Unassociated Document
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
ANNUAL
REPORT
PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
x
ANNUAL
REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE
ACT OF 1934
For
the
fiscal year ended December 31, 2006
OR
o
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE
ACT OF 1934
For
the
transition period from ________________ to ________________
(Name
of
issuer as specified in its charter)
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Delaware
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20-3101079
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(State
or other jurisdiction
of
incorporation
or
organization)
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(I.R.S.
Employer
Identification
No.)
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| |
|
|
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200
Concord Plaza Suite 700 San Antonio,
TX
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78216
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(address
of principal executive
offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (210)
828-1700
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, $.0001 par value
(Title
of
Class)
Common
Stock Purchase Warrants
(Title
of
Class)
Units
consisting of one share of Common Stock and one
Common
Stock Purchase Warrant
(Title
of
Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes
o No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes
x No
o
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes
x No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange. (Check one):
|
Large
Accelerated Filer o
|
Accelerated
Filer o
|
Non-Accelerated
Filer x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
x No
o
State
the
aggregate market value of the voting and non-voting stock held by non-affiliates
of the Issuer as of the last business day of the registrant’s most recently
completed second fiscal quarter: $26,714,332.
Indicate
the number of shares outstanding of each of the Registrant's classes of common
stock, as of the latest practicable date: 4,781,307 at February 28,
2007
DOCUMENTS
INCORPORATED BY REFERENCE: NONE
TABLE
OF
CONTENTS
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Part
I
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Item
1.
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Business
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1
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Item
1A.
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Risk
Factors
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9
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Item
1B.
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Unresolved
Staff Comments
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Item
2.
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Description
of Property
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Item
3.
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Legal
Proceedings
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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Part
II
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Item
5.
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Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases
of Equity Securities
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20
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Item
6.
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Selected
Financial Data
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Item
7.
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Management's
Discussion and Analysis of Financial Condition and Results
of Operations
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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Item
8.
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Financial
Statements and Supplementary Data
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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Item
9A.
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Controls
and Procedures
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Item
9B.
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Other
Information
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Part
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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Item
11.
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Executive
Compensation
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
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31
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Item
13.
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Certain
Relationships and Related Transactions and Director
Independence
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32
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Item
14.
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Principal
Accounting Fees and Services
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33
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Part
IV
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Item
15.
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Exhibits
and Financial Statement Schedules
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34
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PART
I
Item
1. Business
Overview
Argyle
Security Acquisition Corporation (“We”, “Us”, “Our” or “Argyle”) is a Delaware
corporation incorporated on June 22, 2005 in order to serve as a vehicle for
the
acquisition of an operating business through a merger, capital stock exchange,
asset acquisition or other similar business combination. We intend to leverage
the industry experience of our executive officers by focusing our efforts on
identifying a prospective target business in the security industry. We believe
that businesses involved in this industry represent attractive acquisition
targets for a number of reasons, including the increase in global demand for
integrated security-related products and services since September 11, 2001,
the
development of new technology which has the potential to expand applications
and
the trend towards integrated networked solutions.
On
January 24, 2006, the Company completed a private placement of 125,000 units
to
Ron Chaimovski, one of our Co-Chief Executive Officers, and Argyle New Ventures,
LP, an entity controlled by Bob Marbut, our other Co-Chief Executive Officer,
and received net proceeds of $892,500. On January 30, 2006, we consummated
our
initial public offering of 3,700,046 units (which includes 75,046 units sold
as
part of the underwriter’s over-allotment option). Each unit in both the private
placement and the public offering consisted of one share of common stock and
one
redeemable common stock purchase warrant. Each warrant entitles the holder
to
purchase from us one share of our common stock at an exercise price of $5.50.
Our common stock and warrants started trading separately as of March 2, 2006.
In
2006,
the net proceeds from the sale of our units in the public offering and
private placement, after deducting certain offering expenses of approximately
$2,424,001, including underwriting discounts of approximately $1,836,022, were
approximately $28,176,367. Approximately $27,344,346 of the proceeds from the
initial public offering and the private placement was placed in a trust account
for our benefit. Except for income taxes payable and $600,000 in interest that
was earned on the funds contained in the trust account that was released to
us
for working capital, we are not able to access the amounts held in the trust
account until we consummate a business combination. The trust account also
contains $1,377,016 of the underwriter’s compensation plus associated interest
which will be paid to them only in the event of a business combination. On
March
14, 2007, the underwriters from the Company's initial public
offering agreed to forfeit any and all rights or claims to a pro-rata
portion of the deferred underwriting costs and associated interest with respect
to any shares of common stock which are redeemed in connection with our proposed
acquisition. As a result, the deferred underwriting and offering costs discussed
above have been reduced by approximately $.3 million and common stock subject
to
possible redemption has been increased by $.3 million. (See Redemption Rights
under Part 1 and Note 9 to the Company's financial statements.)
The
amounts held outside of the trust account are available to be used by us to
provide for business, legal and accounting due diligence on prospective
acquisitions and continuing general and administrative expenses. The net
proceeds deposited into the trust fund remain on deposit in the trust account
earning interest. In connection with the initial public offering and the private
placement, our officers and directors placed all the shares owned by them before
the initial public offering into an escrow account. Except in certain
circumstances, the shares held in escrow may not be released prior to
January
24, 2009.
The
prospectus provided to purchasers of our securities in our initial public
offering indicated that we would target businesses in one or more of the
following segments of the security industry:
| · |
The
development, sale or distribution of software solutions for security
systems;
|
| · |
The
development, manufacture, sale or distribution of components to be
used in
security systems;
|
| · |
Consultation
on the design of security systems;
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| · |
The
development, manufacture, construction, assembly, sale or distribution
of
security or surveillance systems;
and
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| · |
The
development, manufacture, sale, distribution or assembly of electronic
devices that restrict, deny or grant access to areas using technology
such
as biometrics and other coded
means.
|
Products
comprising a part of the foregoing segments include, but are not limited
to:
Perimeter
security systems permit the monitoring, limiting and controlling of access
by
unauthorized personnel to specific regions or areas. High-end perimeter
systems are sophisticated in nature and are used by correctional facilities,
military installations, power companies, ports, airports, refineries, chemical
plants, and other high-security installations.
| · |
Video
Surveillance/Recording/Motion Analytics Systems and Video Monitoring
Services
|
These
systems include video cameras, recording capabilities (which can be equipment
or
software based) and intelligent video motion analysis capabilities (which can
be
equipment or software based).
Video
monitoring services relate to real-time and/or archived video recording and
remote viewing security services for commercial, governmental, and residential
facilities.
Access
control systems control and permit the entry of authorized persons to all or
selected areas of commercial, industrial, educational, and governmental
facilities based upon access code, card, and/or biometric identification of
individuals. These systems match data against a software database of
authorized persons, their access time/day schedules, and the level of access
needed to different parts of a facility. These systems are often linked to
video surveillance systems to record comings/goings and denials of access and
to
corporate HR IT systems.
Intrusion
systems detect attempts of unauthorized people to enter facilities and illegally
remove the contents of such facilities, activate audible/visual alarms and
communicate these events to monitoring/response services that are either on
site
or remotely located.
| · |
Security
Management and Command and Control
Systems
|
The
deployment of multiple security systems creates the need for a system that
can
manage and control these systems through a single database. In response to
this
need, security management and control systems integrate the management, control
and display of various security systems, video, outdoor (such as perimeter
security) systems, and indoor (such as access control and intrusion alarm)
systems, into a single, real-time database, and support real-time decision
making and wide area command and control. These systems improve the response
to
real-time security events by sharing video and geographical information between
the control center and security personnel acting in the field.
Threat
analysis entails the provision of consulting services to corporations,
organizations, and governmental bodies to develop systems and procedures to
best
protect people and/or facilities from defined threats to their
security.
Although
we focused on businesses in the foregoing areas, we were not limited in the
areas of the security industry in which we could acquire a target business.
On
December 8, 2006, Argyle, Argyle’s wholly-owned subsidiary ISI Security Group,
Inc. (the "Merger Subsidiary") and ISI Detention Contracting Group, Inc. (ISI)
entered into a merger agreement pursuant to which the Merger Subsidiary will
merge into ISI and ISI will become a wholly-owned subsidiary of Argyle. ISI
is a
provider of security solutions to commercial, governmental, and correctional
customers. As a security solutions provider, ISI has the ability to interview
a
customer that needs security for a project and determine that customer’s needs
in light of the products and technology available within the customer’s budget.
ISI, using its expertise in the security industry, then develops security
systems that answer the customer’s needs using hardware and software that is
available in the marketplace from third party vendors, as well as its own
proprietary software. ISI participates in the perimeter security, access control
and video and design consultation segments in the correctional sector through
its ISI-Detention and MCS-Detention subsidiaries and in the
commercial/industrial/educational sectors through its MCS-Commercial subsidiary.
In addition, the MCS-Commercial operation is also engaged in providing its
sectors with fire detection security system solutions.
If
the
merger is consummated, Argyle will pay ISI’s security holders an aggregate of
$16,300,000 and 1,180,000 shares of Argyle’s common stock (valued at $8,708,400,
based on the closing price of the common stock on February 28, 2007). In the
event that ISI’s adjusted earnings before interest, taxes, depreciation and
amortization (EBITDA) for the year ended December 31, 2006 are greater than
$4,500,000 and its backlog of orders at February 28, 2007 is greater than
$80,000,000 (including inter-company amounts), Argyle will pay the stockholders
of ISI an additional $1,900,000. Argyle anticipates that the calculation
of the February 28, 2007 backlog will be finalized in late March or
early April 2007. In
addition, Argyle will assume approximately $6,000,000 of long term debt (not
including capitalized leases) and up to $9,000,000 pursuant to a line of credit
(of which approximately $5,000,000 was outstanding as of December 31, 2006).
The
merger agreement contains representations and warranties by Argyle and ISI
and
representations and warranties to be made by ISI’s stockholders upon closing of
the merger. ISI also makes certain covenants relating to the conduct of its
business between the time the merger agreement was signed and the consummation
of the merger, including that it will not take certain actions without the
permission of Argyle and that Argyle will have access to ISI’s records. The
parties to the merger agreement also make covenants relating to confidentiality,
non-solicitation and non-competition. In addition, after the consummation of
the
merger, Argyle has agreed to file a registration statement for the resale of
the
shares issued by Argyle in connection with the merger. The closing of the merger
is subject to certain conditions, including the approval of the merger and
the
equity incentive plan described below by Argyle’s
stockholders.
Pursuant
to our certificate of incorporation, the merger is subject to the approval
of
our stockholders. Argyle has filed a preliminary proxy statement/prospectus
with
the SEC relating to the merger.
Government
regulation
As
the
communications industry continues to evolve, governments may increasingly
regulate products that monitor and record voice, video and data transmissions
over public communications networks. For example, certain products sold in
the
United States to law enforcement agencies which interface with a variety of
wireline, wireless and Internet protocol networks, must comply with the
technical standards established by the Federal Communications Commission, and
certain products sold in Europe must comply with the technical standards
established by the European Telecommunications Standards Institute, or
ETSI.
In
addition, companies involved in the security industry often sell products to
federal, state or local governments, as well as to foreign governments.
Government contracts often contain provisions that give the governments that
are
party to those contracts certain rights and remedies not typically found in
private commercial contracts, including provisions enabling the governments
to:
(i) terminate or cancel existing contracts for convenience; (ii) in the case
of
the United States government, suspend the contracting company from doing
business with a foreign government or prevent the company from selling its
products in certain countries; (iii) audit and object to the company’s
contract-related costs and expenses, including allocated indirect costs; and
(iv) change specific terms and conditions in the company’s contracts, including
changes that would reduce the value of its contracts. In addition, many
jurisdictions have laws and regulations that deem government contracts in those
jurisdictions to include these types of provisions, even if the contract itself
does not contain them.
Effecting
a business combination
General
We
are
not presently engaged in, and we will not engage in, any substantive commercial
business until we enter into a business combination. We intend to utilize
cash derived from the proceeds of the private placement consummated on January
24, 2006 and the initial public offering of our securities consummated on
January 30, 2006, our capital stock, debt or a combination of these in effecting
a business combination.
If
we
do not consummate the acquisition of ISI, we may seek another target business
to
acquire, assuming that we have sufficient time to do so
If
we do
not acquire ISI pursuant to the merger of ISI into our subsidiary, we will
seek
an alternative business combination. As provided in our charter, we are
required, by July 30, 2007, to consummate a business combination or enter a
letter of intent, agreement in principle or definitive agreement, in which
case
we would be allowed an additional six months to complete the transactions
contemplated by such agreement. Under our Second Amended and
Restated Certificate of Incorporation as currently in effect, if we do not
acquire at least majority control of a target business by January 30, 2008,
we
will dissolve and distribute to our public stockholders the amount in the trust
account plus any remaining net assets.
In
any
liquidation, the funds held in the trust account, plus any interest earned
thereon (net of taxes payable), together with any remaining out-of-trust net
assets, will be distributed pro rata to our common stockholders who hold shares
issued in our initial public offering.
Selection
of a target business and structuring of a business combination
Subject
to the requirement that our initial business combination must be with a target
business with a collective fair market value that is at least 80% of our net
assets at the time of such acquisition, our management had virtually
unrestricted flexibility in identifying and selecting a target business. In
evaluating a prospective target business, our management conducted business,
legal and accounting due diligence on such target business and considered,
among
other factors, the following:
| · |
Business
Sectors Served: Highest priority given to video surveillance, access
control and perimeter/outdoor
|
| · |
Markets
Served: Highest priority given to U.S. and European
companies
|
| · |
Channels
Served: Highest priority given to security IT/IP integrators and
security
value added resellers
|
| · |
Products
Offered to Include One or More of the Following: Part of a solutions
strategy, competitively positioned, scalable, favorable obsolescence
factor, strong brand equity
|
| · |
Annual
Sales: At least $20 million
|
| · |
Gross
Margin: If video or access control - 50%, if perimeter/outdoor, or,
if
intrusion protection - 40%
|
| · |
Operating
Margin: 10% or more, or the potential to reach 10% in the next 12-18
months
|
| · |
Annual
Cash Flow: At least $1.5 million
|
| · |
Relative
Competitive Advantage: Clear competitive advantage in at least one
key
area
|
| · |
R&D
Capability: Ability to continuously integrate into company’s other
offerings, ability to add value to Argyle’s other targeted sectors and
companies, in-house R&D leadership or management
capability
|
| · |
Management
Capabilities: Strong in at least one key functional
area
|
| · |
Location:
Located so as to be cost effective in interacting/communicating with
Argyle management
|
| · |
Relative
Attractiveness: To investors and to other targeted
companies
|
| · |
Opportunities/Potential:
For revenue growth, for improving margin percentages, for synergies
with
other target sectors/companies, to improve/expand offerings, for
channel
expansion
|
| · |
Target
Company’s Culture: Senior management supportive of Argyle vision and
strategy, customer focused, senior management familiar with and supportive
of a solutions strategy
|
Argyle
anticipates that it will incur total transaction costs of approximately $1.3
million in connection with the acquisition of ISI. Such costs do not include
those transaction costs of approximately $1.0 million to be incurred by ISI
(related primarily to anticipated attorney, brokerage and accounting fees).
Of
the $1.3 million of Argyle anticipated transaction costs, approximately $.4
million relate to certain Giuliani Capital Advisors’ advisory fees which are
contingent upon the closing of the transaction. Approximately $.5 million of
the
$.9 million in non-contingent anticipated costs had been incurred and recorded
as of December 31, 2006. The $.9 million primarily relates to Loeb and Loeb
legal expenses, fees for Giuliani Capital Advisors’ fairness opinion,
accountants' and valuation consultants’ fees, road show expenses, printer fees
and other miscellaneous expenses. Argyle’s cash outside the trust and accrued
expenses as of December 31, 2006 was approximately $.7 million and $.6 million,
respectively. Argyle expects to incur the remaining anticipated non-contingent
transaction costs of $.4 million over the first two quarters of 2007.
Additionally, recurring monthly operating expenses of approximately $75,000
per
month will continue to accrue after December 31, 2006, and in January 2007,
Argyle renewed its directors and officers insurance policy, incurring a premium
of $88,000.
Our
Board
of Directors has discussed and preliminarily approved a $300,000 bridge loan
from our Co-Chief Executive Officers, directors and consultants. The terms
and conditions of the bridge loan have not yet been negotiated
and the documentation for the bridge loan has not yet been completed.
We anticipate that this bridge financing will close in late March or April
2007.
As
a
result of the foregoing, Argyle anticipates that the costs to consummate the
acquisition will greatly exceed its available cash outside of the trust even
after considering the proposed financing described above. Argyle expects
these costs would ultimately be borne by the combined company from the funds
held in trust if the proposed ISI acquisition is completed. If the acquisition
is not completed, they would be subject to the potential indemnification
obligations of Argyle’s officers and directors to the trust account related to
expenses incurred for vendors or service providers. If these obligations are
not
performed or are inadequate, it is possible that vendors or service providers
could seek to recover these expenses from the trust account, which could
ultimately deplete the trust account and reduce a stockholder’s current pro rata
portion of the trust account upon liquidation.
Fair
market value of target business
The
target business that we acquire must have a collective fair market value equal
to at least 80% of our net assets at the time of such acquisition, including
any
amount held in the trust fund subject to the redemption rights described below,
although we could acquire a target business whose fair market value
significantly exceeds 80% of our net assets. If we were to acquire a target
whose fair market value significantly exceeded 80% of our net assets, we could
seek to raise additional funds through a private offering of debt or equity
securities. However, if we did enter into such an arrangement, it would only
be
consummated simultaneously with the consummation of the business combination.
The fair market value of a target business will be determined by our board
of
directors based upon standards generally accepted by the financial community,
such as actual and potential sales, earnings and cash flow and book value.
Based
on
the financial analysis of ISI generally used to approve the transaction,
Argyle’s Board of Directors determined that this requirement was met and
exceeded. To determine the value of ISI, the Board of Directors first determined
that as of September 30, 2006, Argyle had $28,402,813 in net assets (total
assets minus total liabilities). The consideration being paid to ISI’s security
holders, is, at minimum, $16,300,000 and 1,180,000 shares of Argyle’s common
stock. Based on the closing price of Argyle’s common stock on October 27,
2006, the trading day before the term sheet was signed, the fair market
value of the common stock to be issued to ISI’s stockholders is $8,496,000
($7.20 per share), for a total consideration of $24,796,000, which is over
87%
of Argyle’s net assets at the time that the letter of intent was executed.
Therefore, the 80% test was satisfied.
Possible
lack of business diversification
Our
initial business combination must be with a target business which satisfies
the
minimum valuation standard at the time of such acquisition, as discussed above.
Accordingly, for an indefinite period of time, the prospects for our future
viability may be entirely dependent upon the future performance of the business.
Unlike other entities which may have the resources to complete several business
combinations of entities operating in multiple industries, or multiple areas
of
a single industry, it is probable that we will not have the resources to
diversify our operations or benefit from the possible spreading of risks or
offsetting of losses. By consummating a business combination with only a single
entity, our lack of diversification may:
| · |
Subject
us to numerous economic, competitive and regulatory developments,
any or
all of which may have a substantial adverse impact upon the particular
industry in which we may operate subsequent to a business combination;
and
|
| · |
Result
in our dependency upon the development or market acceptance of a
single or
limited number of products, processes or
services.
|
Limited
ability to evaluate the target business’ management
Although
Argyle closely examined the management of ISI, Argyle cannot assure you that
its
assessment of ISI’s management will prove to be correct, or that future
management will have the necessary skills, qualifications or abilities to manage
its business successfully. Assuming Argyle acquires ISI, all of the serving
management of ISI will be involved with the management of ISI post acquisition
and will for the most part run its day to day operations. Argyle’s current Board
of Directors will remain directors of Argyle subsequent to the
acquisition.
