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Exploration & Salvage Opportunity in The Bahamas Information Memorandum

Disclaimer

This Information Memorandum has been prepared by KPMG Advisory Caribbean Ltd (“KPMG”) and is being delivered to parties (the “Recipients”) who have submitted expressions of interest in investing in the Shipwreck Salvage Opportunity (the “Opportunity”) of Stuart Cove Exploration Company Ltd (“SC” or the “Company”) in The Bahamas.

This Information Memorandum has been delivered to [party] on a confidential basis for information only, is not a prospectus and does not constitute or form part of any offer or recommendation to invest in the Opportunity nor shall it or any part of it form the basis of or be relied upon in any way in connection with any contract relating to any participation in the Opportunity. Its issue does not constitute any form of commitment on the part of the Company for participation in the Opportunity.

The information contained in this document is selective and does not include a description of any risks. It does not purport to contain all information that the Recipients may require and is subject to updating, expansion, revision and amendment. In particular, we draw your attention to sections relating to the Opportunity’s funding arrangements which are subject to change.

By accepting or reviewing this document, each Recipient agrees to the conditions established herein and as set out in the Non Disclosure Agreement (‘NDA’) signed by the Recipient. This includes the requirement that the Recipient will ensure that none of it, its agents, representatives, directors or employees will copy, reproduce or distribute to others this Information Memorandum, in whole or in part, at any time without the prior written consent of the Company and that it will keep permanently confidential all information contained herein not already in the public domain (other than by the Recipient’s breach of this confidentiality obligation) and will use this Information Memorandum for the sole purpose of evaluating a possible investment in the Opportunity. Distribution of this Information Memorandum may be restricted by law. This Information Memorandum is for distribution only to the persons of the kind to whom this Information Memorandum may lawfully be issued. Persons to whom this Information Memorandum is provided are required to inform themselves about and to observe any such restrictions. This Information Memorandum is and will remain the property of the Company. Each of the Company and KPMG reserves the right to require the return of this Information Memorandum (together with any copies or extracts thereof) at any time.

While the information contained herein is believed by KPMG to be accurate, KPMG has not conducted any investigation with respect to such information. Both KPMG and the Company expressly disclaims to the fullest extent permitted by law any and all liability for representations, expressed or implied, contained in, or for omissions from, this Information Memorandum or any other written or oral communication transmitted to any interested party in the course of its evaluation of the Opportunity and any and all liability based on or relating to the Recipients’ use of this Information Memorandum. Only those particular representations and warranties which may be made in a definitive written investment agreement, when and if one is executed, and subject to such limitations and restrictions as may be specified in such share purchase agreement, shall have any legal effect.

This Information Memorandum includes certain statements, estimates and projections provided by the Company with respect to its anticipated future performance. Such statements, estimates and projections reflect significant assumptions and subjective judgments by the Company concerning anticipated results. These assumptions and judgments may or may not prove to be correct and there can be no assurance that any projected results are attainable or will be realized. Neither KPMG nor the Company assumes responsibility for verifying any of such statements, estimates and projections, and neither of KPMG nor the Company makes any representations or warranties as to their accuracy or completeness.

Except where otherwise indicated, this Information Memorandum speaks as of the date hereof. Neither the delivery of this Information Memorandum nor the participation in the Opportunity shall, under any circumstances, create any implication that there has been no change in the affairs of the Opportunity since the date hereof. Neither of KPMG nor the Company undertakes any obligation to update, expand, revise or amend any information or to correct any inaccuracies contained in this Information Memorandum or provide the Recipients with any additional information.

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The contents of this Information Memorandum are not to be construed as legal, financial, or tax advice. Each Recipient should consult his, her or its advisers. The Recipients are required to conduct their own due diligence and seek their own advice prior to making any decision to participate in the Opportunity.

The Company is not bound to accept any bid or negotiate an investment agreement for the Opportunity with any Recipient. The Company reserves the right to reject any or all offers to purchase the Opportunity without giving any explanation and without incurring any obligation or liability.

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Key Contacts

KPMGPO Box N 123Montague Sterling CentreEast Bay StreetNassau, The Bahamas

Nigel RouseKPMG Advisory Caribbean LimitedDirectorTel: +1 (242) 394 9975Fax: +1 (242) 393 [email protected]

Stuart Cove Stuart Cove Exploration Company LtdPrincipalTel: +1 (242) 322 2050Fax: +1 (954) 337 3881

[email protected]

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mailto:[email protected]

mailto:[email protected]


Contents1 EXECUTIVE SUMMARY....................................................................................................................................... 7

1.1 OPPORTUNITY OVERVIEW..........................................................................................................................................71.2 POTENTIAL YIELD.....................................................................................................................................................81.3 MINIMUM CASH REQUIREMENTS................................................................................................................................91.4 KEY INVESTMENT HIGHLIGHTS..................................................................................................................................101.5 INFORMATION MEMORANDUM................................................................................................................................10

2 SHIPWRECK EXPLORATION & SALVAGING........................................................................................................12

2.1 OVERVIEW...........................................................................................................................................................122.2 TYPICAL PHASES....................................................................................................................................................122.3 SALE OF ARTEFACTS...............................................................................................................................................142.4 OTHER REVENUE...................................................................................................................................................14

3 HISTORICAL BACKGROUND ON SPANISH TRADING ROUTES.............................................................................15

3.1 SPANISH CONQUEST AND DISCOVERY........................................................................................................................153.2 SPANISH TRADE.....................................................................................................................................................153.3 THE FLOTAS..........................................................................................................................................................163.4 THE FAR EAST TRADE.............................................................................................................................................173.5 HAVANA..............................................................................................................................................................173.6 THE END OF AN ERA..............................................................................................................................................183.7 HISTORICAL RESEARCH............................................................................................................................................183.8 VALUATION & SALE OF ARTIFACTS............................................................................................................................19

4 SHIPWRECKS SITES.......................................................................................................................................... 20

4.1 INTRODUCTION......................................................................................................................................................204.2 LICENCE AREA.......................................................................................................................................................214.3 NUESTRA SENORA DE LA MARAVILLAS.......................................................................................................................214.4 DUTCH WRECK.....................................................................................................................................................254.5 THE GENOVEES, SINT DOMINGO..............................................................................................................................27

5 OPERATIONAL STRUCTURE.............................................................................................................................. 29

5.1 OVERVIEW OF OPERATIONS.....................................................................................................................................295.2 SURVEY AND SALVAGE SHIPS....................................................................................................................................295.3 SURVEY TECHNIQUE...............................................................................................................................................305.4 LABORATORY GRAND BAHAMA................................................................................................................................315.5 RESEARCH TEAM...................................................................................................................................................315.6 HEAD OFFICE GRAND BAHAMA................................................................................................................................32

6 MANAGEMENT STRUCTURE............................................................................................................................. 34

6.1 KEY MANAGEMENT................................................................................................................................................346.2 KEY CONSULTANTS.................................................................................................................................................356.3 FINANCIAL AND OPERATIONAL REPORTING.................................................................................................................36

7 LEGAL CONSIDERATIONS................................................................................................................................. 37

7.1 LICENCE OVERVIEW................................................................................................................................................37

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7.2 MONITORING........................................................................................................................................................387.3 LEGAL TITLE..........................................................................................................................................................39

8 THE BAHAMAS................................................................................................................................................ 40

8.1 COUNTRY OVERVIEW..............................................................................................................................................408.2 POLITICAL OVERVIEW.............................................................................................................................................408.3 ECONOMIC OVERVIEW............................................................................................................................................418.4 OTHER CONSIDERATIONS........................................................................................................................................418.5 GRAND BAHAMA...................................................................................................................................................42

9 CONSERVATION & ANCILLARY ACTIVITIES........................................................................................................43

9.1 TOURIST DIVES......................................................................................................................................................439.2 MUSEUM.............................................................................................................................................................439.3 SALVAGE DIVE QUALIFICATION.................................................................................................................................43

10 INVESTMENT STRUCTURE.............................................................................................................................. 44

10.1 OVERVIEW.........................................................................................................................................................4410.2 PREFERENCE SHARES............................................................................................................................................4410.3 COMMON EQUITY INVESTMENT..............................................................................................................................4510.4 FINANCE LEASE....................................................................................................................................................4510.5 REVENUE PARTICIPATION CERTIFICATES....................................................................................................................45

11 FINANCIAL PROJECTIONS............................................................................................................................... 46

11.1 BASIS OF PREPARATION........................................................................................................................................4611.2 PROFIT & LOSS ACCOUNT.....................................................................................................................................4711.3 BALANCE SHEET..................................................................................................................................................5011.4 CASHFLOWS........................................................................................................................................................5211.5 MINIMUM CASH FUNDING (NO RSVS)....................................................................................................................53

12 POTENTIAL FINANCIAL RETURNS.................................................................................................................... 55

12.1 BASIS OF PREPARATION........................................................................................................................................5512.2 CALCULATIONS....................................................................................................................................................5512.3 CASH LEVELS.......................................................................................................................................................56

13 INVESTMENT RISKS........................................................................................................................................ 57

13.1 INTRODUCTION....................................................................................................................................................5713.2 FINANCIAL RISK....................................................................................................................................................5713.3 MARKET RISK......................................................................................................................................................5713.4 POLITICAL RISK....................................................................................................................................................5813.5 OTHER RISKS......................................................................................................................................................58

14 CORPORATE GOVERNANCE............................................................................................................................ 59

14.1 OVERVIEW.........................................................................................................................................................59

A PHASE COST SUMMARY.................................................................................................................................. 60

B SALVAGE BOAT SPECIFICATIONS..................................................................................................................... 61

C SEVILLE SPAIN ARCHIVES RESEARCH................................................................................................................ 63

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1 Executive Summary

1.1 Opportunity OverviewStuart Cove Exploration Company Ltd (“SCEC”) is looking to raise $5.0 million to fund the exploration and salvage of a number of different shipwrecks in Bahamian waters. The Company has applied to have an exclusive rights to salvage an area with a five mile radius in the north western Bahamas (the “Licence Area”), in an area known as the Little Bahama Bank.

The opportunity is a unique investment opportunity, representing significant potential yields should the Company be successful in finding the shipwrecks that it is targeting (primarily the Maravillas wreck). Conversely, it also represents significant downside risks for investors, as given the nature of the proposed venture, there is a risk that the Company will not be successful in making any material finds.

In order to minimize the funding requirement, and potential investment downside risk, the Company has and will take the following measures:

Historical Research: the Company has, and will continue to, undertake a significant amount of historical research in archives across Europe in order to understand the background and potential value of the shipwrecks targeted. These are summarized in Section 4 of this Information Memorandum

Ancillary Revenues: the Company intends to utilize ancillary revenue streams to help fund the operation over the medium term. These include revenue streams from tourist dives (leveraging the Stuart Cove Dive global branding) and from potential reality TV revenues

Cost Minimization: the Company has performed a stringent analysis of the expenditure required to perform the exploration and salvage activities described within this document. These are summarized in Section 11

Based on an assumed $5.0 million of funds raised, the Company is confident that it can continue to operate over the next three years without any significant shipwreck discoveries through both careful cost monitoring and budgeting, as well as through leveraging ancillary tourist dive revenues from Licence Area based packages.

Table 1.1: Investment Summary Investment Summary

Qty Value Total# $'000 $'000

Investment TranchePreference Shares 4 100 400Common Equity 50 2 100Value per Tranche 500

Tranches available 10 500 5,000

The Company is looking to raise funds through selling 10 equal equity and debt tranches of $0.5 million. Each tranche will be inclusive of the following share capital:

Preference Shares: an issue of 4 $100,000 par value Preference Shares (totalling $0.4 million) that are repayable monthly from October 2014 through August 2016. Each Preference Share will have 1 (one) Revenue Participating Certificate (‘RPC’) attached to it which will entitle the holder to 0.5% of the Company’s net revenue (payable based on actual cash receipts for the revenue).

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The preference shares will be a preferred creditor on any winding up of the Company and principal will be paid first before distribution of any sort to equity shareholders. However there will be no obligation of the Company when it has sufficient cashflow to make such distribution. In addition, the shares will also have a minimum guaranteed coupon of 20% per annum (net of revenues generated from the RPC)

Common Equity: the issue of 50 common shares in the Company (equating to 1.0% of the issued share capital of the Company). Each share has a par value of $2,000 (i.e. a total cost of $100,000. This would entitle the holder to the typical rights and preference attached to common equity holders

Based on the management’s detailed forecasts, and sensitivity scenario analyses, it believes that this funding (in conjunction with the original founding shareholder’s funding) will allow the Company to operate for the next three years. By the end of this period, given the Company’s intended strategy for the project, management should have a comprehensive understanding of the opportunities in the Licence Area.

1.2 Potential YieldBased on the Company’s historical research of the shipwrecks that are believed to be in the Company’s proposed Licence Area, the Company’s ‘base case’ estimate for revenue and dividends over the next four years: 1.2.1 Revenue & Dividend – Base Case

52%

53%

54%

55%

56%

57%

58%

-

50

100

150

200

250

300

350

Year 1 Year 2 Year 3 Year 4

$m

Revenue % margin

-20 40 60 80 100 120 140 160 180

-50

100 150 200 250 300 350


$m

Dividends EBITDA

In preparing its forecast, the Company has estimated a range of different outcomes from the Opportunity. All of these estimates are based on the ships’ manifests, as well as historical records of past salvage attempts at the sites. A summary of the estimate values per site is shown below per each of the different recovery scenarios.

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Table 1.2.2 Potential Yield – Residual Artefact ValuesResidual Site Value - Summary

$m Low Base High

Residual Site ValuesMaravillas Site 247.5 371.2 494.9Genovese Site 246.1 369.1 492.1Dutch Wreck 236.2 354.2 472.3Total 729.7 1,094.5 1,459.3

Scenario

We outline the methodology supporting these calculations in Section 4 of this IM.

