SEC Company Response from GLOBAL AXCESS CORP (CIK 0000852570) — Sep 9, 2005
GLOBAL AXCESS CORP (CIK 0000852570)
Date: Sept. 9, 2005 · CIK: 0000852570 · Accession: 0001144204-05-028411
AI Filing Summary & Sentiment
Referenced dates: August 31, 2005
Letter
[GLOBAL AXCESS CORP] September 8, 2005 Mr. William Choi Accounting Branch Chief United States Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549
RE: Letter dated August 31, 2005 on Global Axcess Corp's Form 10-KSB for the Fiscal Year Ended December 31, 2004 filed March 31, 2005 File No. 0-17874
Dear Mr.Choi:
We have reviewed your letter and have made the following responses to each of your comments as numbered.
Consolidated Statements of Income, page F-4 ------------------------------------------
1. We note that you recorded a gain upon cancellation of notes payable to related parties during 2003. Please explain to us in detail the circumstances resulting in the cancellation of the notes and the nature of the related party relationship. Please also tell us why the gain was recorded in income as opposed to a capital contribution. Please refer to footnote 1 of APB26. Additionally please also tell us the authoritative literature you applied in your determination that the debt extinguishment gain should be recorded as income as opposed to a capital contribution. In addition, tell us how you calculated the gain of $261, 023 reflected in your statements of income. In doing so, tell us how you determined the fair value of the new debt instrument. Please refer to EITF 96-19. Please provide us a copy of the agreement referred to in your response.
Response.
There were two (2) actual liability cancellations, both of which were un-secured, one for $243,981 and one for $17,042, totaling the $261,023 reflected as income. The circumstances that led to the modification of the $243,981 liability are as follows:
A. Global Axcess Corp had recorded a liability on their books as of March 31, 2003 in an amount showing in Notes Payable Related Parties of $487,962 (part of the current and long term notes to related parties totaling $697,090). This liability was recorded based on a verbal agreement for vault cash supplied from Dr. Robert Mehlman (obligee) to Tallent & Company (obligor), a transaction that happened prior to the acquisition of Tallent & Co. by Global Axcess Corp. Global kept the liability on their books. During April 2003 Global
224 Ponte Vedra Park Drive, Suite #100 Ponte Vedra Beach, FL 32082 info@globalaxcess.biz www.globalalaxcess.biz Phone: 904-280-3950 Fax: 904-280-2180
<PAGE> [GLOBAL AXCESS CORP]
Axcess Corp had requested from the obligee to cancel half of the debt outstanding at the time for the following change in the terms of the obligation;
a. The original liability had the terms of 5 years with interest at 7% and a balance as of 3/31/03 of $487,962.
b. In April 2003, Global Axcess Corp requested from the obligee that the note be changed in terms to pay the obligee upfront on principal and add value to the note with interest and length of term in exchange for cancellation of 50% of the principal.
c. The obligee agreed to the following terms of the new obligation in exchange for 50% cancellation of the current liability (an amount of $243,981); the obligee would receive an upfront payment towards the principal of $25,000, an interest rate of 11% and ongoing monthly interest and principal payment of $3000 for 10 years (see the attached letter of agreement for the new note).
B. The related party relationship was determined because the note holder was a shareholder although not holding more than 5% of the Company. Global Axcess Corp recorded the liability in the Company's consolidated balance sheet as a note to related party; because Dr. Mehlman had stock of Global Axcess Corp, (albeit less than 5% of the shares outstanding at the time) and due to the significant size of the liability the Company felt that showing the relationship separately would be important to disclose. The cancellation of the note was determined to be a gain and recorded into income as opposed to a capital contribution for the following reasons:
a. The unsecured obligee was not given any additional equity in the Company and was not a related party with 10% or more of ownership of the Company.
b. For the forgiveness and cancellation of 50% for the original balance the Company re-signed a new note with a higher rate of interest, over a longer term and paid down the original note with a $25,000 cash payment.
c. The terms of the note had changed for both the obligee and the obligor.
