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EXHIBIT 10.31  


 
 

EXCHANGE AND RECAPITALIZATION AGREEMENT    
    


        This Exchange and Recapitalization Agreement (together with the Exhibits hereto, the "Agreement") is made as of November 15, 2004 by and among
Tri-S Security Corporation, a Georgia corporation (the "Company"), the holders (collectively, the "Shareholders") of all the Company's outstanding shares of common stock, $0.001 par value
per share (the "Common Stock"), series A convertible preferred stock, $1.00 par value per share (the "Series A Convertible Preferred Stock"), and series B convertible preferred
stock, $1.00 par value per share (the "Series B Convertible Preferred Stock"), and the holders of all the Company's outstanding options and warrants to purchase Common Stock (the "Option
Holders"). 


        WHEREAS, the Company presently is preparing for an underwritten initial public offering of Common Stock to be registered on a registration
statement on Form S-1 (together with all amendments and supplements thereto, the "Registration Statement") under the Securities Act of 1933, as amended (the "Initial Public
Offering"); 


        WHEREAS, the Company currently has authorized (i) 25,000,000 shares of Common Stock, of which 2,558,000 shares are outstanding on
the date hereof, and (ii) 10,000,000 shares of preferred stock, $1.00 par value per share (the "Preferred Stock"), of which (a) 1,000,000 shares are designated as Series A
Convertible Preferred Stock and 100,000 shares of which are outstanding as of the date hereof, (b) 250,000 shares are designated as Series B Convertible Preferred Stock and 40,000 shares
of which are outstanding as of the date hereof, and (c) 100 shares are designated as series C redeemable preferred stock, $1.00 par value per share (the "Series C Redeemable
Preferred Stock"), and all of which are outstanding as of the date hereof, with the Series A Convertible Preferred Stock, Series B Convertible Preferred Stock and Series C
Redeemable Preferred Stock having the relative rights and preferences as set forth in the Company's Articles of Incorporation in effect as of the date hereof; and 


        WHEREAS, in anticipation of the Initial Public Offering, the Company desires to exchange all of the Company's outstanding Common Stock,
Series A Convertible Preferred Stock and Series B Convertible Preferred Stock and all of the outstanding options and warrants to purchase Common Stock as set forth herein (the
"Exchange"), with the Exchange to be effective on a date to be chosen by the Company's Chief Executive Officer (the "Exchange Date"), which date shall be a date immediately prior to the date upon
which the Company, in the judgment of its Chief Executive Officer, anticipates
that the Registration Statement shall be declared effective by the Securities and Exchange Commission ("SEC"); 


        NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and for other good and valuable consideration,
the receipt and sufficiency of which is hereby mutually acknowledged, the parties hereto agree as follows: 


        1.    Exchange.    



        1.1.    The
Company and each Shareholder acknowledge and agree that, effective upon the Exchange Date, the shares of capital stock of the Company held by such Shareholder as of
the date hereof as set forth on Exhibit A attached hereto shall be exchanged for a number of post-Exchange shares of Common Stock equal to the product of such Shareholder's
Ownership Percentage multiplied by the Post-Exchange Outstanding Share Number. As used herein (i) "Ownership Percentage" for each Shareholder is set forth opposite such
Shareholder's name on Exhibit A and is calculated for each Shareholder by dividing (a) the number of shares of Common Stock held by such Shareholder as of the date hereof (assuming the
conversion into Common Stock on the date hereof of all shares of Series A Convertible Preferred Stock and Series B Convertible Preferred Stock held by such Shareholder immediately prior
to the date hereof) as set forth opposite such Shareholder's name on Exhibit A, by (b) 3,708,000, which is the total number of shares of Common Stock outstanding on the date hereof
(assuming the conversion into Common Stock on the date hereof of all shares of Series A Convertible Preferred Stock and 








 

Series B
Convertible Preferred Stock outstanding immediately prior to the date hereof) as set forth on Exhibit A (the "Pre-Exchange Outstanding Share Number"); and
(ii) "Post-Exchange Outstanding Share Number" means the number of shares of Common Stock which the Company's Chief Executive Officer determines should be outstanding upon the
completion of the Exchange; provided, however, that the Post-Exchange Outstanding Share Number shall in no event be less than 1,200,000 and shall not include the shares of Common Stock
underlying any Post-Exchange Option (as defined below). For purposes of example, Exhibit B sets forth opposite each Shareholder's name the number of shares of Common Stock such
Shareholder would receive upon completion of the Exchange pursuant to this Section 1.1 if the Post-Exchange Outstanding Share Number is 1,200,000. 