Based on a discounted cashflow analysis of dividend yield over the next 4 years, management estimate that the internal rate of return (IRR) on common equity could yield returns in excess of 200% (dependent almost entirely on the artefacts found). This would be in addition to the potential yield on the Preference Shares.

Taking into account, both direct and indirect costs of the operation, this would generate yields in the range of:1.2.3 Potential Yield – Scenarios 1 to 3

-

50

100

150

200

250

300

Low Base High

$m

Valuation - DCF

0.0%

50.0%

100.0%

150.0%

200.0%

250.0%

300.0%

Low Base HighIRR %

Conversely, as noted earlier, if the Company is unsuccessful in making any material finds, investors may not recoup any of their investment.

1.3 Minimum Cash Requirements In estimating the Company’s investment requirements, management has considered the project’s minimum cash requirements over the next 3 years (after 3 years the Company should have a clear understanding of the quantum and nature of artefacts (if any) residing within the Licence Area). This minimum cash requirement is estimated to be $5.0 million and assumes the following:

Revenue: the Company does not earn any artefact based revenues however does earn a portion of its other ancillary revenues (it has assumed only 6 of the forecast 14 TV show episodes are sold in a scenario where there is a lack of significant finds)

Cost: management has included negative $100,000 sensitivity to other costs to allow for some slippage on costs. It addition to this, management also note that they would also look to reduce general operating expenditure should this scenario arise (creating further buffer in the forecast cost base)

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Capex: a further allowance of $100,000 has been made in forecast boat expenditure capex

Whilst management are confident that, given the historical research findings outlined in Sections 4 & 5, it will be able to realise artefact based sales over the next three years. By raising $4.5 million at the outset of the project, the Company will ensure that it will be able to purely focus on the operational aspects of the project.

1.4 Key Investment HighlightsThe opportunity to invest up to $5.0 million in the Company presents the following key investment highlights for investors:

Returns if the Company is successful in making significant discoveries in its Licence Area, the investors stand to make material returns on their investments. For example, using the Company’s Base Case as an example, investors would make a return in excess of 400% on their investment

Unique: the opportunity is a unique opportunity to become part of a project which could help define the shipwreck salvaging industry in the Bahamas, and given the investor unprecedented access to experience the discoveries first hand.

Stuart Cove: through partnering with Stuart Cove, the Company will have unrivalled access to his experience and expertise at underwater operations. For any diving enthusiast, this represents an opportunity to explore the Bahama Banks and to potentially discover artefacts lost for over 400 years.

Pre-emption Rights: by being an initial investor in the Company, you will be granted special pre-emption rights on further share offerings. These rights will allow you to remain part of the Company should it wish to expand its dive site area at a later date or apply for new licence areas

As noted above, the opportunity does also have considerable investment risks attached to it, including the potential failure of the Company to be successful in making any material discoveries. We set out these risks in further detail in Section 13.

The opportunity to invest will be dependent on the Company receiving a licence from the Government of the Commonwealth of The Bahamas (the “Government”). Based on its present discussions with the Government, the Company expects this to be granted by Q4 2013.

1.5 Information MemorandumThis Information Memorandum (or ‘IM’) seeks to provide potential investors with further information on the following:

Investment Cycle: the typical cashflow cycle of a salvaging operation, including the different phases that a project such as this experiences over its lifecycle

Background: background on the Spanish trading routes from the “New World” to Spain, as well as the importance of Havana as a trading post between the Old World and the New

Salvage Sites: the historical background of the target shipwreck sites, as well as potential value of the shipwrecks themselves (based on historical records and estimates)

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Operational Overview: an overview of some of the key components of the proposed operation, including management team, key expenditure items and route to market

Financial Summary: the potential cashflows relating to the opportunity, including the range of potential yields from investment in the project

Risks: some of the key risks associated with an investment such as this, including legal, financial, operational and political risks

To help support the IM, an electronic dataroom has also been prepared that includes the documents referred to in the IM (including translations of original documents found in European archives). Whilst management appreciates the speculative nature of this investment, they have tried, where possible, to substantiate any estimates with actual research performed.

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2 Shipwreck Exploration & Salvaging

2.1 OverviewShipwreck exploration and salvaging is a very specialized activity that has not been seen in The Bahamas for over 15 years following the Government’s decision to place an effective moratorium on the activity in 1996. The activity, which can vary in complexity depending on the depth and nature of the target sites, typically has seven different phases, ranging from the initial desktop research phase through to the actual realization of the artefacts found (itself a specialized process usually involving private auction houses).

Broadly shipwreck exploration and salvaging can most easily be referenced to oil exploration and drilling. The initial phases involve locating and verifying (also known as ‘truthing’) target sites and the later phases relating to extracting the targeted material and realising the value from it.

Given the historical nature of the shipwrecks in the Licence Area, unlike the oil exploration and drilling business, the Company will perform a number of steps to help document and conserve certain aspects of the shipwrecks found (where this is possible).

2.2 Typical Phases

Research & Data Collection

Initially historical research is conducted in order to identify viable shipwreck targets. This includes finding reliable information which specifies what the ship was carrying in sufficient detail to value the cargo. Given the likely discrepancies between declared items in a ship’s manifest, and actual cargo loads (to evade import duties ship owners often understated cargo held on their manifests), often researchers will try to cross reference documents with journals and other supporting files.

As a number of the potential target sites in the Licence Area are ships that were scheduled to sail between Cuba and Europe, a considerable amount of the Company’s proposed research is targeted at archives in Europe.

A significant amount of research has been performed on the ship manifests (copies of) in Spain, Paris and Amsterdam (the main shipping capitals at that time) to date for this project (refer to Section 4 for further details).

Key Target Development

This phase involves the analysis of the potential shipwreck sites in the area, and the development of a strategic plan for targeting them. In addition, the phase includes a study of issues relating to its cargo, acquisition of equipment and personnel, arrangement of financial support and procurement of visas, permits and other government documents required.

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Research & Data

CollectionKey Targets Search &

Survey Analysis Truthing Document Realisation


Search & Survey

A search typically begins with a survey of the target area. The viability of excavation is evaluated by searching the area for surface objects or through a more rigorous electro-magnetic based analysis of the composition of the seabed in the targeted area. At times, it is immediately obvious whether the inspected site is of interest or not, for instance when coins or valuables are readily apparent on the site.

To help expedite and provide better clarity during this process, the Company is proposing to use advanced technology to analyse the seabed composition in its Licence Area. The technology is similar to that used for mine sweeping, and is able to analyse up to 20 feet of seabed material across the Licence Area. The use of this technology will help save the Company considerable time and effort in surveying the Licence Area, as well as provide Investors with an early level of confidence over the potential for recovering a significant level of artefacts from the site.

Analysis & Key Target Truthing

Once the Licence Area is fully surveyed, the Company will need to analyse the results of the survey. Typically this includes ad hoc verification analysis of specific sites to assess the accuracy of the readings obtained, as well as to try and excavate specific artefacts in order to establish the specific ship that the site relates to (usually through referencing a coin or artefact to a ship’s manifest).

Depending on the results of the survey, this should take between 4 to 6 months to complete (typically longer if more traditional survey techniques are used).

Truthing & Excavation

This phase initially involves the raising of the cargo from the wreck. Each individual artefact is carefully lifted and placed in a recovery container. This phase will typically require an air lift or prop-wash to remove the covering sand and mud. Where possible, in order to ensure the historical integrity of the sites is documented and understood, the company will perform detailed mapping of the site as well as specific excavation work around any remaining ship structures.

Documentation & Conservation

All artefacts recovered from the shipwreck site will be documented and photographed. When the recovery container is lifted to the surface, skilled assistants carefully begin detailed recording, photography and documentation of each object, followed by on board "first-aid" conservation whereby the artefacts are stabilized and placed in environmentally-controlled storage until they are transported to land.

Artefacts recovered from the ocean are generally impregnated with corrosive salts that can be damaging to the object. Therefore, the salts must be removed and artefacts treated in a timely and judicious manner in order to prevent deterioration and loss of value. Every item recovered from a shipwreck site must go through a conservation process. Depending on the artefact’s material and condition, extensive conservation treatments are applied, using specialized chemicals, procedures and tools.

Realisation

After conservation and documentation, items are distributed in an agreed upon manner by personnel and Government. Where objects have a specific historical significance, the Government will often require that these are kept in museums (with the corresponding value counting towards the Government’s 25% share of revenue). Remaining items are then usually sold via private auction houses that specialise in the sale of such finds (including houses such as Sotheby’s).

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2.3 Sale of ArtefactsIn order to realise value from artefacts found, salvaging companies will typically engage an auction house that specialises in such goods to manage the whole sales process. It is the Company’s intention to adopt a similar approach from the sale of its artefacts.

The actual sale of the artefacts will typically be made in tranches, via public auctions in the main auction house centres (New York and London). Prior to any sale, the artefacts will have been properly treated and conserved, as well as documented to prove authenticity.

In addition to the public auctions, it is the Company’s intention to make a smaller quantity of direct sales to individuals (such as to any tourist divers who make a discovery)1. These sales, which will largely be of coins and similar items, are not expected to be a material income stream for the Company.

The Company expects to incur a direct commission and insurance cost when using the private auction house of between 5-15% depending on the volumes sold. These costs have been featured into the cost forecasts.

2.4 Other RevenueIn addition to the sale of artefacts, the Company intends to generate revenue from the ancillary supporting activities. These will include:

TV Reality Shows: based on preliminary discussions with producers, the Company estimates it can secure approximately 14 episodes for a TV reality show of the dive site. Given recent interest in the sector, and actual live ‘adventure’ activities, management estimate that there will be considerable interest in the concept (starting once the sites make initial material finds)

Tourist Dives: using the Stuart Cove customer database, the Company intends to offer a select group of divers the opportunity to come on a paid dive trip to help the salvage crew. The package would include training necessary to effectively operate in the Licence Area, as well as allow divers and investors the opportunity to experience the project first hand

Other: in addition to the two revenue streams above, the Company expects to make a marginal amount from other sales of goods, such as t-shirts, books and other such items (estimated at less than 1% of total revenue)

In aggregate, non artefact based revenue streams are estimated at $7 million over the estimated four year life of the opportunity.

1 Provided that such sales have been pre-approved by the Government

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3 Historical Background on Spanish Trading Routes

3.1 Spanish Conquest and DiscoveryThe country of Spain exploded into European dominance after the successful voyage of Christopher Columbus in 1492, and his discovery of ‘The New World’. Not only did this discovery add valour to the Spanish’s quest of exploration and discovery, but much to their delight, The New World was rich with natural resources and commodities that provided the wealth necessary to attain status as the most powerful nation in Europe, and to maintain this position for over a century. It was during this time that Spain created a new precedent in global trade routes, by establishing trade routes with ports from Manila (in the Far East) to Peru, and all over the West Indies back to Europe. Commercially, this route established some very key components of even today’s global economic system.

The Manila-Acapulco trade route started in 1568 and Spanish treasure fleets (white) and its eastwards rivals, the Portuguese India Armadas routes of 1498-1640 (blue). Source: World Topography, NASA.

3.2 Spanish TradeControlled extremely strictly by the Spanish crown, a pattern of trade evolved based on the economic policies of the times. The main aim of Spain’s policy was to establish a full monopoly on this trade, keeping her colonies dependent upon her; this was typical of colonial powers during this time. The monopoly was eventually challenged by English and Dutch traders, however according to Spanish law, Spanish colonials could trade only with the authorized Spanish merchant flotas (trade ships).

Around the early 16th Century, a law was passed by the Casa de Contratacion, or “House of Trade”, which established the periodic sailing of fleets from Spain to the Caribbean twice a year. These fleets carried manufactured goods for sale from Europe to the citizens of the New World, and were then filled with the rich treasures of the Americas and the Far East for transport back to Spain.

Eventually, the established trade monopoly and the power gained from it drew unwanted attention from other parties. The Spanish treasure fleets became the favourite targets of unfriendly nations, privateers, and of course – Pirates! Spain’s hold over the West Indies became a bone of contention with other European nations, and the wars that ensued created a huge financial demand that depended on the flow of

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gold and silver coming from the New World and Far East. These battles, pirates and privateers led to the risk of sinking more ships other than just due to the common concern of wrecking. This forced Spain to then protect all their trade ships and armed galleons were sent to accompany every treasure fleet crossing the Atlantic.

3.3 The FlotasThe Spanish made complex plans to minimize losses from their treasure fleets by carefully planning their routes to take advantage of favourable winds and currents and by scheduling departures to avoid seasonal storms. Two great convoys were organized to transport the treasure; the Tierra Firme fleet and the Nueva Espana fleet. The Tierra Firme fleet would visit Cartagena and Nombre de Dios. The Nueva Espana fleet would go to Vera Cruz. These fleets would depart Spain, every year, loaded with supplies needed by the colonies. These trips were scheduled to take the maximum advantage of winds, currents, and avoid the seasonal hurricanes. Each fleet travelled separately to minimise exposure to pirates or storms.

The typical fleet consisted of several types of ships; heavily armed galleons served as protection for the bulk of the fleet, merchant and naos (the only difference between the nao and galleon was the amount of armament carried.) Several pataches, small reconnaissance vessels, also accompanied the fleet, as well as resfuerzos or supply ships. The fleet was led by the Capitana, or flagship, and the Almiranta, or viceflagship. The New World bound fleets, first sailed to the Canary Islands to take on supplies. From there, they sailed west, using the trade winds.

The Nueva Espana Fleet

The first fleet sailed to Mexico or ‘New Spain’ as it was known during those times. When the officials at Mexico City learned that the fleet was arriving in Vera Cruz they would transport all of the mined silver by wagons to Vera Cruz. When the fleet arrived, there would be a large fair, where the Spanish merchants from the fleet, would trade their goods for silver. These fairs generally lasted about one to two months. At the end of the fair, of the silver and other traded goods were loaded onto the ships for the return trip to Spain.

