
    
    
    %Revenues:Contract revenues
    
    $
    70,050
    
    
    
    80.8
    %
    
    $
    77,030
    
    
    
    72.8
    %
    
    $
    (6,980
    )
    
    
    (9.1
    %)Contract revenues  related party
    
    
    1,922
    
    
    
    2.2
    %
    
    
    15,131
    
    
    
    14.3
    %
    
    
    (13,209
    )
    
    
    (87.3
    %)Manufacturing revenues
    
    
    4,733
    
    
    
    5.5
    %
    
    
    5,322
    
    
    
    5.0
    %
    
    
    (589
    )
    
    
    (11.1
    %)Service and other revenues
    
    
    9,958
    
    
    
    11.4
    %
    
    
    8,320
    
    
    
    7.9
    %
    
    
    1,638
    
    
    
    19.7
    %Total revenues
    
    $
    86,663
    
    
    
    100.0
    %
    
    $
    105,803
    
    
    
    100.0
    %
    
    $
    (19,140
    )
    
    
    (18.1
    %)Cost of Revenues:Contract costs
    
    $
    60,119
    
    
    
    69.4
    %
    
    $
    76,579
    
    
    
    72.4
    %
    
    $
    (16,460
    )
    
    
    (21.5
    %)Manufacturing costs
    
    
    3,079
    
    
    
    3.6
    %
    
    
    3,770
    
    
    
    3.6
    %
    
    
    (691
    )
    
    
    (18.3
    %)Service and other costs, including
amortization of intangibles
    
    
    7,013
    
    
    
    8.1
    %
    
    
    9,468
    
    
    
    9.0
    %
    
    
    (2,455
    )
    
    
    (25.9
    %)Cost of revenues
    
    $
    70,211
    
    
    
    81.0
    %
    
    $
    89,817
    
    
    
    84.9
    %
    
    $
    (19,606
    )
    
    
    (21.8
    %)Gross profit
    
    $
    16,452
    
    
    
    19.0
    %
    
    $
    15,986
    
    
    
    15.1
    %
    
    $
    466
    
    
    
    2.9
    %Total operating expenses
    
    $
    21,986
    
    
    
    25.4
    %
    
    $
    37,359
    
    
    
    35.3
    %
    
    $
    (15,373
    )
    
    
    (41.1
    %)Other income (expense):Interest income
    
    $
    33
    
    
    
    0.1
    %
    
    $
    136
    
    
    
    0.1
    %
    
    $
    (103
    )
    
    
    (75.7
    %)Interest expense
    
    
    (2,590
    )
    
    
    (3.0
    %)
    
    
    (2,650
    )
    
    
    (2.5
    %)
    
    
    60
    
    
    
    (2.3
    %)Total other income (expense)
    
    $
    (2,557
    )
    
    
    (3.0
    %)
    
    $
    (2,514
    )
    
    
    (2.4
    %)
    
    $
    (43
    )
    
    
    1.7
    %Net income (loss)
    
    $
    (8,114
    )
    
    
    (9.4
    %)
    
    $
    (20,121
    )
    
    
    (19.0
    %)
    
    $
    12,007
    
    
    
    (59.7
    %)EBITDA
    
    $
    (2,947
    )
    
    
    (3.4
    %)
    
    $
    (14,687
    )
    
    
    (13.9
    %)
    
    $
    11,740
    
    
    
    (79.9
    %)
 Revenues
   43




---



##### Table of Contents



Cost of Revenues
  Gross Margin
  Operating Expenses
    Other Income / Expense
  Net Income / (Loss)
  Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA)
   44




---



##### Table of Contents



Liquidity and Capital Resources
                    45




---



##### Table of Contents



Long-Term Debt
  September 30, 2009
    
    
    December 31, 2008Collateral
    
    Book Value
    
    
    Fair Value
    
    
    Book Value
    
    
    Fair ValueNotes payable:Vehicles and equipment
    
    $
    964
    
    
    $
    964
    
    
    $
    418
    
    
    $
    418Unsecured debt  related party
    
    
    11,748
    
    
    
