As filed with the Securities and Exchange Commission on December 30, 2004
Registration File No. 333-_____
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
STRATEGY INTERNATIONAL INSURANCE GROUP, INC.
(Exact name of small business issuer in its charter)
Texas 5500 16-1644353
(State or other jurisdiction of (primary standard (I.R.S. Employer
incorporation or organization) industrial code) Identification Number)
200 Yorkland Blvd., Suite 200
Toronto, Ontario M2J5C1, Canada
1-866-876-7368
(Address and telephone number of principal executive offices)
With a Copy to:
Stephen Stonhill, Chief Executive Officer Martin Eric Weisberg
200 Yorkland Blvd., Suite 200 Jenkens & Gilchrist Parker Chapin LLP
Toronto, Ontario M2J5C1, Canada 405 Lexington Avenue
1-866-876-7368 New York, New York 10174
(212) 704-6000
(Name, address, including zip code, and telephone number of agent for service)
Approximate date of commencement of proposed sale to the public: From time to
time after this registration becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration number of the earlier effective registration
statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If the delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------- -------------------- --------------------- -------------------- --------------------
Title of each Amount Proposed Maximum Proposed Maximum
Class of to be Offering Price per Aggregate Offering Amount of
Securities to be Registered Registered (1) Share Price Registration Fee
Common stock, $.001 par value 29,992,207 (2) $2.06 (3) $61,783,946.42 $7,828.03
per share
- -------------------------------- -------------------- --------------------- -------------------- --------------------
(1) In the event of a stock split, stock dividend or similar transaction
involving the Registrant's common stock, in order to prevent dilution, the
number of shares registered shall be automatically increased to cover the
additional shares in accordance with Rule 416(a) under the Securities Act of
1933.
(2) Constitutes shares of common stock issuable upon the exercise of warrants
issued in a private placement on November 16, 2004.
(3) The proposed maximum offering price per share has been estimated solely for
the purpose of calculating the registration fee pursuant to Rule 457(c) of the
Securities Act of 1933 and is based upon the average of the high and low
reported prices of the Registrant's common stock on December 28, 2004.
The Registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement becomes effective
on such date as the Commission, acting under Section 8(a), may determine.
Subject To Completion, dated December __, 2004
The information in this prospectus is not complete and may be changed.
The selling security holders may not sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any state where the offer or
sale is not permitted.
PROSPECTUS
29,992,207 Shares
STRATEGY INTERNATIONAL INSURANCE GROUP, INC.
Common Stock
This prospectus relates to the resale by the selling security holders
for their own account of up to an aggregate of 29,992,207 shares of our common
stock which are issuable upon the exercise of warrants issued in a private
placement on November 16, 2004.
Our common stock trades on the Over the Counter Bulletin Board(R) under
the symbol "SGYI." The last reported sale price of our common stock on December
27, 2004 was $2.10 per share.
The mailing address and the telephone number of our principal executive
offices are 200 Yorkland Blvd., Suite 200, Toronto, Ontario M2J5C1, Canada,
1-866-876-7368.
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Investing in our common stock involves a high degree of risk.
Please see the section of this prospectus entitled "Risk Factors" beginning on
page 4.
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We will not receive any proceeds from the sale of the shares by the
selling security holders.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is _________________.
You should rely only on the information contained in this document. We
have not authorized anyone to provide you with information that is different.
This document may only be used where it is legal to sell these securities.
TABLE OF CONTENTS
Page No.
Prospectus Summary...............................................................................................1
Risk Factors.....................................................................................................4
Special Note Regarding Forward Looking Statements...............................................................13
Use of Proceeds.................................................................................................13
Market for Common Equity and Related Stockholder Matters........................................................14
Dilution........................................................................................................14
Description of Business.........................................................................................15
Description of Property.........................................................................................24
Management's Discussion and Analysis of Financial Condition and Results of Operations...........................26
Selling Security Holders .......................................................................................33
Plan of Distribution............................................................................................35
Description of Securities.......................................................................................36
Directors, Executive Officers, Promoters and Control Persons....................................................40
Security Ownership of Certain Beneficial Owners and Management..................................................41
Executive Compensation..........................................................................................42
Certain Relationships and Related Transactions..................................................................43
Legal Proceedings...............................................................................................43
Disclosure of Commission Position on Indemnification For Securities Act Liabilities.............................43
Changes In and Disagreements with Accountants...................................................................44
Transfer Agent and Registrar....................................................................................44
Interest of Named Experts and Counsel...........................................................................44
Where You Can Find More Information.............................................................................44
PART I
PROSPECTUS SUMMARY
This summary highlights some information from this prospectus and does
not contain all of the information necessary to your investment decision. To
understand this offering fully, you should read carefully the entire prospectus,
especially the risks of investing in our common stock discussed under "Risk
Factors."
On November 16, 2004, our indirect wholly-owned subsidiary, Strategy
Real Estate Investments Ltd., a corporation formed under the laws of the
Province of Ontario, Canada, sold to a group of institutional and accredited
investors in a private placement exempt from registration under Section 4(2) of
the Securities Act of 1933, as amended, an aggregate amount of $50,000,000 of
units, each unit consisting of (a) one share of Series A Insured Redeemable
Preferred Stock of Strategy Real Estate Investments; (b) one share of Series B
Preferred Stock of Strategy Real Estate Investments; and (c) warrants to
purchase shares of our common stock, $.001 par value per share. The purchase
price was $10,000 per unit.
The warrants issued by us in the private placement are exercisable at
the option of the holder for a period of three years into shares of our common
stock. Each warrant permits its holder to exercise the warrant into a number of
shares of common stock equal to the quotient obtained by dividing (a) the
liquidation preference amount of the shares of Series A Preferred Stock of
Strategy Real Estate Investments owned by such holder plus any accrued but
unpaid dividends thereon by (b) $1.6671. The holders of the warrants are
required to surrender the certificates representing the shares of Series A
Preferred Stock of Strategy Real Estate Investments with the appropriate
liquidation preference upon the exercise of the warrants.
We are obligated to register for resale the shares of common stock
issuable upon exercise of the warrants pursuant to a registration rights
agreement, dated November 16, 2004, between the registrant and the purchasers
named therein, of which this registration statement relates.
Our Company
Strategy Holding Company Limited and its wholly-owned subsidiary,
Strategy Insurance Limited, were incorporated in Barbados on December 23, 2003
under the Exempt Insurance Act. Strategy Insurance Limited is the operating
insurance company of the group.
In early February 2004 Strategy Holding Company Limited received, as
consideration for the issuance of shares of its Series A Preferred Stock and
Series B Preferred Stock, mortgage notes receivable totaling $104,231,610. The
notes mature on April 1, 2014. The notes are collateralized by real estate
having an estimated fair market value equal to the carrying amount of the
mortgage notes.
On June 14, 2004, the closing was completed of that certain Agreement
and Plan of Reorganization ("Definitive Stock Exchange Agreement") with
Strategy, Frank Ney and Kavrav Ltd. Pursuant to the Definitive Stock Exchange
Agreement, Strategy Holding Company Limited became a wholly owned subsidiary of
CI Sell Cars, Inc. (sometimes referred to as "CI"), our predecessor company. On
October 29, 2004, CI changed its name to Strategy International Insurance Group,
Inc.
Through Strategy Insurance Limited (sometimes referred to as "SIL"), we
are a holding company for an integrated, international group of providers of
specialty lines of insurance, reinsurance and structured risk solutions,
focusing on credit enhancement, contingent liability and other specialty
insurance and reinsurance. We have developed and are implementing a strategy to
design, structure and sell a broad series of pass-through risk, specialty
insurance and reinsurance platform products. SIL is a wholly owned subsidiary of
Strategy Holding Company Limited, a Barbados company, and our wholly owned
direct subsidiary (sometimes referred to as "Strategy"). Strategy conducts its
insurance and reinsurance operations principally through its subsidiaries
incorporated in Barbados, West Indies. It has offices in Barbados, West Indies;
London, England; and Toronto, Canada.
SIL received an Exempt Insurance License from the Ministry of Finance,
Barbados, West Indies, on March 25, 2004, which authorizes SIL to engage in the
following classes of insurance business from within Barbados:
- General insurance business.
- Credit and liability insurance.
- Mortgage indemnity insurance.
- Rental guarantee insurance.
- Reinsurance.
On December 17, 2004, we announced that we intend to acquire all the
outstanding common stock of RS Group of Companies, Inc. (OTCBB:RSGC) for a
combination of cash and stock, which would result in a value to RS Group common
stock holders of $1.75 per common share (approximately 65 million shares
outstanding), representing a 237 percent premium over the closing price of $0.52
on December 15, 2004. Our management, together with RS Group, is in the process
of determining the most effective method of achieving this acquisition. We do
not anticipate that the transaction will be conditioned upon obtaining any
external financing.
See "Description of Business" for more information.
The Offering
Common stock offered by selling security holders: Up to 29,992,207 shares of common stock may be offered
under this prospectus which shares are issuable upon the
exercise of warrants issued in a private placement on
November 16, 2004.
Common Stock to be outstanding after this offering: 93,139,710
Use of Proceeds All proceeds of this offering will be received by the
selling security holders for their own account. No proceeds
will be received by us in connection with the exercise of
the warrants whose underlying shares may in turn be sold by
the selling security holders.
Risk Factors You should read the "Risk Factors" section beginning on page
4, as well as other cautionary statements throughout this
prospectus, before investing in shares of our common stock.
OTC Bulletin Board(R) symbol SGYI.OB
2
Summary Consolidated Financial Data
The following table presents certain selected historical consolidated
financial data. The historical consolidated financial information for the period
from January 1, 2004 (inception) through February 15, 2004 and as of February
15, 2004 has been derived from our consolidated financial statements, which have
been audited by Samuel Klein and Company, independent accountants. You should
read carefully the consolidated financial statements included in this
prospectus, including the notes to the consolidated financial statements and the
section of this prospectus entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
January 1, 2004
Three months ended Six months ended October (inception) through
October 31, 2004 31, 2004 February 15, 2004
Unaudited Unaudited Audited
Statement of Operations Data
Gross written premium $753,992 $753,992 --
Net earned premium 311,660 311,660 --
Net loss (2,403,975) (4,594,491) (25,000)
Net loss per share - basic and diluted (0.04) (0.08) --
October 31, 2004 April 30, 2004 February 15, 2004
Unaudited Unaudited Audited
Balance Sheet Data
Total assets $106,673,884 $104,793,985 $104,581,610
Total current liabilities 9,947,769 3,488,609 1,327,895
Stockholders equity 96,726,115 101,305,376 103,253,715
Risk Factors
Our ability to attain our objectives depends upon our success in
addressing the risks relating to our business, and our industry discussed in
"Risk Factors" and elsewhere in this prospectus, including the following:
- - our future performance is difficult to predict because we have a
limited operating history;
- - we have not been operating long enough to build a balanced and
diversified portfolio;
- - our profitability depends on our ability to accurately predict claims
liabilities when pricing our products, making acquisitions and
establishing our liabilities for future policy benefits and claims;
- - insurance companies are frequently the targets of litigation, including
class action litigation, which could result in substantial judgments;
- - our common stock has had low trading volume and its price may continue
to be subject to significant fluctuations; and
- - because our shares are deemed "penny stocks," you may have difficulty
selling our shares in the secondary trading market.
3
RISK FACTORS
An investment in our common stock involves a high degree of risk. In
addition to the other information in this prospectus, you should carefully
consider the following risk factors before deciding to invest in shares of our
common stock. If any of the following risks actually occurs, it is likely that
our business, financial condition and operating results would be harmed. As a
result, the trading price of our common stock could decline, and you could lose
part or all of your investment.
RISKS RELATED TO OUR BUSINESS
OUR FUTURE PERFORMANCE IS DIFFICULT TO PREDICT BECAUSE WE HAVE A LIMITED
OPERATING HISTORY.
We are a recent "start-up" that merged, effective June 14, 2004, into
CI Sell Cars, Inc., an existing public shell company, and our subsidiaries are
in the development stage. We have limited historical, financial and operating
information available to help you evaluate our performance or an investment in
our common stock. Companies in their initial stage of development present
substantial business and financial risks and may suffer significant losses. They
must successfully develop business relationships, establish operating
procedures, hire staff, install management information and other systems and
complete other tasks necessary to conduct their intended business activities. We
cannot assure you that we will be successful in accomplishing these necessary
tasks and there is no assurance that we will enjoy long-term success.
WE HAVE NOT BEEN OPERATING LONG ENOUGH TO BUILD A BALANCED AND DIVERSIFIED
PORTFOLIO OR EXPOSURES.
We began quoting on possible business after March 25, 2004 and our
current portfolio of business is not as balanced or diverse as it might be if we
had a longer operating history. This could render our results of operations
relatively more exposed to the risks in the business that we have written.
OUR OPERATING RESULTS MAY BE ADVERSELY AFFECTED BY CURRENCY FLUCTUATIONS.
Our functional currency is the U.S. dollar. We expect that a large
portion of our premiums will be written in currencies other than the U.S.
dollar. A portion of our loss reserves are also in non-U.S. currencies. We may,
from time to time, experience losses resulting from fluctuations in the values
of these non-U.S. currencies, which could adversely affect our operating
results.
WE MAY REQUIRE ADDITIONAL CAPITAL IN THE FUTURE.
Our future capital requirements depend on many factors, including our
ability to write new business successfully and to establish premium rates and
reserves at levels sufficient to cover losses. To the extent that our initial
funding is insufficient to fund future operating requirements and cover claim
losses, we may need to raise additional funds through financings or curtail our
growth and reduce our assets. Any equity or debt financing, if available at all,
may be on terms that are not favorable to us. In the case of equity financings,
dilution to our shareholders could result, and in any case such securities may
have rights, preferences and privileges that are senior to those of our common
stock. If we cannot obtain adequate capital, our business, operating results and
financial condition could be adversely affected.
4
WE ARE AN INSURANCE HOLDING COMPANY AND, THEREFORE, MAY NOT BE ABLE TO RECEIVE
DIVIDENDS FROM OUR SUBSIDIARIES IN AMOUNTS NEEDED TO MEET OUR OBLIGATIONS.
Our principal assets are the shares of capital stock of our
subsidiaries. We rely on funds and dividends from our subsidiaries to meet our
obligations and pay corporate expenses. The payment of dividends by our
non-regulated subsidiaries is not restricted by state insurance regulatory
restrictions but the payment of dividends by our insurance subsidiaries is
subject to regulatory restrictions and will depend on the surplus and future
earnings of these subsidiaries, as well as these regulatory restrictions. As a
result, we may be unable to receive dividends from these insurance subsidiaries
at times and in amounts necessary to meet our obligations. The future
performance of our non-regulated subsidiaries, which are subject to economic,
financial, competitive and other factors beyond their control is the sole source
of funds to meet our obligations. If our non-regulated subsidiaries do not
generate sufficient fee income to service all of our obligations, there may be a
material adverse effect on our business, financial condition and results of
operations, and a significant adverse effect on the market value of our common
stock.
OUR PROFITABILITY DEPENDS ON OUR ABILITY TO ACCURATELY PREDICT CLAIMS
LIABILITIES WHEN PRICING OUR PRODUCTS, MAKING ACQUISITIONS AND ESTABLISHING OUR
LIABILITIES FOR FUTURE POLICY BENEFITS AND CLAIMS.
If actual claims experience is less favorable than our underlying
assumptions used in setting the prices for our products and establishing our
liabilities, the required change in our claims reserves could have a material
adverse effect on our business, financial condition and results of operations.
Reserves are only actuarial estimates and it is possible that our claims
experience may be worse than anticipated.
With acquired and existing businesses, we may, from time to time, need
to increase our loss projections for claims reserves significantly in excess of
our original estimates. In addition, we review on a regular basis the loss
ratios of our business segments and record a premium deficiency reserve, if
necessary. Any increase in claims reserves could have a material adverse effect
on our business, financial condition and results of operations.
In addition, in connection with the sale of our insurance policies, we
defer and amortize a portion of the policy acquisition costs over the related
premium paying periods of the life of the policy. Deferred acquisition costs are
affected by unanticipated termination of policies because, upon such
termination, we expense fully the unamortized deferred acquisition costs
associated with the terminated policies. In addition, when we determine that a
specific block of our business is unprofitable and therefore the deferred
acquisition costs are not recoverable, we expense fully the unamortized deferred
acquisition costs associated with that business. Therefore, the unanticipated
termination of a significant number of policies or the determination that
deferred acquisition costs are unrecoverable could have a material adverse
effect on our financial condition and results of operations.
CHANGES IN GOVERNMENT REGULATION MAY AFFECT OUR PROFITABILITY AND INCREASE OUR
COSTS TO MAINTAIN COMPLIANCE.
Strategy Insurance Limited is subject to the Barbados Exempt Insurance
Act. Compliance with currently applicable and future laws and regulations could
increase our operating costs. This supervision and regulation is largely for the
benefit and protection of policyholders and not stockholders. Supervision and
regulation by the applicable Barbados authorities extends, among other things,
to:
- - the declaration and payment of dividends;
- - the granting and revocation of licenses to conduct business;
- - the approval of forms;
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- - the establishment of reserve requirements; and
- - the form and content of financial statements required by statute.
A failure to comply with legal or regulatory restrictions may subject
us to a loss or suspension of a right to engage in certain businesses or
business practices, criminal or civil fines, an obligation to make restitution
or pay refunds or other sanctions, which could have a material adverse effect on
our business, financial condition or results of operations.
We might be subject to additional government regulation if and to the
extent we operate in other jurisdictions.
Additional regulatory initiatives may be undertaken in the future to
engage in structural reform of the insurance industry in order to reduce the
escalation of insurance costs or to make insurance more accessible. These future
regulatory initiatives could have a material adverse effect on our business,
financial condition and results of operations.
RECENT EVENTS MAY RESULT IN POLITICAL, REGULATORY AND INDUSTRY INITIATIVE WHICH
COULD ADVERSELY AFFECT OUR BUSINESS.
Changes in the marketplace, including the tightening in supply of
certain coverages arising out of the September 11th terrorist attacks, may
result in government intervention in the insurance and reinsurance markets, both
in the United States and worldwide. Recently, the insurance and reinsurance
regulatory framework has been subject to increased scrutiny by the United States
federal government and individual state governments. There is uncertainty in the
insurance and reinsurance markets about the extent to which future coverages
will extend to terrorist acts as well as the definition of terrorist acts. The
effect of potential governmental intervention in the markets we serve, including
the extent to which coverage for terrorist acts is offered in the future, is
uncertain. Government regulators are generally concerned with the protection of
policyholders to the exclusion of other constituencies, including shareholders.