The Tierra Firme Fleet

The other fleet sailed to Tierra Firme, and left Spain in the late summer. They sailed from Sevilla to Cartagena. This trip took them from 4 to 6 weeks and was assigned to pick up the gold and silver from the southern colonies. When they arrived to Cartagena, word was sent to Panama City advising officials to start sending the treasure. This treasure travelled by riverboats and mule trains over the Kings Highway to Nombre de Dios. The silver from Peru was sent to Panama City, on the Spain’s South Sea Fleet in the New World. This fleet was smaller and not as heavily armed as the Atlantic Fleet as the Spanish believed that it was much more difficult for pirates to traverse the Straits of Magellan, and prey on the South Sea Fleet. It would take about two months, to move the silver from the Ports of Arica (Chile and Callao, Peru) to Panama, for storage.

At these ports, the ships again traded manufactured goods for the wealth of the Indies, such items as gold, silver, emeralds and other gemstones, hides, exotic woods, copper, tobacco, sugar, cochineal, indigo and other valuables. Additionally, another Spanish fleet established in the Far East (or East Indies) called the Manila Galleons, crossed the Pacific and sent treasures from the Orient to Acapulco and Peru, which then were transported across to the Caribbean flotas.

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3.4 The Far East TradeManila in the Far East was just as important, if not more, than the New World as it was also a huge source of revenue for the country. It was here that lucrative trade ensued with Ming China (known simply as China now) for precious metals and other goods. The discovery of the New world led to shorter trade routes in getting these goods back to Europe. In fact, the Manila trade was so lucrative that the Seville Merchants petitioned the King of Spain at the time to protect the monopoly they had established in this region. They then fell under the Casa de Contratacion, coordinating 2 fleets per year, with the Atlantic crossing fleets for the delivery of treasure and goods. A Spanish Armada (armed escort of galleons) was also approved for the voyages of these fleets. Because of the route’s increasingly high revenue generated, the largest possible galleons of the time were constructed, averaging 140-160ft in length, and displacing around 2,000 tons. Most of these ships were constructed in the Philippines, and a few in Mexico. The commodities brought over included such materials as ginger, cowrie shells, porcelains, Chinese silks, velvets, damasks, drugs, pearls, Indian Gems, spices and ivory. As with most travel at the time, wrecking was a common concern, and did occur. The wrecks of the Manila galleons are legends second only to the treasure shipwrecks in the Caribbean. Similar to Mexico, the trade fairs in South America lasted one to two months, and then the fleets were loaded for the return voyage.

3.5 HavanaThe two flotas rendezvoused at Havana for the voyage home to Spain. Havana was a very important and key colony for Spain, as in Havana, the Spanish had a large shipyard, for repairing ships in need of repair, preparing them for the longest part of the journey back to Europe, and also recording manifests. This is also where most of the ships manifests were checked before departing to Europe. Other private trade ships from all over the New World also carried their products first to Havana – then known as the ‘Key to the New World’ - in order to be taken by the fleet to Spain. Thousands of Ships regularly gathered in the city’s bay, whose popularity was also fuelled by Havana’s great agriculture and manufacturing industries that developed mainly to supply ships with food, water and other products needed to traverse the Atlantic.

Due to Spain’s ‘official’ attempts at controlling the galleon trade, and taxation on merchandise of private ships as high as 20% (known as the Quinto Real, or the ‘King’s fifth’ tax), the common practice to understate a ship’s cargo became widespread. This could have possibly been the establishment of the New World’s first ‘black market’. Because of these occurrences, it is generally expected that any treasure discovered from salvaged ships if in reality was up to 100% to 200% of what was recorded on the official manifest.

From Havana, the fleet sailed north using the Gulf Stream, along the coast of Florida, all the way to Cape Hatteras, where they turned east, and sailed to Spain. The Florida coast and the northern adjacent Bahamian waters were some of the most dangerous parts of the trip because of the large number of reef, shoals and hurricanes, along the coast. This is where the majority of lost galleons would wreck and sink – thus making it a very lucrative salvage area for huge amounts of treasure. The ships would then pass dangerously close to Bermuda, where they would fix their positions, before the trip across the Atlantic.

Once the fleet reached the open water of the Atlantic, it was on its own because it lacked the protection of the local protective squadrons the Spanish had established in the Caribbean and Spanish home waters. Once close to Europe, it was easier for Spain’s enemies to attack the Treasure Fleet. In response to this threat, Spanish authorities would send their European Armada of the Ocean Sea, to rendezvous with the fleet to escort it to Spain.

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3.6 The End of an EraThe great flota system reached its height between 1590 and 1600. Then, over the next century, the system began to slowly decline. Spain’s leadership weakened and her debts increased, colonial mines produced less precious metals, privateer attacks increased, and other European powers began to colonize the Caribbean and break the Spanish trading monopoly. At the end of the 16th Century, the average number of ships in the flota was 100; this decreased to 55 by 1610 and to 25 by 1640. At home, Spain suffered general economic and industrial decline and began to lose its shipbuilding industry, as attested to by the fact that by 1650 more than two thirds of the fleet ships were of foreign construction. The Spanish navy was so weak by the end of the 17th Century that often foreign warships (usually belonging to the nation that Spain owed the most money to) escorted the flota home.

The loss of the 1715 and 1733 treasure flotas was a tremendous blow to Spain in the early 18th Century. The financial demands of these losses and the protection needed became overwhelming over time; this combined with the loss of numerous fleets to storms, battles and wrecks eventually took its toll. The Treaty of Utrecht in 1713 brought to an end Spain’s exclusive hold over the West Indies. The last flota to make the transatlantic run sailed in 1778, and Spain officially declared free trade among its colonies ushering in an era of free trade.

Among this prosperous era of trade, numerous Wrecks of Spanish treasure ships, whether sunk in combat or storms exist mostly off the coast of Florida and the Little Bahama Bank (where the Licence Area is situated). Some of the worst storms occurred in 1622, 1715 and 1733. The 1715 Treasure Fleet which sank off Cuba/Florida just 7 days after departing Havana for Spain is an example of an incredible salvage expedition. All 11 ships of this fleet were lost in a hurricane near present day Vero Beach. Even to present day, some artefacts and even coins are still washing up on the Florida beaches every now and then. These shipwrecks are just some of the many shipwrecks that are dotted along the ocean floor waiting to be discovered and salvaged.

3.7 Historical ResearchHistorical research is a critical aspect to any salvaging operation. Not only does it provide the historical context and data on the wrecks being salvaged, it can also provided important historical data on the location and likely condition of the wreck. Information such as manifests, details on what conditions the ships went down (hurricanes, pirate attack etc) can prove invaluable in determining the likely condition of the ship’s hull and whether the ship’s cargo is likely to be consolidated in one place or scattered across the ocean.

Research also helps establish a wreck’s origin and history, allowing salvage companies to associate specific items with a specific period. Often items such as canons and anchors prove invaluable in helping companies associate finds with specific ships.

The Company intends to utilise a number of different researches to provide both the update research analysis required to establish wreck sites, as well as provide ongoing support if/when the Company makes a material find. This support will largely be split between the following:

Robert Marx: a world famous researcher within the shipwreck industry. He has a significant amount of historical research which may help provide insight into any finds made in the Licence Area, as well as firsthand experience of salvaging the Maravillas

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Patrick Lize: an archivist based in Paris, France specialising in historic shipwreck research in the Americas. His focus area will be on targeting the archives available in Paris as well as Amsterdam, Netherlands

Ciro de la Fuente: an archivist based out of Madrid that will focus on retrieving information from the archives in Seville

These efforts will be coordinated by marine archaeologist William Chalfant, the Company’s Chief Archaeologist and person responsible for establishing the historical origin for any discoveries made.

3.8 Valuation & Sale of ArtifactsThe Company intends to market artifacts found via Sotheby’s New York (an experienced auctioneer in this field). Sotheby’s Special Project Group, headed by Mr. David Redden, has been responsible for auctions some of the most famous sales at Sotheby's including Faberge Easter Eggs, Papers of Martin Luther King Jr, the 710-year-old copy of the Magna Carta, First Printing of the Declaration of Independence. Sotheby’s recently sold at auction (March 2012), a 16th & 17th century Spanish coin collection of 37,895 pieces that fetched an estimated US$27 million via the Special Auctions division at Sotheby’s NYC branch. The recent sale was the most spectacular collection of coins relating to the entirety of Spanish history that is housed outside of Spain. The ambitious collection was among the finest and most comprehensive ever to be assembled, either by an individual or institution.

One of the primary factors behind why the licensee selected this company was selected due to their experience of selling large quantities of 16th century Spanish coins. Transport and security/insurance will be supplied by the preferred courier of Sotheby’s, Brinks Latin America, which offers weekly secured courier services from Nassau, Bahamas to New York.

Sotheby's commissions range from 5% to 10%, depending upon the auction valuation. Within the forecasts, the Company has used 10% as an average commission rate (our model assumes a further 7% for security costs). Management do note however that the pricing and sales strategy for artifacts will be up to their discretion.

Sale dates will be determined by the volume of recovered artifacts, with sales likely to occur biannually or annually.

As a base pricing limit, the Company has assumed no historical premium for artifact sales and instead used the raw material prices as the basis for estimating the value of the wrecks in the License Area (such as the market price for silver and gold per ounce).

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4 Shipwrecks Sites

4.1 IntroductionThe Florida Straits which lie between Florida and The Bahama Banks has been considered to be a death-trap by seamen during storms. By the mid 1700s this region was littered with galleon wrecks. 2 The exact locations of most wrecks are unknown as those who salvaged these vessels rarely disclosed the true location.

The exact value of these shipwrecks is difficult to ascertain as unregistered treasure can account for two to three times the amount of registered cargo3. This was not uncommon during the 17th century. In most instances officers paid to secure their positions knowing that most of their income would be derived from unregistered cargo. However, post wreckage legal documents, such as court documents, legal filings and official statements often describe these unregistered cargos in great detail.

The archives in Seville contain the majority of documents relating to 17 th Century shipwrecks, along with various institutions in Madrid, England, the Vatican Archives, and Peru. Although some documents are available online, the vast majority of these collections are housed within archival departments and government offices.

Whilst management consider there to be numerous different shipwreck site opportunities in the Licence Area, they intend to focus on the following three:

Nuestra Senora de la Maravillas: a ship that sunk in 1656 on her way from Havana to Spain, with an estimated cargo of between $240 million and $490 million

Dutch Wreck: 2 ships carrying cargo stolen from Spanish ships that sunk in 1628, with an estimated cargo of between $250 million and $490 million

The Genovees, Sint Domingo: a ship that wrecked in 1669 carrying an estimated cargo of $230 million and $470 million

We set out below further information on these wrecks, their recorded manifests as well as any historical references that we have with regard to past attempts to salvage the sites. This historical information, largely researched from original documents in the French and Spanish archives, forms the basis for our assessment of the potential Residual Site Values (RSVs) for the Licence Area.

It should be noted that any estimate of RSVs is highly subjective and uncertain. Given the wrecks are over 300 years old, documentation and records are often scarce and incomplete. In addition, little or no record (understandably) exists in relation to any illegal attempts to salvage the ships over the last 300 years.

2 Diving to a Flash of Gold. Meylach, Martin. Florida Classics Library 1986. 3 The Lure of Sunken Treasure, Robert F. Marx. David McKay Company, Inc. New York. 1973. P. 82

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4.2 Licence AreaThe Licence Area is a site with a five mile radius, with the centre being located around the following co-ordinates:

27 08 30 N79 07 30 W

The site has been specifically identified by the Company based on historical analyses of shipwreck data on the Maravillas, and the likely tidal flows that would have affected the cargo held.

4.2.1 Map of Licence Area

Roughly the area is 30 miles off the North West coast of Grand Bahama (an area known as ‘West End’). Currently Stuart Cove’ company has a dive operation based in this area. The Company has agreed with Stuart Cove’s west end company to utilise this operation as its land based hub, acting as both the head office and an access point for supplies and divers.

4.3 Nuestra Senora de la MaravillasBackground

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Amongst the 650 Spanish galleons lost between 1500 and 1750, the most mystic of them all is the famous “N.S de la Maravillas”, Almiranta of the fleet of General Marquis de Montealegre, lost in 1656 on the Bahama reef loaded with a huge treasure from South America.

On January 1, 1656, she departed from Havana, Cuba, en route to Spain. After four days of sailing northward through the “Canal de Bahama”, the ships encountered adverse winds which pushed them towards the Florida reefs. On January 4th, while new courses were set in a more north-easterly direction, the “Maravillas” collided with the Capitana commanded by Montealegre, causing severe damage. The two ships continued to fight the currents in order to clear the reefs but just after having sounded 12 fathoms, the Almiranta struck a reef and sank in 6 fathoms. Of the 400 people aboard, only 44 were rescued, having saved themselves by hanging on the masts and spars remaining above the surface until the longboat from the “Jesus Maria Y Jose” rescued them.

Among those drowned was the Admiral Don Matias de Orellana. Doctor Don Portalo and Pilot Gaspar Reyes Palacios, survivors of the ship, declared to Don Pedro Zapata, Governor of Cartagena, in a document dated March 12, that “In the early morning hours of January 4, one hour after the collision, the Almiranta threw out two anchors to avoid the reefs but the anchors didn’t hold and the Almiranta struck the reef and sank. The position of the wreck was given as being 27 degrees 15 minute latitude in the north of the Mimbres, about one league from the north of the Florida channel”. After rescuing the survivors and taking the mentioned sightings and also depth soundings, Capt. Don Juan de Hoyos of the “Jesus Maria y Jose” returned to Cartagena.

