#  

# **UNITEDSTATES**

# **SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C.  20549**

** **

**FORM 10-Q**

 

#### **ý****  QUARTERLY REPORT PURSUANT TO SECTION 13OR 15 (d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934**

** **

#### **For the quarterly period ended June 30,2005**

#### ** **

**o**** TRANSITION REPORT UNDER SECTION 13 OR 15(d)**

**OF THE EXCHANGE ACT**

** **

**For the transition period from              to              **

** **

#### **Commission file number 0-51148**

 

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**TRI-SSECURITY CORPORATION**

(ExactName of Registrant as Specified in its Charter)

 
| **GEORGIA**                        | ** ** | **30-0016962**                        |
|------------------------------------|------------|---------------------------------------|
| (State or Other Jurisdiction       |       | (I.R.S. Employer  Identification No.) |
| of Incorporation or  Organization) |       |                                  |

 

**3700 Mansell Road, Suite 220,Alpharetta, Georgia 30022**

(Address of Principal Executive Offices)

 

**(770) 625-4945**

(Registrant’s Telephone Number, IncludingArea Code)

 

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Indicate by check mark whether theregistrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

Yes  ý  No  o.

 

Indicatedby check mark whether registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act) Yes  o  No  ý.

 

Shares of the registrant’scommon stock, par value $0.001 per share, outstanding as of August 5, 2005:**3,323,700.**

 

 

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**TRI-S SECURITY CORPORATION**

**QUARTERLY REPORT ON FORM 10-Q**

**For the quarter ended June 30,2005**

 

**INDEX**

 
| ** **                             | ** **                                                                                                                                                                    | **Page No.** |
|----------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------|
|                                   |                                                                                                                                                                          |              |
| **Part I. FINANCIAL INFORMATION** |                                                                                                                                                                          |
| ** **                             |                                                                                                                                                                          |
| Item 1.                                | Financial Statements                                                                                                                                                          |              |
|                                   |                                                                                                                                                                          |              |
|                                   | Condensed Consolidated Balance Sheets  as of June 30, 2005 and December 31, 2004                                                                                    | 3                 |
|                                   |                                                                                                                                                                          |              |
|                                   | Condensed  Consolidated Statements of Operations for the Three Months Ended  July 30, 2005 and 2004                                                                      | 4                 |
|                                   |                                                                                                                                                                          |              |
|                                   | Condensed Consolidated  Statements of Operations for the Six Months Ended June 30, 2005 and 2004 and for the Period From  January 1, 2004 to February 27, 2004 | 5                 |
|                                   |                                                                                                                                                                          |              |
|                                   | Condensed  Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2004 and for  the Period From January 1, 2004 to February 27, 2004 | 6                 |
|                                   |                                                                                                                                                                          |              |
|                                   | Notes to  Condensed Consolidated Financial Statements                                                                                                                         | 7                 |
|                                   |                                                                                                                                                                          |              |
| Item 2.                                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                   | 10                |
|                                   |                                                                                                                                                                          |              |
| Item 3.                                | Quantitative and  Qualitative Disclosures about Market Risk                                                                                                                   | 16                |
|                                   |                                                                                                                                                                          |              |
| Item 4.                                | Controls and Procedures                                                                                                                                                       | 16                |
|                                   |                                                                                                                                                                          |              |
| **PART II.  OTHER INFORMATION**   | 16                                                                                                                                                                            |
|                                   |                                                                                                                                                                          |              |
| Item 1.                                | Legal Proceedings                                                                                                                                                             | 16                |
|                                   |                                                                                                                                                                          |              |
| Item 2.                                | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                                  | 17                |
|                                   |                                                                                                                                                                          |              |
| Item 5.                                | Other Information                                                                                                                                                             | 17                |
|                                   |                                                                                                                                                                          |              |
| Item 6.                                | Exhibits                                                                                                                                                                      | 17                |
|                                   |                                                                                                                                                                          |              |
| Signature Page                         | 18                                                                                                                                                                            |
|                                   |                                                                                                                                                                          |              |
| Exhibit Index                     | 19                                                                                                                                                                            |

 

2

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**Tri-S Security Corporation andSubsidiary**

