Winterflood Investment Trusts

Transcription

1 THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. If you are in any doubt as to the contents of this document or what action you should take, you are recommended to seek your own personal financial advice from your stockbroker, bank manager, solicitor, accountant or other independent financial adviser authorised under the Financial Services and Markets Act 2000 or, if you are in a jurisdiction outside the United Kingdom, another appropriately authorised independent financial adviser. If you have sold or otherwise transferred all of your Shares in Quorum Oil and Gas Technology Fund Limited, please forward this document as soon as possible to the purchaser or transferee or the stockbroker, bank or other agent through whom the sale or transfer was effected for delivery to the purchaser or transferee. However, this document should not be forwarded to or transmitted in or into the United States, Australia, the Republic of Ireland or Japan. This document comprises a Prospectus relating to Quorum Oil and Gas Technology Fund Limited (the Company ) and has been prepared in accordance with the Prospectus Rules. A copy of this document has been filed with the FSA in accordance with Rule 3.2 of the Prospectus Rules. The Company and the Directors (whose names appear on page 24 of this document) accept responsibility for the information contained in this document. To the best of the knowledge and belief of the Company and the Directors (who have taken all reasonable care to ensure that such is the case), such information is in accordance with the facts and does not omit anything likely to affect the import of such information. Application has been made to the FSA in its capacity as UK Listing Authority for all of the Placing Shares to be issued in connection with the Placing and the Warrants described in this document to be admitted to the Official List and to trading on the London Stock Exchange s market for listed securities. It is not intended that the Shares issued in connection with the Placing or the Warrants will be admitted to listing in any other jurisdiction. It is expected that Admission will become effective and that unconditional dealings in the Shares issued in connection with the Placing and the Warrants will commence at 8.00 a.m. on 28 July The whole text of this document should be read. For a discussion of certain risks and other factors that should be considered in connection with an investment in the Shares issued in connection with the Placing, see the Risk Factors set out on pages 8 to 17 of this document. QUORUM OIL AND GAS TECHNOLOGY FUND LIMITED (incorporated with limited liability in Guernsey under the Companies (Guernsey) Law, 1994 (as amended) with registered number 48074) Placing of Shares of US$1 each at a price of US$10.35 per Share and bonus issue of Warrants and admission of the Shares and Warrants to the Official List and to trading on the London Stock Exchange s main market Corporate broker, financial adviser and placing agent Winterflood Investment Trusts The Company is listed under Chapter 14 of the Listing Rules on the basis of Prospectus Directive requirements and as a consequence Chapters 7 to 13 (inclusive) and 15 of the Listing Rules and the additional standards under Chapter 15 of the Listing Rules will not apply to the Company. See the section entitled Consequences of a Secondary Listing on page 20 for more information. Winterflood Investment Trusts, which is authorised and regulated in the United Kingdom by the FSA, is advising the Company and no one else in relation to the Placing and will not be responsible to anyone other than the Company for providing the protections afforded to the Company nor for providing any advice in relation to the Placing, the contents of this document or any transaction, arrangement or matter referred to in this document. This document does not constitute an offer or invitation to sell or issue, or the solicitation of an offer to purchase or subscribe for, any Shares in any jurisdiction in which those offers or invitations would be unlawful. This document does not constitute an offer to sell, or the solicitation of an offer to buy or subscribe for any securities other than the Shares to be issued in connection with the Placing. Further information with regard to restrictions on offers and sales of the Shares and the distribution of this document is set out in Part XII. The number of Shares being offered in connection with the Placing should not be taken to be an indicative number of Shares which will be issued. The Company reserves the right to scale back applications under the Placing. The distribution of this document and the offer and sale of the Shares in certain jurisdictions may be restricted by law. No action has been taken by the Company or Winterflood Investment Trusts