While we cannot predict the exact nature, timing or scope of possible
governmental initiatives, such proposals could adversely affect our business by:
- providing insurance and reinsurance capacity in markets and to
consumers that we target;
- requiring our participation in industry pools and guaranty
associations;
- regulating the terms of insurance and reinsurance policies; or
- disproportionately benefiting the companies of one country
over those of another.
The insurance industry is also affected by political, judicial and
legal developments that may create new and expanded theories of liability. Such
changes may result in delays or cancellations of products and services by
insurers and reinsurers which could adversely affect our business.
CONSOLIDATION IN THE INSURANCE INDUSTRY COULD LEAD TO LOWER MARGINS FOR US AND
REDUCED DEMAND FOR OUR REINSURANCE.
The insurance industry is undergoing a process of consolidation as
industry participants seek to enhance their product and geographic reach, client
base, operating efficiency and general market power through merger and
acquisition activities. These larger entities may seek to use the benefits of
consolidation to, among other things, implement rate reductions for their
reinsurance. These rate reductions could make it more difficult for us to
underwrite risks at profitable levels.
As the insurance industry consolidates, competition for customers may
become more intense and the importance of acquiring and properly servicing each
customer will grow. We could incur greater
6
expenses relating to customer acquisition and retention, which could reduce our
operating margins. In addition, insurance companies that merge may be able to
enhance their negotiating position when buying reinsurance and may be able to
spread their risks across a consolidated, larger capital base so that they
require less reinsurance.
WE ARE A NEW COMPANY AND MAY ENCOUNTER DIFFICULTIES ESTABLISHING THE INFORMATION
TECHNOLOGY SYSTEMS NECESSARY TO RUN OUR BUSINESS.
The performance of our information technology systems is critical to
our business and reputation and our ability to process transactions and provide
high quality customer service. Such technology is and will continue to be a very
important part of our underwriting process. We cannot be certain that we will be
able to develop proprietary technology, or that our proprietary technology, once
established, will operate as intended. Any defect or error in our information
technology systems could result in a loss or delay of revenues, higher than
expected loss levels, diversion of management resources, harm to our reputation
or an increase in costs.
WE MAY BE ADVERSELY AFFECTED BY INTEREST RATE CHANGES.
Our operating results depend, in part, on the performance of our
investment portfolio. Our investment portfolio will contain interest sensitive
instruments, such as bonds, which may be adversely affected by changes in
interest rates. Changes in interest rates could also have an adverse effect on
our investment income and results of operations. Interest rates are highly
sensitive to many factors, including governmental monetary policies, domestic
and international economic and political conditions and other factors beyond our
control. Any measures we take that are intended to manage the risks of operating
in a changing interest rate environment may not effectively mitigate such
interest rate sensitivity.
WE AND OUR SUBSIDIARIES MAY BE SUBJECT TO U.S. TAX.
Certain of our subsidiaries are organized under the laws of Barbados,
West Indies, and we believe they operate in a manner such that we are not
subject to U.S. taxation on our income (other than excise taxes on insurance and
reinsurance premium income attributable to insuring or reinsuring U.S. risks and
U.S. withholding taxes on certain U.S. source investment income). However,
because there is considerable uncertainty as to the activities which constitute
being engaged in a trade or business within the United States, there can be no
assurances that the U.S. Internal Revenue Service will not contend successfully
that we are engaged in a trade or business in the United States. If we were
considered to be engaged in a business in the United States, we could be subject
to U.S. corporate income tax on the portion of our earnings effectively
connected to such U.S. business.
OUR SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP NEW PRODUCTS THAT RESPOND TO
CHANGES IN THE INSURANCE INDUSTRY.
Our success depends, in part, on our ability to develop and provide new
products that meet consumers' changing insurance needs and changes in government
requirements. Our future success will depend, in part, on our ability to
effectively enhance our current and to develop new products in the constantly
changing insurance environment on a timely and cost-effective basis. In
addition, our products may require approval by the various states in which those
products are offered. We could be adversely affected if we are unable to obtain
approval for the products that we plan to offer.
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FAILURE BY OUR REINSURERS TO TIMELY AND FULLY MEET THEIR OBLIGATIONS UNDER OUR
REINSURANCE AGREEMENTS COULD HAVE AN ADVERSE EFFECT ON OUR PROFITABILITY AND
FINANCIAL CONDITION.
We will be able to write insurance risks beyond the level that the
capital and surplus of our insurance subsidiaries would support by transferring
substantial portions of these risks to other, larger insurers through
reinsurance contracts. We reinsure portions of the insurance policies we write
and portions of policies we reinsure from other companies. Reinsurance does not
discharge us from our primary liability to our insureds. Our growth may be
dependent on our ability to obtain reinsurance in the future. We may be unable
to obtain reinsurance in the future, if necessary, at competitive rates or at
all.
Failure by reinsurers to continue to pay in full and in a timely manner
the claims made against them in accordance with the terms of our reinsurance
agreements could expose our insurance subsidiaries to liabilities in excess of
their reserves and surplus and could subject each of them to insolvency
proceedings.
OUR INSURANCE SUBSIDIARIES ARE SUBJECT TO RISK-BASED OR STATUTORY CAPITAL
REQUIREMENTS. OUR FAILURE TO MEET THESE STANDARDS COULD SUBJECT US TO REGULATORY
ACTIONS.
Our insurance subsidiaries are subject to risk-based capital standards
imposed by their states of domicile. These laws require our regulated
subsidiaries to report their results of risk-based capital calculations to the
various departments of insurance. Failure to meet minimum risk-based capital
requirements or statutory capital requirements could subject our insurance
subsidiaries to further examination or corrective action, including state
supervision or liquidation, which could have a material adverse effect on our
business, financial condition and results of operations.
INSURANCE COMPANIES ARE FREQUENTLY THE TARGETS OF LITIGATION, INCLUDING CLASS
ACTION LITIGATION, WHICH COULD RESULT IN SUBSTANTIAL JUDGMENTS.
We may become a party to a variety of legal actions that affect our
business. A number of civil jury verdicts have been returned against insurers in
the jurisdictions in which we do business involving the insurers' sales
practices, alleged agent misconduct, discrimination and other matters.
Increasingly these lawsuits have resulted in the award of substantial judgments
against the insurer that are disproportionate to the actual damages, including
material amounts of punitive damages. In some states, juries have substantial
discretion in awarding punitive and non-economic compensatory damages which
creates the potential for unpredictable material adverse judgments in any given
lawsuit. In addition, in some class actions and other lawsuits involving
insurers' sales practices, insurers have made material settlement payments. We,
in the ordinary course of business, will be involved in such litigation or
alternatively, in arbitration. We cannot predict the outcome of any such
litigation or arbitration.
OUR PERFORMANCE WILL BE SUBSTANTIALLY DEPENDENT ON OBTAINING KEY SENIOR
MANAGEMENT PERSONNEL AND ON THE CONTINUED SERVICES AND PERFORMANCE OF THESE
PERSONNEL.
We are in process of adding key personnel. Our performance depends on
our ability to obtain, retain and motivate our officers and key employees. The
loss of the services of any of our executive officers or other key employees
could have a material adverse effect on our business, financial condition and
results of operations. We do not maintain "key person" life insurance policies
on any key personnel.
Our future success also will depend on our ability to identify,
attract, hire, train, retain and motivate other highly skilled technical,
managerial, marketing and customer service personnel. Competition for these
employees is intense and we may not be able to successfully attract, integrate
or retain sufficiently qualified personnel. Our future success also depends on
our ability to attract, retain and
8
motivate our brokers. Our failure to attract and retain the necessary personnel
and brokers could have a material adverse effect on our business, financial
condition and results of operations.
A GROUP OF OUR EXISTING STOCKHOLDERS HAS THE ABILITY TO APPROVE ALL MATTERS
REQUIRING THE VOTE OF OUR STOCKHOLDERS INCLUDING THE ELECTION OF OUR BOARD OF
DIRECTORS.
A group of our stockholders owns approximately 73.4% of our outstanding
common stock. These stockholders, acting together, will be able to elect all of
our directors and to determine the outcome of all corporate actions requiring
stockholder approval, including approving or preventing a change of control of
the company, a business combination involving the company, the incurrence of
indebtedness, the issuance of equity securities and the payment of dividends on
our common stock.
WE MAY HAVE DIFFICULTY MANAGING OUR EXPANDING OPERATIONS.
Our ability to manage any future growth depends on our ability to
continue to implement and improve our operational, financial and management
information systems on a timely basis and to expand, train, motivate and manage
our work force and, when appropriate, to cost-effectively outsource certain
administrative and claims functions. Our ability to compete effectively will
depend, in part, upon our ability to overcome these growth-related risks and to
revise, improve and effectively use our operational, management, marketing and
technical systems. Any failure by us to effectively manage our growth and to
respond to changes in our business could have a material adverse effect on our
business, financial condition and results of operations.
WE COULD BE FORCED TO SELL INVESTMENTS TO MEET OUR LIQUIDITY REQUIREMENTS.
We make both long-term and short-term investments to achieve the best
investment returns consistent with the preservation of capital and the
maintenance of liquidity adequate to meet payment of policy claims. We believe
that we maintain adequate amounts of cash and short-term investments to fund
expected claims, and do not expect to have to sell invested capital prematurely
for such purposes. We may, however, decide to sell securities as a result of
changes in interest rates, credit quality, the rate of repayment or other
similar factors. A significant increase in market interest rates could result in
a situation in which we are required to sell securities at depressed prices to
fund payments to our insureds.
OUR INVESTMENT PORTFOLIO INVOLVES RISKS THAT ARE COMMON WITH FIXED MATURITY
SECURITIES.
Our investment portfolio primarily consists of fixed maturity
securities, such as investment grade publicly-traded debt securities and
mortgage and asset backed securities, including collateralized mortgage
obligations, which are known as CMOs. There are risks inherent in connection
with the ownership of bonds, including loss upon default and price volatility in
reaction to changes in interest rates and general market factors. Additional
risks are also inherent with CMOs, including the risks associated with
reinvestment of proceeds due to prepayments of these obligations.
IF WE INCREASE OUR LOSS RESERVES, OUR INCOME WILL DECREASE IN THE PERIOD IN
WHICH THE ADJUSTMENT OCCURS.
We maintain accounting reserves to cover amounts we estimate we will
need to pay policyholders for insured losses and for the expenses we expect to
incur to settle policyholder claims. Determining the appropriate level of these
reserves is an inherently uncertain process and we cannot assure you that our
actual losses will not exceed our reserves. If our reserves are too low and we
have to increase them, the adjustment will reduce income during the period in
which the adjustment is made and may cause the market price of our shares of
common stock to fall.
9
IF WE ARE UNABLE TO OBTAIN ADEQUATE REINSURANCE COVERAGE AT REASONABLE RATES IN
THE FUTURE, IT WILL BE DIFFICULT FOR US TO MANAGE OUR UNDERWRITING RISKS AND
OPERATE OUR BUSINESS PROFITABLY.
Reinsurance is the practice of transferring part of the liability and
the premium under an insurance policy to another insurance company. Like other
insurance companies, we use reinsurance arrangements to limit and manage the
amount of risk we retain, to stabilize our underwriting results and to increase
our underwriting capacity. We consider reinsurance to be important to our
success. The availability and cost of reinsurance are subject to prevailing
market conditions and may vary significantly over time. Reinsurance may not be
available to us in the future at commercially reasonable rates. If it is not
available at reasonable rates, it will be difficult for us to manage our
underwriting risks and operate our business profitably.
RISKS RELATED TO THIS OFFERING
WE MAY EXPERIENCE VOLATILITY IN OUR STOCK PRICE WHICH COULD NEGATIVELY AFFECT
YOUR INVESTMENT AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT OR ABOVE THE
PURCHASE PRICE FOR SUCH SHARES.
If you purchase shares of common stock, you may not be able to resell
those shares at or above the price you purchased them for. The market price of
our common stock may fluctuate significantly in response to a number of factors,
some of which are beyond our control, including:
- quarterly variations in operating results;
- changes in financial estimates by securities analysts;
- changes in market valuations of other similar companies;
- announcements by us or our competitors of new products or of
significant technical innovations, contracts, acquisitions,
strategic partnerships or joint ventures;
- additions or departures of key personnel;
- any deviations in net sales or in losses from levels expected
by securities analysts; and
- future sales of common stock.
In addition, the stock market has recently experienced extreme
volatility that has often been unrelated to the performance of particular
companies. These market fluctuations may cause our stock price to fall
regardless of our performance.
OUR COMMON STOCK HAS HAD LOW TRADING VOLUME AND ITS PRICE MAY CONTINUE TO BE
SUBJECT TO SIGNIFICANT FLUCTUATIONS.
The market price of our common stock could be subject to significant
fluctuations due to a limited trading volume, variations in our quarterly
financial results and other factors, such as changes in earnings estimates by
analysts or our ability to meet these estimates, conditions in the overall
economy and the financial markets and other developments affecting us and our
competitors.
SHARES ELIGIBLE FOR SALE IN THE FUTURE COULD AFFECT THE MARKET PRICES FOR OUR
COMMON STOCK.
No prediction can be made as to the effect, if any, future sales of
shares, or the availability of shares for future sales, will have on the market
price of our common stock prevailing from time to time.
BECAUSE OUR SECURITIES TRADE ON THE OVER THE COUNTER BULLETIN BOARD, YOUR
ABILITY TO SELL YOUR SHARES IN THE SECONDARY MARKET MAY BE LIMITED.
10
Our common stock is traded on the Over the Counter Bulletin Board
market under the symbol SGYI. The average daily trading volume from January 8,
2004 through September 28, 2004 is approximately 16,134 shares. Over that same
period, the daily closing price per share has been as low as $.02 and as high as
$2.50. Since these quotations reflect dealer-to-dealer prices, without retail
mark-ups, mark-downs or commissions they may not represent actual transactions.
Accordingly, the common stock is thinly traded in comparison to companies with
greater market capitalization. We have experienced more volatility than most
higher priced stocks. As a result, large sell trades, negative news and general
economic pressures on the stock market can have an impact on the price of the
common stock that is more pronounced than securities of other issuers with
larger listed stock volume or higher prices per share. If our stockholders seek
to sell their shares in a thinly traded stock, it may be difficult to obtain the
price desired. Further, our common stock has a limited float. When a large
percentage of the outstanding stock of a company is held by management and
insiders, the float is limited and the stock is much less liquid.
Moreover, because our securities currently trade on the Over the
Counter Bulletin Board, they are subject to the rules promulgated under the
Securities Exchange Act of 1934, as amended, which impose additional sales
practice requirements on broker-dealers that sell securities governed by these
rules to persons other than established customers and "accredited investors"
(generally, individuals with a net worth in excess of $1,000,000 or annual
individual income exceeding $200,000 or $300,000 jointly with their spouses).
For such transactions, the broker-dealer must determine whether persons that are
not established customers or accredited investors qualify under the rule for
purchasing such securities and must receive that person's written consent to the
transaction prior to sale. Consequently, these rules may adversely affect the
ability of purchasers to sell our securities and otherwise affect the trading
market in our securities.
BECAUSE OUR SHARES ARE DEEMED "PENNY STOCKS," YOU MAY HAVE DIFFICULTY SELLING
OUR SHARES IN THE SECONDARY TRADING MARKET.
The Securities and Exchange Commission has adopted regulations which
generally define a "penny stock" to be any equity security that has a market
price (as therein defined) less than $5.00 per share or with an exercise price
of less than $5.00 per share, subject to certain exceptions. Additionally, if
the equity security is not registered or authorized on a national securities
exchange or Nasdaq, the equity security also would constitute a "penny stock."
As our common stock falls within the definition of penny stock, these
regulations require the delivery, prior to any transaction involving our common
stock, of a risk disclosure schedule explaining the penny stock market and the
risks associated with it. Disclosure is also required to be made about
compensation payable to both the broker-dealer and the registered representative
and current quotations for the securities. In addition, monthly statements are
required to be sent disclosing recent price information for the penny stocks.
The ability of broker/dealers to sell our common stock and the ability of
shareholders to sell our common stock in the secondary market would be limited.
As a result, the market liquidity for our common stock would be severely and
adversely affected. We can provide no assurance that trading in our common stock
will not be subject to these or other regulations in the future, which would
negatively affect the market for our common stock.
WE HAVE ADDITIONAL SECURITIES AVAILABLE FOR ISSUANCE, INCLUDING PREFERRED STOCK,
WHICH IF ISSUED COULD ADVERSELY AFFECT THE RIGHTS OF THE HOLDERS OF OUR COMMON
STOCK.
Our articles of incorporation authorize the issuance of 100,000,000
shares of common stock and 10,000,000 shares of preferred stock. See
"Description of Securities" on page 37. The common stock and the preferred stock
can be issued by, and the terms of the preferred stock, including dividend
rights, voting rights, liquidation preference and conversion rights can
generally be determined by, our board of directors without shareholder approval.
Any issuance of preferred stock could adversely affect the rights of the holders
of common stock by, among other things, establishing preferential dividends,
liquidation
11
rights or voting powers. Accordingly, shareholders, including those purchasing
the securities offered hereby, will be dependent upon the judgment of our
management in connection with the future issuance and sale of shares of our
common stock and preferred stock, in the event that buyers can be found
herefore. Any future issuances of common stock or preferred stock would further
dilute the percentage ownership of our company held by the public shareholders.
Furthermore, the issuance of preferred stock could be used to discourage or
prevent efforts to acquire control of our company through acquisition of shares
of common stock.
12
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, which generally
include the plans and objectives of management for future operations, including
plans and objectives relating to our future economic performance and our current
beliefs regarding revenues we might earn if we are successful in implementing
our business strategies. The forward-looking statements and associated risks may
include, relate to or be qualified by other important factors. You can identify
forward-looking statements generally by the use of forward-looking terminology
such as "believes," "expects," "may," "will," "intends," "plans," "should,"
"could," "seeks," "pro forma," "anticipates," "estimates," "continues," or other
variations of those terms, including their use in the negative, or by
discussions of strategies, opportunities, plans or intentions. You may find
these forward-looking statements under the captions "Risk Factors," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and "Description of Business," as well as captions
elsewhere in this prospectus. A number of factors could cause results to differ
materially from those anticipated by forward-looking statements, including those
discussed under "Risk Factors" and "Description of Business."
These forward-looking statements necessarily depend upon assumptions
and estimates that may prove to be incorrect. Although we believe that the
assumptions and estimates reflected in the forward-looking statements are
reasonable, we cannot guarantee that we will achieve our plans, intentions or
expectations. The forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to differ in
significant ways from any future results expressed or implied by the
forward-looking statements.
