PROSPECTUS
SUMMARY
This
section contains a general summary of the information contained in this
prospectus and highlights selected information described in greater detail
elsewhere or incorporated by reference in this prospectus. You should carefully
read this entire prospectus, including the risk factors beginning on page
6, and
the documents incorporated by reference in this prospectus to fully understand
it and our business, results of operations and financial condition. The
information in this prospectus is not complete and may be changed. The selling
stockholders named in this prospectus may not sell these securities until
the
registration statement filed with the Securities and Exchange Commission
becomes
effective. This prospectus is not an offer to sell these securities and it
is
not soliciting an offer to buy these securities in any state where the offer
or
sale is not permitted. Neither the Securities and Exchange Commission nor
any
state securities commission has approved or disapproved of these securities
or
passed upon the adequacy and accuracy of this prospectus. Any representation
to
the contrary is a criminal offense.
This
prospectus relates to the sale by the selling stockholders of up to 4,299,006
shares of our Common Stock issuable upon the conversion of Preferred Stock
and
the exercise of warrants issued in three separate transactions (summarized
below) for the account of the stockholders named in this prospectus. The
selling
stockholders may sell the Common Stock from time to time in the principal
market
on which the stock is traded at the prevailing market price or in negotiated
transactions. We will pay the expense of registering these shares.
The
three
transactions are summarized here and are more fully explained in separate
sections below:
| 1. |
On
February 28, 2006, we sold units consisting of up to $4,250,000 of
Series
A 8% Cumulative Convertible Preferred Stock (the “Preferred Stock”) and
Warrants (the “Warrants”) in a private offering exempt from registration
under the Securities Act of 1933. Northeast Securities, Inc. (“Northeast
Securities”) acted as placement agent for this offering. We entered into a
registration rights agreement with the individual investors and with
the
placement agent in the offering in which we agreed, for the benefit
of the
holders of the Preferred Stock and Warrants, to file a registration
statement with the U.S. Securities and Exchange Commission (the “SEC”),
with respect to the resale of the Common Stock issuable upon conversion
of
the Preferred Stock and upon exercise of the Warrants. The exercise
price
for the Preferred Stock and Warrants is $1.77 per share. See the
section
captioned “Description of the February 27, 2006
Offering.”
|
| 2. |
On
February 28, 2006, we entered into a Cancellation and Warrant Exchange
Agreement with Dolphin Direct Equity Partners, LP (the “Cancellation
Agreement”). Pursuant to that Cancellation Agreement, we issued Dolphin a
warrant to purchase 900,000 shares of our Common Stock at an exercise
price equal to $0.67 per share. See the section captioned “Description of
the Cancellation and Warrant Exchange
Agreement.”
|
| 3. |
On
March 7, 2006, we 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”). 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. In consideration of
the New Facility, we issued LMF a warrant to purchase 367,647 shares
of
our Common Stock at an exercise price of $0.01 per share. See the
section
captioned “Description of the New Two-Year Revolving Credit Facility.”
|
The
Company
General
GSE
Systems, Inc. (the “Company,” “GSE” or “GSE Systems” or “we” or “us”) is
organized under the laws of the State of Delaware and is a leader in real-time,
high fidelity simulation. The Company provides simulation solutions and
services
to the nuclear and fossil electric utility industry, the chemical and
petrochemical industries and to the U.S. Military Complex. In addition,
the
Company provides plant monitoring and signal analysis monitoring and
optimization software primarily to the power industry. GSE Systems, Inc.’s
executive offices are located at 7133 Rutherford Road, Suite 200, Baltimore,
Maryland 21244. The Company’s telephone number is (410) 277-3740 and its
facsimile number is (410) 277-5287. GSE maintains a Web site at
http://www.gses.com. Nothing contained in such Web site should be deemed
a part
of this prospectus.
Recent
Developments
For the six months ended June 30, 2006, the Company has incurred operating
income of $651,000, but has incurred a net loss of $1.2 million. The
Company’s
backlog has increased from $12.3 million at December 31, 2005 to $28.5
million
at June 30, 2006.
In
the
fourth quarter 2005, the Company announced the formation of the Emirates
Simulation Academy, LLC (ESA), a United Arab Emirates company, to build
and
operate simulation training academies in the Arab Gulf Region. GSE is
a 10%
owner of ESA. These simulation training centers will be designed to train
and
certify indigenous workers for deployment to a nation’s critical infrastructure
facilities including power plants, oil refineries, petrochemical plants,
desalination units and other industrial facilities. In January 2006,
the Company
announced the award of a contract valued at over $15 million from ESA
to supply
five simulators and an integrated training program. ESA accounted for
12.6% of
the Company’s consolidated revenue for the six months ended June 30, 2006. Under
the terms of the contract, the Company provided a $2.1 million performance
bond
to ESA that will remain outstanding until the end of the warranty period
on
October 31, 2008.
In
order
to ensure that the Company would have sufficient working capital in 2006,
the
Company completed several financing transactions in early 2006 which
are fully
described below in the sections entitled “Description of the February 27, 2006
Offering”, “Description of the Cancellation and Warrant Exchange Agreement” and
“Description of the New Two-Year Revolving Credit Facility”. In conjunction with
the cancellation of the Company’s 2.0 million Senior Subordinated Secured
Convertible Promissory Note and warrant payable to Dolphin Direct Equity
Partners, LP described below, the Company incurred a $1.4 million loss
on
extinguishment of debt. This loss was comprised of a $1.1 million charge
from
the write off of the remaining unamortized Original Issue Discount, a
$185,000
charge from the write off of the remaining unamortized deferred financing
charges, and a $868,000 charge for the value of the new warrants issued
to
Dolphin which charges were partially offset by a $698,000 credit from
the write
off of the remaining liabilities related to the Dolphin Note conversion
feature
and the related warrants. After the completion of these financing transactions,
the Company believes that it has sufficient liquidity and working capital
for
its operations in 2006.
In
October 2005, the Company signed an “Assignment of Lease and Amendment to Lease”
that assigns and transfers to another tenant (the “assignee”) the Company’s
rights, title and interest in its Columbia, Maryland facility lease.
The
assignee’s obligation to pay rent under the lease began on February 1, 2006. The
Company remains fully liable for the payment of all rent and for the
performance
of all obligations under the lease through the scheduled expiration of
the
lease, May 31, 2008, should the assignee default on its obligations.
In October
2005, the Company relocated its Maryland operations from its facility
in
Columbia to the Baltimore facility.
Description
of the February 27, 2006 Offering
The
Company offered Units consisting of up to $4.25 million of shares of Preferred
Stock and Warrants. The minimum investment was $50,000 and the price per
share
of Preferred Stock was $100 (or 500 shares per the minimum investment). The
Preferred Stock is convertible at any time into a total of 2,401,133 shares
of
GSE Common Stock at a conversion price of $1.77 per share. The conversion
price
was equal to 110% of the closing price of the Company’s Common Stock on February
28, 2006, the date the sale of the Convertible Preferred Stock was completed.
In
addition to Preferred Stock, each investor received a five-year Warrant to
purchase GSE Common Stock equal to 20% of the shares they would receive from
the
conversion of the Convertible Preferred Stock, at an exercise price of $1.77.
In
aggregate, the Company issued Warrants to purchase a total of 480,226 shares
of
GSE Common Stock.
The
Preferred Stock holders are entitled to an 8% cumulative dividend, payable
on a
semiannual basis every June 30 and December 30. If the Company does not make
two
consecutive dividend payments on the dates such payments are due, there will
be
an additional 30% warrant coverage of five-year warrants at a conversion
price
of $1.77 per share. At any time after March 1, 2007, the Company has the
right
to convert the Preferred Stock into shares of GSE common stock when the average
of the current stock price during the twenty trading days immediately prior
to
the date of such conversion exceeds 200% of the Series A Conversion Price.
The
holders of the Preferred Stock are entitled to vote on all matters submitted
to
the stockholders for a vote, together with the holders of the voting common
stock, all voting together as a single class. The holders of the Convertible
Preferred Stock are entitled to the number of votes equal to the number of
GSE
Common Stock that they would receive upon conversion of their Preferred
Stock.
The
Company paid the placement agent 6% of the gross proceeds received by the
Company from the offering ($255,000) plus five-year warrants to purchase
150,000
shares of the Company’s Common Stock at an exercise price of $1.77 per share
(the “NESC Warrant”). On March 5, 2006, counsel for the placement agent notified
the Company that the placement agent had assigned a portion of the NESC Warrant
to certain of the selling stockholders identified in the “Selling Security
Holders” section of this Prospectus (See also Footnote 18).
This
offering was made on an “any and all” basis. That is, funds tendered for payment
of the subscription purchase price were not maintained in an escrow or other
account until a minimum number of units had been sold. Rather, as acceptable
subscriptions were received by the Company, they were accepted in whatever
order
the Company determined. Upon acceptance of each subscription, the accompanying
payment became the property of the Company and may have been applied by the
Company to any of its business purposes and uses. Subscriptions were submitted
and received on an irrevocable basis.
This
offering was made only to “accredited investors,” as that term is used in rules
and regulations of the SEC.
The
proceeds of the private placement offering were used to pay off the Dolphin
Note
and the Company’s line of credit balance and for other working capital purposes.
Description
of the Cancellation and Warrant Exchange Agreement
On
February 28, 2006, the Company and Dolphin Direct Equity Partners, LP, a
Delaware limited partnership (“Dolphin”), entered into a 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
“Exchange 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 private
placement offering, the Company paid off the Note and exchanged the warrant
issued pursuant to the Purchase Agreement for the 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
$0.67 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 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 Dolphin, agreed to invest in the Company’s private
placement offering.
Description
of the New Two-Year Revolving Credit Facility
On
March
7, 2006, GSE entered into the New Facility with LMF in an amount up to $5.0
million (all as further described in the Form 8-K filed with the Commission
on
March 13, 2006 and incorporated by reference herein). 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 as an Exhibit to the Form 8-K filed with the Commission
on March 13, 2006 and incorporated by reference herein), 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. On July 31, 2006, LMF exercised its warrant in a cashless exercise
transaction and received 366,666 shares of the Company’s restricted Common
Stock.
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
key
agreements underlying the New Facility are more fully described below and
were
attached as exhibits to the Form 8-K filed with the SEC on March 13,
2006:
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 Subsidiaries also waived all suretyship defenses and any rights to interpose
any defense, counterclaim or offset of any nature and description which any
company may assert on the underlying debt. A complete copy of the Subsidiary
Guaranty is contained in the Form 8-K filed with the Commission on March
13,
2006 and is incorporated by reference herein.
