Dear Omagine Shareholders,
Omagine, Inc. has today filed with the SEC its annual report on Form 10-K (the “10-K Report”).
Below are certain excerpts from the 10-K Report. The excerpts do not purport to be or represent the full filing. Please use the following link to view the complete text of the 10-K Report:
http://www.sec.gov/Archives/edgar/data/820600/000101376215000339/f10k2014_omagine.htm
Excerpts from 10-K Report
The Development Agreement and the Usufruct Agreement
The contract between the Government and LLC that governs the design, development, construction, management and ownership of the Omagine Project, the use and sale by LLC of the Project Land and the Government’s and LLC’s rights and obligations with respect to the Omagine Project, is the Development Agreement. (See: Exhibits 10.24 and 10.25).
The Government of Oman signed the Development Agreement with LLC on October 2, 2014 (the “Execution Date”). The DA was ratified by the MOF on March 15, 2015. The DA defines: (i) the “Effective Date”, as the date Ratification occurs (although there is an ongoing discussion to change that definition to the date the UA is registered); (ii) the “Minimum Build Obligation” or “MBO”, as the substantial completion of the construction of the seven Pearl buildings and one hotel building; and (iii) the “MBO Completion Date”, as the date such substantial completion of the MBO is achieved.
The DA requires LLC to substantially complete the MBO within five (5) years of the Effective Date, as such time period may be amended or extended per the DA. The five (5) year time period allocated to complete the MBO begins on the Effective Date and the term of the DA is for 20 years after the Effective Date.
In anticipation of the occurrence of the Effective Date, management has, since the October 2, 2014 Execution Date, undertaken a burst of activities associated with the land valuation process for the Omagine Site, the financing, master planning, engineering, design and construction efforts for the Omagine Project, the sale of additional Omagine LLC equity, the creation of the Omagine LLC Strategic Plan and the ramp-up of Omagine LLC’s organizational activities in Oman.
The contracts between the Government and LLC governing the Project Land are the DA and the UA. The UA is an exhibit to the DA and is incorporated by reference into the DA and both the DA and the UA stipulate that in the event of any conflict between the terms and conditions of the DA and the terms and conditions of the UA, the terms and conditions of the DA will control (See Exhibits 10.24 and 10.25, The Development Agreement).
After ratification of the DA by the MOF on March 15, 2015, the Usufruct Agreement must now be signed by the Minister of Tourism. The UA will then be officially transmitted to the Ministry of Housing (“MOH”) for signature by the Minister of Housing. LLC is awaiting notification from MOT that the UA has been signed by MOT and then we will await notification from the MOH to have LLC sign and register the UA. The date upon which the registration of the UA at the MOH (and payment of the appropriate registration fee therefor) is accomplished (the “Registration Date”), is the date when the process whereby control of the Project Land is transferred from the Government to Omagine LLC is completed.
The foregoing UA registration process at MOH is a routine bureaucratic procedure but no assurance can be presently given regarding when the Registration Date will occur. The term of the UA is fifty (50) years from the Registration Date (the “Usufruct Term”) and such Usufruct Term is renewable for an additional period upon the agreement of the parties.
The DA and UA grant LLC the right to use, control, develop and sell the Project Land (to itself or others) pursuant to the terms of the DA and UA. The DA obligates LLC, beginning on the fifth anniversary of the Registration Date, to pay the Government an annual rental fee equal to three hundred Omani Baisa (equivalent to approximately $0.78) for each square meter of Project Land upon which there is a substantially completed non-residential building (the “Usufruct Rent”). No Usufruct Rent is due or owing during the first five years after the Registration Date (the “Rent Free Period”) and no Usufruct Rent is ever due or owing with respect to plots of Project Land (i) on which there is a residential building, or (ii) on which there is not a substantially completed non-residential building (i.e. Project Land that is open space, roads, building work-in-progress, etc.).
The DA also obligates LLC to pay the Government twenty-five (25) Omani Rials (equivalent to approximately $65) for each square meter of Project Land purchased directly by LLC or sold by LLC to any third party (the “Land Price Payment”). At the present time, local real estate agents conservatively estimate that the average selling price for land at the Omagine Site would be at least 250 Omani Rials (approximately $650) per square meter.
