UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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) February 28, 2006
GSE SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 0-26494 52-1868008
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(State or other (Commission (I.R.S. Employer
jurisdiction File Number) Identification No.)
of incorporation)
7133 Rutherford Rd., Suite 200, Baltimore, MD 21244
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(Address of principal executive office and zip code)
(410) 277-3740
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Registrant's telephone number, including area code
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation or the registrant under any of the
following provisions (see General Instructions 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.
For a brief description of the terms and conditions of such material agreement
not made in the ordinary course of business of the registrant including the
date on which such agreement was entered into, the identity of the parties to
the agreement and a brief description of any material relationship between the
registrant and its affiliates and any of the parties, other than in respect of
the material definitive agreement; and a brief description of the terms and
conditions of the agreement that are material to the registrant, see Item 8.01
hereinbelow.
Item 3.02 Unregistered Sales of Equity Securities.
Private Placement of the Company's Equity Securities
The Company raised $4.25 million by sale of units consisting of shares of Series
A Cumulative Convertible Preferred Stock (the "Convertible Preferred Stock") and
Warrants (collectively referred to hereinafter as "Units") by means of a private
offering of its equity securities (the "Offering"). The minimum investment was
$50,000 and the price per share at which the Convertible Preferred Stock was
offered was $100 (or 500 shares per the minimum investment). The Warrants issued
to investors under the offering memorandum entitle the investors to purchase
that number of shares of the Company's common stock equal to 20% of the dollar
amount of Convertible Preferred Stock purchased by an investor divided by the
exercise price of the Warrant set forth in the definitive form of Warrant. The
definitive terms for the securities are set forth in certain agreements and
other documents provided by the Company to the investors. The Company will
furnish copies of these materials at the time it submits a registration
statement for filing with the Commission and relevant exchange on or about March
30, 2006. Proceeds from the private offering combined with working capital from
the Company were used to pay off the $2.0 million Senior Subordinated Secured
Convertible Note held by Dolphin Direct Equity Partners, LP.
(a) Securities Sold. On February 28, 2006, the Company sold $4.25 million
Units. The Units sold by the Company represent 42,500 shares of the
Convertible Preferred Stock and Warrants.
(b) Underwriters and Other Purchasers. The Units were sold to "accredited
investors," as that term is used in rules and regulations of the
Commission, by Northeast Securities, Inc. ("NESC"), as placement agent for
the offering.
(c) Consideration. The aggregate offering price for the minimum investment
was $50,000. The Company agreed to compensate NESC, as placement agent for
the offering, in the following manner: six percent (6%) of the gross
proceeds received by the Company from this offering plus Warrants to
purchase 150,000 shares of the Company's common stock with terms
substantially similar to the terms of the Warrants issued to investors in
this offering, including the same registration rights as being offered
investors in this financing. The aggregate underwriting discounts or
commission totaled $255,000.
(d) Exemption from Registration Claimed. The Company claims an exemption
from registration under Regulation D, Rule 506. The Company intends to file
a registration statement with the Commission and relevant exchange on or
about March 30, 2006 pertaining to the offering of its equity securities.
(e) Terms of Conversion or Exercise. The holders of the Company's
Convertible Preferred Stock are entitled to receive cumulative dividends.
Dividends are to be paid on a semiannual basis every June 30 and December
30, commencing on June 30, 2006. Dividends on each Series A Preferred Share
accrue on a daily basis from and including the date of issuance at the rate
of 8% per annum of the Liquidation Value (the "Dividend Rate"). Holders of
the Company's Convertible Preferred Stock have the option to convert at any
time into fully paid and nonassessable shares of Common Stock. The number
of shares of Common Stock to which a holder of Convertible Preferred Stock
is entitled upon conversion is equal to the quotient obtained by dividing
(i) the product of the number of shares of Convertible Preferred Stock
being converted multiplied by the Liquidation Value (plus, at the option of
the holder, any accrued and unpaid dividends) by (ii) the then effective
Series A Conversion Price. The Convertible Preferred Stock will convert
automatically into shares of the Company's Common Stock upon the closing of
an underwritten public offering of Common Stock of the Company in which (i)
gross proceeds to the Company are equal to or greater than $15 million and
(ii) the price-per-share of the Common Stock sold in such public offering
is equal to or greater than 150% of the Series A Conversion Price. The
number of shares of Common Stock to which a holder of Convertible Preferred
Stock shall be entitled upon conversion will be equal to the quotient
obtained by dividing (i) the product of the number of Convertible Preferred
Stock being converted multiplied by the Liquidation Value (plus, at the
option of the holder, any accrued and unpaid dividends) by (ii) the then
effective Series A Conversion Price. At any time after the 366th day from
the Closing Date, the Company has the right to convert Series A Preferred
Stock into shares of Common Stock when the average of the Current Stock
Price during the twenty (20) trading days immediately prior to the date of
such conversion exceeds 200% of the Series A Conversion Price. The number
of shares of Common Stock to which a holder of Convertible Preferred Stock
shall be entitled upon conversion will be equal to the quotient obtained by
dividing (i) the product of the number of Convertible Preferred Stock being
converted multiplied by the Liquidation Value (plus, at the option of the
holder, any accrued and unpaid dividends) by (ii) the then effective Series
A Conversion Price.
