##### 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 June 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
(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
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller reporting company þ
 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 32




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1  CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 ARGYLE SECURITY, INC.
 
 CONSOLIDATED BALANCE SHEETS
  June 30,
    
    
    December 31,2009
    
    
    2008unauditedAssetsCurrent assets:Cash and cash equivalents
    
    $
    10,180
    
    
    $
    11,142Restricted cash
    
    
    5,000
    
    
    
    2,500Receivables:Contract  net of allowance for doubtful accounts of
$735 and $777 at June 30, 2009 December 31, 2008, respectively
    
    
    20,559
    
    
    
    28,815Contract receivables  related party
    
    
    2,651
    
    
    
    4,685Other receivables
    
    
    37
    
    
    
    335Costs and estimated earnings in excess of billings
on incomplete contracts
    
    
    10,346
    
    
    
    6,475Intangible assets
    
    
    
    
    
    
    184Refundable income taxes
    
    
    
    
    
    
    168Inventory
    
    
    1,505
    
    
    
    2,146Other current assets
    
    
    196
    
    
    
    385Deferred income taxes, net
    
    
    405
    
    
    
    898Total current assets
    
    
    50,879
    
    
    
    57,733Property and equipment, net
    
    
    8,511
    
    
    
    9,033Goodwill
    
    
    2,844
    
    
    
    2,844Intangible assets
    
    
    11,430
    
    
    
    12,111Deposits, deferred transaction costs, and other assets
    
    
    391
    
    
    
    591Total other assets
    
    
    23,176
    
    
    
    24,579Total assets
    
    $
    74,055
    
    
    $
    82,312Liabilities and Stockholders EquityCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    12,636
    
    
    $
    15,799Accounts payable  related party
    
    
    
    
    
    
    173Billings in excess of costs and estimated earnings
on incomplete contracts
    
    
    5,365
    
    
    
    7,633Interest payable to stockholders
    
    
    
    
    
    
    49Current portion of capitalized lease obligations
    
    
    249
    
    
    
    239Current portion of long-term debt
    
    
    4,185
    
    
    
    3,235Total current liabilities
    
    
    22,435
    
    
    
    27,128Long-Term Liabilities:Deferred income taxes
    
    
    1,346
    
    
    
    1,577Long-term debt  less current portion
    
    
    21,493
    
    
    
    29,558Derivative, deferred rent and other long term liabilities (including dividends)
    
    
    947
    
    
    
    635Long-term capitalized lease obligations  less current portion
    
    
    3,262
    
    
    
    3,389Total long-term liabilities
    
    
    27,048
    
    
    
    35,159Total liabilities
    
    
    49,483
    
    
    
    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 June 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; shares issued and outstanding 6,277,105
shares at June 30, 2009 and 5,969,342 shares at December 31, 2008
    
    
    1
    
    
    
    1Additional paid in capital
    
    
    55,656
    
    
    
    50,925Accumulated other comprehensive income (loss)
    
    
    (96
    )
    
    
    (116
    )Accumulated earnings (deficit)
    
    
    (30,989
    )
    
    
    (30,785
    )Total stockholders equity
    
    
    24,572
    
    
    
    20,025Total liabilities and stockholders equity
    
    $
    74,055
    
    
    $
    82,312
  1




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##### Table of Contents



ARGYLE SECURITY, INC.
 
 CONSOLIDATED STATEMENT OF OPERATIONS
 (unaudited)
  Three Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008Revenues:Contract revenues
    
    $
    25,390
    
    
    $
    26,572Contract revenues  related party
    
    
    
    
    
    
    5,282Manufacturing revenues
    
    
    1,868
    
    
    
    1,923Service and other revenues
    
    
    3,129
    
    
    
    2,729Total revenues
    
    
    30,387
    
    
    
    36,506Cost of revenues:Contract costs
    
    
    20,085
    
    
    
    26,285Manufacturing costs
    
    
    1,122
    
    
    
    1,158Service and other costs, including $74 and $1,276 of
amortization of intangibles in 2009 and 2008,
respectively
    
    
    2,199
    
    
    
    2,999Total cost of revenues
    
    
    23,406
    
    
    
    30,442Gross profit
    
    
    6,981
    
    
    
    6,064Operating expenses:Salaries and related expense, including stock-based
compensation of ($29) and $191 in 2009 and 2008,
respectively
    
    
    2,961
    
    
    
    3,410Professional fees and outside services
    
    
    546
    
    
    
    638General and administrative expenses
    
    
    1,287
    
    
    
    1,671Depreciation
    
    
    436
    
    
    
    598Amortization of intangible assets
    
    
    340
    
    
    
    426Total operating expenses
    
    
    5,570
    
    
    
    6,743Operating income (loss)
    
    
    1,411
    
    
    
    (679
    )Other income (expense):Interest income
    
    
    6
    
    
    
    52Interest expense
    
    
    (820
    )
    
    
    (854
    )Total other income (expense)
    
    
    (814
    )
    
    
    (802
    )Income (loss) before provision for income taxes
    
    
    597
    
    
    
    (1,481
    )(Benefit) Provision for income taxes
    
    
    282
    
    
    
    (461
    )Net income (loss)
    
    
    315
    
    
    
    (1,020
    )Dividends on redeemable preferred stock
    
    
    (145
    )
    
    
    (86
    )Net income (loss) allocable to holders of common stock
    
    $
    170
    
    
    $
    (1,106
    )Weighted-average number of shares of common stock outstandingBasic
    
    
    6,038,772
    
    
    
    5,799,342Diluted
    
    
    6,270,292
    
    
    
    5,799,342Net income (loss) per share allocable to holders of common stockBasic
    
    $
    0.02
    
    
    $
    (0.19
    )Diluted
    
    $
    0.02
    
    
    $
    (0.19
    )
   2




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##### Table of Contents



ARGYLE SECURITY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
  Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008Revenues:Contract revenues
    
