CANCELLATION AND WARRANT EXCHANGE AGREEMENT
THIS CANCELLATION AND WARRANT EXCHANGE AGREEMENT (the "Agreement") is made
as of this 28th day of February, 2006, among GSE SYSTEMS, INC., a corporation
organized under the laws of the State of Delaware (the "Company") and DOLPHIN
DIRECT EQUITY PARTNERS, LP. a Delaware limited partnership (the "Creditor").
RECITALS
WHEREAS, the Company entered into that certain Senior Subordinated Secured
Convertible Note and Warrant Purchase Agreement dated as of May 26, 2005 (the
"Purchase Agreement") with the Creditor whereby the Company (i) issued and sold
to the Creditor a senior subordinated secured convertible promissory note of the
Company in the aggregate principal amount of $2,000,000 (the "Note"), and (ii)
issued to the Creditor a warrant to purchase an aggregate of 380,952 shares of
common stock, par value $0.01 per share (the "Warrant"); and
WHEREAS, the Company wishes to repay and cancel the Note in accordance with
the terms and conditions set forth herein;
WHEREAS, Dolphin Offshore Partners, L.P., an affiliate of the Creditor, has
agreed to invest in the Company's private placement of units consisting of up to
$4,250,000 of 8% cumulative convertible preferred stock and warrants (the
"Private Placement"); and
WHEREAS, the Company and the Creditor have agreed to exchange the Warrant
for an Exchange Warrant, as defined below,
AGREEMENTS
NOW THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Parties agree on the following terms and conditions:
ARTICLE I
DEFINITIONS
1.1 "Closing" shall mean the closing of the transactions contemplated
herein, and the closing of the transactions contemplated by the Private
Placement.
1.2 "Closing Date" shall mean February 28, 2006.
1.3 "Common Stock" shall mean the shares of the Company's common stock, par
value $0.01 per share, authorized under the Certificate of Incorporation;
1.5 "Current Stock Price" for any day shall mean the last reported sale
price, or, in case no such reported sale takes place on such day, the average of
the last reported sale prices for the last three trading days, in either case as
officially reported by the American Stock Exchange as of 4:00 P.M., New York
time.
ARTICLE II
PAYMENT IN FULL SATISFACTION AND DISCHARGE OF NOTE
2.1 Upon Closing, the Company agrees to pay the Creditor the following
consideration in exchange for the cancellation of the Note, the Warrant and for
the participation of Dolphin Offshore Partners, L.P. in the above referenced
private offering of the Company's Cumulative Convertible Preferred Stock and
Warrants ("Cancellation Payment"):
(a) in cash, official bank check or wire transfer an amount equal to
the principal amount then outstanding plus any accrued interest under the Note
at the date of Closing ("Cancellation Payment"); and
(b) a warrant, in substantially the form attached hereto as Exhibit A
(the "Exchange Warrant"), exercisable to acquire 900,000 shares of the Company's
common stock at a price per share (the "Exercise Price") equal to $ .67 cents.
2.2 Upon Closing, the Company agrees to pay to Dolphin Advisors, L.L.C. a
transaction fee in the amount of $3,000 in respect of its services to the
Creditor related to this transaction.
ARTICLE III
CANCELLATION OF THE NOTE AND RELEASE
3.1 Subject to the terms and conditions set forth herein, Creditor agrees
to deliver to Company at Closing the Note marked across its face "CANCELLED,"
and upon such delivery thereby, shall forever release and discharge the Company
of any and all of its obligations under the Note, including any obligation to
pay principal and interest.
ARTICLE IV
EXCHANGE WARRANT / REGISTRATION RIGHTS
4.1 Creditor shall exercise the Exchange Warrant to acquire 900,000 shares
of the Company's Common Stock promptly after the Company certifies to the
Creditor, on or after May 30, 2006, that the following conditions have been met
(the "Mandatory Exercise Date"): (i) the Company shall have 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 Securities and Exchange Commission, (ii) the Common Stock shall
be listed on the American Stock Exchange and the Company shall not have 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.