Any of the factors described above or in the "Risk Factors" section
above could cause our financial results, including our net income (loss) or
growth in net income (loss) to differ materially from prior results, which in
turn could, among other things, cause the price of our common stock to fluctuate
substantially.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares of
common stock offered under this prospectus issuable upon the exercise of the
warrants issued to the selling security holders. Rather, the selling security
holders will receive those proceeds directly.
13
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The shares of our common stock have been listed and principally quoted
on the Nasdaq Over the Counter Bulletin Board under the trading symbol "SGYI"
since October 29, 2004 and prior thereto, from January 8, 2004, under the
trading symbol "CISL". The following table sets forth the high and low prices
for our common stock as reported on the Nasdaq Over the Counter Bulletin Board.
These prices reflect inter-dealer prices, without retail markup, markdown or
commissions, and may not necessarily represent actual transactions.
Year Ended Year Ended Year Ended
December 31, 2004 December 31, 2003 December 31, 2002
------------------------- ----------------------------- ------------------------------
High Low High Low High Low
Ask Bid Ask Bid Ask Bid
------------ ------------ --------------- ------------- -------------- ---------------
First Quarter $0.06 $0.01 -- -- -- --
Second Quarter 5.50 0.04 -- -- -- --
Third Quarter 2.60 1.20 -- -- -- --
Fourth Quarter 2.39 0.90 -- -- -- --
On December 28, 2004, the closing price for our common stock, as
reported by the Nasdaq Over the Counter Bulletin Board, was $2.39 per share and
there were approximately 31 shareholders of record.
Dividend Policy
We have not paid any cash dividends since our inception and do not
anticipate paying any cash dividends on our common stock in the foreseeable
future. We expect to retain our earnings, if any, to provide funds for the
expansion of our business. Future dividend policy will be determined
periodically by the Board of Directors based upon conditions then existing,
including our earnings and financial condition, capital requirements and other
relevant factors.
Equity Compensation Plans
We currently do not have any equity compensation plan or any securities
authorized for issuance under individual compensation arrangements.
DILUTION
Sales of the shares of common stock by the selling security holders in
this offering will not result in any substantial change to the net tangible book
value per share before and after the distribution of shares by the selling
security holders. There will be no change in the net tangible book value per
share attributable to cash payments made by purchasers of the shares being
offered by the selling security holders. Prospective investors in the shares
held by the selling security holders should be aware, however, that the price of
shares being offered by the selling security holders may not bear any rational
relationship to our net tangible book value per share.
14
DESCRIPTION OF BUSINESS
History - CI Sell Cars, Inc.
CI Sell Cars, Inc. or "CI" was incorporated on December 13, 2002, in
the state of Texas, to become a car dealer and to obtain a license to sell cars
in the state of Texas. Its operations actually commenced in September 2002 when
it was operated as a sole proprietorship doing business as CI Sell Cars. From
the time it commenced operations in September 2002 until early 2003, Curtis
Hunsinger, CI's sole officer and director, at that time, applied for a used car
dealer license, researched the used car market and sold cars but not at the
wholesale or dealer level. In February 2003, Mr. Hunsinger was successful in
obtaining a Texas used car dealer license. This license was issued to CI by the
Texas Department of Transportation, Motor Vehicle Division, and permitted CI to
sell used cars in the State of Texas. In addition, CI conducted research to
determine if there were any web sites that offered to sell used cars, and,
whether there were any public companies that sold used cars on the Internet.
Effective June 14, 2004, CI discontinued its used car operations in
order to pursue the Strategy Holding Company Limited business plan.
History - Strategy
Strategy Holding Company Limited and its wholly-owned subsidiary,
Strategy Insurance Limited, were incorporated in Barbados on December 23, 2003
under the Exempt Insurance Act. Strategy Insurance Limited is the operating
insurance company of the group.
Strategy Insurance (Canada) Ltd., a company formed under the laws of
the Province of Ontario, Canada, was incorporated on January 23, 2004. Strategy
Underwriting Agency Limited, a company formed under the laws of England, was
incorporated on June 22, 2004. These 2 companies are wholly-owned subsidiaries
of Strategy Insurance Limited. Their purpose is to perform local administrative
and marketing services on behalf of Strategy Insurance Limited.
Strategy Insurance Limited received permission from the Barbados
Ministry of Finance to begin operations on March 25, 2004. Until March 25, 2004,
the company was prohibited by statute from carrying on its insurance business
and engaged in organizational and administrative set-up activities. Strategy
Insurance Limited began operating as an insurance company after March 25, 2004.
In early February 2004 Strategy Holding Company Limited received, as
consideration for the issuance of shares of its Series A Preferred Stock and
Series B Preferred Stock, mortgage notes receivable totaling $104,231,610. The
notes mature on April 1, 2014. The notes are collateralized by real estate
having an estimated fair market value equal to the carrying amount of the
mortgage notes.
Acquisition of Strategy Holding Company Limited
On June 14, 2004, the closing was completed of an Agreement and Plan of
Reorganization ("Definitive Stock Exchange Agreement") with Strategy Holding
Company Limited (sometimes referred to as "Strategy"), whereby Strategy became a
wholly owned subsidiary of CI.
Strategy, through its wholly-owned subsidiary, Strategy Insurance
Limited (sometimes referred to as "SIL"), is a provider of specialty lines of
insurance, reinsurance and risk and credit enhancement. Strategy conducts its
insurance and reinsurance operations through its subsidiary, SIL, which is
incorporated in Barbados, West Indies. It has offices in Barbados, West Indies;
London, England; and Toronto, Canada.
15
The Definitive Stock Exchange Agreement provided for the purchase and
retirement of 25,827,000 shares of our common stock by Strategy; the forward
split of the remaining 1,105,000 common shares into 15,470,000 shares; the
issuance of 45,100,000 shares of our common stock to acquire Strategy; and the
issuance of 900,000 shares of our common stock as a finders fee. After
completion of the above transactions, the Company had 61,470,000 shares of its
common stock outstanding. As a result of these transactions, a change in control
has occurred and Frank Ney received 26,691,840 shares of common stock (43.42% of
the total outstanding) and Kavrav Ltd. received 18,408,160 shares of common
stock (29.95% of the total outstanding).
SIL received an Exempt Insurance License from the Ministry of Finance,
Barbados, West Indies, on March 25, 2004, which authorizes SIL to engage in the
following classes of insurance business from within Barbados:
- General insurance business.
- Credit and liability insurance.
- Mortgage indemnity insurance.
- Rental guarantee insurance.
- Reinsurance.
The acquisition of Strategy by CI was approved by The Ministry of
Finance, Barbados, on October 25, 2004.
Description of Business
Strategy, through its wholly owned subsidiary, SIL, is organized as a
multi-line insurer with a focus on credit and liability insurance in the fixed
income and construction industries, predominately in North America. It also
offers insurance related risk management solutions to users and providers of
capital.
Strategy is headquartered and licensed in Barbados and commenced
operations on March 25, 2004. Strategy will also operate risk management and
broker support offices in London, Toronto, and Tampa, Florida. Premium income is
expected to be derived from the following sources:
- Underwriting and support of RS Group of Companies Inc. and its
affiliates.
- Mortgage indemnity insurance.
- Condominium pre-sale sureties.
- Senior Life Settlements held by Merlin Underwriting Agency.
- Canadian Intermediaries Limited North American Contractor
liability portfolio.
- Film completion bonds.
- Credit enhancement products.
Organization
Strategy has organized itself as a multi-line insurance company in
Barbados. It is the parent of several wholly owned subsidiaries strategically
located in target markets. Strategy is responsible for the strategic direction
of our company and will be the approving authority on all underwriting.
Key subsidiary companies are as follows:
- Strategy Underwriting Agency Limited ("SUAL") - provides
underwriting expertise and
16
agency services. It is located in the city of London where it
is a part of our U.K operations.
- Strategy Insurance (Canada) Limited - an Ontario, Canada
corporation, provides administrative, agency, licensing and
marketing support for the North American market. It is located
in Ontario, Canada.
- Strategy Real Estate Investments Ltd. - is located in Toronto,
Canada and invested in five real estate projects in Toronto,
and Kingston, Canada.
- Strategy Senior Life Investments Company, Ltd. - is located in
Barbados and has been created in anticipation of participating
in the senior life marketplace.
Market Philosophy
The global insurance market is reflective of societal changes be they
limited to regional adjustment or reaction to international events. Many players
in the industry have retrenched in recent years, revising their portfolio mix
and underwriting philosophy to embrace conservatism of style, while attempting
to maintain market share and acceptable yields to shareholders.
Strategy is created with respect for the role insurance plays in
society and mindful of the winds of change blowing through the industry, in
particular the convergence of insurance and finance.
As in any business, a single underwriting philosophy governs all of our
underwriting operations. We are careful and disciplined underwriters, but are
creative and flexible. We invest substantial time and resources to develop
sophisticated securitization and risk models in an attempt to ensure that
underwriting is profitable and risk is mitigated. We marry both capital markets
financial products and traditional insurance underwriting practices to ensure
expanded premium growth while maintaining minimal risk exposure. Our core
business philosophy is financial performance and security.
The convergence of financial products and insurance has created a new
arena with almost endless potential. The conception and launch of Strategy is
timed to exploit this opportunity. The composition of our board of directors
reflects commercial success and insurance expertise that drives corporate
philosophy. Through executive risk review and embedded expertise, Strategy's
mission is to be an influential player in the development and expansion of the
financial insurance sector.
The Market
Strategy views the credit market as its primary focus of business.
Changes within the insurance and financial industries, specifically capital
markets and those protocols being developed in the Basel Accord have
precipitated a convergence of financial products and insurance throughout the
global capital markets. This convergence has created a development of credit
insurance products that will provide securitization and certainty for long-term
asset/liability management that is a benefit for every investor who has
long-term income planning issues. Credit insurance will influence not only long
term lending investment strategies but it will directly affect an investor's
approach to asset allocation and portfolio management in the fixed income
market.
Globally, insurance companies are supportive of credit based insurance
given recent re-positioning of their infrastructures to include capital market
activities and have begun to create Financial Solutions Groups to support those
markets. Marsh & McLennan Insurance and Marsh & McLennan Securities Corporation,
Swiss Reinsurance Company and Swiss Re Financial Services Group are two of the
many growing examples of this trend. Max Re, a reinsurer based in Bermuda has
developed a Capital Markets Insurance structure that is providing investors
market leading returns. They are offering Credit
17
Default Swaps, Credit Default Insurance, Residual Value Insurance and many more
credit insurance derivatives.
Swiss Re recently participated in the development of contingent loss
coverage for banks saddled with long term loan loss provisions. They concluded
an underwriting for the Royal Bank of Canada wherein they insured the Royal
Bank's loan loss provisions using Contingent Loss coverage backed up by a call
option for preferred stock of each other's companies. The result was the freeing
up of $200 Million Canadian in capital that bank regulators were requiring the
bank to hold without investing as part of their loan loss provisions
requirements. The cost of the insurance premiums for this transaction was a
fraction of the funds the bank is now earning from investing the recaptured $200
Million Canadian.
Christopher L. Culp has written a review of this transaction, titled a
"CLOC". He is an Economics Professor at the University of Chicago who has
studied the growing trend of Credit Insurance derivatives and now is on the
Board of Advisory of a periodical journal titled "Risk Finance, The Convergence
of Financial Products and Insurance". Credit Default Insurance and Residual
Value Insurance are the two widely used credit insurance products in the
insurance market today. Standard & Poor's have developed a rating system for
insurance companies offering Credit Insurance: Financial Enhancement Ratings
(FER) is a rating system that applies to those insurance companies providing
Credit Insurance products who have agreed to pay losses on demand and without
delay.
The brokerage community in London is also changing its brokerage
services to meet the Credit Insurance needs and requests of their clients and
underwriters. They see themselves as Intermediaries with newly defined claims
adjustment parameters and increased responsibilities as Risk Managers. Strategy
has recognized the trend and has created a strategic relationship with a UK
based insurance brokerage to support our business objectives.
It is anticipated that Strategy will earn 75% of its premium income
from the credit market while the remainder of its income will be derived from
standard contingent liability underwriting in the North American market.
Risk Minimization Strategy
Our key risk minimization strategy has two platforms, Insurance and
Capital Market Products. We invest and will continue to invest substantial
resources in the development of sophisticated analytical tools to support the
insurance underwriting platform and personnel who understand and can structure
complex financial products to hedge risk positions insured by strategy. Our
market consists of Credit Products which have historic data support or are
priced to garner high enough premium yields to support the acquisitions of
either reinsurance or financial products from global capital markets. However,
we also believe that an underwriter operating within our structure must have the
freedom to use its experience, intelligence and judgment if they are to offer
the client the most appropriate insurance product given that our core business
is insurance.
We have identified the following risks that are faced by Strategy and
have implemented appropriate minimization strategies to protect our
shareholders.
Catastrophic Loss
Catastrophic loss such as natural disasters can cause significant
impact on the results of insurance companies. To minimize exposure from these
risks, we have chosen lines of business that are less susceptible to natural
disaster.
18
Conflagration of Claims
Conflagration of claims or the tendency for claims to cluster together
thus causing an insurance company to pay a frequency of claims in an area where
they would not normally expect it can cripple a company. We minimize this
exposure by using spread of risk. By diversifying the portfolio of business and
transferring the risk through retrocession or reinsurance, we reduce our
exposure to this risk.
Poor Demand
Poor demand can cause a reduction in the return on investment of the
company and increase the cost of our capital. We have taken a multi-pronged
approach to this risk. First, we are partnering with certain international
intermediaries who have a better than average portfolio of business and have
agreed to place a predetermined amount of business with us. Second, we have
established strategic partnerships with other underwriters that will feed
business to us through Tyser Credit Risk Ltd. Third, we have established a set
of underwriting principals that reduce this exposure by limiting business
written to those portfolios that are ongoing as opposed to start-up businesses.
Regional Differences
Certain regions in the global market do not produce results that
contribute to profitability. In order to mitigate this risk, we have chosen
underwriting officers who know and understand the global market and have the
experience to choose the best business in these markets. We have also reduced
this exposure by choosing lines of business that naturally reduce this exposure
as the demand for them in less desirable regions is negligible.
Profitability
In any insurance company there is always the risk of loss due to the
assumption of risk that may not be fully identified or changes due to external
forces beyond our control. A recent example of this is risks such as terrorism
that for may years went unnoticed in the North American context and have become
very prominent in the risk minimization strategies of insurance companies since
September 11, 2001. We have chosen lines of business that have traditionally
shown better results and will choose to underwrite only those risks in these
lines that indicate better than average results.
Regulatory Changes
As a result of certain commitments made by the Barbados government,
insurance companies licensed in Barbados may operate in the United States as
Non-Admitted carriers. As this is a special exemption that could be changed at
any time, we will need to maintain a presence onshore. Over time, this presence
will be increased in order to make the transition onshore should regulatory
changes require it.
Securitization Plan
Strategy is organized as a multi-line insurer with a focus on credit
and liability insurance in the fixed income and construction industries,
predominately in the North American markets.
Our key risk minimization strategy is based on a two-platform
securitization strategy, re-insurance and/or capital market derivative and
discounted bond products to be used as securitization for its book of
underwriting. While we maintain some risk, it is not weighted on average more
than premium dollars earned. In some cases our risk strategy includes only
analytical and statistical data, as in the case
19
of Rental Guarantee Insurance and Mortgage Indemnity Insurance. In both cases we
are able to build an appropriate risk analysis based on historic default and
vacancy rates. In the case of mortgages, the traditional default rate is 4% of
premium earned and in the case of Rental Guarantee Insurance, U.S. Census
information has provided us with detailed information on default and vacancy
rates which indicates a loss ratio no higher than 6% of premium earned.
Following is a more detailed plan for our securitization:
Rental Guarantee Insurance
The national default rate is 1.35% based on a 38 city comparison
analysis which is based on U.S. census information. Given the plan provided by
Rent Shield, we believe this product doesn't need additional institutional
securitization given that each apartment rent insured is personally guaranteed
by the tenant.
Mortgage Indemnity Insurance
The North American Mortgage model indicates a default rate of less than
1%. Given the plan provided by RSC Financial, we believe this product does not
require further securitization, given that property and personal guarantees form
part of the security for the underwriting.
Credit Enhancement Residential Developer Pre-Sale Surety
Traditionally, in North America, most construction loans on residential
developments are based on pre-sales and pre-sale contracts. Given this, banks
take absolutely no risk on market issues, solely considering risk on
construction completion and budgetary issues that can be mitigated through
insurance, bid bonds, material bonds, labor bonds and completion bonds. In spite
of the above, banks traditionally lend no more than 65% of the construction
cost, even though pre-sales account for 100% of these costs. Builders and
developers are tying up capital in projects, capital that is needed for
development of new projects, and this has created a market for pre-sale backed
construction financing. It can be a lucrative market, the premium charged can be
4.5% on the gross coverage and risk can be totally minimized if we use the
following securitization plan:
- Proof of financing for the first 65%.
- Pre-sales for 100% of the construction costs which include
both the 65% bank loan and the 35% Strategy Surety.
- Pre-sales must carry a minimum 20% deposit.
- Pre-sales must be third party and personally guaranteed by the
purchaser.
- Pre-sales must be beyond the rescission period.
- Completion bond from third party insurer rated no less than
A-AM Best.
- Bid, Material and Labor Bonds to cover all outstanding issues,
this must be posted by the General Contractor and must be in
support of the completion bond.
- The builder must demonstrate to the insurance company that the
fair market retail value of the property is at least 124% of
the construction costs.
In this model the insurer is underwriting the pre-sales which are
secured by the 20% deposit, the buyer's personal guarantee, the equity on the
project (minimum 24%) and completion backed by third party construction bonds.
20
Fair Market Value Coverage - Time Share Industry
Fair Market Value Coverage for the time share industry is a financial
exercise marketed as Time Share Cost Protection Insurance.
The time-share market has proven to be inefficient when it comes to
pricing and resale. A standard week of time-share in the U.S. costs roughly
$10,600 and based on current surveys only 3% of the U.S. population own
time-shares. In 2002 the time-share industry sold approximately $9 Billion in
time-shares worldwide, 60% of this accounted for marketing costs, a number that
is growing all of the time. It is generally understood that time-share owners
are typically dissatisfied but surveys demonstrate that 62% of the market are
satisfied with their purchase. Of course, the vocal 38% are entirely unhappy
about the purchase. The industry faces two issues, how to increase both market
size and customer satisfaction. This can be achieved using time-share cost
protection insurance, i.e.: provide insurance to a purchaser that in the event
their time-share cannot be resold or exchanged they can call on the insurance to
recover the cost of the time-share purchase or the difference between the
exchange and the original purchase if the exchange is valued at a lesser amount.