    $
    50,716
    
    
    $
    53,432Contract revenues  related party
    
    
    860
    
    
    
    12,225Manufacturing revenues
    
    
    3,769
    
    
    
    3,441Service and other revenues
    
    
    6,786
    
    
    
    5,005Total revenues
    
    
    62,131
    
    
    
    74,103Cost of revenues:Contract costs
    
    
    41,417
    
    
    
    53,627Manufacturing costs
    
    
    2,380
    
    
    
    1,848Service and other costs, including $184 and $2,529 of
amortization of intangibles in 2009 and 2008,
respectively
    
    
    4,696
    
    
    
    6,159Total cost of revenues
    
    
    48,493
    
    
    
    61,634Gross profit
    
    
    13,638
    
    
    
    12,469Operating expenses:Salaries and related expense, including stock-based
compensation of $116 and $749 in 2009 and 2008,
respectively
    
    
    5,971
    
    
    
    6,779Professional fees and outside services
    
    
    1,426
    
    
    
    1,583General and administrative expenses
    
    
    2,513
    
    
    
    3,259Depreciation
    
    
    861
    
    
    
    1,057Amortization of intangible assets
    
    
    681
    
    
    
    847Total operating expenses
    
    
    11,452
    
    
    
    13,525Operating income (loss)
    
    
    2,186
    
    
    
    (1,056
    )Other income (expense):Interest income
    
    
    31
    
    
    
    78Interest expense
    
    
    (1,703
    )
    
    
    (1,653
    )Total other income (expense)
    
    
    (1,672
    )
    
    
    (1,575
    )Income (loss) before provision for income taxes
    
    
    514
    
    
    
    (2,631
    )(Benefit) Provision for income taxes
    
    
    430
    
    
    
    (877
    )Net income (loss)
    
    
    84
    
    
    
    (1,754
    )Dividends on redeemable preferred stock
    
    
    (288
    )
    
    
    (86
    )Net income (loss) allocable to holders of common stock
    
    $
    (204
    )
    
    $
    (1,840
    )Weighted-average number of shares of common stock outstandingBasic
    
    
    6,029,187
    
    
    
    5,795,221Diluted
    
    
    6,029,187
    
    
    
    5,795,221Net income (loss) per share allocable to holders of common stockBasic
    
    $
    (0.03
    )
    
    $
    (0.32
    )Diluted
    
    $
    (0.03
    )
    
    $
    (0.32
    )
   3




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ARGYLE SECURITY, INC.
 
 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
 DECEMBER 31, 2008 THROUGH JUNE 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
    
    
    $
    0
    
    
    $
    50,925
    
    
    $
    (116
    )
    
    $
    (30,785
    )
    
    $
    20,025Net income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84
    
    
    
    84Deferred gain / (loss) on hedging
activities, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    20ISI seller note conversion
    
    
    192,763
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,928
    
    
    
    
    
    
    
    
    
    
    
    1,928Stock-based compensation
    
    
    145,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    116
    
    
    
    
    
    
    
    
    
    
    
    116Forfeiture of stock-based compensation
    
    
    (30,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of preferred stock
    
    
    
    
    
    
    
    
    
    
    27,273
    
    
    
    0
    
    
    
    2,687
    
    
    
    
    
    
    
    
    
    
    
    2,687Dividends on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (288
    )
    
    
    (288
    )Balance at June 30, 2009
    
    
    6,277,105
    
    
    $
    1
    
    
    
    46,023
    
    
    $
    0
    
    
    $
    55,656
    
    
    $
    (96
    )
    
    $
    (30,989
    )
    
    $
    24,572
   4




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##### Table of Contents



ARGYLE SECURITY, INC.
 
 CONSOLIDATED STATEMENT OF CASH FLOWS
 (unaudited)
 Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008Cash flows from operating activities:Net income (loss)
    
    $
    84
    
    
    $
    (1,754
    )Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities
Stock-based compensation
    
    
    116
    
    
    
    749Amortization
    
    
    865
    
    
    
    3,376Depreciation
    
    
    944
    
    
    
    1,114Gain (loss) on disposal of asset
    
    
    8
    
    
    
    Deferred interest on Merit debt
    
    
    233
    
    
    
    Decrease (increase) in contract receivables
    
    
    8,256
    
    
    
    (10,210
    )Decrease (increase) in related party contract receivables
    
    
    2,034
    
    
    
    43Decrease (increase) in related party receivables
    
    
    298
    
    
    
    9Decrease (increase) in costs and estimated earnings in excess of billings
    
    
    (3,871
    )
    
    
    1,687Decrease (increase) in other assets
    
    
    781
    
    
    
    (76
    )Increase (decrease) in accounts payable and accrued expenses
    
    
    (3,028
    )
    
    
    (660
    )Increase (decrease) in other long-term liabilities
    
    
    41
    
    
    
    64Increase (decrease) in deferred income taxes and refundable taxes
    
    
    430
    
    
    
    (963
    )Increase (decrease) in billings in excess of costs and estimated earnings
    
    
    (2,268
    )
    
    
    4,022Net cash provided by (used in) operating activities
    
    $
    4,923
    
    
    $
    (2,599
    )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
    
    
    (431
    )
    
    
    (1,679
    )Transaction costs
    
    
    
    
    
    
    (329
    )Net cash provided by (used in) investing activities
    
    $
    (431
    )
    
    $
    (7,272
    )Cash flows from financing activities:Issuance of preferred stock
    
    
    3,000
    
    
    
    15,000Restricted cash
    
    
    (2,500
    )
    
    
    (2,505
    )Offering costs and financing costs
    
    
    (414
    )
    
    
    (1,452
    )Repayment on borrowings
    
    
    (12,918
    )
    
