STRATEGIC INTERNET INVESTMENTS, INC. (OTCBB: SIII), Part I – BUILDING CASTLES IN THE SAND October 30, 2002
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Are you planning a vacation? Why not pick a tranquil spot, like the Middle East? Plenty of sand and sun. Far away from the stress of your hometown, and a stone’s throw (or, perhaps more appropriately, a Scud’s throw) from Iraq and Iran, there soon could be a “dream resort” that includes a luxury hotel, villa, a water park, a spa, restaurants an entertainment center, a marina and sports facilities. As an added bonus we suspect you might even be able to lounge by the pool and watch a U.S. military jet or two.
Does it sound too good to believe? Or too bizarre to contemplate? Not according to the “Small Cap Profile” which has been paid to circulate a report on Strategic Internet Investments, Inc. (OTCBB: SIII), the Company that is planning to build this “Dream Resort” on a man-made island just a few hundred yards off the coast of Manama, Bahrain.
Strategic does not intend to stop there. The Company also has announced plans to acquire a business that develops internet security projects.
And if that seems ambitious, consider this – Strategic has $123.
Yes We Can(Arab)
Strategic is one of many small public companies traded in the U.S. but maintaining corporate offices north of the border – in this case in Vancouver, British Columbia, Canada. The Company (which used to be known as Ohio & Southwestern Energy Company) entered into a reverse-merger in June 1998 with a private Canadian company called CanArab Acquisitions Corp. As a result of that transaction, an individual named Abbas Salih gained control of the Company. Mr. Salih, who presently serves as Strategic’s Chairman and Secretary, is the beneficial owner of 68% of the Company’s outstanding stock.
After the reverse-merger, the Company (with Mr. Salih at the helm) made several unsuccessful attempts to acquire companies, including affiliates of CanArab Acquisition. First, the Company set out to acquire CanArab Technology Limited, which seemed like it should have been easy since CanArab Technology had been formed as a subsidiary of CanArab Acquisition.
As part of that transaction, (i) the owner of CanArab Technology (presumably CanArab Acquisition) was going to receive 14,650,000 shares of Strategic, and (ii) CanArab Acquisition had agreed to return to the Company 8,650,000 of the Strategic shares that it received on the reverse-merger. That would leave CanArab Acquisition with a net gain of 6 million shares.
CanArab Technology purportedly was in the shrimp farming business, although there was no sign that either shrimp farming or any other business was yet underway. In order to develop that business, the Company said it would build a shrimp and seafood processing plant in Germany, at a cost of approximately $40 million. It also indicated that it planned to acquire Canbau Construction GMBH, the entity that would build the processing plant.
The Company did not provide audited financial statements for CanArab Technology or Canbau. In the end, it did not matter. Strategic abandoned both the CanArab Technology and Canbau Construction acquisitions because it was unable to raise sufficient funds to implement the proposed shrimp farming plan.
Fish farming was out, but the Company was not finished dealing with CanArab Technology. On July 31, 2000 Strategic again agreed to acquire CanArab Technology, this time in exchange for 5,280,907 of the Company’s common shares. CanArab Technology purportedly had entered into an agreement to acquire 75% of a Canadian entity called Strategic Profits Inc. at a cost of $2,400,000 (Canadian).
Although the Company raised a portion of those funds, it abandoned the acquisition in December 2001, citing weakness in the technology sector and litigation that was then pending between Strategic Profits and several other technology companies.
The Company had failed twice in efforts to acquire an affiliate of its principal shareholder. It was not through trying.
No Manama Is An Island
Which brings us to the Company’s most recent ventures. On July 12, 2002, Strategic announced that it had entered into agreement to purchase 80% of the outstanding shares of Gulf Star World Development W.L.L. (a Bahrain corporation) from British Columbia, Canada based, Star Leisure & Entertainment Inc. ("Star Leisure"), in exchange for 5 million shares of Strategic common stock.
According to the Company’s July 12th press release, Gulf Star owned the rights to develop the “Dream Island” resort off the coast of Manama, Bahrain. The Company described the proposed venture as “an integrated real estate and tourism development project” that would include more than 100 villas; 85 time/share apartments; a luxury hotel with at least 225 rooms and 25 suites; a spa; a health club; restaurants, cafes; a shopping, retail and entertainment center; a marina; an aquarium; a water park; sports facilities; a children's play area; a mosque, a beachfront area, parking, landscaping and water features.
The Company did not indicate how much the project was likely to cost, how long it would take to construct the facilities, or where it would obtain the funds.
First, however, there is another hurdle to clear – the “Dream Island” has to be built. Strategic says that Robodh Contracting of Manama, Bahrain has agreed to do the dredging and reclamation work necessary to build the island in exchange for convertible preferred shares of Strategic stock having an aggregate face value of $5 million. Strategic says the preferred stock will be issued at $4 a share, suggesting that Robodh will receive 1.25 million preferred shares.
The August 21st press release did not indicate the conversion terms of the preferred shares, but Strategic promised to release that information within ten days. As best we can determine, the Company has not yet revealed those details.
What are the possibilities? At the time of the August 21st announcement, Strategic’s common stock was trading at approximately 15 cents a share – meaning one $4 preferred share was equal in value to approximately 27 common shares. If that conversion rate were applied, Robodh Construction would hold almost 34 million common shares of Strategic (1,250,000 multiplied by 27) – or over 70% of the outstanding stock.
Until the Company releases the conversion terms investors cannot determine whether that is a realistic scenario. If it is, the owners of Robodh Construction –who have yet to be identified – would control Strategic.
How will Robodh pay for the supplies and work force required to construct an island? It seems unlikely that workers will be handed Strategic shares. That does not mean, however, that Robodh Construction will not move quickly to liquidate those shares. Regulation S permits non-U.S. persons to buy and sell unregistered shares, outside of the United States.
The Company can continue to issue Reg. S stock to vendors, but it will also need funding to proceed with the ambitious resort project. The July 12th press release said that Strategic had agreed to formulate a “comprehensive funding plan.” It also said that Strategic would reimburse $100,000 in expenses incurred by Star Leisure, within three months. Additional reimbursement would be paid after funding was secured.
Once again, Strategic was doing business with an affiliate. Star Leisure, which was to receive 5 million Strategic shares and reimbursed $100,000, was controlled by the Company’s Chairman, Abbas Salih. Was Strategic paying a fair price for the right to build the “Dream Island?” Are the plans realistic, and likely to come to fruition? No independent party made that determination for Strategic’s public shareholders. As the Company correctly conceded, this was not an arms-length transaction.
Strategic Internet did not say how much the project was likely to cost. Suffice it to say that the $123 that the Company had in the bank at the end of June 2002 would not get it done. And the vendors who would be building the ambitious project presumably would want more than preferred shares if they were to pay for materials, personnel and other costs.
So where is the money going to come from?
We will explore that question, and others, in Part II of this series.
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