**BalanceSheets**

**Unaudited**

**(In thousands, except per share data)**

 
| ** **                                                                                                                                                                          | ** ** | **June 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| **Assets**                                                                                                                                                                          |       |                   |       |                       |       |
| Current assets:                                                                                                                                                                     |       |                   |       |                       |       |
| Cash and cash  equivalents                                                                                                                                                          |       | $                      | 1,425      |                       | $          | 313 |   |
| Trade accounts receivable,  net                                                                                                                                                     |       | 5,742                  |       | 5,312                      |       |
| Deferred initial  public offering costs                                                                                                                                             |       | —                 |       | 633                        |       |
| Refundable  income taxes                                                                                                                                                            |       | 140                    |       | 140                        |       |
| Deferred income  taxes                                                                                                                                                              |       | 200                    |       | 200                        |       |
| Prepaid expenses  and other assets                                                                                                                                                  |       | 864                    |       | 178                        |       |
|                                                                                                                                                                                |       |                   |       |                       |       |
| Total current  assets                                                                                                                                                               |       | 8,371                  |       | 6,776                      |       |
|                                                                                                                                                                                |       |                   |       |                       |       |
| Property and  equipment, less accumulated depreciation                                                                                                                              |       | 220                    |       | 325                        |       |
| Note receivable -  officer                                                                                                                                                          |       | 105                    |       | 100                        |       |
| Investment in  joint venture                                                                                                                                                        |       | 5,810                  |       | 6,665                      |       |
| Investment in  government contracts, net                                                                                                                                            |       | 990                    |       | 1,172                      |       |
| Non compete  agreements, net                                                                                                                                                        |       | 273                    |       | 318                        |       |
| Deferred loan  cost, net                                                                                                                                                            |       | —                 |       | 18                         |       |
| Goodwill                                                                                                                                                                            |       | 7,747                  |       | 7,747                      |       |
|                                                                                                                                                                                |       |                   |       |                       |       |
| Total assets                                                                                                                                                                        |       | $                      | 23,516     |                       | $          | 23,121 |   |
|                                                                                                                                                                                |       |                   |       |                       |       |
| **Liabilities and Stockholders’ Equity (Deficit)**                                                                                                                             |       |                   |       |                       |       |
| Current  liabilities:                                                                                                                                                               |       |                   |       |                       |       |
| Trade accounts  payable                                                                                                                                                             |       | $                      | 49         |                       | $          | 351 |   |
| Accrued salaries  and wages                                                                                                                                                         |       | 1,399                  |       | 774                        |       |
| Payroll and  payroll withholding taxes                                                                                                                                              |       | 296                    |       | 347                        |       |
| Accrued vacation                                                                                                                                                                    |       | 639                    |       | 612                        |       |
| Accrued interest  expense                                                                                                                                                           |       | —                 |       | 316                        |       |
| Accrued interest  on preferred stock subject to mandatory redemption                                                                                                                |       | 100                    |       | 250                        |       |
| Other accrued  expenses                                                                                                                                                             |       | 925                    |       | 689                        |       |
| Note payable to  financial institution                                                                                                                                              |       | 1,716                  |       | 3,092                      |       |
| Short-term notes  payable                                                                                                                                                           |       | —                 |       | 7,706                      |       |
| Current portion  of capital lease obligations                                                                                                                                       |       | 91                     |       | 91                         |       |
|                                                                                                                                                                                |       |                   |       |                       |       |
| Total current  liabilities                                                                                                                                                          |       | 5,215                  |       | 14,228                     |       |
|                                                                                                                                                                                |       |                   |       |                       |       |
| Other  liabilities:                                                                                                                                                                 |       |                   |       |                       |       |
| Capital lease  obligations, less current portion                                                                                                                                    |       | 57                     |       | 103                        |       |
| Deferred income  taxes                                                                                                                                                              |       | 3,721                  |       | 4,071                      |       |
| Series C  preferred stock subject to mandatory redemption                                                                                                                      |       | 6,000                  |       | 6,000                      |       |
|                                                                                                                                                                                |       |                   |       |                       |       |
| Total  liabilities                                                                                                                                                                  |       | 14,993                 |       | 24,402                     |       |
|                                                                                                                                                                                |       |                   |       |                       |       |
| Stockholders’  equity (deficit):                                                                                                                                               |       |                   |       |                       |       |
| Preferred stock,  $1.00 par value, 10,000,000 shares authorized Series A convertible  preferred stock 100,000 shares issued and outstanding                                    |       | —                 |       | 460                        |       |
| Series B  convertible preferred stock, 40,000 shares issued and outstanding                                                                                                    |       | —                 |       | 196                        |       |
| Common stock,  $0.001 par value, 25,000,000 shares authorized, 3,323,700 and 827,832 shares  issued and outstanding at June 30, 2005 and December 31, 2004,  respectively |       | 3                      |       | 1                          |       |
| Additional  paid-in capital                                                                                                                                                         |       | 11,145                 |       | 115                        |       |
| Retained  earnings (deficit)                                                                                                                                                        |       | (2,625                 | )          | (2,053                     | )          |
|                                                                                                                                                                                |       |                   |       |                       |       |
| Total  stockholders’ equity (deficit)                                                                                                                                          |       | 8,523                  |       | (1,281                     | )          |
|                                                                                                                                                                                |       |                   |       |                       |       |
| Total  liabilities and stockholders’ equity (deficit)                                                                                                                          |       | $                      | 23,516     |                       | $          | 23,121 |   |

 

See accompanying notes to financial statements.

 

3

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**Tri-S Security Corporation andSubsidiary**

** **

**Statementsof Operations**

**Unaudited**

**(In thousands, except per share data)**

 
| ** **                                                   | ** ** | **Three Months**       | ** ** | **Three Months**       | ** ** |
|--------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                   | ** ** | **Ended**              | ** ** | **Ended**              | ** ** |
| ** **                                                   | ** ** | **June 30, 2005** | ** ** | **June 30, 2004** | ** ** |
|                                                         |       |                   |       |                   |       |
| Revenues                                                     |       | $                      | 7,745      |                   | $          | 7,468 |   |
|                                                         |       |                   |       |                   |       |
| Cost of  revenues:                                           |       |                   |       |                   |       |
| Direct labor                                                 |       | 4,122                  |       | 4,150                  |       |
| Indirect labor  and labor related costs                      |       | 2,502                  |       | 2,635                  |       |
| Other contract  support costs                                |       | 281                    |       | 273                    |       |
| Amortization of  government contracts                        |       | 87                     |       | 88                     |       |
|                                                         |       | 6,992                  |       | 7,146                  |       |
| Gross profit                                                 |       | 753                    |       | 322                    |       |
|                                                         |       |                   |       |                   |       |
| Selling, general  and administrative                         |       | 793                    |       | 454                    |       |
| Operating income  (loss)                                     |       | (40                    | )          | (132                   | )          |
|                                                         |       |                   |       |                   |       |
| Other income  (expense):                                     |       |                   |       |                   |       |
| Interest income                                              |       | 9                      |       | 2                      |       |
| Interest expense                                             |       | (108                   | )          | (446                   | )          |
| Interest on  preferred stock subject to mandatory redemption |       | (75                    | )          | (75                    | )          |
|                                                         |       | (174                   | )          | (519                   | )          |
|                                                         |       |                   |       |                   |       |
| Income (loss)  before income taxes                           |       | (214                   | )          | (651                   | )          |
|                                                         |       |                   |       |                   |       |
| Income tax  expense (benefit)                                |       | (81                    | )          | (249                   | )          |
|                                                         |       |                   |       |                   |       |
| Net income  (loss)                                           |       | $                      | (133       | )                      | $          | (402 | ) |
|                                                         |       |                   |       |                   |       |
| Pro forma income  tax expense (benefit)                      |       |                   |       |                   |       |
|                                                         |       |                   |       |                   |       |
| Proforma net  income (loss)                                  |       |                   |       |                   |       |
|                                                         |       |                   |       |                   |       |
| Basic net income  (loss) per common share                    |       | $                      | (0.04      | )                      | $          | (0.49 | ) |
| Diluted net  income (loss) per common share                  |       | $                      | (0.04      | )                      | (0.49      | ) |
| Basic weighted  average number of common shares              |       | 3,315                  |       | 828                    |       |
| Diluted weighted  average number of common shares            |       | 3,376                  |       | 1,265                  |       |

 

See accompanying notes to financial statements.