The Payment-In-Kind (“PIK”) Valuation:
In addition to its 7,640,625 Omani Rials ($19,865,625) Deferred Cash Investment mentioned above, RCA has made an additional non-cash payment-in-kind investment (the “PIK”) into LLC. Pursuant to the DA and UA the Government granted usufruct rights to LLC over the approximately 245 acres of beachfront land constituting the Omagine Site (the “Existing Land”) previously owned by His Majesty Sultan Qaboos bin Said, which His Majesty transferred to MOT on condition that such Existing Land be used for development of the Omagine Project. The value of the PIK equals the value to LLC of the Existing Land. The value of the Existing Land has been determined by professional valuation firms in accordance with the requirements and procedures specified for such a valuation by the Royal Institute of Chartered Surveyors (“RICS”) of London, England. The PIK investment will be perfected on the Registration Date and although LLC has the RICS valuation of the Existing Land in its possession, management has determined that disclosure of such RICS Valuation should not occur until after the Registration Date has occurred.
We have held extensive discussions with LLC’s independent accountant and auditor, Deloitte & Touche (M.E.) & Co. LLC (“Deloitte”), and management presently expects that on or shortly after the Registration Date, the value of the PIK will be reflected in LLC’s financial statements as a non-cash capital investment by RCA into LLC in accordance with International Financial Reporting Standards (“IFRS”).
Management believes that the PIK investment of the Existing Land and the New Investment of the 26,968,125 Omani Rials [$70,117,125] in cash are the most important parts of LLC’s equity capital structure. They were the most difficult to arrange since they are the highest risk portion of such equity capital structure. Both the PIK investment and the New Investment are memorialized in the Shareholder Agreement. Management is presently holding discussions with several potential equity investors interested in becoming shareholders of LLC.
The CCC-Oman Contract:
Management is continuing its extensive discussions regarding the CCC-Oman Contract. Over the past several months, LLC management, its engineering and construction consultants and its attorneys held many meetings among themselves and with multiple CCC senior managers and executives in Muscat, Athens, Dubai, London, Pittsburgh and New York City. The foregoing meetings resulted in agreement that the CCC-Oman Contract will be based on the internationally accepted contracting standards promulgated by the International Federation of Consulting Engineers (“FIDIC”) and it will contain a set of industry standard performance parameters, incentives and penalties to ensure Omagine LLC’s interests are protected and that value is delivered. The parties also agreed that the first draft of the CCC-Oman Contract (the “First Draft Construction Contract”) would be written by a law firm representing Omagine LLC and specializing in FIDIC contracts and that such First Draft Construction Contract would outline a two part “framework agreement” specifying a “Pre-Design Period” and a “Post-Design Period” and the different contracting methodologies to be followed for each such period.
The First Draft Construction Contract is targeted for completion in May 2015 and it will be used by the parties as a basis for final negotiations and conclusion of the “Final Draft Construction Contract” which will then be presented to the LLC Shareholders for their consideration. Management presently estimates that the CCC-Oman Contract will be signed by LLC and CCC-Oman before June 30, 2015.
Part one (the “Pre-Design Period”) will encompass the time period beginning on the Contract Date and lasting approximately 12 months subsequent to the Effective Date during which LLC’s engineers, architects and designers will be undertaking the master-planning, engineering and architectural design work for the Omagine Project (the “Initial Design Work”). During the Pre-Design Period LLC will pay CCC-Oman for its construction activities and services (the “Initial Construction Activities”) via a pre-agreed bill-of-materials (“BOM”) specifying unit pricing for each of the Initial Construction Activities expected to be performed during the Pre-Design Period. Such unit pricing will be incorporated into the CCC-Oman Contract. The Pre-Design Period is expected to consist of several “lettered” phases (Phase A, B, C, D etc.).
Part two (the “Fixed-Price Period”) remains planned to encompass the time period beginning at the conclusion of the Pre-Design Period and lasting until the conclusion of all remaining specified and required construction work on the Omagine Project (the “Remaining Construction Activities”) are completed. In order for LLC to maintain complete design control at all points throughout the development cycle, the Fixed-Price Period is now expected to consist of several “numbered” phases (Phase 1, 2, 3, 4 etc.), each of which will only commence subsequent to that time when the Design Work for such relevant numbered Phase is either 100% completed or when the percentage of Design Work completed for any such numbered Phase is such that LLC and CCC-Oman can agree on a fixed lump-sum price for such numbered Phase. There are multiple construction Phases contemplated for the Fixed-Price Period covering the Remaining Construction Activities. The CCC-Oman Contract will allow for flexibility in determining the actual number of numbered Phases. LLC plans to maintain direct control of the design of each numbered Phase through to completion. CCC-Oman will work closely with LLC and the master planner and architects from the beginning to ensure that constructability and value engineering are integrated in the final design for each numbered Phase.