This product is designed and marketed as insurance, although,
underlying the product is a pre-contract hedge with a major bank to offset 100%
of the risk of the insurer.
Share Cost Protection Insurance
Premium is 25% of the purchase price. For an average purchase price of
$10,600, the average premium would be $2,650 with a one-time affinity group
membership fee of the greater of $1,000 or $500 plus 5%.
- Term is 10 years, with no call on the insurance until the 10th
year. Insured must provide notice anytime by the seventh year
of their intention to sell or exchange within the ten year
period.
- Marketing - As an affinity program through major timeshare
sellers, exchangers and developers, such as Cendant, RCI and
Intra West
- Securitization - Purchase capital market products providing
hedge fund returns that match 100% exposure to the risk.
Senior Life Settlement Term Payment Insurance
We believe that Senior Life Settlement underwriting can be very
lucrative if the underwriter were to use some basic pool and derivative
principles of securitization. In the past underwriters have written this product
on a one off basis, not pooled the overall results and thus left the entire
profit on each underwriting with the originators without the benefit of cross
collateralization for risk minimization.
The Life Settlement market in the United States comprises various
entities purchasing the Life Insurance policies of third parties. To do so, it
is necessary for the subject lives to be evaluated in terms of their mortality
in order to define costing and place a value on the policy at purchase date. In
addition to mortality, the market should be pooling the origination of these
transactions in much the same way as mortgages are poolsed and the underwriters
should be capping the return to a market rate and not the full face value of the
Life Insurance.
Film and Construction Completion Bonds
21
Strategy has in-house expertise and experience in this type of coverage
with a major supporter having produced many feature films and hundreds of hours
of television. We will assemble a team to provide Film Completion bonding. This
is a lucrative business, given the current nature of independent film
production. The key issues in this market are in knowing (a) which risks to
accept, (b) when a film should be taken over and (c) what to do after the
takeover. There is virtually zero risk of complete loss, and properly
structured, manageable risk of any loss.
Liability Insurance
Underwriting consideration in this wide-ranging class is restricted to
historical high-yield business. Risk assessment requires a factual performance
database spanning the prior five years.
The impact of September 11, 2001 created major portfolio revisions,
particularly by the large insurers, leaving a significant opportunity for small
players. Strategy has access to a number of such books where current pricing
levels (due to market contraction) are at an all-time high.
Of prime underwriting importance is assessment of the existing legal
environment and its trend in any given jurisdiction. While premiums may have
ballooned in the hard-to-place sector, coverage such as E&O/D&O and Professional
Liability would not be considered as opportunities. The long-tail nature of such
heavy liability risks and the court award levels are not elements Strategy will
contemplate under any circumstances.
Contingency underwriting is considered due to the typically unique
nature of such risks. We would anticipate a minimum premium level due to the
review effort on each case but would expect a gross underwriting ratio of 10% to
15% on the overall book.
Other Classes of Insurance
Initially we are focusing on the areas outlined above, but remain open
to reviewing other business that is risk averse and economically viable.
Many regions have surplus capacity from large insurers and the bank
assurance market. This creates an unstable rating environment as pricing levels
are generally inadequate with consequent (often massive) re-adjustments being
periodically necessary. This can tend to lead to over-regulation on pricing, or,
in the case of a politically sensitive class, government intervention. High
volume, low-yield business, such as personal lines and standard commercial, will
not be written by Strategy.
Similarly, high-risk exposed business (Professional Liability and
environmental exposures for example) will not be considered. Strategy will not
write Marine or Aviation business.
We anticipate considering niche business, such as accident/disability,
but not on a retail basis to individuals. For this type of coverage, and most
others, it is preferable to underwrite Group or Affinity type programs, which
have sufficiently large numbers to reflect a sound statistical base over time,
but also provide the ability to adjust terms in the event of unexpected
deviation.
Strategy will consider increased involvement in the Reinsurance area
over time, but will not entertain portfolios with catastrophic potential or low
retention Excess of Loss business. It is common in the industry to back licensed
paper in specific jurisdictions and this will be considered subject to the
quality of the insurer involved, as well as, the portfolio itself. At all times,
it is a pre-requisite that the ceding insurer be approved by the Underwriting
Committee.
22
Technology Plan
Our vision is to develop a web-based application that will enable
approved intermediaries to securely enter insurance and financial data from
anywhere in the world in multiple languages and multiple currencies. This system
will in turn be able to record and report on all financial transactions as well
as transfer funds according to those transactions.
Qualified intermediaries will be able to submit an application for
underwriting via the Internet through an SSL encrypted secure login and have
their choice of language such as English, French, German, Spanish, etc.
Intermediaries will be located throughout the globe in multiple countries, in
multiple regions, entering a variety of different insurance lines. Options and
fields on the system will be dynamically presented based on their role/access.
This will include but not be limited to Insuree's contact information, banking
information, policy number, premiums, and currency. The system will also support
the upload of multiple file types to be associated with policies. Moving
forward, we will provide document systems that will enable users to fax in
documents and images to be tied to different policies. Users within the system
will be limited to Intermediaries and various administrative roles for
underwriting, accounting, claims processing and management reporting.
Underwriters logging into the system will be able to view new applications
pending, including attached documents, as well as approve, decline or request
more information from the intermediaries. The system will also notify users of
any abeyance and any actions to be taken. The system will automatically assign
policy numbers once approved, as well as, record all premiums established and to
be collected through electronic sweeps of bank accounts. Subject to currencies
involved, such as Pound Sterling, Euros or US Dollars, interfaces will be
written to automatically withdraw or deposit funds into different accounts.
Scheduled reports will include details on premiums written and earned, claims
paid, claims outstanding, loss ration on written and earned, as well as, total
incurred loss ration on a written and earned basis.
System uptime required will be 24 hours a day, 7 days a week. To ensure
this performance, the selected company will have to provide loan-balancing
services either though hardware or software, as well as, UPS with possibly
diesel generators to ensure the timely transfer of services to another offsite
location in the event of power outage or facilities damage.
In supporting multiple overseas offices, we anticipate no additional
technical requirements, as this is an Internet based application. We will
investigate options regarding the best locations for standby facilities, such as
standby locations in Barbados with Cable & Wireless or in the UK with British
Telecom. This would facilitate a failsafe environment providing 100% uptime.
Service Level Agreement (SLA) would include automated system monitoring, as well
as, at a minimum, 2-hour response time, available 24x7, with appropriate
escalation procedures.
In developing the system, we will leverage as much of the existing
source code to support the new business. Interfaces already in place include:
Moneris' e-commerce payment system, Royal Bank direct deposit and withdrawal and
TransUnion/Equifax for credit checks. The development supplier will have to have
demonstrated experience in developing applications for insurance or financial
institutions using Microsoft SQL Server, .Net technologies and XML. Other
possible technologies would include Oracle, J2EE, Java and WAP (Wireless
Application Protocol). To work with multiple systems, XML standards will be
established to provide seamless communication between systems, as well as, ASCII
file standards to support systems that are not XML compatible. Data will also be
backed up on a daily schedule with 21-day rotation of tapes to an offsite
facility such as those services offered by Iron Mountain.
23
Access to server rooms will be restricted to those authorized personnel
by keypads and electronic keycards. 128-bit encryption will be implemented
whenever possible subject to US laws regarding the export of this encryption
algorithm. Network architecture will include firewalls, routers, DMZ, etc.
Employees
We employed 12 people as of October 30, 2004. None of our employees is
represented by a union and we believe our relationship with our employees is
good.
Strategy employs 3 full-time personnel and contracts the services of
4 others in Barbados who support the Board of Directors, Executive Director,
Chief Actuary and Chief Financial Officer.
SUAL is housed in the City of London and currently has 3 employees.
We expect that they will have 20 employees in various executive, management,
underwriting and administrative support roles by the end of 2006.
Strategy Insurance (Canada) Ltd. currently employs 6 individuals
supporting the administrative and sales areas. Two additional sales staff plus 2
additional administrative support staff are anticipated to be hired by June 30,
2005. Further staffing requirements will be subject to review based on sales
growth.
Private Placement Transaction
On November 16, 2004, our indirect wholly-owned subsidiary, Strategy
Real Estate Investments Ltd., a corporation formed under the laws of the
Province of Ontario, Canada, and us sold to a group of institutional and
accredited investors in a private placement exempt from registration under
Section 4(2) of the Securities Act of 1933, as amended, an aggregate amount of
$50,000,000 of units, each unit consisting of (a) one share of Series A Insured
Redeemable Preferred Stock of Strategy Real Estate Investments; (b) one share of
Series B Preferred Stock of Strategy Real Estate Investments; and (c) warrants
to purchase shares of our common stock, $.001 par value per share. The purchase
price was $10,000 per unit.
The warrants issued by us in the private placement are exercisable at
the option of the holder for a period of three years into our common stock. Each
warrant permits its holder to exercise the warrant into a number of shares of
common stock equal to the quotient obtained by dividing (a) the liquidation
preference amount of the shares of Series A Preferred Stock of Strategy Real
Estate Investments owned by such holder plus any accrued but unpaid dividends
thereon by (b) $1.6671. The holders of the warrants are required to surrender
the certificates representing the shares Series A Preferred Stock of Strategy
Real Estate Investments with the appropriate liquidation preference upon the
exercise of the warrants.
We are obligated to register for resale the shares of common stock
issuable upon exercise of the warrants pursuant to a registration rights
agreement dated November 16, 2004 between the registrant and the purchasers
named therein, of which this registration statement relates.
DESCRIPTION OF PROPERTY
Our Corporate office is at Sagicor Corporate Centre, Wildey, St.
Michael, Barbados, West Indies. We maintain a business and administrative office
at 200 Yorkland Blvd., Suite 200, Toronto, Ontario M2J5C1, Canada and are in the
process of finalizing the lease and preparing the office space for a second
business and administrative office at Crosby Court, 38 Bishopsgate, London,
England, EC2. This is expected to be ready for occupancy at about March 15,
2005.
24
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables present certain selected historical consolidated
financial data. The historical consolidated financial information for the period
from January 1, 2004 (inception) through February 15, 2004 and as of February
15, 2004 has been derived from our consolidated financial statements, which have
been audited by Samuel Klein and Company independent accountants. You should
read carefully the consolidated financial statements included in this
prospectus, including the notes to the consolidated financial statements and the
section of this prospectus entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Three Months ended Six Months ended January 1, 2004
October 31, 2004 October 31, 2004 (inception) through
Unaudited Unaudited February 15, 2004
Audited
Statement of Operations Data
Gross written premiums 753,992 753,992 --
Net earned premiums 311,660 311,660 --
General and administrative expenses 761,293 1,208,580 --
Net Loss from operations 499,633 896,920 --
Other revenue (expense) --
Investment income 651,448 1,529,564
Net income before discontinued operations 201,815 632,644 --
Net income before preferred dividends 201,815 617,090 --
Dividends on preferred stock (2,605,790) (5,211,580) --
Net loss on common stock (2,403,975) (4,594,491) (25,000)
Basic and diluted earnings (loss) per share (0.04) (0.08) --
Weighted-average shares outstanding basic 61,470,000 57,602,500 --
and diluted
October 31, 2004 April 30, 2004 February 15, 2004
Unaudited Unaudited Audited
Balance Sheet Data
Total assets $106,673,884 $104,793,985 $104,581,610
Total current liabilities 9,947,769 3,488,609 1,327,895
Stockholders equity 96,726,115 101,305,376 103,253,715
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
Through Strategy Insurance Limited, we are a holding company for an
integrated, international group of providers of specialty lines of insurance,
reinsurance and structured risk solutions, focusing on credit enhancement,
contingent liability and other specialty insurance and reinsurance. We have
developed and are implementing a strategy to design, structure and sell a broad
series of pass-through risk, specialty insurance and reinsurance platform
products. SIL is a wholly owned subsidiary of Strategy Holding Company Limited,
a Barbados company, and our wholly owned direct subsidiary. Strategy conducts
its insurance and reinsurance operations principally through its subsidiaries
incorporated in Barbados, West Indies. It has offices in Barbados, West Indies;
London, England; and Toronto, Canada.
SIL received an Exempt Insurance License from the Ministry of Finance,
Barbados, West Indies, on March 25, 2004, which authorizes SIL to engage in the
following classes of insurance business from within Barbados:
- General insurance business.
- Credit and liability insurance.
- Mortgage indemnity insurance.
- Rental guarantee insurance.
- Reinsurance.
Our initial organization stages from late December 2003 until the
middle of 2004 were characterized by (i) efforts to capitalize the Company in
order to provide the asset base on which an insurance business could be
constructed and (ii) an effort to receive approval to operate as an insurance
company under the Barbados Exempt Insurance Act. During this period, operating
expenses, legal fees and payroll costs were incurred. Additionally, dividends
were paid on the preferred stock issued by Strategy Holdings as part of the
capitalization process.
Contemporaneously, we began to staff our offices in Barbados, Toronto
and London in anticipation of obtaining our license to operate from the Barbados
Supervisor of Insurance. This resulted in an increase in our payroll expense,
travel expense and legal costs as the structure for doing business was being put
in place.
Upon receipt of the Barbados Supervisor of Insurance's permission to
operate as an insurance company on March 25, 2004, we began quoting on potential
business. This is done through, and with the assistance of, insurance brokers
around the world. Additional staff was hired in Barbados and Toronto and we
entered into leases for our office space.
We received our first premium income in September 2004.
Significant Accounting Policies
(a) Basis of Presentation
The accompanying financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
and all amounts are stated in U.S. dollars.
(b) Use of Estimates
26
The preparation of financial statements in accordance with accounting
principals generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Management periodically reviews its
estimates and assumptions including particularly the adequacy of reserves for
unpaid losses and loss adjustment expenses, reinsurance allowance for doubtful
accounts and litigation liabilities, as well as deferred policy acquisition
costs. Actual results may differ from the estimates and assumptions used in
preparing the financial statements.
(c) Financial Instruments
We plan to account for our investments in accordance with Financial
Accounting Standards Board Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115) or in accordance with
Statement No. 107, "Disclosures About Fair Value of Financial Instruments" (SFAS
107). This statement, as amended by Statement No. 133 (SFAS 133), requires
disclosures of both the fair value and the basis of estimating the fair value.
SFAS No. 115 requires that certain debt and equity securities be
classified into one of three categories: held-to-maturity, available-for-sale,
or trading securities. Investments in debt securities that the enterprise has
the positive intent and ability to hold to maturity are classified as
held-to-maturity and reported at amortized cost in the statement of financial
position. Securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading securities and reported
at fair value. Trading generally reflects active and frequent buying and
selling, and trading securities are generally used to generate profit on
short-term differences in price. Investments not classified as either
held-to-maturity or trading securities are classified as available-for-sale
securities and reported at fair value.
SFAS No. 107 defines noncurrent receivables as financial instruments
and requires disclosure of fair value information about financial instruments,
whether or not recognized on the face of the balance sheet, for which it is
practical to estimate that value. SFAS 107 defines fair value as the quoted
market prices for those instruments that are actively traded in financial
markets. In cases where quoted market prices are not available, fair values are
estimated using present value or other valuation techniques. The fair value
estimates are made at a specific point in time, based on available market
information and judgments about the financial instrument, such as estimates of
timing and amount of expected future cash flows. Such estimates do not reflect
any premium or discount that could result from offering for sale at one time the
Company's entire holdings of a particular financial instrument, nor do they
consider the tax impact of the realization of unrealized gains or losses. In
many cases, the fair value estimates cannot be substantiated by comparison to
independent markets, nor can the disclosed value be realized in immediate
settlement of the instrument.
(d) Cash Equivalents
We consider all investments with original maturities of 90 days or less
to be cash equivalents.
(e) Premium Income
Income on premiums will be recognized as written upon inception of the
policy. For multi-year policies written which are payable in annual
installments, due to the ability of the insured/reinsured to commute or cancel
coverage within the term of the policy, only the annual premium will be included
as written at policy inception. The remaining annual premiums included as
written at each successive anniversary date within the multi-year term.
27
Premiums written will be primarily earned on a daily pro-rata basis
over the terms of the policies to which they relate. Accordingly, unearned
premiums will represent the portion of premiums written which is applicable to
the unexpired portion of the policies in force.
Reinsurance premiums assumed will be estimated based on information
provided by ceding companies. The information used in establishing these
estimates is reviewed and subsequent adjustments are recorded in the period in
which they are determined. These premiums are earned over the terms of the
related reinsurance contracts.
(f) Policy Acquisition Costs
Policy acquisition costs will consist of commissions, premium taxes,
underwriting and other costs that vary with and are primarily related to the
production of premiums. Acquisition costs are deferred and amortized over the
period in which the related premiums are earned. To the extent that future
policy revenues on existing policies are not adequate to cover related costs and
expenses, deferred policy acquisition costs will be charged to earnings.
We will consider anticipated investment income in determining whether a
premium deficiency exists.
(g) Unpaid Losses and Loss Expenses
Unpaid losses and loss expenses will consist of a provision for
outstanding losses and loss expenses and a provision for losses incurred but not
reported (IBNR). As with premiums, current year losses will be as reported.
Provisions for outstanding losses and loss expenses are valued on claim
adjusters' evaluations, with additional provisions made where the ceding
company's management considers necessary. The IBNR component of the reported
losses is established by ceding company management in consultation with its
actuaries based on a combination of company and industry data.
A liability will be established for our estimated unpaid losses and
loss expenses under the terms of, and with respect to, its policies and
agreements.
The process of establishing reserves is a complex and imprecise
process, requiring the use of informed estimates and judgments. Estimates and
judgments may be revised as additional experience and other data become
available and are reviewed, as new or improved methodologies are developed or as
current laws change. Any such revisions could result in future changes in
estimates of losses or reinsurance recoverable, and would be reflected in our
results of operations in the period in which the estimates are changed.
Reported losses and loss expenses on direct business will be valued on
claim adjusters' evaluation, with additional provisions made where management
considers these necessary. The IBNR provision is primarily established by
management in conjunction with the consulting actuaries based on the application
of a combination of company and industry data. Any difference between the
estimated amounts and the actual settlements will be reflected in the results of
the year in which they are determined.
Future developments may result in losses and loss expenses
significantly greater or less than the reserve provided.
(h) Property And Equipment
28
Property and equipment will be stated at cost less accumulated
depreciation and amortization. Depreciation and amortization of property and
equipment are calculated using the straight-line method over the estimated
useful lives.
(i) Comprehensive Income
Comprehensive income represents all changes in equity of an enterprise
that result from recognized transactions and other economic events during the
period. Other comprehensive income refers to revenues, expenses, gains and
losses that, under accounting principles generally accepted in the United States
of America, are included in comprehensive income but excluded from net income,
such as unrealized gains or losses on certain investments in fixed maturities
and equity securities.