 

4

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**Tri-SSecurity Corporation and Subsidiary**

** **

**Statements of Operations**

**Unaudited**

**(In thousands, except per share data)**

 
| ** **                                                   | ** ** | ** **             | ** ** | ** **             | ** ** | **Predecessor Basis**          | ** ** |
|--------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **                                                   | ** ** | ** **             | ** ** | ** **             | ** ** | **Paragon Systems, Inc.** | ** ** |
| ** **                                                   | ** ** | **Six Months**         | ** ** | **Six Months**         | ** ** | **January 1, 2004**       | ** ** |
| ** **                                                   | ** ** | **Ended**              | ** ** | **Ended**              | ** ** | **to**                         | ** ** |
| ** **                                                   | ** ** | **June 30, 2005** | ** ** | **June 30, 2004** | ** ** | **February 27, 2004**     | ** ** |
|                                                         |       |                   |       |                   |       |                           |       |
| Revenues                                                     |       | $                      | 15,724     |                   | $          | 10,046                         |       | $ | 4,705 |   |
|                                                         |       |                   |       |                   |       |                           |       |
| Cost of  revenues:                                           |       |                   |       |                   |       |                           |       |
| Direct labor                                                 |       | 8,338                  |       | 5,414                  |       | 2,481                          |       |
| Indirect labor  and labor related costs                      |       | 5,504                  |       | 3,355                  |       | 1,892                          |       |
| Other contract  support costs                                |       | 599                    |       | 383                    |       | 221                            |       |
| Amortization of  government contracts                        |       | 182                    |       | 118                    |       | —                         |       |
|                                                         |       | 14,623                 |       | 9,270                  |       | 4,594                          |       |
| Gross profit                                                 |       | 1,101                  |       | 776                    |       | 111                            |       |
|                                                         |       |                   |       |                   |       |                           |       |
| Selling, general  and administrative                         |       | 1,471                  |       | 667                    |       | 230                            |       |
| Operating income  (loss)                                     |       | (370                   | )          | 109                    |       | (119                           | )          |
|                                                         |       |                   |       |                   |       |                           |       |
| Other income  (expense):                                     |       |                   |       |                   |       |                           |       |
| Interest income                                              |       | 21                     |       | 3                      |       | —                         |       |
| Interest expense                                             |       | (423                   | )          | (618                   | )          | (11                            | )          |
| Interest on  preferred stock subject to mandatory redemption |       | (150                   | )          | (102                   | )          | —                         |       |
|                                                         |       | (552                   | )          | (717                   | )          | (11                            | )          |
|                                                         |       |                   |       |                   |       |                           |       |
| Income (loss)  before income taxes                           |       | (922                   | )          | (608                   | )          | (130                           | )          |
|                                                         |       |                   |       |                   |       |                           |       |
| Income tax  expense (benefit)                                |       | (350                   | )          | (233                   | )          | —                         |       |
|                                                         |       |                   |       |                   |       |                           |       |
| Net income  (loss)                                           |       | $                      | (572       | )                      | $          | (375                           | )          | $ | (130 | ) |
|                                                         |       |                   |       |                   |       |                           |       |
| Pro forma income  tax expense (benefit)                      |       |                   |       |                   |       | (49                            | )          |
|                                                         |       |                   |       |                   |       |                           |       |
| Proforma net  income (loss)                                  |       |                   |       |                   |       | $                              | (81        | ) |
|                                                         |       |                   |       |                   |       |                           |       |
| Basic net income  (loss) per common share                    |       | $                      | (0.18      | )                      | $          | (0.45                          | )          |   |   |
| Diluted net  income (loss) per common share                  |       | $                      | (0.18      | )                      | (0.45      | )                              |       |   |
| Basic weighted  average number of common shares              |       | 3,192                  |       | 828                    |       |                           |       |
| Diluted weighted  average number of common shares            |       | 3,289                  |       | 1,265                  |       |                           |       |

 

See accompanying notes to financial statements.

 

5

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**Tri-S Security Corporation andSubsidiary**

 

**Statements of Cash Flows**

**Unaudited**

**(Inthousands)**

 
| ** **                                                                                        | ** ** | **Six Months**         | ** ** | **Six Months**        | ** ** | **For the period**          | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|-----------------------------|------------|
| ** **                                                                                        | ** ** | **Ended**              | ** ** | **Ended**             | ** ** | **January 1, 2004 to** | ** ** |
| ** **                                                                                        | ** ** | **June 30, 2005** | ** ** | **June 30 2004** | ** ** | **February 27, 2004**  | ** ** |
|                                                                                              |       |                   |       |                  |       |                        |       |
| Cash flow from  operating activities:                                                             |       |                   |       |                  |       |                        |       |
| Net income  (loss)                                                                                |       | $                      | (572       | )                     | $          | (375                        | )          | $ | (130 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided (used) by operating  activities: |       |                   |       |                  |       |                        |       |
| Depreciation and  amortization                                                                    |       | 340                    |       | 213                   |       | 28                          |       |
| Deferred income  tax benefits                                                                     |       | (350                   | )          | (233                  | )          | —                      |       |
| Common shares  issued in exchange for services                                                    |       | 95                     |       | —                |       | —                      |       |
| Changes in  operating assets and liabilities:                                                     |       |                   |       |                  |       |                        |       |
| Trade accounts  receivable, net                                                                   |       | (430                   | )          | 1,294                 |       | (1,161                      | )          |
| Prepaid expenses  and other assets                                                                |       | (686                   | )          | 138                   |       | (499                        | )          |
| Trade accounts  payable                                                                           |       | (302                   | )          | 10                    |       | 62                          |       |
| Accrued salaries                                                                                  |       | 625                    |       | 576                   |       | (59                         | )          |
| Payroll and  payroll withholding taxes                                                            |       | (51                    | )          | (87                   | )          | 226                         |       |
| Accrued vacation                                                                                  |       | 27                     |       | 107                   |       | 85                          |       |
| Accrued interest  expense                                                                         |       | (316                   | )          | 172                   |       | —                      |       |
| Accrued interest  on redeemable preferred stock                                                   |       | (150                   | )          | 102                   |       | —                      |       |
| Other accrued  expenses                                                                           |       | 231                    |       | (1,068                | )          | 692                         |       |
| Income taxes  payable                                                                             |       | —                 |       | (223                  | )          | (111                        | )          |
|                                                                                              |       |                   |       |                  |       |                        |       |
| Net cash  provided (used) by operating activities                                                 |       | (1,539                 | )          | 626                   |       | (867                        | )          |
|                                                                                              |       |                   |       |                  |       |                        |       |
| Cash flow from  investing activities:                                                             |       |                   |       |                  |       |                        |       |
| Acquisition of  subsidiary                                                                        |       | —                 |       | (2,300                | )          | —                      |       |
| Proceeds from  sale of property and equipment                                                     |       | 10                     |       | —                |       | —                      |       |
| Purchase of  property and equipment                                                               |       | —                 |       | (5                    | )          | —                      |       |
| Proceeds from  investment in joint venture                                                        |       | 855                    |       | 149                   |       | 715                         |       |
|                                                                                              |       |                   |       |                  |       |                        |       |
| Net cash  provided (used) by investing activities                                                 |       | 865                    |       | (2,156                | )          | 715                         |       |
|                                                                                              |       |                   |       |                  |       |                        |       |
| Cash flow from  financing activities:                                                             |       |                   |       |                  |       |                        |       |
| Proceeds from  initial public offering                                                            |       | 11,079                 |       | —                |       | —                      |       |
| Proceeds  (repayments) of short-term notes                                                        |       | (9,082                 | )          | 1,691                 |       | (405                        | )          |
| Proceeds  (repayments) of capital lease obligations                                               |       | (46                    | )          | (34                   | )          | (13                         | )          |
| Deferred initial  public offering costs                                                           |       | (165                   | )          | —                |       | —                      |       |
| Loan costs                                                                                        |       | —                 |       | (120                  | )          | —                      |       |
|                                                                                              |       |                   |       |                  |       |                        |       |
| Net cash  provided (used) by financing activities                                                 |       | 1,786                  |       | 1,537                 |       | (418                        | )          |
|                                                                                              |       |                   |       |                  |       |                        |       |
| Net increase  (decrease) in cash and cash equivalents                                             |       | 1,112                  |       | 7                     |       | (570                        | )          |
| Cash and cash  equivalents at beginning of period                                                 |       | 313                    |       | 102                   |       | 846                         |       |
| Cash and cash  equivalents at end of period                                                       |       | $                      | 1,425      |                  | $          | 109                         |       | $ | 276 |   |
|                                                                                              |       |                   |       |                  |       |                        |       |
| Supplemental  disclosures of cash flow information:                                               |       |                   |       |                  |       |                        |       |
| Interest paid                                                                                     |       | $                      | 1,039      |                  | $          | 548                         |       | $ | 6 |   |
| Income taxes  paid                                                                                |       | $                      | 6          |                  | $          | 223                         |       | $ | — |   |