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 an Exhibit to the Form 8-K
filed
with the Commission on March 13, 2006 and incorporated by reference herein.
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 filed as an Exhibit to the Form 8-K filed with the Commission on
March
13, 2006 and incorporated by reference herein) 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 severally
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 Overadvances incurred are due and payable by the
Companies monthly, in arrears, on the first business day of each calendar
month
and upon expiration of the Term. 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 an Exhibit to
the
Form 8-K filed with the Commission on March 13, 2006 and incorporated by
reference herein ), 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”).
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.
Registration
Rights
In
connection with each of the above described transactions, 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 the completion of the foregoing transactions
to
cover resales of the Common Stock underlying the securities.
Other
Information
Our
common stock trades on the American Stock Exchange under the symbol “GVP.”
Our
principal executive offices are located at 7133 Rutherford Road, Suite 200,
Baltimore, Maryland 21244. Our telephone number is (410) 277-3740.
Our
website address is www.gses.com.
Except
for any documents that are incorporated by reference into this prospectus
that
may be accessed from our website, the information available on or through
our
website is not part of this prospectus.
RISK
FACTORS
You
should carefully consider the risks described below before making an investment
decision. The risks and uncertainties described below may not be the only
ones
we will face. Additional risks and uncertainties not presently known to us
or
that we currently deem not material may also impair our business operations.
If
any of the following risks actually occur, our business, financial condition
or
results of operations could be materially adversely affected. In such case,
the
trading price of our common stock could decline, and you may lose all or
part of
your investment.
The
Company has limited cash resources. If the Company is unable to generate
adequate cash flow from operations, it will need additional capital to fund
its
operations.
In
2005,
the Company incurred a net loss of $4.8 million. The Company’s revenue and
profitability were impacted by the low volume of orders logged in 2004 and
2005
and the Company’s backlog decreased from $19.6 million at December 31, 2004 to
$12.3 million at December 31, 2005. In addition, the Company continued to
spend
heavily on business development activities in order to expand the Company’s
simulation business into new sectors, such as integrating its simulation
capabilities with broader training and educational programs. Accordingly,
the
Company’s cash position weakened during the year, with total cash used in
operating activities of $1.9 million. Although the Company took actions that
will reduce its operating expenses in 2006, including the termination of
a
number of employees and by restructuring two facility leases, our ability
to
meet our debt obligations and to reduce our debt level depends on our future
performance which is affected by general economic conditions and financial,
business and other factors, and there can be no assurance the Company will
continue to be able to reduce its operating expenses.
Although
the Company believes that, as a result of the transactions described in this
prospectus, it has sufficient liquidity and working capital for its operations
in 2006, the Company may be required to look for additional capital to fund
its
operations if the Company is unable to operate profitably and generate
sufficient
cash from operations. There can be no assurance that the Company would be
successful in raising such additional funds.
The
Company's expense levels are based upon its expectations as to future revenues,
so it may be unable to adjust spending to compensate for a revenue shortfall.
Accordingly, any revenue shortfall would likely have a disproportionate effect
on the Company's operating results.
The
Company’s revenue was $22.0 million, $29.5 million and $25.0 million for the
years ended December 31, 2005, 2004 and 2003, respectively. The Company’s
operating income (loss) was ($4.7 million), $2,000 and ($1.0 million) in
2005,
2004 and 2003, respectively. The Company's operating results have fluctuated
in
the past and may fluctuate significantly in the future as a result of a variety
of factors, including purchasing patterns, timing of new products and
enhancements by the Company and its competitors, and fluctuating foreign
economic conditions. Since the Company's expense levels are based in part
on its
expectations as to future revenues and includes certain fixed costs, the
Company
may be unable to adjust spending in a timely manner to compensate for any
revenue shortfall and such revenue shortfalls would likely have a
disproportionate adverse effect on operating results. The Company believes
that
these factors may cause the market price for its common stock to fluctuate,
perhaps significantly. In addition, in recent years the stock market in general,
and the shares of technology companies in particular, have experienced extreme
price fluctuations. The Company's common stock has also experienced a relatively
low trading volume, making it further susceptible to extreme price
fluctuations.
Risk
of International Sales and Operations
Sales
of
products and the provision of services to end users outside the United States
accounted for approximately 65% of the Company's consolidated revenue in
2004
and 63% of the Company’s consolidated revenue in 2005. As a result, the Company
may be subject to certain risks, including risks associated with the application
and imposition of protective legislation and regulations relating to import
or
export (including export of high technology products) or otherwise resulting
from trade or foreign policy and risks associated with exchange rate
fluctuations. Additional risks include potentially adverse tax consequences,
tariffs, quotas and other barriers, potential difficulties involving the
Company's strategic alliances and managing foreign sales agents or
representatives and potential difficulties in accounts receivable collection.
The Company currently sells products and provides services to customers in
emerging market economies such as Russia, Ukraine, Bulgaria, and the Czech
Republic. Although end users in the Ukraine accounted for 18%, 21%, and 29%
of
the Company’s consolidated revenue in 2005, 2004, and 2003, respectively, GSE’s
customer for these projects was Battelle’s Pacific Northwest National
Laboratory, which is the purchasing agent for the U.S. Department of Energy
(“DOE”). The DOE provides funding for various projects in Eastern and Central
Europe. Accordingly, the Company is not subject to the political and financial
risks that are normally faced when doing business in the Ukraine. The Company
has taken steps designed to reduce the additional risks associated with doing
business in these countries, but the Company believes that such risks may
still
exist and include, among others, general political and economic instability,
lack of currency convertibility, as well as uncertainty with respect to the
efficacy of applicable legal systems. There can be no assurance that these
and
other factors will not have a material adverse effect on the Company's business,
financial condition or results of operations.
The
Company relies on one customer for a substantial portion of its revenue.
The
loss of this customer could have a material adverse effect upon the Company's
revenues and results of operations.
For
the
years ended December 31, 2005, 2004, and 2003, one customer (Battelle's Pacific
Northwest National Laboratory) accounted for approximately 25%, 24%, and
29%,
respectively, of the Company's consolidated revenue. The Pacific Northwest
National Laboratory is the purchasing agent for the DOE and the numerous
projects the Company performs in Eastern and Central Europe. If the Company
lost
this customer, the Company's revenue and results of operations would be
materially and adversely affected.
The
Company's business is substantially dependent on sales to the nuclear power
industry. Any disruption in this industry would have a material adverse effect
upon the Company's revenue.
In
2005,
83% of GSE’s revenue was from customers in the nuclear power industry. The
Company will continue to derive a significant portion of its revenue from
customers in the nuclear power industry for the foreseeable future. The
Company's ability to supply nuclear power plant simulators and related products
and services is dependent on the continued operation of nuclear power plants
and, to a lesser extent, on the construction of new nuclear power plants.
A wide
range of factors affect the continued operation and construction of nuclear
power plants, including the political and regulatory environment, the
availability and cost of alternative means of power generation, the occurrence
of future nuclear incidents, and general economic conditions.
The
Company's new line of credit agreement with Laurus Master Fund Ltd. imposes
significant operating and financial restrictions, which may prevent it from
capitalizing on business opportunities.
GSE’s
new
line of credit agreement imposes significant operating and financial
restrictions. These restrictions affect, and in certain cases limit, among
other
things, the Company’s ability to:
| ¨ |
incur
additional indebtedness and liens;
|
| ¨ |
make
capital expenditures;
|
| ¨ |
make
investments and acquisitions and sell
assets;
|
| ¨ |
consolidate,
merge or sell all or substantially all of its
assets.
|
There
can
be no assurance that these restrictions will not adversely affect the Company's
ability to finance its future operations or capital needs or to engage in
other
business activities that may be in the interest of stockholders.
The
Company is dependent on product innovation and research and development,
which
costs are incurred prior to revenues for new products and
improvements.
The
Company believes that its success will depend in large part on its ability
to
maintain and enhance its current product line, develop new products, maintain
technological competitiveness and meet an expanding range of customer needs.
The
Company's product development activities are aimed at the development and
expansion of its library of software modeling tools, the improvement of its
display systems and workstation technologies, and the advancement and upgrading
of its simulation technology. The life cycles for software modeling tools,
graphical user interfaces, and simulation technology are variable and largely
determined by competitive pressures. Consequently, the Company will need
to
continue to make significant investments in research and development to enhance
and expand its capabilities in these areas and to maintain its competitive
advantage.
The
Company relies upon its intellectual property rights for the success of its
business; however, the steps it has taken to protect its intellectual property
may be inadequate.
Although
the Company believes that factors such as the technological and creative
skills
of its personnel, new product developments, frequent product enhancements
and
reliable product maintenance are important to establishing and maintaining
a
technological leadership position, the Company's business depends, in part,
on
its intellectual property rights in its proprietary technology and information.
The Company relies upon a combination of trade secret, copyright, patent
and
trademark law, contractual arrangements and technical means to protect its
intellectual property rights. The Company enters into confidentiality agreements
with its employees, consultants, joint venture and alliance partners, customers
and other third parties that are granted access to its proprietary information,
and limits access to and distribution of its proprietary information. There
can
be no assurance, however, that the Company has protected
or will be able to protect its proprietary technology and information
adequately, that the unauthorized disclosure or use of the Company's proprietary
information will be prevented, that others have not or will not develop similar
technology or information independently, or, to the extent the Company owns
patents, that others have not or will not be able to design around those
patents. Furthermore, the laws of certain countries in which the Company's
products are sold do not protect the Company's products and intellectual
property rights to the same extent as the laws of the United
States.
The
industries in which GSE operates are highly competitive. This competition
may
prevent the Company from raising prices at the same pace as its costs
increase.
The
Company's businesses operate in highly competitive environments with both
domestic and foreign competitors, many of whom have substantially greater
financial, marketing and other resources than the Company. The principal
factors
affecting competition include price, technological proficiency, ease of system
configuration, product reliability, applications expertise, engineering support,
local presence and financial stability. The Company believes that competition
in
the simulation fields may further intensify in the future as a result of
advances in technology, consolidations and/or strategic alliances among
competitors, increased costs required to develop new technology and the
increasing importance of software content in systems and products. As the
Company's business has a significant international component, changes in
the
value of the dollar could adversely affect the Company's ability to compete
internationally.
The
nuclear power industry, the Company's largest customer group, is associated
with
a number of hazards which could create significant liabilities for the
Company.