(j) Translation Of Foreign Currencies
Under FAS 52, "Foreign Currency Translation", monetary foreign currency
assets and liabilities are translated into U.S. dollars using period end rates
of exchange. Non-monetary assets and liabilities, as well as statement of
operations amounts, expressed in foreign currencies are translated using average
exchange rates. Gains and losses resulting from foreign currency translations
are recorded in current income.
(k) Risks and Uncertainties
Cash and investment securities are exposed to various risks, such as
interest rate, market, and credit. Due to the level of risk associated with
investment securities and the level of uncertainty related to changes in the
value of investment securities, it is at least reasonably possible that changes
in risks in the near term would materially affect the amounts reported in the
financial statements.
(l) New Accounting Standards
In May 2003, the Financial Accounting Standards Board (FASB) issued
SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity" (SFAS 150). The statement requires an issuer to
classify a financial instrument as a liability (or an asset in some
circumstances) because that financial instrument embodies an obligation of the
issuer. These obligations include, but are not limited to, mandatorily
redeemable stock, obligations to repurchase company shares and other obligations
payable in company stock. The Company has completed its assessment of the effect
of the pronouncement and has determined that it will not have an impact on its
financial condition, results of operations or cash flows.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
No. 133 on Derivative Instruments and Hedging Activities" (SFAS 149). SFAS 149
is generally effective for contracts entered into or modified after June 30,
2003. This amendment, among other things, further clarifies several
implementation issues related to SFAS 133, as amended. The adoption of SFAS 149
did not have an impact on the Company's financial condition, results of
operations or cash flows.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" (FIN 46), which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements." This
interpretation provides guidance on the identification and consolidation of
variable interest entities, whereby consolidation is achieved through means
other than through control. FIN 46 did not have an impact on the Company's
financial condition, results of operations or cash flows.
29
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" (SFAS 148), an amendment
of FASB Statement No. 123. SFAS 148 provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS 148 amends the disclosure
requirements of SFAS 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
Company has not elected a voluntary change in accounting to the fair value based
method, and accordingly, the adoption of SFAS 148 did not have a significant
impact on the Company's results of operations or financial position.
Results of Operations
The following table sets forth our income statement data as a
percentage of net sales for the periods indicated below.
Three Months ended Six Months ended
October 31, 2004 October 31, 2004
Unaudited Unaudited
Gross written premiums 100.0% 100.0%
General and administrative expenses 100.9% 160.3%
Net Loss from operations 59.6% 118.9%
Other revenue (expense) 86.4% 202.8%
Investment income
Net income before discontinued operations 26.8% 83.9%
Net income before preferred dividends 26.8% 81.8%
Dividends on preferred stock 345.6% 691.2%
Net loss on common stock 318.8% 609.4%
Results of Operations For The Three Months Ended October 31, 2004
Revenues. Revenues for the three months ended October 31, 2004 were
$753,992 consisting of insurance premium generated by business written in Europe
and Asia. Management believes the Company will continue to generate revenues
from international sources because we are working with brokers in London.
General and Administrative Expenses. General and Administrative
Expenses for the three months ended October 31, 2004 were $761,293, comprised of
claims reserves, payroll, travel, legal and accounting fees, and consulting fees
and office expenses (including rent) and various other immaterial costs. We
anticipate that as the business grows we will likely see increases in virtually
all expense categories, particularly during the course of the next 12 months as
we move out of our initial start-up phase into a full-blown operating status.
Other Revenue (Expense). Other Revenue (Expense) for the three months
ended October 31, 2004 were $651,448, comprised of interest income on
$104,231,610 of Mortgage Notes Receivable at 2.5% annual interest rate.
30
Dividends on Preferred Stock. Dividends on Preferred Stock for the
three months ended October 31, 2004 were $2,605,790, comprised of a 10% dividend
payable on the Cumulative Preferred A and Cumulative Preferred B shares issued
and outstanding.
Results of Operations For The Six Months Ended October 31, 2004
Revenues. Revenues for the six months ended October 31, 2004 were the
$753,992 generated during the 3 month period ending October 31, 2004. The
Company is in its first year of operations and it has taken until the recent
quarter to generate the first premiums written.
General and Administrative Expenses. General and Administrative
Expenses for the six months ended October 31, 2004 were $1,208,579, comprised of
claims reserves, payroll, legal and accounting fees, consulting expense and
office costs (including rent), and other immaterial operating costs.
Other Revenue (Expense). Other Revenue (Expense) for the six months
ended October 31, 2004 were $1,529,564, comprised of interest income on the
Mortgage Notes Receivable of $104, 231,610.
Dividends on Preferred Stock. Dividends on Preferred Stock for the six
months ended October 31, 2004 were $5,211,580, comprised of 10% dividends
payable on the Cumulative Preferred A and Cumulative Preferred B shares issued
and outstanding.
Liquidity and Capital Resources
As of October 31, 2004 we had cash and cash equivalents of $415,761
compared to $48,310 as of July 31, 2004. The increase in cash and cash
equivalents is a result of cash receipts from business written.
The Company's operating expenses are currently approximately $250,000
per month. These are anticipated to increase to approximately $450,000 per month
by the end of 2005 as business increases and the costs necessary to generate and
support increased business also increase, beginning with increased staffing.
Cash will be generated from operations and from an equity raise. In the event a
proposed equity raise is not successful, the Company has sufficient resources to
operate to throughout 2005, but may be hindered with respect to its rate of
growth.
The company began quoting on possible insurance business immediately
following the receipt of permission to operate from the Ministry of Finance
(Barbados) on March 26, 2004. The nature of the insurance business is such that
individual pieces of business can take many months to negotiate and come to
fruition. The Company is actively quoting on business. It is difficult to
predict at this early stage in the Company's development what proportion of
business quoted will generate revenues because we do not have a sufficient
history by which to accurately estimate such numbers.
Commitments
The following table summarized our contractual obligations and
commercial commitments as of October 30, 2004:
Payment Due
Less than After
Contractual Obligations 1 Year 2 Years 3 Years 4 Years 5 Years 5 Years
- ----------------------- ------ ------- ------- ------- ------- -------
(in thousands)
Short-term debt and other __ __ __ __ __ __
current liabilities
31
Long-term debt __ __ __ __ __ __
Operating leases (1) $304 $304 $169 $54 $54 $270
Other long term liabilities
Total contractual obligations $304 $304 $169 $54 $54 $270
(1) Consists of payments of office rent under real estate leases.
Intellectual Property
We do not have any patents trademarks or copyrights. In order to
protect our trade secretes we enter into non-disclosure agreements with our
employees.
Governmental Regulation
The principal operating entity in our group, Strategy Insurance Limited
("SIL"), is licensed in the Island of Barbados, West Indies as an "Exempt
Insurance Company". SIL operates in the offshore financial sector of Barbados.
Under the Exempt Insurance Act, SIL is permitted to:
(a) insure risks located outside Barbados in respect of which premiums
originate outside Barbados; and
(b) perform the functions of an underwriter, broker, agent, dealer or
salesman.
Exempt insurance companies are regulated by the Minister of Finance, who has
delegated certain functions to the Supervisor of Insurance.
SIL staffs and maintains its head office in Barbados, from which it
directs its insurance operations. It is not permitted to write business in
Barbados.
Barbados has reciprocal taxation treaties with several countries,
notably the United States, Canada and the United Kingdom. Barbados has sought to
maintain its reputation as a reputable international financial jurisdiction by
establishing an Anti-Money Laundering Authority in accordance with the
provisions of the Money Laundering and Financing of Terrorism Act.
The Company is not subject directly to regulation by other
jurisdictions. In the event that we wish to do business in a jurisdiction with
regulatory requirements, our options are :
- to use a fronting company (i.e., to have a licensed company
underwrite the policy and then 100% re-insure that company in
connection with such policy);
- not to write the business at this point in time; or
- to obtain the necessary approvals in the applicable
jurisdiction.
We currently choose to use fronting companies in order to act in the
insurance business in the United States in Canada.
Competition
We are an insurance company and, as such, compete with other insurance
companies for available business. Where we differentiate ourselves, and how we
see and market ourselves, as a company serving primarily credit requirements at
the boundary of insurance and financial products, makes us different
32
from other companies. Our market edge is not likely to be permanent. Others will
step up and offer their products and services in our niche. The entrance of
other entities into our market space will have both positive and negative
impacts on us. A positive perspective is that competition verifies the validity
of our approach and may also serve to expand the market by informing the world
of the approach and the nature of the products and services being offered. A
negative impact could be felt if market size is over-estimated and competition
forces pricing to become too tight to generate adequate returns on investment
Off Balance Sheet Arrangements
We have no off-balance sheet financing arrangements within the meaning
of Item 303(c) of Regulation S-B.
33
SELLING SECURITY HOLDERS
The selling security holders listed below may sell, from time to time
under this prospectus, up to an aggregate of 29,992,207 shares of our common
stock issuable upon the exercise of warrants. The warrants are exercisable at
the option of the holder for a period of three years into our common stock. Each
warrant permits its holder to exercise the warrant into a number of shares of
common stock equal to the quotient obtained by dividing (a) the liquidation
preference amount of the shares of Series A Preferred Stock of Strategy Real
Estate Investments owned by such holder plus any accrued but unpaid dividends
thereon by (b) $1.6671. The holders of the warrants are required to surrender
the certificates representing the shares Series A Preferred Stock of Strategy
Real Estate Investments with the appropriate liquidation preference upon the
exercise of the warrants.
The following table sets forth, to our knowledge, certain information
about the selling security holders as of December 28, 2004. Beneficial ownership
is determined in accordance with Rule 13d-3 promulgated by the Securities and
Exchange Commission, and generally includes voting or investment power with
respect to securities. In computing the number of shares beneficially owned by
the holders and the percentage ownership of the holders, shares of common stock
issuable upon the exercise of the warrants held by the holders that are
currently exercisable or exercisable within 60 days after the date of the table
are deemed outstanding.
To our knowledge, each of the selling security holders listed below has
sole voting and investment power with respect to all of the shares of common
stock beneficially owned by it except as may be listed below. None of the
selling security holders has held nor had any material relationship with us
within the past three years.
As of December 9, 2004, a total of 63,147,503 shares of our common
stock were outstanding. The following table sets forth information as of that
date regarding the beneficial ownership of our common stock both before and
immediately after the offering. Actual ownership of the shares is subject to
exercise of the warrants.
The shares of common stock being offered under this prospectus may be
offered for sale from time to time during the period the registration statement
of which this prospectus is a part remains effective, by or for the account of
the selling security holders described below.
- ------------------------------------------------------------------------------------------------------------------------
Shares Beneficially Owned Shares Beneficially Owned
Prior to Offering Shares Being After the Offering (1)
Name of Beneficial Owner Number % of Class (2) Offered Number % of Class
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Whitebox Convertible Arbitrage
Partners, L.P. (3) 2,999,221 4.53% 2,999,221 0 0
- ------------------------------------------------------------------------------------------------------------------------
Pandora Select Partners, L.P. (4) 599,845 0.94% 599,845 0 0
- ------------------------------------------------------------------------------------------------------------------------
Whitebox Hedged High Yield
Partners, L.P. (5) 2,399,377 3.66% 2,399,377 0 0
- ------------------------------------------------------------------------------------------------------------------------
Aviator Overseas Fund II, Ltd. (6) 1,019,735 1.59% 1,019,735 0 0
- ------------------------------------------------------------------------------------------------------------------------
Aviator Master Fund, Ltd. (7) 7,678,004 10.84% 7,678,004 0 0
- ------------------------------------------------------------------------------------------------------------------------
Longview Equity Fund, L.P. (8) 449,883 0.71% 449,883 0 0
- ------------------------------------------------------------------------------------------------------------------------
Longview International Equity
Fund, L.P. (9) 149,961 0.24% 149,961 0 0
- ------------------------------------------------------------------------------------------------------------------------
JMG Triton Offshore Fund, Ltd.
(10) 5,848,480 8.48% 5,848,480 0 0
- ------------------------------------------------------------------------------------------------------------------------
34
- ------------------------------------------------------------------------------------------------------------------------
Shares Beneficially Owned Shares Beneficially Owned
Prior to Offering Shares Being After the Offering (1)
Name of Beneficial Owner Number % of Class (2) Offered Number % of Class
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
JMG Capital Partners, LP (11) 5,848,480 8.48% 5,848,480 0 0
- ------------------------------------------------------------------------------------------------------------------------
Veritas High Yield Arbitrage Fund
I LLC (12) 635,835 1.00% 635,835 0 0
- ------------------------------------------------------------------------------------------------------------------------
Veritas High Yield Arbitrage Fund
II LLC (13) 212,945 0.34% 212,945 0 0
- ------------------------------------------------------------------------------------------------------------------------
Veritas High Yield Arbitrage Fund
(Bermuda) Ltd. (14) 2,150,441 3.29% 2,150,441 0 0
- ------------------------------------------------------------------------------------------------------------------------
(1) Assumes all shares being offered by the selling security holders are
sold.
(2) Assumes exercise of all of the warrants issued in the private placement
on November 16, 2004.
(3) We have been advised by the selling shareholder that Andrew Redleaf is
its controlling person.
(4) We have been advised by the selling shareholder that Andrew Redleaf is
its controlling person.
(5) We have been advised by the selling shareholder that Andrew Redleaf is
its controlling person.
(6) We have been advised by the selling shareholder that Eric Wong is its
controlling person.
(7) We have been advised by the selling shareholder that Eric Wong is its
controlling person.
(8) We have been advised by the selling shareholder that Wayne H. Coleson
is its controlling person.
(9) We have been advised by the selling shareholder that Wayne H. Coleson
is its controlling person.
(10) We have been advised by the selling shareholder that JMG Triton
Offshore Fund, Ltd. is an international business company under the laws
of the British Virgin Islands. Its investment manager is Pacific Assets
Management LLC, a Delaware limited liability company. The manager is an
investment adviser registered with the Securities and Exchange
Commission and has voting and dispositive power over the selling
shareholder's investments. The equity interests of the manager are
owned by Pacific Capital Management, Inc., a Delaware company and Asset
Alliance Holding Corp., a Delaware Company. The equity interests of
Pacific are owned by Messrs. Roger Richter, Jonathan M. Glaser and
Daniel A. David and Messrs. Glaser and Richter have sole investment
discretion over the selling shareholder's portfolio holdings.
(11) JMG Capital Partners, L.P. is a California limited partnership. Its
general partner is JMG Capital Management, LLC, a Delaware limited
liability company and an investment adviser registered with the
Securities and Exchange Commission. The manager has voting and
dispositive power over the selling shareholder's investments. The
equity interests of the manager are owned by JMG Capital Management,
Inc., a Delaware corporation, and Asset Alliance Holding Corp., a
Delaware corporation. Jonathan M. Glaser is the Executive Officer and
Director of JMG Capital and has sole investment discretion over selling
shareholder's portfolio holdings.
(12) We have been advised by the selling shareholder that Jim Kastberg is
its controlling person.
(13) We have been advised by the selling shareholder that Jim Kastberg is
its controlling person.
(14) We have been advised by the selling shareholder that Jim Kastberg is
its controlling person.
35
PLAN OF DISTRIBUTION
The selling security holders and any of their donees, pledgees,
assignees and other successors-in-interest may, from time to time, sell any or
all of their shares of our common stock being offered under this prospectus on
any stock exchange, market or trading facility on which the shares are traded or
in private transactions. These sales, which may include block transactions, may
be at fixed or negotiated prices. The selling security holders may use any one
or more of the following methods when selling shares:
- ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
- block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
- purchases by a broker-dealer as principal and resales by the
broker-dealer for its own account;
- an exchange distribution in accordance with the rules of the
applicable exchange;
- privately negotiated transactions;
- in connection with short sales of the shares;
- broker-dealers may agree with the selling security holders to
sell a specified number of shares at a stipulated price per
share;
- a combination of any of these methods of sale; or
- any other method permitted by applicable law.
The sale price to the public may be:
- the market price prevailing at the time of sale;
- a price related to the prevailing market price;
- at negotiated prices; or
- a price the selling security holder determines from time to
time.
The shares may also be sold under Rule 144 under the Securities Act, if
available, rather than under this prospectus. The selling security holders have
the sole and absolute discretion not to accept any purchase offer or make any
sale of shares if it deems the purchase price to be unsatisfactory at any
particular time.
The selling security holders may pledge their shares to their brokers
under the margin provisions of customer agreements. If any selling security
holder defaults on a margin loan, the broker may, from time to time, offer and
sell the pledged shares. Broker-dealers engaged by any selling security holder
may arrange for other broker-dealers to participate in sales. Broker-dealers may
receive commissions or discounts from the selling security holders (or, if any
broker-dealer acts as agent for the purchaser of shares, from the purchaser) in
amounts to be negotiated. The selling security holders do not expect these
commissions and discounts to exceed what is customary in the types of
transactions involved.
The selling security holders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with these sales. In that event, any
commissions received by these broker-dealers or agents and any profit on
36
the resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
The selling security holders, alternatively, may sell all or any part
of the shares offered in this prospectus through an underwriter. To our
knowledge, no selling security holder has entered into any agreement with a
prospective underwriter, and we cannot assure you as to whether any such
agreement will be entered into. If any selling security holder informs us that
it has entered into such an agreement or agreements, the relevant details will
be set forth in a supplement or revisions to this prospectus.
The selling security holders and any other persons participating in the
sale or distribution of the shares offered under this prospectus will be subject
to applicable provisions of the Exchange Act and the rules and regulations under
the Exchange Act, including Regulation M. These provisions may restrict
activities of, and limit the timing of purchases and sales of any of the shares
by, the selling security holders or any other such person. Furthermore, under
Regulation M, persons engaged in a distribution of securities are prohibited
from simultaneously engaging in market making and other activities with respect
to those securities for a specified period of time prior to the commencement of
such distributions, subject to specified exceptions or exemptions. All of these
limitations may affect the marketability of the shares.
We are required to pay all fees and expenses incident to the
registration of the shares and have agreed to indemnify the selling security
holders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act of 1933.
McMahan Securities Co. L.P. acted as placement agent in connection with
the private placement transaction that closed on November 16, 2004 and received
a cash fee of $2,500,000.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 100,000,000 shares of common
stock, par value $0.01 per share, and 10,000,000 shares of preferred stock, par
value $0.01 per share. As of December 9, 2004, we had 63,147,503 shares of
common stock outstanding and no shares of preferred stock outstanding. The
following is a summary description of our capital stock.
Common Stock
The holders of outstanding shares of our common stock are entitled to
receive dividends out of assets legally available at times and in amounts as the
board of directors may from time to time determine, subordinate to any
preferences that may be granted to the holders of preferred stock. Holders of
common stock are entitled to one vote per share on all matters on which the
holders of common stock are entitled to vote.