Following
the acquisition of ISI, Argyle has agreed that it will negotiate employment
agreements with Sam Youngblood, Don Carr, Mark McDonald and Tim Moxon. Other
than the agreement that the term of the employment agreements will be five
years
for Mark McDonald and two years for the others, and that Sam Youngblood and
Don
Carr must be directors of ISI post merger, the agreements have not yet been
negotiated, meaning that the employment agreements currently in place with
those
parties will remain in full force and effect until the new agreements take
effect. It is also anticipated that Argyle’s current Co-Chief Executive
Officers, Bob Marbut and Ron Chaimovski, will enter into employment agreements
with Argyle post merger, though the terms of such agreements have not yet been
determined. All the employment agreements will be approved by the Compensation
Committee of Argyle’s Board of Directors that will be formed after the closing
of the merger.
Following
a business combination, we may seek to recruit additional managers to supplement
the incumbent management of the target business. We cannot assure our
stockholders that we will have the ability to recruit additional managers,
or
that additional managers will have the requisite skills, knowledge or experience
necessary to enhance the incumbent management.
Opportunity
for stockholder approval of business combination
Prior
to
the completion of a business combination, we will submit the transaction to
our
stockholders for approval, even if the nature of the acquisition is such that
it
would not ordinarily require stockholder approval under applicable state law.
In
connection with seeking stockholder approval of a business combination, we
will
furnish our stockholders with proxy solicitation materials prepared in
accordance with the Securities Exchange Act of 1934, which, among other matters,
will include a description of the operations of the target business and audited
historical financial statements of the target business based on United States
generally accepted accounting principles. The SEC is currently reviewing a
registration statement on Form S-4 (including a preliminary proxy statement
that
will be provided to the holders of Argyle’s common stock in connection with the
vote on the merger) that we filed with the SEC relating to the acquisition
of
ISI.
In
connection with the vote required for any business combination, all of our
officers and directors have agreed to vote their respective shares of common
stock owned by them immediately prior to the initial public offering and the
private placement in accordance with the majority of the shares of common stock
voted by the public stockholders. Our officers and directors, and their
respective affiliates who own our securities, have agreed to vote all the shares
of our common stock acquired in the private placement or in the aftermarket
in
favor of any transaction that our officers negotiate and present for approval
to
our stockholders. We will proceed with the business combination only if a
majority of the shares of common stock of the public stockholders are voted
in
favor of the business combination and public stockholders owning less than
20%
of the shares sold in the initial public offering and the private placement
exercise their redemption rights.
Redemption
rights
At
the
time we seek stockholder approval of any business combination, we will offer
each public stockholder the right to have such stockholder’s shares of common
stock redeemed for cash if the stockholder votes against the business
combination and elects to exercise the stockholder’s redemption rights and the
business combination is approved and completed. The actual per-share redemption
price will be equal to the amount in the trust account, which includes interest
(calculated as of two business days prior to the consummation of the proposed
business combination (net of taxes payable, $45,000 of private placement fees
plus associated interest and $600,000 of interest that was released from
the trust account for working capital purposes), divided by the number of shares
sold in the initial public offering and the private placement. Including
interest earned on the trust account, net of taxes payable, as of December
31,
2006, the per share redemption amount would be approximately $7.66. The
underwriters from our initial public offering recently agreed to reduce their
underwriting compensation on a pro-rata basis for dissenting stockholders.
As of
December 31, 2006, the redemption amount was $.36 (including interest) higher
than it would otherwise have been due to that agreement; the $.36
increase is reflected in the $7.66 redemption price previously discussed.
Because the initial per-share redemption price is lower than the $8.00 per-unit
offering price and may be lower than the market price of the common stock on
the
date of redemption, there may be a perceived disincentive on the part of public
stockholders to exercise their redemption rights.
An
eligible stockholder may request redemption at any time after the mailing to
our
stockholders of the proxy statement and prior to the vote taken with respect
to
a proposed business combination at a meeting held for that purpose, but the
request will not be granted unless the stockholder votes against the business
combination and elects to exercise the stockholder’s redemption rights and the
business combination is approved and completed. If a stockholder votes against
the business combination but fails to properly exercise his, her or its
redemption rights, such stockholder will not have his, her or its shares of
common stock redeemed for its pro rata distribution of the trust account. Any
request for redemption, once made, may be withdrawn at any time up to the date
of the meeting. It is anticipated that the funds to be distributed to
stockholders entitled to redeem their shares who elect redemption will be
distributed promptly after completion of a business combination. Public
stockholders who redeem their stock for their share of the trust account still
have the right to exercise the warrants that they received as part of the units.
We will not complete any business combination if public stockholders owning
20%
or more of the shares sold in the initial public offering and the private
placement, exercise their redemption rights.
Liquidation
if no business combination
If
we do
not complete a business combination by July 30, 2007, or by January 30, 2008
if
the extension criteria described below have been satisfied, we will dissolve
and
distribute to all of our public stockholders, in proportion to their respective
equity interests, an aggregate sum equal to the amount in the trust account,
inclusive of any interest (net of taxes payable and $600,000 of interest
released to us), plus any remaining net assets. Our officers and directors,
and
their respective affiliates who own our securities, have waived their rights
to
participate in any liquidation distribution with respect to shares of common
stock owned by them immediately prior to the initial public offering, including
those acquired in the private placement. There will be no distribution from
the
trust account with respect to our warrants, which will expire
worthless.
If
we are
unable to consummate a business combination and expend all of the net proceeds
of the initial public offering, other than the proceeds deposited in the trust
account, and without taking into account interest, if any, earned on the trust
account, the initial per-share liquidation price to the holders of the 3,700,046
shares entitled to participate in liquidation distributions was $7.76, or $0.24
less than the per-unit offering price of $8.00. Including interest earned on
the
trust account net of income taxes and the $600,000 of interest income released
to us, as of December 31, 2006, the per share liquidation amount would be
approximately $7.93. The proceeds deposited in the trust account could, however,
become subject to the claims of our creditors, which could be prior to the
claims of our public stockholders. Each member of our board of directors has
agreed, pursuant to agreements with us, that if we liquidate prior to the
consummation of a business combination, they will be personally liable to pay
debts and obligations to vendors that are owed money by us for services rendered
or products sold to us in excess of the net proceeds of the initial public
offering not held in the trust account at that time, but only to the extent
necessary to ensure that such loss, liability,
claim, damage or expense does not reduce the amount in the trust
account. It is our intention that all vendors, prospective target businesses
and
other entities that we engage will execute agreements with us waiving any right
to the monies held in the trust account. If any third party refuses to execute
an agreement waiving such claims, we would perform an analysis of the
alternatives available to us and evaluate if such engagement would be in the
best interest of our stockholders, if such third party refused to waive such
claims. Examples of possible instances where we may engage a third party that
had refused to execute a waiver include the engagement of a third party
consultant whose particular expertise or skills are believed by management
to be
superior to those of other consultants that would agree to execute a waiver,
or
in cases where management does not believe it would be able to find a provider
of required services willing to provide the waiver. We cannot assure our
stockholders, however, that they would be able to satisfy those obligations.
Further, they will not be personally liable to pay debts and obligations to
prospective target businesses if a business combination is not consummated
with
such prospective target businesses, or for claims from any other entity other
than vendors. Accordingly, we cannot assure our stockholders that the actual
per-share liquidation price will not be less than $7.93, plus interest (net
of
taxes payable and the $600,000 of interest released to us), due to claims of
creditors.
If
we
enter into either a letter of intent, an agreement in principle or a definitive
agreement to complete a business combination prior to July 30, 2007, but are
unable to complete the business combination by such date, then we will have
an
additional six months in which to complete the business combination contemplated
by the letter of intent, agreement in principle or definitive agreement. If
we
are unable to do so by January 30, 2008, we will then liquidate. Upon notice
from us, the trustee of the trust account will commence liquidating the
investments constituting the trust account and will turn over the proceeds
to
our transfer agent for distribution to our public stockholders.
Our
public stockholders shall be entitled to receive funds from the trust account
only in the event of our liquidation or if the stockholders seek to redeem
their
respective shares for cash upon a business combination which the stockholder
voted against and which is actually completed by us. In no other circumstances
shall a stockholder have any right or interest of any kind to or in the trust
account.
Should
the acquisition of ISI not be consummated, we may encounter intense competition
in connection with identifying, evaluating and selecting another target business
from other entities having a business objective similar to ours. Many of these
entities are well established and have extensive experience identifying and
effecting business combinations directly or through affiliates. Many of these
competitors possess greater technical, human and other resources than we do
and
our financial resources will be relatively limited when contrasted with those
of
many of these competitors. While we believe there are numerous potential target
businesses that we could acquire with the net proceeds of the initial public
offering, our ability to compete in acquiring a certain sizable target business
will be limited by our available financial resources. This inherent competitive
limitation gives others an advantage in pursuing the acquisition of a target
business. Further:
| · |
Our
obligation to seek stockholder approval of a business combination
and to
obtain the necessary financial information to be included in the
proxy
statement to be sent to stockholders in connection with such business
combination may delay or prevent the completion of a
transaction;
|
| · |
Our
obligation to redeem for cash shares of common stock held by our
public
stockholders in certain instances may reduce the resources available
to us
for a business combination; and
|
| · |
Our
outstanding warrants, and the future dilution they potentially represent,
may not be viewed favorably by certain target
businesses.
|
Any
of
these factors may place us at a competitive disadvantage in successfully
negotiating a business combination. Our management believes, however, that
to
the extent that a target business is a privately held entity, our status as
a
well-financed public entity may give us a competitive advantage over entities
having a similar business objective as ours in acquiring a target business
on
favorable terms.
If
we
succeed in effecting a business combination, there will be, in all likelihood,
intense competition from competitors of the target business. We cannot assure
our stockholders that, subsequent to a business combination, we will have the
resources or ability to compete effectively.
We
have
two officers, both of whom are also members of our board of directors. These
individuals are not obligated to contribute any specific number of hours per
week and intend to devote only as much time as they deem necessary to our
affairs. The amount of time they will devote in any time period will vary based
on the availability of suitable target businesses to investigate, although
we
expect each of them to devote an average of approximately 10 hours per week
to
our business until a target business is acquired. We do not intend to have
any
full time employees prior to the consummation of a business combination. We
have, however, hired four consultants to assist with securities compliance,
the
acquisition process and administration.
Periodic
reporting and financial information
We
have
registered our units, common stock and warrants under the Securities Exchange
Act of 1934, as amended, and have reporting obligations, including the
requirement that we file annual and quarterly reports with the SEC. In
accordance with the requirements of the Securities Exchange Act of 1934, our
annual reports will contain financial statements audited and reported on by
our
independent accountants.
We
will
not acquire a target business if audited financial statements based on United
States generally accepted accounting principles cannot be obtained for such
target business. Additionally, our management will provide stockholders with
the
foregoing financial information as part of the proxy solicitation materials
sent
to stockholders to assist them in assessing each specific target business we
seek to acquire. Our management believes that the requirement of having
available financial information for the target business may limit the pool
of
potential target businesses available for acquisition.
We
will
be required to comply with the internal control requirements of the
Sarbanes-Oxley Act for the fiscal year ending December 31, 2007. A target
business may not be in compliance with the provisions of the Sarbanes-Oxley
Act
regarding adequacy of their internal controls. The development of the internal
controls of any such entity to achieve compliance with the Sarbanes-Oxley Act
may increase the time and costs necessary to complete any such
acquisition.
Item
1A. Risk Factors
Risks
associated with our business
We
are a development stage company with a limited operating history and,
accordingly, our stockholders will not have any basis on which to evaluate
our
ability to achieve our business objective.
Since
we
have a limited operating history and no business operations, our stockholders
will have no basis upon which to evaluate our ability to achieve our business
objective, which is to acquire an operating business. We will not generate
any
revenues until, at the earliest, after the consummation of a business
combination.
If
we are forced to liquidate before a business combination, our public
stockholders will receive less than $8.00 per share upon distribution of the
trust account and our warrants will expire worthless.
If
we are
unable to complete a business combination and are forced to liquidate our assets
(which will include the full amount in the trust account, including
the amounts held for the benefit of the co-managers and any interest earned
thereon (net of taxes payable and the $600,000 of interest released to us)),
the
per-share liquidation price to our public stockholders, as of December 31,
2006,
was approximately $7.93. The initial per shares liquidation amount of $7.76
was
less than the initial per share offering amount of our units because of the
expenses of the initial public offering, our general and administrative expenses
and the anticipated costs of seeking a business combination. Furthermore, there
will be no distribution with respect to our outstanding warrants and,
accordingly, the warrants will expire worthless if we liquidate before the
completion of a business combination.
Our
Stockholders are not entitled to protections normally afforded to investors
of
blank check companies.
Since
the
net proceeds of the initial public offering and the private placement are
intended to be used to complete a business combination with a target business,
we may be deemed to be a “blank check” company under the United States
securities laws. However, since we have net tangible assets in excess of
$5,000,000, we are exempt from rules promulgated by the SEC to protect investors
of blank check companies, such as Rule 419. Accordingly, investors will not
be
afforded the benefits or protections of those rules.
If
third parties bring claims against us, the proceeds held in trust could be
reduced and the per-share liquidation price received by stockholders could
be
less than $7.93 per share.
Our
placing of funds in trust may not protect those funds from third party claims
against us. Although we will seek to have vendors, prospective target businesses
or other entities we hire or do business with execute agreements with us waiving
any right, title, interest or claim of any kind in or to any monies held in
the
trust account for the benefit of our public stockholders, there is no guarantee
that they will execute such agreements or, even if they execute such agreements,
that they would be prevented from bringing claims against the trust account.
If
any third party refused to execute an agreement waiving such claims to the
monies held in the trust account, we would perform an analysis of the
alternatives available to us and evaluate if such engagement would be in the
best interest of our stockholders. Examples of possible instances where we
may
engage a third party that has refused to execute a waiver include the engagement
of a third party consultant whose particular expertise or skills are believed
by
management to be significantly superior to those of other consultants that
would
agree to execute a waiver or in cases where management is unable to find a
provider of required services willing to provide the waiver. In addition, there
is no guarantee that such entities will agree to waive any claims they may
have
in the future as a result of, or arising out of, any negotiations, contracts
or
agreements with us and will not seek recourse against the trust account for
any
reason. Accordingly, the proceeds held in trust could be subject to claims
which
could take priority over the claims of our public stockholders and the per-share
liquidation price could be less than the liquidation price of $7.93 as of
December 31, 2006, which takes into consideration interest earned through that
date, income taxes payable and the $600,000 of interest released to us, due
to
claims of such creditors. If we are unable to complete a business combination
and are forced to liquidate, our officers and directors, severally, in
accordance with their respective beneficial ownership interests in us, will
be
personally liable to ensure that the proceeds in the trust account are not
reduced by the claims of various vendors or other entities that are owed money
by us for services rendered or contracted for or products sold to us, but only
to the extent necessary to ensure that such loss,
liability, claim, damage or expense does not reduce the amount
in the trust account. However, we cannot assure our stockholders that they
will
be able to satisfy those obligations. Further, they will not be personally
liable to pay debts and obligations to prospective target businesses, if a
business combination is not consummated with a prospective target business,
or
for claims from any entity other than vendors.
In
the event we do not acquire ISI, because there are numerous companies with
business plans similar to ours seeking to effectuate business combinations,
it
may be more difficult for us to identify another target
business.
Since
August 2003 and through February 2007, based upon publicly available
information, approximately 87 similarly structured blank check companies
have completed initial public offerings, and numerous others have filed
registration statements for initial public offerings. Of these companies,
only 20 companies have consummated a business combination, while 22
(not including Argyle) other companies have announced they have entered into
a
definitive agreement for a business combination, but have not consummated such
business combination. While, like us, some of those companies have specific
industries in which they must complete a business combination, a number of
them
may consummate a business combination in any industry they choose. In the event
that we are unable to consummate the acquisition of ISI, we may be subject
to
competition from these and other companies seeking to consummate a business
plan
similar to ours, which, as a result, would increase demand for privately-held
and publicly-held companies to combine with companies structured similarly
to
ours. Further, the fact that only a few of such companies have completed a
business combination or entered into a definitive agreement for a business
combination, may be an indication that there are only a limited number of
attractive target businesses available to such entities, or that many privately
held or publicly held, target businesses may not be inclined to enter into
business combinations with publicly held blank check companies like us. We
cannot assure our stockholders that we will be able to successfully compete
for
an attractive business combination. Additionally, because of this competition,
we cannot assure our stockholders that we will be able to effectuate a business
combination within the required time periods. If we are unable to find a
suitable target business within such time periods, we will be forced to
liquidate.
We
may issue shares of our capital stock or debt securities to complete a business
combination, which would reduce the equity interest of our stockholders and
likely cause a change in control of our ownership.
Our
certificate of incorporation authorizes the issuance of up to 89,000,000 shares
of common stock, par value $.0001 per share, and 1,000,000 shares of preferred
stock, par value $.0001 per share. As of February 28, 2007 there are 80,018,647
authorized but unissued shares of our common stock available for issuance (after
appropriate reservation for the issuance of shares upon full exercise of our
outstanding warrants and the purchase option granted to Rodman & Renshaw,
LLC, the representative of the underwriters) and all of the 1,000,000 shares
of
preferred stock available for issuance. We may issue a substantial number of
additional shares of our common stock or preferred stock, or a combination
of
common and preferred stock, to complete a business combination. The issuance
of
additional shares of our common stock or any number of shares of our preferred
stock:
| · |
May
significantly reduce the equity interest of current
stockholders;
|
| · |
Will
likely cause a change in control if a substantial number of our shares
of
common stock are issued, which may affect, among other things, our
ability
to use our net operating loss carry forwards, if any, and most likely also
result in the resignation or removal of our present officers and
directors; and
|
| · |
May
reduce the prevailing market prices for our common
stock.
|
Similarly,
if we issue debt securities, it could result in:
| · |
Default
and foreclosure on our assets if our operating cash flow after a
business
combination were insufficient to pay our debt
obligations;
|
| · |
Acceleration
of our obligations to repay the indebtedness even if we have made
all
principal and interest payments when due if the debt security contained
covenants that required the maintenance of certain financial ratios
or
reserves and any such covenant were breached without a waiver or
renegotiation of that covenant;
|
| · |
Our
immediate payment of all principal and accrued interest, if any,
if the
debt security was payable on demand;
and
|
| · |
Our
inability to obtain additional financing, if necessary, if the debt
security contained covenants restricting our ability to obtain additional
financing while such security was
outstanding.
|
If
we
consummate the acquisition of ISI, we agreed to issue 1,180,000 of our shares
of
common stock to the stockholders of ISI as partial consideration for the
acquisition.
Our
officers and directors control a substantial interest in us and, thus, may
influence certain actions requiring a stockholder
vote.
Our
officers and directors and their respective affiliates collectively own 22.61%
of our issued and outstanding shares of common stock (and following the
acquisition of ISI, the management teams of Argyle and ISI will collectively
and
beneficially own 29.8% of our outstanding common stock), which could permit
them
to effectively influence the outcome of all matters requiring approval by our
stockholders at such time, including the election of directors and approval
of
significant corporate transactions, following the consummation of our initial
business combination.
In
addition, our board of directors is divided into three classes, each of which
will generally serve for a term of three years with only one class of directors
being elected in each year. It is unlikely that there will be an annual meeting
of stockholders to elect new directors prior to the consummation of a business
combination, in which case all of the current directors will continue in office
at least until the consummation of the business combination. If there is an
annual meeting, as a consequence of our “staggered” board of directors, only a
minority of the board of directors will be considered for election, and our
officers and directors, because of their ownership position, will have
considerable influence regarding the outcome. Accordingly, our officers and
directors will continue to exert control at least until the consummation of
a
business combination.
