James R. Hagerty 888 17th Street NW, Suite 1000
jhagerty@kalbianhagerty.com Washington, DC 20006
(202) 223-5600 Telephone
(202) 223-6625 Facsimile
March 7, 2006
Laurus Capital Management, LLC
825 Third Ave., 14th Floor
New York, New York 10022
Re: GSE Systems, Inc., a Delaware Corporation
Ladies and Gentlemen:
This firm has acted as counsel to GSE Systems, Inc., a Delaware Corporation
(the "Company"), GSE Power Systems, Inc., a Delaware corporation ("GSE Power"),
GSE Services Company LLC, a Delaware limited liability company ("Services"), GSE
Erudite Software Inc., a Delaware corporation ("Erudite"), GSE Government and
Military Simulation Systems, Inc., a Delaware corporation ("Military"), GSE
Process Solutions, Inc., a Delaware corporation ("Process") and MSHI, Inc., a
Virginia corporation ("MSHI," and together with Process, Military, Erudite,
Services and GSE Power, the "Subsidiaries") in connection with the $5,000,000
credit facility between the Company, GSE Power and Laurus Master Fund, Ltd., a
Cayman Islands company (the "Creditor") in the form of the following documents,
all dated as of the date hereof: (i) a secured, non-convertible revolving note
issued by the Company and GSE Power to the Creditor (the "Note"); (ii) a
Security Agreement by and among the Creditor, the Company and GSE Power (the
"Secur ity Agreement"); (iii) that certain Stock Pledge Agreement by and among
the Creditor, the Company, GSE Power, MSHI and Process (the "Stock Pledge");
(iv) that certain Subsidiary Guaranty by and among the Creditor, the Company and
its Subsidiaries ("Subsidiary Guaranty"); (v) that certain Common Stock Purchase
Warrant by and among the Creditor and the Company (the "Warrant"); (vi) that
certain Funds Escrow Agreement by and among the Creditor, the Company and Loeb &
Loeb LLP (the "Escrow Agreement"); (vii) that certain Control Agreement
Regarding Limited Liability Company Interests by and among the Creditor, the
Company and Services (the "Control Agreement"); (viii) Authorizing Resolutions
of each of GSE Power, Process, Erudite, Military, Services and MSHI (the
"Authorizing Resolutions"); (ix) that certain Disbursement Letter (the
"Disbursement Letter"); that certain IP Assignment by and among the Creditor,
the Company and GSE Power (the "IP Assignment"); (xi) that certain Registration
Rights Agreement by and among the Creditor and the Company (the "Registration
Rights"); and (xii) that certain Post-Closing Letter (the "Post-Closing
Letter").
For purposes of this opinion letter, we have examined copies of the
following documents (the "Documents"):
1. Certificate of Incorporation of the Company, as amended through the
date hereof;
2. Bylaws of the Company as amended through the date hereof;
3. Certificate of Good Standing for the Company issued by the State of
Delaware;
4. Certificate of Good Standing for the Company issued by the State of
Maryland;
5. Resolutions of the Board of Directors of the Company with respect to
the transactions referred to herein;
6. A certificate of the Secretary of the Company, dated March 1, 2006, as
to the incumbency and signatures of certain officers of the Company;
7. Certificate of Incorporation of GSE Power, as amended through the date
hereof;
8. Certificate of Good Standing of Power;
9. Certificate of Incorporation of Process, as amended through the date
hereof;
10. Certificate of Good Standing of Process;
11. Certificate of Incorporation of Erudite, as amended through the date
hereof;
12. Certificate of Good Standing of Erudite;
13. Certificate of Incorporation of Military, as amended through the date
hereof;
14. Certificate of Good Standing of Military;
15. Certificate of Formation of Services, as amended through the date
hereof;