    
    (23,097
    )Proceeds from borrowings
    
    
    7,495
    
    
    
    27,271Proceeds from notes payable
    
    
    
    
    
    
    5,000Payments on capital lease obligations
    
    
    (117
    )
    
    
    (64
    )Net cash provided by (used in) financing activities
    
    $
    (5,454
    )
    
    $
    20,153Net increase (decrease) in cash and cash equivalents
    
    $
    (962
    )
    
    $
    10,282Cash and cash equivalents at beginning of year
    
    
    11,142
    
    
    
    3,556Cash and cash equivalents at end of period
    
    $
    10,180
    
    
    $
    13,838
   5




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




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ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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
JUNE 30, 2009
 Note 1  Basis of Presentation (continued)
 Pro Forma Results of Operations
   Pro Forma Consolidated Statement of Operations Data
(unaudited)
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Total revenues
    
    
    30,387
    
    
    
    36,506
    
    
    
    62,131
    
    
    
    75,821Net income (loss) allocable to holders of common stock
    
    $
    170
    
    
    $
    (1,106
    )
    
    $
    (204
    )
    
    $
    (1,855
    )Weighted-average number of shares of common stock outstandingBasic
    
    
    6,038,772
    
    
    
    5,799,342
    
    
    
    6,029,187
    
    
    
    5,795,221Diluted
    
    
    6,270,292
    
    
    
    5,799,342
    
    
    
    6,029,187
    
    
    
    5,795,221Net income (loss) per share allocable to holders of common stockBasic
    
    $
    0.02
    
    
    $
    (0.19
    )
    
    $
    (0.03
    )
    
    $
    (0.32
    )Diluted
    
    $
    0.02
    
    
    $
    (0.19
    )
    
    $
    (0.03
    )
    
    $
    (0.32
    )
  8




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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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
JUNE 30, 2009
 Note 2  Background, Formation, and Summary of Significant Accounting Policies (continued)
 Assets Held Under Capital Leases
  Goodwill and Other Intangible Assets
    rd
 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
  11




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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
 Note 2  Background, Formation, and Summary of Significant Accounting Policies (continued)
 Self Insurance
  Warranty Reserve
  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
   12




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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
 Note 2  Background, Formation, and Summary of Significant Accounting Policies (continued)
 Reclassifications
  Recently Issued Accounting Pronouncements
 Accounting for Transfers of Financial Assets  an amendment of FASB Statement No. 140 Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities Consolidation of Variable Interest Entities
 Amendments to FASB Interpretation No. 46(R) Consolidation of Variable Interest Entities
 Subsequent Events
 Interim Disclosures About Fair
Value of Financial Instruments Disclosures about Fair Value of Financial Instruments Interim Financial Reporting
  13




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ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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
JUNE 30, 2009
 Note 2  Background, Formation, and Summary of Significant Accounting Policies (continued)
 Concentrations of Credit Risk
 Disclosure of Information about Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit Risk
 Net Income / (Loss) Per Share
 Earnings Per Share Participating Securities and the Two-Class Method under FASB
Statement No. 128
   Three Months Ended June 30
    
    
    Six Months Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Weighted average common shares outstanding  basic
    
    
    6,038,772
    
    
    
    5,799,342
    
    
    
    6,029,187
    
    
    
    5,795,221Effect of convertible securities
    
    
    231,520
    
    
    
    
    
    
    
    
    
    
    
    Weighted average common shares outstanding  diluted
    
    
    6,270,292
    
    
    
    5,799,342
    
    
    
    6,029,187
    
    
    
    5,795,221
   Note 3  Contract Receivables
  June 30,
    
    
    December 31,2009
    
    
    2008Completed contracts and contracts in progress (net of
allowance)
    
    $
    15,460
    
    
    $
    24,494Retainage
    
    
    5,099
    
    
    
    4,321Completed contracts and contracts in progress  related parties
    
    
    1,568
    
    
    
    2,938Retainage  related parties
    
    
    1,083
    
    
    
    1,747Contract receivables
    
    $
    23,210
    
    
    $
    33,500
  15




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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
 Note 4  Costs and Estimated Earnings on Incomplete Contracts and Backlog Information
  Total
    
    
    Corrections
    
    
    CommercialJune 30,
    
    
    June 30,
    
    
    June 30,2009
    
    
    2009
    
    
    2009Amended contract amount
    
    $
    300,705
    
    
    $
    241,415
    
    
    $
    59,290Revenues recognized to date
    
    
    254,539
    
    
    
    204,848
    
    
    
    49,691Unearned contract amount  backlog
    
    $
    46,166
    
    
    $
    36,567
    
    
    $
    9,599Costs incurred to date
    
    
    218,400
    
    
    
    178,747
    
    
    
    39,653Estimated costs to complete
    
    
    31,910
    
    
    
    25,720
    
    
    
    6,190Estimated total cost
    
    $
    250,310
    
    
    $
    204,467
    
    
    $
    45,843Billings to date
    
    $
    249,723
    
    
    $
    200,478
    
    
    $
    49,245Costs and estimated earnings in excess of billings on incomplete contracts
    
    $
    10,346
    
    
    $
    8,187
    
    
    $
    2,159Billing in excess of costs and estimated earnings on incomplete contracts
    
    $
    5,365
    
    
    $
    3,499
    
    
    $
    1,866
 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.     16




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ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
 Note 5  Long-Term Debt
  June 30, 2009
    
    
    December 31, 2008Collateral
    
    Book Value
    
    
    Fair Value
    
    
    Book Value
    
    
    Fair ValueNotes payable:Vehicles and equipment
    
    $
    347
    
    
    $
    347
    
    
    $
    418
    
    
    $
    418Unsecured debt  related party
    
    
    11,626
    
    
    
    11,626
    
    
    
    11,393
    
    
    