The original archives in Seville mention numerous salvage operations that occurred later and Padre Diego Portichuelo de Rivadeneira, a survivor, in his Memoirs printed in 1657, revealed some of these operations:

On June 1, 1656 a fleet of 6 salvage ships commanded by captains Marcus del Puerto, Juan de la Pena, Juan de Somovilla Tejada and Gaspar de los Reyes departed from Cuba to the site where they worked for 13 days during which time divers recovered 300 silver bars, 100,000 pesos in gold and silver and a bronze canon, brought back to Puerto Rico. The salvers noticed that the ship was sunk in 8 “brazas” (fathoms) deep at high tide and 7 at low tide. The main strong room remained inaccessible as it was deeply buried in the sand and that a large part of the hull has been cast away.

In January 1657, Somovilla arrived in Seville where he delivered his report to the Casa de la Contratacion. According to him, the wreck lied in 33 feet of water and was buried in the sand. Supposedly the “Jesus Maria”, one of the salvage ship, en route to Spain was in danger of skinking near Bermuda and was towed to St Georges Harbour for safety. There the crew was well received by the Governor who listened carefully to their story and, a few weeks later, sent Captain Richard Lockyer with William Coxen with the “Discovery” to try to and recover part of the treasure.

In 1657, Pedro de Zapata, Governor of Cartagena de Indias, sent a second expedition to the wreck under the charge of Don Juan de Ochoa y Campo and Captain Josef de Yriarte, They worked on the wreck for two weeks from June 17th. According to Yriarte, they salvaged 1,500,000 pesos in gold and silver, 100 large silver bars, 150 medium and small bars, 30,000 pieces of 8 and 24 bronze canons. Unfortunately however, en route back to Havana, the salvage ships (i) “Madama” struck a reef called “Cayo de las Gordas” (ii) and “El Panito” was lost on a rock on Grand Bahama's reef

In 1658, Somovilla and Reyes returned to the wreck of the “Maravillas” after having stopped with the “El Champeton” on the wreck of the “Madama do Brasil” where they salvaged some bronze canons.

In 1666 new efforts were made by Don Marcus Lucio who recovered one cannon and 190 marks of silver in 33 feet depth. Don Francisco de Mella and Martin de Melgar remained for 75 days on the “Maravillas”‘s and recovered 42,000 pesos of silver coins, silver ingots and plates.

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Further salvage efforts carried out by Martin de Melgar in 1676 and 1677 produced another 41,744 pesos in treasure but the wreck, deeply buried in the sand, made the salvage extremely difficult.

In 1682, the famous Sir William Phipps himself salvaged about 10,000 pesos and in 1683, Captain Warren with the “Rose of Algarve” and captain Charles Salmon on the “Good Intent” went on the site.

Location

Various declarations of the survivors, the pilot, the captain of the “Jesus Maria y Jose” and the salvers who worked on the wreck site during over 26 years, have helped identify the location of the wreck.

Manifest

According to multiple court documents and first hand testimonies and accounts from on-board personnel, as estimated, 5.5 million Pesos, was loaded on the Maravillas when she sank. Further documents also within archives across Europe show approximately 2.9 million peso have been recovered, leaving approximately 2.6 million still to be found on the wreck sites.

In addition to the declared manifest, other documents outline the practice of loading up to 1 to 2 times the declared value onto ships of the day, in order to avoid paying taxes and duties. It has been theorized by multiple sources, that in excess of 15 million pesos were loaded on the ship when it sank in 1665.

To establish the modern day value of the cargo one must review the monetary system of 1665. Cobs are the original "treasure coins." Struck and trimmed by hand in the 16th through 18th centuries at Spanish mints in Mexico, Peru, and Colombia (among others), silver and gold cobs are handsomely crude, nearly all with a cross as the central feature on one side and either a coat-of-arms (shield) or a tic-tac-toe-like "pillars and waves" on the other side.

Silver cobs are known as "reales" and gold cobs are known as "escudos", with two 8 reales (about 27 grams each) equaling one escudo. Some cobs were struck with a date, and most show a mintmark and an initial or monogram for the assayer, the mint official who was responsible for weight and fineness. Size and shape were immaterial, which means that most cobs are far from round or uniform in thickness. Cobs were generally accepted as good currency all around the world, and were the exact coins pirates referred to as "pieces of eight" (8 reales) and "doubloons" (any gold cobs but originally 2 escudos). So translated:

Peso = 8 Reales = 27 grams or an ounce of silver (‘Piece of Eight’)

1 Escudo = 2 Pesos = 16 Reales

Given the ship was loaded down with between 5.5 million and 10 million Pesos, and the Peso in 1656 was equivalent to a Piece of Eight or 8 reales, 27.07 grams of silver or one ounce, it’s value of the day was one unit of measure (similar to a US Dollar, or Yen, etc.). That same Peso or Piece of Eight is worth about $400 on the open market if sold as a ‘Piece of Eight’ or US$27 as of August 2012 on the Silver market.

Based on this, the cargo is estimated at the following (use the raw silver values as the calculation basis):

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Table 4.3.1: RSV Calculation

Residual Site Value - Calculation: Maravillas to present day value

Est$m ValueCalculationShip Manifest - Pesos 5.5Spanish Reals per Peso 8.0Silver Ounces per Peso 1.0Silver Price per Ounce (Aug 2012) 28.1Gross Value (USD) 1,237.3

In addition to the estimated value noted below, management’s estimate of the residual value for the cargo has been adjusted to account for a number of different factors. The process used to estimate the value of the residual values has included the following:

Prior salvage attempts: management are aware that there have been prior attempts to salvage cargoes from the shipwreck sites (including a number of attempts shortly after the shipwreck itself). Accordingly, it is highly unlikely that the full value of the shipwrecks will still remain in the seabed. Based again on historical averages, the Company has sensitised the Site Values by varying percentages to arrive at a ‘likely’ value for the finds (based on historical records)

Lost or unrecoverable items: an adjustment has been made to allow for items that will be outside of the Licence Area or unrecoverable. This estimate is based on historical records of prior salvage attempts and their success in finding ship related items

Using this approach, management estimate a range of different residual values for the shipwreck:Table 4.3.2 RSV Calculation

Residual Site Value - Calculation: MaravillasAdjust Calc

$m % Adj ValueCalculation MethodologyShip Manifest 1,237.31. Prior salvage work adjustment (50.0)% (618.6) 618.62. Unrecoverable artefacts (10.0)% (123.7) 494.9Residual Site Value - Gross Value 494.9

Sensitivity AdjustmentsHigh Scenario: High Recovery 100.0% 494.9Base Scenario: Base Case 75.0% 371.2Low Scenario: Low Recovery 50.0% 247.5

This implies a total value range of between $240 million and $490 million.

It should be noted that management’s estimate of RSV does not include any adjustment for undeclared items on board the ships (i.e. it is purely based on the reported manifests). As noted earlier, it is likely that the reported manifests understated actual cargoes as it was common for ship captains to try and minimize duties payable on cargoes. Management has not attempted to include any uplift for these potential understatements as the nature of the adjustment is too uncertain.

These values have been used in preparing the different forecast models for the projections (with the same principles applied for each of the different wreck sites targeted).

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4.4 Dutch Wreck

Background

Dubbed ‘Spain’s greatest marine disaster’, the entire New Spain Fleet of 24 ships was lost in 1628. The immense loss of this fleet to Spain was not due to bad weather, a strong hurricane, privateers, pirates or a large shallow reef but instead lost to Dutch privateers.

The treasure convoy of 24 ships was captured approaching Havana from Vera Cruz by a strong armada of Dutch warships commanded by Admiral Piet Heyn. Upon sighting the warships, the Spanish galleons changed track, slipping into Mantazas Bay hoping to unload the treasure onto the island before the Dutch could reach them and plunder it. The plan went awry when they misjudged the depth of the bay, and all 24 ships ran aground upon entering. Abandoning the original plan to save the treasure, the Spanish crew jumped ship and ran ashore seeking cover and safety. This allowed the Dutch to plunder the ships without resistance, and seize the treasure from the entire fleet of ships. The Dutch seized so much wealth, that they had to re-float the four largest ships of the Spanish fleet in order to carry all that they had plundered.

On the Dutch armada’s journey back to Holland, two of the re-floated Spanish ships separated from the convoy amidst a strong storm, and subsequently wrecked off Grand Bahama Island. A small section of the wreckage was discovered in 1965 (in addition to some coinage) however the majority of the treasure remains buried at sea.

Had the Dutch known that the Spaniards had hidden large amounts of gold and precious stones within the ballast of their ships, they could have plundered twice the amount of treasure. When they set sail for Holland, the captain ordered his men to burn the remaining ships, leaving the destroyed ships and hidden treasures to sink into the soft mud of the bay, where they currently still remain.

The two ships wrecked off the coast of Grand Bahama with one ship first striking a very shallow reef off the coast, and then completely wrecking a few miles east of the reef’s location. The second ship wrecked just east of the first wrecked ship. Local folk tales record that about 150 years ago, local fishermen found a vast amount of gold and silver on the sea floor near where the ships are recorded as being wrecked.

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Manifest

The Santa Gertrude and the Santa Ana (both 600 tons) were the ships that were wrecked from the fleet. The entire treasure being sent back to Spain was recorded being worth 25 million pesos at the time of sailing. With manifest fraud being a common occurrence at the time in order to avoid taxations, it can be estimated that the manifest’s recorded value was grossly understated.

With the majority of the plundered treasure being carried by the four re-floated Spanish ships, and two of the ‘heaviest’ ones being wrecked off Grand Bahama, it is estimated that the ships could have carried approximately 12.5 million pesos worth of treasure.4

Based on this, the cargo is estimated at the following (use the raw silver values as the calculation basis):Table 4.4.1: RSV Calculation

Residual Site Value - Calculation: Dutch wrecks to present day value

Est$m ValueCalculationShip Manifests - Combined (50%) 6.3Spanish Reals per Peso 8.0Silver Ounces per Peso 1.0Silver Price per Ounce (Aug 12) 28.1Total Gross Value (USD) 1,406.0

Using the same approach used for the Maravillas, management estimate a range of different residual values for the shipwreck:


Residual Site Value - Calculation: Dutch wrecksAdjust Calc

$m % Adj ValueCalculation MethodologyShip Manifests - Santa Gertrudes & Santa Ana combined 1,406.01. Prior salvage work adjustment i) 1965 - some silver coinage (5.0)% (70.3) 1,335.7 ii) 1968 - 450 silver coins & some artifacts (10.0)% (140.6) 1,195.1 iii) 1859 - 'large amount of gold and silver' (25.0)% (351.5) 843.62. Unrecoverable artefacts (25.0)% (351.5) 492.1Residual Site Value - Gross Value 492.1



4 The World’s Richest Wrecks: A Wreck Diver’s Guide to Gold and Silver Treasures of the Seas by Robert F. Marx & Jenifer Marx. Management has only used 50% of these estimates in their calculations.

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4.5 The Genovees, Sint Domingo

Background

The Genovees, Sint Domingo – also known as the Genovees – wrecked during a strong storm on the little Bahama Bank in 1669 after departing Havana. This Spanish galleon of 650 tons was captained by Captain Domingo Ypenarita5; the vessel was outfitted with 32 cannons, and at the time carried 3.2 million pesos of treasure.

Historical records note the Genovees wrecked on the Little Bahama Bank near the drop off of the Gulf Stream. Another ship of the same fleet was able to rescue 63 of the 478 people on board. At the time of wrecking, the ship sank to a depth of only approximately 30 feet; however over time shifting sands quickly covered the wreck, and natural currents displaced parts of it making it difficult for less sophisticated tools and equipment of the time to salvage the wreck. In April 1670, Havana sailors located the site of the wreck, however it was already almost completely covered over by sand - all they found were two anchors 1. The treasure still lies buried under the sand, as no recorded salvages have been noted over the centuries to present day.

Manifest

The Genovees was carrying 3.2 million pesos of treasure at the time of wreckage. Based on this, the cargo is estimated at the following (use the raw silver values as the calculation basis):


Residual Site Value - Calculation: Genovees to present day value

Est$m Value

CalculationShip Manifests - Genovees 3.2Spanish Reals per Peso 8.0Silver Ounces per Peso 1.0Silver Price per Ounce (Aug 12) 28.1Total Gross Value (USD) 726.6

Using the same approach used for the Maravillas, management estimate a range of different residual values for the shipwreck:.

5 Shipwreck: A Saga of Sea Tragedy and Sunken Treasure by Dave Horner

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Residual Site Value - Calculation: Sint Domingo; also known as the GenoveesAdjust Calc

$m % Adj Value

Calculation MethodologyShip Manifests 726.61. Prior salvage work adjustment (10.0)% (72.7) 654.02. Unrecoverable artefacts (25.0)% (181.7) 472.3Residual Site Value - Gross Value 472.3



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5 Operational Structure

5.1 Overview of Operations

The proposed timeline for the project used for forecasting purposes is shown above. Given the variable nature of the project’s cost base, should the forecast periods vary to those noted, the cost per phase will differ accordingly.

Management estimate that truthing and excavation will commence in late 2013 or early 2014 following the completion of the survey and subsequent analysis of the Licence Area. Unlike historical salvage projects, given the highly detailed nature of the technology to be used for the survey, management are confident that they can minimise time spent in ramping up to the revenue generating excavation phase of the project (incorporated into the final phase above). As noted above, the last 3 phases of the operation will be performed concurrently once the Company initiates its main excavation activities.

Set out below are descriptions of the main operational areas of the business. Whilst all cost centres will be responsible for their own performance, the central management will be based out of the Company’s head office in Grand Bahama.

In addition to the overview below, we have also provided a summary of the estimated revenue and costs per phase in Appendix A.

5.2 Survey and Salvage ShipsSurvey Ship

Management intend to acquire a ‘RV DEEP SCAN’ boat to use as the survey boat. It is a production landing craft produced in Holland and designed from the hull-up as an underwater survey boat with special features, such as minimal ferrous metals, carbon fibber rigging and other features unique for survey vessels. Aside from the numerous features/equipment designed for shallow water treasure hunting/research, the vessel will be outfitted with state-of-the-art magnetometers and side-scan sonar equipment and related computers. The primary advantage of this vessel is all equipment will be owned by the licensee, allowing for multiple areas of continued survey at minimal costs.