(f) Use of Proceeds. The Company intends to use the net proceeds of the
Offering, in combination with currently available funds, to refinance
existing senior debt obligations, fund its ongoing business operations and
other general corporate purposes, including development of new training
simulators, pursuance of new contracts, marketing, and other working
capital requirements.
The Company intends to file a registration statement with the Commission and
relevant exchange on or about March 30, 2006 pertaining to the Company's
recently completed efforts to raise working capital by means of its recently
completed Offering and as contemplated in the Cancellation Agreement and the
related Registration Rights Agreement. The Registration Rights Agreement
requires that the Company use best efforts to prepare and file a registration
statement with respect to the resale of the Common Stock issuable upon exercise
of the Exchange Warrant with the Commission within 30 days after the execution
of the Cancellation Agreement and to use reasonable best efforts to have such
Registration Statement declared effective within 90 days thereafter.
The foregoing is a brief description of the terms of the various agreements and
documents described herein and by its nature is incomplete. It is qualified in
its entirety by the text of the respective agreements and documents, copies of
which are included herewith as Exhibits to this Current Report. All readers of
this Current Report are encouraged to read the entire text of the documents
referred to in the text.
Item 8.01 Other Events.
Extinguishment and Release of Indebtedness
On February 28, 2006 the Company and Dolphin Direct Equity Partners, LP, a
Delaware limited partnership ("Dolphin"), entered into Cancellation and
Warrant Exchange Agreement (the "Cancellation Agreement"). Pursuant to the terms
of the Cancellation Agreement, Dolphin agreed to cancel its senior subordinated
secured convertible promissory note issued by the Company to Dolphin on May 26,
2005 in the aggregate principal amount of $2,000,000 (the "Note"), all as
further provided for in the Senior Subordinated Secured Convertible Note and
Warrant Purchase Agreement dated as of May 26, 2005 (the "Purchase Agreement")
wherein the Company agreed to issue to Dolphin a warrant to purchase an
aggregate of 380,952 shares of common stock, par value $0.01 per share (the
"Warrant") in addition to the Note.
In exchange for Dolphin's agreement to enter into the Cancellation Agreement and
for the participation of Dolphin Offshore Partners, L.P. in the Offering, the
Company paid off the Note and agreed to exchange the Warrant issued pursuant to
the Purchase Agreement for an Exchange Warrant. Upon exercise of the Exchange
Warrant, Dolphin will acquire 900,000 shares of the Company's common stock at a
price per share (the "Exercise Price") equal to $ .67 cents. Dolphin must
exercise the Exchange Warrant promptly after the Company certifies to Dolphin on
or after May 30, 2006 (the "Mandatory Exercise Date") that (i) the Company has
filed a registration statement with respect to the resale of the Common Stock
issuable upon exercise of the Exchange Warrant and such registration statement
shall have been declared effective by the Commission, (ii) the Common Stock has
been listed on the American Stock Exchange and the Company has not received any
communication from such exchange regarding the Company's failure to meet listing
qualifications or the institution of any delisting proceeding at any time up to
and including the Mandatory Exercise Date, (iii) the Current Stock Price shall
not be less than $1.25 on the Mandatory Exercise Date and (iv) the average of
the Current Stock Prices for each trading day of the 30 calendar day period up
to and including the Mandatory Exercise Date shall not be less than $1.25. The
Company also agreed to use its best efforts to file a registration statement
with respect to the resale of the Common Stock issuable upon exercise of the
Exchange Warrant with the Commission within 30 days after the original issuance
of the Convertible Preferred Stock and Warrants as set forth in the Registration
Rights Agreement.