    11,393Unsecured convertible debt  stockholders
    
    
    
    
    
    
    
    
    
    
    1,925
    
    
    
    1,925Seller notes
    
    
    5,205
    
    
    
    5,205
    
    
    
    6,106
    
    
    
    6,106Line of credit and senior term debt
    
    
    8,500
    
    
    
    8,500
    
    
    
    12,951
    
    
    
    12,951$
    25,678
    
    
    $
    25,678
    
    
    $
    32,793
    
    
    $
    32,793Less  current maturities
    
    
    4,185
    
    
    
    4,185
    
    
    
    3,235
    
    
    
    3,235Long term debt
    
    $
    21,493
    
    
    $
    21,493
    
    
    $
    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
JUNE 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
JUNE 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
JUNE 30, 2009
 Note 5  Long-Term Debt (continued)
 Interest Rate Risk Management
 Accounting for Derivative Instruments and Hedging Activities
  Fair ValueBalance Sheet Location
    
    June 30, 2009
    
    
    December 31, 2008Derivatives designated as
hedging instrument under
FAS 133Derivative Liabilities:Interest Rate Contracts
    
    Derivative, deferred rent and other long term liabilities (including dividends)
    
    $
    157,107
    
    
    $
    188,001
    20




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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
 Note 6  Fair Value Measurement
         Significant Other Observable Inputs (Level 2)June 30, 2009
    
    
    December 31, 2008LiabilityInterest Rate Swap (included in
Deferred rent and other long term
liabilities)
    
    $
    157,107
    
    
    $
    188,001
  21




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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
JUNE 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
JUNE 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
JUNE 30, 2009
 Note 12  Other Comprehensive Income (Loss)
  Three Months Ended
    
    
    Three Months Ended
    
    
    Six Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income / (loss)
    
    $
    315
    
    
    $
    (1,020
    )
    
    $
    84
    
    
    $
    (1,754
    )Net unrealized gain (loss) on
cash flow hedge
    
    
    51
    
    
    
    0
    
    
    
    76
    
    
    
    0Reclassification adjustment for
gain / (loss) included in
income, net of taxes
    
    
    (31
    )
    
    
    0
    
    
    
    (57
    )
    
    
    0Other comprehensive income
    
    $
    20
    
    
    $
    0
    
    
    $
    19
    
    
    $
    0Total comprehensive income (loss)
    
    $
    335
    
    
    $
    (1,020
    )
    
    $
    103
    
    
    $
    (1,754
    )
 Note 13  Related-Party Transactions
 th
    27




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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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
JUNE 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
JUNE 30, 2009
 Note 14  Segment Information (continued)
 Summary Segment Information
 Three Months Ended
    
    
    Three Months Ended
    
    
    Six Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Industry Segment (in thousands)Revenues:Corrections
    
    $
    21,124
    
    
    $
    28,843
    
    
    $
    42,997
    
    
    $
    58,881Commercial
    
    
    9,263
    
    
    
    7,663
    
    
    
    19,134
    
    
    
    15,222Corporate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Eliminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    30,387
    
    
    $
    36,506
    
    
    $
    62,131
    
    
    $
    74,103Operating income (loss):Corrections
    
    $
    1,494
    
    
    $
    103
    
    
    $
    2,596
    
    
    $
    1,713Commercial
    
    
    840
    
    
    
    522
    
    
    
    1,755
    
    
    
    386Corporate
    
    
    (923
    )
    
    
    (1,304
    )
    
    
    (2,165
    )
    
    
    (3,155
    )Eliminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    1,411
    
    
    $
    (679
    )
    
    $
    2,186
    
    
    $
    (1,056
    )Capital expenditures:Corrections
    
    $
    105
    
    
    $
    2,356
    
    
    $
    348
    
    
    $
    3,006Commercial
    
    
    34
    
    
    
    191
    
    
    
    79
    
    
    
    312Corporate
    
    
    1
    
    
    
    77
    
    
    
    4
    
    
    
    87Total
    
    $
    140
    
    
    $
    2,624
    
    
    $
    431
    
    
    $
    3,405Total assets:Corrections
    
    $
    54,151
    
    
    $
    98,377
    
    
    $
    54,151
    
    
    $
    98,377Commercial
    
    
    10,461
    
    
    
    5,942
    
    
    
    10,461
    
    
    
    5,942Corporate
    
    
    24,160
    
    
    
    49,404
    
    
    
    24,160
    
    
    
    49,404Eliminations
    
    
    (14,717
    )
    
    
    (34,206
    )
    
    
    (14,717
    )
    
    
    (34,206
    )Total
    
    $
    74,055
    
    
    $
    119,517
    
    
    $
    74,055
    
    
    $
    119,517
  30




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##### Table of Contents



ARGYLE SECURITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
 Note 15  Supplemental Disclosures of Cash Flow Information (in thousands)
 Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008Cash paid for interest
    
    $
    1,097
    
    
    $
    1,335Cash paid for income taxes
    
    
    2
    
    
    
    520Supplemental schedule of non-cash investing activities:Financed purchases of property and equipment
    
    $
    
    
    
    $
    Issuance of common stock to retire notes with related parties
    
    
    1,925
    
    
    
    Accrual for deferred transaction costs
    
    
    132
    
    
    
    426Supplemental schedule of non-cash financing activities:Notes issued for acquisitions
    
    $
    
    
    
    $
    6,765Dividends accrued
    
    
    288
    
    
    
    86Accrual of offering costs
    
    
    
    
    
    
    302
 Note 16  Subsequent Events
     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 SOP 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



Goodwill and
Other Intangible Assets Clarification of Reporting Unit Guidance
in Paragraph 30 of FASB Statement No. 142
     Non Cash Compensation Expense Share Based Payment
       37




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##### Table of Contents



Explanatory Note Relating to Pro Forma Financial Information
   Three Months Ended June 30, 2009
    