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Research & Data

CollectionKey Targets Search &

Survey Analysis Truthing Document Realisation

3 Months 1 Month 2 Months 5 Months 36 Months(concurrent)

36 Months(concurrent)

36 Months(concurrent)


Salvage Ship

The Company proposed to acquire a Salvage Ship which be based permanently over the dive site. The ship will act as the main operational base, including providing accommodation for crew and tourist divers. Key specifications will include:

Cruising Speed: 12 knots Range: 1200 nautical miles Navigation Aids: VHF, SSB, Furuno 48-mile radar, GPS x 2, depth sounder QuaD Staterooms: 2 upper single beds and 2 lower single beds, private facilities located in the quad

stateroom,

5.3 Survey TechniqueThe survey phase of the project is perhaps the most critical phase to be undertaken, short of recovery of artifacts. The computer-driven high-powered technologies available in 2012 did not exist the last time this site was legally salvaged in the late 80’s and early 90’s. State-of-the-art, geophysical and geo-positioning military-grade survey technologies will be used such as USBL, MRU, Side Scan Survey, Cesium vapor magnetometer. This will be coupled with time domain electromagnetic (TDEM) sensors that can process data with a program utilized by the Department of Defense to locate sediment-buried unexploded bombs, to accurately assess artifacts buried deeply under sand, rubble and reef.

This TDEM underwater array allows for a “picture” to be created showing not only the position of underwater features in incredible accuracy, but actually classifies buried metal objects as being ferrous (iron) or non-ferrous (gold, silver etc.). This ability to differentiate is unique within the underwater archeology and artifact recovery world, and has never been applied to such a large area as proposed for the prospectus leaseholder’s area.

Based on known weather conditions, sub-aquatic features and planned vessels and crew deployments, the analysis will yield literally an artifact map of the entire coverage area showing all objects of interest on top of, and beneath the bottom of the ocean within the advanced detection range of the equipment. Deployments of this nature should run between 45 and 60 days, including contingencies and possible weather delays.

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As this initial survey will create a unique ‘treasure map’ of sorts, this phase is critical to the rest of the recovery process and provide data for the next several phases of deployment.

5.4 Laboratory Grand BahamaConservation Process

Before artefacts recovered from a site can be studied or even identified they have to be properly recorded and stabilized before conservation can begin. This process starts with each artefact being properly mapped, documented, photographed, drawn and entered into a comprehensive artefact database. This database also includes detailed information on each artefacts’ condition at the time of recovery and what initial stabilization steps were taken.

These records are comprehensively updated and expanded upon as each item goes through the conservation and curation process. This database will become one of the primary source materials that future researchers will use to judge the professionalism and effectiveness of the project at a whole.

The conservation process can be complex, expensive and time consuming to establish and operate however without such a facility in place any artefacts recovered or data gleaned from the excavations will most certainly be tainted by accusations of improper methodologies, faulty science, and even claims of destruction of priceless cultural heritage and possibly fraud. So it is imperative that on a project the size, scope and historical importance of the Maravillas and surrounding resources, that no efforts are spared in ensuring that all artefacts are subject to the highest standards of archaeological and scientific professionalism.

Laboratory

Depending on the size and condition of the artefacts found, the stabilisation and recording process with take place on:

Salvage Boat: for smaller, higher value items, such as coins and gems, this process can be performed in special vats. Given the chemical nature of these artefacts, stabilisation is not expected to be complicated and as such the Salvage Boat will suffice

Laboratory: for larger, or more fragile items, this process will be performed at a specific laboratory in Grand Bahama

Once the initial conservation lab and associated facilities are established and professionally staffed, they can help pay for themselves in the long term by providing conservation services to other archaeological (not for profit efforts) and salvage projects operating within the region.

5.5 Research TeamAll research will be coordinated by the technical director, William Cline, with each researcher supplying various data sets for the wrecks valuations, previous salvage efforts, and target locations. This ongoing process is expected to continue well into year three or four, as trails of recovered artifacts may be from multiple wrecks in the area, all highly valued with potential yield. Each source researcher will be utilized in various ongoing manners depending upon the recovered artifact items and trails. Given that multiple wrecks are in the Licensee Area, ongoing research material will be needed as various artifacts are recovered.

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Researchers will include:

Robert F. Marx

Robert F. Marx is one of the pioneer American scuba divers and is best known for his work with shipwrecks and sunken treasure. Although he is considered controversial for his frequent and successful forays into treasure hunting, fellow treasure hunter E. Lee Spence describes Marx as the true father of underwater archaeology.

Marx became a diving specialist in the United States Marine Corps in 1953. He has since made over 5,000 dives and has authored over 800 reports\articles and 59 books on history, archaeology, shipwrecks and exploration.

He was a founding member of the Council on Underwater Archaeology and of the Sea Research Society and served on the Society's Board of Advisors. In 1972 participated in the creation of the research/professional degree of Doctor of Marine Histories.

Marx was made a Knight-commander in the Order of Isabella the Catholic by the Spanish government for his re-enactment in the Nina II of Christopher Columbus' first voyage of exploration.

Marx was also one of the original salvors of the Maravilla in the 1970’s. Marx has supplied and will continue to supply data, charts and other information to assist with the location and salvage efforts within the License Area.

Patrick Lize

Patrick Lize is a Paris based researcher and archivist, specializing in Spanish shipwrecks in the Americas. He is supplying data and documents from both the Archives in Paris, London and Amsterdam. Lize is the author on shipwrecks of the new world, and authored six books in French and Portuguese on related subjects and studies.

Ciro de la Fuente

Ciro de la Fuente is a Madrid based archivist who is supplying original Spanish Government documents, manifests and other salvage documents from Spain’s National Archives in Seville, Spain.

5.6 Head Office Grand BahamaThe Company’s head office function will be led out of West End, Grand Bahama. Not only is this location convenient for the actual Licence Area (as noted above, the Company will be using West End as its hub for transporting passengers and goods to and from the salvage boat), the Company has access to pre-existing office space via Stuart Cove’s West End diving company.

The main functions that the head office will be performing include the following:

Co-ordination of tourist bookings Logistics for the salvage boat (food, fuel, etc) Legal and company secretarial duties Liaison with the financial accounting provider Registered office Travel scheduling for team members

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Government liaison Insurance Payroll services co-ordination

The Company currently envisages that the office will be staffed with one full time employee, with secretarial support through the local Stuart Cove diving company.

In addition, this cost centre will include all other ancillary costs of the operation, including any shared costs with the local Stuart Cove dive company and corporate governance costs (audit costs, director fees and insurance etc).

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6 Management Structure

6.1 Key ManagementStuart Cove will function as CEO and President of the company, and directly coordinate all efforts, including managing the research department, survey team, and recovery/preservation team.

William Cline will serve as Technical Director, overseeing the technical aspects of the research and survey phases of the company, directing research or survey staff as needed, based on data collected via the research and survey phases. William will report directly to Stuart Cove.

Marine archaeologist William Chalfant will serve as Chief Underwater Archaeology responsible for artifact recovery and preservation team. His direct responsibilities will be to manage the entire survey process as well as recovery and preservation of artifacts found during the survey and truthing processes. William will report directly to Stuart Cove.

An Office Manager (yet to be named) will coordinate the payroll, accounting and other day-to-day business functions of supplying the vessels and staff with needed resources and communications. This person will be located in West End and be the direct contact for all personnel for the company, and report directly to Stuart Cove

The Company currently operates with a skeletal management team given its current funding requirements. A summary of key managements’ experiences and backgrounds are set out below:

6.1.1 Stuart Cove – Managing Director

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Stuart Cove Managing Director Bahamian Citizen PADI Open Water Certified in 1972, PADI Instructor 1983, TDI

Technical and Recreate Instructor 1992, SSI Instructor 1989, NAUI Lifetime Instructor 1987, Boat Captain 1981

Private Pilot IFR and Seaplane ratings Created Oceanwatch Bahamas Board member of both Coast Awareness Committee and BREEF Started “Children of the Reef” a program that has helped over

10,000 Underprivileged Bahamian Children Created the Modern “Shark Feed Interactive Experience” utilized

throughout the Bahamas, with tens of thousands of consumer & film interaction experiences to date.

Vice-President, Bahamas Diving Association Board Member, Bahamas Ministry of Tourism, Dive Marketing

Committee Listed twice in Entertainment Weekly’s “Top 100 Most Influential

People in Hollywood” for his work on Deep Blue Sea in 1999 and Open Water in 2003.


6.1.2 William Chalfant - Chief Archeologist

6.1.3 William Cline – Technical Director

6.2 Key

ConsultantsThe Company has engaged the following key consultants as part of the project, to help with the initial start up and subsequent management of its ongoing operations.

KPMG

KPMG has been engaged to act as the financial advisor for the firm, to assist it with both its initial fund raising efforts, as well as to provide advice on future financial aspects of the business, including a possible listing on Bahamas Stock Exchange (‘BISX’).

KPMG is a wholly Bahamian owned member firm of KPMG International. KPMG has been present in The Bahamas since 1954. With a staff of 73 led by 5 Bahamian partners and 4 principals, the firm provides a wide range of services including audit and advisory services to an extensive range of private and public

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William Chalfant Bermuda: Underwater Archaeologist; Survey of period wrecks. Excavation of the Tile Wreck

American Shoal, FL. Lead Archaeologist; Developed research plan for survey project of American Shoal area for the American Shoal Archaeology Project. On site artifact documentation.

Traverse City, MI Survey Team Leader Team leader on a multidisciplinary survey of wooden vernacular vessels in Lake Michigan. Survey techniques included sector scan sonar, remotely operated vehicle, photographic documentation and structural measurements and input into a GIS program.

St. Augustine, FL Archaeological Dive. Conducted magnetometer, side scan survey and preliminary excavation of a late 18th century wreck known as the Storm Wreck of unknown origin.

William Cline President and owner of The Cline Group Advertising. The company was founded in 1990 as an international consultancy, specializing in the recreational scuba diving industries.

Represents and consults on a variety of matters from technical consulting, to operations to tourism projects with some of the world’s leading companies, governments and destinations within the Scuba Diving Industry.

Worked with many governments all over the Caribbean. Cline Group is highly respected in the specialized field of scuba

diving consulting, operations, and marketing, within the USA and in South America and Asia. William is sought after in the field of dive consulting worldwide.

William Cline is a diving veteran, and currently holds the highest training distinction and certification in the world - a PADI Course Director Designation (#27109), and currently working on his MBA and is also on the DEMA Board of Directors, the dive industry’s trade association


sector Bahamian and international clients. It operates from two offices in The Bahamas, one in Nassau, and one in Freeport, Grand Bahama.

[Local law firm]

[Law firm] has been engaged to act as the legal counsel for the Company.

6.3 Financial and Operational ReportingAs part of its ongoing internal management and reporting structure, the Company will prepare monthly management accounts and status updates for its key stakeholders (shareholders and Government). These reports will largely take the form of integrated financial statements (P&L, cashflow statement and balance sheet), and include a commentary of progress to date and performance against budget.

On a quarterly basis, the Company intends to update its cashflow forecast and budget to reassess the adequacy of its cash balances over the short to medium term. Whilst the Company does not anticipate any issues with its forecasts, this continual reassessment will help management safely navigate any unexpected variances or issues that may impact funding.

On an annual basis, the Company intends to have its financial statements audited by an independent firm of auditors. These audited financial statements will be made available to shareholders and other key stakeholders.

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7 Legal Considerations

7.1 Licence OverviewFor years salvage companies and individuals have pillaged shipwrecks throughout The Bahamas without regard to historical or cultural significance to these sites. Treasures have been stolen under the cloak of night with little to no compensation to the people of The Bahamas. In 2012 the Government of The Bahamas decided to develop a comprehensive program which would allow for the salvage of shipwrecks, in conjunction with the efforts of cultural resource management initiatives. For the first time those who are found to be in violation of the Salvage Wreck Act will be subject to fines and/or a prison term of up to six months.

Specific elements from the initial application are addressed below, along with a description of the rationale associated with each activity. The archaeologist for AMMC, who oversees all of the permits was educated in the United States and has an extensive background in archaeology, environmental sciences and planning. Thus, he will be able to readily identify if researchers or salvers are utilizing appropriate measures throughout the survey, excavation or conservation process.

Selections of The License Agreement are indicated in Bold

AMMC requires the following of all licenses:

An initial survey of the entire license area must be conducted prior to any salvage activities (However, should an area of ‘significance’ be identified during the survey process we can request permission to modify the initial license application to include areas not specified within the initial license)

Only limited ‘truthing’ will be permitted during the survey phase. Only in very rare instances may any artefacts be removed (to assist in the identification of a shipwreck, to protect artefact in peril, etc.). Truthing may only be conducted under the guidance of an approved archaeologist.

Once surveying has completed, AMMC will require the submission of the following:

Final report of survey, including an analysis of findings and recommendations for any modifications needed.

A comprehensive research design including evidence of the development and implementation of appropriate conservation facilities on land and on the research vessel.

Evidence of comprehensive archival research.

Evidence that other conditions set forth in the initial application have been met such as environmental conservation and monitoring plans, educational outreach initiatives, etc.

Archival Research

‘Archival research of all available materials will be conducted utilizing published and (primarily) unpublished documents obtained from those who have conducted sanctioned and unsanctioned research throughout this region’

The purpose of archival research is to ensure that valid documentation of all available resources on known and unknown shipwrecks in the license area. Management cannot rely on previously published and unpublished information on these sites as it is strongly believed that data was skewed and oftentimes

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fabricated by previous salvers to appeal to investors. Contrary to popular belief, there is no single manifest for any of the ‘potential wrecks’ in this area. Numerous manifests were created for each vessel. Other documents, such as court records, royal correspondence, and post wreck interviews oftentimes contain even greater detail on the cargo of each vessel, as it is not uncommon for 30% or more of the cargo to be undocumented contraband and information regarding this cargo would be located in documents not relative to manifests.