16. Certificate of Good Standing of Services;
17. Articles of Incorporation of MSHI, as amended through the date hereof;
18. Certificate of Good Standing of MSHI;
19. Security Agreement, dated as of March 6, 2006;
20. Note, dated as of March 6, 2006;
21. Warrant dated as of March 6, 2006;
22. Registration Rights, dated as of March 6, 2006;
23. Control Agreement, dated as of March 6, 2006;
24. Escrow Agreement, dated as of March 6, 2006;
25. Disbursement Letter, dated as of March 6, 2006;
26. Subsidiary Guaranty, dated as of March 6, 2006;
27. IP Assignment, dated as of March 6, 2006;
28. Stock Pledge, dated as of March 6, 2006; and
29. Authorizing Resolutions, dated as of March 6, 2006.
The Security Agreement, the Note, the Warrant, the Registration Rights, the
Control Agreement, the Escrow Agreement, the Subsidiary Guaranty, the
Disbursement Letter, the Stock Pledge, the IP Assignment, the Post Closing
Letter and the Authorizing Resolutions are hereinafter referred to individually
as a "Transaction Document" and collectively as the "Transaction Documents." In
our examination of the Transaction Documents and the other Documents, we have
assumed the genuineness of all signatures (other than those of the Company and
the Subsidiaries), the legal capacity of all natural persons, the accuracy and
completeness of all of the Documents, the authenticity of all originals of the
Documents and the conformity to authentic originals of all of the Documents
submitted to us as copies (including telecopies). As to matters of fact relevant
to the opinions expressed herein, we have relied on the representations and
statements of fact made in the Documents, we have not independently established
the facts so relied on, and we have not made any investigation or inquiry other
than our examination of the Documents. The opinion letter is given, and all
statements herein are made, in the context of the foregoing.
In addition to the above stated assumptions and limitations, the opinions
which follow are subject to the following additional assumptions and
limitations:
1. The undersigned has assumed the organization, existence, good
standing, qualification (to do business) and capacity of the Creditor,
and that the Creditor has the right, power and authority to enter into
this transaction;
2. The undersigned has assumed that there has been no mutual mistake of
fact or misunderstanding or fraud, duress or undue influence, in
connection with the negotiation, execution or delivery of the
Transaction Documents, and the conduct of all parties to the
Transaction Documents has complied with any requirements of good
faith, fair dealing and conscionability;
3. There are and have been no agreements or understandings among the
parties, written or oral, and there is and has been no usage of trade
or course of prior dealings among the parties to the Transaction
Documents that would, in either case, define, supplement or qualify
the terms of the Transaction Documents; and
4. This opinion letter is based as to matters of law solely on applicable
provisions of the following, as currently in effect: (i) United States
Federal Law; (ii) the General Corporation Law of the State of
Maryland; (iii) the Virginia Code; and (iv) the General Corporation
Law of the State of Delaware.
Based upon such examinations and the assumptions and limitations stated
above, and in the undersigned's capacity as counsel for the Company, the
undersigned is of the opinion that:
1. The Company is a corporation, duly organized, validly existing and in
good standing under the laws of the State of Delaware, and possess all
requisite power and authority to own, operate and lease its
properties, to carry on its business as it is now being conducted, and
to execute, deliver and perform its obligations under the Transaction
Documents;
2. The Company is duly qualified and in good standing to do business as a
foreign corporation in Maryland;
3. The Company has full and requisite corporate power and authority to
execute, deliver and perform its obligations under the Transaction
Documents;
4. The authorization, execution and delivery by the Company of each of
the Transaction Documents, and the performance of all obligations
thereunder, has been duly authorized by all necessary corporate action
on behalf of the Company;
5. Each of GSE Power, Process, Erudite and Military is a corporation,
duly organized and in good standing under the laws of the State of
Delaware, possesses all power and authority to own, operate and lease
its properties and to carry out its business as it is now being
conducted and to execute, deliver and perform its obligations under
the Transaction Documents;
6. The authorization, execution and delivery by the Subsidiaries of each
of the Transaction Documents, and the performance of all obligations
thereunder, has been duly authorized by all necessary corporate action
on behalf of each of the Subsidiaries;
7. MSHI is a corporation, duly organized and in good standing under the
laws of the Commonwealth of Virginia, and MSHI possesses all requisite
power and authority to own, operate and lease its properties, to carry
out its business as it is now being conducted and to execute, deliver
and perform its obligations under the Transaction Documents;
8. Except as set forth in the Transaction Documents, there are no
actions, suits proceedings or investigations pending or, to our
knowledge, threatened against the Company or any of the Subsidiaries