The Company also agreed to pay to Dolphin Advisors, L.L.C. a transaction fee in
the amount of $3,000 in respect of services it rendered to Dolphin related to
the Cancellation Agreement transaction. Furthermore, Dolphin Offshore Partners,
L.P., an affiliate of the Dolphin, agreed to invest in the Company's private
placement of units consisting of up to $4,250,000 of 8% cumulative convertible
preferred stock and warrants (the "Private Placement").
As of February 8, 2006, the Company had 8,999,706 shares of Common Stock
outstanding. Upon completion of the Offering, the Company had a total of
12,781,062 shares of Common Stock outstanding, based on: (i) the issuance of
$4.25 million of shares of its Convertible Preferred Stock; (ii) the conversion
or exercise of all such Convertible Preferred Stock and Warrants issued in
connection with the Offering at an assumed Conversion Price equal to $1.77.
Based on these same assumptions, upon completion of the Offering, the holders of
Convertible Preferred Stock and Warrants issued in the Offering (excluding any
Warrant issued to NESC) would hold approximately 29.6% of the total outstanding
shares of Common Stock. Of the approximately 29.6% shares of Common Stock
referred to above, Dolphin Direct Equity Partners L.P. and its affiliate Dolphin
Offshore Partners, L.P. will hold approximately 12.35% of the total outstanding
shares of Common Stock.
The foregoing is a brief description of the terms of the Cancellation Agreement
and by its nature is incomplete. It is qualified in its entirety by the text of
that agreement, a copy of which is included herewith as an Exhibit to this
Current report. All readers of this current report are encouraged to read the
entire text of the Cancellation Agreement.
Item 9.01 Financial Statements and Exhibits.
(c) Exhibits.
3(i)1 Third Amended and Restated Certificate of Incorporation of the Company.
Previously filed in connection with the GSE Systems, Inc. Form 8-K as
filed with the Securities and Exchange Commission on October 24,
2001 and incorporated herein by reference.
3(ii)1 Form of Amended and Restated Bylaws of the Company. Previously
filed in connection with Amendment No.1 to the GSE Systems, Inc. Form
S-1 Registration Statement as filed with the Securities and Exchange
Commission on June 14, 1995 and incorporated herein by reference.
4.1 Cancellation and Warrant Exchange Agreement dated February 28, 2006 by
and among GSE Systems, Inc. and Dolphin Direct Equity Partners, LP,
filed herewith.
4.2 Registration Rights Agreement dated February 28, 2006 by and among GSE
Systems, Inc. and Dolphin Direct Equity Partners, LP, filed herewith.
4.3 Senior Subordinated Secured Convertible Note and Warrant Purchase
Agreement dated as of May 26, 2005 by and among GSE Systems, Inc. and
Dolphin Direct Equity Partners, LP, filed herewith.
4.4 Form of Senior Subordinated Secured Convertible Promissory Note dated as
of May 26, 2005 issued by and among GSE Systems, Inc. and Dolphin Direct
Equity Partners, LP in the aggregate principal amount of $2,000,000,
filed herewith.
4.5 Form of Warrant to Purchase 900,000 Shares of Common Stock of GSE
Systems, Inc. dated as of February 28, 2006, filed herewith.
4.6 Form of Warrant to Purchase 380,952 shares of Common Stock of GSE
Systems, Inc. dated as of May 26, 2005, filed herewith.
4.7 Form of Warrant to Purchase shares of Common Stock of GSE Systems, Inc.
dated as of February 28, 2006, filed herewith.
4.8 Certificate of Designation, Preferences and Rights of Series A
Cumulative Preferred Stock dated as of February 28, 2006 providing for
the issuance of a series of 42,500 shares of Series A Cumulative
Convertible Preferred Stock, par value $0.01 per share, filed herewith.
5 Legal Opinion dated as of March 1, 2006.
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: March 6, 2006 /s/ Jeffery G. Hough
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Jeffery G. Hough
Senior Vice President and CFO