| Attention: |
Brad
Skinner, Accounting Branch Chief
|
| Re: |
Cardinal
Communications, Inc.
|
| 8. |
We
note that you entered into significant convertible debt arrangements
during your first quarter of fiscal 2006. Tell us how you considered
the
guidance in SFAS 133 and EITF 00-19 in determining how to classify
and
measure these instruments in your financial statements. Separately
address
the embedded conversion feature of your convertible notes and any other
derivatives that may be embedded within the debt instruments. Your
response should clearly set forth your analysis of all of the terms
of
each transaction and how your accounting and classification complies
with
SFAS 133 and EITF 00-19 and the views expressed in Issue Summary 1
of EITF
05-04. Refer also to Staff Guidance on this topic in Section II.B.
of the
Current
Accounting and Disclosure Issues in the Division of Corporation
Finance,
available on our website at
http://www.sec.gov/divisions/corpfin/acctdis120105.pdf.
|
| 1) |
We
determined that SFAS 133 was more appropriate to use for guidance than
SFAS 150 because the convertible feature of the debt made the loan
agreements derivative instruments.
|
| 2) |
We
determined the loan agreements would be better placed in the liability
section of our Balance Sheet than the Equity section of our balance
sheet
because the loan’s are primarily payable by cash and only at the option of
ISP V,LLC can some or all of the loan principal be converted to our
stock.
Please note we are paying the interest monthly on these loans with
cash.
|
| 3) |
The
Warrants - Since warrants are freestanding instruments, the warrants
were
determined to meet the definition of a derivative under SFAS 133
(paragraphs 6 -9), and are not excluded under the scope exception in
paragraph 11. Please note these Warrants have no value to the holder
unless they are exercisable in the open market. The Company is under
no
obligation to register the warrants until the company receives
notification that the holder will exercise the warrants.
|
| 4) |
We
valued the cost of the Warrants using the Black-Scholes pricing model.
We
calculate our volatility based on the previous 52 weeks of stock prices
using a standard deviation of our set of natural logs of our weekly
stock
price change and then apply the square root of time rule to come up
with
our annual volatility. This volatility calculation is dependent on
the
date of valuation and will change over time (hence Random Walk - from
your
college stats class). On January 6, 2006 our volatility was calculated
as
69% we then used 5% as our discount rate, and calculated the present
value
for the 5 year warrants as $0.007 per warrant which made the 2,400,000
warrants valued at $16,825. This is the amount we then discounted the
face
of our note by and will then amortize as additional, accreted interest
over the life of the note.
|
| 9. |
We
note your disclosures regarding the significant transactions entered
into
with GalaVu, Livonia Pty Limited, EMT and Alleasing. Please explain
to us,
in more detail than is provided in your disclosures, how you accounted
for
each aspect of these transactions citing the authoritative guidance
that
supports your accounting treatment. In addition, explain the relationship
among these entities and your relationship to each one prior to entering
into the transactions. Please note that any reference to authoritative
guidance should be accompanied by a detailed discussion of how that
guidance was applied in accounting for these transactions.
|
| 1. |
Technology
and Trademark License Agreement with GalaVu - This agreement allows
Cardinal Communications to purchase product (Television set top boxes)
as
we need it. Our investment in this hardware will be capitalized and
the
cost is depreciated over the useful life of the product. We did not
pay
anything as consideration for this agreement, so no additional costs
were
capitalized in relationship to this agreement. For guidance we used
SFAS 5
paragraph 67 section (a). Historical cost (historical proceeds).
Property,
plant, and equipment and most inventories are reported at their historical
cost, which is the amount of cash, or its equivalent, paid to acquire
an
asset, commonly adjusted after acquisition for amortization or other
allocations. Liabilities that involve obligations to provide goods
or
services to customers are generally reported at historical proceeds,
which
is the amount of cash, or its equivalent, received when the obligation
was
incurred and may be adjusted after acquisition for amortization or
other
allocations.
|
| 2. |
Purchase
and Exchange Agreement between the Company, GalaVu, EMT, Livonia and
Alleasing and;
|
| 3. |
Assignment
Deed with Alleasing - With these agreements we did two things: a) we
consolidated the debt that EMT had with both Livonia and Alleasing,
and b)
we gave a bridge loan for working capital to EMT’s subsidiary, GalaVu. The
Company has the consolidated debt and bridge loan recorded at Net
Realizable value pursuant to SFAS 5 paragraph 67 section d. Net realizable
(settlement) value. Short-term
receivables and some inventories are reported at their net realizable
value, which is the nondiscounted amount of cash, or its equivalent,
into
which an asset is expected to be converted in due course of business
less
direct costs, if any, necessary to make that conversion. Liabilities
that
involve known or estimated amounts of money payable at unknown future
dates, for example, trade payables or warranty obligations, generally
are
reported at their net settlement value, which is the nondiscounted
amounts
of cash, or its equivalent, expected to be paid to liquidate an obligation
in the due
course of business, including direct costs, if any, necessary to make
that
payment.
|
| 10. |
Please
amend this filing to provide the disclosures required by Items 307
and
308(c) of Regulation S-B. It appears that you have omitted all disclosures
required by these items in this
report.
|
|
Date: September
13, 2006
|
By: /s/
Edouard A. Garneau
|
|
Name: Edouard
A. Garneau
|
|
|
Title: Chief
Executive Officer
|
|
|
Date: September
13, 2006
|
By: /s/
Ronald S. Bass
|
|
Name: Ronald
S. Bass
|
|
|
Title: Principal
Accounting Officer
|
|