Before being finalized, the Draft Construction Contract will be reviewed and analyzed by two expert construction consultants employed by LLC: (i) LLC’s engineering design consultants, and (ii) an Oman quantity surveying company specializing in construction cost consulting. Subsequent to this process (which is presently expected to be completed following the completion of the Draft Construction Contract sometime in May 2015), the Draft Construction Contract will be presented to the LLC shareholders for their consideration and approval.
The costs and expenses associated with the Initial Design Work and the Initial Construction Activities executed during the Pre-Design Period could vary substantially depending on the scope of such activities determined to be undertaken by LLC during the Initial Design Period – which determination by LLC will be driven primarily by the availability of financing for such Initial Design Work and Initial Construction Activities.
Financing / Pre-Design Phase Activities / The Financing Agreement Date:
Management is now in the initial stages of the processes required to arrange the necessary financing to execute the Omagine Project. LLC management is meeting with, interviewing and requesting proposals from a number of banks and financial institutions seeking to act as LLC’s financial adviser (“Financial Adviser”) and it is presently expected that a definitive and binding agreement between one such bank or financial institution will be signed sometime before June 30, 2015. No assurance however can be given that any such agreement will be signed until it is actually signed by the parties.
It is anticipated that the Omagine Project will be developed in several “phases’ and therefore several Financing Agreements will be executed during the course of the project’s development, each such Financing Agreement coinciding with the beginning of a new phase of the development. As indicated above, the execution date of the first such Financing Agreement is defined in the Shareholder Agreement as the “Financing Agreement Date”.
Although Omagine and the New Shareholders will have invested an aggregate of 360,000 Omani Rials (equivalent to approximately $936,000) prior to the Financing Agreement Date, the 26,628,125 Omani Rial ($69,233,125) New Shareholder Deferred Cash Investment will not be invested by the New Shareholders or received by LLC until the Financing Agreement Date occurs.
The first phase of the development of the Omagine Project (the “Pre-Design Phase”) will be the Initial Design Period (i.e. the approximately 12 month period immediately subsequent to the Effective Date). The scope of the Pre-Design Phase is presently being determined and will comprise that set of activities designated by LLC as being within the Pre-Design Phase and, subject to the level of financing available for the Pre-Design Phase, it could include all or some of the Initial Design Work (initial planning, design, environmental studies and approvals, master planning), surveying, soil engineering and testing, initial site work, initial additions by LLC of office space, personnel and equipment, and initial administrative, organizational, marketing and public relations efforts (collectively, the “Pre-Design Phase Activities”). The cost for the Pre-Design Phase Activities could vary substantially (from between $5 million to over $20 million) depending on the scope of the Pre-Design Phase Activities LLC determines to undertake as the Pre-Design Phase – which determination will be driven primarily by the availability of financing for the Pre-Design Phase.
LLC presently expects that the firm it ultimately selects to be its Financial Adviser (See: “Financial Adviser”) will arrange for the syndication among several banks of debt financing for use by LLC to design, develop and construct the Omagine Project (the “Syndicated Project Financing”). The closing of each tranche (coinciding roughly with the phases of the project) of such Syndicated Project Financing will be memorialized by a Financing Agreement (each, a “Syndicated Financing Agreement”). The arrangement for and closing of such Syndicated Project Financing is presently projected by LLC management to occur within twelve months after the Effective Date.
Provided the execution and delivery of a Syndicated Financing Agreement is the first Financing Agreement to be executed and delivered, the date of such execution and delivery will therefore be the Financing Agreement Date (as defined in the Shareholder Agreement) and the New Shareholders will then be obligated pursuant to the Shareholder Agreement to invest the $69,233,125 New Shareholder Deferred Cash Investment into LLC. If alternate financing is not available, LLC will wait until the closing of the Syndicated Project Financing (and the first Financing Agreement Date) to begin most of the aforesaid Pre-Design Phase Activities.