Archival research will also assist us in identifying the individuals associated with specific artefacts, further enhancing their value. For example, it has been suggested that members of the Order of Santiago were onboard the Maravillas when it sank. These members were required to wear veneras. Once the identification of passengers can be confirmed, should these artefacts be retrieved they could be associated with individuals.

Reporting During Surveying Phase

‘It is anticipated that all preliminary research, including archival research, field surveying, data analyses and report writing will be completed within ninety (90) days of initial commencement of initial fieldwork’.

It is anticipated that the preliminary surveying staff will be responsible for the accumulation and dissemination of preliminary data. However, it will be the responsibility of the archaeologists and GIS specialist to incorporate this into report format. This report will be extensive as it will contain the following, at a minimum:

Initial underwater survey; Findings and recommendations including any modifications that may be needed to scope, duration or mode of research.

Archival Report

Laboratory Design and Artefact Conservation Methodology Report

Community Inclusionary Synopsis

Environmental Assessment and Monitoring Plan

Research Proposal for Phase II (Comprehensive proposal for survey, excavation, site stabilization, if needed and conservation measures)

AMMC has made it clear that no excavations may be conducted until the above-mentioned components have been adequately addressed.

‘Status reports, including all ship and dive logs will be submitted to AMMC every thirty (30) days during this time.’

These reports will include a summation of all activities conducted, including those outside the realm of archaeological research, such as environmental impact assessment planning, educational initiatives, etc.

7.2 MonitoringIt is anticipated that excavations will commence in April 2013. Should AMMC grant the excavation before this time (anticipated date of excavation license is December 2012/January 2013), weather permitting limited excavations may begin at an earlier date.

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Monitoring of this site/s is the joint responsibility of the license holder, the Government of The Bahamas and AMMC. Environmental Monitoring will also be a keep component of this license. It is anticipated that students from various colleges will be of a great deal of assistance in this manner.

The license holder’s responsibilities include various oversight initiatives, archaeological oversight of excavations, stabilization and conservation of artefacts, along with the security of all artefacts until they have reached the point of exchange in Nassau. All archaeological work will be conducted in accordance to the Nautical Archaeological Standards http://www.nauticalarchaeologysociety.org/. The license holder will maintain vessels in the area throughout the survey and excavation process to ensure the site is not compromised.

Mapping, photography and video-graphy of all excavation activities will be conducted to ensure the site has been properly assessed and documented in the interest of maintaining the integrity of the work being conducted and securing the interests of all stakeholders. All divers participating in excavations will be required to attend an underwater surveying and excavation workshop through regional universities. Appropriate security measures will be taken to ensure site integrity is maintained.

The Government of The Bahamas will rotate a Royal Bahamas Defence Force Officer onboard the excavation vessel for onboard security and Government supervision.

7.3 Legal Title

According to the Commonwealth of the Bahamas, Chapter 274 of the Abandoned Wreck Act as shows below, the sovereign rights and title to any abandoned shipwreck belongs to the Bahamas as stated in http://laws.bahamas.gov.bs/statutes/statute_CHAPTER_274.html

Section 3. The claims of all persons to abandoned wreck are hereby barred and the property in all such wreck is hereby vested in Her Majesty in right of Her Government of The Bahamas except wreck found in any place where Her Majesty or any of Her Royal Predecessors has granted to any other person the right to that wreck.

Section 4. (1) It shall be lawful for the Minister, in any case in which he deems it to be in the public interest so to do, to enter into an agreement with any prospector licensing such prospector to prospect for, salve and bring to shore any abandoned wreck.

Section 9, Sub-Section 10. (1) No person other than a prospector acting under and in accordance with the terms of an agreement made pursuant to this Act shall unless thereto specially authorised in writing by the Minister work, take or bring to shore any abandoned wreck and where under the terms of any such agreement an exclusive licence has been granted to a prospector in respect of a defined area of the sea bed within the limits of The Bahamas no person other than

Furthermore, since Spain and other countries have already salvaged this and other vessels in the license area, and in some cases, multiple times, any claim they might have has been historically satisfied. Therefore, since the Bahamas claims title to such wrecks, and legally granted title to licensee, title will be transferred upon recovery of such items, subject to the agreed split with government.

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http://laws.bahamas.gov.bs/statutes/statute_CHAPTER_274.html

http://www.nauticalarchaeologysociety.org/


8 The Bahamas

8.1 Country Overview The Bahamas is an archipelago of 700 islands extending over 500 miles into the Atlantic Ocean from a point 50 miles off the east coast of Florida. The Bahamas' English-speaking population of just over 330,000, concentrated mainly on the major islands of New Providence (where Nassau, the capital city, is located) and Grand Bahama (where Freeport, the largest free trade zone in the hemisphere, is located), has an adult literacy rate of 95% and an average per capita income of more than $20,000, one of the highest in the region. A parliamentary democracy for more than two-and-a-half centuries, The Bahamas has continued to enjoy political and social stability since its independence from Britain in 1973.

The Bahamas' well-developed economy is driven largely by tourism, which accounts for approximately 60% of the nation's $7 billion gross domestic product, and a rapidly expanding financial services industry. The balance of economic output comes from retail and wholesale trade, fishing, light manufacturing and agriculture.

An independent nation since 1973 and one of the oldest, vibrant democracies in the Western Hemisphere, the Commonwealth of The Bahamas is a member of the Commonwealth of Nations, the United Nations and has observer status to the World Trade Organization.

8.2 Political Overview The Bahamas is a sovereign, independent, nation. Political and legal traditions closely follow those of the United Kingdom and the Westminster system. The Government of the Bahamas is a parliamentary democracy with two main parties, the Free National Movement and the Progressive Liberal Party.

Tourism generates about half of all jobs, but the number of visitors has dropped significantly since the beginning of the global economic downturn during the last quarter of 2008. Banking and international financial services also have contracted, and The Bahamas is one of 34 secrecy jurisdictions that would be subject to the Stop Tax Haven Abuse Act introduced in the U.S. Congress.

The Bahamas is a member of the Commonwealth of Nations, and a Commonwealth realm with Queen Elizabeth II as head of state (represented by a Governor-General).

Legislative power is vested in a bicameral parliament, which consists of a 41-member House of Assembly (the lower house), with members elected from single-member districts, and a 16-member Senate, with members appointed by the governor-general, including nine on the advice of the prime minister, four on the advice of the leader of the opposition, and three on the advice of the prime minister after consultation with the leader of the opposition. The House of Assembly carries out all major legislative functions. As under the Westminster system, the prime minister may dissolve parliament and call a general election at any time within a five-year term. The Prime Minister is the head of government and is the leader of the party with the most seats in the House of Assembly. Executive power is exercised by the cabinet, selected by the prime minister and drawn from his supporters in the House of Assembly. The current governor-general is Sir Arthur Foulkes and the current Prime Minister is Perry Christie.

The Bahamas has a largely two-party system dominated by the centre-left Progressive Liberal Party and the centre-right Free National Movement. A handful of splinter parties have been unable to win election to

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parliament. These parties have included the Bahamas Democratic Movement, the Coalition for Democratic Reform, Bahamian Nationalist Party and the Democratic National Alliance.

Constitutional safeguards include freedom of speech, press, worship, movement, and association. Although The Bahamas is not geographically located in the Caribbean, it is a member of the Caribbean Community. The judiciary is independent of the executive and the legislature. Jurisprudence is based on English law.

8.3 Economic Overview One of the most prosperous countries in the Caribbean region, The Bahamas relies on tourism to generate most of its economic activity. Tourism as an industry not only accounts for over 60 percent of the Bahamian GDP, but provides jobs for more than half the country's workforce. After tourism, the next most important economic sector is financial services, accounting for some 15 percent of GDP.

The Government has adopted incentives to encourage foreign financial business, and further banking and finance reforms are in progress. The Government plans to merge the regulatory functions of key financial institutions, including the Central Bank of The Bahamas (CBB) and the Securities and Exchange Commission. The Central Bank administers restrictions and controls on capital and money market instruments. The Bahamas International Securities Exchange currently consists of 19 listed public companies. Reflecting the relative soundness of the banking system (mostly populated by Canadian banks), the impact of the global financial crisis on the financial sector has been limited.

The economy has a very competitive tax regime. The Government derives its revenue from import tariffs, license fees, property and stamp taxes, but there is no income tax, corporate tax, capital gains tax, value-added tax (VAT), or wealth tax. Payroll taxes fund social insurance benefits and amount to 3.9% paid by the employee and 5.9% paid by the employer. In 2010, overall tax revenue as a percentage of GDP was 17.2%. Authorities are trying to increase tax compliance and collection in the wake of the global crisis. Inflation has been moderate, averaging 3.7 percent between 2006 and 2008.

8.4 Other ConsiderationsWork Permits

No foreign person may be offered a job that a skilled Bahamian is qualified to perform, and any employer that has job vacancies must first advertise them locally, and only when unsuccessful may they be offered to a foreigner.

Given the specialized nature of the project, and the archaeological skills required, the Company does not believe it will have any difficulties in obtaining the work permits necessary to carry out the project.

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Logistics for Transporting material

As the project progresses, the company will become increasingly reliant on logistical support for the following functions:

Supplies for the Salvage Boat Transportation of artifacts Transportation for tourist divers and TV crew

Management does not consider that this reliance will be an issue for the Company as there are many ways to transport materials to and from the island of Grand Bahama including:

Couriers (DHL, FedEx, UPS, etc) Freight Forwarders Ships (freighters, mail boats, private carriers)

For higher value items, the Company will organize special secure couriers (potentially via seaplane directly from the Salvage Boat).

8.5 Grand Bahama Sitting 55 miles off the coast of Florida, Grand Bahamas is the northernmost of the islands of The Bahamas. It is also the 5th largest island in The Bahamas. Grand Bahama was first claimed by the Spanish, which originally gave the island the name Gran Bajamar, which means Great Shallows because of the large numbers of reefs and shallow waters surrounding the island. This, coupled with piracy which thrived under the island’s British rule in the 17th century, makes the island a perfect base for wreck salvaging, as its location is where the majority of wrecks occurred.

Tourism is the main industry of the island, with a ride variety of resorts, casinos, boutique hotels, and frequent visits by cruise ships making the island a regular stop to the main city of Freeport. Lucaya, however, is the main tourist destination on the island with many beautiful beaches and hotels. The city of West End is the oldest on the island, gaining its notoriety as a Rum-running port during the American Prohibition era; the city is rich in history, and is also the westernmost city of the island. This is also where Stuart Cove’s West End dive company is located and will be where the Company’s head office will be based.

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9 Conservation & Ancillary Activities

9.1 Tourist Dives Stuart Cove's companies' serve in excess of 60,000 tourists in the Bahamas per annum. Based on 30 years of tourism experience, the Company believes offering experience an opportunity to work on a real U/W Archeology site would be economically viable and marketable within the diving industry. In addition, the effort will be in conjunction with the world's largest dive live-a-board company, The Aggressor Fleet of Morgan City, LA. The Aggressor fleet is a worldwide company with 20 dive live-a-boards and currently offers a Bahamas based boat out of Nassau. Stuart Cove's Exploration Company plans to offer up to 4 passengers each week the opportunity to participate in the U/W archeology process, including receiving a university-level mini-course on-board the main vessel, Ocean Diver. The divers will help also actually with the underwater and top-side process of the search and recovery for artifacts. Based on similar excursions, and the weekly rate for diving in the region, the company anticipates diving tourists will pay as much as $3,500 per week to participate in this once-in-a-lifetime 'be Mel Fisher for a week' vacation.

Using the world's largest combined diver database, both companies will jointly market this excursion, and anticipated revenue based on a 20 week operation window per year.

9.2 Museum Since many key artifacts would be of wide-spread public interest, Stuart Cove's Exploration Company is partnering with the Bahamas AMMC (Antiquities, Monuments and Museum Corporation) to supply Museum-quality artifacts. These artifacts would be stored with the AMMC and put on display at various venues around the Country as possible. Equally key historically significant artifacts will be lent out as needed to various universities and colleges for academic purposes.

9.3 Salvage Dive QualificationThe Company intends to insist that all divers that are present on the dive sites within the Licence Area complete a certification/qualification prior arriving at the dive site (or on arrival). Management intend to use the NAS International Training Programme. The programme aims to provide not just an introduction to archaeological dives but also to offer people a chance to build their skills and experience, allowing them to take part in projects and fieldwork around the world and perhaps to run their own projects

The Training Programme has a modular structure, starting with a one day Introduction Course and working through the Part I, II and III Certificates and finally the Part IV Diploma. The programme will be open to everybody with the Introduction course requiring no prior learning or qualifications (refer http://www.nauticalarchaeologysociety.org/training/index.php ).

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http://www.nauticalarchaeologysociety.org/training/index.php


10 Investment Structure10.1 OverviewIn order to raise the $5.0 million that the Company requires to complete its proposed exploration and salvaging plans in the Licence Areas, it plans to sell 10 equal equity and debt tranches of $0.5 million. Investors will be able to invest in as many tranches as they wish, allotments will however be allocated based on the order in which requests are received.

Each tranche will consist of the following constituent parts:

Preference Shares: an issue of 4 $100,000 par value Preference Shares (totalling $0.4 million) , with each share having 1 (one) Revenue Participating Certificate attached to it

Common Equity: the issue of 50 common shares in the Company (equating to 1.0% of the issued share capital of the Company). Each share has a par value of $2,000 (i.e. a total cost of $100,000

The total fund raising will equate to the following: Table 10.1.1: Investment Summary Investment Summary

Qty Value Total# $'000 $'000

Investment TranchePreference Shares 4 100 400Common Equity 50 2 100Value per Tranche 500

Tranches available 10 500 5,000

We outline the terms of the above financing structures below.