The
Company's business could expose it to third party claims with respect to
product, environmental and other similar liabilities. Although the Company
has
sought to protect itself from these potential liabilities through a variety
of
legal and contractual provisions as well as through liability insurance,
the
effectiveness of such protections has not been fully tested. Certain of the
Company's products and services are used by the nuclear power industry primarily
in operator training. Although the Company's contracts for such products
and
services typically contain provisions designed to protect the Company from
potential liabilities associated with such use, there can be no assurance
that
the Company would not be materially adversely affected by claims or actions
which may potentially arise.
The
Common Stock issuable upon conversion of the Convertible Preferred Stock
may be
diluted.
The
number of shares of our Common Stock issuable upon conversion is subject
to
adjustment only for stock splits and combinations, stock dividends and specified
other transactions. The number of shares of our common stock issuable upon
conversion is not subject to adjustment for other events, such as employee
stock
option grants, offerings of our common stock, or in connection with acquisitions
or other transactions which may adversely affect the price of our Common
Stock.
The terms of our Convertible Preferred Stock do not restrict our ability
to
offer Common Stock in the future or to engage in other transactions that
could
dilute our Common Stock. We have no particular obligation to consider the
interests of the holders of our Convertible Preferred Stock in engaging in
any
such offering or transaction.
Our
Convertible Preferred Stock may be diluted upon the issuance of a new series
of
preferred stock on parity with the shares sold in this
offering.
While
the
terms of our Convertible Preferred Stock restrict our ability to offer a
new
series of preferred stock that would rank senior to our Convertible Preferred
Stock, they do not restrict our ability to offer a new series of preferred
stock
that is on parity with our Convertible Preferred Stock in the future or engage
in other transactions that could dilute our Convertible Preferred Stock.
We have
no particular obligation to consider the interests of the holder of our
Convertible Preferred Stock in engaging in any such offering or
transaction.
Our
Convertible Preferred Stock will rank behind our current debt
obligations.
Until
such time as our current debt obligations are satisfied, our Convertible
Preferred Stock will rank junior to our outstanding debt obligations as to
payment of dividends and distribution of assets upon dissolution, liquidation
or
winding up of the Company.
You
should consider the tax considerations relating to investing in the Convertible
Preferred Stock and Warrants.
Investors
in this offering may face adverse federal, state and local tax consequences
by
virtue of their purchase, ownership and holdings of Convertible Preferred
Stock
and Warrants. Prospective investors should consult their own tax advisors
regarding these and other possible tax consequences to them of an investment
in
this offering.
FORWARD-LOOKING
STATEMENTS
This
prospectus and the documents incorporated by reference herein contain
“forward-looking” statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act that
are
based on management’s assumptions, expectations and projections about us, and
the industry within which we operate,
that
have been made pursuant to the Private Securities Litigation Reform Act of
1995
which reflect our expectations regarding our future growth, results of
operations, performance and business prospects and opportunities. Wherever
possible, words such as “anticipate,” “believe,” “continue,” “estimate”,
“intend”, “may,” “plan”, “potential”, “predict”, “expect”, “should”, “will” and
similar expressions, or the negative of these terms or other comparable
terminology, have been used to identify these forward-looking statements.
These
forward-looking statements may also use different phrases. These statements
regarding
our expectations reflect
our current beliefs and are based on information currently available to us.
Accordingly, these statements by their nature are subject to risks and
uncertainties, including those listed under “Risk Factors,” which could cause
our actual growth, results, performance and business prospects and opportunities
to differ from those expressed in, or implied by, these statements. Discussions
containing these forward-looking statements may be found, among other places,
in
“Business” and “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” incorporated by reference from our most recent annual
report on Form 10-K and in our most recent quarterly report on Form 10-Q
subsequent to the filing of our most recent annual report on Form 10-K with
the
SEC, as well as any amendments thereto reflected in subsequent filings with
the
SEC. We may not actually achieve the plans, intentions or expectations
disclosed in our forward-looking statements and you should not place undue
reliance on our forward-looking statements. Actual results or events could
differ materially from the plans, intentions and expectations disclosed in
the
forward-looking statements we make. Except as otherwise required by federal
securities law, we are not obligated to update or revise these forward-looking
statements to reflect new events or circumstances. We caution you that a
variety
of factors, including but not limited to the factors described below under
the
heading “Risk Factors” and the following, could cause our business conditions
and results to differ materially from what is contained in forward looking
statements:
-
changes
in the rate of economic growth in the United States and other major
international
economies;
-
changes
in investment by the nuclear and fossil electric utility industry, the chemical
and
petrochemical industries and the U.S. military-industrial complex;
-
changes
in the financial condition of our customers;
-
changes
in regulatory environment;
-
changes
in project design or schedules;
-
contract cancellations;
-
changes
in our estimates of costs to complete projects;
-
changes
in trade, monetary and fiscal policies worldwide;
-
currency fluctuations;
-
war
and/or terrorist attacks on facilities either owned or where equipment or
services are or may be provided;
-
outcomes of future litigation;
-
protection and validity of our patents and other intellectual property
rights;
-
increasing competition by foreign and domestic companies;
-
compliance with our debt covenants;
-
recoverability of claims against our customers and others; and
-
changes
in estimates used in our critical accounting policies.
Other
factors and assumptions not identified above were also involved in the formation
of these forward looking statements and the failure of such other assumptions
to
be realized, as well as other factors, may also cause actual results to differ
materially from those projected. Most of these factors are difficult to predict
accurately and are generally beyond our control. You should consider the
areas
of risk described above in connection with any forward looking statements
that
may be made by us.
You
should not place undue reliance on any forward-looking statements. New factors
emerge from time to time, and it is not possible for us to predict which
factors
will arise.
We
undertake no obligation to publicly update any forward looking statements,
whether as a result of new information, future events or otherwise. You are
advised, however, to consult any additional disclosures we make in proxy
statements, quarterly reports on Form 10-Q, annual reports on Form 10-K and
current reports on Form 8-K filed with the SEC.
GUIDE
TO READING THIS PROSPECTUS
We
urge
you to read the entire prospectus, including “Risk Factors,” and the information
contained in the public documents that we have filed with the Securities
and
Exchange Commission (the “Commission”). You should read this prospectus together
with additional information described under the headings “Where You Can Find
More Information” and “Incorporation of Documents by Reference.”
Certain
of the information contained in this prospectus was obtained from other sources.
This prospectus also incorporates by reference important business and financial
information about us that is not included in or delivered with this prospectus.
You
should rely only on the information contained in this prospectus or any
supplement and any information incorporated by reference in this prospectus
or
any supplement. We have not authorized anyone to provide you with any
information that is different from such information. If you receive any
unauthorized information, you should not rely on it. You should disregard
anything we said in an earlier document that is inconsistent with what is
included or incorporated by reference in this prospectus or any supplement.
You
should not assume that the information in this prospectus or any supplement
is
current as of any date other than the date on the front page of this prospectus
or on the date of any supplement as to information contained in it. This
prospectus is not an offer to sell nor is it seeking an offer to buy these
securities in any state or jurisdiction where the offer or sale is not
permitted.
We
include cross references to captions in this prospectus where you can find
further related discussions. The above table of contents tells you where
to find
these captions.
Throughout
this prospectus, we refer to ourselves, GSE Systems, Inc. as the “Company,”
“GSE” or “GSE Systems”, “we” or “us”.
USE
OF PROCEEDS
The
Company will not receive any of the proceeds from the sale of the resale
shares
by the selling security holders. All proceeds from the resale of shares will
be
for the accounts of the selling security holders named in this prospectus,
any
supplement to this prospectus or in any amendment to the registration statement
of which this prospectus forms a part. We will, in the ordinary course of
business, receive proceeds from the issuance of shares upon exercise of the
warrants described in this prospectus, which we will use for general corporate
purposes.
The
Company used the net proceeds of the private placement 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 draw down the New Facility for working capital and to
fund
its ongoing business operations and for other general corporate purposes.
DIVIDEND
POLICY
The
holders of convertible preferred stock are entitled to receive cumulative
dividends on a semiannual basis every June 30 and December 30, commencing
on
June 30, 2006. On June 30, 2006, the Company paid dividends totaling $115,000
to
the preferred stockholders. If the Company does not make two consecutive
dividend payments on the dates such payments are due, the Company will
issue to
holders of Convertible Preferred Stock additional warrants to purchase
such
number of shares of Common Stock equal to 30% of the dollar amount invested
in
Convertible Preferred Stock divided by $1.77. Should the Company miss its
dividend payments and issue the additional warrants as described above,
the
Company will undertake to register with the SEC and with AMEX such number
of
additional shares of Common Stock as necessary to cover the issuance of
the
warrants.
Except
as
described above, the Company intends to retain its future earnings, if any,
to
finance the further development and expansion of our business and do not
intend
to pay dividends for the foreseeable future. Any future determination to
pay
dividends will be at the discretion of our board of directors and will depend
on
our financial condition, results of operations, capital requirements,
restrictions contained in our current and future financing instruments and
other
factors our board of directors deems relevant.
DESCRIPTION
OF OUR SHARE CAPITAL
The
following description of the Company’s share capital summarizes certain
provisions of the Company’s certificate of incorporation and by-laws and a
certificate of designation in respect of the preferred shares and of applicable
U.S. law. Such summaries are not complete and are subject to, and are qualified
in their entirety by reference to, all of the provisions of the Company’s
certificate of incorporation and by-laws, and the certificate of designation
in
respect of the preferred shares, copies of which have been filed as exhibits
to
the registration statement of which this prospectus forms a part. Prospective
investors are urged to read those exhibits carefully.
Authorized
Capital Stock
As
of the
date of this prospectus, we are authorized to issue 20,000,000 shares of
common
stock, par value $0.01, of which 18,000,000 shares shall be common stock
and
2,000,000 shares shall be preferred stock.
As
of the
date of this prospectus, the Company had 9,456,490 shares of common stock
outstanding, and had reserved an additional (1) 2,401,133 shares of common
stock
for issuance upon conversion of the Preferred Stock, (2) 480,226 shares
of
common stock for issuance upon exercise of the Warrants, (3) 150,000 shares
of
common stock for issuance upon exercise of the NESC Warrant and (4) 900,000
shares of common stock for issuance upon exercise of the Exchange Warrant.
Common
Stock
Generally.