2 that would permit a public offer of the Shares or possession or distribution of this document where action for that purpose is required. Persons into whose possession this document comes should inform themselves about and observe any of those restrictions. Any failure to comply with those restrictions may constitute a violation of the securities law of that jurisdiction. Consent has been obtained from the Guernsey Financial Services Commission under the Control of Borrowing (Bailiwick of Guernsey) Ordinances, 1959 to 2003, as amended for the Company to raise US$500 million by the issue of shares and/or through borrowings. To receive that consent, application was made under the Guernsey Financial Services Commission s framework relating to Registered Closed-ended Investment Funds. Under this framework neither the Guernsey Financial Services Commission nor the States of Guernsey Policy Council have reviewed this document but instead have relied on specific warranties provided by the Guernsey licensed administrator of the Company. Neither the Guernsey Financial Services Commission nor the States of Guernsey Policy Council takes any responsibility for the financial soundness of the Company or for the correctness of any of the statements made or opinions expressed with regard to it. No Shares have been, or will be, registered under the Securities Act, or under the securities laws of any state or other political sub-division of the United States or under the applicable securities laws of Australia, Canada or Japan. Accordingly, subject to certain exceptions, no Shares may, directly or indirectly, be offered, sold, transferred, taken up or delivered, directly or indirectly, in the United States, Australia, Canada or Japan or for the benefit of any US Person and this document will not be posted to any person in the United States, Australia or Japan. None of the Company, the Quorum Group or either Investment Manager has authorised, nor do they authorise, the making of any offer of Shares through any financial intermediary or other person, other than offers made by Winterflood Investment Trusts which constitutes the Placing contemplated in this document. The Shares issued in connection with the Placing are being offered, as specified in this document, subject to prior sale and withdrawal, cancellation or modification of the Placing without notice and subject to certain other conditions. Payment for and delivery of the Placing Shares is expected to be made on or about 28 July No person has been authorised to give any information or to make any representation other than those contained in this document in connection with the Placing and, if given or made, that information or representation must not be relied on as having been authorised by or on behalf of the Company or Winterflood Investment Trusts. Prospective investors must not treat the contents of this document or any subsequent communications from the Company, Winterflood Investment Trusts or the Investment Managers or any of their respective affiliates, officers, directors, employees or agents as advice relating to legal, taxation, accounting, regulatory, investment or any other matters. Prospective investors must inform themselves as to: (a) the legal requirements within their own countries for the purchase, holding, transfer, redemption or other disposal of Shares; (b) any foreign exchange restrictions applicable to the purchase, holding, transfer, redemption or other disposal of Shares which they might encounter; and (c) the income and other tax consequences which may apply in their own countries as a result of the purchase, holding, transfer, redemption or other disposal of Shares. Prospective investors must rely on their own representatives, including their own legal advisers and accountants, as to legal, tax, accounting, regulatory, investment or any other related matters concerning the Company and an investment in the Company. In making an investment decision, investors must rely on their own examination of the Company and the terms, conditions and provisions of the Placing, including the merits and risks involved. The information contained in this document has been provided by the Company. Winterflood Investment Trusts makes no representation, express or implied, nor accepts responsibility, with respect to the accuracy or completeness of any of the information in this document. This document is not intended to provide the basis of any credit or other evaluation and should not be considered as a recommendation by any of the Company or Winterflood Investment Trusts that any recipient of this document should purchase the Shares. Each potential purchaser of Shares should determine for itself the relevance of the information contained in this document and any purchase by it of Shares should be based on those investigations as it deems necessary. 2

3 CONTENTS SUMMARY 4 RISK FACTORS 8 CONSEQUENCES OF A SECONDARY LISTING 20 IMPORTANT INFORMATION 22 EXPECTED TIMETABLE 23 PLACING AND ADMISSION STATISTICS 23 DIRECTORS, INVESTMENT MANAGERS, SECRETARY AND ADVISERS 24 LETTER FROM THE CHAIRMAN 26 PART I INTRODUCTION TO THE COMPANY AND INVESTMENT STRATEGY 28 PART II OIL AND GAS SECTOR 34 PART III INFORMATION ON SIGNIFICANT HOLDINGS 38 PART IV INFORMATION ON WELLPOINT SYSTEMS, INC. 39 PART V INFORMATION ON STRATA ENERGY SERVICES INC. 126 PART VI FINANCIAL INFORMATION RELATING TO THE COMPANY 191 PART VII PROCEDURE IN RESPECT OF WARRANTS 209 PART VIII WARRANTS 210 PART IX DIRECTORS, MANAGEMENT AND ADMINISTRATION 220 PART X FEES AND EXPENSES 228 PART XI THE PLACING AND RELATED MATTERS 230 PART XII ADDITIONAL INFORMATION 232 DEFINITIONS 262 GLOSSARY OF TECHNICAL TERMS 266 3

