UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section 14(c) of the Securities
Exchange Act of 1934 (Amendment No. )
Check the appropriate box:
[X] Preliminary Information Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14c-5
(d)(2))
[ ] Definitive Information Statement
GSE SYSTEMS, INC.
(Name of Registrant as Specified In Its Charter)
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(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
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previously. Identify the previous filing by registration statement number, or
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GSE SYSTEMS, INC.
9189 Red Branch Road
Columbia, Maryland 21045
(410) 772-3500
INFORMATION STATEMENT
To the Stockholders:
This Information Statement is being furnished to holders of shares of common
stock of GSE Systems, Inc. ("GSE," the "Company," "we" or "us"). The purpose of
this Information Statement is to notify the stockholders that the holder of a
majority of the outstanding shares of common stock of the Company has taken
action by written consent to approve the issuance by the Company to Dolphin
Direct Equity Partners, LP, a Delaware limited partnership, of a senior
subordinated secured convertible note of the Company in the aggregate principal
amount of $2,000,000, and a warrant to purchase shares of the Company's common
stock, for an aggregate purchase price of $2,000,000. Under the rules of the
American Stock Exchange, because the conversion of the note and exercise of the
warrant could require the issuance by us of 20% or more of our outstanding
common stock if certain anti-dilution adjustments are applied, we are required
to obtain stockholder approval of the transaction. GP Strategies Corporation,
which holds a majority of our outstanding common stock, approved the transaction
on May 19, 2005 by written consent, as permitted by the Delaware General
Corporation Law and our bylaws. No other approval is necessary or will be
sought. The transaction closed and became effective on May 26, 2005, except that
the approval to issue, upon the conversion of the note, certain shares of common
stock of the Company will become effective 20 days after the mailing of this
Information Statement to stockholders of the Company.
This Information Statement is being mailed on June __, 2005 to stockholders of
record of common stock of the Company at the close of business on June __, 2005.
The enclosed Information Statement is being furnished to you to inform you that
the foregoing actions have been approved by the holder of a majority of the
outstanding shares of common stock. We are not asking you for a proxy, and you
are requested not to send us a proxy. You are urged to read the Information
Statement in its entirety for a description of the actions taken by the holder
of a majority of the outstanding shares of common stock of the Company.
By Order of the Board of Directors
Jeffery G. Hough
Secretary
Columbia, Maryland
June __, 2005
We are furnishing this Information Statement and notice of actions taken
without a meeting to our stockholders in connection with the approval by our
board of directors of the matters described below and the subsequent approval of
these matters by written consent of the holder of a majority of our outstanding
common stock. All corporate approvals in connection with these matters have been
obtained and this Information Statement is being furnished solely for the
purpose of informing stockholders of these corporate actions in the manner
required by the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the Delaware General Corporation Law. Section 228(e) of the Delaware
General Corporation Law requires us to provide notice of the taking of corporate
action by written consent of stockholders without a meeting by less than
unanimous consent to those stockholders who have not consented in writing to
such actions. This Information Statement constitutes such notice.
We are not asking you for a proxy and you are requested not to send us a
proxy.
Stockholders of record of common stock of the Company at the close of
business on June __, 2005 are entitled to receive this Information Statement. On
that date, there were [8,999,706] shares of common stock issued and outstanding.
Each share of common stock is entitled to one vote on all matters.
ACTIONS APPROVED BY THE WRITTEN CONSENT
On May 26, 2005, pursuant to a Senior Subordinated Secured Convertible Note
and Warrant Purchase Agreement, dated as of May 26, 2005 (the "Agreement"), we
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. 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 this Information
Statement is mailed to our stockholders. No other approval is necessary or will
be sought. This Information Statement is being mailed to stockholders on or
about June __, 2005.
Summary of the Terms of the Financing
The following is a summary of the terms of the Financing.
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 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 Limi t until the
effectiveness of the Majority Consent on the day following the twentieth day
after this Information Statement 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.
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 suc h 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.
Reasons for the Actions Taken
We entered into the Financing for working capital purposes.
Effects of the Financing
The issuance of a significant amount of common stock upon conversion of the
Note or exercise of the Warrant may adversely affect the price of our common
stock. We have agreed to file a registration statement to permit the public
resale of the shares of common stock issuable upon conversion of the Note or
exercise of the Warrant. The influx of such a substantial number of shares into
the public market could also have a significant negative effect on the trading
price of our common stock. Issuance of these shares of common stock may
substantially dilute the ownership interests of our existing stockholders.
No Dissenter' Rights
The corporate action described in this Information Statement will not
afford to stockholders the opportunity to dissent from the actions described
herein or to receive an agreed or judicially appraised value for their shares.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding beneficial ownership
of the Company's common stock, as of May 16, 2005, by: (i) each stockholder who
is known by the Company to own beneficially more than 5% of the outstanding
common stock, (ii) each of the Company's directors, (iii) each current executive
officer of the Company named in the Summary Compensation Table, and (iv) all
directors and executive officers as a group. Except as otherwise indicated, the
Company believes that the beneficial owners of the common stock listed below
have sole investment and voting power with respect to such shares, subject to
community property laws where applicable.
We are not aware of any material proceedings to which any of the parties
identified under (i), (ii) or (iii) above, or any associate thereof, is a party
adverse to the Company or any of its subsidiaries or has a material interest
adverse to the Company or any of its subsidiaries.
In preparing the following table, the Company has relied on the information
contained in the statements previously filed by GP Strategies, and Schedule
13G/A filed for 2004 by Wells Capital Management, Inc. Certain of the shares
reported in the following table may be deemed to be beneficially owned by more
than one person and, therefore, may be included in more than one table entry.