The
Company’s common shares, into which the Series A convertible preferred shares
are convertible, are quoted on the American Stock Exchange under the symbol
“GVP”. Holders of common shares have no pre-emptive, redemption, conversion or
sinking fund rights. The Company’s by-laws provide
that any variation of the rights attached to the common shares, whether by
the
amendment, alteration or repeal of the terms of the Company’s certificate of
association and by-laws relating to the common shares or resulting from any
merger, amalgamation or similar business combination, or otherwise would
require
the approval of holders of at least three fourths of the issued and outstanding
common shares, voting as a separate class. This approval can be evidenced
either
by a unanimous consent in writing or by a resolution passed by the requisite
majority at a meeting of the holders of the common shares at which a quorum
consisting of at least two persons holding or representing one-third of the
issued and outstanding common shares is present.
Liquidation.
In
the
event of the liquidation, dissolution or winding up of the Company, the holders
of common shares are entitled to share equally and ratably (with the holders
of
other shares of the Company entitling the holders to liquidation rights pro
rata
with the common shares, including holders of preferred shares) in the assets,
if
any, remaining after the payment of all of the Company’s debts and liabilities,
subject to any liquidation preference on any outstanding preferred
shares.
Voting
Rights. Holders
of common shares are entitled to one vote per share on all matters submitted
to
a vote of holders of common shares. Unless a different majority is required
by
law or by the Company’s by-laws, resolutions to be approved by holders of common
shares require approval by an affirmative majority of the votes cast at a
meeting at which a quorum is present. The common shares and, prior to their
becoming convertible, the preferred shares will vote together as a single
class
except in the case of circumstances which constitute a variation of the rights
of the common shares or the preferred shares, as described below or as required
by applicable law, when holders of common shares and preferred shares will
each
vote as a separate class.
Dividend
Rights. The
Company’s board of directors may declare and pay dividends on the common shares
or the preferred shares or make distributions out of contributed surplus
from
time to time unless there are reasonable grounds for believing the Company
is or
would, after the payment, be unable to pay its liabilities as they become
due or
that the realizable value of its assets would thereby be less than the aggregate
of its liabilities and issued share capital and share premium accounts. The
board of directors may declare that any dividend be paid wholly or partly
by the
distribution of shares of the Company.
Preferred
Stock
Prior
to
the date of this Prospectus, convertible preferred shares were issued by
the
Company pursuant to the terms of the offering of units consisting of up to
$4.25
million of preferred shares and warrants. However, no such shares were listed
on
the American Stock Exchange or on any market.
Terms
of the Series A Convertible Preferred Shares.
A total
of 42,500 preferred shares were designated as “Series A Convertible Preferred
Shares” pursuant to a certificate of designation adopted by resolution of the
board of directors of the Company. The Company began accepting subscription
agreements on February 27, 2006 and the Company closed the offering on February
28, 2006. As of March 31, 2006, 42,500 such shares were issued and outstanding
and no preferred shares had been converted into common shares. The material
terms of the preferred shares are described below.
Holders
of preferred shares have no pre-emptive, redemption, or sinking fund rights.
The
holders of the Series A preferred stock shall be entitled to notice of all
stockholder meetings in accordance with the Company’s bylaws. Except as
otherwise required by applicable law, the holders of the Convertible Preferred
Stock shall be entitled to vote on all matters submitted to the stockholders
for
a vote, together with the holders of the voting Common Stock all voting together
as a single class. The holders of Preferred Stock shall be entitled to such
number of votes as shall be equal to the whole number of shares of Common
Stock
into which holder's aggregate number of shares of Preferred Stock are
convertible immediately after the close of business on the record date fixed
for
such meeting where the votes will be cast or the effective date of any written
consent.
So
long
as the Preferred Stock represent ten percent (10%) or more of the outstanding
voting stock of the Company (calculated as if each Preferred Stock was converted
at the then-current Conversion Price), without the affirmative vote of the
holders of a majority of the outstanding Convertible Preferred Stock, all
voting
together as a single class, the Company shall not:
(i) issue
any
additional equity securities or other equity securities convertible into
equity
securities of the Company or effect a reclassification of any of the outstanding
capital stock of the Company in each case that is senior to or pari passu
with
the Preferred Stock; or
(ii) amend
the
Certificate of Incorporation or By-Laws of the Company in a manner that would
materially adversely affect or impair the rights or preferences of the Preferred
Stock.
Dividends.
The
holders of the Series A preferred stock shall be entitled to receive cumulative
dividends on a semiannual basis every June 30 and December 30, commencing
on
June 30, 2006. On June 30, 2006, the Company paid dividends totaling $115,000
to
the preferred stockholders. Dividends on each Series A preferred share
shall
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" as that term
is
defined in the Certificate of Designation, previously filed as an Exhibit
to the
Company’s March 6, 2006 Form 8-K). The dividends shall accrue whether or not
they have been declared and whether or not there are profits, surplus or
other
funds of the Company legally available for the payment of dividends. If
the
Company does not make two consecutive dividend payments on the dates such
payments are due, the Company will issue to holders of Preferred Stock
additional Warrants to purchase such number of shares of Common Stock equal
to
30% of the dollar amount invested in Preferred Stock divided by $1.77.
Such
warrants shall have other terms substantially similar to the terms of the
other
warrants issued to investors in the Preferred Stock.
All
holders of Preferred Stock shall be pari
passu
with
respect to their entitlement to receive dividends. After payment of all
dividends on Preferred Stock, the holders of Preferred Stock shall be entitled
to participate with the outstanding Common Stock as to any dividends payable
on
the Common Stock.
Conversion
of the Preferred Stock. The
certificate of designation provides that each preferred share is convertible
at
the holder’s option into common shares at a conversion price of $1.77. In order
to effect a conversion of preferred shares, a holder must deliver a notice
of
conversion to the Company. Once the Company receives a notice of conversion,
the
holder’s preferred shares will immediately cease to have the rights and
restrictions of a preferred share, and the holder will simultaneously receive
common shares in accordance with the terms outlined above. We will also deliver
a copy of such notice at any time at the request of a holder of preferred
shares. Upon such a conversion of the preferred shares, the number of authorized
preferred shares will decrease and the number of authorized, issued and
outstanding common shares will increase by a proportionate amount.
MARKET
PRICE INFORMATION
For
the
week beginning August 21, 2006, and ending August 25, 2006, the high and
low
sale price for the Company’s Common Stock, as reported by the American Stock
Exchange, was $3.79 (high) and $3.65 (low). The following table sets forth,
for
the periods indicated, the high and low sale prices for the Company’s common
stock reported by the American Stock Exchange:
|
2006
|
| |
|
|
|
|
|
|
|
|
| |
Quarter
|
|
|
High
|
|
|
Low
|
|
| |
First
|
|
$
|
1.90
|
|
$
|
1.30
|
|
| |
Second
|
|
$
|
4.56
|
|
$
|
1.70
|
|
| |
|
|
|
|
|
|
|
|
|
2005
|
| |
|
|
|
|
|
|
|
|
| |
Quarter
|
|
|
High
|
|
|
Low
|
|
| |
First
|
|
$
|
2.76
|
|
$
|
1.75
|
|
| |
Second
|
|
$
|
2.20
|
|
$
|
1.70
|
|
| |
Third
|
|
$
|
1.80
|
|
$
|
1.25
|
|
| |
Fourth
|
|
$
|
1.58
|
|
$
|
1.06
|
|
| |
|
|
|
|
|
|
|
|
|
2004
|
| |
|
|
|
|
|
|
|
|
| |
Quarter
|
|
|
High
|
|
|
Low
|
|
| |
First
|
|
$
|
2.33
|
|
$
|
1.72
|
|
| |
Second
|
|
$
|
2.70
|
|
$
|
1.45
|
|
| |
Third
|
|
$
|
2.78
|
|
$
|
2.35
|
|
| |
Fourth
|
|
$
|
2.70
|
|
$
|
1.95
|
|
The
following table sets forth the equity compensation plan information as
of June
30, 2006:
|
Plan
Category
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
|
Weighted
average exercise price of outstanding options, warrants and
rights
|
Number
of securities remaining available for future issuance under equity
compensation plans
|
|
Equity
compensation plan approved by security holders
|
2,007,150
|
$2.49
|
217,486
|
|
Equity
compensation plan not approved by security holders
|
--
|
$
--
|
--
|
|
Total
|
2,007,150
|
$2.49
|
217,486
|
There
were approximately 74 holders of record of the common stock as of June
30, 2006.
The Company has
never
declared or paid a cash dividend on its common stock. The Company currently
intends to retain future earnings to finance the growth and development
of its
business and, therefore, does not anticipate paying any cash dividends
in the
foreseeable future on its common stock. In December 2001, the Company issued
to
ManTech International Corp. (“ManTech”) 39,000 shares of convertible preferred
stock which accrued dividends at an annual rate of 6% payable quarterly.
ManTech
elected to convert the preferred stock to common stock in October 2003.
At the
date of the conversion, the Company’s credit facility restricted the Company
from paying any dividends on the preferred stock. At June 30, 2006, the
Company
had accrued dividends payable to ManTech of $316,000. The unpaid dividends
accrue interest at 6% per annum. At June 30, 2006, the Company had an accrual
for interest payable of $70,000.
The
Company believes factors such as quarterly fluctuations in results of operations
and announcements of new products by the Company or by its competitors may
cause
the market price of the common stock to fluctuate, perhaps significantly.
In
addition, in recent years the stock market in general, and the shares of
technology companies in particular, have experienced extreme price fluctuations.
The Company’s common stock has also experienced a relatively low trading volume,
making it further susceptible to extreme price fluctuations. These factors
may
adversely affect the market price of the Company's common stock.
SELLING
SECURITY HOLDERS
We
initially issued the preferred stock and warrants to the selling security
holders, as initial purchasers in transactions exempt from the registration
requirements of the Securities Act of 1933, as amended (the “Securities Act”).
To the best of our knowledge and after due inquiry, with the exception of
Dolphin (see “Description of the Cancellation and Warrant Exchange Agreement”),
none of the selling security holders owned any of the Company’s securities prior
to the transactions described in the sections captioned “Prospectus Summary” and
“Recent Developments.”
The
selling security holders, including their transferees, pledges, donees or
other
successors, may from time to time offer and sell pursuant to this prospectus
any
and all of the common stock issuable upon conversion of the preferred stock
or
exercise of the warrants. Any selling security holder may also elect not
to sell
any common stock issuable upon conversion of the preferred stock or exercise
of
the warrants.