Our
officers and directors will allocate their time to other businesses, thereby
causing conflicts of interest in their determination as to how much time to
devote to our affairs. This could have a negative impact on our ability to
consummate a business combination.
Our
officers and directors are not required to commit their full time to our
affairs, which may result in a conflict of interest in allocating their time
between our operations and other businesses. We do not intend to have any
full-time employees prior to the consummation of a business combination. Our
executive officers are engaged in several other business endeavors and are
not
obligated to contribute any specific number of hours per week to our affairs.
While it is our executive officers’ intention to devote substantial business
time to identifying potential target businesses and consummating a business
combination, their other business affairs could require them to devote more
substantial amounts of time to such affairs, thereby limiting their ability
to
devote time to our affairs. This could have a negative impact on our ability
to
consummate a business combination.
Our
officers and directors are now, and may in the future become, affiliated with
entities engaged in business activities similar to those intended to be
conducted by us and, accordingly, may have conflicts of interest in determining
to which entity a particular business opportunity should be
presented.
Our
officers are, and our officers and directors may in the future become,
affiliated with entities engaged in business activities similar to those
intended to be conducted by us. Additionally, our officers and directors may
become aware of business opportunities which may be appropriate for presentation
to us as well as the other entities with which they are or may be affiliated.
Further, Bob Marbut is currently the Executive Chairman of Electronics Line
3000
Ltd. and the Executive Chairman of SecTecGlobal, Inc. and Ron Chaimovski is
the
Vice Chairman of Electronics Line 3000 Ltd. Electronics Line 3000 Ltd. is
an intrusion protection security company and SecTecGlobal, Inc. is a sales
and
marketing subsidiary of Electronics Line 3000 Ltd. Due to these existing
affiliations, they may have fiduciary obligations to present potential business
opportunities to those entities prior to presenting them to us which could
cause
additional conflicts of interest. Accordingly, they may have conflicts of
interest in determining to which entity a particular business opportunity should
be presented.
All
of our officers and directors own shares of our common stock which will not
participate in liquidation distributions and, therefore, our officers and
directors may have a conflict of interest in determining whether or not a
particular target business is appropriate for a business
combination.
All
of
our officers and directors own shares of our common stock that were issued
prior
to our initial public offering, but have waived their right to receive
distributions with respect to those shares upon our liquidation upon our failure
to complete a business combination. Each of our officers and directors has
agreed to vote all shares purchased in the private placement and in the open
market in favor of any proposal to approve a business combination negotiated
by
our officers. The shares and warrants owned by our officers and directors and
their affiliates will be worthless if we do not consummate a business
combination. The personal and financial interests of our officers and directors
may influence their motivation in identifying and selecting a target business
and completing a business combination in a timely manner. Consequently, our
directors’ and officers’ discretion in identifying and selecting a suitable
target business may result in a conflict of interest when determining whether
the terms, conditions and timing of a particular business combination are
appropriate and in our stockholders’ best interest.
Our
officers and directors will not receive reimbursement for any out-of-pocket
expenses incurred by them to the extent that such expenses exceed the available
proceeds not deposited in the trust account, unless the business combination
is
consummated and, therefore, they may have a conflict of interest in determining
whether or not a particular target business is appropriate for a business
combination and in the public stockholders’ best
interest.
Our
officers and directors, will not receive reimbursement for any out-of-pocket
expenses incurred by them to the extent that such expenses exceed the available
proceeds not deposited in the trust account and the portion of the interest
on
the trust account released to us (which, because interest rates are unknown,
may
be insufficient to fund all of our working capital requirements) unless the
business combination is consummated. The financial interest of our officers
and
directors could influence their motivation in selecting a target business and,
thus, there may be a conflict of interest when determining whether or not a
particular business combination is in the stockholders’ best
interest.
Our
initial business combination will be with a single target business, which may
cause us to be solely dependent on a limited number of
services.
As
of
December 31, 2006, we have approximately $29.5 million held in the trust account
with which to complete a business combination. Our initial business combination
must be with a business with a collective fair market value of at least 80%
of
our net assets at the time of such acquisition. There is no limitation on our
ability to raise funds privately or through loans that would allow us to acquire
a company with a fair market value in excess of 80% of our net assets at the
time of the acquisition; however, we have no current plans or agreements to
enter into any such financing arrangements. The prospects for our success may
be:
| · |
Solely
dependent upon the performance of a limited number of services,
or
|
| · |
Dependent
upon the development or market acceptance of a single or limited
number of
products or services.
|
In
this
case, we may not be able to diversify our operations or benefit from the
possible spreading of risks or offsetting of losses, unlike other entities
which
may have the resources to complete several business combinations in different
industries or different areas of a single industry.
We
may be unable to obtain additional financing, if required, to complete a
business combination or to fund the operations and growth of the target
business, which could compel us to restructure the transaction or abandon a
particular business combination.
Although
we believe that the net proceeds of the initial public offering and the private
placement will be sufficient to allow us to consummate a business combination,
as we have not yet completed an acquisition, we cannot ascertain the capital
requirements for any particular transaction. If we have insufficient funds,
either because of the size of the business combination or the depletion of
the
available net proceeds in search of a target business (including interest earned
on the trust account released to us), or because we become obligated to redeem
for cash a significant number of shares from dissenting stockholders, we will
be
required to seek additional financing. We cannot assure our stockholders that
such financing would be available on acceptable terms, if at all. To the extent
that additional financing proves to be unavailable when needed to consummate
a
particular business combination, we would be compelled to restructure the
transaction or abandon that particular business combination and seek an
alternative target business candidate. In addition, it is possible that we
could
use a portion of the funds not in the trust account to make a deposit, down
payment or fund a “no-shop” provision with respect to a particular proposed
business combination, although we do not have any current intention to do so.
In
the event that we were ultimately required to forfeit such funds (whether as
a
result of our breach of the agreement relating to such payment or otherwise),
we
may not have a sufficient amount of working capital available outside of the
trust account to conduct due diligence and pay other expenses related to finding
a suitable business combination without securing additional financing. If we
were unable to secure additional financing, we would most likely fail to
consummate a business combination in the allotted time and would be forced
to
liquidate. In addition, if we consummate a business combination, we may require
additional financing to fund the operations or growth of the target business.
The failure to secure additional financing could result in our inability to
effectuate our business plan for the development or growth of the target
business. None of our officers, directors or stockholders is required to provide
any financing to us in connection with or after a business
combination.
If
we are deemed to be an investment company, we may be required to institute
burdensome compliance requirements, and our activities may be restricted, which
may make it difficult for us to complete a business
combination.
If
we are
deemed to be an investment company under the Investment Company Act of 1940,
our
activities may be restricted, including:
| · |
Restrictions
on the nature of our investments;
and
|
| · |
Restrictions
on the issuance of securities,
|
which
may
make it difficult for us to complete a business combination.
In
addition, we may have imposed upon us burdensome requirements,
including:
| · |
Registration
as an investment company;
|
| · |
Adoption
of a specific form of corporate structure;
and
|
| · |
Reporting,
record keeping, voting, proxy and disclosure requirements and other
rules
and regulations.
|
We
do not
believe that our anticipated principal activities will subject us to the
Investment Company Act of 1940. To this end, the proceeds held in trust may
only
be invested by the trustee in Treasury Bills issued by the United States with
maturity dates of 180 days or less or in money market funds meeting certain
conditions under Rule 2a-7 promulgated under the Investment Company Act of
1940.
By restricting the investment of the proceeds to these instruments, we intend
to
meet the requirements for the exemption provided in Rule 3a-1 promulgated under
the Investment Company Act of 1940. If we were deemed to be subject to the
act,
compliance with these additional regulatory burdens would require additional
expense that we have not allotted for.
Our
directors may not be considered “independent” under the policies of the North
American Securities Administrators Association, Inc.
Under
the
policies of the North American Securities Administrators Association, Inc.,
an
international organization devoted to investor protection, because each of
our
directors owns shares of our securities and may receive reimbursement for
out-of-pocket expenses incurred by him in connection with activities on our
behalf, such as identifying potential target businesses and performing due
diligence on suitable business combinations, state securities administrators
could take the position that such individuals are not “independent.” If this
were the case, they would take the position that we would not have the benefit
of independent directors examining the propriety of expenses incurred on our
behalf and subject to reimbursement. Additionally, there is no limit on the
amount of out-of-pocket expenses that could be incurred, and there will be
no
review of the reasonableness of the expenses by anyone other than our board
of
directors, which would include persons who may seek reimbursement, or a court
of
competent jurisdiction if such reimbursement is challenged. Although we believe
that all actions taken by our directors on our behalf will be in our best
interests, whether or not they are deemed to be “independent,” we cannot assure
our stockholders that this will actually be the case. If actions are taken,
or
expenses are incurred that are actually not in our best interests, our revenues
and profits could be reduced, and the price of our stock held by the public
stockholders could decrease.
Because
one of our officers resides outside of the United States and, after the
consummation of a business combination, a significant portion of our assets
may
be located outside of the United States, it may be difficult for investors
to
enforce their legal rights against such individual or such
assets.
Ron
Chaimovski, our Vice Chairman and Co-Chief Executive Officer, resides outside
of
the United States and, after the consummation of a business combination, a
significant portion of our assets may be located outside of the United States.
As a result, it may not be possible for investors in the United States to
enforce their legal rights, to effect service of process upon Mr. Chaimovski,
or
to enforce judgments of United States courts predicated upon civil liabilities
and criminal penalties of our directors and officers under Federal securities
laws.
Because
we may acquire a company located outside of the United States, we may be subject
to various risks of the foreign jurisdiction in which we ultimately
operate.
If
we
acquire a company that has sales or operations outside the United States, we
could be exposed to risks that negatively impact our future sales or
profitability following a business combination. Additionally, if the acquired
company is in a developing country or a country that does not have a fully
market-oriented economy, our operations may not develop in the same way, or
at
the same rate, as might be expected in the United States, or another country
with an economy similar to the market-oriented economies of member countries
which are members of the Organization for Economic Cooperation and Development,
or the OECD. The OECD is an international organization helping governments
through the economic, social and governance challenges of a globalized economy.
The additional risks we may be exposed to if the target business we acquire
is
located outside of the United States include, but are not limited
to:
| · |
Tariffs
and trade barriers;
|
| · |
Regulations
related to customs and import/export
matters;
|
| · |
Regulations
related to product functionality;
|
| · |
Tax
issues, such as tax law changes and variations in tax laws as compared
to
the United States;
|
| · |
Government
instability;
|
| · |
An
inadequate banking system;
|
| · |
Foreign
exchange controls;
|
| · |
Restrictions
on the repatriation of profits or payment of
dividends;
|
| · |
Crime,
strikes, riots, civil disturbances, terrorist attacks,
wars;
|
| · |
Nationalization
or expropriation of property;
|
| · |
Law
enforcement authorities and courts that are weak or inexperienced
in
commercial matters;
|
| · |
Local
labor law changes and mandated increases in social welfare costs;
and
|
| · |
Deterioration
of political relations with the United
States.
|
Argyle
may choose to redeem its outstanding warrants at a time that is
disadvantageous to the warrant holders.
Subject
to there being a current prospectus under the Securities Act of 1933,
Argyle may redeem all of its outstanding warrants at any time after they become
exercisable at a price of $.01 per warrant, upon a minimum of 30 days
prior written notice of redemption, if and only if, the last sale price of
Argyle’s common stock equals or exceeds $11.50 per share for any 20 trading
days within a 30 trading day period ending three business days before
Argyle sends the notice of redemption. Calling all of Argyle’s outstanding
warrants for redemption could force the warrant holders:
| · |
To
exercise the warrants and pay the exercise price for such warrants at
a time when it may be disadvantageous for the holders to do
so;
|
| · |
To
sell the warrants at the then current market price when they might
otherwise wish to hold the warrants;
or
|
| · |
To
accept the nominal redemption price which, at the time the warrants
are called for redemption, is likely to be substantially less than
the market value of
the warrants.
|
Argyle’s
warrant holders may not be able to exercise their warrants, which may create
liability for Argyle.
Holders of
the warrants Argyle issued in its initial public offering and private placement
will be able to receive shares upon exercise of the warrants only if (i) a
current registration statement under the Securities Act of 1933 relating to
the shares of its common stock underlying the warrants is then
effective and (ii) such shares are qualified for sale or exempt from
qualification under the applicable securities laws of the states in which
the various holders of warrants reside. Although Argyle has agreed to use
its best efforts to maintain a current registration statement covering the
shares underlying the warrants to the extent required by federal securities
laws, and Argyle intends to comply with such agreement, Argyle cannot
assure that it will be able to do so. In addition, some states may not
permit Argyle to register the shares issuable upon exercise of its warrants
for sale. The value of the warrants will be greatly reduced if a
registration statement covering the shares issuable upon the exercise of
the warrants is not kept current or if the securities are not qualified, or
exempt from qualification, in the states in which the holders of
warrants reside. Holders of warrants who reside in jurisdictions in which
the shares underlying the warrants are not qualified and in which there is
no exemption will be unable to exercise their warrants and would either
have to sell their warrants in the open market or allow them to expire
unexercised. If and when the warrants become redeemable by Argyle, Argyle
may exercise its redemption right even if Argyle is unable to qualify the
underlying securities for sale under all applicable state securities laws.
Since Argyle’s obligations in this regard are subject to a “best efforts”
standard, it is possible that, even if Argyle is able to successfully assert
a
defense to a claim by warrant holders due to the impossibility of registration,
a court may impose monetary damages on Argyle to compensate warrant holders
due
to the change in circumstances that led to Argyle being unable to fulfill its
obligations.
Argyle
does not have an Audit Committee composed solely of independent directors and
therefore Argyle’s
financial statements have not been subject to independent
review.
Argyle
does not have an audit committee. Pursuant to SEC regulations, the entire Board
of Directors of a company without an audit committee acts as the audit
committee. Two of the members of Argyle’s Board of Directors are also officers
of Argyle and therefore not independent. Therefore, Argyle does not have solely
independent directors reviewing its financial statements, making it more
difficult for Argyle to discover if there was any fraud in connection with
the
preparation of its financial statements.
Risks
associated with the security industry
It
is difficult to forecast the timing of revenues in the security industry, and
it
is likely that any business we acquire will have significant variation in
revenues from period to period.
It
is
difficult to forecast the timing of revenues in the security industry because
the development period for a customized system or solution may be lengthy,
customers often need a significant amount of time to evaluate products before
purchasing them and, in the case of governmental customers, sales are dependent
on budgetary and other bureaucratic processes. The period between initial
customer contact and a purchase by a customer varies greatly, and could be
a
year or more. During the evaluation period, customers may defer or scale down
proposed orders of products or systems for various reasons, including: (i)
changes in budgets and purchasing priorities; (ii) a reduced need to upgrade
existing systems; (iii) deferrals in anticipation of enhancements or new
products; (iv) introduction of products by competitors; and (v) lower prices
offered by competitors.
If
we are unable to respond to the technological, legal, financial or other changes
in the security industry and changes in our customers’ requirements and
preferences, we will not be able to effectively compete with our
competitors.
Once
we
enter into a business combination, if we are unable, for technological, legal,
financial or other reasons, to adapt in a timely manner to changing market
conditions, customer needs or regulatory requirements, we could lose customers.
Changes in customer requirements and preferences, the introduction of new
products and services embodying new technologies, and the emergence of new
industry standards and practices could render the existing products of the
company we acquire obsolete. Our success will depend, in part, on our ability
to:
| · |
Enhance
products and services;
|
| · |
Anticipate
changing customer requirements by designing, developing, and launching
new
products and services that address the increasingly sophisticated
and
varied needs of customers;
|
| · |
Respond
to technological advances and emerging industry standards and practices
on
a cost-effective and timely basis; and
|
| · |
Respond
to changing regulatory requirements in a cost effective and timely
manner.
|
The
development of additional products and services involves significant
technological and business risks and requires substantial expenditures and
lead
time. If we fail to introduce products with new technologies in a timely manner,
or adapt our products to these new technologies, we will not be able to
effectively compete with our competitors. We cannot assure our stockholders
that, even if we are able to introduce new products or adapt our products to
new
technologies, that our products would gain acceptance among our
customers.
The
market in certain segments of the security industry is still not fully
developed, and, if we acquire a business operating in one of those segments,
and
if the market for our products does not expand as we expect after acquiring
a
business, our business will not generate the growth and/or profits that
stockholders expect.
The
market in certain segments of the security industry, including, but not limited
to, outdoor perimeter protection (an area often ignored previously but, since
the onset of greatly escalated global terrorism, is getting much greater
attention, much of it linked to governmental subsidies or funding), video
analytics (newly emerging technology linked with concerns about escalating
global terrorism) and digital video (emerging from under the shadow of
less costly and more accepted analog video), is still emerging. If we acquire
a
business in one of these segments, our growth will be dependent on, among other
things, the size and pace at which the markets for our products and/or services
develop. If the market for our products or services decreases, remains constant
or grows slower than we anticipate, we will not be able to generate the growth
and/or profits that stockholders expect.
Intellectual
property infringement claims are not uncommon in the security industry and,
after acquiring a business, we may be involved in costly litigation that
substantially reduces our profitability.
Any
allegation of infringement of intellectual property against us could be time
consuming and expensive to defend or resolve, result in substantial diversion
of
management resources, cause product shipment delays, or force us to enter into
royalty or license agreements rather than dispute the merits of such an
allegation. If holders of intellectual property rights initiate legal
proceedings against us, we may be forced into protracted and costly litigation.
We may not be successful in defending such litigation and we may not be able
to
procure any required royalty or license agreements on acceptable terms, or
at
all.
If
a business we acquire does business internationally, we may face labor,
political, currency and other risks.
Any
business we acquire may involve the sale of products internationally.
International sales may be impacted by, among other things:
| · |
Regulatory
limitations imposed by foreign governments and insurance
industry-sponsored bodies (similar to Underwriter’s Laboratories in the
United States),
|
| · |
Price
increases due to fluctuations in currency exchange
rates,
|
| · |
Political,
military and terrorist risks,
|
| · |
Disruptions
or delays in shipments caused by customs brokers or government
agencies,
|
| · |
Unexpected
changes in regulatory requirements, tariffs, customs, duties and
other
trade barriers, and
|
| · |
Potentially
adverse tax consequences resulting from changes in tax
laws.
|
Any
of
the foregoing factors may result in reduced earnings and/or
profits.
If
a business we acquire exports products to foreign countries, and we are unable
to maintain required licenses, we may be prevented from exporting our products,
reducing our revenues and profits.
We
may be
required to obtain export licenses to the extent we wish to ship products to
certain countries. We may not be successful in obtaining or maintaining the
licenses and other authorizations required to export our products from
applicable governmental authorities. Our failure to receive or maintain any
required export license or authorization could hinder our ability to sell our
products, reducing our revenues and profits.
Government
contracts generally contain rights and remedies which could reduce the value
of
such contracts, or result in losses for a business we
acquire.
Companies
involved in the security industry often sell products to federal, state or
local
governments, as well as to foreign governments. Government contracts often
contain provisions that give the governments that are party to those contracts
certain rights and remedies not typically found in private commercial contracts,
including provisions enabling the governments to: (i) terminate or cancel
existing contracts for convenience; (ii) in the case of the U.S. government,
suspend the contracting company from doing business with a foreign government
or
prevent the company from selling its products in certain countries; (iii) audit
and object to the company’s contract-related costs and expenses, including
allocated indirect costs; and (iv) change specific terms and conditions in
the
company’s contracts, including changes that would reduce the value of its
contracts. In addition, many jurisdictions have laws and regulations that deem
government contracts in those jurisdictions to include these types of
provisions, even if the contract itself does not contain them. If a government
terminates a contract with a target business for convenience, we may not be
able
to recover our incurred or committed costs, any settlement expenses or profit
on
work completed prior to the termination. If a government terminates a contract
for default, we may not recover those amounts and, in addition, we may be liable
for any costs incurred by a government in procuring undelivered items and
services from another source. Further, an agency within a government may share
information regarding our termination with other government agencies. As a
result, our on-going or prospective relationships with such other government
agencies could be impaired.