        1.2.    Each
of the Shareholders acknowledges and agrees that all certificates representing shares of capital stock of the Company that are issued and outstanding immediately
prior to the Exchange Date (the "Original Certificates") shall, upon the Exchange Date, be deemed to represent only a right to receive a replacement certificate (each, a "Replacement Certificate")
representing the applicable number of
shares of Common Stock to be received by such Shareholder in connection with the Exchange. Each Shareholder further acknowledges and agrees that upon issuance of the Replacement Certificates, the
Original Certificates shall be deemed cancelled without any further action on the part of the Company or such Shareholder. 



        1.3.    The
Company and each Option Holder acknowledge and agree that, effective upon the Exchange Date, the option or warrant to purchase shares of Common Stock held by such
Option Holder as of the date hereof as set forth on Exhibit B attached hereto (the "Pre-Exchange Option") shall be exchanged for an option (the "Post-Exchange Option")
to purchase a number of post-Exchange shares of Common Stock equal to the product of (i) the quotient obtained by dividing the Post-Exchange Outstanding Share Number by
the Pre-Exchange Outstanding Share Number, multiplied by (ii) the number of shares of Common Stock underlying the Pre-Exchange Option. Each Post-Exchange
Option shall have an exercise price equal to the quotient obtained by dividing (i) the product of the number of shares of Common Stock underlying the associated Pre-Exchange Option
multiplied by the per share exercise price of such Pre-Exchange Option, by (ii) the number of shares of Common Stock underlying such Post-Exchange Option. On the
Exchange Date, the Company shall deliver to each Option Holder an executed option agreement representing the Post-Exchange Option such holder is entitled to receive in a form reasonably
acceptable to the parties thereto. Each Option Holder acknowledges and agrees that all agreements or certificates representing the Pre-Exchange Option held by such Option Holder as of the
date hereof shall, upon the Exchange Date, be cancelled and terminated without any further action on the part of the Company or such Option Holder. 




        2.    Exchange Date.    The parties hereto intend for the Exchange to occur on a date prior to
the date upon which the Registration Statement shall be declared effective by the SEC. In the event that the SEC has not declared the Registration Statement effective on or before a date which is five
business days following the Exchange Date, then the Shareholders and the Company (unless they otherwise unanimously agree) intend and agree that the Exchange (as contemplated by Section 1)
shall become null and void and of no further force or effect (except that such nullification shall not limit any right of enforcement of, or for damages in connection with, any breach of this
Agreement on the part of any party). In the event that the Exchange shall become null and void as herein specified and certain partial performances hereunder shall have been completed by the parties
hereto with respect to the Exchange, the parties severally covenant and agree to take any and all action and to file any and all instruments and documents as shall be necessary, appropriate or, upon
the reasonable request of any party hereto, desirable in order to restore all parties to their respective rights and obligations immediately prior to the Exchange Date. 


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	3.
	Representations and Warranties of Shareholders. Each Shareholder represents and warrants to the Company that the following statements
are true and correct: 




        (i)    the
shares of Common Stock, Series A Convertible Preferred Stock and Series B Convertible Preferred Stock held by such Shareholder as of the date hereof as
set forth on Exhibit A are owned by such Shareholder free and clear of all claims, liens, pledges, options, charges, security interests, mortgages, deeds of trust, encumbrances or rights of any
third party of any nature whatsoever; 


        (ii)    in
the Exchange, each Shareholder will convey to the Company good title to the shares of Common Stock, Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock held by such Shareholder as of the date hereof as set forth on Exhibit A attached hereto free and clear of all claims, liens, pledges, options, charges, security
interests, mortgages, deeds of trust, encumbrances or rights of any third party of any nature whatsoever; 


        (iii)    if
such Shareholder is not a natural person, then this Agreement, when executed and delivered by such Shareholder, shall have been duly authorized, executed and
delivered by and on behalf of such Shareholder, and shall constitute the valid and binding agreement of such Shareholder, enforceable in accordance with its terms, except as enforceability may be
limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; 


        (iv)    if
such Shareholder is not a natural person, then such Shareholder has the requisite power and authority to enter into this Agreement and to perform its obligations
hereunder; 


        (v)    such
Shareholder is acquiring the shares of Common Stock issuable to such Shareholder upon the Exchange for investment purposes only, for its own account and not with a
view to, or for resale in connection with, any distribution thereof in violation of applicable securities laws; 


        (vi)    such
Shareholder has been advised that the shares of Common Stock issuable to such Shareholder upon the Exchange will not be registered under the Securities Act of
1933, as amended ("Securities Act"), or applicable state securities laws and that such shares must be held indefinitely unless the offer and sale thereof are subsequently registered under the
Securities Act or an exemption from such registration is available; 