To
sell
common stock issuable upon exercise of the Series A preferred stock or warrants
pursuant to the registration statement, each investor will be required to,
among
other things, be named as a selling security holder in the prospectus. We
are
registering the shares of preferred stock and warrants in order to permit
the
stockholders to offer the shares for resale from time to time. None of the
selling security holders has, or had, any position, office or other material
relationship with us or any of our affiliates beyond their investment in
or
receipt of our securities, except for Dolphin Offshore Equity Partners, L.P.,
and Northeast Securities, Inc. (the placement agent for the private placement).
The
following table is prepared based on information supplied to us by the selling
security holders. Although we have assumed for purposes of the table below
that
the selling security holders will sell all of the shares offered by this
prospectus, because the selling security holders may offer from time to time
all
of their shares covered under this prospectus, or in another permitted manner,
no assurances can be given as to the actual number of shares that will be
resold
by the selling security holders or that will be held by the selling security
holders after completion of the resales.
Certain
of the selling shareholders and/or their affiliates provide or from time
to time
have provided or in the future may provide certain investment banking and
other
services to us and/or our affiliates and subsidiaries, for which they receive
or
have received customary fees and commissions or for which we expect them
to
receive customary fees and commissions. In addition, affiliates of certain
of
the selling
shareholders from time to time have acted or in the future may act as agents
and
lenders to us and/or our affiliates and subsidiaries under our credit facility,
for which services they have received or expect to receive customary
compensation.
| |
|
Shares
of Common Stock Beneficially Owned
|
|
|
|
|
|
|
|
|
| |
|
Prior
to the Offering
|
|
|
|
|
|
|
|
|
| |
|
|
|
Number
of Shares
|
|
Number
of Shares
|
|
|
|
Percent
of
|
|
Number
of
|
|
Shares
of Common
|
|
Percent
of
|
|
|
| |
|
|
|
of
Common Stock
|
|
of
Common Stock
|
|
|
|
Outstanding
|
|
Shares
of
|
|
Stock
Beneficially
|
|
Outstanding
|
|
|
| |
|
Common
|
|
Underlying
Series A
|
|
Underlying
|
|
|
|
Common
Stock
|
|
Common
Stock
|
|
Owned
After the
|
|
Common
Stock
|
|
|
|
Name
of Selling Shareholder
|
|
Stock
|
|
Preferred
Stock
|
|
Warrants
|
|
Total
|
|
(2)
|
|
Offered
|
|
Offering
(1)
|
|
(2)
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dolphin
Offshore Partners, LP (3)
|
|
-
|
|
564,972
|
|
1,012,994
|
|
1,577,966
|
|
14.3%
|
|
1,577,966
|
|
-
|
|
*
|
|
|
|
Select
Contrarian Value Partners, LP (4)
|
|
53,000
|
|
1,129,944
|
|
225,989
|
|
1,408,933
|
|
12.5%
|
|
1,355,933
|
|
53,000
|
|
*
|
|
|
|
Laurus
Master Fund, Ltd (5)
|
|
-
|
|
-
|
|
367,647
|
|
367,647
|
|
3.9%
|
|
367,647
|
|
-
|
|
*
|
|
|
|
Gregory
H. Ekizian Revocable Trust (6)
|
|
-
|
|
225,989
|
|
45,198
|
|
271,187
|
|
2.8%
|
|
271,187
|
|
-
|
|
*
|
|
|
|
Opallo
Investment Ltd. (7)
|
|
-
|
|
169,492
|
|
33,898
|
|
203,390
|
|
2.1%
|
|
203,390
|
|
-
|
|
*
|
|
|
|
O.
Lee Tawes, III (8)
|
|
-
|
|
56,497
|
|
56,299
|
|
112,796
|
|
1.2%
|
|
112,796
|
|
-
|
|
*
|
|
|
|
The
Churchill Funds QP, LP (9)
|
|
-
|
|
79,096
|
|
15,819
|
|
94,915
|
|
1.0%
|
|
94,915
|
|
-
|
|
*
|
|
|
|
The
Churchill Funds, LP (10)
|
|
-
|
|
62,147
|
|
12,429
|
|
74,576
|
|
*
|
|
74,576
|
|
-
|
|
*
|
|
|
|
TEBO
Capital, LLC (11)
|
|
-
|
|
28,249
|
|
5,650
|
|
33,899
|
|
*
|
|
33,899
|
|
-
|
|
*
|
|
|
|
TEBO
Capital, LLC SEP (12)
|
|
-
|
|
28,249
|
|
5,650
|
|
33,899
|
|
*
|
|
33,899
|
|
-
|
|
*
|
|
|
|
Harvey
Ginsberg (13)
|
|
-
|
|
28,249
|
|
5,650
|
|
33,899
|
|
*
|
|
33,899
|
|
-
|
|
*
|
|
|
|
Peter
Duchin (14)
|
|
-
|
|
28,249
|
|
5,650
|
|
33,899
|
|
*
|
|
33,899
|
|
-
|
|
*
|
|
|
|
K.
Leslie McCall (15)
|
|
-
|
|
-
|
|
20,000
|
|
20,000
|
|
*
|
|
20,000
|
|
-
|
|
*
|
|
|
|
David
T.R. Tsiang (16)
|
|
-
|
|
-
|
|
20,000
|
|
20,000
|
|
*
|
|
20,000
|
|
-
|
|
*
|
|
|
|
Northeast
Securities, Inc. (17)
|
|
-
|
|
-
|
|
15,000
|
|
15,000
|
|
*
|
|
15,000
|
|
-
|
|
*
|
|
|
|
William
P. Behrens (18)
|
|
-
|
|
-
|
|
10,000
|
|
10,000
|
|
*
|
|
10,000
|
|
-
|
|
*
|
|
|
|
Stephen
J. Perrone (19)
|
|
-
|
|
-
|
|
10,000
|
|
10,000
|
|
*
|
|
10,000
|
|
-
|
|
*
|
|
|
|
Robert
A. Bonelli (20)
|
|
-
|
|
-
|
|
10,000
|
|
10,000
|
|
*
|
|
10,000
|
|
-
|
|
*
|
|
|
|
Yaudoon
David Chiang (21)
|
|
-
|
|
-
|
|
8,000
|
|
8,000
|
|
*
|
|
8,000
|
|
-
|
|
*
|
|
|
|
Boaz
Rahav (22)
|
|
-
|
|
-
|
|
7,000
|
|
7,000
|
|
*
|
|
7,000
|
|
-
|
|
*
|
|
|
|
Andrew
Russell (23)
|
|
-
|
|
-
|
|
5,000
|
|
5,000
|
|
*
|
|
5,000
|
|
-
|
|
*
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Assumes all of the Common Stock registered is sold.
(2)
*
Indicates less than 1%.
(3)
Includes 1,012,994 shares of Common Stock issuable upon exercise of warrants
held by Dolphin Offshore Partners, LP (“Dolphin’) which are currently
exercisable, as well as 564,972 shares of Common Stock issuable upon conversion
of Series A Cumulative Convertible Preferred Stock held by Dolphin. (See
“Recent
Developments”, page 2 and “Description of the Cancellation and Warrant Exchange
Agreement”, page 3). Peter E. Salas is the natural person with sole or shared
voting or dispositive power over the shares held by the selling security
holder.
The selling security holder acquired the securities to which this prospectus
relates from us in the February 28, 2006 offering and the February 28, 2006
Cancellation Agreement.
(4)
Based
on a Schedule 13G filed jointly by Kaizen Capital, LLC, Kaizen Management,
LP
and Select Contrarian Value Partners, LP (“SCVP”) with the SEC on March 22, 2006
and a Form 4 filed with the SEC on August 14, 2006. Kaizen Management,
LP is the
general partner of SCVP. Includes 53,000 shares of Common Stock owned directly
by SCVP, 225,989 shares of Common Stock issuable upon exercise of warrants
held
by SCVP which are currently exercisable, and 1,129,944 shares of Common
Stock
issuable upon conversion of Series A Cumulative Convertible Preferred Stock
held
by SCVP. David W. Berry is the natural person with sole or shared voting
or
dispositive power over the shares held by the selling security holder.
In
accordance with the provisions of Item 507, Regulation S-K, except as herein,
no
other material transactions occurred in the last three years. The selling
security holder acquired the securities to which this prospectus relates
from us
in the February 28, 2006 offering.
(5)
Includes 366,666 shares of restricted Common Stock issued to LMF upon exercise
of warrants, as well as the 981 shares of Common Stock withheld by the Company
as payment of the exercise price of the warrants upon LMF's cashless
exercise thereof. Eugene Grin and David Grin are the natural persons with
shared voting or dispositive power over the shares held by the selling security
holder. (See Section “Recent Developments”, page 2 and “Description of the New
Two-Year Revolving Credit Facility”, pages 4-5). The selling security holder
acquired the securities to which this prospectus relates from us in connection
with the March 7, 2006 New
Facility.
(6
) Includes 45,198 shares of Common Stock issuable upon exercise of warrants
held
by Gregory H. Ekizian Revocable Trust (“GHERT”) which are currently exercisable,
as well as 225,989 shares of Common Stock issuable upon conversion of Series
A
Cumulative Convertible Preferred Stock held by GHERT. Gregory H. Ekizian
is the
natural person with sole or shared voting or dispositive power over the shares
held by the selling security holder. The selling security holder acquired
the
securities to which this prospectus relates from us in the February 28, 2006
offering.
(7)
Includes 33,898 shares of Common Stock issuable upon exercise of warrants
held
by Opallo Investment Ltd. (“Opallo”) which are currently exercisable, as well as
169,492 shares of Common Stock issuable upon conversion of Series A Cumulative
Convertible Preferred Stock held by Opallo. Joelle Mamane is the natural
person
with sole/shared voting power over the shares held by the selling security
holder.In accordance with the provisions of Item 507, Regulation S-K, except
as
herein, no other material transactions occurred in the last three years.
The
selling security holder acquired the securities to which this prospectus
relates
from us in the February 28, 2006 offering.
(8)
Includes 56,299 shares of Common Stock issuable upon exercise of warrants
held
by O. Lee Tawes III which are currently exercisable, as well as 56,497 shares
of
Common Stock issuable upon conversion of Series A Cumulative Convertible
Preferred Stock held by Mr. Tawes. The selling security holder acquired the
securities to which this prospectus relates from us in the February 28, 2006
offering and as compensation from Northeast Securities as further described
hereinbelow.
(9)
Includes 15,819 shares of Common Stock issuable upon exercise of warrants
held
by The Churchill Funds QP, LP which are currently exercisable, as well as
79,096
shares of Common Stock issuable upon conversion of Series A Cumulative
Convertible Preferred Stock held by The Churchill Funds QP, LP. Cecilia Brancato
is the natural person with sole or shared voting or dispositive power over
the
shares held by the selling security holder. The selling security holder acquired
the securities to which this prospectus relates from us in the February 28,
2006
offering.