If
a target business has government contracts, we could be required to comply
with
various regulations relating to government contracts, which could prevent us
from operating in the most economically efficient
manner.
A
target
business with which we seek a business combination may be required to comply
with domestic and foreign laws and regulations relating to the formation,
administration and performance of government contracts. These laws and
regulations affect how such an entity does business with government agencies
in
various countries and may impose added costs on its business. For example,
in
the United States, we could be subject to the Federal Acquisition Regulations,
which comprehensively regulate the formation, administration and performance
of
federal government contracts, and to the Truth in Negotiations Act, which
requires certification and disclosure of cost and pricing data in connection
with contract negotiations. We could be subject to similar regulations in
foreign countries as well.
Governments
are increasingly regulating the security industry, and such additional
regulations could lead to increased operating costs for any business we
acquire.
As
the
communications industry continues to evolve, governments may increasingly
regulate products that monitor and record voice, video and data transmissions
over public communications networks. For example, certain products sold in
the
United States to law enforcement agencies which interface with a variety of
wireline, wireless and Internet protocol networks, must comply with the
technical standards established by the Federal Communications Commission
pursuant to CALEA, and certain products sold in Europe must comply with the
technical standards established by ETSI. The adoption of new laws or regulations
governing the use of products or changes made to existing laws or regulations
could cause a decline in the use of our products and could result in increased
expenses for the business we acquire, particularly if we are required to modify
or redesign our products to accommodate these new or changing laws or
regulations.
Risks
associated with the Acquisition of ISI
The
combined company’s working capital could be reduced if stockholders exercise
their redemption rights.
Pursuant
to Argyle’s Second Amended and Restated Certificate of Incorporation, holders of
shares purchased in Argyle’s initial public offering (other than Argyle’s
initial stockholders) may vote against the acquisition and demand that
Argyle redeem their shares into pro rata portions of the trust account, net
of
taxes payable, as of the record date. Argyle and ISI will not consummate the
acquisition if holders of 765,009 or more shares exercise these redemption
rights. To the extent the acquisition is consummated and holders have demanded
to so redeem their shares, there will be a corresponding reduction in the amount
of funds available to the combined company following the acquisition. As of
December 31, 2006, assuming the acquisition is approved, the maximum amount
of
funds that could be disbursed to Argyle’s stockholders upon the exercise of
their redemption rights is approximately $5.9 million.
If
outstanding warrants are exercised, the underlying common shares will be
eligible for future resale in the public market. “Market overhang” from the
warrants results in dilution and has an adverse effect on the common stock’s
market price.
Outstanding
warrants and unit purchase options to purchase an aggregate of 4,200,046 shares
of common stock issued in connection with Argyle’s initial public offering will
become exercisable after consummation of the ISI acquisition. If they are
exercised, a substantial number of additional shares of Argyle common stock
will
be eligible for resale in the public market, which could adversely affect the
market price.
Registration
rights held by Argyle’s initial stockholders who purchased shares prior to
Argyle’s initial public offering may have an adverse effect on the market price
of Argyle’s common stock.
Argyle’s
initial stockholders who purchased common stock prior to its initial public
offering are entitled to demand that Argyle register the resale of their shares
at any time after they are released from escrow. If such stockholders exercise
their registration rights with respect to all of their shares, there will be
an
additional 1,081,261 shares of common stock eligible for trading in the public
market. The presence of these additional shares may have an adverse effect
on
the market price of Argyle’s common stock.
Argyle’s
directors and officers have interests in the acquisition that are different
from
yours, because if the acquisition is not approved, their shares may become
worthless.
In
considering the recommendation of Argyle’s Board of Directors to vote to approve
the acquisition, you should be aware that Argyle’s directors, officers and
original stockholders have agreements or arrangements that provide them with
interests in the acquisition that differ from, or are in addition to, those
of
Argyle stockholders generally. Argyle’s original stockholders, including its
directors and officers, are not entitled to receive any of the funds that would
be distributed upon liquidation of the trust account. Therefore, if the
acquisition is not approved, these original shares may become worthless. The
personal and financial interests of directors and officers may have influenced
their motivation in identifying and selecting a target business and in timely
completion of a business combination. Consequently, their discretion in
identifying and selecting a suitable target business may result in a conflict
of
interest when determining whether the terms, conditions and timing of a
particular business combination are appropriate and in the best interests of
Argyle’s stockholders.
Because
Argyle does not intend to pay dividends on its common stock, stockholders will
benefit from an investment in Argyle’s common stock only if it appreciates in
value.
Argyle
has never declared or paid any cash dividends on its shares of common stock.
Post acquisition, Argyle currently intends to retain all future earnings, if
any, for use in the operations and expansion of the business. As a result,
Argyle does not anticipate paying cash dividends in the foreseeable future.
Any
future determination as to the declaration and payment of cash dividends will
be
at the discretion of Argyle’s Board of Directors and will depend on factors
Argyle’s Board of Directors deems relevant, including among others, Argyle’s
results of operations, financial condition and cash requirements, business
prospects, and the terms of Argyle’s credit facilities and other financing
arrangements. It is likely that the debt financing arrangements Argyle puts
into
place in connection with the acquisition will prohibit Argyle from declaring
or
paying dividends without the consent of its lenders. Accordingly, realization
of
a gain on stockholders’ investments will depend on the appreciation of the price
of Argyle’s common stock. There is no guarantee that Argyle’s common stock will
appreciate in value.
Argyle’s
securities are quoted on the Over-the-Counter Bulletin Board, which may limit
the liquidity and price of its securities more than if the securities were
quoted or listed on the Nasdaq market.
Argyle’s
securities are quoted on the Over-the-Counter Bulletin Board, a NASD-sponsored
and operated inter-dealer automated quotation system. Quotation of Argyle’s
securities on the Over-the-Counter Bulletin Board will limit the liquidity
and
price of its securities more than if the securities were quoted or listed on
Nasdaq.
Argyle
has agreed in the merger agreement that it will negotiate employment agreements
with ISI’s management post business combination.
Although
the merger agreement contains certain terms relating to the employment
agreements to be negotiated between Argyle and ISI’s management (the specified
terms relate to the term of the employment agreements and that certain members
of management will remain on the Board of Directors of post merger ISI), Argyle
has agreed in the merger agreement that it will negotiate employment agreements
with ISI’s management post business combination. Therefore, Argyle’s
stockholders will not have the benefit of knowing what compensation arrangements
will be post business combination when voting for the merger. In addition,
by
not negotiating agreements prior to the merger, it is possible that some or
all
of ISI’s management may decide to seek employment at a company that will provide
them with definitive terms of employment now.
Failure
to complete the acquisition could reduce the market price of Argyle’s common
stock and may make it more
difficult for Argyle to attract another acquisition candidate, resulting,
ultimately, in the disbursement of
the trust proceeds, causing some investors to experience a loss on their
investment.
If
the
acquisition is not completed for any reason, Argyle may be subject to a number
of material risks, including:
| · |
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 acquisition will be
consummated;
|
| · |
Costs
related to the acquisition, such as legal and accounting fees and
the
costs of the fairness opinion, must be paid even if the acquisition
is not
completed; and
|
| · |
Charges
will be made against earnings for transaction-related expenses, which
could be higher than expected.
|
Argyle’s
Board of Directors has had Limited Ability to Evaluate the Target Business’
Management.
Although
Argyle closely examined the management of ISI, Argyle cannot assure you that
its
assessment of ISI’s management will prove to be correct, or that future
management will have the necessary skills, qualifications or abilities to manage
its business successfully. Essentially, all of the serving management of ISI
will be involved with the management of the Merger Subsidiary, will remain
with
the combined company, and will for the most part run its day to day operations.
Argyle’s current Board of Directors will remain directors of Argyle subsequent
to the acquisition.
Item
1B. Unresolved Staff Comments
None.
Argyle
maintains executive offices at Concord Plaza, Suite 700, San Antonio, TX 78216.
The base rental cost for this space is approximately $5,500 per month. Argyle
considers its current office space adequate for current operations.
Item
4. Submission of Matters to a Vote of Security Holders
During
the fourth quarter of our fiscal year ended December 31, 2006, there were no
matters submitted to a vote of security holders.
PART
II
The
Company’s common stock, warrants and units, are quoted on the Over the Counter
Bulletin Board under the symbols “ARGL,” “ARGLW,” and “ARGLU,” respectively. The
Units have been quoted on the Bulletin Board since January 30, 2006 and the
common stock and warrants since March 2, 2006. Our securities did not trade
on
any market or exchange prior to January 30, 2006. The following table sets
forth
the high and low sales information for the Company’s Units for the period from
January 30, 2006 through February 28, 2007 and the Company’s Common Stock and
Warrants for the period from March 2, 2006 through February 28, 2007. The
Over-the-Counter Bulletin Board quotations reflect inter-dealer prices, are
without retail markup, markdowns or commissions, and may not represent actual
transactions.
| |
|
Common
Stock
|
|
Warrants
|
|
Units
|
| |
|
High
|
|
Low
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
First
Quarter 2006
|
|
7.55
|
|
7.25
|
|
1.35
|
|
0.93
|
|
8.85
|
|
7.90
|
|
Second
Quarter 2006
|
|
7.45
|
|
7.22
|
|
1.56
|
|
1.02
|
|
8.86
|
|
8.00
|
|
Third
Quarter 2006
|
|
7.30
|
|
7.14
|
|
1.08
|
|
0.88
|
|
8.30
|
|
8.00
|
|
Fourth
Quarter 2006
|
|
7.45
|
|
7.15
|
|
1.55
|
|
0.75
|
|
8.80
|
|
7.94
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter 2007 (through February 28, 2007)
|
|
7.44
|
|
7.35
|
|
1.10
|
|
0.80
|
|
8.50
|
|
8.14
|
Number
of Holders of Common Stock.
The
number of holders of record of our Common Stock on February 28, 2007 was five,
which does not include beneficial owners of our securities.
Dividends.
There
were no cash dividends or other cash distributions made by us during the fiscal
year ended December 31, 2006. Future dividend policy will be determined by
our
Board of Directors based on our earnings, financial condition, capital
requirements and other then existing conditions. It is anticipated that cash
dividends will not be paid to the holders of our common stock in the foreseeable
future.
Recent
Sales of Unregistered Securities.
On
June 23, 2005 we issued shares of our common stock to the following persons
for
an aggregate offering price of $25,000 or $0.027 per share:
|
|
|
Number
of Shares
|
|
|
Argyle
Joint Venture
|
|
|
296,875
|
|
|
Argyle
New Ventures, L.P.
|
|
|
296,875
|
|
|
Ron
Chaimovski
|
|
|
296,875
|
|
|
John
J. Smith
|
|
|
46,875
|
|
Such
shares were issued pursuant to the exemption from registration contained in
Section 4(2) of the Securities Act as they were sold to sophisticated, wealthy
individuals. No underwriting discounts or commissions were paid with respect
to
such sales.
On
July 13, 2005, the aforementioned stockholders were issued options to purchase
such additional number of shares as would maintain their respective percentage
ownership in the event the over-allotment option granted to the underwriters
in
our initial public offering was exercised. The maximum number of shares that
each stockholder could purchase pursuant to this option was:
|
Stockholders
|
|
Maximum
Number of Shares
|
|
|
Argyle
Joint Venture
|
|
|
43,047
|
|
|
Argyle
New Ventures, L.P.
|
|
|
43,047
|
|
|
Ron
Chaimovski
|
|
|
43,047
|
|
|
John
J. Smith
|
|
|
6,797
|
|
The
exercise price of these options was $0.027 per share. On September 23, 2005,
Messrs. Marbut and Chaimovski, along with their affiliated entities,
transferred an aggregate of 70,313 of their shares and a pro rata portion of
their over-allotment options to Wesley Clark in connection with his appointment
to the board of directors. On January 30, 2006, the underwriters exercised
a
portion of their over-allotment option and on February 1, 2006, the stockholders
indicated exercised their option for an aggregate of 18,761 shares of our common
stock and we received $506.55 in connection with such exercise. The underwriters
terminated their right to exercise the remainder of the overallotment option
and
the remainder of the options terminated unexercised. Such securities were issued
pursuant to the exemption from registration contained in Section 4(2) of the
Securities Act as they were issued to sophisticated, wealthy individuals. No
underwriting discounts or commissions were paid with respect to such securities.
On
January 24, 2006, we sold 125,000 units to Ron Chaimovski and Argyle New
Ventures, L.P. for an aggregate purchase price of $1,000,000, or $8.00 per
unit.
Each unit consists of one share of common stock and a warrant to purchase
one share of common stock, exercisable at $5.50 per share. The securities
were sold in reliance on the exemption from registration contained in Section
4(2) of the Securities Act since they were sold to sophisticated, wealthy
individuals. We paid Rodman & Renshaw, LLC a placement fee of $60,000
in connection with this placement.
On
January 30, 2006, we sold a warrant to purchase 187,500 units to the two
co-managing underwriters in the offering for an aggregate of $100. The exercise
price per unit is $8.80, and each unit consists of one share of common stock
and
a warrant to purchase one share of common stock, exercisable at $5.50 per share.
The securities were sold in reliance on the exemption from registration
contained in Section 4(2) of the Securities Act since they were sold to the
underwriters in our initial public offering. No underwriting discounts or
commissions were paid with respect to such securities.
Use
of Proceeds
On
January 24, 2006, we consummated a private placement of 125,000 units. On
January 30, 2006, we consummated our initial public offering of 3,700,046 units
(which includes 75,046 units sold pursuant to the exercise of a portion of
the
underwriter’s over-allotment option). Each unit consists of one share of common
stock and one redeemable common stock purchase warrant. Each warrant entitles
the holder to purchase from us one share of our common stock at an exercise
price of $5.50. The units were sold at an offering price of $8.00 per unit,
generating total gross proceeds of $30,600,368. Rodman & Renshaw, LLC acted
as lead underwriter. The securities sold in our initial public offering were
registered under the Securities Act of 1933 on a registration statement on
Form
S-1 (No. 333-126569). The Securities and Exchange Commission declared the
registration statement effective on January 24, 2006.
At
the
time of our offering, we incurred a total $1,836,022 in underwriting
discounts and commissions and placement agent fees, $1,377,017 of which was
placed in the trust account and will only be paid to the underwriters in the
event that we consummate a business combination. The total expenses in
connection with the sale of our units in the private placement and the initial
public offering were $2,424,001. On
March
14, 2007, the underwriters from the Company's initial public offering agreed
to
forfeit any and all rights or claims to a pro-rata portion of the deferred
underwriting costs and associated interest with respect to any shares of common
stock which are redeemed in connection with our proposed acquisition. As a
result, the deferred underwriting and offering costs have been reduced by
approximately $.3 million and common stock subject to possible redemption has
been increased by $.3 million. (See Redemption Rights under Part 1 and Note
9 to
the Company's financial statements.) No expenses of the offering were
paid to any of our directors or officers or any of their respective affiliates.
We did, however, repay Argyle New Ventures, an affiliate of Bob Marbut, and
Ron
Chaimovski for loans they made to us prior to the consummation of the private
placement and the initial public offering. The aggregate amount of principal
and
interest on such loans that we repaid was $158,177. All the funds held in the
trust account have been invested in either Treasury Bills or Money Market
Accounts.
After
deducting the underwriting discounts and commissions, placement agent fees
and
the offering expenses, the total net proceeds to us from the private placement
and the initial public offering were $28,176,367, of which $27,344,346 was
deposited into the trust account for our benefit (exclusive of the amounts
for
the benefit of the undewriters discussed above). The remaining proceeds are
available to be used to provide for business, legal and accounting due diligence
on prospective business combinations and continuing general and administrative
expenses. The amounts held in the trust account may only be used by us upon
the
consummation of a business combination, with the exception of amounts due for
income taxes and $600,000 of the interest earned on the trust account, which
was
released to us in September 2006 to fund our working capital. As of December
31,
2006, there was approximately $29.5 million held in the trust
account.
Repurchases
of Equity Securities.
None
The
selected financial data presented below summarizes certain financial data which
has been derived from and should be read in conjunction with our financial
statement and footnotes thereto included in the section beginning on page F-1.
See also “Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations.”
| |
|
Year
Ended December 31,
|
|
| |
|
2006
|
|
2005
|
|
|
Statement
of Operations Data:
|
|
|
|
|
|
| |
|
|
|
|
|
|
Operating
expenses
|
|
$ |
1,024,490
|
|
$ |
7,743
|
|
|
Other
income
|
|
|
1,287,925
|
|
|
-
|
|
|
Income/(loss)
before provision for income taxes
|
|
|
263,435
|
|
|
(7,743
|
)
|
|
Provision
for income taxes
|
|
|
90,923
|
|
|
-
|
|
|
Net
income/(loss)
|
|
|
172,512
|
|
|
(7,743
|
)
|
|
Deferred
interest (net of taxes), attributable to common stock subject to
possible
redemption
|
|
|
175,747
|
|
|
-
|
|
|
Net
(loss) allocable to holders of non-redeemable common stock
|
|
$ |
(3,235
|
)
|
$ |
(7,743
|
)
|
|
Net
income/(loss) per share - - basic and diluted
|
|
|
0.04
|
|
|
(0.01
|
)
|
|
Weighted
average number of shares outstanding - - basic and diluted
|
|
|
4,477,861 |
|
|
937,500
|
|
|
Net
(loss) per share exclusive of shares and related interest subject
to
possible redemption - - basic and diluted
|
|
|
(0.00
|
) |
|
(0.01
|
)
|
|
|
|
|
3,773,985
|
|
|
937,500
|
|
| |
|
As
of December 31,
|
|
| |
|
2006
|
|
2005
|
|
|
Balance
Sheet Data:
|
|
|
|
|
|
| |
|
|
|
|
|
|
Cash
|
|
$
|
694,115
|
|
$
|
9,608
|
|
|
Working
capital (deficit)
|
|
|
28,249,730
|
|
|
(277,488
|
)
|
|
Total
assets
|
|
|
30,681,313
|
|
|
304,353
|
|
|
Total
stockholders’ equity
|
|
|
|
|
$
|
17,257
|
|
Forward
Looking Statements
This
Annual Report on Form 10-K includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to known and unknown
risks, uncertainties and assumptions about us that may cause our actual results,
levels of activity, performance or achievements to be materially different
from
any future results, levels of activity, performance or achievements expressed
or
implied by such forward-looking statements. In some cases, you can identify
forward-looking statements by terminology such as “may,” “should,” “could,”
“would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “continue,” or
the negative of such terms or other similar expressions. Factors that might
cause or contribute to such a discrepancy include, but are not limited to,
those
described in our other Securities and Exchange Commission filings. The following
discussion should be read in conjunction with our Financial Statements and
related Notes thereto included elsewhere in this report.
Overview
Argyle
Security Acquisition Corporation is a Delaware corporation incorporated on
June
22, 2005 in order to serve as a vehicle for the acquisition of an operating
business through a merger, capital stock exchange, asset acquisition or other
similar business combination. We intend to leverage the industry experience
of
our executive officers by focusing our efforts on identifying a prospective
target business in the security industry. We believe that businesses involved
in
this industry represent attractive acquisition targets for a number of reasons,
including the increase in global demand for integrated security-related products
and services since September 11, 2001, the development of new technology which
has the potential to expand applications and the trend towards integrated
networked solutions.
Critical
Accounting Policies
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of
expenses during the reporting period. Actual results could differ from these
estimates.