LLC management however is of the opinion that the optimum development plan for the Omagine Project entails a strategy which undertakes the Initial Design Work and the maximum amount of Pre-Design Phase Activities as soon as possible after the Effective Date. By fully launching the design and development processes in parallel with the up to 12 months required for the Syndicated Project Financing effort, LLC would realize many benefits. This fast-track strategy however is not possible to execute absent significant Pre-Design Phase financing.
LLC is presently considering several methods to finance this fast-track development strategy for the Pre-Design Phase of the Omagine Project in an effort to facilitate the initiation, early implementation, and completion during the Initial Design Period of the maximum amount of Initial Design Work and the Pre-Design Phase Activities. Some of the financing methods presently under consideration are:
i.
a sale by LLC to non-U.S. investors of mandatory convertible LLC promissory notes (“Notes”), which Notes would automatically convert at a future date into shares of LLC capital stock representing a minority LLC equity stake.
ii.
a secured loan from Omagine to LLC, which loan could be funded by either:
a.
funds available to Omagine at such time, or
b.
funds received by Omagine from the sale by Omagine to non-U.S. investors of shares of LLC capital stock owned by Omagine.
iii.
a sale to non-U.S. investors of a minority equity stake in LLC.
The closing of debt financing by LLC sufficient to finance the Pre-Design Phase (the “Pre-Design Phase Financing”), which Pre-Design Phase Financing consists of:
1.
the sale of Notes by LLC mentioned in (i) above, or
2.
the Omagine loan to LLC mentioned in (ii) above, or
3.
a combination of the sale of LLC Notes and the Omagine loan to LLC
will be memorialized by a written agreement constituting a Financing Agreement (as defined in the Shareholder Agreement) and the date of any such closing, provided it is the first Financing Agreement to be executed, would therefore be the Financing Agreement Date (as defined in the Shareholder Agreement).
Because such Pre-Design Phase Financing would also trigger the Financing Agreement Date (as defined in the Shareholder Agreement), in addition to financing the Pre-Design Phase, it would also coincidently provide additional advantages to LLC:
i.
it would accelerate the date the New Shareholders become obligated under the Shareholder Agreement to make their $69,233,125 New Shareholder Deferred Cash Investment into LLC, and
ii.
it would facilitate the Syndicated Project Financing effort which LLC’s designated financial adviser will be conducting with the bank syndicate because:
a.
LLC’s capital will be increased, and
b.
the CCC-Oman Contract will likely be in effect with its fixed price lump sum provision for the Remaining Construction Activities and such fixed price construction contracts are very attractive to banks when considering construction financing for projects, and
c.
much of the Omagine Project design will be greatly advanced or completed as the bank syndication process is underway, and
d.
many critical non-design activities included in the Pre-Design Phase Activities will be underway or completed as the bank syndication process is underway, and
iii.
it advances LLC’s marketing, advertising and sales schedules relevant to the sales releases of its residential and commercial properties, and
iv.
it advances LLC’s development and construction schedules with respect to such Pre-Design Phase Activities by nine to twelve months ahead of the schedules that would otherwise be attainable, and
v.
it further solidifies LLC’s relationship with the Oman Government and the MOT as the relevant Government authorities see the development of the Omagine Project being rapidly initiated.
The DA was signed on October 2, 2014 and LLC management is, among other things, presently pursuing the above mentioned strategies in order to finance its planned Pre-Design Phase Activities. Management presently believes it can maintain Omagine’s majority control of LLC by selling a further minority percentage of LLC’s equity to non-U.S. investors in the MENA Region for an amount in excess of the average cash investment amount paid by the New Shareholders.
Subject to the necessary financial resources becoming available to Omagine, the Company presently intends to finance the Pre-Design Phase Activities and trigger the Financing Agreement Date by exerting its best efforts to organize and arrange the Pre-Design Phase Financing as described above. No assurance however can be given at this time (i) as to whether such necessary financial resources required to make such secured loan to LLC will be available to Omagine or (ii) if the Company will be successful in arranging such Pre-Design Phase Financing. Management is also exploring additional financing mechanisms to facilitate the initiation of its fast-track development strategy and the financing of the Pre-Design Phase Activities. (See: “Design, Engineering, Content Development and Construction” below).