d. Footnote 1 of APB 26 Paragraph 20 states; "20. Disposition of amounts. A difference between the reacquisition price and the net carrying amount of the extinguished debt should be recognized currently in income of the period of extinguishment as losses or gains and identified as a separate item.(1) Gains and losses should not be amortized to future periods. Footnote (1) If upon extinguishment of debt, the parties also exchange unstated (or stated) rights or privileges, the portion of the consideration exchanged allocable to such unstated (or stated) rights or privileges should be given appropriate accounting recognition. Moreover, extinguishment transactions between related entities may be in essence capital transactions." The change in the terms of the note did not give either party unstated or stated rights other than the change in terms of the note itself and remained unsecured. The obligee is not considered a true related party since his holdings of stock are not significant with less than 5%, and has no other rights or relationship with the Company. The Footnote refers that the transaction `may be in essence capital transactions', however the opinion does suggest that there needs to be some additional rights given to the creditor of which there were none given. It is possible that the amount should be reclassified into Notes Payable out of Related Party Notes Payable.
224 Ponte Vedra Park Drive, Suite #100 Ponte Vedra Beach, FL 32082 info@globalaxcess.biz www.globalalaxcess.biz Phone: 904-280-3950 Fax: 904-280-2180
<PAGE> [GLOBAL AXCESS CORP]
e. We did apply APB 26 in categorizing the transaction as extinguished debt and that the extinguishment should be classified as an income gain; the issue we had was how to classify the income; either in operations or extraordinary, which, based on the discussions in SFAS 4 and FAS 145, we recorded the income as an extraordinary gain, see FAS 145 APPENDIX section, "Rescission of Statements 4 and 64
A4. The Board noted that at the time Statement 4 was issued, its requirement to classify all gains and losses associated with extinguishment of debt as extraordinary items was intended to be a temporary measure and that application of the criteria in Opinion 30 would seldom, if ever, require that resulting gains and losses be classified as extraordinary items. The Board noted that Statement 4 dictated the classification of gains and losses from extinguishment of debt and, thus, did not permit a conceptual consideration under the provisions of Opinion 30 of whether an extinguishment of debt is extraordinary in nature. The Board concurred that debt extinguishments are often routine, recurring transactions and concluded that classifying the associated gains and losses as extraordinary items in all cases is inconsistent with the criteria in Opinion 30. Furthermore, such classification may not provide the most useful information to users of financial statements.
A5. The Board observed that the rescission of Statement 4 would not preclude gains and losses from extinguishment of debt that meet the criteria in Opinion 30 from being classified as extraordinary items. The Board noted that Opinion 30 requires disclosures about material gains and losses associated with debt extinguishments that are unusual or infrequent in nature. Thus, applying the provisions of Opinion 30 would distinguish transactions that are part of an entity's recurring operations from those that are unusual or infrequent or that meet the criteria for classification as extraordinary items. The Board concluded that the rescission of Statement 4 would improve financial reporting by eliminating a requirement to classify a normal and important part of many entities' ongoing activities to manage interest rate risk as an extraordinary item." NOTE that the transaction is not routine so therefore it is extraordinary.
See the attached Memo written on the entry which refers to SFAS 4 and FAS 145
f. EITF Issue No 96-19 which addresses the following issues:
"ISSUE
Issue No. 86-18, "Debtor's Accounting for a Modification of Debt Terms," addresses circumstances under which existing debt should be considered extinguished, resulting in recognition by the debtor of an extraordinary gain or loss. In that Issue, the Task Force reached a consensus that an exchange of a new noncallable debt instrument for an older callable debt instrument should be accounted for as an extinguishment by the
224 Ponte Vedra Park Drive, Suite #100 Ponte Vedra Beach, FL 32082 info@globalaxcess.biz www.globalalaxcess.biz Phone: 904-280-3950 Fax: 904-280-2180
<PAGE> [GLOBAL AXCESS CORP]
debtor. Many Task Force members agreed that substantive modifications of debt (that is, modifications to principal, interest rate, maturity, or call provisions) should be accounted for as the extinguishment of that debt and the creation of new debt, although no consensus was reached on that issue. Other Task Force members said that extinguishment accounting should be applied only to those debt instruments meeting the conditions for extinguishment under Statement 76.
