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) March 8, 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 jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)
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 agreements
not made in the ordinary course of business of the registrant concerning the
dates on which such agreements were entered into, the identity of the parties to
the agreements 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 agreements; and a brief description of the terms and
conditions of the agreements that are material to the registrant, please see
Item 2.03, 3.02, 5.01 and 8.01 herein below,
Item 2.03 Creation of a Direct Financial Obligation or an Obligation under an
Off-Balance Sheet Arrangement of a Registrant.
New Credit Facility
On March 7, 2006, GSE Systems, Inc., a corporation organized under the laws of
the State of Delaware (the "Company"), entered into a new, two-year Revolving
Credit Facility with Laurus Master Fund, Ltd. ("LMF"), a limited liability
company organized under the laws of the Cayman Islands, in an amount up to $5.0
million (the "New Facility") (all as further described in Item 3.02 herein
below). The exact amount of the New Facility that the Company is permitted to
draw will be based on the Company's accounts receivable at an advance rate equal
to 90% of eligible billed receivables and 40% of unbilled receivables (subject
to a cap of $1.0 million on unbilled receivables) at the time of such draw. The
interest rate on the New Facility is the Prime Rate (as reported in the Wall
Street Journal) plus 2.0%, provided that the minimum interest rate is 8.0%.
The New Facility is secured by a first lien on certain assets and receivables of
the Company as set out more fully in that certain Security Agreement dated as of
March 7, 2006 (attached hereto as Exhibit 4.5), including but not limited to:
(i) a security interest in the patents and trademarks of the Company and GSE
Power Systems, Inc. ("GSE Power"), a Delaware corporation and wholly owned
subsidiary of GSE Systems, Inc.; (ii) a security interest in favor of LMF in all
of the right, title and interest of the Company in and to any and all equity
interests (including, without limitation, limited liability company interests
and membership interests) from time to time issued by GSE Services, LLC ("GSE
Services"), a Delaware limited liability company owned and controlled by the
Company; and (iii) a security interest in certain defined collateral of (a)
MSHI, Inc. ("MSHI"), a Virginia corporation and wholly owned subsidiary of the
Company, (b) GSE Power, (c) GSE Erudite Software, Inc. ("GSE Erudite"), a
Delaware corporation and wholly owned subsidiary of the Company, (d) GSE
Process Solutions, Inc. ("GSE Process"), a Delaware corporation and wholly owned
subsidiary of the Company, and (e) GSE Government & Military Simulation Systems,
Inc. ("GSE Military" and together with MSHI, GSE Power, GSE Erudite, GSE
Process, GSE Military and GSE Services, the "Subsidiaries"), a Delaware
corporation and wholly owned subsidiary of the Company.
In connection with entering into the New Facility, the Company also issued to
LMF a Warrant to purchase up to 367,647 shares of the Company's Common Stock, at
a price per share equal to $0.01 (the "LMF Warrant"). The Company paid LMF
$15,000 in due diligence fees and $30,000 in structuring fees associated with
the New Facility.
The Company agreed that it would use its best efforts to prepare and file a
registration statement with the Securities and Exchange Commission (the
"Commission") and the American Stock Exchange within 60 days of LMF funding the
New Facility and use reasonable best efforts to have such Registration Statement
declared effective within 120 days thereafter. The Company intends to file a
registration statement with the Commission and the American Stock Exchange on or
about March 30, 2006 pertaining to the LMF Warrants and the recently completed
private placement of units consisting of up to $4,250,000 of 8% Cumulative
Convertible Preferred Stock (the "Private Placement"), as more fully described
in the Company's Form 8-K filed with the Commission on March 6, 2006, and
incorporated herein by reference.
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.