The common stock is not entitled to preemptive rights and may not be
redeemed or converted. Upon our liquidation, dissolution or winding up, the
assets legally available for distribution to our stockholders are divided among
the holders of the common stock in proportion to the number of shares of common
stock held by each of them, after payment of all of our debts and liabilities
and fulfillment of the rights of any outstanding class or series of preferred
stock that has priority to distributed assets. The rights of holders of common
stock are subordinate to those of holders of any series of preferred stock.
All of the issued and outstanding shares of common stock are duly
authorized, validly issued, fully paid, and non-assessable. To the extent that
additional shares of our common stock are issued, the relative interests of
existing stockholders may be diluted.
37
Preferred Stock
Preferred stock may be issued from time to time in one or more series,
and our board of directors, without action by the holders of common stock, may
fix or alter the voting rights, redemption provisions, dividend rights, dividend
rates, claims to our assets superior to those of holders of our common stock,
conversion rights and any other rights, preferences, privileges and restrictions
of any wholly unissued series of preferred stock. The board of directors,
without stockholder approval, can issue shares of preferred stock with rights
that could adversely affect the rights of the holders of common stock. The
issuance of shares of preferred stock could adversely affect the voting power of
the holders of common stock and could have the effect of making it more
difficult for a third party to acquire, or could discourage or delay a third
party from acquiring, a majority of our outstanding common stock.
Preferred stock can be used as an anti-takeover measure. The board of
directors has exclusive discretion to issue preferred shares with rights that
may trump those of its common stock. The board of directors could use an
issuance of preferred stock with dilutive or voting preferences to delay, defer
or prevent common stock stockholders from initiating a change in control of our
company or reduce the rights of common stockholders to the net assets upon
dissolution. Preferred stock issuances may also discourage takeover attempts
that may offer premiums to holders of our common stock.
Warrants
On November 16, 2004, our indirect wholly-owned subsidiary, Strategy
Real Estate Investments Ltd., a corporation formed under the laws of the
Province of Ontario, Canada, sold to a group of institutional and accredited
investors an aggregate amount of $50,000,000 of units, each unit consisting of
(a) one share of Series A Insured Redeemable Preferred Stock of Strategy Real
Estate Investments; (b) one share of Series B Preferred Stock of Strategy Real
Estate Investments; and (c) warrants to purchase shares of our common stock,
$.001 par value per share. The purchase price was $10,000 per unit.
The warrants are exercisable at the option of the holder for a period
of three years into our common stock. Each warrant permits its holder to
exercise the warrant into a number of shares of common stock equal to the
quotient obtained by dividing (a) the liquidation preference amount of the
shares of Series A Preferred Stock of Strategy Real Estate Investments owned by
such holder plus any accrued but unpaid dividends thereon by (b) $1.6671. The
holders of the warrants are required to surrender the certificates representing
the shares Series A Preferred Stock of Strategy Real Estate Investments with the
appropriate liquidation preference upon the exercise of the warrants.
We are obligated to register for resale the shares of common stock
issuable upon exercise of the warrants pursuant to a registration rights
agreement dated November 16, 2004 between the registrant and the purchasers
named therein, of which this registration statement relates.
Class A Redeemable Preference Shares Series 1 of Strategy Holdings
The Class A Redeemable Preference Shares Series 1 of Strategy Holdings
bear interest at a rate of 10% per annum and rank on parity with the preference
shares of every other series with respect to priority in the payment of
dividends and in the distribution of assets of Strategy Holdings in the event of
any liquidation, dissolution or winding-up of Strategy Holdings or other
distribution of assets of Strategy Holdings among its shareholders for the
purpose of winding-up its affairs. The Series A shares have no voting rights,
except as noted under certain special circumstances indicated in the Articles of
Incorporation. The shares are redeemable at the Strategy Holding's direction
after 10 years, upon proper notice of not less than 1 year being provided to the
shareholders by Strategy Holdings. The shareholders may, at any time, cause
redemption by providing proper notice to Strategy Holdings, as indicated in the
38
Articles of Incorporation.
Class B Redeemable Preference Shares Series 1 of Strategy Holdings
The Class B Redeemable Preference Shares Series 1 of Strategy Holdings
bear interest at a rate of 10% per annum and rank on parity with the preference
shares of every other series with respect to priority in the payment of
dividends and in the distribution of assets of Strategy Holdings in the event of
any liquidation, dissolution or winding-up of Strategy Holdings or other
distribution of assets of Strategy Holdings among its shareholders for the
purpose of winding-up its affairs. The Series B shares have no voting rights,
except as noted under certain special circumstances indicated in the Articles of
Incorporation. The shares are redeemable at the Strategy Holding's direction
after 10 years, upon proper notice of not less than 1 year being provided to the
shareholders by Strategy Holdings. The shareholders may, at any time, cause
redemption by providing proper notice to Strategy Holdings, as indicated in the
Articles of Incorporation.
Series A Preferred Shares of Strategy Real Estate Investments
Strategy Real Estate Investments has 5,000 shares designated as Series
A preferred shares. As of December 28, 2004, all 5,000 shares of Series A
preferred shares of Strategy Real Estate Investments were outstanding. The
Series A Preferred shares pay dividends at an annual rate of ten percent (10%),
which are paid quarterly. United Insurance Company Limited, a company formed
under Barbados law (an insurance company with an "A-" rating by AM Best's), is
insuring payment of 100% of the quarterly dividends on the Series A Preferred
over the three (3) year period they will be outstanding and the liquidation
preference of the Series A Preferred pursuant to a Contingent Guarantee Policy.
Upon the occurrence of certain events of default (as set forth in the Articles
of Incorporation of Strategy Real Estate Investments), the Series A liquidation
preference and all accrued and unpaid dividends thereon shall become immediately
payable.
The Series A Preferred will be subject to mandatory redemption by
Strategy Real Estate Investments, three (3) years from the date of issuance, at
their full liquidation preference, net of all appropriate Canadian withholding
and income tax, plus all accrued and unpaid dividends.
The holders of Series A preferred shares are not entitled to receive
notice of or to attend any meeting of the shareholders and shall not be entitled
to vote at any such meeting unless and until Strategy Real Estate Investments
fails to pay the cumulative preferential dividends on the Series A preferred
shares for two consecutive quarters and the United Insurance Company Limited
shall, from September 21, 2005 through the maturity date, fail to pay for two
consecutive quarters an amount equivalent to such dividends that have not been
paid by us to the holders. Thereafter, and only so long as such dividends are in
arrears, the Series A preferred shares shall be entitled to call meeting of
shareholders of Strategy Real Estate Investments and have one vote for each
share of Series A Preferred of Strategy Real Estate Investments.
Series B Preferred Shares of Strategy Real Estate Investments
Strategy Real Estate Investments has 5,000 shares designated as Series
B preferred shares. As of December 28, 2004, all 5,000 shares of Series B
preferred shares of Strategy Real Estate Investments were outstanding. Each
share of Series B Preferred of Strategy Real Estate Investments entitles its
holder to receive a pro rata share of five percent (5%) of the gross sales from
each of the five (5) special purpose residential real estate properties in
Canada, being developed by the Lux Group. Payments of the gross sales interest
shall be made from time to time after the sale of each project to a third party
for monetary consideration. Strategy Real Estate Investments will receive the
gross sales interest (which will be paid out to the holders of shares of Series
B Preferred) pursuant to Participation Agreements between Strategy
39
Real Estate Investments and each of the five (5) entities investing in the
projects. The shares of Series B Preferred of Strategy Real Estate Investments
are not redeemable and they will continue to receive the gross sales interest
for as long as they are outstanding. No dividends (other than payment of the
gross sales interest) will be payable on the shares of the Series B Preferred.
40
REINSERT
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following is a list of the names and ages of our directors and
executive officers:
NAME AGE POSITION
- --------------------------------------------------------------------------------
Stephen Stonhill 47 Chairman of the Board and Chief Executive Officer
Lennox Gibbs 59 Managing Director of Global Operations, Director
Hugh Forrest 49 Chief Underwriting Officer, Director
Anthony Iatesta 47 Vice President of Underwriting
Edward J. Kruk 52 Chief Financial Officer
Phillip Armstrong 48 Managing Director of SUAL
STEPHEN STONHILL became Chief Executive Officer and a Chairman of the
Board on June 14, 2004. Mr. Stonhill brings to us a wealth of managerial
experience in the insurance and marketing areas. He owned and operated, for the
past 15 years, Canadian Intermediaries Limited, a Lloyd's of London Coverholder
insurance intermediary/underwriting company that he recently sold in order to
lead Strategy's management team. He has over 29 years experience in the London
and North American insurance and reinsurance markets. Since moving to North
America in 1987, he has been an Approved Correspondent with Lloyd's.
LENNOX GIBBS, Managing Director of Global Operations, was President of
his own financial consultancy from 2002 to 2004, Chief Financial Officer of
Visual Bible International from 2000 to 2002 and a Director of Canadian Imperial
Bank of Commerce's Media and Knowledge-based lending group from 1997 to 2000.
Prior thereto he was for seven years a Senior Executive with Astral Media and
with Alcan Aluminum for twelve years before that. His last position with Alcan
was Chief Financial Officer of Alcan International's venture capital group. He
is a First Class Honors Graduate of Queens University School of Engineering and
an MBA graduate of Harvard Business School.
HUGH FORREST became our Chief Underwriting Officer on June 14, 2004.
Mr. Forrest has spent 25 years in the insurance industry in Canada and worldwide
with organizations such as Lloyds, AXA and Liberty Mutual and has educational
credentials in Risk Management and Insurance. He spent 8 years in 2 of the top 4
consulting firms in the world. From 1999 to 2002 Mr. Forrest was Chief of Agency
Operations for Direct Link Insurance Services; from 2002 to 2003, President of
AACQ Financial Services, and in 2003 COO of RS Group of Companies, Inc., before
moving to Strategy Insurance Limited as Chief Underwriting Officer. Mr. Forrest
graduated with a bachelor's degree in psychology from York University.
ANTHONY IATESTA became our Vice President of Underwriting on June 14,
2004. Mr. Iatesta has been in the Commercial Insurance sector since 1979. His
work experience has been in both Canada and the United States with such notable
companies as AIG, Aon and Zurich. He has held senior positions in the
underwriting area as well as being a licensed broker in Canada and the United
States. His experience includes managerial and marketing in the standard and
Excess & Surplus Lines marketplace.
EDWARD J. KRUK became our Chief Financial Officer on June 14, 2004. He
had previously been Chief Financial Officer of Strategy Insurance Limited since
January 1, 2004. Mr. Kruk is an accomplished senior financial executive, with
broad experience in handling the demands of multi-divisional operations and had
a private consulting practice, which assisted companies in the development of
growth management strategies. Mr. Kruk is a Chartered Accountant with an MBA
from the University of Toronto. For the 6 years prior to joining Strategy
Insurance Limited, Mr. Kruk was a Financial Consultant working with corporations
at the senior financial levels.
41
PHILIP ARMSTRONG became Managing Director of SUAL on June 14, 2004. Mr.
Armstrong started brokering in 1973 with Willis Faber, moving to the
underwriting side in 1978, he held a number of senior positions in the London
Market. In 1990 he moved to the Brockbank Syndicate where he was an underwriter
in his own right until 2000 when he moved to Aon as an Executive Director of
Global Risks. Mr. Armstrong left AON in June 2004 to join Strategy. Philip is a
former Chairman of Lloyd's European Working Group and Deputy Chairman of the
British Insurers European Committee.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our common stock as of December 28, 2004, by (i) each person who
"beneficially" owns more than 5% of all outstanding shares of common stock, (ii)
each director and the executive officer identified above and (iii) all directors
and the executive officer as a group.
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Owner Percent of Class
5% HOLDERS
Frank Ney 26,691,840 43.4%
c/o Strategy International Insurance Group
Inc.
200 Yorkland Blvd., Suite 200
Toronto, Ontario M2J5C1 Canada
Kavrav Ltd. 18,406,160 30.0%
c/o Strategy International Insurance Group
Inc.
200 Yorkland Blvd., Suite 200
Toronto, Ontario M2J5C1 Canada
Aviator Master Fund, Ltd. 7,678,004(1) 10.84%
JMG Triton Offshore Fund, Ltd. 5,848,480(1) 8.48%
JMG Capital Partners, LP 5,848,480(1) 8.48%
OFFICERS AND DIRECTORS
Stephen Stonhill 0 *
c/o Strategy International Insurance Group Inc.
200 Yorkland Blvd., Suite 200
Toronto, Ontario M2J5C1 Canada
Lennox Gibbs 0 *
c/o Strategy International Insurance Group Inc.
200 Yorkland Blvd., Suite 200
Toronto, Ontario M2J5C1 Canada
42
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Owner Percent of Class
Hugh Forrest 0 *
c/o Strategy International Insurance Group Inc.
200 Yorkland Blvd., Suite 200
Toronto, Ontario M2J5C1 Canada
Anthony Iatesta 0 *
c/o Strategy International Insurance Group Inc.
200 Yorkland Blvd., Suite 200
Toronto, Ontario M2J5C1 Canada
Edward J. Kruk 0 *
c/o Strategy International Insurance Group Inc.
200 Yorkland Blvd., Suite 200
Toronto, Ontario M2J5C1 Canada
Phillip Armstrong 0 *
c/o Strategy International Insurance Group Inc.
200 Yorkland Blvd., Suite 200
Toronto, Ontario M2J5C1 Canada
Directors and Officers as a group 0 *
(total of 7 persons)
- ---------------------------------------------------------------------------------------------------------------
* Represents less than 1%.
(1) Consists of shares of common stock underlying warrants exercisable
within 60 days.
EXECUTIVE COMPENSATION
(a) Summary Executive Compensation Table
Summary Compensation Table
Name and Principal Fiscal
Position Year* Salary ($) Bonus ($) Other Annual Compensation ($)
-------- ----- ---------- --------- -----------------------------
Stephen Stonhill 2004 $0 $0 $0
Chairman of the Board and Chief 2003 -- -- --
Executive Officer 2002 -- -- --
43
* Represents compensation for the fiscal year ended April 30 of the
specified year.
(b) Summary Option Grants
During the year ended April 30, 2004, we did not grant any options to
any named executive officers.
(c) Aggregated Option Exercises and Fiscal Year End Values
During the year ended April 30, 2004 none of our named executive officers
exercised options.
(d) Long Term Incentive Plans
We do not have any long-term incentive plans in place.
(e) Compensation of Directors
No standard arrangement regarding compensation of the
directors has been adopted by the Board, and, except as noted above, we have not
paid any compensation to any director.
(f) Employment Contracts
There are no current written employment agreements with any of
our officers and directors.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 17, 2004, we announced that we intend to acquire all the
outstanding common stock of RS Group of Companies, Inc. (OTCBB:RSGC) for a
combination of cash and stock, which would result in a value to RS Group common
stock holders of $1.75 per common share (approximately 65 million shares
outstanding), representing a 237 percent premium over the closing price of $0.52
on December 15, 2004. Our management, together with RS Group, is in the process
of determining the most effective method of achieving this acquisition. We do
not anticipate that the transaction will be conditioned upon obtaining any
external financing.
On November 16, 2004, a group of investors invested an aggregate amount
of US$50,000,000 in Units comprised of securities issued by us and our indirect
subsidiary, Strategy Real Estate Investments Ltd. Each Unit is comprised of (i)
one share of Series A Insured Redeemable Preferred Stock of SREI, (ii) one share
of Series B Preferred Stock of SREI and (iii) a warrant to purchase shares of
our common stock. The funds are being used to invest, through placements of
short-term second mortgages, in five (5) special purpose residential real estate
properties in Canada, being developed by the Lux Group Inc.
SREI's President, Mr. John Hamilton, together with SREI's Vice
President and a Director, Sandro Sordi, directly and indirectly beneficially own
approximately thirty-two percent (32%) of Lux and are beneficial owners of a
controlling stake of in RS Group. Several of our officers and directors,
including Stephen Stonhill and Edward Kruk, are officers and directors of RS
44
Group. In addition, Mr. John Hamilton is the brother of Mr. Kevin Hamilton, the
Chief Executive Officer of Lux.
LEGAL PROCEEDINGS
Other than immaterial claims in the ordinary course, to our knowledge,
there are no material legal proceedings presently pending or threatened to which
we (or any of our directors or officers in their capacity as such) are, or may
be, a party or to which our property is, or may be, subject.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None of the principal accountant's reports on the financial statements
for either of the past two years or the transition period contains an adverse
opinion or disclaimer of opinion, and none was modified as to uncertainty, audit
scope or accounting principles. There were no disagreements with Samuel Klein
and Company on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American
Registrar & Transfer, 342 E. 900 South, Salt Lake City, UT 84111. Its telephone
number is (801) 363-9065.
INTEREST OF EXPERTS AND COUNSEL
Our consolidated financial statements for the period from January 1,
2004 (inception) through February 15, 2004 and as of February 15, 2004 included
in this prospectus and in the registration statement of which this prospectus is
a part have been audited by Samuel Klein and Company, independent certified
public accountants, to the extent and for the periods set forth in their report
and are incorporated in this prospectus in reliance upon the report given upon
the authority of Samuel Klein and Company as experts in auditing and accounting.
The validity of the shares of common stock offered under this
prospectus will be passed upon by Jenkens & Gilchrist Parker Chapin LLP, The
Chrysler Building, 405 Lexington Avenue, New York, New York 10174.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement on Form SB-2 under the Securities Act, and the rules and
regulations promulgated under the Securities Act, with respect to the common
stock offered under this prospectus. This prospectus, which constitutes a part
of the registration statement, does not contain all of the information contained
in the registration statement
45
and the exhibits and schedules to the registration statement. While material
elements of the contracts and documents referenced in this prospectus are
contained in this prospectus, statements contained in this prospectus as to the
contents of any contract or other document referred to are not necessarily
complete, and in each instance reference is made to the full text of the
contract or other document which is filed as an exhibit to the registration
statement.
For further information with respect to us and the common stock offered
under this prospectus, reference is made to the registration statement and its
exhibits and schedules. The registration statement, including its exhibits and
schedules, may be inspected without charge at the Public Reference Room
maintained by the Securities and Exchange Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such documents may be obtained from the
Securities and Exchange Commission upon the payment of the charges prescribed by
the Securities and Exchange Commission. The public may obtain information on the
operation of the Public Reference Room by calling the Securities and Exchange
Commission at 1-800-SEC-0330.
The Securities and Exchange Commission maintains an Internet web site
that contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Securities and Exchange
Commission. The Securities and Exchange Commission's web site address is
http://www.sec.gov. Our web site address is www.strategyunderwriting.com.