Deferred income taxes are provided for temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts for tax purposes. Valuation allowances are provided
against the deferred tax asset amounts when the realization is
uncertain.
Argyle purchases U.S. Treasury Bills and money market
investments and holds these investments to maturity. The investments are
recorded at market value which approximates their carrying amount, which
includes interest accrued through that date.
Argyle must seek stockholder approval to effect any
business combination. Argyle will proceed with a business
combination only if a
majority of the shares of common stock voted by the public stockholders are
voted in favor of the business combination, and public stockholders owning
less
than 20% of the shares sold in the offering exercise their conversion rights
and
vote against the business combniation. Public stockholders voting against the
combination may demand that Argyle redeem his or her shares at a redemption
price of $7.52 per share plus interest earned thereon in the trust account,
net
of taxes payable, if an acquisition is consummated. Accordingly, Argyle has
classified the contingent shares at $7.52 and related deferred interest outside
of permanent equity and liabilities in the mezzanine area on the balance
sheet.
Results
of Operations for the Year Ended December 31, 2006
Argyle
reported net income of $172,512 for the year ended December 31, 2006, before
the
deduction of $175,747 of interest income, net of taxes, attributable to common
stock subject to possible redemption. Argyle incurred a net loss of $7,743
for
the period from inception (June 22, 2005) through December 31,
2005.
Argyle’s
trust account earned interest of $1,332,087 for the year ended December 31,
2006, and its funds outside the trust account earned interest of $20,242. Until
Argyle enters into a business combination, it will not generate operating
revenues. Argyle had no funds in trust as of December 31, 2005.
For
the
year ended December 31, 2006, Argyle incurred expenses of $469,943 for
consulting and professional fees, $130,632 for stock compensation, $148,516
for
franchise taxes, $82,411 for insurance expense, $61,467 for rental expense
pursuant to Argyle’s lease of office space and other operating costs of
$131,521.
The
consulting and professional fees of $469,943 for the year ended December 31,
2006 relate primarily to monthly consulting fees that, cumulatively, totaled
approximately $288,000, legal fees of approximately $52,000, auditing, tax
and
accounting fees of approximately $103,000 and bankers’ fees and expenses of
approximately $25,000.
On
February 1, 2006, Argyle’s officers and directors exercised options and
purchased 18,761 shares of common stock for an aggregate cost of $507. The
compensation cost associated with these options of $130,632 was recorded in
the
first quarter of 2006 and was computed utilizing the Black-Scholes pricing
model.
The
franchise tax expense of $148,516 for the year ended December 31, 2006 was
due
to the state of Delaware, and approximately $145,000 of this amount was paid
in
the first quarter of 2007.
The
insurance expense of $82,411 for the year ended December 31, 2006 relates to
the
amortization of the prepaid directors and officers insurance policy which was
acquired in January 2006.
The
other
operating costs of $131,520 for the year ended December 31, 2006 relate
primarily to travel expenses of approximately $48,000, computer server hosting
expense of approximately $21,000, communications expenses of approximately
$12,000, stock transfer fees of $13,000, office supplies and expenses of
approximately $6,000 and other miscellaneous costs of approximately
$31,000.
Results
of Operations for the Period from June 22, 2005 (inception) to December 31,
2005
Argyle
had a net loss of $7,743 for the period ended December 31, 2005 as a result
of
formation and operating costs. Additionally, deferred offering costs of
approximately $295,000 were incurred in 2005. These costs consisted of
professional fees of approximately $203,000, road show and travel expenses
of
approximately $25,000, and regulatory and filing fees of approximately $67,000.
Argyle had no income in 2005.
Liquidity
and Capital Resources
On
January 24, 2006, Argyle completed a private placement of 125,000 units to
its
executive officers and their affiliates and received net proceeds of
approximately $.9 million. On January 30, 2006, Argyle consummated its initial
public offering of 3,700,046 units (which included 75,046 units sold as part
of
the underwriter’s over-allotment option). Each unit in both the private
placement and the public offering consisted of one share of common stock and
one
redeemable common stock purchase warrant. Each warrant entitles the holder
to
purchase from Argyle one share of Argyle’s common stock at an exercise price of
$5.50 per share commencing on the later of the completion of a business
combination or January 24, 2007 and expiring January 24, 2011. Argyle’s common
stock and warrants started trading separately as of March 2, 2006.
The
net
proceeds from the sale of Argyle’s units, after deducting certain offering
expenses of approximately $2.4 million, including underwriting discounts of
approximately $1.8 million, were approximately $28.2 million. Approximately
$27.3 million of the proceeds from the initial public offering and the private
placement was placed in a trust account for Argyle’s benefit. Except for
reimbursement of taxes payable and $600,000 in interest from the trust account
that was released to Argyle in September 2006 for working capital, Argyle will
not be able to access the amounts held in the trust until it consummates a
business combination. The approximate $29.5 million held in trust as of December
31, 2006 includes approximately $1.4 million of underwriters' and placement
agent’s compensation and related interest from Argyle’s private placement and
initial public offering that will be paid to the underwriters and placement
agent only in the event of a business combination. On
March
14, 2007, the underwriters from the Company's initial public
offering agreed to forfeit any and all rights or claims to a pro-rata
portion of the deferred underwriting costs and associated interest with respect
to any shares of common stock which are redeemed in connection with our proposed
acquisition. As a result, the deferred underwriting and offering costs have
been
reduced by approximately $.3 million and common stock subject to possible
redemption has been increased by $.3 million. (See Redemption Rights under
Part
1 and Note 9 to the Company's financial statements.) The trust account
earned interest income of approximately $1.3 million during the year ended
December 31, 2006. The amounts held outside of the trust account are available
to be used by Argyle to provide for business, legal and accounting due diligence
on prospective acquisitions and continuing general and administrative expenses.
As of December 31, 2006, Argyle had approximately $.7 million outside the trust
account to fund its working capital requirements.
Argyle
expects to use up to approximately $20.5 million (including Argyle and ISI
transaction costs) of the net proceeds of the initial public offering to acquire
ISI. After paying off any expenses relating to the identification and evaluation
of prospective acquisition candidates, the structuring, negotiation and
consummation of the business combination and paying for the redemption of the
stock of any of Argyle’s stockholders who choose to exercise their redemption
rights, any residual proceeds from Argyle’s initial public offering will be used
by the company as working capital.
Argyle
anticipates that it will incur total transaction costs of approximately $1.3
million. Such costs do not include transaction costs of approximately $1.0
million to be incurred by ISI (related primarily to anticipated attorney,
brokerage and accounting fees). Of the $1.3 million of Argyle anticipated
transaction costs, approximately $.4 million relate to certain Giuliani Capital
Advisors’ advisory fees which are contingent upon the closing of the
transaction. Approximately $.5 million of the $.9 million in non-contingent
anticipated costs had been incurred and recorded as of December 31, 2006. The
$.9 million primarily relates to Loeb and Loeb legal expenses, fees for Giuliani
Capital Advisors’ fairness opinion, accountants and valuation consultants’ fees,
road show expenses, printer fees and other miscellaneous expenses. Argyle’s cash
outside the trust and accrued expenses as of December 31, 2006 was approximately
$.7 million and $.6 million, respectively. Argyle expects to incur the remaining
anticipated non-contingent transaction costs of $.4 million over the first
two
quarters of 2007. Additionally, recurring monthly operating expenses of
approximately $75,000 per month will continue to accrue after December 31,
2006
and, in January 2007, Argyle renewed its directors and officers’ insurance
policy, incurring a premium of $88,000.
Our
Board
of Directors has discussed and preliminarily approved a $300,000 bridge loan
from our Co-Chief Executive Officers, directors and consultants. The terms
and conditions of the bridge loan have not yet been negotiated
and the documentation for the bridge loan has not yet been completed.
We anticipate that this bridge financing will close in late March or April
2007.
Argyle
anticipates that the costs to consummate the acquisition will greatly exceed
its
available cash outside of the trust, even after the proposed financing discussed
above. Argyle
expects these costs would ultimately be borne by the combined company from
the
funds held in trust if the proposed ISI acquisition is completed. If the
acquisition is not completed, the costs would be subject to the potential
indemnification obligations of Argyle’s officers and directors to the trust
account related to expenses incurred for vendors or service providers. If these
obligations are not performed or are inadequate, it is possible that vendors
or
service providers could seek to recover these expenses from the trust account,
which could ultimately deplete the trust account and reduce a stockholder’s
current pro rata portion of the trust account upon liquidation.
Upon
going public in late January 2006, Argyle has focused its attention on the
search for a target business in the security industry. The expenses related
to
this effort are primarily comprised of certain monthly consulting fees paid
to parties identified below for the research and investigation of potential
target companies, and professional fees and travel expenses associated with
targets which are no longer being pursued. Argyle has recorded these expenses
as
either part of the disclosed consulting and professional fees, or as travel
expenses which are classified as other operating costs. The costs directly
associated with the ISI acquisition, excluding the recurring monthly consulting
fees which are expensed, have been capitalized as transaction costs. Two of
Argyle’s consultants work exclusively on the research, investigation and
targeting of security companies, while one of the other consultants spends
approximately one-half of his time on acquisitions. Argyle believes that the
amounts recorded as expenses associated with its search during 2006 were
approximately $.2 million. Additionally, transaction costs associated with
the
ISI acquisition of approximately $.5 million were capitalized during 2006,
and
approximately $.4 million of additional non-contingent transaction costs
associated with the ISI acquisition are anticipated. In the prospectus related
to Argyle’s initial public offering, Argyle estimated legal, accounting and
other expenses attendant to the structuring and negotiation of a business
combination, and the preparation and filing of the related proxy statement
of
$.15 million and due diligence of prospective target businesses of $.225
million. The majority of the difference is related primarily to the cost of
a
fairness opinion from Giuliani Capital Advisors and legal fees which are
accumulating at a higher rate than those estimated in the Form S-1.
Argyle’s
accrued expenses, as of December 31, 2006, which includes accruals for deferred
acquisition costs, totaled $624,129. The amount is primarily comprised of an
accrual to the state of Delaware for franchise taxes in the amount of
approximately $145,000 and accruals for professional fees, associated with
attorneys, accountants and bankers and related expenses of approximately
$440,000. The franchise tax and banker fees are not specifically disclosed
in
the use of proceeds section of Argyle’s Registration Statement on Form S-1
related to its initial public offering, but expenses for legal and accounting
are disclosed.
Assuming
the completion of the ISI acquisition, Argyle will assume approximately $6.0
million in long term debt, in addition to the $9.0 million ISI line of credit
which had an outstanding balance of approximately $5.0 million as of December
31, 2006. Argyle anticipates that the $6.0 million in long term debt
will be due eighteen months after completion of the acquisition and that
there will be no prepayment penalties. The line of credit matures
in October 2008 with interest payable quarterly and is secured by certain
tangible and intangible assets. The line of credit agreement
contains certain financial covenants as well as restrictive and affirmative
convenants. Additionally, Argyle will assume the capital lease obligation
related to ISI’s offices in San Antonio, Texas, which had a balance of
approximately $2.1 million as of December 31, 2006. At closing, Argyle will
pay
certain ISI obligations totaling approximately $1.9 million as of December
31,
2006, relating to ISI*MCS and notes payable to ISI shareholders. Argyle will
also assume the current liabilities relating to accounts payable, accrued
liabilities and billings in excess of costs and estimated earnings on incomplete
contracts.
As
of
February 1, 2006, Argyle entered into a lease for Argyle’s office space in San
Antonio, Texas and began to pay a base rental of approximately $5,500 per month.
The lease was originally scheduled to terminate on January 31, 2007; however,
it
was amended to extend the termination date by six months. In connection with
its
operations, in March 2006, Argyle paid an outstanding obligation to a consultant
for approximately $53,000 and is currently paying approximately $24,000 per
month in consulting fees for services assisting Argyle in the identification
of
a target business, securities compliance and administration. The consulting
agreements entered into thus far may be terminated by either party for any
reason upon 15 days notice.
Presently,
Argyle is utilizing four consultants on a monthly basis. Alan Wachtel and Graham
Wallis perform research and investigation of target companies in the security
industry and assist in the performance of due diligence on potential acquisition
candidates. Cindy Kittrell is the office manager and performs associated
administrative functions. Mark Mellin is a financial consultant who assists
Argyle in its SEC reporting responsibilities, accounting matters and also
assists in the investigation and due diligence of potential acquisition
candidates.
Off
Balance Sheet Arrangements
Argyle
does not have any off-balance sheet arrangements.
Contractual
Obligations
We
do not
have any long term debt, capital lease obligations, purchase obligations or
other long term liabilities. However, as discussed above, we have an operating
lease commitment with the landlord of our office facilities at a monthly rental
of approximately $5,500 through July 2007.
Market
risk is the sensitivity of income to changes in interest rates, foreign
exchanges, commodity prices, equity prices, and other market-driven rates or
prices. We are not presently engaged in and, if a suitable business target
is
not identified by us prior to the prescribed liquidation date of the trust
fund,
we may not engage in, any substantive commercial business. Accordingly, we
are
not and, until such time as we consummate a business combination, we will not
be, exposed to risks associated with foreign exchange rates, commodity prices,
equity prices or other market-driven rates or prices. The net proceeds of our
initial public offering held in the trust fund have been invested only in money
market funds meeting certain conditions under Rule 2a-7 promulgated under the
Investment Company Act of 1940. Given our limited risk in our exposure to money
market funds, we do not view the interest rate risk to be significant.
Financial
statements are attached hereto beginning on Page F-1.
None.
An
evaluation of the effectiveness of our disclosure controls and procedures as
of
December 31, 2006 was made under the supervision and with the participation
of
our management, including our co-chief executive officers (one of whom serves as
our principal financial officer). Based on that evaluation, our co-chief
executive officers concluded that our disclosure controls and procedures are
effective as of the end of the period covered by this report to ensure that
information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized
and
reported within the time periods specified in Securities and Exchange commission
rules and forms. During the most recently completed fiscal quarter, there has
been no significant change in our internal control over financial reporting
that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Compliance
with Section 404 of the Sarbanes-Oxley Act of 2002
Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002 (the Act), beginning with
our
Annual Report on Form 10-K for the fiscal year ending December 31, 2007, we
will
be required to furnish a report by our management on our internal control over
financial reporting. This report will contain, among other matters, an
assessment of the effectiveness of our internal control over financial reporting
as of the end of our fiscal year, including a statement as to whether or not
our
internal control over financial reporting is effective. This assessment must
include disclosure of any material weaknesses in our internal control over
financial reporting identified by management. If we identify one or more
material weaknesses in our internal control over financial reporting, we will
be
unable to assert that our internal control over financial reporting is
effective.
Management
acknowledges its responsibility for internal controls over financial reporting
and seeks to continually improve those controls. In order to achieve compliance
with Section 404 of the Act within the prescribed period, we have begun the
system and process documentation and evaluation needed to comply with Section
404, which is both costly and challenging. We believe our process, which will
be
performed primarily in 2007 as our first acquisition is not yet complete, will
be consistent with the objectives of Section 404 of the Act.
None
Our
current directors and executive officers are as follows:
|
Name
|
|
Age
|
|
Position
|
|
Bob
Marbut
|
|
71
|
|
Chairman
of the Board and Co-Chief Executive Officer
|
|
Ron
Chaimovski
|
|
47
|
|
Vice
Chairman of the Board and Co-Chief Executive Officer
|
|
John
J. Smith
|
|
58
|
|
Director
|
|
Wesley
Clark
|
|
61
|
|
Director
|
Bob
Marbut
has been
Argyle’s Chairman of the Board and Co-Chief Executive Officer since Argyle’s
inception. From November 2004 to the present, Mr. Marbut has been the Executive
Chairman of Electronics Line 3000 Ltd., an intrusion protection security
company, and from July 2002 to the present he has been the Executive Chairman
of
SecTecGLOBAL, Inc., a sales and marketing subsidiary of Electronics Line 3000
Ltd., and was the Chief Executive Officer of SecTecGLOBAL from July 2002 to
February 2006. From October 2001 to the present, Mr. Marbut has served as the
Managing Director of Argyle Global Opportunities, LP, an investment partnership
which owns a 41% interest in Electronics Line 3000 Ltd. From January 2001 to
January 2003, Mr. Marbut served as the Chairman of Hearst-Argyle Television,
Inc., a non-network owned television group and, from August 1997 to January
2001, served as its Chairman and Co-Chief Executive Officer. From January 1995
to August 1997, Mr. Marbut was the co-founder, Chairman and controlling partner
of Argyle Television, Inc., which became a Nasdaq traded company and was merged
with Hearst Broadcasting in August 1997 to form Hearst-Argyle Television, Inc.
From 1993 to 1995, Mr. Marbut founded and was the Chief Executive Officer of
Argyle Television Holding, Inc., a private television group that was sold in
1995. From August 1970 through 1990, Mr. Marbut served as the President and
Chief Executive Officer of Harte-Hanks Communications, Inc., and concurrently
as
its Chief Operating Officer from April 1973 to September 1984, and as
Vice-Chairman in 1991. During the period that Mr. Marbut was CEO, Harte-Hanks
developed from a family-owned newspaper company into a Fortune 500 company
listed on the New York Stock Exchange that Mr. Marbut took private in 1984
in a
management buyout that he led. In addition to the Board of Directors of
Electronics Line 3000 Ltd., Mr. Marbut currently serves on the boards of
directors of Hearst-Argyle Television, Tupperware Corporation and Valero Energy
Corporation. Mr. Marbut, through control of the general partner of Argyle Joint
Venture, manages Argyle Joint Venture, one of Argyle’s stockholders which was
formed to make equity investments in companies. Mr. Marbut is the sole investor
and manager of Argyle New Ventures, which manages Mr. Marbut’s personal family
investments. He has a Masters of Business Administration degree with Distinction
from Harvard University and was a registered engineer in the State of California
and holds a Bachelors of Industrial Engineering from Georgia Tech.
Ron
Chaimovski
has been
Argyle’s Vice Chairman of the Board and Co-Chief Executive Officer since
Argyle’s inception. Mr. Chaimovski has served as the Vice Chairman of
Electronics Line 3000 Ltd. since May 2005 and as a partner in Argyle Global
Opportunities, LP since January 2001. From October 1998 to August 2001 Mr.
Chaimovski served as the Israeli Economic Minister to North America. From 1991
to 1998, Mr. Chaimovski was a partner in an Israeli law firm. Mr. Chaimovski
was
the co-founder of Transplan Enterprises Group, an investment group, and served
as its Co-Chairman from 1993 to 1998. Mr. Chaimovski served in the Israeli
Navy
from 1977 to 1983 in various command roles, including those of combat officer
and flotilla commander. Mr. Chaimovski, through entities controlled by him
or
his spouse, owns limited partnership interests in Argyle Joint Venture. Mr.
Chaimovski is a member of the Israeli Bar. Mr. Chaimovski received an LLB from
Tel Aviv University and an LLM from the University of London.
Wesley
Clark
joined
Argyle’s Board of Directors in September 2005. Since March 2003, he has been the
Chairman and Chief Executive Officer of Wesley K. Clark & Associates, a
business services and development firm based in Little Rock, Arkansas. In
February 2006, Gen. Clark joined Rodman & Renshaw Holdings, LLC, which
controls Rodman & Renshaw, LLC, one of the co-managing underwriters in the
initial public offering, as Chairman of the Board and as a member of their
Advisory Board. From March 2001 to February 2003 he was the Managing Director
of
the Stephens Group Inc., an emerging company development firm. From July 2000
to
March 2001 he was a consultant for Stephens Group Inc. Prior to that time,
Gen.
Clark served as the Supreme Allied Commander of NATO and Commander-in-Chief
for
the United States European Command and as the Director of the Pentagon’s
Strategic Plans and Policy operation. Gen. Clark retired from the United States
Army as a four-star general in July 2000 after 38 years in the military and
received many decorations and honors during his military career. Gen. Clark
is a
graduate of the United States Military Academy and studied as a Rhodes Scholar
at the Magdalen College at the University of Oxford.