Subsidiary Guaranty
In consideration of the Company and LMF entering into the New Facility, the
Subsidiaries unconditionally guaranteed all present and future obligations and
liabilities of any and all kinds of each Company to LMF. The Guaranty is a
guaranty of payment and not of collection. LMF has no obligation to take any
action against any company, person or entity liable with respect to any of the
obligations or resort to any collateral security held by it to secure any of the
obligations as a condition precedent to the Subsidiaries being obligated to
perform. Each Subsidiary waived any and all statutory or common law rights which
would require LMF to seek redress first from any liable person or entity before
seeking redress from the Subsidiary. LMF is also under no obligation to marshal
any assets in favor of Subsidiaries, or against or in payment of any or all of
the obligations. Each of the Guarantor also waived all suretyship defenses and
any rights to interpose any defense, counterclaim or offset of any nature a nd
description which any company may assert on the underlying debt. A complete copy
of the Subsidiary Guaranty is attached hereto as Exhibit 4.5.
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 3.02 Unregistered Sales of Equity Securities
(a) Securities Sold. On March 7, 2006, the Company issued to LMF a Warrant
to purchase, at a price per share equal to $0.01, 367,647 shares of the
Company's Common Stock.
(b) Underwriters and Other Purchasers. The Warrant was issued by the
Company to LMF, an "accredited investor", as that term is used in accordance
with Section 13(d) of the Securities Exchange Act of 1934, as amended, and
Regulation 13d-3 thereunder.
(c) Consideration. The Company issued Warrants to LMF to purchase 367,647
shares of the Company's common stock with terms substantially similar to the
terms of the warrants issued to investors in the Private Placement, including
the same registration rights as being offered investors in the recently
completed financing undertaken by Dolphin Direct Equity Partners, LP (all as
further described in the report on Form 8-K filed with the Commission on March
6, 2006 and incorporated by reference herein).
(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 the American Stock Exchange on or
about March 30, 2006 pertaining to the offering of its equity securities.
(e) Terms of Conversion or Exercise. In connection with entering into the
New Facility, LMF or its assigns, is entitled, subject to the terms set forth in
the LMF Warrant, to purchase from the Company from and after the issue date of
the LMF Warrant, up to 367,647 fully paid and nonassessable shares of Common
Stock, $0.01 par value per share, at the exercise price per share of $0.01. The
exercise formula is fully described in the attached Exhibit 4.1.
The Company intends to draw down the New Facility for working capital and to
fund its ongoing business operations and for other general corporate purposes.
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
Security Agreements and Interests
Capitalized terms used herein have the same meaning as indicated in the Security
Agreement, a complete copy of which is attached hereto as Exhibit 4.5.
Pursuant to a Security Agreement by and among the Company, GSE Power and LMF
dated as of March 7, 2006, the Company and GSE Power are jointly and severally
liable for payment of interest at the Contract Rate (all as further defined in
the Security Agreement attached hereto as Exhibit 4.5) on the unpaid principal
balance of each Loan made by LMF under the Security Agreement with interest and
payments being computed on the basis of actual days elapsed in a year of 360
days, with interest chargeable to the Company or GSE Power's accounts at LMF's
option. Upon the occurrence or continuation of any Event of Default, the
Contract Rate shall automatically be increased and all outstanding Obligations,
including unpaid interest, shall continue to accrue interest from the date of
such Event of Default at the Default Rate applicable to such Obligations. In the
event any Company fails to deliver to LMF financial information required by the
Security Agreement as specified therein, all Companies shall jointly and sev
erally pay LMF an aggregate fee in the amount of $250.00 per week (or portion
thereof) for each such failure until such failure is cured or waived in writing
by Laurus.
In addition, upon execution of the Security Agreement, the Company agreed to pay
Laurus Capital Management, LLC ("LCM") a closing payment in an amount equal to
three and three-fifths (3.60%) of the Capital Availability Amount which would be
deemed fully earned on the Closing Date and not be subject to rebate or
pro-ration. In the event the Loans exceed the Formula Amount (each such event,
an "Overadvance"), all such Overadvances shall bear additional interest at a
rate equal to one and one half percent (1.5%) per month of the amount of such
Overadvances. All amounts that are incurred are due and payable by the Company
monthly, in arrears, on the first business of each calendar month and upon
expiration of the Term. Furthermore, The Company paid LMF $15,000 in due
diligence fees and $30,000 in structuring fees associated with the New Facility.