        (vii)    such
Shareholder (a) has knowledge, skill and experience in financial, business and investment matters, (b) is capable of evaluating the merits and risks
of the receipt of the shares of Common Stock issuable to such Shareholder upon the Exchange, (c) is an "accredited investor" as that term is defined in Rule 501(a) of Regulation D
promulgated under the Securities Act, and (d) has the ability to bear the risk of losing such Shareholder's entire position in shares of Common
Stock issuable to such Shareholder upon the Exchange; and 



        (viii)    such
Shareholder acknowledges and agrees that the certificates evidencing the shares of Common Stock issuable to such Shareholder upon the Exchange will bear a
restrictive legend in substantially the following form: 


THE
SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAW AND THEY MAY NOT BE OFFERED FOR SALE OR SOLD IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT THEREUNDER OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. 




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THESE
SECURITIES HAVE BEEN ISSUED OR SOLD IN RELIANCE ON PARAGRAPH (13) OF CODE SECTION 10-5-9 OF THE "GEORGIA SECURITIES ACT OF 1973,' AND MAY NOT BE SOLD OR
TRANSFERRED EXCEPT IN A TRANSACTION WHICH IS EXEMPT UNDER SUCH ACT OR PURSUANT TO AN EFFECTIVE REGISTRATION UNDER SUCH ACT. 





        4.    Representations and Warranties of the Company.    The Company represents and warrants to
the Shareholders that the following statements are true and correct: 




        (i)    upon
issuance and delivery to the Shareholders of the shares of Common Stock issuable to the Shareholders upon the Exchange, such shares will be validly issued, fully
paid and non-assessable; 


        (ii)    the
issuance and sale of the shares of Common Stock issuable to the Shareholders upon the Exchange will not give rise to any preemptive rights or rights of first
refusal which have not been duly waived by the holders thereof and will not violate any laws to which the Company or any of its assets are subject; 


        (iii)    this
Agreement, when executed and delivered by the Company, shall have been duly authorized, executed and delivered by and on behalf of the Company, and shall
constitute the valid and binding agreement of the Company, enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally; 


        (iv)    the
Company has the requisite corporate power and authority to enter into this Agreement and to perform its obligations hereunder; and 


        (v)    neither
the execution and delivery of this Agreement and the other agreements, certificates or instruments required to be executed and delivered pursuant to the terms
and conditions of this Agreement nor the consummation of the transactions contemplated thereby will (a) conflict with, or result in a breach of the terms, conditions or provisions of, or
constitute a default under, (1) the governing documents of the Company, (2) any agreement or instrument to which the Company or any of its subsidiaries is now a party or by which any of
them is bound, (3) any provision of any judgment, decree, order, statute, rule or regulation applicable to or binding on the Company or (4) result in the creation of any mortgage,
pledge, lien, encumbrance, or charge upon any of the properties or assets of the Company. 





        5.    Miscellaneous.    



        5.1.    This
Agreement shall be binding upon the parties hereto and their respective successors, assigns, heirs and legal representatives. 



        5.2.    This
Agreement shall be subject to the laws of the State of Georgia without regard to principles of conflict of law. 


        5.3.    Headings
and captions are included herein for convenience, do not form a part of this Agreement, and are not admissible as to construction. 


        5.4.    This
instrument is the entire expression of the agreement of the parties with respect to its subject matter, and supersedes all prior understandings, agreements or
representations in such regard. 


        5.5.    Neither
this Agreement nor any term hereof may be amended, waived, discharged or terminated other than by written instrument signed by the party against whom
enforcement of any such amendment, waiver, discharge or termination is sought 


        5.6.    The
parties acknowledge the unique nature of the provisions hereof, and agree that damages in event of breach would be both difficult to calculate and an inadequate
remedy. 



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Consequently,
in the event of breach, and in addition to recovering any provable damages and reimbursement of any legal fees, the injured party shall be entitled to equitable relief, including
specific performance. 


        5.7.    No
person or entity not signatory shall have any rights as a third party beneficiary under this Agreement, or to enforce the provisions hereof on behalf of any
signatory hereto. 


        5.8.    Any
signature page delivered by a fax machine or telecopy machine shall be binding to the same extent as an original signature page, with regard to any agreement
subject to the terms hereof or any amendment thereto. Any party who delivers such a signature page agrees to later deliver an original counterpart to any party that requests it. 


        5.9.    This
Agreement may be executed in any number of counterparts, all of which together shall constitute one instrument, and each of which may be executed by less than all
of the parties to this Agreement. 


        5.10.    In
the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement
shall continue in full force and effect without said provision. In such event, the parties shall negotiate, in good faith, a valid, legal and enforceable substitute provision which most nearly effects
the intent of the parties in entering into this Agreement. 