4 SUMMARY This summary highlights certain matters relating to the Company and the Placing and must be read as an introduction to this document. Any decision to invest in the Shares to be issued in connection with the Placing should be based on a consideration of this document as a whole. If an investor brings a claim relating to the information contained in this document before a court, it might, under the national legislation of the relevant EEA State in which the claim is brought, have to bear the costs of translating this document before the legal proceedings are initiated. Civil liability attaches to those persons responsible for this summary, including any translation of the summary, but only if the summary is misleading, inaccurate or inconsistent when read together with other parts of this document. 1 OVERVIEW 1.1 Quorum Oil and Gas Technology Fund Limited The Company is a registered closed-ended investment company, incorporated in Guernsey on 20 November 2007 to provide expansion capital to companies which own and/or are developing proven proprietary technology which may have a potentially significant effect on the oil and gas industry. The existing Shares in the Company were admitted to the Official List and to trading on the London Stock Exchange on 7 January 2008, raising approximately US$43 million. The Company is managed by the Investment Managers, who are members of the Quorum Group. The Quorum Group is a 21 year old strategic sector private equity firm, headquartered in North America. 1.2 Investment objective The Company s investment objective is to provide investors with the potential for long term capital growth by providing capital to companies that provide technological solutions to the following challenges in the oil and gas industry: * need to develop new exploration technologies to identify new global oil and natural gas fields; * requirement for new technologies to increase recovery rates from known fields; * reduction of exploration and production costs and to turn under-performing prospects, projects or shut-in wells into attractive investments; * need to develop unconventional oil and natural gas resources; and * requirement to address the environmental footprint of the industry s activities and products. The Directors believe that smaller companies in the oil and gas sector currently do not, in general, have sufficient access to capital at a reasonable price. 1.3 Investment criteria The Company may make investments outside its target markets if those investments are consistent with the Board s return and risk management strategies and meet the Company s other investment criteria. The investee companies to whom the Company will provide capital will typically have: * proprietary technology that addresses one or more of the challenges identified above; * established and recurring annual revenue of between US$1 million to US$50 million; and * strong growth potential. The Investment Managers have spent over two and a half years developing a pipeline of potential investments, on which they have conducted due diligence and engaged in discussions with management, based on which, the Investment Managers expect that the majority of the funds raised pursuant to the Placing will be invested by December Investment Structure The Investment Managers will, wherever possible, seek to effect the Company s investments using a convertible secured debenture structure developed by the Quorum Group. 4

5 This investment structure typically comprises a high single-digit interest-bearing five year loan secured against the assets of the investee company, which can be converted into equity either at the option of the holder (i.e. the Company) or, in certain circumstances (such as meeting liquidity and market capital tests) at the option of the investee company. If the loan is not converted prior to the end of its term, the investee company must repay the principal and any outstanding interest. The advantages of this structure are that: (a) (b) (c) during the period prior to conversion into equity, the Company will receive interest income which the Company will use to pay the Management Fee and other expenses of the Company and which should enable the payment of a running dividend or distribution to Shareholders; it provides a degree of capital protection through the security granted in respect of the debt; and it provides a long option over a portion of shares in the investee company. The convertible secured debentures are typically secured against the assets of the investee company, and rank ahead of all other debt, other than traditional secured working capital financing lines. The convertible secured debentures contain various covenants and other restrictions on the investee company. The convertible secured debentures also provide for regular and detailed reporting by the investee companies and the provision of one or two board seats for the Company. 1.5 Potential Investments The Investment Managers and the Key Principals have identified and undertaken due diligence on potential investments that would satisfy the Company s investment strategy. The Investment Managers will only undertake these investments for the Company following the satisfactory completion of final, reasonable and appropriate due diligence and negotiation of terms of investment. In addition, the Investment Managers have identified a pipeline of other investment opportunities that they intend to investigate further, which could satisfy the Company s investment objective. 1.6 Key Strengths The Directors believe that the Company has the following key competitive strengths: * sector opportunities other than a few small regional funds based in Norway and Houston, Texas, the Investment Managers are not aware of any other company, or investment fund, in existence which offers investors the opportunity to participate in the growth of companies in the oil and gas technology sector; * sector knowledge and contacts the Quorum Group has a 19 year track record of successfully investing in companies in the oil and gas technology sector; and * portfolio effect and consolidations the Investment Managers investments will provide opportunities for the synergistic combination of technologies across the Portfolio. 1.7 Quorum Group Overview The Quorum Group is a successful and experienced manager of technology private equity funds headquartered in North America, with a 21 year track record. The Quorum Group has performed specified audit procedures (with an audit firm other than the Company s current auditor) on its investment performance in its technology portfolio as at 30 June 2007 which show that, in respect of technology investments managed by the Quorum Group, since inception in 1987, its IRR is per cent.. (Source: Quorum). 1.8 Management of the Company The Board comprises Christopher Hill, Wanda Dorosz and Thomas Price who are collectively charged with responsibility for the determination of the Company s investment objective and policy and have overall responsibility for the Company s activities. The Directors have delegated responsibility for the day to day management of the Portfolio to the Investment Managers. 5