John
J. Smith
has been
one of Argyle’s directors since Argyle’s inception. He has been the Director of
Security for the Bank of New York since February 2000. At the Bank of New York,
Mr. Smith directs and supervises a worldwide security program that encompasses
the investigation and prevention of fraud-related activities, as well as the
physical protection of corporate assets, employees, customers and executives.
Mr. Smith retired from the United States Secret Service in January 2000 after
24
years of service. He held a variety of positions in field offices and
headquarters, culminating with his appointment as the Special Agent in Charge
of
the New York Field Office, the Service’s largest and busiest office. During his
career, Mr. Smith was assigned to the Vice Presidential Protective Division,
the
Presidential Protective Division and as the Special Assistant to the Treasury
Secretary. He served as the security coordinator for several high profile
protective venues, including: the U.S. delegation attending the Olympic Games
in
Barcelona, Spain, 1992; the Presidential Inaugural activities of 1993; the
dedication of the Holocaust Museum, Washington, DC, 1994; and the visit of
Pope
John Paul II to New York, 1995. In 1996, he supervised the protective detail
assigned to Presidential Candidate Robert Dole. Mr. Smith holds bachelors and
masters degrees in Criminal Justice from West Chester University in West
Chester, Pennsylvania.
Our
board
of directors is divided into three classes with only one class of directors
being elected in each year and each class serving a three-year term. The term
of
office of the first class of directors, consisting of John J. Smith, will expire
at our first annual meeting of stockholders. The term of office of the second
class of directors, consisting of Wesley Clark, will expire at the second annual
meeting. The term of office of the third class of directors, consisting of
Bob
Marbut and Ron Chaimovski, will expire at the third annual meeting.
None
of
these individuals has been a principal of or affiliated with a public company
or
blank check company that executed a business plan similar to our business plan
and none of these individuals is currently affiliated with such an entity.
However, we believe that the skills and experience of these individuals, their
collective access to acquisition opportunities and ideas, their contacts, and
their transaction expertise should enable them to successfully identify and
effect a business combination although we cannot assure our stockholders that
they will, in fact, be able to do so.
Argyle’s
Board of Directors is divided into three classes, with only one class of
directors being elected in each year and each class serving a three-year term.
The term of office of the first class of directors, consisting of John J. Smith,
will expire at Argyle’s first annual meeting of stockholders. The term of office
of the second class of directors, consisting of Wesley Clark, will expire at
the
second annual meeting. The term of office of the third class of directors,
consisting of Bob Marbut and Ron Chaimovski, will expire at the third annual
meeting.
The
Board
of Directors has not determined whether anyone on the Board is an “audit
committee financial expert,” as such term is defined by SEC rules. Since the
Board does not have a separately designated Audit Committee and Argyle will
not
have any operating activities until such time as Argyle enters into a business
combination (meaning that its financial statements are relatively simple),
Argyle’s Board of Directors did not feel it was necessary to determine if anyone
on Argyle’s Board of Directors was an audit committee financial expert. Argyle’s
Board of Directors will make a determination if there is an audit committee
financial expert on its Board of Directors after a business combination with
a
target business is consummated.
Director
Independence
Argyle’s
Board of Directors has not determined if any of its directors qualifies as
independent, although Argyle’s management believes that Gen. Clark and Mr. Smith
would qualify as independent directors under the rules of the American Stock
Exchange because they do not currently own a large percentage of Argyle’s stock,
are not currently employed by Argyle, have not been actively involved in the
management of Argyle and do not fall into any of the enumerated categories
of
people who cannot be considered independent in the American Stock Exchange
Rules. Argyle’s Board of Directors will make a determination about independence
after the business combination is consummated. Argyle does not have an audit
committee, nominating committee or compensation committee and therefore the
entire Board of Directors performs those functions for Argyle.
Compensation
Committee Interlocks and Insider Participation
During
the last fiscal year, no officer and employee of Argyle, and no former officer
of Argyle, during the last completed fiscal year, participated in deliberations
of Argyle’s Board of Directors concerning executive officer compensation. Bob
Marbut and Ron Chaimovski are each officers and directors of SecTecGlobal and
Electronics Line 3000 Ltd.
Code
of Ethics
We
currently do not have a formal code of ethics. Upon consummation of a business
combination, we intend to adopt a code of ethics that applies to our principal
executive officer, principal financial officer, principal accounting officer
or
controller or persons performing similar functions.
Section
16(a) of the Securities Exchange Act requires our directors, executive officers
and persons who own more than 10% of our common stock to file reports of
ownership and changes in ownership of our common stock with the Securities
and
Exchange Commission. Directors, executive officers and persons who own more
than
10% of our common stock are required by Securities and Exchange Commission
regulations to furnish to us copies of all Section 16(a) forms they file.
Based
solely on our review of such forms furnished to us and written representations
from certain reporting persons, we believe that all filing requirements
applicable to our executive officers, directors and greater than 10% beneficial
owners were complied with during 2006.
Item
11. Executive Compensation
Executive
Compensation
In
2006,
no compensation of any kind, including finders and consulting fees, was paid
to
any of our officers or directors, or any of their respective affiliates, nor
will any compensation of any kind be paid to such persons for services rendered
prior to or in connection with a business combination. However, our officers
and
directors have been and will continue to be reimbursed for any out-of-pocket
expenses incurred in connection with activities on our behalf, such as
identifying potential target businesses and performing due diligence on suitable
business combinations. There is no limit on the amount of these out-of-pocket
expenses, and there will be no review of the reasonableness of the expenses
by
anyone other than Argyle’s directors, or a court of competent jurisdiction if
such reimbursement is challenged.
Since
we
do not currently have an operating business, our officers do not receive any
compensation for their service to us; and, since we have no other employees,
we
do not have any compensation policies, procedures, objectives or programs in
place. We will adopt appropriate compensation policies, procedures, objectives
or programs after a merger with a target business is consummated and our
management team has had the opportunity to fully understand the operations
of
the business. However, it is anticipated that, after closing, the compensation
for our senior executives will be comprised of four elements: a base salary,
an
annual performance bonus, equity and benefits.
In
developing salary ranges, potential bonus payouts, equity awards and benefit
plans, it is anticipated that our Compensation Committee (when formed after
a
business combination) will take into account: 1) competitive compensation among
comparable companies and for similar positions in the market, 2) relevant ways
to incentivize and reward senior management for improving shareholder value
while building Argyle into a successful company, 3) individual performance,
4)
how best to retain key executives, 5) Argyle’s overall performance and its
various key component entities, 6) our ability to pay and 7) other factors
deemed to be relevant at the time.
Argyle
and ISI senior management have discussed Argyle’s above mentioned planned
process for executive compensation after the merger is complete and the four
compensation components. Specific compensation plans for ISI’s key executives,
assuming the acquisition of ISI is completed, will be negotiated and established
by the Compensation Committee after closing.
Compensation
Committee Interlocks and Insider Participation
Argyle’s
Board of Directors does not have a compensation committee and the entire Board
of Directors performs the functions of a compensation committee.
No
member
of the Compensation Committee has a relationship that would constitute an
interlocking relationship with executive officers or directors of the Company
or
another entity, except that Bob Marbut and Ron Chaimovski are each officers
and
directors of SecTecGlobal and Electronics Line 3000 Ltd.
Compensation
Committee Report
Argyle’s
Board of Directors does not have a compensation committee and the entire Board
of Directors performs the functions of a compensation committee.
The
Board
of Directors has reviewed and discussed the discussion and analysis of Argyle’s
compensation which appears above with management, and, based on such review
and
discussion, the Board of Directors determined that the above disclosure be
included in this Annual Report on Form 10-K.
The
members of the Board of Directors are:
Bob
Marbut
Ron
Chaimovski
John
J.
Smith
Wesley
Clark
The
following table sets forth, as of February 28, 2007, certain information
regarding beneficial ownership of our common stock by each person who is known
by us to beneficially own more than 5% of our common stock. The table also
identifies the stock ownership of each of our directors, each of our officers,
and all directors and officers as a group. Except as otherwise indicated, the
stockholders listed in the table have sole voting and investment powers with
respect to the shares indicated.
Shares
of
common stock which an individual or group has a right to acquire within 60
days
pursuant to the exercise or conversion of options, warrants or other similar
convertible or derivative securities are deemed to be outstanding for the
purpose of computing the percentage ownership of such individual or group,
but
are not deemed to be outstanding for the purpose of computing the percentage
ownership of any other person shown in the table.
|
|
|
Amount
and
Nature
of
Beneficial
Ownership
|
|
Approximate
Percentage of
Outstanding
Common Stock
|
|
Bob
Marbut
|
|
651,569(2)
|
|
13.6%
|
| |
|
|
|
|
|
Argyle
Joint Venture
200
Concord Plaza, Suite 700
San
Antonio, Texas 78216
|
|
278,910(3)
|
|
5.8%
|
| |
|
|
|
|
|
Ron
Chaimovski
|
|
310,159
|
|
6.5%
|
| |
|
|
|
|
|
Wesley
Clark
|
|
71,720
|
|
1.5%
|
| |
|
|
|
|
|
John
J. Smith
|
|
47,813
|
|
1.0%
|
| |
|
|
|
|
|
Sapling,
LLC (4)
Fir
Tree Recovery Master Fund, L.P.
Fir
Tree, Inc.
535
Fifth Avenue
31st
Floor
New
York, New York 10017
|
|
292,976
|
|
6.1%
|
| |
|
|
|
|
|
Jonathan
M. Glaser(5)
Daniel
Albert David
Roger
Richter
Pacific
Assets Management, LLC
Pacific
Capital Management, Inc.
JMG
Triton Offshore Fund, Ltd.
|
|
247,751
|
|
5.2%
|
| |
|
|
|
|
|
All
directors and executive officers as a group
(4
individuals)
|
|
1,081,261
|
|
22.61%
|
(1)
The
business address of each of the individuals and entities is 200 Concord Plaza,
Suite 700, San Antonio, Texas 78216.
(2)
Includes 372,659 shares of common stock held by Argyle New Ventures, LP which
is
controlled by Mr. Marbut.
(3)
Mr.
Marbut has voting and dispositive power over the shares held by Argyle Joint
Venture.
(4)
The
information relating to Sapling, Fir Tree Master Recovery Fund and Fir Tree,
Inc. is derived from a Schedule 13G dated December 31, 2006 filed by such
entities with the Securities and Exchange Commission. Sapling may direct the
voting and disposition of 200,241 shares of Argyle’s common stock, Fir Tree
Master Recovery Fund may direct the voting and disposition of 92,735 shares
of
Argyle’s common stock and Fir Tree, Inc. as their investment manager has voting
and dispositive power over all of such securities. The sole member of both
Sapling and Fir Tree Master Recovery Fund is Fir Tree Value Master Fund, LP
and
their investment manager is Fir Tree, Inc. Jeffrey Tannenbaum is the President
of Sapling, LLC and Fir Tree, Inc.
(5)
The
information relating to the indicated stockholders is derived from a Schedule
13G, dated December 8, 2006, filed by such persons with the Securities and
Exchange Commission. The principal business address of Jonathan M. Glaser is
11601 Wilshire Boulevard, Suite 2180, Los Angeles, CA 90025. The principal
business address of Daniel Albert David, Pacific Assets Management, LLC and
Pacific Capital Management, Inc. is 100 Drakes Landing, Suite 207, Greenbrae,
CA
94904. The principal business address of Roger Richter is One Sansome Street,
39th Floor, San Francisco, CA 94104. The principal business address of JMG
Triton Offshore Fund, Ltd. is Citco Building, Wickhams Cay, P.O. Box 662, Road
Town, Tortola, BVI. Each person has shared voting and dispositive power with
respect to each share of Argyle’s common stock owned. Pacific Assets Management,
LLC is the investment adviser to JMG Triton Offshore Fund, Ltd. and Pacific
Capital Management, Inc. is a member of Pacific Assets Management, LLC. Mr.
Glaser, Mr. David and Mr. Richter are control persons of Pacific Capital
Management, Inc. and Pacific Assets Management, LLC.
Argyle
had no options outstanding as of fiscal year end.
Item
13. Certain Relationships and Related Transactions, and Director Independence
Certain
Relationships and Related Transactions
On
June
23, 2005, we issued an aggregate of 937,500 shares of our common stock to the
individuals and entities set forth below for $25,000 in cash, at a purchase
price of $0.027 per share, as follows:
|
Name
|
|
Number
of Shares
|
|
Relationship
to Us
|
|
Argyle
Joint Venture
|
|
296,875
|
|
The
general partner is an entity controlled by Bob Marbut, our Co-Chief
Executive Officer, and Mr. Chaimovski, our other Co-Chief Executive
Officer, owns interests in certain of its limited
partners
|
| |
|
|
|
|
|
Bob
Marbut
|
|
296,875
|
|
These
shares are owned by Argyle New Ventures, L.P., whose general partner
is
owned by Mr. Marbut, our Chairman and Co-Chief Executive
Officer
|
| |
|
|
|
|
|
Ron
Chaimovski
|
|
296,875
|
|
Vice
Chairman and Co-Chief Executive Officer
|
| |
|
|
|
|
|
John
J. Smith
|
|
46,875
|
|
Director
|
On
July
13, 2005, we issued the aforementioned stockholders options to purchase such
additional number of shares as would be necessary to maintain their percentage
ownership in us after the offering in the event the underwriters exercise the
over-allotment option. Such options are exercisable at $0.027 per share only
if
and only to the extent that the over-allotment option is exercised. On September
23, 2005, Messrs. Marbut and Chaimovski, along with their affiliated
entities, transferred an aggregate of 70,313 of their shares and a pro rata
portion of their over-allotment options to Wesley Clark in connection with
his
appointment to the board of directors. On January 30, 2006, the underwriters
exercised a portion of their over-allotment option and on February 1, 2006,
the
stockholders indicated exercised their option for an aggregate of 18,761 shares
of our common stock and we received $506.55 in connection with such exercise.
The remainder of the options terminated unexercised. The holders of the majority
of these shares owned prior to our private placement and initial public offering
will be entitled to make up to two demands that we register these shares. The
holders of the majority of the shares issued prior to the private placement
and
initial public offering may elect to exercise these registration rights at
any
time after the date on which these shares of common stock are released from
escrow, which, except in limited circumstances, is not before January 24, 2009.
In addition, these stockholders have certain “piggy-back” registration rights on
registration statements filed subsequent to the date on which these shares
of
common stock are released from escrow. We will bear the expenses incurred in
connection with the filing of any such registration statements.
On
June
23 and July 6, 2005, Mr. Chaimovski and Argyle New Ventures, L.P., an entity
controlled by Mr. Marbut, advanced a total of $125,000 to us to cover expenses
related to our initial public offering. Such loans were payable with 4% annual
interest on the earlier of June 30, 2006 or the consummation of our initial
public offering. In November 2005, these stockholders loaned us an additional
$30,000 pursuant to 4% promissory notes due the earlier of November 15, 2006
or
the consummation of the initial public offering. These loans were paid off
subsequent to the closing of our initial public offering.
Argyle
New Ventures, LP, an entity controlled by Bob Marbut, and Ron Chaimovski
purchased 125,000 units, consisting of 125,000 shares of our common stock and
warrants to purchase 125,000 shares of our common stock, from us on January
24,
2006 at a purchase price of $8.00 per unit in a private placement. We granted
them demand and “piggy-back” registration rights with respect to the 125,000
shares, the 125,000 warrants and the 125,000 shares underlying the warrants
at
any time commencing on the date we announce that we have entered into a letter
of intent with respect to a proposed business combination. The demand
registration may be exercised by the holders of a majority of such units. We
will bear the expenses incurred in connection with the filing of any such
registration statements.
We
will
reimburse our officers and directors for any reasonable out-of-pocket business
expenses incurred by them in connection with certain activities on our behalf
such as identifying and investigating possible target businesses and business
combinations. There is no limit on the amount of accountable out-of-pocket
expenses reimbursable by us, which will be reviewed only by our board of
directors or a court of competent jurisdiction if such reimbursement is
challenged.
Our
Board
of Directors does not have any policies or procedures that it follows in
connection to transactions it undertakes with related parties. The determination
of any policies or procedures will be made after we consummate a business
combination. Other than the repayment of expenses, Argyle has had no
transactions with related parties since its initial public
offering.
Director
Independence
Argyle’s
Board of Directors has not determined if any of its directors qualifies as
independent, although Argyle’s management believes that Gen. Clark and Mr. Smith
would qualify as independent directors under the rules of the American Stock
Exchange, because they do not currently own a large percentage of Argyle’s
stock, are not currently employed by Argyle, have not been actively involved
in
the management of Argyle and do not fall into any of the enumerated categories
of people who cannot be considered independent in the American Stock Exchange
Rules. Argyle’s Board of Directors will make a determination about independence
after the business combination is consummated. Argyle does not have an audit
committee, nominating committee or compensation committee and therefore the
entire Board of Directors performs those functions for Argyle.
Ernst
& Young LLP audited our financial statements for the year ended December 31,
2006. Goldstein
Golub Kessler LLP acted as our principal accountant from our inception through
April 18, 2006. Through September 30, 2005, Goldstein Golub Kessler
LLP had a continuing relationship with American Express Tax and Business
Services Inc. (TBS), from which it leased auditing staff who were full time,
permanent employees of TBS and through which its partners provide non-audit
services. Subsequent to September 30, 2005, this relationship ceased and
Goldstein Golub Kessler LLP established a similar relationship with RSM
McGladrey, Inc. Goldstein Golub Kessler LLP has no full time employees and
therefore, none of the audit services performed were provided by permanent
full-time employees of Goldstein Golub Kessler LLP. Goldstein Golub Kessler
LLP
manages and supervises the audit and audit staff, and is exclusively responsible
for the opinion rendered in connection with its examination.
Audit
Fees
Fees
for
audit services provided by Ernst & Young LLP totaled $132,878 in 2006,
including fees associated with the audit of the annual financial statements
for
the fiscal year ended December 31, 2006, the reviews of the Company’s quarterly
reports on Form 10-Q, and for services performed in connection with the
Company’s Form S-4 filing in December 2006.
Fees
for
audit services provided by Goldstein Golub Kessler LLP totaled $47,460 in 2005,
including fees associated with the audit of the annual financial statements
for
the fiscal year ended December 31, 2005, the audit of the Company’s balance
sheet at January 30, 2006 included in the Current Report on Form 8-K, and for
services performed in connection with the Company’s registration statement on
Form S-1 initially filed in 2005. In addition, fees of $6,000 were billed in
2006 related to the audit for the fiscal year ended December 31,
2005.
Audit-Related
Fees
Fees
for
audit-related services provided by Ernst & Young LLP totaled $28,500 in
2006. Audit-related services principally include due diligence in connection
with acquisitions.
Other
than the fees described under the caption “Audit Fees” above, Goldstein Golub
Kessler LLP did not bill any fees for services rendered to us during fiscal
year
2005 for assurance and related services in connection with the audit or review
of our financial statements.
Tax
Fees
Fees
for
tax services provided by Ernst & Young LLP, including tax compliance, tax
advice, and tax planning, totaled $11,015 in 2006.
There
were no fees billed by Goldstein Golub Kessler LLP for tax services in 2005,
however, RSM McGladrey, Inc. did charge us $3,264 for tax compliance
services in 2006.
All
Other Fees
There
were no fees billed by Ernst & Young LLP or Goldstein Golub Kessler LLP for
other professional services rendered during the fiscal years ended December
31,
2006 or 2005.