Statement 125, which superseded Statement 76 on January 1, 1997, limits derecognition of a liability to extinguishments. It limits extinguishments to situations in which the debtor pays the creditor and is relieved of its obligation or is legally released as the primary obligor either judicially or by the creditor.
The issues are:
1. How a debtor should account for an exchange of debt instruments with substantially different terms
2. How a debtor should account for a substantial modification in the terms of an existing debt agreement (other than a troubled debt restructuring)
3. If a gain or loss is recognized from an exchange or modification, whether the gain or loss should be classified as extraordinary."
Implementation Guidelines
"The Task Force reached a consensus that transactions involving the modification or exchange of debt instruments can only result in gain or loss recognition by the debtor if the conditions for extinguishment of debt described in paragraph 16 of Statement 125 are satisfied or if the consensus in this Issue requires that accounting."
Paragraph 16 of Statement 125 states,
"16. A debtor shall derecognize a liability if and only if it has been extinguished. A liability has been extinguished if either of the following conditions is met:
a. The debtor pays the creditor and is relieved of its obligation for the liability. Paying the creditor includes delivery of cash, other financial assets, goods, or services or reacquisition by the debtor of its outstanding debt securities whether the securities are canceled or held as so-called treasury bonds.
224 Ponte Vedra Park Drive, Suite #100 Ponte Vedra Beach, FL 32082 info@globalaxcess.biz www.globalalaxcess.biz Phone: 904-280-3950 Fax: 904-280-2180
<PAGE> [GLOBAL AXCESS CORP]
b. The debtor is legally released(5) from being the primary obligor under the liability, either judicially or by the creditor. (5.)If nonrecourse debt (such as certain mortgage loans) is assumed by a third party in conjunction with the sale of an asset that serves as sole collateral for that debt, the sale and related assumption effective
Show Raw Text
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<TEXT>
[GLOBAL AXCESS CORP]
September 8, 2005
Mr. William Choi
Accounting Branch Chief
United States Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: Letter dated August 31, 2005 on Global Axcess Corp's Form 10-KSB for
the Fiscal Year Ended December 31, 2004 filed March 31, 2005 File No.
0-17874
Dear Mr.Choi:
We have reviewed your letter and have made the following responses to each
of your comments as numbered.
Consolidated Statements of Income, page F-4
------------------------------------------
1. We note that you recorded a gain upon cancellation of notes payable
to related parties during 2003. Please explain to us in detail the
circumstances resulting in the cancellation of the notes and the
nature of the related party relationship. Please also tell us why
the gain was recorded in income as opposed to a capital
contribution. Please refer to footnote 1 of APB26. Additionally
please also tell us the authoritative literature you applied in your
determination that the debt extinguishment gain should be recorded
as income as opposed to a capital contribution. In addition, tell us
how you calculated the gain of $261, 023 reflected in your
statements of income. In doing so, tell us how you determined the
fair value of the new debt instrument. Please refer to EITF 96-19.
Please provide us a copy of the agreement referred to in your
response.
Response.
There were two (2) actual liability cancellations, both of which were
un-secured, one for $243,981 and one for $17,042, totaling the $261,023
reflected as income. The circumstances that led to the modification of the
$243,981 liability are as follows:
A. Global Axcess Corp had recorded a liability on their books as
of March 31, 2003 in an amount showing in Notes Payable
Related Parties of $487,962 (part of the current and long term
notes to related parties totaling $697,090). This liability
was recorded based on a verbal agreement for vault cash
supplied from Dr. Robert Mehlman (obligee) to Tallent &
Company (obligor), a transaction that happened prior to the
acquisition of Tallent & Co. by Global Axcess Corp. Global
kept the liability on their books. During April 2003 Global
224 Ponte Vedra Park Drive, Suite #100 Ponte Vedra Beach, FL 32082
info@globalaxcess.biz www.globalalaxcess.biz
Phone: 904-280-3950 Fax: 904-280-2180
<PAGE>
[GLOBAL AXCESS CORP]
Axcess Corp had requested from the obligee to cancel half of
the debt outstanding at the time for the following change in
the terms of the obligation;
a. The original liability had the terms of 5 years with
interest at 7% and a balance as of 3/31/03 of $487,962.