(10)
Includes 12,429 shares of Common Stock issuable upon exercise of warrants
held
by The Churchill Funds, LP which are currently exercisable, as well as 62,147
shares of Common Stock issuable upon conversion of Series A Cumulative
Convertible Preferred Stock held by The Churchill Funds, LP. Cecilia Brancato
is
the natural person with sole or shared voting or dispositive power over the
shares held by the selling security holder. The selling security holder acquired
the securities to which this prospectus relates from us in the February 28,
2006
offering.
(11)
Includes 5,650 shares of Common Stock issuable upon exercise of warrants
held by
TEBO Capital, LLC which are currently exercisable, as well as 28,249 shares
of
Common Stock issuable upon conversion of Series A Cumulative Convertible
Preferred Stock held by TEBO Capital, LLC. Todd A. Tumbleson is the natural
person with sole or shared voting or dispositive power over the shares held
by
the selling security holder. The selling security holder acquired the securities
to which this prospectus relates from us in the February 28, 2006
offering.
(12)
Includes 5,650 shares of Common Stock issuable upon exercise of warrants
held by
TEBO Capital, LLC SEP which are currently exercisable, as well as 28,249
shares
of Common Stock issuable upon conversion of Series A Cumulative Convertible
Preferred Stock held by TEBO Capital LLC SEP. Todd A. Tumbleson is the natural
person with sole or shared voting or dispositive power over the shares held
by
the selling security holder. The selling security holder acquired the securities
to which this prospectus relates from us in the February 28, 2006
offering.
(13)
Includes 5,650 shares of Common Stock issuable upon exercise of warrants
held by
Harvey Ginsberg which are currently exercisable, as well as 28,249 shares
of
Common Stock issuable upon conversion of Series A Cumulative Convertible
Preferred Stock held by Mr. Ginsberg. The selling security holder acquired
the
securities to which this prospectus relates from us in the February 28, 2006
offering.
(14)
Includes 5,650 shares of Common Stock issuable upon exercise of warrants
held by
Peter Duchin which are currently exercisable, as well as 28,249 shares of
Common
Stock issuable upon conversion of Series A Cumulative Convertible Preferred
Stock held by Mr. Duchin. The selling security holder acquired the securities
to
which this prospectus relates from us in the February 28, 2006
offering.
(15)
Includes 20,000 shares of Common Stock issuable upon exercise of warrants
held
by K. Leslie McCall which are currently exercisable. The selling security
holder
acquired the securities to which this prospectus relates as compensation
from
Northeast Securities as further described hereinbelow.
(16)
Includes 20,000 shares of Common Stock issuable upon exercise of warrants
held
by David T.R.Tsiang which are currently exercisable. The selling security
holder
acquired the securities to which this prospectus relates as compensation
from
Northeast Securities as further described hereinbelow.
(17)
Includes 15,000 shares of Common Stock issuable upon exercise of warrants
held
by Northeast Securities Inc. which are currently exercisable. (See “Recent
Developments”, page 2 and “Description of the February 27, 2006 Offering”, page
2). The selling security holder acquired the securities to which this prospectus
relates as compensation for services provided as placement agent in connection
with the February 28, 2006 offering as further described
hereinbelow.
(18)
Includes 10,000 shares of Common Stock issuable upon exercise of warrants
held
by William P. Behrens which are currently exercisable. The selling security
holder acquired the securities to which this prospectus relates as compensation
from Northeast Securities as further described hereinbelow.
(19)
Includes 10,000 shares of Common Stock issuable upon exercise of warrants
held
by Stephen J. Perrone which are currently exercisable. The selling security
holder acquired the securities to which this prospectus relates as compensation
from Northeast Securities as further described hereinbelow.
(20)
Includes 10,000 shares of Common Stock issuable upon exercise of warrants
held
by Robert A. Bonelli which are currently exercisable. The selling security
holder acquired the securities to which this prospectus relates as compensation
from Northeast Securities as further described hereinbelow.
(21)
Includes 8,000 shares of Common Stock issuable upon exercise of warrants
held by
Yaudoon David Chiang which are currently exercisable. The selling security
holder acquired the securities to which this prospectus relates as compensation
from Northeast Securities as further described hereinbelow.
(22)
Includes 7,000 shares of Common Stock issuable upon exercise of warrants
held by
Boaz Rahav which are currently exercisable. The selling security holder acquired
the securities to which this prospectus relates as compensation from Northeast
Securities as further described hereinbelow.
(23)
Includes 5,000 shares of Common Stock issuable upon exercise of warrants
held by
Andrew Russell which are currently exercisable. The selling security holder
acquired the securities to which this prospectus relates as compensation
from
Northeast Securities as further described hereinbelow.
With
the
exception of Northeast Securities, none of the selling security holders are
registered broker-dealers or affiliated with a registered broker-dealer.
As
is
more fully described in the Section labeled, “Prospectus Summary” and in the
Company’s Form 8-K filed with the Commission on March 6, 2006, Northeast
Securities provided advice to the Company with respect to raising funds
and
acted as the placement agent for the Company’s offering of Preferred Stock and
Warrants. Northeast Securities received $255,000 plus five-year warrants
to
purchase 150,000 shares of the Company’s common stock at an exercise price of
$1.77 per share as compensation for services provided as placement agent
in
connection with the February 27, 2006 offering of up to $4.25 million of
shares
of the Company’s Preferred Stock and Warrants. Subsequent to completion of the
offering and receipt of its earned compensation, Northeast Securities elected
to
grant a portion of the securities received as compensation to certain of
its
employees as stated in the table and footnotes above.
In
addition, and as more fully described in the section labeled “Prospectus
Summary” and in the Company’s Form 8-K filed with the Commission on March 13,
2006, LMF provided the Company with up to $5 million in financing in the
form of
two-year revolving credit facility secured by a first lien on certain assets
and
receivables of the Company. As additional consideration 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 Company also paid LMF $15,000
in due
diligence fees and $30,000 in structuring fees. On July 31, 2006, LMF exercised
its warrant in a cashless transaction and received 366,666 shares of the
Company’s restricted Common Stock.
Other
than the relationships discussed above, we are not aware of any position,
office, or any other material relationship of any of the selling shareholders
named above with the registrant or any of its predecessors or affiliates
within
the past three years.
PLAN
OF DISTRIBUTION
In
addition to registering the 2,401,133 common shares issuable upon conversion
of
the 42,500 Units sold in the private placement offering, the Company agreed
to
pay all expenses of the registration of the common stock issuable upon
conversion of (1) 480,226 shares of common stock for issuance upon exercise
of
warrants, (2) 150,000 shares of common stock for issuance upon exercise of
warrants, (3) 900,000 shares of common stock for issuance upon exercise of
warrants, and (4) 367,647 shares of common stock for issuance upon exercise
of
warrants.
If
the
selling security holders effect such transactions by selling the shares of
common stock to or through underwriters, broker-dealers or agents, such
underwriters, broker-dealers or agents may receive compensation in the form
of
discounts, concessions or commissions from the selling security holders and/or
the purchasers of the shares of common stock for whom they may act
as agent
or
to whom they may sell as principal, or both (which discounts, concessions
or
commissions as to particular
underwriters,
broker-dealers or agents may be in excess of those customary in the types
of
transactions involved). In connection with sales of any securities or otherwise,
the selling security holders may enter into hedging transactions with
broker-dealers or other financial institutions. In connection with these
transactions, such broker-dealers and financial institutions may engage in
short
sales (i) of shares of the Company’s common stock or (ii) of
securities convertible into or exchangeable for shares of the Company’s common
stock in the course of hedging positions they assume with the selling
shareholders. The selling shareholders may also enter into options or other
transactions with broker-dealers or other financial institutions, which require
the delivery to such broker-dealers and financial institutions of shares
of the
Company’s common stock offered in this prospectus, which shares may be resold by
the broker-dealer or financial institution, pursuant to this prospectus (as
amended or supplemented to reflect such transaction). Subject to any contrary
terms of the Agreement, the selling security holders may also sell securities
short and deliver securities covered by this prospectus to close out short
positions. The selling security holders may also loan or pledge securities
to
broker-dealers that in turn may sell such securities.
The
selling security holders, including their donees, pledgees, transferees or
other
successors-in-interest, may sell shares of common stock received as a gift,
pledge, partnership distribution or other transfer from a selling stockholder
after the date of this prospectus. The selling security holders may, from
time
to time, sell, transfer pledge or grant a security interest in or otherwise
dispose of some or all of the shares of Company common stock owned by them
on
any stock exchange, market or trading facility on which the shares are traded
or
in private transactions. These dispositions may be at fixed prices, at
prevailing market prices at the time of sale, at prices related to the
prevailing market price, at varying prices determined at the time of sale,
or at
negotiated prices. If they default in the performance of their secured
obligations, the pledgees or secured parties may offer and sell shares of
common
stock from time to time pursuant to this prospectus or any amendment to this
prospectus under Rule 424(b)(3) or other applicable provision of the Securities
Act of 1933, as amended (the "Securities Act"), amending, if necessary, the
list
of selling security holders to include the donee, pledgee, transferee or
other
successors-in-interest as selling security holders under this prospectus.
The
selling security holders also may transfer, gift, pledge, or donate the shares
of common stock in other circumstances in which case the transferees, donees,
pledgees, transferees or other successors-in-interest will be the selling
beneficial owners for purposes of this prospectus and such
donees, pledgees, transferees or other successors-in-interest may offer and
sell
the shares from time to time under this prospectus, provided that this
prospectus has been amended under Rule 424(b)(3) or other applicable provision
of the Securities Act to include the names of such donees, pledgees, transferees
or other successors-in-interest in the list of selling stockholders under
this
prospectus.
The
selling security holders and any broker-dealer participating in the distribution
of the shares of common stock may be deemed to be “underwriters" within the
meaning of Section 2(11) of the
Securities Act, and any commission received by, paid, or any discounts or
concessions allowed to, the selling security holder or any such
broker-dealer or
any
profit on the resale of the shares of Company common stock sold by the selling
shareholders or the broker-dealer while acting as principals may be deemed
to be
underwriting commissions or discounts under the Securities Act. At the time
a
particular offering of the securities is made, a prospectus supplement, if
required, will be distributed which will set forth the aggregate amount of
securities being offered and the terms of the offering, including the name
or
names of any broker-dealers or agents, any discounts, commissions and other
terms constituting compensation from the selling security holders and any
discounts, commissions or concessions allowed or real lowed or paid to
broker-dealers. Additionally, the selling shareholders may be subject to
the
prospectus delivery requirements of the Securities Act. The selling shareholders
may agree to indemnify any agent, dealer or broker-dealer that participates
in
transactions involving sales of the shares of Company common stock against
certain liabilities, including liabilities arising under the Securities Act.