Pre-Approval
of Services
We
do not
have an audit committee. As a result, our board of directors performs the duties
of an audit committee. Our board of directors evaluates and approves in advance
the scope and cost of the engagement of an auditor before the auditor renders
the audit and non-audit services. We do not rely on pre-approval policies and
procedures.
PART
IV
Item
15. Exhibits and Financial Statement Schedules
(a) (1)
Consolidated Financial Statements
Consolidated
Balance
Sheets
Consolidated
Statement
of Operations
Consolidated
Statement
of Stockholders’ Equity
Consolidated
Statement
of Cash Flows
(2) Schedules
None.
(b)
Exhibits
| |
|
|
|
Exhibit
No.
|
|
Description
|
|
3.1
|
|
Second
Amended and Restated Certificate of Incorporation (1)
|
| |
|
|
|
3.2
|
|
By-laws(1)
|
| |
|
|
|
4.1
|
|
Specimen
Unit Certificate(1)
|
| |
|
|
|
4.2
|
|
Specimen
Common Stock Certificate (1)
|
| |
|
|
|
4.3
|
|
Specimen
Warrant Certificate(1)
|
| |
|
|
|
4.4
|
|
Form
of Warrant Agreement between American Stock Transfer & Trust Company
and the Registrant(1)
|
| |
|
|
|
4.5
|
|
Form
of Unit Purchase Option to be granted to Rodman & Renshaw,
LLC(1)
|
|
10.1
|
|
Form
of Letter Agreement among the Registrant, Rodman & Renshaw, LLC and
Argyle Joint Venture (1)
|
| |
|
|
|
10.2
|
|
Form
of Letter Agreement among the Registrant, Rodman & Renshaw, LLC and
Argyle New Ventures L.P. (1)
|
| |
|
|
|
10.3
|
|
Form
of Letter Agreement among the Registrant, Rodman & Renshaw, LLC and
John J. Smith(1)
|
| |
|
|
|
10.4
|
|
Form
of Letter Agreement among the Registrant, Rodman & Renshaw, LLC and
Ron Chaimovski(1)
|
| |
|
|
|
10.5
|
|
Form
of Letter Agreement among the Registrant, Rodman & Renshaw, LLC and
Bob Marbut(1)
|
| |
|
|
|
10.6
|
|
Form
of Letter Agreement among the Registrant, Rodman & Renshaw, LLC and
Wesley Clark(1)
|
| |
|
|
|
10.7
|
|
Form
of Investment Management Trust Agreement between American Stock Transfer
& Trust Company and the Registrant(1)
|
| |
|
|
|
10.8
|
|
Form
of Stock Escrow Agreement between the Registrant, American Stock
Transfer
& Trust Company and the pre-offering stockholders
(1)
|
| |
|
|
|
10.9
|
|
Form
of Registration Rights Agreement among the Registrant and the pre-offering
stockholders(1)
|
| |
|
|
|
10.10
|
|
Form
of Voting Agreement by John J. Smith and Wesley
Clark(1)
|
| |
|
|
|
10.11
|
|
Letter
Agreement between Argyle Security Acquisition Corporation, Rodman
&
Renshaw, LLC and I-Bankers Securities, Inc. dated March 14, 2007.
(2)
|
|
10.12
|
|
Warrant
Clarification Agreement between the Company and American Stock
Transfer
& Trust Company, dated August 10, 2006 (3)
|
| |
|
|
|
10.13
|
|
Unit
Purchase Option Clarification Agreement between the Company and
I-Bankers,
Inc., dated August 10, 2006 (3)
|
| |
|
|
|
10.14
|
|
Unit
Purchase Option Clarification Agreement between the Company and
Rodman
& Renshaw, LLC, dated August 10, 2006 (3)
|
| |
|
|
|
10.15
|
|
Letter
Agreement between Argyle Security Acquisition Corporation, Rodman
&
Renshaw, LLC and I-Bankers Securities, Inc. (4)
|
| |
|
|
|
10.16
|
|
Merger
Agreement by and among Argyle Security Acquisition Corporation,
ISI
Security Group, Inc. and ISI Detention Contracting, Inc.
(5)
|
| |
|
|
|
10.17
|
|
Lease
between the Company and Frost National Bank, Trustee For A Designated
Trust (6)
|
| |
|
|
| 21.1 |
|
List
of Subsidiaries |
| |
|
|
|
31.1
|
|
Certification
of the Co-Chief Executive Officer (Principal Financial Officer) pursuant
to Rule 13a-14(a) of
the Securities Exchange Act, as amended
|
| |
|
|
|
31.2
|
|
Certification
of the Co-Chief Executive Officer and (Principal Executive Officer)
pursuant to Rule 13a-14(a) of
the Securities Exchange Act, as amended
|
| |
|
|
|
32.1
|
|
Certification
of the Co-Chief Executive Officers pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
| (1) |
Incorporated
by reference to the Registrant’s Registration Statement on Form S-1 (File
No. 333-124601).
|
| (2) |
Incorporated
by reference to the Registrant’s Current Report on Form 8-K dated March
14, 2007.
|
| (3) |
Incorporated
by reference to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2006.
|
| (4) |
Incorporated
by reference to the Registrant’s Current Report on Form 8-K dated March
14, 2007.
|
| (5) |
Incorporated
by reference to the Registrant’s Current Report on Form 8-K dated December
8, 2006.
|
| (6) |
Incorporated
by reference to the Registrant’s Current Report on Form 8-K dated April
20, 2006.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act
of
1934, the Registrant had duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
| |
|
|
| |
ARGYLE
SECURITY ACQUISITION CORPORATION
|
|
|
|
|
March
19, 2007
|
By: |
/s/ Bob
Marbut |
| |
Bob
Marbut, Co-Chief Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
| |
|
|
|
March
19, 2007
|
By: |
/s/ Bob
Marbut |
| |
Bob
Marbut, Chairman of the Board and Co-Chief Executive Officer (Principal
accounting and financial officer)
|
| |
|
|
|
March
19, 2007
|
By: |
/s/ Ron
Chaimovski |
| |
Ron
Chaimovski, Co-Chairman of the Board and Co-Chief Executive Officer
(Principal Executive Officer)
|
| |
|
|
|
March
19, 2007
|
By: |
/s/ Wesley
Clark |
| |
Wesley
Clark, Director
|
| |
|
|
|
March
19, 2007
|
By: |
/s/ John
J. Smith |
| |
John
J. Smith, Director
|
| |
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Report
of Independent Registered Public Accounting Firm
|
F-3
|
|
|
|
|
Financial
Statements
|
|
|
Consolidated
Balance Sheet
|
F-4
|
|
Consolidated
Statements of Operations
|
F-5
|
|
Consolidated
Statements of Stockholders’ Equity
|
F-6
|
|
Consolidated
Statements of Cash Flows
|
F-7
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
F-8
- F-12
|
Report
of Independent Registered
Public Accounting Firm
The
Board
of Directors and Stockholders
Argyle
Security Acquisition Corporation
We
have
audited the accompanying consolidated balance sheet of Argyle Security
Acquisition Corporation (the Company) (a development stage company) as of
December 31, 2006, and the related consolidated statements of operations,
stockholders’ equity, and cash flows for the year then ended, and for the period
June 22, 2005 (inception) through December 31, 2006. These financial statements
are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our audits. The
financial statements as of December 31, 2005, and for the period June 22,
2005 (inception) through December 31, 2005, were audited by other auditors
whose report dated February 3, 2006, expressed an unqualified opinion on
those
statements. The financial statements for the period June 22, 2005 (inception)
through December 31, 2005 include no revenues and net loss of $7,743. Our
opinion on the statements of operations, stockholders’ equity, and cash flows
for the period June 22, 2005 (inception) through December 31, 2006, insofar
as it relates to amounts for prior periods through December 31, 2005, is
based solely on the report of other auditors.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform
an
audit of the Company’s internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a
basis
for designing audit procedures that are appropriate in the circumstances,
but
not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and
evaluating the overall financial statement presentation. We believe that
our
audit and the report of other auditors provide a reasonable basis for our
opinion.
In
our
opinion, based on our audit and the report of other auditors, the financial
statements referred to above present fairly, in all material respects, the
financial position of Argyle Security Acquisition Corporation at December
31,
2006, and the results of its operations and its cash flows for the year then
ended and the period from June 22, 2005 (inception) through December 31,
2006, in conformity with U.S. generally accepted accounting
principles.
The
accompanying consolidated financial statements have been prepared assuming
that
Argyle Security Acquisition Corporation will continue as a going concern.
As
more fully described in Note 1, the Company has a working capital deficiency
(excluding funds held in trust) and must consummate an acquisition by July
30,
2007 (or by January 30, 2008 if certain extension criteria have been satisfied)
or be dissolved. These conditions raise substantial doubt about the Company’s
ability to continue as a going concern. (Management’s plans in regard to these
matters also are described in Note 1.) The 2006 financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification
of
liabilities that may result from the outcome of this uncertainty.
|
/s/
Ernst & Young LLP
|
|
|
| |
|
|
| San Antonio, Texas |
|
|
| March 15, 2007 |
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders
Argyle
Security Acquisition Corporation
We
have
audited the accompanying balance sheets of Argyle Security Acquisition
Corporation (a corporation in the development stage) as of December 31, 2005,
and the related statements of operations, stockholders' equity and cash flows
for the period from June 22, 2005 (inception) to December 31, 2005. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on
our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Argyle Security Acquisition
Corporation as of December 31, 2005, and the results of its operations and
its
cash flows for the period from June 22, 2005 (inception) to December 31, 2005
in
conformity with United States generally accepted accounting
principles.
/s/
Goldstein Golub Kessler LLP
GOLDSTEIN
GOLUB
KESSLER LLP
New
York,
New York
February
3, 2006
Argyle
Security Acquisition Corporation
(a
development stage company)
Consolidated
Balance Sheet
| |
|
December
31,
|
|
| |
|
2006
|
|
2005
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
694,115
|
|
$
|
9,608
|
|
|
Cash
and cash equivalents, held in trust
|
|
|
29,453,449
|
|
|
-
|
|
|
Prepaid
expenses
|
|
|
7,333
|
|
|
-
|
|
|
Total
current assets
|
|
|
30,154,897
|
|
|
|
|
|
Deferred
income taxes
|
|
|
27,932
|
|
|
-
|
|
|
Property
and equipment, net of accumulated depreciation of $1,619
|
|
|
4,901
|
|
|
-
|
|
|
Deferred
offering costs
|
|
|
- |
|
|
294,745
|
|
|
Deferred
transaction costs
|
|
|
493,583
|
|
|
-
|
|
|
Total
assets
|
|
$
|
30,681,313
|
|
$
|
304,353
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accrued
expenses
|
|
$
|
624,129
|
|
$
|
132,096
|
|
|
Notes
payable - stockholders
|
|
|
-
|
|
|
155,000
|
|
|
Deferred
underwriting costs
|
|
|
1,162,183
|
|
|
-
|
|
|
Accrued
income taxes
|
|
|
118,855
|
|
|
-
|
|
|
Total
current liabilities
|
|
|
1,905,167
|
|
|
287,096
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock, subject to possible redemption - 764,627 shares at $7.50
per
share
|
|
|
5,738,206
|
|
|
-
|
|
|
Deferred
interest attributable to common stock subject to possible redemption
(net
of taxes of $90,536)
|
|
|
175,747
|
|
|
-
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
|
Preferred
stock — $.0001 par value; 1,000,000 shares authorized; 0
shares issued and outstanding
|
|
|
-
|
|
|
-
|
|
|
Common
stock—$.0001 par value; 89,000,000 shares authorized; issued and
outstanding: 4,781,307 at December 31, 2006 (including 764,627 shares
of common stock subject to possible redemption) and 937,500 at
December
31, 2005
|
|
|
478
|
|
|
94
|
|
|
Additional
paid-in capital
|
|
|
22,696,946
|
|
|
24,906
|
|
|
Retained
earnings/(deficit accumulated) during the development
stage
|
|
|
164,769
|
|
|
(7,743
|
)
|
|
Total
stockholders’ equity
|
|
|
22,862,193
|
|
|
17,257
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
30,681,313
|
|
$
|
304,353
|
|
See
notes
to financial statements
Argyle
Security Acquisition Corporation
(a
development stage company)
Consolidated
Statements of Operations
|
|
|
Year
Ended December 31, 2006
|
|
Inception
(June 22, 2005) through December 31, 2005
|
|
Inception
(June 22, 2005) through December 31, 2006
|
|
|
Operating
expenses
|
|
$
|
1,024,490
|
|
$
|
7,743
|
|
$
|
1,032,233
|
|
|
Other
income and expense
|
|
|
|
|
|
|
|
|
|
|
|
Bank
interest income
|
|
|
20,242
|
|
|
-
|
|
|
20,242
|
|
|
Interest
on cash and cash equivalents held in trust
|
|
|
1,332,087
|
|
|
-
|
|
|
1,332,087
|
|
|
Interest
expense
|
|
|
(64,404
|
)
|
|
-
|
|
|
(64,404
|
)
|
|
Total
other income and expense
|
|
|
1,287,925
|
|
|
-
|
|
|
1,287,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(Loss)
before provision for income taxes
|
|
|
263,435
|
|
|
(7,743
|
)
|
|
255,692
|
|
|
Provision
for income taxes
|
|
|
90,923
|
|
|
-
|
|
|
90,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income/(loss)
|
|
|
172,512
|
|
|
(7,743
|
)
|
|
164,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
interest attributable to common
stock subject to possible redemption (net of taxes)
|
|
|
175,747
|
|
|
-
|
|
|
175,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) allocable to holders of
non-redeemable common stock
|
|
$
|
(3,235
|
)
|
$
|
(7,743
|
)
|
$
|
(10,978
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income/(loss) per share - - basic and diluted
|
|
$
|
0.04
|
|
$
|
(0.01
|
)
|
$
|
0.05
|
|
|
Weighted
average number of shares outstanding
- - basic and diluted
|
|
|
4,477,861
|
|
|
937,500
|
|
|
3,253,327
|
|
|
Net
(loss) per share exclusive of shares and related interest subject
to
possible redemption - - basic and diluted
|
|
$
|
(0.00
|
)
|
$
|
(0.01
|
)
|
$
|
(0.00
|
)
|
|
Weighted
average number of shares outstanding exclusive of shares subject
to
possible redemption -basic and diluted
|
|
|
3,773,985
|
|
|
937,500
|
|
|
2,792,907
|
|
Argyle
Security Acquisition Corporation
(a
development stage company)
|
|
|
|
|
|
|
|
|
Retained
Earnings/
|
|
|
|
|
|
|
|
|
|
|
|
|
(Deficit
|
|
|
|
|
|
|
|
|
|
|
Paid-in
|
|
Accumulated)
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
During
the
|
|
Total
|
|
|
|
|
Common
Stock
|
|
in
Excess
|
|
Development
|
|
Stockholders'
|
|
|
|
|
Shares
|
|
Amount
|
|
of
Par
|
|
Stage
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
issuance on June 23, 2005 at $.027
|
|
|
937,500
|
|
$
|
94
|
|
$
|
24,906
|
|
|
|
|
$
|
25,000
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
$
|
(7,743
|
)
|
|
(7,743
|
)
|
|
Balances,
at December 31, 2005
|
|
|
937,500
|
|
$
|
94
|
|
$
|
24,906
|
|
$
|
(7,743
|
)
|
$
|
17,257
|
|
|
Stock
issuance on January 24, 2006 at $8
|
|
|
125,000
|
|
|
12
|
|
|
999,988
|
|
|
-
|
|
|
1,000,000
|
|
|
Stock
issuance on January 30, 2006 at $8
|
|
|
3,625,000
|
|
|
362
|
|
|
28,999,638
|
|
|
-
|
|
|
29,000,000
|
|
|
Stock
issuance on January 30, 2006 at $8
|
|
|
75,046
|
|
|
8
|
|
|
600,360
|
|
|
-
|
|
|
600,368
|
|
|
Proceeds
from issuance of option to underwriters
|
|
|
-
|
|
|
-
|
|
|
100
|
|
|
-
|
|
|
100
|
|
|
Expenses
of offerings
|
|
|
-
|
|
|
-
|
|
|
(2,145,230
|
)
|
|
-
|
|
|
(2,145,230
|
)
|
|
Less:
Proceeds subject to possible redemption of 764,627 shares and associated
deferred interest
|
|
|
-
|
|
|
-
|
|
|
(5,913,953
|
)
|
|
-
|
|
|
(5,913,953
|
)
|
|
Stock
based compensation
|
|
|
-
|
|
|
-
|
|
|
130,632
|
|
|
-
|
|
|
130,632
|
|
|
Officer
and director option exercise
|
|
|
18,761
|
|
|
2
|
|
|
505
|
|
|
-
|
|
|
507
|
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
172,512
|
|
|
172,512
|
|
|
Balances
at
December 31, 2006
|
|
|
4,781,307
|
|
$
|
478
|
|
$
|
22,696,946
|
|
$
|
164,769
|
|
$
|
22,862,193
|
|
See
notes
to financial statements
Argyle
Security Acquisition Corporation
(a
development stage company)
|
|
|
Year
ended
December
31,
2006
|
|
Inception
through
December
31,
2005
|
|
Inception
through
December
31,
2006
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
|
Net
income/(loss)
|
|
$
|
172,512
|
|
$
|
(7,743
|
)
|
$
|
164,769
|
|
|
Adjustment
to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
Stock
based compensation
|
|
|
130,632
|
|
|
-
|
|
|
130,632
|
|
|
Depreciation
expense
|
|
|
1,619
|
|
|
-
|
|
|
1,619
|
|
|
Increase
in prepaid expenses
|
|
|
(7,333
|
)
|
|
-
|
|
|
(7,333
|
)
|
|
Increase
in accrued expenses
|
|
|
177,910
|
|
|
4,096
|
|
|
182,006
|
|
|
Interest
earned on cash and cash equivalents, held in trust
|
|
|
(1,332,087
|
)
|
|
-
|
|
|
(1,332,087
|
)
|
|
Accrued
interest on deferred underwriting costs
|
|
|
63,938
|
|
|
-
|
|
|
63,938
|
|
|
Increase
in deferred income tax asset
|
|
|
(27,932
|
)
|
|
-
|
|
|
(27,932
|
)
|
|
Increase
in accrued income taxes
|
|
|
118,855
|
|
|
-
|
|
|
118,855
|
|
|
Interest
income released from the trust
|
|
|
600,000
|
|
|
-
|
|
|
600,000
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
(101,886
|
)
|
|
(3,647
|
)
|
|
(105,533
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of investments held in trust
|
|
|
(318,720,208
|
)
|
|
-
|
|
|
(318,720,208
|
)
|
|
Maturity
of investments held in trust
|
|
|
289,998,845
|
|
|
-
|
|
|
289,998,845
|
|
|
Purchase
of property and equipment
|
|
|
(6,520
|
)
|
|
-
|
|
|
(6,520
|
)
|
|
Transaction
costs
|
|
|
(58,343
|
)
|
|
-
|
|
|
(58,343
|
)
|
|
Net
cash used in investing activities
|
|
|
(28,786,226
|
)
|
|
-
|
|
|
(28,786,226
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
Gross
proceeds from public offering and private placement
|
|
|
30,600,368
|
|
|
-
|
|
|
30,600,368
|
|
|
Offering
costs
|
|
|
(873,356
|
)
|
|
(166,745
|
)
|
|
(1,040,101
|
)
|
|
Proceeds
from issuance and exercises of options
|
|
|
607
|
|
|
-
|
|
|
607
|
|
|
Proceeds
from notes payable, stockholders
|
|
|
-
|
|
|
155,000
|
|
|
155,000
|
|
|
Repayment
of notes payable, stockholders
|
|
|
(155,000
|
)
|
|
-
|
|
|
(155,000
|
)
|
|
Proceeds
from sale of common stock to founding stockholders
|
|
|
-
|
|
|
25,000
|
|
|
25,000
|
|
|
Net
cash provided by financing activities
|
|
|
29,572,619
|
|
|
13,255
|
|
|
29,585,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash
|
|
|
684,507
|
|
|
9,608
|
|
|
694,115
|
|
|
Cash,
beginning of period
|
|
|
9,608
|
|
|
-
|
|
|
-
|
|
|
Cash,
end of period
|
|
$
|
694,115
|
|
$
|
9,608
|
|
$
|
694,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
3,177
|
|
$
|
-
|
|
$
|
3,177
|
|
|
Supplemental
schedule of non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Accrual
of deferred underwriting costs
|
|
$
|
1,098,245
|
|
$
|
-
|
|
$
|
|
|
|
Accrual
of costs of public offering
|
|
$
|
6,885
|
|
$
|
128,000
|
|
$
|
6,885
|
|
|
Supplemental
schedule of non-cash investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Accrual
of deferred transaction costs
|
|
$
|
435,240
|
|
$
|
-
|
|
$
|
435,240
|
|
See
notes
to financial statements
Argyle
Security Acquisition Corporation
(a
development stage company)
Notes
to Consolidated Financial Statements
December
31, 2006
Note
1 - Background, formation and summary of significant accounting
policies
The
Company was incorporated in Delaware on June 22, 2005 as a blank check company
formed to acquire, through merger, capital stock exchange, asset acquisition
or
other similar business combination, a business in the security
industry.