 

See accompanying notes to financial statements.

 

6

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**TRI-S SECURITY CORPORATION ANDSUBSIDIARY**

 

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**June 30, 2005**

 

**1.****    ****Unaudited Financial Statements**

 

The accompanying financial statements are unauditedand have been prepared by management of Tri-S Security Corporation, a Georgiacorporation, and Subsidiary (the “Company” or “Tri-S” or “we”) in accordancewith the rules and regulations of the Securities and Exchange Commission(the “SEC”).  In the opinion ofmanagement, all adjustments, consisting of normal recurring accruals, necessaryfor the fair presentation of the financial position, results of operations andcash flows have been included.  Forfurther information, see our audited financial statements and footnotes theretoincluded in our Annual Report on Form 10-K for the year ended December 31,2004 filed with the SEC (the “Annual Report”). Disclosure that substantially duplicates the disclosure contained in thefootnotes to the audited financial statements included in the Annual Report hasbeen omitted from these Notes.  Certainbalance sheet items as of December 31, 2004 have been reclassified toconform to the presentation as of June 30, 2005.

 

**2.****    ****Income Taxes**

 

We account for our income taxes in accordance withStatement of Financial Accounting Standards No. 109, “Accounting forIncome Taxes.”  Deferred tax assets andliabilities are recognized for the expected tax consequences of temporarydifferences between the tax basis of assets and liabilities and their reportedamounts and for operating loss carry forwards.

 

**3.****    ****Initial Public Offering**

 

On February 9, 2005, we commenced anunderwritten initial public offering of 1,800,000 units (plus up an additional270,000 units subject to the exercise of the underwriters’ over-allotmentoption), with each unit (a “Unit”) consisting of one share of our common stock,par value $0.001 per share (the “Common Stock”), and a warrant to purchase oneshare of Common Stock, at an initial offering price per Unit of $6.00 (the “InitialPublic Offering”).  The Initial PublicOffering closed with respect to the initial 1,800,000 Units on February 14,2005 and with respect to the additional 270,000 Units on March 17,2005.  The aggregate net proceeds to usfrom the Initial Public Offering were approximately $11,079,000 afterunderwriting discounts and commissions, offering expenses and consultingfees.  As of December 31, 2004, wehad accrued or paid $633,000 in aggregate costs for the Initial PublicOffering.  Since December 31, 2004,we

 

7

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have accrued or paid an additional $165,000 inaggregate costs for the Initial Public Offering.

 

**4.****    ****Acquisition of Paragon Systems, Inc.**

 

On February 27, 2004, Tri-S acquired (the “Acquisition”)all of the outstanding capital stock of Paragon Systems, Inc., an Alabamacorporation with offices located in Huntsville, Alabama (“Paragon Systems”).  At the closing of the Acquisition, we: (i) paid$10.0 million, of which $2.3 million was paid in cash and $7.7 million was paidthrough the issuance of promissory notes (the “Paragon Notes”), to the formershareholders of Paragon Systems; and (ii) issued 100 shares of our Series CRedeemable Preferred Stock, par value $1.00 per share (the “Series CRedeemable Preferred Stock”), with an aggregate redemption value of $6.0million.  After the completion of theInitial Public Offering, we repaid the outstanding principal of the ParagonNotes and paid all unpaid, accrued interest thereon.  We are obligated to redeem the outstandingshares of the Series C Redeemable Preferred Stock no later than February 27,2007.

 

**5.****    ****Common and Preferred Stock**

 

On February 7, 2005, we effected an exchangeand recapitalization (the “Exchange and Recapitalization”) of all outstandingshares of our Common Stock, Series A Convertible Preferred Stock, parvalue $1.00 per share (the “Series A Convertible Preferred Stock”), and Series BConvertible Preferred Stock, par value $1.00 per share (the “Series BConvertible Preferred Stock”), and all rights to acquire our Common Stockpursuant to an Exchange and Recapitalization Agreement dated November 19,2004, among the Company and all of the holders of the outstanding Common Stock,Series A Convertible Preferred Stock and Series B ConvertiblePreferred Stock and the holders of all rights to acquire Common Stock.  As a result of the Exchange andRecapitalization, all of the outstanding shares of Common Stock, Series AConvertible Preferred Stock and Series B Convertible Preferred Stock wereexchanged for an aggregate of 1,200,000 shares of Common Stock.  The Exchange and Recapitalization was givenretroactive treatment in the financial statements and related disclosures.

 

As of June 30, 2005, we are authorized to issueten million shares of preferred stock, par value $1.00 per share (the “PreferredStock”).  Our Board of Directors (the “Board”)is authorized, without further shareholder action, to divide any or all sharesof authorized Preferred Stock into series and to fix and determine thedesignations, preferences and relative participating, optional or other specialrights, and qualifications, limitations or restrictions thereon, of any seriesso established, including voting powers, dividend rights, liquidationpreferences, redemption rights and conversion or exchange privileges.