Pursuant to the terms of that certain Grant of Security Interest in Patents and
Trademarks by and among GSE Systems, GSE Power and LMF dated March 7, 2006
(attached hereto as Exhibit 4.2), LMF was granted a security interest that
extends to all right, title and interest in and to the Trademarks and Patents,
and all proceeds thereof, together with the business as well as the goodwill of
the business symbolized by, or related or pertaining to, the Trademarks, and the
customer lists and records related to the Trademarks and Patents and all causes
of action which may exist by reason of infringement of any of the Trademarks and
Patents (collectively, the "T&P Collateral").
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.
Stock Pledge Agreement
Pursuant to a Stock Pledge Agreement by and among GSE Services, MSHI, GSE Power
and GSE Process and LMF dated as of March 7, 2006, each of which pledged and
granted a security interest to LMF in certain collateral (the "Collateral") to
include certain shares of stock together with (i) any additional shares of stock
or other equity interests acquired by any Pledgor, the "Pledged Stock"); (ii)
the certificates representing the Pledged Stock and all dividends, cash,
instruments and other property or proceeds from time to time received,
receivable or otherwise distributed in respect of or in exchange for any or all
of the Pledged Stock; (iii) all additional shares of stock of any issuer (each,
an "Issuer") of the Pledged Stock acquired by any Pledgor in any manner,
including stock dividends or a distribution (in connection with any increase or
reduction of capital, reclassification, merger, consolidation, sale of assets,
combination of shares, stock split, spin-off or split-off); (iv) the
certificates representing such additional shares, and (v) all dividends, cash,
instruments and other property or proceeds received, receivable or otherwise
distributed in respect of or in exchange for any or all of such shares; (vi) and
all options and rights to any shares of any Pledged Stock and all dividends,
cash, instruments and other property or proceeds received, receivable or
otherwise distributed in respect of or in exchange for any or all such options
and rights.
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 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 Form of Warrant to Purchase 367,647 shares of the Company's
Common Stock dated as of March 7, 2006, filed herewith.
4.2 Grant of Security Interest in Patents and Trademarks by and
among GSE Systems, Inc, GSE Power Systems, Inc. and Laurus
Master Fund, Ltd. dated March 7, 2006, filed herewith.
4.3 Subsidiary Guaranty by and among GSE Company Services LLC,
MSHI, Inc., GSE Power Systems, Inc., GSE Erudite Software Inc.,
GSE Government & Military Simulations Systems, Inc., and GSE
Process Solutions, Inc. and Laurus Master Fund, Ltd. dated as of
March 7, 2006, filed herewith.
4.4 Control Agreement by and among GSE Systems, Inc., Laurus Master
Fund, Ltd. and GSE Services Company LLC dated as of March 7,
2006, filed herewith.
4.5 Security Agreement by and among GSE Systems, Inc., GSE Power
Systems, Inc. and Laurus Master Fund, Ltd. dated as of March 7,
2006, filed herewith.
4.6 Registration Rights Agreement by and among GSE Systems, Inc. and
Laurus Master Fund, Ltd. dated as of March 7, 2006, filed
herewith.
4.7 Stock Pledge Agreement by and among the Company, MSHI, Inc., GSE
Power Systems, Inc., GSE Process Solutions, Inc. and Laurus
Master Fund, Ltd. dated as of March 7, 2006, filed herewith.
4.8 Secured Non-Convertible Revolving Note dated as of March 7,
2006, filed herewith
5.0 Opinion of Counsel dated as of March 7, 2006.
99 Form 8-K dated February 28, 2006, filed with the Securities and
Exchange Commission on March 6, 2006, incorporated herein by
reference
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 13, 2006 /s/ Jeffery G. Hough
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Jeffery G. Hough
Senior Vice President and CFO