10.2 Preference SharesThe Company is looking to raise $4.0 million through the issuance of preference shares with a par value of $100,000 per share (the “Series A Preference”). Significant terms and conditions of the Series A Preference Shares are as follows:

Dividends: the holders of the Series A Preference will be entitled to a minimum guaranteed dividend yield of 20% per annum. This dividend will be payable semi-annually on April 1 and October 1 of each year, commencing October 1, 2014. The dividends will be cumulative and shall accrue, whether or not earned or declared, from and after the date of issue. The yield will be calculated net of any returns from the RPCs issued (i.e. if RPC yields are in excess of 20% per annum there will not be any dividend on the Series A Preference)

Revenue Participation Certificate: the shares will, in addition, each have one Revenue Participation Certificate attached to them, entitling them to 0.5% of the Company’s net revenue (paid as cash is received for the respective revenue). Should the Company’s Base Case projections prove accurate over time, this will equate to approximately $2.0 million over the next 4 years

Liquidation Preference: in the event of any liquidation, dissolution, or winding up of the Company’s affairs, each holder of the Series A Preference Shares then outstanding will be entitled to receive full payment, before any payment or distribution will be made on the Company’s common equity or any capital equity of the Company ranking junior to the Series A Preference Shares as to the payment of dividends or the distribution of assets.

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Repayment: the Company will repay the preference shares on a monthly basis starting October 2014 through till August 2016. These repayments can, at the Company’s discretion be made at an earlier stage (any such repayment would not however impact any rights under the Revenue Participation Certificates). Importantly the Company will only be obliged to repay the Preference Shares should it have sufficient cashflows to fund the payment

10.3 Common Equity Investment It is intended that the Common Equity in the Company will have normal voting and distribution rights attached to them. Following completion of the Company’s fund raising activities the precise terms and conditions will be finalised (in consultation with the investors).

10.4 Finance LeaseOther than the finance lease agreed for the purchase of the salvage boat, the Company does not intend to source any debt related financing for the project at this stage (other than the preference share issue detailed above). At a later stage, the Company may look to secure debt financing to help provide short term funding for its operations by way of an overdraft facility (this is not however assumed within the Forecasts).

10.5 Revenue Participation CertificatesThe Company intends to use Revenue Participation Certificates (“RPCs”) to help incentivise key stakeholders, including service providers and key employees These RPCs represent the right to share in the Company’s future revenues derived from the project over the next 4 years. The Company plans to issue the following shares:

Preference Shareholders: a total of 40 RPCs equating to a total of 20% of the Company’s relevant revenue

Key Employees: a total of 10 RPCs equating to a total of 5% of the Company’s relevant revenue

The RPC units constitute restricted securities. Each RPC entitles the holder to receive 0.5% of the gross revenue received by the Company from the project, which is defined as all cash proceeds payable to the Company as a result of the project, less any amounts paid to the Bahamian Government or their designee(s); provided, however, that all funds received by the Company to finance the project are excluded from gross revenue.

In total, RPC holders will be entitled to 25% of the first $400 million of gross revenue. The key terms of the RPCs will be as follows:

Loss of the licence (expiration or revoked by the Government)

Payment in full of the maximum revenue share ($2.0m per RPC)

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11 Financial Projections

11.1 Basis of Preparation Overview

Management has prepared, in conjunction with their financial advisors, an integrated financial model to estimate the financing required for the Opportunity (the “Forecasts”). The model, developed in Excel, has been constructed based on the different phases of an exploration project.

Artefact SalesTV RevenueTourist DivesOther Revenue

Phase 1: Research & Data CollectionPhase 2: Key Targets & DevelopmentPhase 3: Search & SurveyPhase 4: Truthing & Key Target AnalysisPhase 5: Truthing & ExcavationPhase 6: Lab & Artifact DocumentationPhase 7: Artifact Division & Sales

Capex AssumptionsWorking CapitalFinancing RequirementsOther

P&L: Revenue (Phases 5 -7)

P&L: Cost CentresArtefact SalesSalvage Boat

SurveyLaboratoryResearch

Head Office

Balance Sheet

Cashflow Forecasts:

Cash Requirements

Sensitivity Scenarios

In order to arrive at a range of potential outcomes, management has made a series of further adjustments to the value of the shipwreck sites. These have been categorised into three different scenarios as follows:

‘Low’ Recovery Scenario: 50% reduction in the RSV

“Base Case” Recovery Scenario: 75% reduction in the RSV

‘High’ Recovery Scenario: no adjustment to the value of the shipwreck finds (i.e. 100% of the RSV)

It should be noted that the above revenue estimates are entirely subjective, and also contingent on the Company be successful in finding the targeted shipwrecks in the Licence Area. Whilst the Company is confident that it will be successful in finding the shipwreck sites, it does recognise the highly speculative nature of the project.

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Given the potential variability of other key factors in the Company’s operations, we have also incorporated other sensitivities to the three scenarios above. These are set out below, as well as the ‘no RSV’ scenario whereby the Company is unsuccessful in making any material find.

Table 11.1.1: Key Variable Used Key Scenario Variables: Summary

No RSVLow Base High Est

Key Variables UsedResidual Site Values 729.7 1,094.5 1,459.3 -Truthing & Key Target Analysis - Period (mths) 10.0 5.0 5.0 5.0Sales Commission (Artefacts) 15.0% 10.0% 10.0% 10.0%Reality TV Show Episodes - 14.0 14.0 6.0Diesel Price per Gallon 6.0 5.0 5.0 5.0Other Costs (HQ) ($k per annum) 100.0 36.0 36.0 136.0Boat Equipment Capex ($k) 200.0 150.0 150.0 250.0

Scenario

The above variables are considered by management to be the key areas of sensitivities in the Company’s forecasts; as such, they have been chosen to show potential investors the range of different scenarios that could result over the next three years. It should be noted however, that management consider the Base Case Scenario as the most likely outcome. Accordingly, we focus on these forecasts in our analyses below.

11.2 Profit & Loss Account As noted earlier, the profit and loss account forecast (“P&L Forecast”) has been structured around the different expected phases of the project, as well as the key cost centres for the operation as a whole.

We set out the key assumptions underpinning the revenue and cost forecasts below.

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Table 11.2.1 Profit & Loss Account - ForecastsP&L: Summary per Year

Base Year 1 Year 2 Year 3 Year 4 Total$m F'cast F'cast F'cast F'cast Years 1-4

RevenueTV Rights 0.2 2.1 2.2 2.1 6.5Artifact Sales 22.8 281.8 290.3 274.1 869.0Tourist Visits 0.0 0.1 0.2 0.1 0.5Other income 0.0 0.0 0.0 0.0 0.1Total 23.0 284.1 292.6 276.3 876.0

Direct CostsArtefact Sales Costs (9.6) (118.4) (121.9) (115.1) (365.0)Boat (0.3) (1.5) (1.6) (1.5) (4.8)Laboratory (0.2) (0.3) (0.3) (0.3) (1.1)Survey Costs (0.1) (0.0) (0.0) (0.0) (0.1)Total Direct Costs (10.1) (120.2) (123.8) (116.9) (371.0)

Gross Profit 12.9 163.9 168.8 159.4 505.0% Revenue 55.9% 57.7% 57.7% 57.7% 57.6%

Indirect CostsResearch (0.1) (0.0) (0.0) (0.0) (0.1)Head Off ice (0.4) (0.4) (0.4) (0.4) (1.7)Total Indirect Costs (0.4) (0.5) (0.5) (0.4) (1.8)

EBITDA 12.4 163.5 168.4 159.0 503.2% Revenue 54.0% 57.5% 57.5% 57.5% 57.4%

Other costs/incomeDepreciation (0.1) (0.1) (0.1) (0.1) (0.3)Amortisation (0.3) - - - (0.3)Interest Expense (0.0) 0.5 0.8 0.5 1.9Total (0.3) 0.4 0.7 0.4 1.3

Net Profit/Loss (pre Dividends) 12.1 163.9 169.1 159.4 504.5% Revenue 52.7% 57.7% 57.8% 57.7% 57.6%

Dividends - - (305.9) (170.8) (476.7)

Net Profit/Loss (post Dividends) 12.1 163.9 (136.8) (11.4) 27.9% Revenue 52.7% 57.7% (46.7)% (4.1)% (7.6)%

Revenue

Given the highly variable nature of the Company’s potential revenue base, management has produced a range of outcomes from the estimated artefact finds in the Licence Area. The process used to estimate the value of the artefact finds has been as follows:

Shipwreck sites: the Company has performed detail research of the likely shipwreck sites in the Licence Area. This analysis, as set out in Section 4, has been based on archival research in Europe as well as through interviews with salvage experts in the region

Prior salvage attempts: management are aware that there have been prior attempts to salvage cargoes from the shipwreck sites (including a number of attempts shortly after the shipwreck itself). Accordingly, it is highly unlikely that the full value of the shipwrecks will still remain in the seabed. Based again on historical averages, the Company has sensitised the Site Values by between 10% and 50% to arrive at a ‘likely’ value for the finds

Lost or unrecoverable items: an adjustment has been made to allow for items that will be outside of the Licence Area or unrecoverable ranging from 10% to 25%

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Applying the estimation process outlined above, management has used Scenario 2 to arrive at its base case forecast for the project.

Table 11.2.2 Profit & Loss Account - MethodologyResidual Site Value - Calculation Methodology

Adjust$ % Adj Value

Calculation MethodologyShip Manifest 100.01. Prior salvage w ork adjustment (50.0)% (50.0) 50.03. Unrecoverable/lost artefacts (10.0)% (10.0) 40.0Residual Site Value - Gross Value 40.0

Sensitivity AdjustmentsHigh' Scenario: High Recovery 100.0% 40.0Base' Scenario: Base Case 75.0% 30.0Low ' Scenario: Low Recovery 50.0% 20.0

Example

The underlying details of this calculation can be shown in Section 4. In addition, management has included an estimate for a TV reality show series; these have been based on discussions with an industry expert and are expected to start when the Company makes its first significant discovery. A nominal amount has also been included for ancillary other revenue, such as t-shirt and book sales, based on management’s prior experience of such revenue.

In addition, to these sites, management is aware of further shipwrecks in the Licence Area. As there is little supporting documentation on these sites, they have not assumed any value for artefact sales from these sites, and as such they represent potential revenue upside for the project.

Cost Base

Each of the Company’s main operations has been treated as a separate cost centre as follows:

Artefact Sales: the commission and insurance costs required to sell any artefact sales through an international auction house. These costs are fully variable based on the value of the artefacts sold;

Salvage Boat: the ongoing fuel, employee, food and other costs required to operate the salvage boat (the capital expenditure required to acquire the boat has been treated separately). These costs are assumed to be fully commence following completion of the seabed survey;

Survey Costs: as noted earlier, the Company intends to use in-house survey equipment and staff to perform a detailed analysis of the seabed in the Licence Area. In addition, a smaller variable amount has been included for ongoing specific research during the main excavation period;

Laboratory Costs: management anticipate that they will operate a laboratory in Grand Bahama. As noted earlier, there is a possibility that the Company will opt to share a laboratory site with other salvage operators in The Bahamas. It should be noted that, management would only agree to such an arrangement, if the cost to the Company was lower than that included within the Forecasts;

Research Costs: management plan on maintaining a research function over the next four years to supplement the laboratory function in the Bahamas. This function will focus on providing support for the significant artefacts found by the Company through referencing them to European archives

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Head Office Costs: management will operate a small head office out of Grand Bahama to help support the ongoing salvage operations. These costs will also include other shared functions such as licence rights, management costs and financial reporting costs

11.3 Balance SheetManagement has forecast the Company’s Base Case balance sheet based on the following key variables:

Capex: they have included forecast capital expenditure levels over the period. These largely relate to investments in the Survey and Salvage Boats (both the boat itself and equipment on board), the Laboratory and Head Office

Working Capital: they have included high level assumptions with regard to standard working capital items (debtors, creditors, etc). These are largely based on management’s historical experience of working capital cycles in the Bahamas

Financing: these items are based on the agreed and proposed financing structure for the business, including the $5.0 million funding proposal set out in this IM. In addition to this funding, the Company will also be purchasing the Salvage Boat on a finance type lease over the next 5 years

Cash & Dividends management has budgeted for a minimum cash balance of $0.5 million over the forecast period. The Company’s dividend policy is based on assumed distributions bi-annually from the start of Year 3, such that the Company distributes up to 95% of its available free cashflow (subject to its requisite minimum cash balance and retained earnings)

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Set out below are the forecast balance sheet for the Base Case Scenario over the next 4 years.