before any court or administrative agency where such action, suit or
proceeding: (a) either individually or in the aggregate would have
material adverse effect on the business, assets, liabilities,
financial condition, or results of the operations of the Company or
the Subsidiaries; (b) calls into question the validity of any of the
Transaction Documents or any action taken or to be taken pursuant
thereto; or (c) seeks to prevent the consummation of the transactions
contemplated by the Transaction Documents. To our knowledge neither
the Company nor any of the Subsidiaries is a party to or subject to
the provisions of any order, injunction, judgment or decree of any
court or government agency or instrumentality; nor is there any
action, proceeding or investigations by the Company or the
Subsidiaries, or any actio n, proceeding or investigation that the
Company or the Subsidiaries intends to initiate;
9. No approval or consent of, or registration, filing or other action
with any state or federal governmental authority, is required to be
obtained or made by the Company and the Subsidiaries under applicable
federal law or applicable state law in connection with the execution,
delivery and performance on the date hereof by the Company and the
Subsidiaries of each of the Transaction Documents, except for (a) the
authorizations which have previously been obtained, taken or made and
(b) filings such as may be required to be filed pursuant to applicable
federal and state securities laws subsequent to the consummation of
the transactions contemplated by the Transaction Documents;
10. Neither the execution and delivery of, nor the performance by the
Company and its Subsidiaries of its obligations under the Transactions
Documents, including without limitation, the Company's issuance and
delivery of the Warrant will, with or without the giving of notice or
the passage of time or both,: (a) violate, conflict with, or result in
a breach or default under any provision of the Certificate of
Incorporation of such entity, as amended through the date hereof, or
Bylaws of such entity, (b) violates any judgment, decree, governmental
order, statute, law, rule or regulations to which the Company or any
Subsidiary is subject including, without limitation, any applicable
state law pertaining to permissible interest rates, (c) results in a
violation, breach or default by the Company (or gives rise to any
right of termination, cancellation or acceleration) under conditions
or provisions of any material agreement, or (d) violate any Delaware,
Maryland, Virginia or federal law;
11. No taxes, fees or other charges, including without limitation,
intangible, documentary, stamp, mortgage, transfer or recording taxes
or similar charges are payable to any governmental or regulatory body
on account of the execution or delivery of the Warrants;
12. Assuming the accuracy of the representations and warranties of the
Creditor contained in the Security Agreement, the offer, sale and
issuance of the Securities on the Closing Date will be exempt from the
registration requirements of the Securities Act. To our knowledge,
neither the Company, nor any of the Subsidiaries, nor any of its
affiliates, nor any person acting on its or their behalf, has directly
or indirectly made any offers or sales of any security or solicited
any offers to buy any security under circumstances that would cause
the offering of the Securities pursuant to the Security Agreement to
be integrated with prior offerings by the Company for purposes of the
Securities Act which would prevent the Company from selling the
Securities pursuant to Rule 506 under the Securities Act, or any
applicable exchange-related stockholder approval provisions;
13. The Company is not an "investment company" or a company "controlled"
by an "investment company" within the meaning of the Investment
Company Act of 1940, as amended;
14. The authorized capital stock of the Company is as described in the
Transaction Documents. All issued and outstanding shares of Common
Stock of the Company have been duly authorized and validly issued, and
are fully paid and nonassessable and free of any preemptive or similar
rights. To our knowledge, except for rights described in the
Transaction Documents or the incorporated SEC filings, there are no
other options, warrants, conversion privileges or other rights
presently outstanding to purchase or otherwise acquire any authorized
but unissued shares of capital stock or other securities of the
Company, or any other agreements to issue any such securities of the
Company, or any other agreements to issue any such securities or
rights;
15. The Common Stock underlying the exercise of the Warrant, when issued
pursuant to and in accordance with the terms of the Transaction
Documents and upon delivery shall be validly issued and outstanding,
fully paid and non assessable;
16. Nothing has come to our attention that has caused us to believe that
the Transaction Documents, at the date thereof, or any of the
Company's public filings with the Securities and Exchange Commission
(the "SEC"), at the date they were filed with the SEC, contained an
untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading;
17. The Security Agreement and the Ancillary Agreements will constitute,
valid and legally binding obligations of each Company and the
Subsidiaries (to the extent such entity is a party thereto), and are
enforceable against the Company and the Subsidiaries party thereto in