[SIGNATURE PAGES FOLLOW]


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        IN WITNESS WHEREOF, the parties hereto have executed and delivered this Exchange and Recapitalization Agreement, or caused this Exchange
and Recapitalization Agreement to be executed and delivered, as of the date first written above. 



	 	 	TRI-S SECURITY CORPORATION
	

 	
 	

By:	
 	

 
	 	 	 	 	
 Printed Name: Ronald G. Farrell

Title: Chief Executive Officer







	

 	
 	
SHAREHOLDERS:
	

 	
 	

DOUGLAS K. BALL
	

 	
 	

 MICHAEL F. BENNETT
	

 	
 	

 BONNIE LYNN FARRELL
	

 	
 	

 HAROLD E. HODGE
	

 	
 	

 JUNE D. HODGE
	

 	
 	

 TIMOTHY J. MCGAUGHEY
	

 	
 	

 MICHAEL MCKINZIE
	

 	
 	

 KENNETH E. MOORE
	

 	
 	

 ROBERT PARKER




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	 	 	R.G.F. INVESTMENTS, INC.
	

 	
 	

By:	
 	

 
	 	 	 	 	

	 	 	 	 	Printed Name:

Title:







	

 	
 	

 BRYANT W. SCOTT
	

 	
 	

 SOUTHWICK CAPITAL, LLC
	

 	
 	

 RODNEY A. TAYLOR
	



 	

 	



OPTION HOLDERS:
	

 	
 	

 RONALD G. FARRELL
	

 	
 	

 BRE LLC




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EXHIBIT A  



	Name of Shareholder
 
	 	Number of Shares of the Company's Capital Stock Held as of the Date of the Agreement
	 	Number of Shares of Common Stock Held as of the Agreement (assuming the conversion of all shares of Series A Preferred Stock and Series B Preferred Stock)
	 	Ownership

Percentage
	 
	Douglas K. Ball	 	20,000 shares Series B Convertible Preferred Stock	 	200,000	 	5.39	%
	Michael F. Bennett	 	15,000 shares Common Stock, 50,000 shares Series A Convertible Preferred Stock, and 10,000 shares Series B Convertible Preferred Stock	 	490,000	 	13.21	%
	Bonnie Lynn Farrell	 	300,000 shares Common Stock	 	300,000	 	8.09	%
	Harold E. Hodge	 	10,000 shares Series A Convertible Preferred Stock	 	75,000	 	2.02	%
	June D. Hodge	 	10,000 shares Series A Convertible Preferred Stock	 	75,000	 	2.02	%
	Timothy J. McGaughey	 	25,000 shares Common Stock	 	25,000	 	0.67	%
	Michael McKinzie	 	9,000 shares Common Stock	 	9,000	 	0.24	%
	Kenneth E. Moore	 	4,500 shares Common Stock	 	4,500	 	0.12	%
	Robert Parker	 	5,000 shares Series A Convertible Preferred Stock, and 10,000 shares Series B Convertible Preferred Stock	 	137,500	 	3.71	%
	R.G.F. Investments, Inc.	 	2,200,000 shares Common Stock	 	2,200,000	 	59.33	%
	Bryant W. Scott	 	10,000 shares Series A Convertible Preferred Stock	 	75,000	 	2.02	%
	Southwick Capital, LLC	 	15,000 shares Series A Convertible Preferred Stock	 	112,500	 	3.03	%
	Rodney A. Taylor	 	4,500 shares Common Stock	 	4,500	 	0.12	%
	 	Pre-Exchange Outstanding Share Number	 	3,708,000	 	 	 









EXHIBIT B  



	Name of Shareholder
 
	 	Aggregate Number of Shares of Common Stock to be Issued Upon the Exchange if the Post-Exchange Outstanding Share Number is 1,200,000

	Douglas K. Ball	 	64,725
	Michael F. Bennett	 	158,576
	Bonnie Lynn Farrell	 	97,087
	Harold E. Hodge	 	24,272
	June D. Hodge	 	24,272
	Timothy J. McGaughey	 	8,091
	Michael McKinzie	 	2,913
	Kenneth E. Moore	 	1,456
	Robert Parker	 	44,498
	R.G.F. Investments, Inc.	 	711,974
	Bryant W. Scott	 	24,272
	Southwick Capital, LLC	 	36,408
	Rodney A. Taylor	 	1,456









EXHIBIT C  



	Name of Option Holder
 
	 	Number of Shares of Common Stock Purchase Agreement Underlying Options or Warrants Held as of the Date Hereof
	 	Pre-Exchange Exercise Price Per Share

	Ronald G. Farrell, Inc.	 	300,000	 	$	0.04
	BRE LLC	 	50,000	 	$	1.00













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EXCHANGE AND RECAPITALIZATION AGREEMENT