Table 11.3.1 Balance Sheet – Base CaseBS: Summary per Annum

Base Year 1 Year 2 Year 3 Year 4$'000 F'cast F'cast F'cast F'cast

Fixed AssetsBoat Purchases 1,279.1 1,213.3 1,147.4 1,081.6Boat Equipment 142.5 127.5 112.5 97.5Lab Equipment 9.0 7.0 5.0 3.0HO Equipment 8.8 6.3 3.8 1.3Other 17.5 12.5 7.5 2.5Total 1,456.9 1,366.5 1,276.2 1,185.8

Working CapitalInventory 4,561.4 4,698.2 4,839.1 -Debtors 5,746.7 5,919.1 6,096.7 -Creditors (1,942.4) (2,000.7) (2,060.7) -Prepayments 1,456.8 1,500.5 1,545.5 -Other Liabilities (1,477.4) (1,546.0) (1,552.8) (1.8)Total 8,345.1 8,571.1 8,867.8 (1.8)

FinancingCash 8,092.2 171,698.3 32,955.6 28,260.8Finance Lease (733.3) (573.3) (413.3) (253.3)Preference Shares (4,000.0) (4,000.0) (2,434.8) (347.8)Shareholder Loan (85.0) (85.0) (56.7) (28.3)Overdraft - - - -Total 3,273.9 167,039.9 30,050.8 27,631.3

Net Assets 13,075.9 176,977.6 40,194.8 28,815.2

EquityShare Capital 1,005.0 1,005.0 1,005.0 1,005.0Retained Earnings 12,070.9 175,972.6 39,189.8 27,810.2Total 13,075.9 176,977.6 40,194.8 28,815.2

Over the historical period, the main movements in the forecast balance sheets are driven by the following factors:

Fixed Assets: fixed assets will largely include the Company’s investment into the Survey Boat and the Salvage Ship (including the supporting equipment and fittings). Management has assumed a 20 year useful economic life for the boats and a 10 year useful economic life for the supporting equipment

Working Capital: working capital movements are largely driven by the forecast artefact recoveries over the forecast period, with management assuming the following:

Inventory: the Company will develop an ongoing inventory of artefacts as management wait to both clean the artefacts and prepare them for sale at auction (with balances estimated at 20% of artefact sales revenue)

Debtors: management has assumed debtors will arise both in relation to artefact sales as well as in relation to the Company’s other income streams. As revenues increase, the Company’s corresponding debtor balances are also forecast to increase (calculated at 25% of revenue)

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Creditors: management has assumed that creditor balances will equate to approximately 20% of its ongoing cost base, mainly reflecting taxes due to the Government of The Bahamas, commissions payable to auction houses, logistics and insurance costs as well as the Company’s ongoing day-to-day operational costs

Cash: based on management’s planned dividend policy (i.e. no dividends paid until October the start of Year 3 cash is forecast to build up significantly towards the end of Year 2 prior to dividend payments in early Year 3.

Financing: in addition to preference shares offered to investors, the Company will also have debt relating to a finance lease for the Salvage Ship (initially totalling $800k on the ship’s initial acquisition) and a shareholder loan ($85k). The finance lease is repayable over a five year period and is forecast to incur an interest cost of 3% over LIBOR

11.4 CashflowsManagement’s forecast cashflows (and cash requirement analysis) is largely generated from the P&L and balance sheet assumptions above. Other key assumptions include:

Capex: management has assumed $60k of maintenance capex within the Salvage Boat cost centre. Coupled with the proposed mechanic on board the Salvage Boat, management does not anticipate any further significant capex requirements over the next 4 years (other than the initial outlays forecast in Year 1)

Working Capital: cash absorbed into working capital in Year 1 is expected to unwind as the Company completes the planned salvage operations (Year 4). This results in a net cash inflow towards the end of the project

Dividends: given the Company’s proposed dividend policy commences in FY15, there is a large ‘catch up’ payment in Year 3 for profits earned in Year 2. This policy is designed to ensure that the Company allocates sufficient time to realise the sales of artefacts found in early Year 2

Set out below are the forecast cashflows for the Base Case Scenario over the next 4 years.

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Table 11.4.1 Cashflows – Base CaseCashflow: per Annum

Base Case Year 1 Year 2 Year 3 Year 4 Total$m F'cast F'cast F'cast F'cast Years 1-4

OperationsEBITDA 12.4 163.5 168.4 159.0 503.2Change in w orking capital (8.4) (0.3) (0.3) 8.9 (0.0)Total 4.0 163.2 168.1 167.8 503.2

CapexBoat Equipment (0.2) - - - (0.2)Lab Equipment (0.0) - - - (0.0)HO Equipment (0.0) - - - (0.0)Other (0.0) - - - (0.0)Total (0.2) - - - (0.2)

FinancingChange in f inance lease 0.7 (0.2) (0.2) (0.2) 0.3Change in senior debt 4.0 - (1.6) (2.1) 0.3Change in shareholder loans - - (0.0) (0.0) (0.1)Change in common equity 1.0 - - - 1.0Interest on cash (debt) 0.0 0.5 0.8 0.5 1.9Capital Raising Costs (0.3) - - - (0.3)Dividends - - (305.9) (170.8) (476.7)Total 4.8 0.5 (306.7) (172.4) (473.8)

Net Cashflow 8.6 163.8 (138.6) (4.5) 29.3

In aggregate, the Base Case forecasts a total of $470m of dividends to be paid in Year 3 and Year 4. This is almost entirely driven by the estimated RSVs of the targeted shipwrecks.

11.5 Minimum Cash Funding (no RSVs)In preparing its forecasts, and estimated funding requirements, the Company has prepared an analysis of its base cash requirements over its first 3 years of operations. In preparing this analysis, the Company has attempted to prepare a realistic ‘worst case’ scenario that assumes the Company does not make any significant artefacts finds over the period as well as further negative sensitivities, such as lower TV revenues and higher operating cost and capex spend.

This analysis results in a net $5.0 million shortfall (assuming a base $0.2 million of residual cash) for the three year period. A graphical analysis of the cash usage is shown below.

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Chart 11.5.1 Base Cash Requirement

(2,000)

(1,000)

-

1,000

2,000

3,000

4,000

5,000

6,000

Mth 1 Mth 7 Mth 13 Mth 19 Mth 25 Mth 31 Mth 37 Mth 43

$kCash Balance

Management has used this analysis in preparing its funding requirement. They note that, by the end of Year 3, given the detailed survey and truthing approach that will be used by the company, they should have a comprehensive understanding of the Licence Area by the end of 3 years (and the likely returns to investors). By providing the Company sufficient funds to operate over this period, investors will allow management to focus on the operational aspects of the project (and not on any future cash funding requirements).

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12 Potential Financial Returns

12.1 Basis of Preparation In order to help investors assess the opportunity, we have calculated the estimated IRR for the opportunity for each of the 3 scenarios outlined in Section 11, as well as the ‘No RSV’ scenario. The analysis is based on a discounted cash flow analysis for the common equity investment and resultant dividend yields. Given the relatively uncertain nature of the yields, we have used a discount factor of 30% to arrive at our IRRs.

The key assumptions in our analysis are as follows:

Investment: a $1.0 million investment in common equity, equating to a 1.0% stake in the Company

Dividends: dividends are shared based on the common equity % stake held. In line with the Company’s proposed dividend policy, these payments will be made bi-annually from October 2014

Terminal Value: we have not assumed any terminal value at the end of the project (any residual cash will be used to wind up the Company should management not wish to continue with operations at other shipwreck sites)

We set out the resulting IRR results below.

12.2 Calculations A summary of the IRRs is shown below for the different scenarios. Note for the No RSV scenario there would not be any return for the investor (other than any residual liquidation returns for the business after repayments to the preference shareholders).

Table 12.2.1: Potential Yield AnalysisReturns

No RSV$m Low Base High Est

Equity InvestmentValuation - DCF 117.9 208.2 277.2 n/a

Common Equity Issue 1.0 1.0 1.0 1.0% Investor Holding 5.0% 5.0% 5.0% 5.0%IRR % 131.8% 221.0% 267.6% n/a

Scenario

As can be seen in the table, a range of potential IRRs may occur from the investment. These are largely all driven by the RSVs actually found (other factors such as cost and capex variations only really impact minimum cash levels and not the IRRs).

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Set out below is a graphical summary of the EBITDA and resultant dividends forecast in management’s Base Case Scenarios. It can be seen that the EBITDA earned in Year 2 is due to be paid in dividends in Year 3.

Chart 12.2.2: EBITDA and Dividend

-20 40 60 80 100 120 140 160 180

-50

100 150 200 250 300 350


$m

Dividends EBITDA

12.3 Cash LevelsTo help give comfort over the cash balances for the Company using the different scenarios, we have set out below the minimum month end cash balances forecast in each of the 4 years through completion of the project. You will see that, other than in the No RSV Scenarios, the Company is forecast to have positive cash balances throughout the period (the lowest being $10k in the first month of operation prior to completing the fund raising).

Table 12.3.1: Cash Levels Key Scenario Variables: Summary

No RSV$k Low Base High Est

Funding AssumptionsCash - Day 1 Stuart Cove 50.0 50.0 50.0 50.0Preference Share Issue 4,000.0 4,000.0 4,000.0 4,000.0Common Equity Issue 1,000.0 1,000.0 1,000.0 1,000.0

Minimum Cash BalanceYear 1 9.6 10.6 10.6 9.0Year 2 2,642.9 21,464.6 27,554.0 1,701.5Year 3 3,218.4 5,223.2 6,903.3 348.2Year 4 3,159.9 4,960.7 6,552.5 (945.2)

Scenario

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13 Investment Risks

13.1 IntroductionThe shipwreck salvage industry is characterized by a high degree of risk and return. The principal risk factors are discussed below. Although the industry is subject to a high degree of risk, continual technological advances have contributed to make locating and excavation of shipwrecks more efficient and cost effective.

13.2 Financial riskSalvage Costs

The salvage industry is one which is essentially of a speculative nature. A particular shipwreck salvage project could turn out to be unsuccessful in the event that valuable objects are not located. Even if valuable objects are located and salvaged, there is a possibility that the excavation cost will exceed the value of the objects salvaged. Since wrecks are often partly of completely buried beneath the seabed, an air supplied blower or prop-wash might be required to remove the covering sand and mud.

Artefact Values

The market of valuable objects, such as the precious metals market, is uncertain as the prices are volatile. Moreover, a large supply of similar objects from shipwrecks could suppress the price in the market. However, a possible way to mitigate this risk is to wait and spread the objects through several outlets in order to maximise returns.

Duration of Project

The duration of a project depends on a number of factors:

The salvage process could be delayed due to adverse weather and sea conditions or other natural hazards. For instance, during hurricane season it may not be possible to execute underwater operations

The complexity of the project also plays a role. The extent and method of salvage depends on factors such as depth of water, the extent of marine encrustation, the age of the wreck and the depth of the wreck beneath the seabed

13.3 Market RiskEconomic Conditions

The Company’s earnings may depend on the economy of The Bahamas, which is sensitive to numerous external factors including general economic domestic and international conditions and macroeconomic policies. General economic conditions such as inflation, recession, unemployment and monetary policies can affect the profitability of a company.

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Competition within the market/industry

Should the salvaging business grow and become popular in the region, there may be increased competition within the industry, leading to more competitive exploration and salvaging projects. Should these changes in the competitive environment from domestic or foreign entities occur, this could adversely impact the company’s financial performance.

13.4 Political RiskTaxes & Duties

As the industry is a relatively untouched industry of The Bahamas, the need for any special equipment may not be readily available and will have to be imported. Any changes to taxes and duties on the salvage industry and equipment needed will affect the performance of the company.

International Licenses and legal matters

If a ship is salvaged, there may be a risk that another party may attempt to lay claim to it hundreds of years later. There are several legal technicalities which may have to be worked out both locally and perhaps internationally should the ownership of a wrecked ship be challenged.

As noted in Section 7.3 however, given the Government of The Bahamas’ legal claim over title, management does not foresee this being an issue.

Dependent upon continuation of licenses

Obtaining yearly approval to operate the business is an important aspect of the overall business. Any disruption in this arrangement could impact the company’s ability to explore and salvage.

13.5 Other RisksWeather

There is the risk that the natural weather patterns of the region may delay the discovery process and/or the salvage process of a wreck. As the area is known for seasonal monsoons and hurricanes, any strong acts of weather would give rise to the risk of delay and possible damage.

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14 Corporate Governance

14.1 Overview When the company is formed, it aims to have a typical corporate structure setup, flowing from top to bottom consisting of a President/CEO and other key management personnel, shareholders, stakeholders and employees, supported by a board of directors.

The board of directors will consist of both executive and non-executive directors with key industry knowledge and experience to steer the company in the direction of positive growth and efficient operation. The company will initially set up to standards of the Bahamas Stock Exchange (BISX) with the intent of listing at some point in the future. With this aim, corporate governance will be held to the highest standards, as this increases the level of confidence associated with the company. Incidentally, foreign investors also look at the levels of corporate governance, and use these levels to decide which company is deserving of their investment.

The rules and regulations for listing can be found here:

http://www.bisxbahamas.com/download/resources/rules/rules06_listing.pdf,

The company intends to strictly adhere to these rules from set up stages. In addition to a board of directors, the company will also appoint an audit committee to ensure the annual external audits of the company are carried out in a timely and efficient matter, and that the financial statements of the company are reflected in a true and fair way. Their role will also be to monitor the integrity of the financial reporting systems, ensure proper controls are in place and effective, monitor the performance of the auditors, implement and monitor policies for internal controls.

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http://www.bisxbahamas.com/download/resources/rules/rules06_listing.pdf

A Phase Cost SummaryP&L: Summary per Phase

1 2 3 4 5 6 7 Total

$'000Research &

Data CollectionKey Targets & Development

Search & Survey

Truthing & Key Target

AnalysisTruthing & Excavation

Lab & Artifact Documentation

Artifact Division &

Sales

RevenueLow - - - - 1,433 - 586,624 588,057Base - - - - 6,973 - 869,071 876,044High - - - - 6,973 - 1,158,736 1,165,709No RSV - - - - 3,797 - 76 3,873

Total Direct CostsLow - (22) (160) (468) (5,249) (911) (275,677) (282,487)Base - (22) (157) (225) (4,727) (900) (364,978) (371,009)High - (22) (157) (225) (4,727) (900) (486,637) (492,668)No RSV - (22) (157) (225) (4,727) (900) - (6,031)

Total Indirect CostsLow (112) (41) (74) (425) (1,620) - - (2,271)Base (108) (38) (68) (183) (1,397) - - (1,794)High (108) (38) (68) (183) (1,397) - - (1,794)No RSV (114) (42) (77) (225) (1,714) - - (2,172)

EBITDALow (112) (63) (233) (893) (5,436) (911) 310,947 303,299Base (108) (60) (226) (408) 849 (900) 504,093 503,241High (108) (60) (226) (408) 849 (900) 672,099 671,247No RSV (114) (64) (234) (450) (2,644) (900) 76 (4,330)

B Salvage Boat Specifications


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C Seville Spain Archives Research

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