 

As of December 31, 2004, we had outstanding100,000 shares of Series A Convertible Preferred Stock, 40,000 shares of Series BConvertible Preferred Stock and 100 shares of Series C RedeemablePreferred Stock.  In the Exchange andRecapitalization, all of the outstanding shares of Series A ConvertiblePreferred Stock and Series B Convertible

 

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Preferred Stock were exchanged for an aggregate of242,718 shares of Common Stock and 129,450 shares of Common Stock,respectively.  As of June 30, 2005,we did not have outstanding any shares of Series A Convertible PreferredStock or Series B Convertible Preferred Stock, and we had outstanding 100shares of Series C Redeemable Preferred Stock.

 

The Series A Convertible Preferred Stock and Series BConvertible Preferred Stock have no voting rights, except as otherwise requiredby applicable law, and no redemption, preemptive, dividend or sinking fundrights.

 

The Series C Redeemable Preferred Stock have novoting rights, except as otherwise required by applicable law, and no preemptive,conversion or sinking fund rights.  Inthe event of a liquidation, dissolution or winding up of the Company, holdersof the Series C Redeemable Preferred Stock are entitled to a liquidationpreference, and the holders of shares of Common Stock have a secondaryliquidation right to the assets of the Company. The shares of Series C Redeemable Preferred Stock have a redemptionvalue of $60,000 per share.  We mayredeem the outstanding shares of the Series C Redeemable Preferred Stockat any time, but must redeem all of the outstanding shares of the Series CRedeemable Preferred Stock no later than February 27, 2007.  The holders of the Series C RedeemablePreferred Stock are entitled to receive cumulative cash dividends at a rate of5% of the redemption value per annum (or $3,000 per share per annum).

 

We are authorized to issue 25 million shares ofCommon Stock.  The holders of CommonStock are entitled to one vote per share on all matters.  The Common Stock does not have cumulativevoting rights.  Each share of CommonStock has an equal and ratable right to receive dividends to be paid fromassets legally available when and if declared by the Board.  We have never paid any cash dividends on theCommon Stock.

 

On March 3, 2005, we issued 15,000 shares ofCommon Stock to Douglas Ball pursuant to that certain Letter Agreement betweenthe Company and Mr. Ball dated December 7, 2004.

 

On April 26, 2005, we issued 8,700 shares ofCommon Stock to a public relations firm in exchange for services rendered bysuch firm to the Company.

 

On April 26, 2005, we issued: (i) anaggregate of 20,000 shares of Common Stock to two former shareholders ofParagon Systems pursuant to that certain Agreement Regarding Notes andPreferred Shares among the Company, Paragon Systems and the former shareholdersof Paragon Systems dated as of September 29, 2004 and amended on October 6,2004; (ii) 10,000 shares of Common Stock to an individual in exchange forservices rendered by such individual to the Company; and (iii) a three-yearoption to purchase 25,000 shares of Common Stock at an exercise price of $6.00per share to a public relations firm in exchange for services rendered by suchfirm to the Company.

 

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In connection with the foregoing issuances, werecorded general and administrative expense in the amount of $95,000 whichrepresents the fair market value of the shares of Common Stock on the issuedates thereof.

 

**6.****    ****Contingencies**

 

Based on currently known facts, we believe there areno claims or litigation pending against us the disposition of which wouldmaterially affect our financial position or future operating results, althoughwe cannot be certain as to the ultimate outcome of any such claim orlitigation.  In addition, exposure tolitigation is inherent in our ongoing business and may harm our business in thefuture.

 

**7.****    ****Investment in Army Fleet Support, LLC**

 

We own a 10% equity interest in Army Fleet Support,LLC (“Army Fleet Support”), which provides all logistics support for U.S. ArmyAviation training at Fort Rucker, Alabama. We account for our 10% interest in Army Fleet Support on a cost basisbecause we do not exercise significant influence over Army Fleet Support’soperating or financial activities.  Werecord cash distributions received from Army Fleet Support as reductions of ourequity investment in Army Fleet Support. In January, April and June 2005, we received cashdistributions of $400,000, $309,000 and $146,000, respectively, with respect toour equity interest in Army Fleet Support.

 

**8.****    ****Debt and Other Obligations**

 

On April 20, 2005, Paragon Systems entered intoa new Factoring and Security Agreement with LSQ Funding Group, L.L.C. (“LSQ”)which amends Paragon Systems’ existing factoring agreement with LSQ to increaseParagon Systems’ available credit line to $6.5 million and to decrease theeffective borrowing rate on such credit line.

 

**Item 2.  Management’s Discussionand Analysis of Financial Condition and Results of Operations.**

 

*Certain information included in this Quarterly Report on Form 10-Qfor the quarter ended June 30, 2005 (the “Quarterly Report”)  contains, and other reports or materials wehave filed or will file with the SEC (as well as information included in oralstatements or other written statements made or to be made by us) contain orwill contain, “forward-looking statements” within the meaning of Section 221Eof the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Section 27Aof the Securities Act of 1933, as amended (the “Securities Act”), and pursuantto the Private Securities Litigation Reform Act of 1995 (the PSLRA”).  Such forward-looking statements may relate tofinancial results and plans for future business activities, and are thusprospective.  Such forward-looking statementsare subject to risks, uncertainties, and other factors that could cause actualresults to differ materially from future results expressed or implied by suchforward-looking statements.  Among theimportant factors that could cause actual results to differ materially fromthose indicated by such forward-looking statements*

 

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* *

*include, without limitation, the loss of existing customers, failure ofcustomers to renew or extend existing contracts for security guard services andthe other risk factors detailed from time to time in our periodic reports andregistration statements filed with the SEC. All forward-looking statements are made pursuant to the PSLRA and assuch speak only as of the date made.*

 

*The results of operations presented or discussed below are based onhistorical results for the Company. Historical amounts for the six months ended June 30, 2004 and theperiod January 1, 2004 to February 27, 2004 for Paragon Systems priorto the Acquisition are combined for presentation and discussion purposes.*

 

*Paragon Systems was formerly a subchapter S corporation and,consequently, pro forma income tax expense and pro forma net income arepresented on the face of the historical statements for the period January 1,2004 to February 27, 2004.  Theadjustments include only taxes at a statutory rate of 38%.*

 

**Overview**

 

Weprovide contract guard services to various Federal government agencies.  These guard services include providinguniformed and armed guards for access control, personnel protection, plantsecurity, theft prevention, surveillance, vehicular and foot patrol, crowdcontrol and prevention of sabotage, terrorist and criminal activities.  In connection with providing these services,we assume responsibility for a variety of functions, including recruiting,hiring, training and supervising security guards deployed to the Federalagencies we serve as well as paying all guards and providing them withuniforms, employee benefits and workers’ compensation insurance.  We are responsible for preventing theinterruption of guard services as a consequence of illness, vacations orresignations.