46
INDEX TO FINANCIAL STATEMENTS
Strategy International Insurance Group, Inc. Unaudited Financial Statements...............................F-1
Strategy Holding Company Limited and Subsidiary (a Development Stage Company) Consolidated Financial
Statements................................................................................................F-9
47
STRATEGY INTERNATIONAL INSURANCE GROUP, INC.
UNAUDITED FINANCIAL STATEMENTS
FOR THE PERIOD FROM FEBRUARY 16, 2004 TO OCTOBER 30, 2004
F-1
STRATEGY INTERNATIONAL INSURANCE GROUP, INC.
FORMERLY CI CELL CARS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
October 31, April 30,
2004 2004
------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 415,761 $ 184,000
Mortgage Interest receivable 1,907,938 378,375
Accounts receivable-other 75,000
------------- -------------
Total Current Assets 2,398,699 562,375
Mortgage notes receivable - held to maturity 104,231,610 104,231,610
Fixed assets 28,575 -
Other assets 15,000 -
Total Assets $ 106,673,884 $ 104,793,985
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accrued preferred dividends payable $ 8,685,967 $ 3,474,387
Accrued liabilities 824,518 14,222
Unearned premium reserves 312,621 -
Claims reserves 124,663 -
------------- -------------
Total Current Liabilities 9,947,769 3,488,609
------------- -------------
Total Liabilities 9,947,769 3,488,609
------------- -------------
Stockholders' Equity:
Common stock ($.001 par value, 100,000,000 shares authorized 61,470,000 and
46,000,000 shares issued and outstanding
as of October 31 and April 30, 2004 respectively) 61,470 46,000
Additional paid in capital
10% Cumulative Class A Preferred stock ($.001 stated value, 303,760 304,000
unlimited shares authorized, 47,670 issued and outstanding) 47,670,084 47,670,084
10% Cumulative Class B Preferred stock ($.001 stated value,
unlimited shares authorized, 56,562 issued and outstanding) 56,561,526 56,561,526
Accumulated deficit (7,870,725) (3,276,234)
------------- -------------
Total Stockholders' Equity 96,726,115 101,305,376
------------- -------------
Total Liabilities and Stockholders' Equity $ 106,673,884 $ 104,793,985
============= =============
--------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-1
STRATEGY INTERNATIONAL INSURANCE GROUP, INC.
FORMERLY CI SELL CARS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
For the Three Months Ended For the Six Months Ended
October 31, October 31,
2004 2003 2004 2003
------------ -------- ------------ --------
Gross Written Premium $ 753,992 $ - $ 753,992 $ -
------------ -------- ------------ --------
Brokerage and Acquisition Costs 129,711 129,711
------------ -------- ------------ --------
Net Written Premium 624,281 624,281
------------ -------- ------------ --------
Unearned Premium Reserve 312,621 312,621
------------ -------- ------------ --------
Net Earned Premium 311,660 - 311,660 -
------------ -------- ------------ --------
General and administrative expenses 761,293 - 1,208,580 -
------------ -------- ------------ --------
Net loss from operations 449,633 - 896,920 -
------------ -------- ------------ --------
Other Revenue (Expense):
Investment Income 651,448 - 1,529,564 -
------------ -------- ------------ --------
Net income before discontinued operations 201,815 - 632,644 -
------------ -------- ------------ --------
Discontinued operations - - (15,555) -
------------ -------- ------------ --------
Net income before preferred dividend 201,815 - 617,089 -
------------ -------- ------------ --------
Dividends on preferred stock (2,605,790) - (5,211,580) -
------------ -------- ------------ --------
Net loss on common stock $ (2,403,975) $ - $ (4,594,491) $ -
============ ======== ============ ========
Loss per Share:
Basic and diluted loss per share:
Continued Operations $ (0.04) $ - $ (0.08) $ -
============ ======== ============ ========
Discontinued Operations $ (0.00) $ - $ (0.00) $ -
============ ======== ============ ========
Basic and diluted weighted average common
shares outstanding 61,470,000 - 57,602,500 -
============ ======== ============ ========
- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
STRATEGY INTERNATIONAL INSURANCE GROUP, INC.
FORMERLY CI SELLS CARS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Six Months Ended
OCTOBER 31,
2004 2003
----------- --------
Cash Flows Provided by Operating Activities:
Net (loss) on common stock $(4,594,491) $ -
Adjustments to reconcile net (loss) on common stock
to net cash provided by operations:
Dividends payable on preferred stock 5,211,580 -
Changes in operating assets and liabilities:
Increase in accounts receivable-other (75,000) -
Increase in mortgage interest receivable (1,529,564) -
Increase in other assets (15,000) -
Increase in accrued expenses 1,247,133 -
----------- --------
Net cash flows provided by operating activities $ 244,658 -
----------- --------
Cash Flows from Investing Activities:
Purchase of property and equipment (28,575) -
Cash acquired in reverse merger 15,678 -
----------- --------
Net cash (used in) investing activities (12,897) -
----------- --------
Cash Flows Provided by Financing Activities: - -
----------- --------
Net increase in Cash 231,761 -
----------- --------
Cash and Cash Equivalents, beginning of period 184,000 -
Cash and Cash Equivalents, end of period $ 415,761 $ -
=========== ========
Supplemental Disclosure of Noncash Investing and
Financing Activities:
Reverse merger:
Common stock issued $ 15,230 $ -
=========== ========
Liabilities assumed $ 448 $ -
=========== ========
Cash acquired $ 15,678 $ -
=========== ========
-------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
STRATEGY INTERNATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
FORMERLY CI SELL CARS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2004
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
On June 14, 2004, the Company completed an Agreement and plan of Reorganization
("The Definitive Stock Exchange Agreement") with CI Sell Cars, Inc. ("CI") a
Texas incorporated public company.
The Definitive Stock Exchange Agreement provided for the purchase and retirement
of 25,827,000 shares of CI's common stock by the Company and the forward split
of the remaining 1,105,000 outstanding shares of CI's common stock into
15,470,000 shares and the issuance of 45,100,000 shares of CI's common stock to
the Company's shareholders.
Under the terms of the transaction, CI issued 45,100,000 shares of its common
stock in exchange for 100% of the Company's outstanding shares. After taking
full effect of the share exchange agreement, as well as a 14 to 1 forward stock
split of CI shares effective as of June 3, 2004.
The stock exchange transaction will be accounted for as a purchase with the
Company deemed the acquirer for accounting and financial reporting purposes.
However since the shareholders of the Company will own approximately 85% of the
outstanding shares of reorganized CI no step up in basis or goodwill will be
recorded. This accounting treatment is in accordance with the Securities and
Exchange Commission Staff Members position that the acquisition by a public
shell of the assets of a business of a private company should be accounted for
at historical cost and accounted for as a reverse merger.
The accompanying unaudited financial statements have been prepared in accordance
with the accounting principles generally accepted in the United States of
America and the rules and regulations of the United States Securities and
Exchange Commission for interim financial information. Accordingly, they do not
include all the information and footnotes necessary for a comprehensive
presentation of financial position and results of operations and should be read
in conjunction with the CI's Annual Report Form 10-KSB for the year ended April
30, 2004 and in conjunction with the financial statements of the company
included in form 8-KA dated August 30, 2004.
The statements of operations for the three and six months ended October 31, 2004
and 2003 are not necessarily indicative of results for the full year.
It is management's opinion, however, that all material adjustments (consisting
of normal recurring adjustments) have been made which are necessary for fair
financial statements presentation. The results for the interim period are not
necessarily indicative of the results to be expected for the year.
Earnings (Loss) per Share
The Company computes earnings or loss per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). Basic
earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding.
Diluted earnings per share reflects the potential dilution that could occur if
securities or other agreements to issue common stock were exercised or converted
into common stock. Diluted earnings per share is computed based upon the
weighted average number of common shares and dilutive common equivalent shares
outstanding, which include convertible debentures, stock options and warrants.
F-4
STRATEGY INTERNATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
FORMERLY CI SELL CARS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2004
The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America and all
amounts are stated in U.S. dollars.
2. SUBSEQUENT EVENTS
On November 16, 2004, a group of investors invested an aggregate amount of
US$50,000,000 in Units (the "Units") comprised of securities issued by the
Registrant and its indirect subsidiary, Strategy Real Estate Investments Ltd., a
corporation formed under the laws of the Province of Ontario, Canada ("SREI").
Each Unit is comprised of (i) one share of Series A Insured Redeemable Preferred
Stock of SREI (the "Series A Preferred"), (ii) one share of Series B Preferred
Stock of SREI (the "Series B Preferred") and (iii) a warrant (the "Warrant") to
purchase shares of common stock, $0.01 par value of the Registrant. The purchase
price was $10,000 per Unit.
The funds will be used to invest, through placements of short-term second
mortgages, in five (5) special purpose residential real estate properties
("SPEs") in Canada, being developed by the Lux Group Inc., a company formed
under the laws of the Province of Ontario, Canada and under common control with
SREI.
The offer and sale of the Units was made to "accredited investors", as that term
is defined under Rule 501 under Regulation D of the Securities Act of 1933, as
amended, pursuant to the exemption from registration requirements under Rule 506
and Section 4(2) of the Securities Act.
Series A Preferred of SREI
The Series A Preferred shares will pay dividends at an annual rate of ten
percent (10%), which shall be paid quarterly. An insurance company with an "A-"
rating by AM Best's is insuring payment of 100% of the quarterly dividends on
the Series A Preferred over the three (3) year period they will be outstanding
and the liquidation preference of the Series A Preferred pursuant to a
Contingent Guarantee Policy. Upon the occurrence of certain events of default
(as set forth in the Articles of Incorporation of SREI), the Series A
liquidation preference and all accrued and unpaid dividends thereon shall become
immediately payable.
The Series A Preferred will be subject to mandatory redemption by SREI, three
(3) years from the date of issuance (the "Maturity Date"), at their full
liquidation preference, net of all appropriate Canadian withholding and income
tax, plus all accrued and unpaid dividends.
Series B Preferred of SREI
Each share of Series B Preferred of SREI entitles its holder to receive a pro
rata share of five percent (5%) of the gross sales (the "Gross Sales Interest")
from each of the five (5) SPEs in which SREI invests. Payments of the Gross
Sales Interest shall be made from time to time after the sale of each project by
the SPEs to a third party for monetary consideration. SREI will receive the
Gross Sales Interest (which will be paid out to the holders of shares of Series
B Preferred) pursuant to Participation Agreements between SREI and each of the
five (5) SPEs. The shares of Series B Preferred of SREI are not redeemable and
they will continue to receive the Gross Sales Interest for as long as they are
outstanding. No dividends (other than payment of the Gross Sales Interest) will
be payable on the shares of Series B Preferred.
F-5
STRATEGY INTERNATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
FORMERLY CI SELL CARS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2004
Warrants to Purchase Common Stock of the Registrant
Each Warrant is exercisable, prior to the Maturity Date, into shares of common
stock, $.001 par value, of the Registrant. Each Warrant will allow its holder to
exercise the warrant into a number of shares of common stock equal to the
quotient obtained by dividing (a) the liquidation preference of the Series A
Shares owned by such investor plus any accrued and unpaid dividends thereon by
(b) the then applicable set price. The initial set price is $1.6671. In order to
exercise the Warrant, an investor will be required to submit for cancellation a
certificate representing Series A Preferred shares with the appropriate
liquidation preference. The Registrant is obligated to register such number of
shares of its common stock into which the warrants are exercisable in accordance
with the terms of a Registration Rights Agreement, not later than December 31,
2004.
The unaudited pro forma consolidated results are based on estimates and
assumptions which are preliminary and have been made solely for the purposes of
developing such pro forma information. The unaudited pro forma consolidated
results are not necessarily an indication of the results that would have been
achieved had such transactions been consummated as of the dates indicated that
may be achieved in the future.
The unaudited pro forma combined results should be read in conjunction with the
historical consolidated financial statements and notes thereto set forth herein
for the Company on Form 10-KSB for April 30, 2004, and Form 8-KA dated August
30, 2004.
The following pro forma balance sheet gives effect to this transaction as if it
had occurred on October 31, 2004.
F-6
STRATEGY INTERNATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
FORMERLY CI SELL CARS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2004
PRO FORMA CONSOLIDATED BALANCE SHEET
(UNAUDITED)
October 31, Pro Forma Pro-Forma
2004 Adjustments Results
--------------- ---------------- ---------------
ASSETS
Current Assets:
Cash and cash equivalents $ 415,761 $ 1,000,000 (a) $ 38,575,761
(1,000,000) (b)
38,160,000 (c)
Mortgage Interest receivable 1,907,938 - 1,907,938
Accounts receivable-other 75,000 - 75,000
Total Current Assets 2,398,699 38,160,000 40,558,699
--------------- ---------------- ---------------
Mortgage notes receivable - held to maturity 104,231,610 8,080,000 (c) 112,311,610
Fixed assets 28,575 - 28,575
Other assets 15,000 - 15,000
Due from affiliate - 1,000,000 (b) 1,000,000
--------------- ---------------- ---------------
Total Assets $ 106,658,884 $ 47,240,000 $ 153,913,884
=============== ================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accrued preferred dividends payable $ 8,685,967 $ - $ 8,685,967
Accrued liabilities 824,518 - 824,518
Unearned premium reserves 312,621 - 312,621
Claims reserves 124,663 - 124,663
--------------- ---------------- ---------------
Total Current Liabilities 9,947,769 - 9,947,769
--------------- ---------------- ---------------
Long-term debt:
Redeemable insured series (A) preferred stock 500,000 (a)
46,235,000 (c)
5,994,441 (d) 52,729,441
Total Liabilities 9,947,769 - 62,677,210
--------------- ---------------- ---------------
Stockholders' Equity:
Common stock ($.001 par value, 100,000,000 shares authorized
61,470,000 and 46,000,000 shares issued and outstanding
as of October 31 and April 30, 2004 respectively) 61,470 - 61,470
Additional paid in capital 303,760 - 303,760
Unamortized finance costs series (A) preferred stock (5,994,441) (d) (5,994,441)
10% Cumulative Class A Preferred stock ($.001 stated value,
unlimited shares authorized, 47,670 issued and 47,670,084 - 47,670,084
outstanding)
10% Cumulative Class B Preferred stock ($.001 stated value,
unlimited shares authorized, 56,562 issued and 56,561,526 - 56,561,526
outstanding)
Class B Preferred stock ($.001 stated value, 500,000 (a)
unlimited shares authorized, 5,000 issued and outstanding) 5,000 (c) 505,000
F-7
STRATEGY INTERNATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
FORMERLY CI SELL CARS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2004
October 31, Pro Forma Pro-Forma
2004 Adjustments Results
--------------- ---------------- ---------------
Accumulated deficit (7,870,725) - (7,870,725)
=============== ================ ===============
Total Stockholders' Equity 96,726,115 (5,489,441) 91,236,674
=============== ================ ===============
Total Liabilities and Stockholders' Equity $ 106,673,884 $ (5,489,441) $ 153,913,884
=============== ================ ===============
F-8
STRATEGY HOLDING COMPANY LIMITED AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM INCEPTION (JANUARY 1, 2004) TO FEBRUARY 15, 2004
F-9
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Strategy Holding Company Limited and Subsidiary
Chancery House
High Street
Bridgetown, Barbados, West Indies
We have audited the accompanying consolidated balance sheet of Strategy Holding
Company Limited and Subsidiary (A Development Stage Company incorporated in
Barbados) at February 15, 2004 and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the period from
inception (January 1, 2004) to February 15, 2004. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statements based on our audit.
We conducted our audit of these financial statements in accordance with auditing
standards generally accepted in the United States of America which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatements. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Strategy
Holding Company Limited and Subsidiary at February 15, 2004, and the results of
its operations and its cash flows for the period from inception (January 1,
2004) to February 15, 2004 in conformity with accounting principles generally
accepted in the United States of America.
SAMUEL KLEIN AND COMPANY
Newark, New Jersey
February 27, 2004
F-10
STRATEGY HOLDING COMPANY LIMITED AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
FEBRUARY 15, 2004
ASSETS
Current Assets:
Cash and cash equivalents $ 350,000
-------------
Mortgage notes receivable - held to maturity 104,231,610
-------------
Total Assets $ 104,581,610
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accrued preferred dividends payable $ 1,302,895
Accrued liabilities 25,000
-------------
Total Current Liabilities 1,327,895
-------------
Total Liabilities 1,327,895
-------------
Stockholders' Equity:
Common stock (no par value, unlimited shares
authorized 1,000 shares issued and outstanding) 350,000
10% Cumulative Class A Preferred stock ($.001 stated value,
unlimited shares authorized, 47,670 issued and outstanding) 47,670,084
10% Cumulative Class B Preferred stock ($.001 stated value,
unlimited shares authorized, 56,562 issued and outstanding) 56,561,526
Deficit accumulated during development stage (1,327,895)
-------------
Total Stockholders' Equity 103,253,715
-------------
Total Liabilities and Stockholders' Equity $ 104,581,610
=============
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
STRATEGY HOLDING COMPANY LIMITED AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (JANUARY 1, 2004) TO FEBRUARY 15, 2004
Revenues $ -
Total Revenues -
Expenses 25,000
Total Expenses 25,000
Net Loss $(25,000)
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
STRATEGY HOLDING COMPANY LIMITED AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (JANUARY 1, 2004) TO FEBRUARY 15, 2004
Cash Flows Provided by Operating Activities:
Net (loss) $ (25,000)
Adjustments to reconcile net (loss) to net
cash provided by operations:
Dividends payable on preferred stock (1,302,895)
Changes in operating assets and liabilities:
Increase in accrued expenses 25,000
Increase in accrued dividends payable 1,302,895
-------------
Net cash flows provided by operating activities -
-------------
Cash Flows from Investing Activities -
-------------
Cash Flows Provided by Financing Activities:
Proceeds from issuance of common shares 350,000
-------------
Net cash flows provided by financing activities 350,000
Net Increase in Cash 350,000
Cash and Cash Equivalents, Inception January 1, 2004 -
-------------
Cash and Cash Equivalents, February 15, 2004 $ 350,000
=============
Supplemental Disclosure of Noncash Investing and
Financing Activities:
Issuances of 10% cumulative preferred stock for
consideration of mortgage notes receivable $ 104,231,610
The accompanying notes are an integral part of these consolidated financial
statements.