    
    Three Months Ended June 30, 2008
    
    
    Percent Increase (Decrease)Corrections
    
    
    Commercial
    
    
    Total
    
    
    Corrections
    
    
    Commercial
    
    
    Total
    
    
    Corrections
    
    
    Commercial
    
    
    TotalNet revenuesContract revenues and
contract revenues -
related party
    
    $
    18,544
    
    
    $
    6,846
    
    
    $
    25,390
    
    
    $
    26,371
    
    
    $
    5,483
    
    
    $
    31,854
    
    
    
    (29.7
    %)
    
    
    24.9
    %
    
    
    (20.3
    %)Manufacturing revenues
    
    
    1,868
    
    
    
    
    
    
    
    1,868
    
    
    
    1,923
    
    
    
    
    
    
    
    1,923
    
    
    
    (2.9
    %)
    
    
    0.0
    %
    
    
    (2.9
    %)Service and other revenues
    
    
    711
    
    
    
    2,418
    
    
    
    3,129
    
    
    
    548
    
    
    
    2,181
    
    
    
    2,729
    
    
    
    29.7
    %
    
    
    10.9
    %
    
    
    14.7
    %Total net revenues
    
    $
    21,123
    
    
    $
    9,264
    
    
    $
    30,387
    
    
    $
    28,842
    
    
    $
    7,664
    
    
    $
    36,506
    
    
    
    (26.8
    %)
    
    
    20.9
    %
    
    
    (16.8
    %)% of total
    
    
    69.5
    %
    
    
    30.5
    %
    
    
    
    
    
    
    79.0
    %
    
    
    21.0
    %Cost of revenuesContract costs and
contract costs  related
party
    
    $
    14,544
    
    
    $
    5,541
    
    
    $
    20,085
    
    
    $
    22,093
    
    
    $
    4,192
    
    
    $
    26,285
    
    
    
    (34.2
    %)
    
    
    32.2
    %
    
    
    (23.6
    %)Manufacturing costs
    
    
    1,122
    
    
    
    
    
    
    
    1,122
    
    
    
    1,158
    
    
    
    
    
    
    
    1,158
    
    
    
    (3.1
    %)
    
    
    0.0
    %
    
    
    (3.1
    %)Service and other costs
    
    
    667
    
    
    
    1,532
    
    
    
    2,199
    
    
    
    1,478
    
    
    
    1,521
    
    
    
    2,999
    
    
    
    (54.9
    %)
    
    
    0.7
    %
    
    
    (26.7
    %)Total cost of revenues
    
    $
    16,333
    
    
    $
    7,073
    
    
    $
    23,406
    
    
    $
    24,729
    
    
    $
    5,713
    
    
    $
    30,442
    
    
    
    (34.0
    %)
    
    
    23.8
    %
    
    
    (23.1
    %)Gross marginContract margins and
contract margins -
related party
    
    $
    4,000
    
    
    $
    1,305
    
    
    $
    5,305
    
    
    $
    4,278
    
    
    $
    1,291
    
    
    $
    5,569
    
    
    
    (6.5
    %)
    
    
    1.1
    %
    
    
    (4.7
    %)Manufacturing margins
    
    $
    746
    
    
    $
    
    
    
    $
    746
    
    
    $
    765
    
    
    $
    
    
    
    $
    765
    
    
    
    (2.5
    %)
    
    
    0.0
    %
    
    
    (2.5
    %)Service and other margins
    
    
    44
    
    
    
    886
    
    
    
    930
    
    
    
    (930
    )
    
    
    660
    
    
    
    (270
    )
    
    
    104.7
    %
    
    
    34.2
    %
    
    
    (444.4
    %)Total gross margin
    
    $
    4,790
    
    
    $
    2,191
    
    
    $
    6,981
    
    
    $
    4,113
    
    
    $
    1,951
    
    
    $
    6,064
    
    
    
    16.5
    %
    
    
    12.3
    %
    
    
    15.1
    %Gross margin percentageContract revenues and
contract revenues -
related party
    
    
    21.6
    %
    
    
    19.1
    %
    
    
    20.9
    %
    
    
    16.2
    %
    
    
    23.5
    %
    
    
    17.5
    %
    
    
    33.3
    %
    
    
    (18.7
    %)
    
    
    19.4
    %Manufacturing margins
    
    
    39.9
    %
    
    
    0.0
    %
    
    
    39.9
    %
    
    
    39.8
    %
    
    
    0.0
    %
    
    
    39.8
    %
    
    
    0.3
    %
    
    
    0.0
    %
    
    
    0.3
    %Service and other revenues
    
    
    6.2
    %
    
    
    36.6
    %
    
    
    29.7
    %
    
    
    (169.7
    %)
    
    
    30.3
    %
    
    
    (9.9
    %)
    
    
    103.7
    %
    
    
    20.8
    %
    
    
    (400.0
    %)Total gross margin percentage
    
    
    22.7
    %
    
    
    23.7
    %
    
    
    23.0
    %
    
    
    14.3
    %
    
    
    25.5
    %
    
    
    16.6
    %
    
    
    58.7
    %
    
    
    (7.1
    %)
    
    
    38.6
    %
  Six Months Ended June 30, 2009
    
    
    Six Months Ended June 30, 2008
    
    
    Percent Increase (Decrease)Corrections
    
    
    Commercial
    
    
    Total
    
    
    Corrections
    
    
    Commercial
    
    
    Total
    
    
    Corrections
    
    
    Commercial
    
    
    TotalNet revenuesContract revenues and
contract revenues -
related party
    
    $
    36,897
    
    
    $
    14,679
    
    
    $
    51,576
    
    
    $
    54,576
    
    
    $
    11,081
    
    
    $
    65,657
    
    
    
    (32.4
    %)
    