 

***Three Months Ended June 30, 2005 Compared toThree Months Ended June 30, 2004.***

 

Revenueincreased $277,000 to $7.7 million, or 3.7%, for the three months ended June 30,2005 compared to revenue of $7.5 million for the three months ended June 30,2004.  The increase in revenue wasgenerated primarily: (i) one new contract which commenced operations on October 1,2004 which generated revenue of $65,000; (ii) additional services weprovided as requested by the Federal Emergency Management Agency under acontract that we manage for the Department of Homeland Security which generatedrevenue of $67,000; and (iii) permitted additional costs increases undercurrent contracts resulting from additional services we provided whichgenerated revenue of $293,000.

 

Theseincreases were partially offset by a reduction in services we provided undercurrent contracts with the Corps of Engineers and a subsidiary of BAE SystemsPLC (“BAE”).  We provide guard service ona dredge operated by the Corps of Engineers when the dredge is inoperation.  When the dredge is not inoperation, we do not provide any guard services.  During the three months ended June 30,2005, the dredge was not in operation for as many hours as it was in operationfor the three months ended June 30, 2004. We provide subcontract services to BAE on an as-requested basis.  BAE provides military logistics supportservices to the US Army 

 

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Spaceand Missile Defense Command.  BAErequested fewer services from us in the three months ended June 30, 2005than in the three months ended June 30, 2004.

 

Costof revenue decreased $154,000 to $7.0 million, or 2.2%, for the three monthsended June 30, 2005, compared to cost of revenue of $7.1 million for thethree months ended June 30, 2004. The new contract which commenced operations on October 1, 2004accounted for an increase in cost of $54,000 and two contracts with theDepartment of Homeland Security accounted for an increase in cost of $85,000.  These cost increases were primarilylabor-related.  Costs associated with ourcontract with the Social Security Administration decreased $107,000 for thethree months ended June 30, 2005 as compared to the three months ended June 30,2004 primarily due to reductions in overtime and in overhead expenses of thecontract.  Costs related to our contractwith the Corps of Engineers decreased $54,000 for the three months ended June 30,2005 as compared to the three months ended June 30, 2004 because we didnot provide as many guard hours to the Corps of Engineers relating to thedredging operation during the three months ended June 30, 2005.  Costs related to our subcontract with BAEdecreased $93,000 for the three months ended June 30, 2005 as compared tothe three months ended June 30, 2004 primarily because BAE requested fewerof our services during the three months ended June 30, 2005.  All other costs decreased $39,000 for thethree months ended June 30, 2005 as compared to the three months ended June 30,2004.

 

Ourgross profit increased by $431,000 for the three months ended June 30,2005 to $753,000 compared to gross profit for the three months ended June 30,2004 of $322,000.  This increase isprimarily attributable to two of our contracts under which we were permitted toinvoice approximately $300,000 in contract cost increases.  In addition, we were able to reduce the costof operations of our contract with the Social Security Administration byapproximately $90,000.

 

Selling,general and administrative expenses increased $339,000 to $793,000, or 75%, forthe three months ended June 30, 2005 compared to $454,000 for the threemonths ended June 30, 2004.  Theincrease in costs for 2005 is attributable primarily to costs associated withthe corporate office of Tri-S, which includes staff costs and legal, accountingand other professional fees associated with being a public company.  There were no similar costs incurred for thethree months ended June 30, 2004. Selling, general and administrative expense for the three months ended June 30,2005 also includes $95,000 which represents the fair market value of the sharesof Common Stock issued in exchange for services rendered to the Company.

 

Wehave signed a non-binding letter of intent to acquire a security services firmthat provides a full range of security and investigative services.  We believe that if this acquisition iscompleted, then our profits will increase.

 

Netinterest expense decreased $345,000 to $174,000 for the three months ended June 30,2005 compared to net interest expense of $519,000 for the three months ended June 30,2004.  Interest expense of $108,000 forthe three months ended June 30, 2005 represents the cost of providingworking capital to Paragon Systems.  Netinterest expense of $317,000 for the three months ended June 30, 2004relates to the cost of providing working capital to Paragon Systems and thecost of the Acquisition.  In connectionwith the Acquisition, Paragon Systems entered into a

 

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factoringagreement with LSQ to finance a portion of the purchase price of theAcquisition.  Interest expense of $127,000for the three months ended June 30, 2004 is the interest costs withrespect to the Paragon Notes.  In February 2005,the Company completed its Initial Public Offering and received proceeds fromthe offering before expenses of the offering of $11.1 million.  The Company used the proceeds from theInitial Public Offering to repay the Paragon Notes and to pay down ParagonSystems’ liability to LSQ.  Repayment ofthe Paragon Notes and the reduction of the obligation to LSQ significantlyreduced interest expense for the three months ended June 30, 2005.  Interest expense relating to the Series CRedeemable Preferred Stock was $75,000 for the three months ended June 30,2005 and for the three months ended June 30, 2004.  Interest expense relating to the Series CRedeemable Preferred Stock will continue to accrue interest at the rate of$25,000 per month.

 

Incometaxes are provided at 38% of income (loss) before income taxes.  The 38% rate equals federal income taxes at34% plus 4% for state income taxes net of the Federal effect.  Even though the Company has a net operatingloss carry forward of approximately $1.1 million, the Company has recognized adeferred income tax benefit for the net operating loss carry forward becausethe Company anticipates reporting income before income taxes in futureperiods.  In addition, cash distributionsreceived by the Company with respect to its equity interest in Army FleetSupport are taxable.  The Companyreceived cash distributions of $309,000 and $146,000 in April and June 2005,respectively, with respect to the Company’s equity interest in Army FleetSupport.

 

***Six Months Ended June 30, 2005 Compared to SixMonths Ended June 30, 2004.***

 

Revenueincreased $973,000 to $15.7 million, or 6.6%, for the six months ended June 30,2005 compared to revenue of $14.8 million for the six months ended June 30,2004.  The increase in revenue wasgenerated primarily from: (i) one new contract which commenced operationson October 1, 2004 which generated revenue of $130,000; (ii) additionalservices we provided as requested by the Federal Emergency Management Agencyunder a contract that we manage for the Department of Homeland Security whichgenerated revenue of $240,000; and (iii) permitted additional costincreases under current contracts resulting from additional services we providedwhich generated revenue of $750,000.

 

Theseincreases were partially offset by a reduction in services we provided undercurrent contracts with the Corps of Engineers. We provide guard service on a dredge operated by the Corps of Engineerswhen the dredge is in operation.  Whenthe dredge is not in operation, we do not provide any guard services.  During the six months ended June 30,2005, the dredge was not in operation for as many hours as it was in operationduring the six months ended June 30, 2004. Most of this reduction occurredin the three months ended June 30, 2005.