b. In April 2003, Global Axcess Corp requested from the
obligee that the note be changed in terms to pay the
obligee upfront on principal and add value to the note
with interest and length of term in exchange for
cancellation of 50% of the principal.
c. The obligee agreed to the following terms of the new
obligation in exchange for 50% cancellation of the
current liability (an amount of $243,981); the obligee
would receive an upfront payment towards the principal
of $25,000, an interest rate of 11% and ongoing monthly
interest and principal payment of $3000 for 10 years
(see the attached letter of agreement for the new note).
B. The related party relationship was determined because the note
holder was a shareholder although not holding more than 5% of
the Company. Global Axcess Corp recorded the liability in the
Company's consolidated balance sheet as a note to related
party; because Dr. Mehlman had stock of Global Axcess Corp,
(albeit less than 5% of the shares outstanding at the time)
and due to the significant size of the liability the Company
felt that showing the relationship separately would be
important to disclose. The cancellation of the note was
determined to be a gain and recorded into income as opposed to
a capital contribution for the following reasons:
a. The unsecured obligee was not given any additional
equity in the Company and was not a related party with
10% or more of ownership of the Company.
b. For the forgiveness and cancellation of 50% for the
original balance the Company re-signed a new note with a
higher rate of interest, over a longer term and paid
down the original note with a $25,000 cash payment.
c. The terms of the note had changed for both the obligee
and the obligor.
d. Footnote 1 of APB 26 Paragraph 20 states; "20.
Disposition of amounts. A difference between the
reacquisition price and the net carrying amount of the
extinguished debt should be recognized currently in
income of the period of extinguishment as losses or
gains and identified as a separate item.(1) Gains and
losses should not be amortized to future periods.
Footnote (1) If upon extinguishment of debt, the parties
also exchange unstated (or stated) rights or privileges,
the portion of the consideration exchanged allocable to
such unstated (or stated) rights or privileges should be
given appropriate accounting recognition. Moreover,
extinguishment transactions between related entities may
be in essence capital transactions." The change in the
terms of the note did not give either party unstated or
stated rights other than the change in terms of the note
itself and remained unsecured. The obligee is not
considered a true related party since his holdings of
stock are not significant with less than 5%, and has no
other rights or relationship with the Company. The
Footnote refers that the transaction `may be in essence
capital transactions', however the opinion does suggest
that there needs to be some additional rights given to
the creditor of which there were none given. It is
possible that the amount should be reclassified into
Notes Payable out of Related Party Notes Payable.
224 Ponte Vedra Park Drive, Suite #100 Ponte Vedra Beach, FL 32082
info@globalaxcess.biz www.globalalaxcess.biz
Phone: 904-280-3950 Fax: 904-280-2180
<PAGE>
[GLOBAL AXCESS CORP]
e. We did apply APB 26 in categorizing the transaction as
extinguished debt and that the extinguishment should be
classified as an income gain; the issue we had was how
to classify the income; either in operations or
extraordinary, which, based on the discussions in SFAS 4
and FAS 145, we recorded the income as an extraordinary
gain, see FAS 145 APPENDIX section, "Rescission of
Statements 4 and 64
A4. The Board noted that at the time Statement 4 was
issued, its requirement to classify all gains and losses
associated with extinguishment of debt as extraordinary
items was intended to be a temporary measure and that
application of the criteria in Opinion 30 would seldom,
if ever, require that resulting gains and losses be
classified as extraordinary items. The Board noted that
Statement 4 dictated the classification of gains and
losses from extinguishment of debt and, thus, did not
permit a conceptual consideration under the provisions
of Opinion 30 of whether an extinguishment of debt is
extraordinary in nature. The Board concurred that debt
extinguishments are often routine, recurring
transactions and concluded that classifying the
associated gains and losses as extraordinary items in
all cases is inconsistent with the criteria in Opinion
30. Furthermore, such classification may not provide the
most useful information to users of financial
statements.