6 The Investment Managers have created the Investment Advisory Committee which is comprised of individuals who have international experience, at a senior level, of the oil and gas industry. The Investment Advisory Committee advises and assists the Investment Managers in considering potential investments by the Company. The Key Principals are responsible for the Investment Managers contractual obligations under the Investment Management Agreement to review, assess and make recommendations in respect of acquisitions and disposals of investments. 1.9 Dividends and distributions policy Subject to compliance with applicable laws, the Company proposes to pay out substantially all of the balance of the interest income received from the secured convertible debentures, after all costs and expenses, by way of an interim dividend or distribution on a quarterly basis. An interim dividend may be satisfied, for the purposes of, and subject to, Guernsey law, by a payment out of the Company s share capital Management of the Company s investments The Company entered into the Investment Management Agreement on 27 December 2007 under which the Investment Managers are responsible for the management of the investments of the Company, in accordance with the Company s investment strategy. The Investment Managers are entitled to the Management Fee calculated by reference to the Net Asset Value, and paid monthly in arrears. The Management Fee will be paid out of the Company s cash flow which, in the initial years, will be principally in the form of interest payments received from its convertible secured debenture investments. It is expected that with the interest rate on those debentures being in the region of 7 to 9 per cent. per annum, the Company will be able both to pay the Management Fee and expenses and to pay a dividend or distribution to Shareholders. Options were granted to the Optionholders in respect of 20 per cent. of the fully diluted share capital of the Company in issue prior to the Placing. The exercise price of these options is US$10 increasing by 8 per cent. per annum, with the 8 per cent. increase being reduced on a US$ for US$ basis in respect of any dividends paid by the Company. The options have vested and are exercisable in three equal tranches on the first three anniversaries of the grant date, and will remain exercisable until the tenth anniversary of the grant date. Subject to the approval of the Directors, further options will be granted to the Optionholders following the Placing and following the exercise of Warrants on the same basis and the same terms as the existing options to ensure that the Investment Managers will be entitled, upon exercise of all the options (including payment of the strike price) to 20 per cent. of the fully diluted share capital of the Company. In addition to the Management Fee, the Investment Managers will receive a transaction fee from the investee companies of a sum equal to 3 per cent. of the principal amount of the convertible secured debenture on execution of the convertible secured debenture or, if an alternative structure is used, 3 per cent. of the capital invested in the relevant investee company by the Company on execution of the legal documents. This transaction fee is not received or borne by the Company under any circumstances Description of the Placing The Company has raised US$19.3 million (before expenses) through the Placing. The Net Proceeds are estimated to be US$18.8 million after estimated expenses of up to US$0.5 million The Bonus Issue of Warrants The Company is proposing to issue Warrants to Qualifying Shareholders on the basis of one new Warrant for every five Shares. The Warrants will be issued to Shareholders on the register at the Record Date, being close of business on 25 July 2008 (which will be prior to the issue of Shares pursuant to the Placing). Each Warrant will confer the right (but not the obligation) to subscribe for one Share on each of 1 April 2009 and 1 April 2010, following which date the rights under the Warrants will lapse, at a Conversion Price of US$10 (subject to adjustment). 6