Consolidated Results
The financial results of LLC are included in the consolidated financial results of the Company in accordance with accounting principles generally accepted in the United States. If and when the Financing Agreement Date occurs, the Company will experience a substantial increase in capital when 60% (or the then appropriate percentage representing Omagine’s ownership interest in LLC) of the approximately $70 million of cash capital investments into LLC are recorded in the Company’s consolidated financial statements as Omagine’s ownership interest in LLC. At or prior to such time the Company may experience an additional substantial increase in its capital when 60% (or the then appropriate percentage representing Omagine’s ownership interest in LLC) of the valuation of the PIK is also recorded as capital on the Company’s consolidated financial statements. LLC's ongoing financial results will be included in the consolidated financial statements of the Company as appropriate for as long as Omagine remains a shareholder of LLC.
Now that the DA has been signed, the Company has accelerated its preparation for its future business activities in various ways including but not limited to: (i) recruiting various executive level personnel for both Omagine and LLC that are now required to ramp up organizationally for the Omagine Project, (ii) examining and implementing various methods of raising additional capital for both Omagine and LLC, (iii) soliciting and issuing requests-for-proposals (“RFPs”) from various professional vendors including designers, engineers, real-estate consultants, financial advisers, and others, (iv) negotiating and concluding the legally binding and definitive CCC-Oman Contract,; (v) negotiating various agreements with other major vendors, contractors, consultants and employees proposed to be involved in the Omagine Project, (vi) leasing and furnishing expanded office space in Oman for LLC, (vii) arranging the appropriate and required legal, accounting, tax and other professional services both in Oman and the U.S., (viii) reviewing and complying (to the extent we are presently able) with the listing requirements of various stock exchanges so we may be prepared to apply for such listing(s) as soon as we are eligible, (ix) examining various other matters we believe will enhance shareholder value, and (x) examining other potential Company revenue streams which are ancillary to, and derivative of, the Omagine Project.
The Company plans to enter businesses other than real estate development - and ancillary to, and derivative of, the Omagine Project - and the Company presently expects to generate ongoing revenue streams from such businesses, but no projections of the amount of such revenue, if any, can be made at this time. The Company is not expected to generate revenue in the near term until the development of the Omagine Project is substantially underway.
Financial Adviser
LLC intends to appoint a firm as its Financial Adviser that has an international reputation for excellence and a strong presence in the MENA region. There are presently many such reputable financial advisory firms and financial institutions that have indicated their interest in the Omagine Project. Since the Execution Date, management has been meeting with, interviewing and requesting proposals from a number of such highly reputable banks and financial institutions seeking to act as LLC’s Financial Adviser. It is presently expected that a definitive and binding agreement between LLC and one such Financial Adviser will be executed sometime before June 30, 2015.
LLC’s Financial Adviser will advise on capital structure and lead the syndication of the debt financing required to execute the Omagine Project. LLC will then work together with its Financial Advisor to appoint lead arrangers for such syndicated debt financing, which may include the Financial Advisor itself.
Recent press reports incorrectly stated that LLC had appointed BNP Paribas (“BNP”) as its Financial Adviser. This is untrue. Although LLC did have a two year old non-binding letter of intent with BNP, BNP was never appointed as the Financial Advisor for LLC. As of the date hereof, both LLC and BNP agree that they maintains a good relationship with each other, but for BNP internal reasons, BNP will not be LLC’s Financial Adviser.
LLC is in the process of appointing its Financial Adviser and the Company will be making the appropriate announcement of the appointment in due course. No assurance however can be given that any such agreement will be signed until it is actually signed by the parties.
As previously disclosed (i) LLC has held discussions with and received letters of interest and “comfort letters” in support of the Omagine Project from some of the largest banks in the MENA Region including three banks in Oman, and (ii) LLC has a longstanding relationship with Bank Muscat SAOG ("BankMuscat") which is 30% owned by RCA and is the largest financial institution in Oman. It is likely that LLC will nominate an Omani bank to be either its Financial Adviser or a joint-venture partner with its Financial Adviser with respect to the syndication by such Financial Adviser with various banks and financial institutions (the “Lenders”) of the debt financing (the ”Construction Financing”) that Omagine LLC will require for the development and construction of the Omagine Project. The amount of Construction Financing debt owed at any one time by LLC to its Lenders is expected to fluctuate over the development and construction cycle of the Omagine Project and will be greatly influenced by (i) any sales of additional capital stock by LLC, and (ii) the pace and tempo of LLC’s receipt of proceeds from its planned sales of real-estate to third parties. The maximum amount of such Construction Financing debt presently expected to be outstanding at any one time during the development and construction cycle of the Omagine Project is presently estimated by management to be between $300 million and $500 million.
