UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): May 26, 2005
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GSE Systems, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware
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(State or Other Jurisdiction of Incorporation)
0-26494 52-1868008
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(Commission File Number) (IRS Employer Identification No.)
9189 Red Branch Road
Columbia, MD 21045
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(Address of principal executive offices, including zip code)
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(410) 772-3500
(Registrant's Telephone Number, Including Area Code)
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(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
|_| Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17
CFR 240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
Item 1.01 Entry into a Material Definitive Agreement.
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On May 26, 2005, GSE Systems, Inc. (the "Company" or "we" or "us")
issued and sold to Dolphin Direct Equity Partners, L.P. (the "Investor"), for an
aggregate price of $2,000,000, a senior subordinated secured convertible note of
the Company in the aggregate principal amount of $2,000,000 (the "Note") and a
warrant (the "Warrant") to purchase 380,952 shares (the "Warrant Shares") of our
common stock, pursuant to a Senior Subordinated Secured Convertible Note and
Warrant Purchase Agreement, dated as of May 26, 2005 (the "Agreement"). We refer
to this transaction as the "Financing." Our board of directors approved the
Financing on May 19, 2005.
Our common stock is listed on the American Stock Exchange (the "Amex"),
and we are therefore subject to the Amex's rules. Under Section 713 of the Amex
Company Guide, companies with securities listed on the Amex must obtain
stockholder approval before the sale, issuance, or potential issuance of their
common stock, or securities convertible into their common stock, in connection
with a transaction other than a public offering, equal to 20% or more of their
outstanding common stock, for less than the greater of book or market value of
their common stock.
The Note is convertible, in part or in whole, into shares of our common
stock based on a conversion price of $1.925. However, the conversion price, and
thus the number of shares into which the Note may be converted, is subject to
adjustment. Under these adjustment provisions, it is possible that we would be
required to issue, upon conversion of the Note (when aggregated with the number
of shares of our common stock issued upon exercise of the Warrant), 20% or more
of the outstanding shares of our common stock on May 26, 2005 for less than the
greater of book or market value of their common stock. Accordingly, under the
Amex's rules, we would be required to obtain stockholder approval for any such
issuance.
Under the terms of the Agreement and Note, notwithstanding the
adjustment provisions of the Note, the number of shares of our common stock
actually issued on conversion of the Note, when aggregated with the number of
shares of our common stock actually issued upon exercise of the Warrant, will
not exceed 19.99% of the outstanding shares of our common stock on May 26, 2005
(the "Conversion Share Limit"). However, the Note provides that the Conversion
Share Limit will terminate upon the effectiveness of the consent to the
transaction by stockholders holding a majority of the outstanding shares of our
common stock, in compliance with the stockholder approval requirements of the
Amex.
On May 19, 2005, we obtained the written consent (the "Majority
Consent") of GP Strategies Corporation ("GP Strategies"), as holder of a
majority of the outstanding shares of our common stock. In accordance with Rule
14c-2 under the Securities Exchange Act of 1934, as amended, the effectiveness
of the Majority Consent, and the termination of the Conversion Share Limit, will
become effective on the day following the twentieth day after an Information
Statement on Schedule 14C is mailed to our stockholders. No other approval is
necessary or will be sought.
The following is a summary of the terms of the Financing.
1
The Agreement. On May 26, 2005, pursuant to the Agreement, we issued
the Note and the Warrant to the Investor for an aggregate purchase price of
$2,000,000, less certain fees we agreed to pay. Of such purchase price, $500,000
was placed in escrow until the termination of the Conversion Share Limit. If the
Conversion Share Limit has not been terminated by the 75th day after the closing
date, such $500,000 will be paid to the Investor.
Under the Agreement, we have agreed, among other things, not to, and to
cause our subsidiaries not to, while the Note is outstanding, (i) acquire, sell
or otherwise transfer any material assets or rights of the Company or a
subsidiary, or enter into any contract or agreement relating to the sale of
assets, which is not consummated pursuant to an arms length transaction, (ii)
enter into any contract, agreement or transaction with any officer, director,
stockholder or affiliate of the Company or a subsidiary other than ordinary
course transactions that are consistent with past practice and pursuant to arms
length terms, (iii) pay or declare any dividend or make any distribution upon,
redeem, retire or repurchase or otherwise acquire, any shares of capital stock
or other securities of the Company or a subsidiary, other than certain dividends
currently owed to ManTech International, or (iv) materially change the Company's
or any subsidiary's line of business as currently conducted.
We have agreed to file, within 30 days of the closing of the Financing,
a registration statement covering the resale by the Investor of all shares of
common stock issuable pursuant to the Note or the Warrant. We have also agreed
to use our best efforts to have such registration statement declared effective
by the Securities and Exchange Commission as soon as possible thereafter, but in
no event later than 90 days after the closing of the Financing, and to keep the
registration statement effective thereafter until all such securities have been
sold or can be sold without most restrictions. If we do not meet the deadlines
for filing and effectiveness of the registration statement, we will be required
to pay Investor 2% of the outstanding principal of the Note for each 30-day
period we are late. We have also agreed to provide piggyback registration rights
if at any time there is not an effective registration statement covering the
resale by the Investor of all shares of common stock issuable pursuant to the
Note or the Warrant.
Note. The Note is in the principal amount of $2,000,000 and matures on
March 31, 2009. The Note initially bears interest at the rate of 8% per annum.
Interest is payable in arrears on the last day of each calendar quarter and all
principal and accrued interest is payable upon maturity. The interest rate will
decrease, for each quarter during which the registration statement registering
the shares of common stock into which the Note is convertible is in effect, by
2% per annum for each 25% increment over the conversion price then in effect
achieved by our stock price.