 

Costof revenue increased $759,000 to $14.6 million, or 5.5%, for the six monthsended June 30, 2005 compared to cost of revenue of $13.9 million for thesix months ended June 30, 2004. Amortization of our investment in government contracts accounted for$65,000 of the increase and the new contract which commenced operations on October 1,2004 accounted for another $110,000 of the increase.  The remaining $584,000 of increased cost ofmanaging our

 

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governmentcontracts relates to previously existing contracts. Costs related to our twocontracts with the Department of Homeland Security increased $560,000 for thesix months ended June 30, 2005 compared to the six months ended June 30,2004 primarily due to labor-related costs increases during the six months endedJune 30, 2005****that we did notincur during the six months ended June 30, 2004.  Cost associated with our contract with theSocial Security Administration increased $102,000 for the six months ended June 30,2005 compared to the six months ended June 30, 2004 primarily due tolabor-related cost increases.  Costrelated to our contract with the Corps of Engineers decreased $92,000 for thesix months ended June 30, 2005 compared to the six months ended June 30,2004 because we did not provide as many guard hours to the Corps of Engineersrelating to the dredging operation.  Costrelated to our contract with BAE decreased $40,000 for the six months ended June 30,2005 compared to the six months ended June 30, 2004 because BAE requestedfewer of our services during the three months ended June 30, 2005.  All other costs increased $54,000 for the sixmonths ended June 30, 2005 compared to the six months ended June 30,2004.

 

Ourgross profit increased by $214,000 for the six months ended June 30, 2005to $1.1 million compared to the gross profit for six months ended June 30,2004 of $887,000.  This increase isprimarily attributable to one of our contracts under which we were permitted toinvoice approximately $200,000 in contract cost increases in the three monthsended June 30, 2005.  In addition,we were able to reduce the cost of operations of our contract with the SocialSecurity Administration by approximately $90,000.  Our gross profit was reduced by $65,000 inthe six months ended June 30, 2005 compared to the six months ended June 30,2004 because the six months ended June 30, 2005 included six months ofamortization and the six months ended June 30, 2004 included four monthsof amortization.

 

Selling,general and administrative expenses increased $574,000 to $1.5 million, or 64%,for the six months ended June 30, 2005 compared to $897,000 for the sixmonths ended June 30, 2004.  Theincrease in costs for 2005 is attributable primarily to costs associated withthe corporate office of Tri-S, which includes staff costs and legal, accountingand other professional fees associated with being a public company.  There were no similar costs incurred for thesix months ended June 30, 2004. Selling, general and administrative expense for the six months ended June 30,2005 also includes $95,000 which represents the fair market value of the sharesof Common Stock issued in exchange for services rendered to the Company.

 

Wehave signed a non-binding letter of intent to acquire a security services firmthat provides a full range of security services.  We believe that if this acquisition iscompleted, then our profits will increase.

 

Netinterest expense decreased $176,000 to $552,000 for the six months ended June 30,2005 compared to net interest expense of $728,000 for the six months ended June 30,2004.  Interest expense of $339,000 forthe six months ended June 30, 2005 is the cost of providing workingcapital to Paragon Systems.  Interestexpense of $453,000 for the six months ended June 30, 2004 relates to thecost of providing working capital to Paragon Systems and to the costs of theAcquisition.  Interest expense of $80,000and $173,000 for the six months ended June 30, 2005 and 2004,respectively, is the interest costs with respect to the Paragon Notes.  In February 2005,

 

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theCompany completed its Initial Public Offering and received proceeds from theoffering before expenses of the offering of $11.1 million.  The Company used the proceeds from theInitial Public Offering to repay the Paragon Notes and to pay down ParagonSystems’ liability to LSQ.  Repayment ofthe Paragon Notes and the reduction of Paragon Systems’ obligation to LSQsignificantly reduced interest expense for the six months ended June 30,2005 compared to the six months ended June 30, 2004.  Interest expense relating to the Series CRedeemable Preferred Stock was $150,000 and $102,000 for the six months ended June 30,2005 and June 30, 2004, respectively. Interest expense relating to the Series C Redeemable PreferredStock will continue to accrue interest at the rate of $25,000 per month.

 

Incometaxes are provided at 38% of income (loss) before income taxes.  The 38% rate equals Federal income taxes at34% plus 4% for state income taxes net of the Federal effect.  Paragon Systems used the cash basis ofaccounting for income taxes prior to the Acquisition.  Pro forma income tax benefit at 38% ispresented for comparative purposes.  Eventhough Tri-S has a net operating loss carry forward of approximately $1.1 million,the Company has recognized a deferred income tax benefit for the net operatingloss carry forward because the Company anticipates reporting income beforeincome taxes in future periods.  Inaddition, cash distributions received by the Company with respect to its equityinterest in Army Fleet Support are taxable. The Company received cash distributions of $400,000, $309,000 and$146,000 in January, April and June 2005, respectively, with respectto the Company’s equity interest in Army Fleet Support.

 

**Liquidity and Capital Resources**

 

Ourcurrent financial condition has been significantly influenced by the followingfactors:  (i) completion of theInitial Public Offering; (ii) repayment of the Paragon Notes; and (iii) receiptof cash distributions with respect to the Company’s equity interest in ArmyFleet Support.  Our current financialcondition has also been influenced by improved margins in the later part of thesix months ended June 30, 2005.

 

OnFebruary 9, 2005, we completed the Initial Public Offering, realizingproceeds of $11.1 million.  Afterrepayment of the Paragon Notes totaling $7.7 million, paying $165,000 inadditional costs of the Initial Public Offering and paying down Paragon Systems’obligation to LSQ, we retained approximately $1.8 million in the business tofund working capital, to pay down other debt obligations, to expand ouroperations and for general corporate purposes.

 

Wereceived $400,000, $309,000 and $146,000 in cash distributions with respect toour equity investment in Army Fleet Support in January, April and June 2005,respectively.  We anticipate receivinglarger distributions from Army Fleet Support over the next six months.  We intend to use these cash distributions tomake acquisitions, to meet our income tax obligations resulting from theconversion of Paragon Systems from an “S” corporation to a “C” corporation forincome tax purposes and for other general corporate purposes.