4.2 Company agrees 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 Wan-ant with the SEC within 30 days after the original issuance of the
Convertible Preferred Stock and Warrants as set forth in the Registration Rights
Agreement attached hereto as Exhibit B.
ARTICLE V
CLOSING
5.1 Closing Date. The Closing of the transactions contemplated hereby
shall be effective as of the delivery of the closing deliverables described in
Section 5.2 on February 28, 2006, or at such time and place as the parties
mutually agree.
5.2 Closing Deliverables. At Closing, (a) the Creditor shall deliver to the
Company the Note marked across its face "CANCELLED"; and (b) the Company shall
deliver to Creditor the Cancellation Payment and the Warrant.
ARTICLE VI
WAIVERS
6.1 No action taken pursuant to this Agreement, including any investigation
by or on behalf of any party, will he deemed to constitute a waiver by the party
taking such action, or compliance with any representation, warranty, covenant or
agreement contained herein. The waiver by any party hereto of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach. The waiver by any party hereto at or before the Closing Date
of any condition to its obligations hereunder which is not fulfilled shall
preclude such party from seeking redress from the other party hereto for breach
of any representations, warranty, covenant or agreement contained in this
Agreement.
ARTICLE VII
BINDING EFFECT
7.1 This Agreement shall inure to the benefit of the parties hereto and
shall be binding upon the parties hereto and their respective successors and
assigns, heirs and legal representatives. Except as otherwise set forth herein.
nothing in this Agreement, express or implied, is intended to confer on any
person other than the parties hereto or their respective successors and assigns
any rights, remedies, obligations, or liabilities under of by reason of this
Agreement.
ARTICLE VIII
GOVERNING LAW, JURISDICTION, VENUE, REMEDIES,
INDEPENDENT LEGAL COUNSEL
8.1 This Agreement shall be interpreted and construed as to both validity
and performance and enforced in accordance with and governed by the laws of the
State of New York, without giving effect to the choice of law principles
thereof. The parties agree that any action hereunder will be held exclusively in
the courts in the State of New York. The parties acknowledge that remedies at
law, including monetary damages, may be inadequate to remedy a breach of certain
material terms herein, including the Creditor's delivery of the Note, and the
parties agree that equitable remedies may be necessary to enforce such terms and
covenants, including specific performance. The parties acknowledge that the
terms of this Agreement have been negotiated by the parties hereto and each of
them has had a full opportunity to receive independent business, tax and legal
counsel with respect to this Agreement and the transactions contemplated herein.
ARTICLE IX
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Creditor, as follows:
9.1 Existence. The Company (a) is a Registered Organization under the laws
of the jurisdiction stated in the Preamble of this Agreement, (b) is in good
standing under the laws of the jurisdiction in which it is organized, (c) has
the power to own its property and to carry on its business as now being
conducted, and (d) is duly qualified to do business and is in good standing in
each jurisdiction in which the character of the properties owned by it therein
or in which the transaction of its business makes such qualification necessary.
9.2 Power and Authority. The Company has full power and authority to
execute and deliver this Agreement and the other financing documents to which it
is a party, to incur and perform the obligations under this Agreement, all of
which have been duly authorized by all proper and necessary action. No consent
or approval of owners or any creditors of the Company, and no consent, approval,
filing or registration with or notice to any Governmental Authority on the part
of the Company, is required as a condition to the execution, delivery, validity
or enforceability of this Agreement, or any of the other financing documents, or
the performance by the Company of the obligations stated herein.
9.3 Binding Agreements. This Agreement and the other Financing Documents
executed and delivered by the Company have been properly executed and delivered
and constitute the valid and legally binding obligations of the Company and are
fully enforceable against the Company in accordance with their respective terms,
subject to bankruptcy, insolvency, reorganization, moratorium and other Iaws of
general application affecting the rights and remedies of creditors and secured
parties, and general principles of equity regardless of whether applied in a
proceeding in equity or at law.