The
Company completed a private placement (the “Private Placement”) on January 24,
2006 and received net proceeds of approximately $900,000. Also on January 24,
2006, the registration statement for the Company’s initial public offering (the
“Public Offering”) was declared effective. The Company consummated the Public
Offering on January 30, 2006 and received net proceeds of approximately $27.3
million. The Company’s management has broad discretion with respect to the
specific application of the net proceeds of the Private Placement and the Public
Offering (collectively the “Offerings”), although substantially all of the net
proceeds of the Offerings are intended to be generally applied toward
consummating a business combination with a target company. As used herein,
a
“target business” shall include an operating business in the security industry
and a “business combination” shall mean the acquisition by the Company of a
target business.
Of
the
proceeds from the Offerings, approximately $28.7 million was deposited into
a
trust account (“Trust Account”) until the earlier of (i) the consummation of the
first business combination or (ii) the distribution of the Trust Account as
described below. The amount in the Trust Account as of December 31, 2006
included approximately $1.4 million total of contingent underwriting
compensation, contingent private placement fees and associated interest which
will be paid to the underwriters if a business combination is consummated.
(See
Note 9 for a subsequent event which impacts the underwriters costs.) The
remaining proceeds may be used to pay for business, legal and accounting due
diligence on prospective acquisitions and continuing general and administrative
expenses.
On
December 8, 2006, Argyle, Argyle’s wholly-owned subsidiary ISI Security Group,
Inc. (referred to in this document as the Merger Subsidiary) and ISI entered
into a merger agreement pursuant to which the Merger Subsidiary will merge
into
ISI, and ISI will become a wholly-owned subsidiary of Argyle. Pursuant to the
merger agreement, Argyle will pay ISI’s security holders an aggregate of
$16,300,000 and 1,180,000 shares of Argyle’s common stock (valued at $8,708,400,
based on the closing price of the common stock on February 28, 2007). In the
event that ISI’s earnings before interest, taxes, depreciation and amortization
(EBITDA) for the year ended December 31, 2006 are greater than $4,500,000 and
its backlog of orders at February 28, 2007 is greater than $80,000,000
(including inter-company amounts), Argyle will pay the stockholders of ISI
an
additional $1,900,000. The calculations of EBITDA and the February 28, 2007
backlog will be initially calculated by ISI and such calculations will be
presented to Argyle. Argyle will verify the calculations and, if they are not
accurate, object to the calculations. Pursuant to the merger agreement, if
there
is a dispute over the calculation of (i) EBITDA that cannot be resolved between
the parties, the parties will engage a third party accountant to resolve the
dispute, and (ii) the February 28, 2007 backlog, then ISI and Argyle must
negotiate a resolution to the dispute among themselves. The calculation of
ISI’s
EBITDA is subject to an adjustment of $900,000 relating to certain events that
Argyle and ISI agreed should not reduce the EBITDA calculation. Argyle
anticipates that the calculation of February 28, 2007 backlog will be finalized
in late March or early April 2007. In addition, Argyle will assume approximately
$6,000,000 of long term debt (not including capitalized leases) and up to
$9,000,000 pursuant to a line of credit (of which approximately $5,000,000
was
outstanding as of December 31, 2006).
The
Company will proceed with the combination only if a majority of the shares
of
common stock voted by the public stockholders are voted in favor of the business
combination and public stockholders owning less than 20% of the aggregate shares
sold in this offering and the private placement exercise their redemption
rights. The officers and directors of the Company (“Initial Stockholders”), have
agreed to vote their 956,261 founding shares of common stock in accordance
with
the vote of the majority in interest of all other stockholders of the Company
with respect to any business combination and to vote the 125,000 shares of
common stock included in the units they purchased in the Private
Placement and any shares they acquire in the aftermarket in favor of the
business combination. After consummation of the Company’s first business
combination, these voting agreements will no longer be applicable.
With
respect to the first business combination which is approved and consummated,
any
holder of shares sold in the Public Offering, other than the Initial
Stockholders and their nominees (the “Public Stockholders”) who voted against
the business combination may demand that the Company redeem his or her shares.
The per share redemption price will equal $7.50 per share (see Note 9) plus
interest earned thereon in the Trust Account, net of taxes payable and $600,000
of interest income which was released from the Trust Account in September,
2006
to fund our working capital. Public Stockholders holding up to 19.99% of the
aggregate number of shares sold in this offering and the private placement
may
seek redemption of their shares in the event of a business combination.
Accordingly, amounts classified as common stock subject to possible redemption
of approximately $5.7 million, and the associated deferred interest of
approximately $176,000 have been reflected in the accompanying balance
sheet.
The
Company’s Certificate of Incorporation provides for liquidation of the Company
in the event that the Company does not consummate a business combination within
18 months from the date of consummation of the Public Offering (July 30, 2007),
or 24 months from the consummation of the Public Offering (January 30, 2008)
if
certain extension criteria have been satisfied. The Initial Stockholders have
waived their right to liquidation distributions with respect to the shares
of
common stock owned by them prior to the Public Offering. Accordingly, in the
event of such a liquidation, the amount in the Trust Account will be distributed
to the holders of the shares sold in the Public Offering.
There is no assurance that the Company will be able to successfully complete
a
business combination within the time frame discussed above. That factor and
the
Company's declining cash available outside of the Trust Account raise
substantial doubt about the Company's ability to continue as a going concern.
To
address some of the Company's liquidity needs, the Company's Board of Directors
has discussed and preliminarily approved a $300,000 bridge loan from our
Co-Chief Executive Officers, directors and consultants. The terms and conditions
of the bridge loan have not yet been negotiated and the documentation for the
bridge loan has not yet been completed. The Company anticipates that the bridge
financing will close in late March or April 2007. Even after considering such
proposed financing, the Company anticipates that the costs to consummate the
acquisition will greatly exceed its available cash outside of the Trust Account.
The Company expects these costs would ultimately be borne by the combined
company from the funds held in the Trust Account if the proposed acquisition
is
completed. If it is not completed, the costs would be subject to the potential
indemnification obligations of Argyle's officers and directors of the Trust
Account related to expenses incurred for vendors or service providers. If these
obligations are not performed or are inadequate, it is possible that vendors
or
service providers could seek to recover these expenses from the Trust Account,
which could ultimately deplete the Trust Account and reduce a stockholder's
current pro rata portion of the Trust Account upon liquidation.
Cash
and cash equivalents
The
Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
Income
taxes
Deferred
income taxes are recorded based on enacted statutory rates to reflect the tax
consequences in future years of the differences between the tax bases of assets
and liabilities and their financial reporting amounts. Deferred tax assets
which
will generate future tax benefits are recognized to the extent that realization
of such benefits through future taxable earnings or alternative tax strategies
in the foreseeable short term future is more likely than not.
Recently
issued accounting pronouncements
In
December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No.
123 (revised 2004), "Share based payment" ("SFAS 123(R)"). SFAS 123(R) requires
all share-based payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their fair
values. The Company adopted SFAS 123(R) on January 1, 2006.
In
June,
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (FIN 48), an interpretation of Statement of Financial Accounting
Standards No. 109, “Accounting for Income Taxes” (FAS 109). FIN 48
clarifies the accounting for uncertainty in income taxes by prescribing a
recognition threshold for tax positions taken or expected to be taken in a
tax
return. FIN 48 is effective for fiscal years beginning after December 15,
2006. We are currently evaluating the impact FIN 48 will have on our
financial position or results of operations.
Transaction
costs
The
Company has capitalized approximately $.5 million related to the ISI
acquisition. These costs are primarily composed of attorney and accountants’
fees and bankers’ fees regarding the fairness opinion.
Use
of estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of
income and expenses during the reporting period. Actual results could differ
from those estimates.
Basis
of presentation
The
consolidated financial statements include the
accounts of the Company and our wholly-owned subsidiary, ISI Security Group,
Inc. All significant intercompany transactions are eliminated in the
consolidation process.
Note
2 - Offerings
Public
Offering
On
January 30, 2006, the Company sold 3,700,046 units (which includes 75,046 units
sold by the underwriters pursuant to a partial exercise of their over-allotment
option) to the public at a price of $8.00 per unit. Each unit consists of one
share of the Company’s common stock, $0.0001 par value, and one redeemable
common stock purchase warrant (“warrant”). Each warrant entitles the holder to
purchase from the Company one share of common stock at an exercise price of
$5.50 commencing the later of the completion of a business combination with
a
target business or January 24, 2007 and expiring January 24, 2011. The warrants
are redeemable by the Company at a price of $.01 per warrant upon 30 days notice
after the warrants become exercisable, only in the event that the last sale
price of the common stock is at least $11.50 per share for any 20 trading days
within a 30 trading day period ending three business days before a notice of
redemption is delivered.
Private
Placement
On
January 24, 2006, the Company sold to its officers an aggregate of 125,000
units
identical to the units sold in the Public Offering at a price of $8.00 per
unit.
Note
3 - Notes Payable to Stockholders
In
2005,
the Company issued unsecured promissory notes to the officers of the Company
totaling $155,000. The Notes had an interest rate of 4% per annum and were
paid
in full with proceeds from the Public Offering, including aggregate interest
of
$3,177.
Note
4 - Stockholders' Equity and Stock-Based Compensation
On
July
13, 2005 the Company granted to its officers, directors and their respective
affiliates certain options, which were exercisable only in the event the
underwriters exercised the over allotment option, to purchase that number of
shares enabling them to maintain their 20% ownership interest in the company
(without taking into account the units they purchased in the private placement).
The measurement date was deemed to be January 30, 2006, the date the over
allotment was exercised because the number of options to be issued was not
known
until that date.
On
January 30, 2006 the underwriters exercised the over allotment option in the
amount of 75,046 units. On February 1, 2006 the officers and directors exercised
their options and purchased 18,761 units for an aggregate cost of $507. The
compensation cost, recorded in operating expenses, resulting from these
share-based payments was $130,632 at January 30, 2006 using the Black-Scholes
pricing model. This model was developed for use in estimating the fair value
of
traded options that have no vesting restrictions and are fully transferable.
The
fair value of the options was estimated at the measurement date using the
following assumptions:
|
|
· |
Weighted
average volatility factor of 0.10;
|
|
|
· |
No
expected dividend payments;
|
|
|
· |
Weighted
average risk-free interest rate of
5%;
|
|
|
· |
A weighted
average expected life of 0.13
years.
|
The
fair
value of each option was $6.99 per share. The exercise price of each option
was
$0.027 per share. All options vested immediately at the measurement date and
no
further options may be exercised. Compensation expense was recognized
immediately and recorded as an operating expense.
As
of
December 31, 2006, no officer or director of the Company holds options to
purchase the Company’s securities.
The
Company’s officers and their respective affiliates purchased an aggregate
of 125,000 units in the Private Placement, but have waived their right to
liquidation distributions with respect to the shares of common stock included
in
such units. Accordingly, in the event of such a liquidation, the amount in
the
Trust Account will be distributed to the holders of the shares sold in the
Public Offering.
The
Company sold to the underwriters for $100, options to purchase up to an
aggregate of 187,500 units. The units issuable upon exercise of these options
are identical to those sold on January 24, 2006. These options will
be exercisable at $8.80 per unit commencing on the later of the
consummation of a business combination or one year from January 24, 2006, and
expiring January 24, 2011. The options to purchase the 187,500 units and the
Securities underlying such units have been deemed compensation by the National
Association of Securities Dealers (“NASD”) and are therefore subject to a
180-day lock-up pursuant to Rule 2710(g) (1) of the NASD Conduct Rules.
Additionally, these options may not be sold, transferred, assigned, pledged
or
hypothecated for a one-year period (including the foregoing 180-day period)
following January 24, 2006. However, these options may be transferred to any
underwriter and selected dealer participating in the offering and their bona
fide officers or partners.
The
Company accounted for these purchase options as a cost of raising capital and
included the instrument as equity in its financial statements. Accordingly,
there is no net impact on the Company’s financial position or results of
operations, except for the recording of the $100 proceeds from the sale. The
Company has estimated, based upon a Black Scholes model, that the fair value
of
the purchase options on the date of sale was approximately $3.40 per unit,
(a
total value of approximately $637,500) using an expected life of five years,
volatility of 44%, and a risk-free rate of 5%. However, because the Company’s
units do not have a trading history, the volatility assumption was based on
information currently available to management. The volatility estimate was
derived using historical data of public companies in the proposed industry.
The
Company believes the volatility estimate calculated from these companies was
a
reasonable benchmark to use in estimating the expected volatility of our units;
however, the use of an index to estimate volatility may not necessarily be
representative of the volatility of the underlying securities. Although an
expected life of five years was used in the calculation, if the Company does
not
consummate a business combination within the prescribed time period and it
liquidates, the options will become worthless.
The
Company has engaged Rodman & Renshaw, LLC (the "Representative"), on a
non-exclusive basis, as its agent for the solicitation of the exercise of the
warrants. To the extent not inconsistent with the guidelines of the NASD and
the
rules and regulations of the Securities and Exchange Commission, the Company
has
agreed to pay the Representative for bona fide services rendered a commission
equal to 5% of the exercise price, if the exercise was solicited by the
Representative. In addition to soliciting, either orally or in writing, the
exercise of the warrants, the Representative’s services may also include
disseminating information, either orally or in writing, to warrant holders
about
the Company or the market for the Company’s securities, and assisting in the
processing of the exercise of the warrants. No compensation will be paid to
the
Representative upon the exercise of the warrants if:
| · |
the
market price of the underlying shares of common stock is lower than
the
exercise price;
|
| · |
the
holder of the warrants has not confirmed in writing that the
representative solicited the
exercise;
|
| · |
the
warrants are held in a discretionary
account;
|
| · |
the
warrants are exercised in an unsolicited transaction;
or
|
| · |
the
arrangements to pay the commission are not disclosed to warrant
holders at the time of exercise.
|
Note
5 - Common stock reserved for issuance
As
of December 31, 2006, 3,825,046 shares of common stock were reserved for
issuance upon exercise of redeemable warrants and 375,000 shares of common
stock
were reserved for issuance pursuant to the underwriters’ unit purchase option
described above.
Note
6 - Preferred Stock
The
Company is authorized to issue 1,000,000 shares of preferred stock with such
designations, voting and other rights and preferences, as may be determined
from
time to time by the Board of Directors. No shares of preferred stock are
currently issued or outstanding.
Significant
components of our deferred tax assets (liabilities) at December 31, 2006 and
2005 are as follows:
| |
|
2006
|
|
2005
|
|
|
Net
Operating Losses
|
|
|
-
|
|
|
922
|
|
|
Stock-Based
Compensation
|
|
|
44,415
|
|
|
-
|
|
|
Other
- net
|
|
|
(16,483
|
)
|
|
1,711
|
|
|
Subtotal
|
|
|
27,932
|
|
|
2,633
|
|
|
Deferred
tax asset valuation allowance
|
|
|
-
|
|
|
(2,633
|
)
|
|
Net
deferred tax assets
|
|
|
27,932
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
The
components of income tax expense for the years ended December 31, 2006 and
2005
are as follows:
| |
|
2006
|
|
2005
|
|
|
Federal:
|
|
|
|
|
|
|
|
|
Current
|
|
|
118,855
|
|
|
-
|
|
|
Deferred
- net
|
|
|
(27,932
|
)
|
|
-
|
|
|
Total
|
|
|
90,923
|
|
|
-
|
|
A
reconciliation of income tax expense and the amount computed by applying the
statutory federal income tax rate (34%) to income before income taxes for the
years ended December 31, 2006 and 2005 are as follows:
| |
|
2006
|
|
2005
|
|
|
Taxes
computed at federal statutory rate
|
|
|
89,568
|
|
|
(2,633
|
)
|
|
Increases
(decreases) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
Change
in valuation allowance
|
|
|
(2,633
|
)
|
|
2,633
|
|
|
Other
|
|
|
3,988
|
|
|
|
|
|
Total
|
|
|
90,923
|
|
|
-
|
|
The
change in the valuation allowance for 2006 is the result of the utilization
of
the 2005 net operating loss.
Note
8 - Office lease
The
Company expensed approximately $61,000 in connection with its office lease
during 2006. The lease was extended in January 2007 for six months and currently
expires in July 2007.
Note 9
- Subsequent Events (Unaudited)
On
February 27, 2007, the Company’s Board of Directors discussed and
preliminarily approved a $300,000 bridge loan from our Co-Chief Executive
Officers, directors and consultants. The terms and conditions of the
bridge loan have not yet been negotiated and the documentation
for the bridge loan has not yet been completed. The Company anticipates
that this bridge financing will close in late March or April
2007.
On
March 14, 2007, the underwriters from the
Company's initial public offering agreed to forfeit any and all rights or claims
to a pro-rata portion of the deferred underwriting costs and associated accrued
interest with respsect to any shares of common stock that are redeemed in
connection with the proposed acquisition. As a result of the agreement, the
redemption price of our common stock, without considering interest earned in
the
trust, taxes payable and the $600,000 of interest released to the Company for
working capital, increased by $.36 per share to $7.50 per share, and the amount
of common stock subject to possible redemption increased by approximately $.3
million to approximately $5.7 million. Additionally, the deferred underwriting
cost liability was reduced by approximately $.3 million.
Note
10 - Quarterly Financial Data (Unaudited)
The
unaudited consolidated results of operations by quarter are summarized
below:
| |
|
Year
Ended December 31, 2006
|
|
| |
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
|
Net
income /(loss)
|
|
$ |
(104,682
|
)
|
$
|
73,700
|
|
$
|
102,047
|
|
|
101,447
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income /(loss) allocable to holders
of non-redeemable common stock
|
|
|
(148,041
|
)
|
|
3,105
|
|
|
63,060
|
|
|
78,641
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income /(loss) per share
— basic
and diluted
|
|
|
(0.03
|
)
|
|
0.02
|
|
|
0.02
|
|
|
0.02
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income /(loss) per share exclusive
of shares and related interest subject
to possible redemption — basic and diluted
|
|
|
(0.05
|
)
|
|
0.00
|
|
|
0.02
|
|
|
0.02
|
|
| |
|
Inception
(June 22, 2005) through December 31, 2005
|
|
|
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
|
Net
loss
|
|
$ |
(88
|
)
|
$ |
(4,449
|
)
|
$ |
(3,206
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share — basic
and diluted
|
|
|
(0.00
|
)
|
|
(0.00
|
)
|
|
(0.00
|
)
|