    11,748
    
    
    
    11,393
    
    
    
    11,393Unsecured convertible debt 
stockholders
    
    
    
    
    
    
    
    
    
    
    1,925
    
    
    
    1,925Seller notes
    
    
    4,871
    
    
    
    4,871
    
    
    
    6,106
    
    
    
    6,106Line of credit and senior term debt
    
    
    8,000
    
    
    
    8,000
    
    
    
    12,951
    
    
    
    12,951$
    25,583
    
    
    $
    25,583
    
    
    $
    32,793
    
    
    $
    32,793Less  current maturities
    
    
    22,964
    
    
    
    22,964
    
    
    
    3,235
    
    
    
    3,235Long term debt
    
    $
    2,619
    
    
    $
    2,619
    
    
    $
    29,558
    
    
    $
    29,558
  Vehicles and Equipment
  Unsecured Debt  Related Parties
    46




---



##### Table of Contents



Unsecured Convertible Debt  Stockholders
   Seller Notes
   47




---



##### Table of Contents



Senior Secured Credit Facility
      Year Ending December 31:2009 (remaining three months)
    
    $
    20,3882010
    
    
    3,3322011
    
    
    1,7272012
    
    
    662013
    
    
    70Thereafter
    
    
    $
    25,583
  48




---



##### Table of Contents



Interest Rate Risk Management
 Derivatives
and
     Commitments
       49




---



##### Table of Contents



Off Balance Sheet Arrangements
  Contractual Obligations
 Total
    
    
    < 1 Year
    
    
    1 < 3 Years
    
    
    3 < 5 Years
    
    
    > 5 YearsPrincipal on Long Term Debt Obligations
    
    $
    25,583
    
    
    $
    22,964
    
    
    $
    2,532
    
    
    $
    87
    
    
    $
    Capital Lease Obligations
    
    
    4,990
    
    
    
    516
    
    
    
    1,013
    
    
    
    986
    
    
    
    2,475Operating Lease Obligations
    
    
    3,130
    
    
    
    1,053
    
    
    
    1,545
    
    
    
    504
    
    
    
    28Interest on Long Term Debt Obligations
    
    
    4,681
    
    
    
    2,387
    
    
    
    2,186
    
    
    
    108
    
    
    
    Total
    
    $
    38,384
    
    
    $
    26,920
    
    
    $
    7,276
    
    
    $
    1,685
    
    
    $
    2,503
 Subsequent Events
     (i)
    
    the conversion of $250,000 of the outstanding principal of the respective PDI
Promissory Note into the Companys common stock at a conversion price equal to 95% of
the average closing price of the Companys common stock for the 20 trading days
preceding delivery of the Election Notice; or(ii)
    
    payment to the respective holder of $7,500 in exchange for which the payment schedule of the
respective PDI Promissory Note shall be amended such that $250,000 of the principal due
in 2010 shall be due and payable on Monday, January 3, 2011, with interest continuing
to accrue on all unpaid principal amounts.
      i.
    
    The Senior Debt to EBITDA ratio covenant will be (a) 2.00 to 1.00 for fiscal
quarter ending December 31, 2009, (b) 2.00 to 1.00 for fiscal quarter ending March 31,
2010, (c) 2.70 to 1.00 for fiscal quarter ending June 30, 2010, and (d) 2.00 to 1.00 for
each fiscal quarter ending thereafter.ii.
    
    The Total Debt to EBITDA ratio covenant will be (a) 4.25 to 1.00 for fiscal
quarter ending December 31, 2009, (b) 5.25 to 1.00 for fiscal quarter ending March 31,
2010, (c) 7.50 to 1.00 for each fiscal quarter ending June 30, 2010, and (d) 3.50 to
1.00 for each fiscal quarter thereafter.
 iii.
    