accordance with their respective terms, except: (a) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other
laws of general application affecting enforcement of creditors'
rights; and (b) general principles of equity that restrict the
availability of equitable or legal remedies;
18. To our knowledge, the issuance of the Note is not subject to any
preemptive rights or rights of first refusal that have not been
properly waived or complied with. To our knowledge, the issuance of
the Warrant and the subsequent exercise of the Warrant for shares of
Common Stock are not subject to any preemptive rights or, to our
knowledge, rights of first refusal that have not been properly waived
or complied with;
19. The terms and provisions of the Security Agreement and the Stock
Pledge create a valid security interest in favor of the Creditor, in
the respective rights, title and interests of the Company and the
Subsidiaries in and to the Collateral (as defined in each of the
Security Agreement and the Stock Pledge). The terms and provisions of
the IP Assignment create a valid security interest in favor of the
Creditor in the respective rights, title and interests of the Company
and the Subsidiaries in and to the T + P Collateral (as defined in the
IP Assignment). The terms and provisions of the Control Agreement
create a valid security interest in favor of the Creditor in the
rights, title and interests of the Company in the Issuer's Pledged
Interests (as defined in the Control Agreement). Each UCC-1 Financing
Statement naming the Company and the Subsidiaries as debtor and Laurus
as secured party are in proper form for filing and assuming that such
UCC-1 Financing Statements have been filed with the Secretary of State
of Delaware, Maryland or Virginia, the security interest created under
the Security Agreement will constitute a perfected security interest
under the Uniform Commercial Code in favor of the Creditor in respect
of the Collateral that can be perfected by filing a financing
statement. After giving effect to the delivery to the Creditor of the
stock certificates representing the ownership interests of each
Subsidiary of each Company (together with effective endorsements) and
assuming the continued possession by the Creditor of such stock
certificates in the State of New York, the security interest created
in favor of the Creditor under the Stock Pledge and the Control
Agreement constitutes a valid and enforceable first perfected security
interest in such ownership interests (and the proceeds thereof) in
favor of the Creditor, subject to no other security interest. No
filings, registrations or recordings are required in order to perfect
(or maintain the perfection or priority of) the security interest cre
ated under the Stock Pledge Agreement or the Control Agreement in
respect of such ownership interests; and
20. The "Lockbox Control Agreement", dated as of March 6, 2006, among the
Creditor, each Company and Wachovia Bank, N.A. is sufficient to give
the Creditor "control" within the meaning of Section 9-104 of the
Maryland Commercial Law Code over the lockbox deposit account(s)
referenced therein, as a result thereof, the Creditor's security
interest in such lockbox deposit accounts (and funds therein) is
perfected.
The foregoing opinions are limited in all respects and for all purposes to
applicable federal and state laws (excluding the principles of conflict-of-laws
or choice-of-laws) as presently in effect. To the extent the matters covered
hereby relate to the laws of any other jurisdiction, the undersigned has not
consulted with legal counsel who are experts with respect to such laws and the
undersigned expresses no opinion on the laws of such jurisdiction(s) might
affect the opinions expressed in this opinion letter.
The undersigned assumes no obligation to supplement this opinion letter if
any of the applicable laws (statutory, decisional or other) or any of the
underlying facts or circumstances changes in any way. This opinion is based upon
and relies upon the current status of law and in all respects is subject to, and
may be limited by, future legislation as well as by developing case laws,
statutes, ordinances, rules and regulations and facts, all as in existence on
this date, and the undersigned expresses no opinion as to the effect which any
future amendments, changes, additions, or modifications thereof may have upon
the future performance or enforceability of the Transaction Documents.
While this opinion letter is given as of the date hereof, it is based upon
certifications of various facts as of the dates referenced herein, and does not
cover any matters arising at any time subsequent thereto, unless otherwise
expressly stated herein. Nothing has come to the undersigned's attention
subsequent to the date hereof which should cause the undersigned to doubt the
continued state of facts as therein certified.
The foregoing opinions are limited to matters expressly set forth herein,
and no opinions are to be implied or may be inferred beyond the opinions
expressly so stated. The foregoing opinions are legal opinions only and do not
constitute a guaranty or warranty of matters discussed therein.
This opinion shall run solely to the Creditor and its counsel. This opinion
letter may not be quoted or relied on (or claim of reliance) by, nor copies
delivered to, any other person or used for any other purpose without the express
prior written consent of the undersigned in each instance.
KALBIAN HAGERTY, LLP
By:_____________________
Name: James R. Hagerty, Esq.