Number of Percent of
Common Stock Outstanding
Shares Beneficially Common
Owned Stock
--------------------- -----------------
Name of Beneficial Owner
Certain Beneficial Owners
GP Strategies Corporation (1) 5,471,052 58.7%
777 Westchester Avenue
White Plains, NY 10604
Wells Capital Management Inc.(2) 1,530,056 17.0%
525 Market Street, 10th Floor
San Francisco, CA 94105
Directors and Executive Officers (3)
Jerome I. Feldman (4) 5,371,052 58.3%
Scott N. Greenberg (5) 5,254,052 57.7%
George J. Pedersen (6) 373,250 4.0%
Chin-Our Jerry Jen (7) 148,032 1.6%
Jeffery G. Hough (8) 107,654 1.2%
Gill R. Grady (9) 59,827 0.7%
Hal D. Paris (10) 53,622 0.6%
John V. Moran (11) 48,376 0.5%
Sheldon L. Glashow (12) 26,258 0.3%
Joseph W. Lewis (13) 10,000 0.1%
Roger Hagengruber (14) 10,000 0.1%
Andrea Kantor - -
Douglas Sharp - -
Directors and Executive Officers as a group
(13 persons) (15) 6,308,071 62.5%
1 Includes 217,000 shares issuable to Mr. Feldman upon the exercise of options
which are currently exercisable, 100,000 shares issuable to Mr. Greenberg upon
the exercise of options which are currently exercisable, 875,000 shares owned by
SGLG, Inc. (SGLG), 250,000 shares owned by General Physics Corporation (GPC),
and 4,029,052 shares owned by GP Strategies. GP Strategies owns GPC as well as a
controlling interest in SGLG. GP Strategies disclaims beneficial ownership of
all shares, including those subject to options, owned directly by Mr. Feldman
and Mr. Greenberg.
2 Persons other than Wells Capital Management, Inc. have the right to receive
dividends from or the proceeds of the sale of such common stock. No such right
to receive proceeds or dividends relates to more than 5% of the class. Wells
Capital Management, Inc. is a subsidiary of Wells Fargo & Company. Dick
Kovacevich is Chairman and CEO.
3 The address of all directors and executive officers is in care of GSE Systems,
Inc., 9189 Red Branch Road, Columbia, MD 21045.
4 Includes 217,000 shares subject to options owned directly by Mr. Feldman which
are currently exercisable, as well as 4,029,052 shares owned by GP Strategies,
875,000 shares owned by SGLG and 250,000 shares owned by GPC. Mr. Feldman
disclaims beneficial ownership of all the shares owned by GP Strategies, SGLG
and GPC.
5 Includes 100,000 shares subject to options owned directly by Mr. Greenberg
which are currently exercisable, as well as 4,029,052 shares owned by GP
Strategies, 875,000 shares owned by SGLG and 250,000 shares owned by GPC. Mr.
Greenberg disclaims beneficial ownership of all the shares owned by GP
Strategies, SGLG and GPC.
6 Includes 56,250 shares owned directly by Mr. Pedersen, 217,000 shares issuable
upon the exercise of options which are currently exercisable, and 100,000
warrants which are owned by ManTech International Corp. and are currently
exercisable. Mr. Pedersen has a controlling interest in ManTech International
Corporation. Mr. Pedersen disclaims beneficial ownership of the warrants owned
by ManTech.
7 Includes 3,800 shares owned directly by Mr. Jen and 144,232 shares issuable
upon the exercise of options which are currently exercisable.
8 Includes 107,654 shares issuable upon the exercise of options which are
currently exercisable.
9 Includes 100 shares owned directly by Mr. Grady and 59,727 shares issuable
upon the exercise of options which are currently exercisable.
10 Includes 53,622 shares issuable upon the exercise of options which are
currently exercisable.
11 Includes 48,376 shares issuable upon the exercise of options which are
currently exercisable.
12 Includes 8,129 shares owned directly by Dr. Glashow and 18,129 shares
issuable upon the exercise of options which are currently exercisable.
13 Includes 10,000 shares issuable upon the exercise of options which are
currently exercisable.
14 Includes 10,000 shares issuable upon the exercise of options which are
currently exercisable.
15 Includes 1,085,740 shares issuable upon the exercise of options and warrants
which are currently exercisable.
INTERESTS OF CERTAIN PERSONS IN THE ACTION TAKEN
On March 30, 2004, the Company was added as an additional borrower under
the Financing and Security Agreement between GP Strategies' wholly-owned
subsidiary, General Physics Corporation, and a financial institution which
expires on August 12, 2006. Under the terms of the agreement, $1.5 million of
General Physics' available credit facility has been carved out for use by the
Company. The line is collateralized by substantially all of the Company's assets
and provides for borrowings of up to 80% of eligible accounts receivable and 80%
of eligible unbilled receivables, up to a maximum of $1.5 million. GP Strategies
also agreed to guarantee the Company's borrowings pursuant to a Management
Services Agreement between the Company and GP Strategies.
On March 9, 2005, General Physics agreed to loan the Company up to a
maximum of $1.0 million (less certain amounts due under the Management Services
Agreement), such loan to be due and payable by no later than June 9, 2006 and on
such other terms and conditions as were agreed upon by General Physics and the
Company. Such loan agreement terminated upon the closing of the Financing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information required by the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), with the Securities and Exchange Commission ("SEC"). You may
read and copy any document we file at the SEC's public reference room located at
450 5th Street, N. W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the public reference room. Our SEC
filings are also available to the public from the SEC's web site at:
http://www.sec.gov.
By Order of the Board of Directors
Jeffery G. Hough
Secretary
Columbia, Maryland
June __, 2005