    The Fixed Charge Coverage ratio covenant will be (a) 1.00 to 1.00 for the fiscal
quarters ending December 31, 2009 and March 3, 2010 and (b) 1.10 to 1.00 for the fiscal
quarter thereafter; provided that, for fiscal quarters commencing with the fiscal
quarter ending December 31, 2009 through the fiscal quarter ending June 30, 2010, the
Fixed Charge Coverage Ratio shall be based on cumulative reporting beginning October 1, 2009 for such periods, and
for the fiscal quarters ending September 30, 2010, and thereafter, the Fixed Charge Coverage
Ratio shall be measured on a trailing twelve (12) month basis.iv.
    
    The limitation on capital expenditures will be $250,000 per fiscal quarter.
  i.
    
    The Senior Debt to EBITDA ratio covenant will be (a) 2.20 to 1.00 for fiscal
quarter ending December 31, 2009, (b) 2.20 to 1.00 for fiscal quarter ending March 31,
2010, (c) 2.97 to 1.00 for fiscal quarter ending June 30, 2010, and (d) 2.20 to 1.00 for
each fiscal quarter ending thereafter.ii.
    
    The Total Debt to EBITDA ratio covenant will be (a) 4.68 to 1.00 for fiscal
quarter ending December 31, 2009, (b) 5.78 to 1.00 for fiscal quarter ending March 31,
2010, (c) 8.25 to 1.00 for each fiscal quarter ending June 30, 2010, and (d) 3.85 to
1.00 for each fiscal quarter thereafter.iii.
    
    The Fixed Charge Coverage ratio covenant will be (a) 0.90 to 1.00 for the fiscal
quarter ending on December 31, 2009 and March 31, 2010 and (b) 1.00 to 1.00 for the
fiscal quarter thereafter; provided that, for fiscal quarters commencing with the fiscal
quarter ending December 31, 2009 through the fiscal quarter ending June 30, 2010, the
Fixed Charge Coverage Ratio shall be based on cumulative reporting
beginning October 1, 2009 for such periods, and
for the fiscal quarters ending September 30, 2010,
and thereafter, the Fixed Charge Coverage Ratio shall be measured on a trailing twelve (12)
month basis.
    This
Quarterly Report on Form 10-Q is not an offer to purchase nor is it a solicitation of an offer to sell
securities of Argyle Security, Inc., and it is not a substitute for any other filings that may be
made with the Securities and Exchange Commission (SEC) should a proposed rights offering go
forward.
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ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLSOURES ABOUT MARKET RISK
    
 ITEM 4T.
    
    CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
      Changes in Internal Control over Financial Reporting
  1.
    
    Reconciliation of certain items to general ledger at the individual Business Unit
level rather than only at a consolidated Company level;2.
    
    Comparison of billings versus the cost estimating for projects with respect to
project contracts entered into the Companys accounting software system;3.
    
    Hiring and training of personnel preparing the entries
associated with costs and revenues; and4.
    
    Multiple-person reviews of reconciliations and support for the revenues and costs
attributed to a contract in the Companys accounting software system.
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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1.
    
    LEGAL PROCEEDINGS
 MCFSA, Ltd. d/b/a Metroplex Control Systems v. Quadsec, LLC, Robert John Villeneuve, et. al.;
Case No. 2008-75694, in the District Court of Harris County, Texas.
  Building Construction Enterprises, Inc. v. Board of County Commissioners of the County of
Johnson; Case No. 06CV03708, in the District Court of Johnson County, Kansas.
  Mezzanine Management Fund IV A, L.P and Mezzanine Management Fund IV Coinvest A, L.P. v.
Argyle Security, Inc.; Case No. 4941-VCS in the Delaware Court of Chancery.
  
 ITEM 1A.
    
    RISK FACTORS
   If we do not consummate the
financing transactions with the MML Entities and amend our
debt facilities, we face liquidity challenges which could impact our ability to continue our
operations.
  We
have violated and we may violate certain financial covenants related to our senior and subordinated debt
facilities in the future.
  We are controlled by our major shareholder.
  We have identified material weaknesses in our internal accounting controls and our inability to effectively remedy
these weaknesses could reduce confidence in our financial statements.
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##### Table of Contents



ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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##### Table of Contents



ITEM 5.
    