 

Cashout flow from operating activities was $1.5 million for the six months ended June 30,2005.  This resulted primarily from twofactors:  (i) payments for interestof $1.0 million; and (ii)

 

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operatinglosses for the six months ended June 30, 2005 of $370,000.  On April 20, 2005, Paragon Systemsamended its factoring facility with LSQ, which significantly reduced the costof funds provided by LSQ for working capital purposes.  We also repaid the Paragon Notes totaling$7.7 million on February 15, 2005. As a result, net interest expense for the three months ended June 30,2005 was $345,000 less than interest expense for the three months ended June 30,2004.  We also anticipate that interestexpense for the six months ending December 31, 2005 will be substantiallyless than interest expense for the six months ended December 31, 2004.

 

**Item 3:****          ****Quantitativeand Qualitative Disclosures about Market Risk**

 

We are exposed to various market risks, includingchanges in interest rates. Market risk is the potential loss arising fromadverse changes in market rates and prices, such as interest rates and foreigncurrency exchange rates. We do not enter into derivatives or other financialinstruments for trading or speculative purposes. We have not entered intofinancial instruments to manage and reduce the impact of changes in interestrates and foreign currency exchange rates, although we may enter into suchtransactions in the future.

 

Our factoring facility with LSQ has a funds usagefee which varies with the prime rate. Accordingly, if we sell our accountsreceivable to LSQ and such accounts remain unpaid, then any increase in the primerate will increase the funds usage fee we owe on such unpaid accounts and,therefore, reduce our earnings.

 

**Item 4:****          ****Controls****and Procedures**

 

Our Chief Executive Officer and Chief Financial Officer have evaluatedour disclosure controls and procedures (as such term is defined in Rules 13a-15(e) or15d-15(e) of the Exchange Act), as of the end of the period covered bythis Quarterly Report, as required by paragraph (b) of Rules 13a-15or 15d-15 of the Exchange Act. Based on such evaluation, such officers haveconcluded that, as of the end of the period covered by this Quarterly Report,our disclosure controls and procedures are effective.

 

During the quarter ended March 31, 2005, there was not any changein our internal control over financial reporting identified in connection withthe evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 ofthe Exchange Act that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

**PART II - OTHER INFORMATION**

 

**Item 1.****           ****Legal Proceedings**

 

Based on currently known facts, we believe there are no claims orlitigation pending against us the disposition of which would materially affectour financial position or future operating results, although we cannot becertain as to the ultimate outcome of any such claim or

 

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litigation.In addition, exposure to litigation is inherent in our ongoing business and mayharm our business in the future.

 

**Item 2.****            UnregisteredSales of Equity Securities and Use of Proceeds**

 

On April 8, 2005, we issued 8,700 shares of Common Stock to apublic relations firm in exchange for services rendered by the firm to us.  These shares of Common Stock were issued without registration under theSecurities Act in reliance upon the exemption from registration set forth in Section 4(2) ofthe Securities Act.  The Company basedsuch reliance upon factual representations made by the recipient of the sharesto us regarding the recipient’s investment intent and sophistication, amongother things.

 

**Item 5.****            OtherInformation**

 

On July 19, 2005, the Compensation Committee of the Board amendedthe executive compensation arrangement of Ronald G. Farrell, the Company’sChief Executive Officer, by rescinding (the “Rescission”) that certainAmendment No. 1 to Employment Agreement between the Company and Mr. Farrelldated February 4, 2005 (the “Amendment”). As a result of the Rescission, Mr. Farrell’s employment with theCompany is governed by that certain Employment Agreement between the Companyand Mr. Farrell dated January 1, 2002 (the “Employment Agreement”),which agreement was in effect immediately prior to the execution of theAmendment.  In connection with theRescission, the Company paid to Mr. Farrell the salary and benefits notpaid previously to him as a result of the Amendment but which he otherwisewould have been entitled to receive if the Amendment were never in effect.  The Employment Agreement is listed as Exhibit 10.4to this Quarterly Report.

 

In June 2005, the Company entered into a lease for 2,675 squarefeet of office space in Alpharetta, Georgia which lease commences on September 1,2005 and expires on November 30, 2008. The Company’s obligations under the lease include rent ranging up to$4,507.38 per month plus a share of operating expenses, among otherthings.  The Company intends to use thisspace to house its corporate offices.

 

**Item 6.****           ****Exhibits**

 

The exhibits required to be filed with this Quarterly Report are setforth on the Exhibit Index attached hereto.

 

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**SIGNATURE**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934 the registrant has duly caused this report to be signed onits behalf by the undersigned thereunto duly authorized.

 
|                                  | **TRI-S SECURITY CORPORATION**  |
|---------------------------------------|---------------------------------|
|                                  |                            |
|                                  |                            |
| Date:  August 10, 2005 | /s/ Ronald G. Farrell           |   |
|                                  | Ronald G. Farrell               |
|                                  | Chief Executive Officer         |
|                                  | (duly authorized signatory  and |
|                                  | Principal Executive  Officer)   |

 

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**EXHIBIT INDEX**

 
| 10.1   |   | Factoring Agreement dated April 2005  between Paragon Systems, Inc. and LSQ Funding Group, L.L.C.  (Incorporated by reference to Exhibit 99.1 to the Company’s Current  Report Form 8-K filed on April 26, 2005.)                                                     |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                |
| 10.2   |   | Office Lease Agreement between the Company  and V.V. Georgia, L.P. dated June 29, 2005.                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                |
| 10.3   |   | Letter Agreement dated August 10, 2005  between the Company and Ronald G. Farrell. Represents an executive  compensation arrangement or plan.                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                |
| 10.4   |   | Employment Agreement dated January 1,  2002, between the Company and Ronald G. Farrell. Represents an executive  compensation arrangement or plan.  (Incorporated  by reference to Exhibit 10.24 to the Company’s Registration Statement on Form  S-1, as amended (No. 333-119737).) |
|   |   |                                                                                                                                                                                                                                                                                                |
| 10.5   |   | Employment Agreement between Paragon Systems, Inc. and Leslie  Kaciban dated July 29, 2005. (Incorporated by reference to  Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on  August 4, 2005.)                                                        |
|   |   |                                                                                                                                                                                                                                                                                                |
| 10.5   |   | Employment Agreement between Paragon Systems, Inc. and Mark  Machi dated July 29, 2005. (Incorporated by reference to  Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on  August 4, 2005.)                                                            |
|   |   |                                                                                                                                                                                                                                                                                                |
| 31.1   |   | Rule 13a-14(a)/15d-14(a) Certification by the Company’s  Chief Executive Officer.                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                |
| 31.2   |   | Rule 13a-14(a)/15d-14(a) Certification by the Company’s  Chief Financial Officer.                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                |
| 32.1   |   | Section 1350 Certification by the Company’s Chief Executive  Officer.                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                |
| 32.2   |   | Section 1350 Certification by the Company’s Chief Financial  Officer.                                                                                                                                                                                                                     |

 

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