    
    32.5
    %
    
    
    (21.4
    %)Manufacturing revenues
    
    
    3,769
    
    
    
    
    
    
    
    3,769
    
    
    
    3,441
    
    
    
    
    
    
    
    3,441
    
    
    
    9.5
    %
    
    
    0.0
    %
    
    
    9.5
    %Service and other revenues
    
    
    2,331
    
    
    
    4,455
    
    
    
    6,786
    
    
    
    864
    
    
    
    4,141
    
    
    
    5,005
    
    
    
    169.8
    %
    
    
    7.6
    %
    
    
    35.6
    %Total net revenues
    
    $
    42,997
    
    
    $
    19,134
    
    
    $
    62,131
    
    
    $
    58,881
    
    
    $
    15,222
    
    
    $
    74,103
    
    
    
    (27.0
    %)
    
    
    25.7
    %
    
    
    (16.2
    %)% of total
    
    
    69.2
    %
    
    
    30.8
    %
    
    
    
    
    
    
    79.5
    %
    
    
    20.5
    %Cost of revenuesContract costs and
contract costs  related
party
    
    $
    29,762
    
    
    $
    11,655
    
    
    $
    41,417
    
    
    $
    44,990
    
    
    $
    8,637
    
    
    $
    53,627
    
    
    
    (33.8
    %)
    
    
    34.9
    %
    
    
    (22.8
    %)Manufacturing costs
    
    
    2,380
    
    
    
    
    
    
    
    2,380
    
    
    
    1,848
    
    
    
    
    
    
    
    1,848
    
    
    
    28.8
    %
    
    
    0.0
    %
    
    
    28.8
    %Service and other costs
    
    
    1,713
    
    
    
    2,983
    
    
    
    4,696
    
    
    
    2,875
    
    
    
    3,284
    
    
    
    6,159
    
    
    
    (40.4
    %)
    
    
    (9.2
    %)
    
    
    (23.8
    %)Total cost of revenues
    
    $
    33,855
    
    
    $
    14,638
    
    
    $
    48,493
    
    
    $
    49,713
    
    
    $
    11,921
    
    
    $
    61,634
    
    
    
    (31.9
    %)
    
    
    22.8
    %
    
    
    (21.3
    %)Gross marginContract margins and
contract margins -
related party
    
    $
    7,135
    
    
    $
    3,024
    
    
    $
    10,159
    
    
    $
    9,586
    
    
    $
    2,444
    
    
    $
    12,030
    
    
    
    (25.6
    %)
    
    
    23.7
    %
    
    
    (15.6
    %)Manufacturing margins
    
    $
    1,389
    
    
    $
    
    
    
    $
    1,389
    
    
    $
    1,593
    
    
    $
    
    
    
    $
    1,593
    
    
    
    (12.8
    %)
    
    
    0.0
    %
    
    
    (12.8
    %)Service and other margins
    
    
    618
    
    
    
    1,472
    
    
    
    2,090
    
    
    
    (2,011
    )
    
    
    857
    
    
    
    (1,154
    )
    
    
    130.7
    %
    
    
    71.8
    %
    
    
    (281.1
    %)Total gross margin
    
    $
    9,142
    
    
    $
    4,496
    
    
    $
    13,638
    
    
    $
    9,168
    
    
    $
    3,301
    
    
    $
    12,469
    
    
    
    (0.3
    %)
    
    
    36.2
    %
    
    
    9.4
    %Gross margin percentageContract revenues and
contract revenues -
related party
    
    
    19.3
    %
    
    
    20.6
    %
    
    
    19.7
    %
    
    
    17.6
    %
    
    
    22.1
    %
    
    
    18.3
    %
    
    
    9.7
    %
    
    
    (6.8
    %)
    
    
    7.7
    %Manufacturing margins
    
    
    36.9
    %
    
    
    0.0
    %
    
    
    36.9
    %
    
    
    46.3
    %
    
    
    0.0
    %
    
    
    46.3
    %
    
    
    (20.3
    %)
    
    
    0.0
    %
    
    
    (20.3
    %)Service and other revenues
    
    
    26.5
    %
    
    
    33.0
    %
    
    
    30.8
    %
    
    
    (232.8
    %)
    
    
    20.7
    %
    
    
    (23.1
    %)
    
    
    111.4
    %
    
    
    59.4
    %
    
    
    (233.3
    %)Total gross margin percentage
    
    
    21.3
    %
    
    
    23.5
    %
    
    
    22.0
    %
    
    
    15.6
    %
    
    
    21.7
    %
    
    
    16.8
    %
    
    
    36.5
    %
    
    
    8.3
    %
    
    
    31.0
    %
  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
    
    
    Six Months EndedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008GAAP net income (loss)
    
    $
    315
    
    
    $
    (1,020
    )
    
    $
    84
    
    
    $
    (1,754
    )Interest, net
    
    
    814
    
    
    
    802
    
    
    
    1,672
    
    
    
    1,575Depreciation
    
    
    480
    
    
    
    624
    
    
    
    944
    
    
    
    1,114Amortization
    
    
    414
    
    
    
    1,703
    
    
    
    865
    
    
    
    3,376Taxes, net
    
    
    282
    
    
    
    (461
    )
    
    
    430
    
    
    
    (877
    )EBITDA
    
    $
    2,305
    
    
    $
    1,648
    
    
    $
    3,995
    
    
    $
    3,434
  39




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##### Table of Contents



Results of Operations for the Three Months Ended June 30, 2009 and 2008
  Three Months
    
    
    Three Months
    
    
    Year to YearJune 30, 2009
    
    
    June 30, 2008
    
    
    Increase (Decrease)% of
    
    
    
    
    
    
    % ofAmount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    Amount
    
    
    %Revenues:Contract revenues
    
    $
    25,390
    
    
    
