Investment in Emirates Simulation Academy, LLC

12 Months Ended

Dec. 31, 2011

Investment in Emirates Simulation Academy, LLC

Invesments in Emirates Simulation Academy, LLC

9.  Investment in Emirates Simulation Academy, LLC

On November 8, 2005, the Emirates Simulation Academy, LLC (“ESA”), headquartered in Abu Dhabi, United Arab Emirates, was formed to build and operate simulation training academies in the Arab Gulf Region. The members of the limited liability company include Al Qudra Holding PJSC of the United Arab Emirates (60% ownership), the Centre of Excellence for Applied Research and Training of the United Arab Emirates (30% ownership) and GSE (10% ownership). The Company accounted for its investment in ESA using the equity method. For the year ended December 31, 2009, the Company recognized a $615,000 equity loss on its investment in ESA. The equity loss was recorded in other income (expense), net.

In January 2006, GSE received a $15.1 million contract from ESA (the “ESA Contract”) to supply five simulators and an integrated training program. The Company received change orders totaling $1.8 million from ESA which increased the total order value to $16.9 million.  In accordance with the equity method of accounting, the Company eliminated 10% of the profit from the ESA Contract as the training simulators were assets that had been recorded on the books of ESA, and the Company was thus required to eliminate its proportionate share of the profit included in the asset value.  ESA assigned a four year life to the simulators and began to amortize the training simulators on their books effective January 1, 2009.  Accordingly, on January 1, 2009, GSE began to amortize the deferred profit to other income over a four year period, recognizing income of $181,000 in the year ended December 31, 2009.

The Company has provided a partial guarantee of 10% of ESA’s credit facility with Union National Bank (“UNB”); $1.2 million was deposited into a restricted interest-bearing account with UNB in 2006.  The interest earned on the restricted cash is part of the pledged deposit.

At December 31, 2010, ESA had borrowed a total of AED 36.4 million ($9.9 million) from its credit facility with UNB, including accrued interest payable.  ESA was delinquent in paying both principal and interest (a total of AED 5.3 million or $1.5 million) and in January 2010, UNB drew upon the guarantees of the three partners to pay off the delinquency, withdrawing $145,000 from GSE’s restricted cash account.  In February 2010, GSE was notified that ESA had missed another loan payment and that 10% of the amount due ($24,000) would be withdrawn from the Company’s restricted cash account.

At a meeting of ESA’s three shareholders held at ESA on February 17, 2010, the shareholders reached agreement to significantly reduce costs and begin to explore options up to and including the selling of ESA.

F-22

 

Accordingly, based upon these events, the Company determined that its remaining investment in ESA at December 31, 2009 was impaired and established reserves for the $1.6 million trade receivable due from ESA at December 31, 2009 and for the cash that GSE has on deposit with UNB as a partial guarantee for ESA’s credit facility. Partially offsetting these charges was the reversal of the remaining deferred profit related to the Company’s sale of five simulators to ESA in prior years and the remaining agent fee that was due upon payment of the final outstanding receivable. The charges recorded and the presentation in the statement of operations for the year ended December 31, 2009 were as follows:

	Year ended
(in thousands)	December 31, 2009
Trade receivable	$	1,604
Accrued agent fee		(96	)
Operating expense		1,508
Restricted cash- bank guarantee and accrued interest income		1,291
Investment in ESA		117
Deferred profit		(543	)
Other expense, net		865
Total	$	2,373

In 2011 and 2010, Union National Bank withdrew a total of $78,000 and $294,000, respectively, from the cash GSE had on deposit with them as a partial guarantee against ESA’s line of credit.  Any interest income earned from this account in 2011 and 2010 was not recorded in interest income but was credited to the reserve balance.  At December 31, 2011 the Company had $926,000 remaining in the restricted UNB account which was fully reserved.