    OTHER INFORMATION
  
 ITEM 6.
    
    EXHIBITS
 Exhibit No.
    
    Description3.2
    
    
    Amended and Restated By-Laws of Argyle Security, Inc. (incorporated by reference to Current Report on Form 8-K
filed on October 6, 2009)10.1
    
    
    Eighth Amendment and Waiver to Note and Warrant Purchase Agreement, dated as of August 3, 2009, between ISI
Security Group, Inc. and William Blair Mezzanine Capital Fund III, L.P.   (incorporated by reference to Current
Report on Form 8-K filed on August 4, 2009)10.2
    
    
    Amendment No. 3 to Loan and Security Agreement, dated as of August 3, 2009, between ISI Security Group, Inc. and
The PrivateBank and Trust Company. (incorporated by reference to Current Report on Form 8-K filed on August 4,
2009)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, filed herewith.99.1
    
    
    Letter of Commitment and Term Sheet dated November 23, 2009 from
Mezzanine Management Fund IV A, LP and Mezzanine Management Fund IV
Coinvest A, LP to Argyle Security, Inc., filed herewith.99.2
    
    
    Letter of Commitment dated November 23, 2009 from The PrivateBank and
Trust Company to ISI Security Group, Inc., filed herewith.99.3
    
    
    Letter of Commitment dated November 23, 2009 from William Blair
Mezzanine Capital Fund III, L.P. to ISI Security Group, Inc., filed
herewith.99.4
    
    

Letter
of Commitment dated November 23, 2009 from Mike Peterson
and Leonard Peterson to ISI Detention Contracting Group, Inc., filed
herewith.
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##### Table of Contents



SIGNATURES
  ARGYLE SECURITY, INCNovember 23, 2009
    By:
    /s/ Bob MarbutBob MarbutChief Executive Officer

(Principal Executive Officer)November 23, 2009
    By:
    /s/ Sam YoungbloodSam YoungbloodPresident and Chief Operating Officer 

(Principal Executive Officer)November 23, 2009
    By:
    /s/ Donald F. NevilleDonald F. NevilleExecutive Vice President and Chief Financial Officer

(Principal Financial Officer)November 23, 2009
    By:
    /s/ Dean A. DresserDean A. DresserVice President and Corporate Controller

(Principal Accounting Officer)  55




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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description3.2
    
    
    Amended and Restated By-Laws of Argyle Security, Inc. (incorporated by reference to Current Report on Form 8-K
filed on October 6, 2009)10.1
    
    
    Eighth Amendment and Waiver to Note and Warrant Purchase Agreement, dated as of August 3, 2009, between ISI
Security Group, Inc. and William Blair Mezzanine Capital Fund III, L.P.   (incorporated by reference to Current
Report on Form 8-K filed on August 4, 2009)10.2
    
    
    Amendment No. 3 to Loan and Security Agreement, dated as of August 3, 2009, between ISI Security Group, Inc. and
The PrivateBank and Trust Company. (incorporated by reference to Current Report on Form 8-K filed on August 4,
2009)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, filed
herewith.99.1
    
    
    Letter of Commitment and Term Sheet dated November 23, 2009
from Mezzanine Management Fund IV A, LP and Mezzanine
Management Fund IV Coinvest A, LP to Argyle Security, Inc.,
filed herewith.99.2
    
    
    Letter of Commitment dated November 23, 2009 from The
PrivateBank and Trust Company to ISI Security Group, Inc.,
filed herewith.99.3
    
    
    Letter of Commitment dated November 23, 2009 from William
Blair Mezzanine Capital Fund III, L.P. to ISI Security
Group, Inc., filed herewith.99.4
    
    

Letter
of Commitment dated November 23, 2009 from Mike
Peterson and Leonard Peterson to ISI Detention Contracting
Group, Inc., filed herewith.