F-13
STRATEGY HOLDING COMPANY LIMITED AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JANUARY 1, 2004) TO FEBRUARY 15, 2004
Deficit
Common Stock Preferred Stock Accumulated
----------------------- ------------------------------ During the Total
Number of Number of Shares Development Stockholders'
Shares Amount $.001 Stated Value Amount Stage Equity
------ ------ ------------------ ------ ----- ------
Balances January 1, 2004
(Inception) - $ - - $ - $ - $ -
Issuance of Common Stock 1,000 350,000 - - - 350,000
Issuance of Class A
Preferred Stock - - 47,670 47,670,084 - 47,670,084
Issuance of Class B
Preferred Stock - - 56,562 56,561,526 - 56,561,526
Net Loss for the Period - - - - (25,000) (25,000)
Dividends Payable on
Preferred Stock - - - - (1,302,895) (1,302,895)
Net Loss for the Period from
Inception (January 1,
2004) to February 15,
2004 - - - - - -
Balances February 15, 2004 1,000 $350,000 104,232 $104,231,610 $(1,327,895) $103,253,715
The accompanying notes are an integral part of these consolidated financial
statements.
F-14
STRATEGY HOLDING COMPANY LIMITED AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 15, 2004
1. THE COMPANY AND NATURE OF OPERATIONS
Strategy Holding Company Limited, a Barbados incorporated company registered
under the Barbados Exempt Insurance Act as a holding company along with its
wholly-owned subsidiary, Strategy Insurance Limited, a Development Stage Company
incorporated in Barbados for the purpose of doing business as a licensed
multi-line insurer. Strategy Holding Company Limited and Strategy Insurance
Limited are hereafter referred to as the "Company". The Company plans to conduct
business as a direct writer as well as a reinsurer of worldwide property,
casualty and specialty risks.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America and all
amounts are stated in U.S. dollars.
(b) Use of Estimates
The preparation of financial statements in accordance with accounting principals
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Management periodically reviews its estimates and
assumptions including particularly the adequacy of reserves for unpaid losses
and loss adjustment expenses, reinsurance allowance for doubtful accounts and
litigation liabilities, as well as deferred policy acquisition costs. Actual
results may differ from the estimates and assumptions used in preparing the
financial statements.
(c) Financial Instruments
The Company plans to account for its investments in accordance with Financial
Accounting Standards Board Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115) or in accordance with
Statement No. 107, "Disclosures About Fair Value of Financial Instruments" (SFAS
107). This statement, as amended by Statement No. 133 (SFAS 133), requires
disclosures of both the fair value and the basis of estimating the fair value.
SFAS No. 115 requires that certain debt and equity securities be classified into
one of three categories: held-to-maturity, available-for-sale, or trading
securities. Investments in debt securities that the enterprise has the positive
intent and ability to hold to maturity are classified as held-to-maturity and
reported at amortized cost in the statement of financial position. Securities
that are bought and held principally for the purpose of selling them in the near
term are classified as trading securities and reported at fair value. Trading
generally reflects active and frequent buying and selling, and trading
securities are generally used to generate profit on short-term differences in
price. Investments not classified as either held-to-maturity or trading
securities are classified as available-for-sale securities and reported at fair
value.
F-15
STRATEGY HOLDING COMPANY LIMITED AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 15, 2004
(continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(c) Financial Instruments (Continued)
SFAS No. 107 defines noncurrent receivables as financial instruments and
requires disclosure of fair value information about financial instruments,
whether or not recognized on the face of the balance sheet, for which it is
practical to estimate that value. SFAS 107 defines fair value as the quoted
market prices for those instruments that are actively traded in financial
markets. In cases where quoted market prices are not available, fair values are
estimated using present value or other valuation techniques. The fair value
estimates are made at a specific point in time, based on available market
information and judgments about the financial instrument, such as estimates of
timing and amount of expected future cash flows. Such estimates do not reflect
any premium or discount that could result from offering for sale at one time the
Company's entire holdings of a particular financial instrument, nor do they
consider the tax impact of the realization of unrealized gains or losses. In
many cases, the fair value estimates cannot be substantiated by comparison to
independent markets, nor can the disclosed value be realized in immediate
settlement of the instrument.
(d) Cash Equivalents
The Company considers all investments with original maturities of 90 days or
less to be cash equivalents.
(e) Premium Income
Income on premiums will be recognized as written upon inception of the policy.
For multi-year policies written which are payable in annual installments, due to
the ability of the insured/reinsured to commute or cancel coverage within the
term of the policy, only the annual premium will be included as written at
policy inception. The remaining annual premiums included as written at each
successive anniversary date within the multi-year term.
Premiums written will be primarily earned on a daily pro-rata basis over the
terms of the policies to which they relate. Accordingly, unearned premiums will
represent the portion of premiums written which is applicable to the unexpired
portion of the policies in force.
Reinsurance premiums assumed will be estimated based on information provided by
ceding companies. The information used in establishing these estimates is
reviewed and subsequent adjustments are recorded in the period in which they are
determined. These premiums are earned over the terms of the related reinsurance
contracts.
(f) Policy Acquisition Costs
Policy acquisition costs will consist of commissions, premium taxes,
underwriting and other costs that vary with and are primarily related to the
production of premiums. Acquisition costs are deferred and amortized over the
period in which the related premiums are earned. To the extent that future
policy revenues on existing policies are not adequate to cover related costs and
expenses, deferred policy acquisition costs will be charged to earnings.
F-16
STRATEGY HOLDING COMPANY LIMITED AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 15, 2004
(continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company will consider anticipated investment income in determining whether a
premium deficiency exists.
(g) Unpaid Losses and Loss Expenses
Unpaid losses and loss expenses will consist of a provision for outstanding
losses and loss expenses and a provision for losses incurred but not reported
(IBNR). As with premiums, current year losses will be as reported. Provisions
for outstanding losses and loss expenses are valued on claim adjusters'
evaluations, with additional provisions made where the ceding company's
management considers necessary. The IBNR component of the reported losses is
established by ceding company management in consultation with its actuaries
based on a combination of company and industry data.
A liability will be established for the estimated unpaid losses and loss
expenses of the Company under the terms of, and with respect to, its policies
and agreements.
The process of establishing reserves is a complex and imprecise process,
requiring the use of informed estimates and judgments. Estimates and judgments
may be revised as additional experience and other data become available and are
reviewed, as new or improved methodologies are developed or as current laws
change. Any such revisions could result in future changes in estimates of losses
or reinsurance recoverable, and would be reflected in the Company's results of
operations in the period in which the estimates are changed.
Reported losses and loss expenses on direct business will be valued on claim
adjusters' evaluation, with additional provisions made where management
considers these necessary. The IBNR provision is primarily established by
management in conjunction with the consulting actuaries based on the application
of a combination of company and industry data. Any difference between the
estimated amounts and the actual settlements will be reflected in the results of
the year in which they are determined.
Future developments may result in losses and loss expenses significantly greater
or less than the reserve provided.
(h) Property and Equipment
Property and equipment will be stated at cost less accumulated depreciation and
amortization. Depreciation and amortization of property and equipment are
calculated using the straight-line method over the estimated useful lives.
F-17
STRATEGY HOLDING COMPANY LIMITED AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 15, 2004
(continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(i) Comprehensive Income
Comprehensive income represents all changes in equity of an enterprise that
result from recognized transactions and other economic events during the period.
Other comprehensive income refers to revenues, expenses, gains and losses that,
under accounting principles generally accepted in the United States of America,
are included in comprehensive income but excluded from net income, such as
unrealized gains or losses on certain investments in fixed maturities and equity
securities.
(j) Translation of Foreign Currencies
Under FAS 52, "Foreign Currency Translation", monetary foreign currency assets
and liabilities are translated into U.S. dollars using period end rates of
exchange. Non-monetary assets and liabilities, as well as statement of
operations amounts, expressed in foreign currencies are translated using average
exchange rates. Gains and losses resulting from foreign currency translations
are recorded in current income.
(k) Risks and Uncertainties
Cash and investment securities are exposed to various risks, such as interest
rate, market, and credit. Due to the level of risk associated with investment
securities and the level of uncertainty related to changes in the value of
investment securities, it is at least reasonably possible that changes in risks
in the near term would materially affect the amounts reported in the financial
statements.
(l) New Accounting Standards
In May 2003, the Financial Accounting Standards Board (FASB) issued SFAS No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" (SFAS 150). The statement requires an issuer to classify
a financial instrument as a liability (or an asset in some circumstances)
because that financial instrument embodies an obligation of the issuer. These
obligations include, but are not limited to, mandatorily redeemable stock,
obligations to repurchase company shares and other obligations payable in
company stock. The Company has completed its assessment of the effect of the
pronouncement and has determined that it will not have an impact on its
financial condition, results of operations or cash flows.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities" (SFAS 149). SFAS 149 is generally
effective for contracts entered into or modified after June 30, 2003. This
amendment, among other things, further clarifies several implementation issues
related to SFAS 133, as amended. The adoption of SFAS 149 did not have an impact
on the Company's financial condition, results of operations or cash flows.
F-18
STRATEGY HOLDING COMPANY LIMITED AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 15, 2004
(continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(l) New Accounting Standards (Continued)
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46), which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements." This
interpretation provides guidance on the identification and consolidation of
variable interest entities, whereby consolidation is achieved through means
other than through control. FIN 46 did not have an impact on the Company's
financial condition, results of operations or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" (SFAS 148), an amendment of FASB
Statement No. 123. SFAS 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
has not elected a voluntary change in accounting to the fair value based method,
and accordingly, the adoption of SFAS 148 did not have a significant impact on
the Company's results of operations or financial position.
3. MORTGAGE NOTES RECEIVABLE
In early February 2004 the Company received, as consideration for their issuance
of both the Class A and Class B 10% cumulative preferred stock, mortgage notes
receivable totaling $104,231,610. The Company has classified the mortgage notes
receivable as noncurrent and they have been recorded at cost in accordance with
the Company's intention to hold these notes to maturity. The aggregate fair
value of the mortgage notes receivable approximates its carrying amount because
the transaction in which the notes were acquired was recent and based on market
conditions. The notes receivable are interest receivable only beginning April 1,
2004 with principal receivable at maturity on April 1, 2014. The notes are
collateralized by real estate having an estimated fair market value equal to the
carrying amount of the mortgage notes receivable.
4. REINSURANCE
The Company intends to purchase reinsurance for the purpose of minimizing their
net loss.
F-19
STRATEGY HOLDING COMPANY LIMITED AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 15, 2004
(continued)
5. TAXATION
Pursuant to the Exempt Insurance Act (the "Act") of the Laws of Barbados, the
profits and gains of a licensee derived from exempt insurance business conducted
in Barbados are exempt from income tax:
(a) for the first 15 financial years of the licensee, including
the year in which its license was issued
(b) thereafter at the rate of 2 percent of the first $250,000 of
taxable income and at the rate of zero per cent in respect of
all other taxable income in excess of $250,000.
6. REGULATORY REQUIREMENTS
A license may be issued to a company under this Act when that company has a
minimum paid-up capital of $250,000.
When a company that has been licensed proposes to begin, and in any case not
later than 7 days after beginning, to engage in exempt insurance business, it
shall so notify the Supervisor, and shall certify to his satisfaction that it
has minimum paid-up capital or contributed reserves.
7. STOCKHOLDERS' EQUITY
Under the Companies Act of Barbados, the Company is authorized to issue:
(i) an unlimited number of shares of a class designated Common
shares
(ii) an unlimited number of redeemable preference shares of a class
designated Class A Redeemable Preference Shares, Series 1
(iii) an unlimited number of redeemable preference of a class
designated Class B Redeemable Preference Shares, Series 1
(vi) an unlimited number of redeemable preference shares of a class
designated Class C Redeemable Preference Shares, Series 1
(v) an unlimited number of redeemable preference shares of a class
designated Class D Redeemable Preference Shares, Series 1.
Common Stock
On January 30, 2004 the Company issued 1,000 shares of its Common Stock for
$350,000.
F-20
STRATEGY HOLDING COMPANY LIMITED AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 15, 2004
(continued)
7. STOCKHOLDERS' EQUITY (Continued)
Preferred Stock
On February 4, 2004 the Company issued non-voting 10% Cumulative Class A
Preferred Stock Series 1; having a redemption value of approximately Forty-Seven
Million Six Hundred and Seventy Thousand and Eighty-Four ($47,670,084.00) and
also issued non-voting 10% Cumulative Class B Preferred Stock of the Company
having a redemption value of approximately Fifty-Six Million Five Hundred and
Sixty One Thousand Five Hundred and Twenty-Six ($56,561,526.00), and received
mortgage notes receivable totaling approximately $104,231,610 in consideration
for these issuances. The preferred stockholders' agreement calls for dividends
to begin to accrue as of January 1, 2004.
8. SUBSEQUENT EVENTS (Unaudited)
On June 14, 2004, the Company completed an Agreement and plan of Reorganization
("The Definitive Stock Exchange Agreement") with CI Sells Cars, Inc. ("CI") a
Texas incorporated public company.
The Definitive Stock Exchange Agreement provided for the purchase and retirement
of 25,827,000 shares of CI's common stock by the Company and the forward split
of the remaining 1,105,000 outstanding shares of CI's common stock into
15,470,000 shares and the issuance of 45,100,000 shares of CI's common stock to
the Company's shareholders.
Under the terms of the transaction, CI Sells issued 45,100,000 shares of its
common stock in exchange for 100% of the Company's outstanding shares. After
taking full effect of the share exchange agreement, as well as a 14 to 1 forward
stock split of CI shares effective as of June 3, 2004, the Company now has
approximately 61,500,000 shares outstanding.
F-21
STRATEGY INTERNATIONAL INSURANCE GROUP, INC.
29,992,207 Shares
Common Stock
PROSPECTUS
You should rely only on the information contained in this document or that we
have referred you to. We have not authorized anyone to provide you with
information that is different. This prospectus is not an offer to sell common
stock and is not soliciting an offer to buy common stock in any state where the
offer or sale is not permitted.
________ __, 200_
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
Strategy International Insurance Group, Inc., Strategy International Insurance
Group, Inc. has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses in connection
with the offering described in this Registration Statement:
------------------------------------------------------------------------ --------------------
Item Amount ($)
------------------------------------------------------------------------ --------------------
SEC Registration Fee 7,828.03
------------------------------------------------------------------------ --------------------
Legal Fees 35,000.00
------------------------------------------------------------------------ --------------------
Accounting Fees 20,000.00
------------------------------------------------------------------------ --------------------
Total $62,828.03
------------------------------------------------------------------------ --------------------
Item 26. Recent Sales of Unregistered Securities
On November 16, 2004, our indirect wholly-owned subsidiary, Strategy
Real Estate Investments Ltd., a corporation formed under the laws of the
Province of Ontario, Canada, sold to a group of institutional and accredited
investors in a private placement exempt from registration under Section 4(2) of
the Securities Act of 1933, as amended, an aggregate amount of $50,000,000 of
units, each unit consisting of (a) one share of Series A Insured Redeemable
Preferred Stock of Strategy Real Estate Investments; (b) one share of Series B
Preferred Stock of Strategy Real Estate Investments; and (c) warrants to
purchase shares of our common stock, $.001 par value per share. The purchase
price was $10,000 per unit.
The warrants issued by us in the private placement are exercisable at
the option of the holder for a period of three years into shares of our common
stock. Each warrant permits its holder to exercise the warrant into a number of
shares of common stock equal to the quotient obtained by dividing (a) the
liquidation preference amount of the shares of Series A Preferred Stock of
Strategy Real Estate Investments owned by such holder plus any accrued but
unpaid dividends thereon by (b) $1.6671. The holders of the warrants are
required to surrender the certificates representing the shares Series A
Preferred Stock of Strategy Real Estate Investments with the appropriate
liquidation preference upon the exercise of the warrants.
We are obligated to register for resale the shares of common stock
issuable upon exercise of the warrants pursuant to a registration rights
agreement dated November 16, 2004 between the registrant and the purchasers
named therein, of which this registration statement relates.
II-1
Item 27. Exhibits and Financial Statement Schedules
Exhibit Footnote
Number Description of Exhibit Reference
2.1 Agreement and Plan of Reorganization by and Among CI Sell Cars, Inc., (1)
Strategy Holding Company Limited and the Stockholders of Strategy Insurance
Limited.
3.1 Articles of Incorporation of Strategy International Insurance Group, Inc., as (3)
amended.
3.2 Bylaws of Strategy International Insurance Group, Inc., as amended. (3)
3.3 Articles of Amendment of Strategy Holding Company Limited (4)
5.1 Opinion of Jenkens & Gilchrist Parker Chapin LLP (4)
10.1 Subscription Agreement, dated as of November 16, 2004, among Strategy (2)
International Insurance Group, Strategy Real Estate Investments Ltd. and the
subscribers named therein.
10.2 Registration Rights Agreement dated as of November 16, 2004 among Strategy (2)
International Insurance Group and the subscribers named therein.
10.3 Form of Warrant dated November 16, 2004 issued by Strategy International (2)
Insurance Group.
10.4 Form of Guaranty dated November 16, 2004 issued by Strategy International (2)
Insurance Group.
10.5 Amendment to Articles of Incorporation of Strategy Real Estate Investments, (2)
Ltd.
23.1 Consent of Samuel Klein and Company, Independent Auditors. (4)
(1) Incorporated by reference to our Annual Report on Form 10-KSB for the fiscal
year ended April 30, 2004, filed on July 29, 2004.
(2) Incorporated by reference to our Current Report on Form 8-K, filed on
November 17, 2004.
(3) Incorporated by reference to our Registration Statement on Form SB-2, filed
on June 30, 2003.
(4) Filed herewith.
Item 28. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement to:
II-2
(i) include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933 (the "Securities Act");
(ii) reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
Registration Statement; and
(iii) include any additional or changed material information on the
plan of distribution.
(2) That, for determining liability under the Securities Act, each such
post-effective amendment shall be treated as a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(3) To file a post-effective amendment to remove from registration any
of the securities being registered that remain unsold at the end of the
offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-3
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the city of Toronto,
Ontario on December 30, 2004.
STRATEGY INTERNATIONAL INSURANCE GROUP, INC.
By: /s/ Stephen Stonhill
--------------------------------------------
Stephen Stonhill,
Chairman of the Board and Chief Executive Officer
/s/ Edward J. Kruk
--------------------------------------------
Edward J. Kruk,
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of
Strategy International Insurance Group, Inc., a Texas corporation that is filing
a registration statement on Form SB-2 with the Securities and Exchange
Commission under the provisions of the Securities Act of 1933, as amended,
hereby constitutes and appoints Ed Kruk its true and lawful attorney-in-fact and
agent; with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign such amendment to
registration statement and any or all amendments to the registration statement,
including a prospectus or an amended prospectus therein, and all other documents
in connection therewith to be filed with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all interests and purposes as they might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent or, or its substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
/s/ Stephen Stonhill Director December 30, 2004
- -----------------------------------------
Stephen Stonhill