    83.6
    %
    
    $
    26,572
    
    
    
    72.8
    %
    
    $
    (1,182
    )
    
    
    (4.4
    %)Contract revenues  related party
    
    
    
    
    
    
    0.0
    %
    
    
    5,282
    
    
    
    14.5
    %
    
    
    (5,282
    )
    
    
    (100.0
    %)Manufacturing revenues
    
    
    1,868
    
    
    
    6.1
    %
    
    
    1,923
    
    
    
    5.3
    %
    
    
    (55
    )
    
    
    (2.9
    %)Service and other revenues
    
    
    3,129
    
    
    
    10.3
    %
    
    
    2,729
    
    
    
    7.5
    %
    
    
    400
    
    
    
    14.7
    %Total revenues
    
    $
    30,387
    
    
    
    100.0
    %
    
    $
    36,506
    
    
    
    100.0
    %
    
    $
    (6,119
    )
    
    
    (16.8
    %)Cost of Revenues:Contract costs
    
    $
    20,085
    
    
    
    66.1
    %
    
    $
    26,285
    
    
    
    72.0
    %
    
    $
    (6,200
    )
    
    
    (23.6
    %)Manufacturing costs
    
    
    1,122
    
    
    
    3.7
    %
    
    
    1,158
    
    
    
    3.2
    %
    
    
    (36
    )
    
    
    (3.1
    %)Service and other costs, including
amortization of intangibles
    
    
    2,199
    
    
    
    7.2
    %
    
    
    2,999
    
    
    
    8.2
    %
    
    
    (800
    )
    
    
    (26.7
    %)Cost of revenues
    
    $
    23,406
    
    
    
    77.0
    %
    
    $
    30,442
    
    
    
    83.4
    %
    
    $
    (7,036
    )
    
    
    (23.1
    %)Gross profit
    
    $
    6,981
    
    
    
    23.0
    %
    
    $
    6,064
    
    
    
    16.6
    %
    
    $
    917
    
    
    
    15.1
    %Total operating expenses
    
    $
    5,570
    
    
    
    18.3
    %
    
    $
    6,743
    
    
    
    18.5
    %
    
    $
    (1,173
    )
    
    
    (17.4
    %)Other income (expense):Interest income
    
    $
    6
    
    
    
    0.0
    %
    
    $
    52
    
    
    
    0.1
    %
    
    $
    (46
    )
    
    
    (88.5
    %)Interest expense
    
    
    (820
    )
    
    
    (2.7
    %)
    
    
    (854
    )
    
    
    (2.3
    %)
    
    
    34
    
    
    
    (4.0
    %)Total other income (expense)
    
    $
    (814
    )
    
    
    (2.7
    %)
    
    $
    (802
    )
    
    
    (2.2
    %)
    
    $
    (12
    )
    
    
    1.5
    %Net income (loss)
    
    $
    315
    
    
    
    1.0
    %
    
    $
    (1,020
    )
    
    
    (2.8
    %)
    
    $
    1,335
    
    
    
    (130.9
    %)EBITDA
    
    $
    2,305
    
    
    
    7.6
    %
    
    $
    1,648
    
    
    
    4.5
    %
    
    $
    657
    
    
    
    39.9
    %
 Revenues
    40




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##### 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 Six Months Ended June 30, 2009 and 2008
  Six Months
    
    
    Six Months
    
    
    Year to YearJune 30, 2009
    
    
    June 30, 2008
    
    
    Increase (Decrease)% of
    
    
    
    
    
    
    % ofAmount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    Amount
    
    
    %Revenues:Contract revenues
    
    $
    50,716
    
    
    
    81.6
    %
    
    $
    53,432
    
    
    
    72.1
    %
    
    $
    (2,716
    )
    
    
    (5.1
    %)Contract revenues  related party
    
    
    860
    
    
    
    1.4
    %
    
    
    12,225
    
    
    
    16.5
    %
    
    
    (11,365
    )
    
    
    (93.0
    %)Manufacturing revenues
    
    
    3,769
    
    
    
    6.1
    %
    
    
    3,441
    
    
    
    4.6
    %
    
    
    328
    
    
    
    9.5
    %Service and other revenues
    
    
    6,786
    
    
    
    10.9
    %
    
    
    5,005
    
    
    
    6.8
    %
    
    
    1,781
    
    
    
    35.6
    %Total revenues
    
    $
    62,131
    
    
    
    100.0
    %
    
    $
    74,103
    
    
    
    100.0
    %
    
    $
    (11,972
    )
    
    
    (16.2
    %)Cost of Revenues:Contract costs
    
    $
    41,417
    
    
    
    66.7
    %
    
    $
    53,627
    
    
    
    72.4
    %
    
    $
    (12,210
    )
    
    
    (22.8
    %)Manufacturing costs
    
    
    2,380
    
    
    
    3.8
    %
    
    
    1,848
    
    
    
    2.5
    %
    
    
    532
    
    
    
    28.8
    %Service and other costs, including
amortization of intangibles
    
    
    4,696
    
    
    
    7.6
    %
    
    
    6,159
    
    
    
    8.3
    %
    
    
    (1,463
    )
    
    
    (23.8
    %)Cost of revenues
    
    $
    48,493
    
    
    
    78.0
    %
    
    $
    61,634
    
    
    
    83.2
    %
    
    $
    (13,141
    )
    
    
    (21.3
    %)Gross profit
    
    $
    13,638
    
    
    
    22.0
    %
    
    $
    12,469
    
    
    
    16.8
    %
    
    $
    1,169
    
    
    
    9.4
    %Total operating expenses
    
    $
    11,452
    
    
    
    18.4
    %
    
    $
    13,525
    
    
    
    18.3
    %
    
    $
    (2,073
    )
    
    
    (15.3
    %)Other income (expense):Interest income
    
    $
    31
    
    
    