As presently contemplated a Financial Adviser will be engaged by LLC to assist LLC in arranging the necessary Construction Financing for the Omagine Project and other financing for LLC as may be required. The capital of LLC, proceeds from the sales, if any, by LLC of additional equity stakes, bank borrowings and the proceeds from sales of its residential and commercial properties, are expected to be utilized by LLC to develop the Omagine Project.
As is present practice in Oman, LLC anticipates that sales contracts with third party purchasers of residential or commercial properties that are purchased “off plan” (i.e. purchased before the construction thereof), will stipulate the payment to LLC by such purchasers of (i) a deposit on signing of such sales contract, and (ii) progress payments during the construction period of the relevant property covered by such sales contract. Since the aggregate of such deposit and progress payments before and during the construction of the relevant property is expected to be approximately 85% of the sales price of the relevant property stipulated in such sales contract, LLC anticipates that (i) the construction costs for properties that are sold “off plan” will be “owner-financed” by the relevant purchaser, and (ii) it will likely be unnecessary therefore for LLC to utilize any or very much Construction Financing from its banks in order to pay for the construction costs of properties which are sold pursuant to “off plan” sales contracts. Management expects that this commonly accepted sales contract and payment process will significantly benefit LLC by reducing its aggregate requirements for Construction Financing from its banks. The consumer appetite for such “off plan” sales is less today than it was before the recent worldwide banking and financial crisis. (See: “Market Conditions” below).
Furthermore, Land Price Payments are not due or owing to the Government from LLC until such time as LLC legally transfers the freehold title to such land to such purchasers, which time will coincide with the closing of the sale of such properties. Such closings will only occur after LLC has received final payment from the purchaser of the relevant sales contract amount for such properties. LLC’s financing profile is therefore further enhanced since it is not obligated to make any Land Price Payments to the Government until after it has already received 100% of the contracted sales price amount from the relevant purchaser at the closing when the freehold title to such land and property is transferred to the purchaser.
Before the DA was signed we had extensive discussions with a number of MENA Region financial institutions with respect to such Construction Financing and we are presently in receipt of six “bank comfort letters” in support of the Omagine Project from some of the largest banks in the MENA Region – including three banks in Oman. These discussions will be advanced further and continued by LLC’s designated Financial Adviser. With LLC’s Financial Adviser leading this effort, management is optimistic with respect to LLC’s prospects for arranging the Construction Financing for the Omagine Project but recognizes that given present economic and market conditions, it is not a trivial task and will be challenging. The DA recognizes and addresses this issue when it states, in relevant part:
“The Government recognises that the Project Company intends to raise limited recourse financing in relation to the Project and that Lenders may expect to be afforded certain rights in relation to it. Accordingly, the Project Company will by or before the completion of twelve (12) months from the Execution Date enter into a written term sheet with the Lenders for the financing of the first phase, any other phase or all of the Project (a “Term Sheet”). If the Project Company has not delivered a copy of such Term Sheet to the Government by or before the expiry of the twelve (12) month period referred to above, this Development Agreement then shall have no further effect.” (See: Exhibits 10.24 and 10.25).
MENA Region banks and financial institutions continue to maintain high levels of liquidity but the project financing environment in Oman and the MENA Region remains cautious after the recent worldwide bank liquidity problems and Eurozone debt crisis. LLC management has met recently with several internationally recognized Financial Advisers, all of whom have deep and wide-ranging expertise in the MENA Region project financing markets and as part of their normal business activities are in regular contact with MENA Region banks and international financial institutions regarding the status of and conditions prevailing in the project finance marketplace. The Company is optimistic that LLC’s designated Financial Adviser will be able to arrange the necessary project financing for the Omagine Project. Management believes that all the Financial Advisers with whom it has recently met concur that there is currently a high degree of liquidity and a strong appetite among MENA Region banks and financial institutions for lending to, and investing in, sound development projects in the MENA Region. The banks and Financial Advisers with which we have discussed the Omagine Project both before and after the DA was signed (including BNP Paribas) have been uniformly impressed with the design vision for the Omagine Project and with the quality of the LLC shareholders.