The Note is convertible, in part or in whole, into a number of shares
of our common stock equal to the principal and interest of the Note being
converted divided by an initial conversion price of $1.925. However, if we issue
or sell any shares of common stock or securities exercisable or exchangeable for
or convertible into common stock (excluding certain shares, including shares
issued to the Investor, under certain employee benefit plans or pursuant to
outstanding options or convertible securities) for a consideration per share
less than the then effective conversion price, then the conversion price will be
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reduced to an amount equal to the consideration per share in such new issuance.
The conversion price will also be appropriately adjusted upon any stock split,
stock dividend, recapitalization, combination, or similar transaction.
Notwithstanding such adjustment provision, the number of shares of common stock
actually issued on conversion of the Note will be limited by the Conversion
Share Limit until the effectiveness of the Majority Consent on the day following
the twentieth day after an Information Statement on Schedule 14C is mailed to
our stockholders. If we fail to issue a certificate for the shares into which
the Note has been converted within three days of such conversion, we will be
required to pay, for each day we are late, an amount equal to 1% of the product
of number of shares to which the Investor is entitled and the closing price of
our common stock on the last day we could have delivered such certificate.
Events of default under the Note include, among other things, and with
certain cure periods, the suspension of trading or failure to be listed on one
of certain markets, failure to comply with certain agreements with Investor
(such as a failure to comply with the conversion provisions of the Note, a
failure to have sufficient shares authorized for conversion, and a failure to
pay principal or interest or other amount when due), failure to pay material
indebtedness, and bankruptcy. Upon and during the continuance of an event of
default of the Note, the interest rate will increase to 24%. The holder of the
Note may require us to redeem all or any portion of the Note upon an event of
default for a price equal to the greater of the amount of the principal and
interest of the note to be redeemed or the product of the number of shares of
common stock into which such principal and interest is convertible multiplied by
the closing trading price of the common stock immediately prior to the event of
default.
The holder of the Note will be entitled to participate in any pro rata
issuance or sale of securities to our stockholders to the extent that the holder
would have been able to participate if the Note had been converted to common
stock in its entirety.
We are prevented, under the terms of the Note, from engaging in any
fundamental transaction (such as a merger, consolidation, or sale of the
Company) unless the successor assumes in writing all of the obligations of the
Company under the Note and the successor is a publicly traded company with
common stock traded on the Amex, Nasdaq, or the New York Stock Exchange.
The Note ranks senior to all other indebtedness of the Company other
than debt connected with our senior credit agreement (or any refinancing
thereof) and our obligation to repay GP Strategies for payments made by GP
Strategies pursuant to its guaranty of our senior credit agreement debt, to
which the Note is expressly junior, and certain capitalized leases and
contingent obligations. We are prohibited from any additional indebtedness
senior to the Note while the Note is outstanding. The ranking is effectuated by
a subordination agreement between our senior lender, the Investor, and us.
Warrant. The Warrant is exercisable for 380,952 Warrant Shares, and the
initial exercise price is $2.22 per Warrant Share. The exercise price of the
Warrant must be paid in cash, except that if a registration statement is not
available for the resale of Warrant Shares, the holder may make a "cashless
exercise" of the Warrant. The Warrant expires on the seventh anniversary of its
issuance.
3
If we issue or sell any shares of common stock or securities
exercisable or exchangeable for or convertible into common stock (excluding
certain shares, including shares issued to the Investor, under certain employee
benefit plans or pursuant to outstanding options or convertible securities) for
a consideration per share less than the then effective exercise price, then the
exercise price will be reduced to an amount equal to the consideration per share
in such new issuance, without adjustment to the number of Warrant Shares
issuable on exercise. The exercise price and number of Warrant Shares will also
be appropriately adjusted upon any dividend or distribution of assets (including
any distribution of cash, securities or other property by way of dividend,
spin-off, reclassification, or similar transaction) and upon any stock split,
recapitalization, combination, or similar transaction. If we fail to issue a
certificate for the shares for which the Warrant has been exercised within three
days of such conversion, we will required to pay, for each day we are late, an
amount equal to 1% of the product of number of shares to which the Investor is
entitled and the closing price of our common stock on the last day we could have
delivered such certificate.
The holder of the Warrant will be entitled to participate in any pro
rata issuance or sale of securities to our stockholders to the extent that the
holder would have been able to participate if the Warrant had been exercised in
its entirety.
We are prevented, under the terms of the Warrant, from engaging in any
fundamental transaction (such as a merger, consolidation, or sale of the
Company) unless the successor assumes in writing all of the obligations of the
Company under the Warrant and the successor is a publicly traded company with
common stock traded on the Amex, Nasdaq, or the New York Stock Exchange.
Security. We have granted the Investor a second priority lien on all of
our and our subsidiaries' assets.
Item 3.02 Unregistered Sales of Equity Securities.
As disclosed above, on May 26, 2005, pursuant to the Agreement, the
Company issued the Note and the Warrant to the Investor for an aggregate
purchase price of $2,000,000. In connection therewith, the Company paid certain
fees and reimbursement of legal expenses totalling $116,500. The Company issued
the Note and the Warrant, and will issue the common stock of the Company
issuable on conversion or exercise thereof, to the Investor without registration
in reliance on the exemption provided by Section 4(2) of the Securities Act of
1933, as amended, for transactions not involving a public offering. In claiming
such exemption, the Company relied on representations that, among other things,
Investor was an accredited investor and was acquiring the Note and the Warrant,
and will acquire the common stock of the Company issuable on conversion or
exercise thereof, for its own account and not with a view to the resale or
distribution thereof.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
GSE SYSTEMS, INC.
Date: May 27, 2005 John V. Moran
Chief Executive Officer