    0.0
    %
    
    $
    78
    
    
    
    0.1
    %
    
    $
    (47
    )
    
    
    (60.3
    %)Interest expense
    
    
    (1,703
    )
    
    
    (2.7
    %)
    
    
    (1,653
    )
    
    
    (2.2
    %)
    
    
    (50
    )
    
    
    3.0
    %Total other income (expense)
    
    $
    (1,672
    )
    
    
    (2.7
    %)
    
    $
    (1,575
    )
    
    
    (2.1
    %)
    
    $
    (97
    )
    
    
    6.2
    %Net income (loss)
    
    $
    84
    
    
    
    0.1
    %
    
    $
    (1,754
    )
    
    
    (2.4
    %)
    
    $
    1,838
    
    
    
    (104.8
    %)EBITDA
    
    $
    3,995
    
    
    
    6.4
    %
    
    $
    3,434
    
    
    
    4.6
    %
    
    $
    561
    
    
    
    16.3
    %
 Revenues
   43




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##### 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
  June 30, 2009
    
    
    December 31, 2008Collateral
    
    Book Value
    
    
    Fair Value
    
    
    Book Value
    
    
    Fair ValueNotes payable:Vehicles and equipment
    
    $
    347
    
    
    $
    347
    
    
    $
    418
    
    
    $
    418Unsecured debt  related party
    
    
    11,626
    
    
    
    11,626
    
    
    
    11,393
    
    
    
    11,393Unsecured convertible debt  stockholders
    
    
    
    
    
    
    
    
    
    
    1,925
    
    
    
    1,925Seller notes
    
    
    5,205
    
    
    
    5,205
    
    
    
    6,106
    
    
    
    6,106Line of credit and senior term debt
    
    
    8,500
    
    
    
    8,500
    
    
    
    12,951
    
    
    
    12,951$
    25,678
    
    
    $
    25,678
    
    
    $
    32,793
    
    
    $
    32,793Less  current maturities
    
    
    4,185
    
    
    
    4,185
    
    
    
    3,235
    
    
    
    3,235Long term debt
    
    $
    21,493
    
    
    $
    21,493
    
    
    $
    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 six months)
    
    $
    1,7242010
    
    
    4,9632011
    
    
    18,8552012
    
    
    662013
    
    
    70Thereafter
    
    
    $
    25,678
  48




---



##### Table of Contents



Interest Rate Risk Management
 Accounting for Derivative Instruments and Hedging Activities
    Commitments
     th
  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
    
    $
    25,678
    
    
    $
    4,185
    
    
    $
    21,389
    
    
    $
    104
    
    
    $
    Capital Lease Obligations
    
    
    5,119
    
    
    
    516
    
    
    
    1,019
    
    
    
    986
    
    
    
    2,598Operating Lease Obligations
    
    
    3,353
    
    
    
    1,032
    
    
    
    1,618
    
    
    
    653
    
    
    
    50Interest on Long Term Debt Obligations
    
    
    9,409
    
    
    
    2,580
    
    
    
    4,646
    
    
    
    2,183
    
    
    
    Total
    
    $
    43,559
    
    
    $
    8,313
    
    
    $
    28,672
    
    
    $
    3,926
    
    
    $
    2,648
 Subsequent Events
    50




---



##### Table of Contents



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
   51




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 Albert A. Salas v. Metroplex Control Systems, Inc.; Case No. SA09CA0424XR in the United States
District Court, Western District, Texas.
   
 ITEM 1A. RISK FACTORS
   Failure to consummate a merger transaction with an entity controlled by MML could reduce
the market price of Argyles common stock and could result in a depletion of Argyles operating
cash.
  
    
    The market price of its common stock may decline to the extent that the current market
price of its common stock reflects a market assumption that the merger will be consummated;
 
    
    Costs related to the merger, such as legal and accounting fees, Special Committee fees
and the costs of the fairness opinion from Houlihan Lokey, must be paid even if the merger
is not completed; and
 
    
    Charges will be made against earnings for transaction-related expenses, which could be
higher than expected.
  Argyles management has been spending and will continue to spend considerable time with
activities related to the transaction with MML and, as a result, they may not devote their full
attention to Argyles business.
   52




---



##### 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
  1.
    
    The election of two directors to serve for a three-year term expiring at
our 2012 annual meeting of stockholders, and
 2.
    
    The ratification of the appointment of Ernst & Young LLP as our
independent registered public accounting firm for the fiscal year ending December 31, 2009.
  Current BoardName
    
    Term ExpiresBob Marbut
    
    
    2010Ron Chaimovski
    
    
    2010Lloyd Campbell
    
    
    2011Chip Smith
    
    
    2011
   Name
    
    Votes For
    
    
    Votes WithheldGen. Wesley Clark
    
    
    7,054,970
    
    
    
    11,100Dean H. Blythe
    
    
    6,985,224
    
    
    
    80,846
  Votes For
    
    Votes Against
    
    Abstentions
    
    Broker Non-votes6,490,717
    
    375,353
    
    0
    
    0
  53




---



##### Table of Contents



ITEM 5. OTHER INFORMATION
    
 ITEM 6. EXHIBITS
 Exhibit No.
    
    Description31.1
    
    
    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.
  54




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##### Table of Contents



SIGNATURES
  ARGYLE SECURITY, INCAugust 13, 2009
    By:
    /s/ Bob MarbutBob MarbutChief Executive Officer
(Principal Executive Officer)August 13, 2009
    By:
    /s/ Sam YoungbloodSam YoungbloodPresident and Chief Operating Officer
(Principal Executive Officer)August 13, 2009
    By:
    /s/ Donald F. NevilleDonald F. NevilleExecutive Vice President and Chief Financial Officer
(Principal Financial Officer)August 13, 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.
    
    Description31.1
    
    
    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.
  56