Notwithstanding the foregoing, no assurance can be given at this time that LLC will be able to obtain any of, or a sufficient amount of, the Construction Financing required to develop, build and complete the Omagine Project. If such a circumstance were to occur, it would have a material adverse effect on our business and operations (See: “Risk Factors Related to Our Company and Our Business”).
The value of the Project Land has been determined in accordance with the requirements and procedures specified for such a valuation by the Royal Institute of Chartered Surveyors of London, England (“RICS”). Following the Registration of the Usufruct Agreement with the Ministry of Housing for the Project Land such valuation will be utilized (i) by LLC’s Financial Adviser in its discussions with banks and other financial institutions in order to arrange the Construction Financing, and (ii) by Deloitte & Touche (M.E.) & Co. LLC, in order to determine in accordance with International Financial Reporting Standards (the “IFRS”) the proper accounting treatment of the PIK valuation in LLC’s financial statements.
Sales and Marketing
LLC plans to undertake several wide ranging and continuous marketing and public relations campaigns in anticipation of its launch of residential and commercial properties for sale and to advertise and promote its forthcoming entertainment, hospitality and retail offerings.
The launch date for residential and commercial sales is presently planned to occur in early 2016. Management expects that the continuing recovery of the project finance and local real estate markets will contribute positively to LLC’s future prospects. Management expects LLC to benefit from Dubai’s hosting of EXPO 2020, and similarly from nearby Qatar’s hosting of the World Cup Games in 2022. The Omagine Project will be conveniently located one hour from Dubai by air and is easily accessible by a fine roadway system in both Oman and the U.A.E. It is a natural and logical addition to a Dubai visit.
Sale prices and rental rates for housing in other integrated tourism projects in the Muscat area of Oman have recovered and are increasingly strengthening. The inventory of unsold housing in the secondary (re-sale) market (both outside of and within ITCs) has diminished due to recent robust, albeit quite price-sensitive, sales activity. New housing inventory, especially smaller apartments designed to hit perceived market price-points, has continued to come onto the local Muscat area market and the market absorption rates (number of market transactions) for such new residential housing is brisk and continues to improve.
The DA allows for sales and pre-sales of any of the residential or commercial buildings that will be developed and built on the Omagine Site.
Non-Omani persons (including but not limited to expatriates living and working in Oman) are forbidden by Omani law to purchase land, residences or commercial properties in Oman unless such land, residences or commercial properties are located within an ITC.
The DA stipulates the obligation of the Government to issue such Licenses and Permits as may be required for the development of the Omagine Project, including but not limited to issuing an Integrated Tourism Complex License (“ITC License”) designating the Omagine Project as an ITC. On June 26, 2014, the Government issued an ITC License to LLC designating the Omagine Project as an ITC.
Because it is now licensed as an ITC, the land, residences and commercial properties within the Omagine Project may be sold to any buyer worldwide - including any non-Omani buyer - and the freehold title to such land, residences and commercial properties may be transferred to such buyers.
The excellent location of the Omagine Site is recognized by local market participants and the significance of the provision of the Omagine Site via the Usufruct Agreement to LLC is substantial. The increase in the value over the last several years of the land constituting the Omagine Site is expected to have a positive effect on the valuation of the PIK and on revenue from the sale of residential and commercial properties. The value of the Omagine Site will be a primary driver of future LLC and Company revenue and the benefits accruing to LLC and the Company pursuant to LLC’s Usufruct Rights over the Omagine Site will be material and significant.
Design, Engineering, Content Development and Construction
The Company does not presently own or directly operate any design, engineering, content development or construction companies or facilities. Because of our strategic emphasis on design however, the Company or LLC may, depending upon circumstances, establish its own design and/or design supervision entity and/or contract with or enter into joint ventures with firms providing such design and design supervision services. The Pre-Design Phase of the development of the Omagine Project is expected to constitute primarily the Initial Design Work and the Initial Construction Activities at the Omagine Site and its scope and budgeted cost is presently being reviewed and will be decided upon by LLC shortly after the availability of Pre-Design Phase Financing becomes clearer to management.
