EXHIBIT 10.31


 


EXCHANGE AND RECAPITALIZATION AGREEMENT


 


This Exchange and Recapitalization Agreement (together with the
Exhibits hereto, the “Agreement”) is made as of
[                        ],
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 of
all 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 the number of post-Exchange shares of Common Stock as
set forth on such exhibit.  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.


 


1.2.                              The
Company and each Option Holder acknowledge and agree that, effective upon the
Exchange Date, all options and warrants to purchase shares of Common Stock held
by such Option Holder as of the date hereof as set forth on Exhibit B attached
hereto shall be exchanged for an option to purchase the number of post-Exchange
shares of Common Stock at the exercise price as set forth on such exhibit.  On the Exchange Date, the Company shall deliver
to the Option Holder an executed option agreement representing such
post-Exchange option in a form reasonably acceptable to the parties
thereto.  Each Option Holder acknowledges
and agrees that all agreements or certificates representing all options and
warrants to purchase shares of Common Stock 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.


 


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


 


2
















 


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.


 


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


 


3
















 


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.


 


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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. 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

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  R

  	
   

  	
   

  
	
   

  	
  JUNE D. HODGE

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  TIMOTHY J. MCGAUGHEY

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  MICHAEL MCKINZIE

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  KENNETH E. MOORE

  	
   

  
				



 
















 


	
   

  	
   

  	
   

  
	
   

  	
  ROBERT PARKER

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  R.G.F. INVESTMENTS, INC.

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Printed Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  BRANT W. SCOTT

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  SOUTHWICK CAPITAL, LLC

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  RODNEY A. TAYLOR

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  OPTION HOLDERS:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  RONALD G. FARRELL

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  BRE LLC

  	
   

  
						



 


7
















 


EXHIBIT A


 


	
  Name
  of

  Shareholder

  	
   

  	
  Number of Shares of the Company’s Capital

  Stock Held as of the Date of the Agreement

  	
   

  	
  Aggregate

  Number of Shares

  of Common Stock

  to be Issued Upon

  the Exchange

  	
   

  
	
  Douglas K. Ball

  	
   

  	
  20,000 shares Series B Convertible Preferred Stock

  	
   

  	
  64,725

  	
   

  
	
  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

  	
   

  	
  158,576

  	
   

  
	
  Bonnie Lynn Farrell

  	
   

  	
  300,000 shares Common Stock

  	
   

  	
  97,087

  	
   

  
	
  Harold E. Hodge

  	
   

  	
  10,000 shares Series A Convertible Preferred Stock

  	
   

  	
  24,272

  	
   

  
	
  June D. Hodge

  	
   

  	
  10,000 shares Series A Convertible Preferred Stock

  	
   

  	
  24,272

  	
   

  
	
  Timothy J. McGaughey

  	
   

  	
  25,000 shares Common Stock

  	
   

  	
  8,091

  	
   

  
	
  Michael McKinzie

  	
   

  	
  9,000 shares Common Stock

  	
   

  	
  2,913

  	
   

  
	
  Kenneth E. Moore

  	
   

  	
  4,500 shares Common Stock

  	
   

  	
  1,456

  	
   

  
	
  Robert Parker

  	
   

  	
  5,000 shares Series A Convertible Preferred Stock,  and  10,000 shares Series B Convertible Preferred
  Stock

  	
   

  	
  44,498

  	
   

  
	
  R.G.F. Investments, Inc.

  	
   

  	
  2,200,000 shares Common Stock

  	
   

  	
  711,974

  	
   

  
	
  Bryant W. Scott

  	
   

  	
  10,000 shares Series A Convertible Preferred Stock

  	
   

  	
  24,272

  	
   

  
	
  Southwick Capital, LLC

  	
   

  	
  15,000 shares Series A Convertible Preferred Stock

  	
   

  	
  36,408

  	
   

  
	
  Rodney A. Taylor

  	
   

  	
  4,500 shares Common Stock

  	
   

  	
  1,456

  	
   

  



 
















 


EXHIBIT B


 


 


	
  Name
  of Option Holder

  	
   

  	
  Number of

  Shares of

  Common Stock

  Underlying

  Options or

  Warrants Held

  as of the Date

  Hereof

  	
   

  	
  Pre-Exchange

  Exercise Price

  Per Share

  	
   

  	
  Post-

  Exchange

  Number of

  Shares

  Underlying

  Option

  	
   

  	
  Post-Exchange

  Exercise Price

  Per Share

  	
   

  
	
  Ronald G. Farrell, Inc.

  	
   

  	
  300,000

  	
   

  	
  $

  	
  0.04

  	
   

  	
  97,087

  	
   

  	
  $

  	
  0.12

  	
   

  
	
  BRE LLC

  	
   

  	
  50,000

  	
   

  	
  $

  	
  1.00

  	
   

  	
  16,181

  	
   

  	
  $

  	
  3.09