9.4 No Conflicts. Neither the execution, delivery and performance of the
terms of this Agreement or of any of the other transaction documents executed
and delivered by the Company nor the consummation of the transactions
contemplated by this Agreement will conflict with, violate or be prevented by
(a) the Company's organizational or governing documents, (b) any existing
mortgage, indenture, contract or agreement binding on the Company or affecting
its property, except for any conflict which could not have a materially adverse
effect on the Company, or (c) any applicable Laws.
9.5 Compliance. Neither the Company nor any of its subsidiaries (a) is in
default under or in violation of (and no event has occurred that has not been
waived that, with notice or lapse of time or both, would result in a default by
the Company or any subsidiary under), nor has the Company or any subsidiary
received notice of a claim that it is in default under or that it is in
violation of, any indenture, loan or credit agreement or any other agreement or
instrument to which it is a party or by which it or any of its properties is
bound (whether or not such default or violation has been waived), other than as
disclosed in the September 30, 2005 Form 10-Q, (b) is in violation of any order
of any court, arbitrator or governmental body, or (c) is or has been in
violation of any statute, rule or regulation of any governmental authority,
including without limitation all foreign, federal, state and local laws
applicable to its business.
9.6 Disclosure. The Company's publicly filed financial statements, and the
statements, reports or certificates furnished by the Company in connection with
this transaction (a) do not contain any untrue statement of a material fact and
(b) when taken in their entirety, do not omit any material fact necessary to
make the statements contained therein not misleading. There is no fact known to
the Company which the Company has not disclosed to the Credito in writing prior
to the date of this Agreement with respect to the transactions contemplated by
the Financing Documents that materially and adversely affects or in the future
could, in the reasonable opinion of the Company, materially adversely affect the
condition, financial or otherwise, results of operations, business, or assets of
the Company and its Subsidiaries taken as a whole.
ARTICLE X
REPRESENTATIONS AND WARRANTIES OF THE CREDITOR
10. l Existence. The Creditor (a) is a Registered Organization under the
laws of the jurisdiction stated in the Preamble of this Agreement, (h) is in
good standing under the laws of the jurisdiction in which it is organized, (c)
has the power to own its property and to carry on its business as now being
conducted, and (d) is duly qualified to do business and is in good standing in
each jurisdiction in which the character of the properties owned by it therein
or in which the transaction of its business makes such qualification necessary.
10.2 Power and Authority. The Creditor has full power and authority to
execute and deliver this Agreement and the other financing documents to which it
is a party, to incur and perform the obligations under this Agreement, all of
which have been duly authorized by all proper and necessary action. No consent
or approval of owners or any creditors of the Creditor, and no consent,
approval, filing or registration with or notice to any Governmental Authority on
the part of the Creditor, is required as a condition to the execution, delivery,
validity or enforceability of this Agreement, or any of the other financing
documents, or the performance by the Creditor of the obligations stated herein.
ARTICLE XI
COUNTERPARTS
11.1. This Agreement may be executed in counterpart originals, each of
which shall constitute an executed original and together shall constitute a
fully-executed document.
ARTICLE XII
NOTICES
12.1 All notices and other communications provided for or permitted
hereunder shall be in writing and shall be deemed given (i) when made, if made
by hand delivery, (ii) upon confirmation, if made by telecopier, or (iii) one
business day after being deposited with a reputable next-day courier, postage
prepaid, to the parties as follows:
if to the Company:
GSE Systems, Inc.
7133 Rutherford Road, Suite 200
Baltimore, Maryland 21244
Facsimile: (410) 277-5287
Attn: John Moran
with a copy to:
Kalbian Hagerty LLP
888 17th Street, NW, Suite 1000
Washington, D.C. 20006
Facsimile: (202) 223-6625
Attn: James R. Hagerty, Esq.
if to the Creditor:
Dolphin Direct Equity Partners, L.P.
c/o Dolphin Asset Management Corp.
129 East 17th Street
New York, New York 10003
Facsimile: (212) 656-1212
Attn: Carlos P. Salas
The Company or the Creditor by notice to the other party may designate
additional or different addresses as shall be furnished in writing by such
party. Any notice or communication mailed to the Creditor shall be mailed by
first class mail or other equivalent means at such Creditor's address and shall
be sufficiently given to such Creditor if so mailed within the time prescribed.