Subsequent to the OMAG Final Equity Investment of 210,000 Omani Rials ($546,000) being made, LLC will have the financial capacity to undertake certain limited initial planning and design activities, but for LLC to promptly undertake the more extensive Initial Design Work and Initial Construction Activities contemplated by the Pre-Design Phase Activities, it will have to sell additional equity or raise additional alternative financing (or a combination thereof) in order to finance such Pre-Design Phase Activities.
Otherwise LLC will have to wait until the closing of the first Syndicated Financing Agreement and the receipt of its first tranche of debt financing along with receipt from the New Shareholders of the $69,233,125 New Shareholder Deferred Cash Investment in order to have the financing necessary to perform the more extensive Initial Design Work and Initial Construction Activities contemplated by the presently desired larger scope of the Pre-Design Phase Activities. The DA was signed on October 2, 2014 and since that time LLC management has been exploring additional financing mechanisms and opportunities to provide LLC with the financing necessary for it to promptly undertake and execute the largest possible scope of the Pre-Design Phase Activities. Such contemplated financing mechanisms may, under certain circumstances, coincidently accelerate the occurrence of the Financing Agreement Date and thereby accelerate the receipt by LLC of the $69,233,125 New Shareholder Deferred Cash Investment. There cannot be any assurance that we will be able to obtain any financing. (See: “Business - Financing / Pre-Design Phase Activities / The Financing Agreement Date” above).
Subject to the approval of its shareholders and to negotiating and agreeing to a contract, LLC presently intends to hire Michael Baker Corporation ("Baker") as its Program Manager and Project Manager. Baker is in the business of providing program and project management, engineering, design and construction management services to a wide variety of clients including the U.S. Department of Defense and many state governments and commercial clients. Omagine has employed Baker through the feasibility and engineering study phases of the Omagine Project and presently anticipates that, subject to the approval of the LLC shareholders, LLC will execute an agreement with Baker. Omagine had a contingent obligation to pay Baker an additional fee of $72,000 for past services if and when the DA was signed by the Government and LLC and ratified by the MOF. The DA was signed on October 2, 2014, the Ratification occurred on March 15, 2015 (the “Effective Date”) and such contingent fee is now due and payable. Baker is headquartered in Pittsburgh, PA, with offices throughout the U.S. and in Abu Dhabi in the United Arab Emirates and is experienced in all aspects of engineering and design, program management and construction management for large scale construction and development projects of the magnitude of the Omagine Project. Baker has significant program management and construction management contracts with the United States military worldwide, including in the MENA Region. The Company believes it maintains a good working business relationship with Baker but recognizes that there are presently many such highly reputable program and project management companies available and operating in Oman. Baker was recently acquired by Integrated Mission Solutions LLC. What effect, if any, this acquisition will have on LLC’s or Baker’s plans to engage Baker as LLC’s Program Manager and Project Manager is unknown at this time. The Company is confident that Baker’s inability or unwillingness to perform or the loss of Baker’s services altogether, (none of which circumstances are presently anticipated by or known to the Company), would not have any adverse impact on its or LLC’s business or operations.
The interpretive design, entertainment content, and visitor experience design candidates to be hired by LLC have been narrowed to a short list of professional companies. One or more of such companies (”Content Developers”) will be engaged by LLC to design the transformation of Omagine’s high level strategic vision for the content of the Pearl structures and surrounding areas into physical places offering emotional, intellectual and physical interactions. Each of the prospective Content Developers has serviced a diverse client base, including theme parks, museums, zoos, aquariums and other such complex entertainment centers around the world, including in the MENA Region, and each continues to regularly produce world class attractions globally of the size and scope of the Omagine Project.
Subject to the approval of its shareholders and to negotiating and agreeing to the CCC Oman Contract, LLC presently intends to hire CCC-Oman as the General Contractor for the construction of the Omagine Project. CCC-Oman is an LLC shareholder and one of the largest construction companies in Oman where it currently employs approximately 13,000 construction personnel. CCC-Oman is experienced in all aspects of the construction business and regularly constructs large scale projects of the magnitude of the Omagine Project. The Company presently expects that the First Draft Construction Contract will be completed in May 2015 and such CCC-Oman Contract will be approved by the LLC shareholders and signed by LLC and CCC-Oman before June 30, 2015. (See: “Business - The CCC-Oman Contract”, above).
Regards,
AGORACOM