Under
the
securities laws of some states, the securities may be sold in such states
only
through registered or licensed brokers or dealers. In addition, in some states
the shares of common stock may not be sold unless such shares of common stock
have been registered or qualified for sale in such state or an
exemption
from registration or qualification is available and is complied
with.
The
selling security holders may choose not to sell any or may choose to sell
less
than all of the shares of common stock registered pursuant to the shelf
registration statement, of which this prospectus forms a part.
The
selling stockholders may use any one or more of the following methods when
disposing of shares or interests therein:
| |
•
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
| |
|
|
| |
•
|
block
trades in which the broker-dealer will attempt to sell the shares
as
agent, but may position and resell a portion of the block as principal
to
facilitate the transaction;
|
| |
|
|
| |
•
|
purchases
by a broker-dealer as principal and resale by the broker-dealer
for its
account under this prospectus;
|
| |
|
|
| |
•
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
| |
|
|
| |
•
|
privately
negotiated transactions;
|
| |
|
|
| |
•
|
“at
the market” or through market makers or into an existing market for the
shares;
|
| |
|
|
| |
•
|
short
sales entered into after the effective date of the registration
statement
of which this prospectus is a part;
|
| |
|
|
| |
•
|
through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or otherwise, after the effective
date
of the registration statement of which this prospectus is a
part;
|
| |
|
|
| |
•
|
broker-dealers
may agree with the selling stockholders to sell a specified number
of such
shares at a stipulated price per share;
|
| |
|
|
| |
•
|
a
combination of any such methods of sale; and
|
| |
|
|
| |
•
|
any
other method permitted pursuant to applicable law.
|
The
Company has informed the selling security holders and any other person
participating in such distribution that they will be subject to applicable
provisions of the 1934 Act, and the rules and regulations hereunder, including,
without limitation, the anti-manipulative provisions of Regulation M of
the 1934
Act, which may limit the timing of purchases and sales of any of the shares
of
common stock by the selling security holders and any other participating
person.
Regulation M may also restrict the ability of any person engaged in the
distribution of the shares of common stock to engage in market-making activities
with respect to the shares of common stock. In addition, all of the selling
security holders have been apprised of the Commission’s position on short sales.
All of the foregoing may affect the marketability of the shares of common
stock
and the ability of any person or entity to engage in market-making activities
with respect to the shares of common stock.
The
selling shareholders may resell all or a portion of their shares of Company
common stock in open market transactions in reliance upon Rule 144 under
the Securities Act, provided they meet the criteria and conform to the
requirements of Rule 144.
Upon
the
Company being notified by the selling shareholders that any material arrangement
has been entered into with a broker-dealer for the sale of shares through
a
block trade, special offering, exchange
distribution or secondary distribution or a purchase by a broker or dealer,
a
supplement to this prospectus will be filed, if required, pursuant to Rule
424(b) under the Securities Act, disclosing:
| |
•
|
the
name of the selling shareholders and each of the participating
broker-dealer(s);
|
| |
|
|
| |
•
|
the
number of shares involved;
|
| |
|
|
| |
•
|
the
initial price at which such shares are to be sold;
|
| |
|
|
| |
•
|
the
commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable;
|
| |
|
|
| |
•
|
that
such broker-dealer(s) did not conduct any investigation to verify
the
information set out or incorporated by reference in this prospectus;
and
|
| |
|
|
| |
•
|
other
facts material to the transactions.
|
We
will
pay all expenses of the registration of the common stock pursuant to the
Agreement; provided, however, that a selling security holder will pay all
underwriting discounts and commissions and selling commissions, if any. We
will
provide customary indemnification of the selling security holders against
liabilities, including some liabilities under the 1933 Act.
Once
sold
under the registration statement, of which this prospectus forms a part,
the
shares of common stock will be freely tradable in the hands of persons other
than our affiliates.
INTERESTS
OF NAMED EXPERTS AND COUNSEL
Certain
legal matters with respect to the securities offered through this prospectus,
to
include the validity
of the common shares, preferred shares and warrants and the corporate authority
of the Company to issue the preferred shares and warrants will
be
passed upon for us by Kalbian Hagerty LLP.
The
consolidated financial statements of GSE Systems, Inc. as of December 31,
2005
and 2004, and for each of the years in the three-year period ended December
31,
2005
have
been incorporated herein
and in
the registration statement in reliance upon the report of KPMG LLP, an
independent registered public accounting firm, incorporated by reference
herein,
and upon
the
authority of said firm as experts in auditing and accounting.
WHERE
YOU CAN FIND MORE INFORMATION
This
prospectus is part of a registration statement that we filed with the Securities
and Exchange Commission (the “Commission”). The registration statement that
contains this prospectus, including the exhibits to the registration statement,
contains additional information about us and the securities offered by this
prospectus.
We
file
annual, quarterly and special reports, proxy statements and other information
with the Commission. You may read, without charge, and copy any document
we file
at the Commission’s Public Reference Room at 100 F Street, N.E., Washington,
D.C. 20549. You may obtain information on the operation of the SEC's public
reference facilities by calling the SEC at 1-800-SEC-0330. You can request
copies of these documents by writing to the Commission and paying a fee for
the
copying cost. You can also access copies of this material electronically,
without charge, on the SEC's home page on the World Wide Web at
http://www.sec.gov.
You
may
write or telephone us to obtain at no cost a copy of any or all of the documents
incorporated by reference. You should direct written requests to, 7133
Rutherford Road, Suite 200, Baltimore,
Maryland 21244, Attn: Secretary. Our telephone number is (410) 277-3740.
However, we will not send you exhibits to a document, unless the exhibits
are
specifically incorporated by reference in the document.
INCORPORATION
OF CERTAIN INFORMATION BY REFERENCE
The
SEC
permits us to "incorporate by reference" the information we file with them,
which means that we can disclose important information to you by referring
you
to those documents. The information incorporated by reference is important
and
is considered to be part of this prospectus, and information that we file
with
the SEC after the date of this prospectus will automatically update and
supersede this information. However, any information contained herein shall
modify or supersede information contained in documents we filed with the
SEC
before the date of this prospectus. We incorporate by reference the documents
listed below and any future filings the Company may make with the SEC pursuant
to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, after the date
of
this prospectus and prior to the termination of this offering shall be deemed
to
be incorporated by reference:
|
•
|
Our
Annual Report on Form 10-K for the year ended December 31, 2005
filed on
March 31, 2006.
|
|
•
|
Our
Current Report on Form 8-K filed on March 6,
2006.
|
|
•
|
Our
Current Report on Form 8-K filed on March 13,
2006.
|
|
•
|
Our
Current Report on Form 10-Q filed on August 14,
2006.
|
To
the
extent that any statement in this prospectus is inconsistent with any statement
that is incorporated by reference and that was made on or before the date
of
this prospectus, the statement in this prospectus supplement shall supersede
such incorporated statement. The incorporated statement shall not be deemed,
except as modified or superseded, to constitute a part of this prospectus.
Statements contained in this prospectus as to the contents of any contract,
or
other document, are not necessarily complete and, in each instance, we refer
you
to the copy of each contract or document filed as an exhibit to the registration
statement.
We
will
furnish without charge to each person, including any beneficial owner, to
whom a
copy of this prospectus is delivered, upon written or oral request, a copy
of
any or all of the information that has been incorporated into this prospectus
by
reference (except exhibits, unless they are specifically incorporated into
this
prospectus by reference). You should direct any requests for copies to:
GSE
Systems, Inc.
7133
Rutherford Road, Suite 200
Baltimore,
MD 21244
(410)
277-3740
If
you
request any incorporated documents from us, we will mail them to you by
first-class mail, or another equally prompt means, within one business day
after
we receive your request.
GSE
SYSTEMS, INC.
Shares
of Common Stock Issuable upon Conversion of Units Consisting of up to $4,250,000
of
8%
Cumulative Convertible Preferred Stock and Warrants
and
Shares
of Common Stock Issuable upon Exercise of Warrants
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
Item 14.
|
Other
Expenses of Issuance and Distribution.
|
The
following table sets forth the costs and expenses in connection with the
issuance and distribution of the securities registered hereby and the offerings
described in this registration statement, other than underwriting discounts
and
commissions. All amounts are estimated except the SEC registration
fee.
| |
SEC
Registration fee
|
$1,692.00
|
|
| |
Accounting
fees and expenses
|
$20,000.00
|
|
| |
Legal
fees and expenses
|
$58,000.00
|
|
| |
Printing
expenses
|
--
|
|
| |
AMEX
registration fee
|
$45,000.00
|
|
| |
Miscellaneous
|
$1,885.00
|
|
| |
|
|
|
| |
TOTAL
|
$126,577.00
|
|
Item
15. Indemnification of Directors and Officers.
Under
Section 145 of the General Corporation Law of the State of Delaware (the
"DGCL"), a corporation may indemnify its directors, officers, employees and
agents and its former directors, officers, employees and agents and those
who
serve, at the corporation's request, in such capacities with another enterprise,
against expenses (including attorney's fees), as well as judgments, fines
and
settlements in no derivative lawsuits, actually and reasonably incurred in
connection with the defense of any action, suit or proceeding in which they
or
any of them were or are made parties or are threatened to be made parties
by
reason of their serving or having served in such capacity. The DGCL provides,
however, that such person must have acted in good faith and in a manner he
or
she reasonably believed to be in (or not opposed to) the best interests of
the
corporation and, in the case of a criminal action, such person must have
had no
reasonable cause to believe his or her conduct was unlawful. In addition,
the
DGCL does not permit indemnification in an action or suit by or in the right
of
the corporation, where such person has been adjudged liable to the corporation,
unless, and only to the extent that, a court determines that such person
fairly
and reasonably is entitled to indemnity for costs the court deems proper
in
light of liability adjudication. Indemnity is mandatory to the extent a claim,
issue or matter has been successfully defended.