A5. The Board observed that the rescission of Statement
4 would not preclude gains and losses from
extinguishment of debt that meet the criteria in Opinion
30 from being classified as extraordinary items. The
Board noted that Opinion 30 requires disclosures about
material gains and losses associated with debt
extinguishments that are unusual or infrequent in
nature. Thus, applying the provisions of Opinion 30
would distinguish transactions that are part of an
entity's recurring operations from those that are
unusual or infrequent or that meet the criteria for
classification as extraordinary items. The Board
concluded that the rescission of Statement 4 would
improve financial reporting by eliminating a requirement
to classify a normal and important part of many
entities' ongoing activities to manage interest rate
risk as an extraordinary item." NOTE that the
transaction is not routine so therefore it is
extraordinary.
See the attached Memo written on the entry which refers
to SFAS 4 and FAS 145
f. EITF Issue No 96-19 which addresses the following
issues:
"ISSUE
Issue No. 86-18, "Debtor's Accounting for a Modification of
Debt Terms," addresses circumstances under which existing debt
should be considered extinguished, resulting in recognition by
the debtor of an extraordinary gain or loss. In that Issue,
the Task Force reached a consensus that an exchange of a new
noncallable debt instrument for an older callable debt
instrument should be accounted for as an extinguishment by the
224 Ponte Vedra Park Drive, Suite #100 Ponte Vedra Beach, FL 32082
info@globalaxcess.biz www.globalalaxcess.biz
Phone: 904-280-3950 Fax: 904-280-2180
<PAGE>
[GLOBAL AXCESS CORP]
debtor. Many Task Force members agreed that substantive
modifications of debt (that is, modifications to principal,
interest rate, maturity, or call provisions) should be
accounted for as the extinguishment of that debt and the
creation of new debt, although no consensus was reached on
that issue. Other Task Force members said that extinguishment
accounting should be applied only to those debt instruments
meeting the conditions for extinguishment under Statement 76.
Statement 125, which superseded Statement 76 on January 1,
1997, limits derecognition of a liability to extinguishments.
It limits extinguishments to situations in which the debtor
pays the creditor and is relieved of its obligation or is
legally released as the primary obligor either judicially or
by the creditor.
The issues are:
1. How a debtor should account for an exchange of debt
instruments with substantially different terms
2. How a debtor should account for a substantial modification
in the terms of an existing debt agreement (other than a
troubled debt restructuring)
3. If a gain or loss is recognized from an exchange or
modification, whether the gain or loss should be classified as
extraordinary."
Implementation Guidelines
"The Task Force reached a consensus that transactions
involving the modification or exchange of debt instruments can
only result in gain or loss recognition by the debtor if the
conditions for extinguishment of debt described in paragraph
16 of Statement 125 are satisfied or if the consensus in this
Issue requires that accounting."
Paragraph 16 of Statement 125 states,
"16. A debtor shall derecognize a liability if and only if it
has been extinguished. A liability has been extinguished if
either of the following conditions is met:
a. The debtor pays the creditor and is relieved of its
obligation for the liability. Paying the creditor includes
delivery of cash, other financial assets, goods, or services
or reacquisition by the debtor of its outstanding debt
securities whether the securities are canceled or held as
so-called treasury bonds.
224 Ponte Vedra Park Drive, Suite #100 Ponte Vedra Beach, FL 32082
info@globalaxcess.biz www.globalalaxcess.biz
Phone: 904-280-3950 Fax: 904-280-2180
<PAGE>
[GLOBAL AXCESS CORP]
b. The debtor is legally released(5) from being the primary
obligor under the liability, either judicially or by the
creditor. (5.)If nonrecourse debt (such as certain mortgage
loans) is assumed by a third party in conjunction with the
sale of an asset that serves as sole collateral for that debt,
the sale and related assumption effective