The
Company's Third Amended and Restated Certificate of Incorporation (the "Restated
Certificate") provides that the Company shall indemnify and hold harmless,
to
the fullest extent permitted by Section 145 of the DGCL, as the same may
be
amended and supplemented, every person who was or is made a party or is
threatened to be made a party or is otherwise involved in any action, suit
of
proceeding by reason of the fact that such person is or was serving as a
director or officer of the Company or, while serving as a director or officer
of
the Company, is or was serving at the request of the Company as a director,
trustee, officer, employee or agent of another corporation, partnership,
joint
venture, trust or other enterprise, against all expense, liability and loss
reasonably incurred or suffered by such person in connection therewith if
such
person satisfied the applicable level of care to permit such indemnification
under the DGCL. The Restated Certificate provides that, subject to any
requirements imposed by law or the Company's Bylaws, the right to
indemnification includes the right to be paid expenses incurred in defending
any
proceeding in advance of its final disposition. The Company's Amended and
Restated By-Laws (the "By-Laws") provide that, if and to the extent required
by
the DGCL, such an advance payment will only be made upon delivery to the
Company
of an undertaking, by or on behalf of the director or officer, to repay all
amounts so advanced if it is ultimately determined that such director is
not
entitled to indemnification.
Section
102(b)(7) of the DGCL permits a corporation to include in its certificate
of
incorporation a provision eliminating or limiting the personal liability
of a
director to the corporation or its stockholders for monetary damages for
breach
of fiduciary duty as a director, provided that such provision
shall not eliminate or limit the liability of a director (i) for any breach
of
the director's duty of loyalty to the corporation or its stockholders, (ii)
for
acts or omissions not in good faith or which involve intentional misconduct
or a
knowing violation of law, (iii) under Section 174 of the DGCL (relating to
unlawful payment of dividends and unlawful stock purchase and redemption)
or
(iv) for any transaction from which the director derived an improper personal
benefit.
The
Restated Certificate also provides that a director shall, to the maximum
extent
permitted by Section 102(b)(7) of the DGCL (or any successor provision),
have no
personal liability to the Company or its stockholders for monetary damages
for
breach of fiduciary duty as a director.
Item
16. Exhibits.
Number Description
|
3(i)
|
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)
|
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, as filed
with the
Securities and Exchange Commission on March 6, 2006 and incorporated
herein by reference.
|
|
4.2
|
Registration
Rights Agreement dated February 28, 2006 by and among GSE Systems,
Inc.
and Dolphin Direct Equity Partners, LP, as filed with the Securities
and
Exchange Commission on March 6, 2006 and incorporated herein by
reference.
|
|
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, as filed with the Securities and Exchange
Commission
on March 6, 2006 and incorporated herein by reference.
|
|
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, as
filed
with the Securities and Exchange Commission on March 6, 2006 and
incorporated herein by reference.
|
|
4.5
|
Form
of Warrant to Purchase 900,000 Shares of Common Stock of GSE
Systems, Inc. dated as of February 28, 2006, as
filed with the Securities and Exchange Commission on March 6, 2006
and
incorporated herein by reference.
|
|
4.6
|
Form
of Warrant to Purchase 380,952 shares of Common Stock of GSE
Systems, Inc. dated as of May 26, 2005, as
filed with the Securities and Exchange Commission on March 6, 2006
and
incorporated herein by reference.
|
|
4.7
|
Form
of Warrant to Purchase 150,000 shares of Common Stock of GSE
Systems, Inc. dated as of February 28, 2006, as
filed with the Securities and Exchange Commission on March 6, 2006
and
incorporated herein by reference.
|
|
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,
as
filed with the Securities and Exchange Commission on March 6, 2006
and
incorporated herein by reference.
|
|
4.9
|
Form
of Warrant to Purchase 367,647 shares of the Company’s Common Stock dated
as of March 7, 2006, as filed with the Securities and Exchange
Commission
on March 13, 2006 and incorporated herein by reference.
|
|
4.10
|
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, as filed with the Securities and Exchange Commission on March
13,
2006 and incorporated herein by
reference.
|
|
4.11
|
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, as filed with the
Securities
and Exchange Commission on March 13, 2006 and incorporated herein
by
reference.
|
|
4.12
|
Control
Agreement by and among GSE Systems, Inc., Laurus Master Fund, Ltd.
and GSE
Services Company LLC dated as of March 7, 2006, as filed with the
Securities and Exchange Commission on March 13, 2006 and incorporated
herein by reference.
|
|
4.13
|
Security
Agreement by and among GSE Systems, Inc., GSE Power Systems, Inc.
and
Laurus Master Fund, Ltd. dated as of March 7, 2006, as filed with
the
Securities and Exchange Commission on March 13, 2006 and incorporated
herein by reference.
|
|
4.14
|
Registration
Rights Agreement by and among GSE Systems, Inc. and Laurus Master
Fund,
Ltd. dated as of March 7, 2006, as filed with the Securities and
Exchange
Commission on March 13, 2006 and incorporated herein by
reference.
|
|
4.15
|
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, as filed with the Securities and Exchange Commission
on
March 13, 2006 and incorporated herein by reference.
|
|
4.16
|
Secured
Non-Convertible Revolving Note dated as of March 7, 2006, as filed
with
the Securities and Exchange Commission on March 13, 2006 and incorporated
herein by reference.
|
|
5.1
|
Opinion
of Kalbian Hagerty LLP regarding legality and validity of the securities
being registered and as to the
corporate authority to issue such securities, filed herewith.
|
|
23.1
|
Consent
of KPMG LLP, filed herewith.
|
|
23.2
|
Consent
of Kalbian Hagerty LLP (contained in exhibit 5.1).
|
|
24.1
|
Power
of Attorney for Directors’ and Officers’ Signatures on Form S-3, filed
herewith.
|
| |
|
Item
17. Undertakings.
The
undersigned registrant hereby undertakes:
(1)
To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i)
To
include any prospectus required by section 10(a) (3) of the Securities Act
of
1933;
(ii)
To
reflect in the prospectus any facts or events arising after the effective
date
of the registration statement(or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental
change
in the information set forth in the registration statement. Notwithstanding
the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the effective
registration statement;
(iii)
To
include any material information with respect to the plan of distribution
not
previously disclosed in the registration statement or any material change
to
such information in the registration statement;
Provided,
however,That:
Paragraphs
(1)(i), (1)(ii) and (1)(iii) do not apply if the registration statement is
on
Form S-3 or Form F-3, and the information required to be included in a
post-effective amendment by those paragraphs is contained in reports filed
with
or furnished to the Commission by the registrant pursuant to section 13 or
section 15(d) of the Securities and Exchange Act of 1934 that are incorporated
by reference in the registration statement, or is contained in a form of
prospectus filed pursuant to Rule 424(b) that is part of the registration
statement.
That,
for
the purpose of determining any liability under the Securities Act of 1933,
each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
To
remove
from registration by means of a post-effective amendment any of the securities
being registered which remain unsold at the termination of the
offering.
That,
for
the purpose of determining liability under the Securities Act of 1933 to
any
purchaser, each prospectus filed pursuant to Rule 424(b) as part of a
registration statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses filed in reliance
on
Rule 430A, shall be deemed to be part of and included in the registration
statement as of the date it is first used after effectiveness. Provided,
however, that no statement made in a registration statement or prospectus
that
is part of the registration statement or made in a document incorporated
or
deemed incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser with
a time
of contract of sale prior to such first use, supersede or modify any statement
that was made in the registration statement or prospectus that was part
of the
registration statement or made in any such document immediately prior to
such
date of first use.
The
undersigned registrant hereby further undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of
the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933
may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the provisions described under “Item 15 - Indemnification of
Directors and Officers” above, or otherwise, the registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act
of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such
issue.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant certifies
that
it has reasonable grounds to believe that it meets all of the requirements
for
filing on Form S-3 and has duly caused this Amendment No. 2 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Baltimore, the State of Maryland, on the 31st
day of
August, 2006.
GSE
SYSTEMS, INC.
BY:
/s/
John V. Moran
-------------------------------
Name:
John V. Moran
Title:
Chief Executive Officer
POWERS
OF
ATTORNEY
KNOW
ALL
MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints John V. Moran and Jeffery G. Hough, and each of
them,
with full power of substitution and reconstitution and each with full power
to
act without the other, his or her true and lawful attorney-in-fact and agent,
for him or her and in his or her name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto,
and all other documents in connection therewith, with the Securities and
Exchange Commission or any state, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each
and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could
do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their, his or her substitutes or substitute, may
lawfully do or cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Act of 1933, this registration statement
has been signed by the following persons in the capacities and on the date
indicated.
|
Date:
April 7, 2006
|
/s/
John V. Moran
|
|
| |
John
V. Moran
|
|
| |
Chief
Executive Officer and Director
|
|
| |
(Principal
Executive Officer)
|
|
| |
|
|
|
Date:
April 7, 2006
|
/s/
Jeffery G. Hough
|
|
|
|
Jeffery
G. Hough
|
|
| |
Senior
Vice President and Chief Financial Officer
|
|
| |
(Principal
Financial and Accounting Officer)
|
|
| |
|
|
|
Date:
April 7, 2006
|
/s/
Jerome I. Feldman
|
|
| |
Jerome
I. Feldman
|
|
| |
Chairman
of the Board
|
|
| |
|
|
|
Date:
April 7, 2006
|
/s/
Michael D. Feldman
|
|
| |
Michael
D. Feldman
|
|
| |
Director
|
|
| |
|
|
|
Date:
April 7, 2006
|
/s/
Dr. Sheldon L. Glashow
|
|
| |
Dr.
Sheldon L. Glashow
|
|
| |
Director
|
|
| |
|
|
|
Date:
April 7, 2006
|
/s/
Scott N. Greenberg
|
|
| |
Scott
N. Greenberg
|
|
| |
Director
|
|
| |
|
|
|
Date:
April 7, 2006
|
/s/
Dr. Roger Hagengruber
|
|
| |
Dr.
Roger Hagengruber
|
|
| |
Director
|
|
| |
|
|
|
Date:
April 7, 2006
|
/s/
Andrea Kantor
|
|
| |
Andrea
Kantor
|
|
| |
Director
|
|
| |
|
|
|
Date:
April 7, 2006
|
/s/
Joseph W. Lewis
|
|
| |
Joseph
W. Lewis
|
|
| |
Director
|
|
| |
|
|
|
Date:
April 7, 2006
|
/s/
George J. Pedersen
|
|
| |
George
J. Pedersen
|
|
| |
Director
|
|
| |
|
|
|
Date:
April 7, 2006
|
/s/
Douglas Sharp
|
|
| |
Douglas
Sharp
|
|
| |
Director
|
|