7 1.13 Debt facility The Company currently has no agreements in place for the use of any debt facility but it is intended that the Company will put in place a borrowing facility and thereafter will use borrowings of up to a maximum of 20 per cent. of NAV at the point of drawdown. 2 RISK FACTORS An investment in the Shares and the Warrants involves a number of risks and uncertainties. These risks and uncertainties include, among others, those listed below: * general economic conditions such as interest rates, general levels of economic activity, the price of securities and participation by other investors in the financial markets may affect the Company s activities; * the Company operates in a highly competitive market for investment opportunities; * the Company is subject to some of the business risks and uncertainties associated with a new business enterprise; * the Company may participate in a limited number of investments; * there is no assurance that the Company will have sufficient resources to make follow-on investments or that it will make those investments; * the success of the Company depends on the ability of the Investment Managers to identify, monitor, negotiate and structure the investments to be made by the Company; * the Company intends to invest in companies the securities of which are not, at the time of investment, and may never be, publicly traded; * there is a possibility that an investee company may fail to pay on time the principal amount due, accrued interest or other amounts due under its debenture pursuant to its terms; * the Company may have a limited ability to protect its position in those investee companies within which it holds non-controlling interests; * the development of the Quorum Group depends on it being able to retain and motivate key employees; * the Company may invest in companies with significant leveraged capital which may increase the Company s exposure to adverse economic factors; * the Company may invest in less established companies which may involve greater risks than associated with investments in established companies as they are often more vulnerable to financial failure; * historically, oil and natural gas prices have fluctuated widely and are affected by numerous factors over which the Company has no control; * investee companies may operate in areas of instability that may disrupt business, potentially giving rise to losses that may not be covered by contractual protections or insurance; * substantial declines in oil and gas prices could lead to a decline in the demand for the investee companies services, whereas substantial price increases may not give rise to an immediate increase in demand for the investee companies services; * there may be a shift in demand from oil and gas towards alternative energy sources which may reduce the demand in investee companies products and services; * the Warrants represent a geared investment and the market price of the Warrants may be volatile; * although the Warrants are tradable securities, market liquidity may be less than the market liquidity of Shares; and * the Warrants could expire and have no value to holders. 7

8 RISK FACTORS Potential investors should consider carefully the risk factors described below, together with all the other information set out in this document and their own circumstances, before deciding to invest in the Company. An investment in the Company offered by this document may not be suitable for all of its recipients. An investment in the Company is only suitable for investors who are capable of evaluating the risks and merits of that investment, who have sufficient resources to bear any loss which might result from that investment and who can accept that there may be limited liquidity in the Shares. Should any of the following events or circumstances occur, the Company s and/or the Quorum Group s (as applicable) business, financial condition and results of operations could be adversely affected. In those circumstances, the market price of the Shares could decline and investors could lose all or part of the value of their investment. If you are in any doubt about the action you should take, you should consult a professional adviser authorised under FSMA who specialises in advising on the acquisition of shares and other securities. An investment in the Company is subject to a number of risk factors. The paragraphs below set out what the Company believes to be the material risks involved in an investment in the Company but those risks are not the only risks relating to the Quorum Group or an investment in the Company and are not intended to be presented in any order of priority. There may be additional risks that the Company does not currently consider to be material or of which it is not aware which may also have an adverse effect on it or the Quorum Group. Prospective investors should be aware that the value of the Shares and the income from them may decrease and that they may not realise the value of their initial investment and could lose all of their investment. Prospective investors should also see the investee specific risk factors set out in Parts IV and V of this document. 1 RISKS RELATING TO THE INDUSTRY IN WHICH THE QUORUM GROUP OPERATES 1.1 General economic conditions General economic conditions may affect the Company s activities. Interest rates, general levels of economic activity, the price of securities and participation by other investors in the financial markets may affect the value and number of investments made by the Company or considered for prospective investment. 1.2 Risks relating to competition for investment opportunities Identifying, completing and realising attractive investments can be competitive and involves a high degree of uncertainty. The availability of investment opportunities generally will be subject to market conditions and the prevailing regulatory or political climate. The Company will be competing with other investors and financial institutions for investments. As a result, there can be no assurance that the Company will be able to secure investments that satisfy the Company s investment objective or that the Company will be able to become fully invested for a significant period of time, if at all. The Company was incorporated with an unlimited life, although Shareholders will, every seven years, have the right to vote on the continuation of the Company and will also have the right to vote on continuation if less than 75 per cent. of the Company s gross assets, at the time of the Initial Placing, have been invested by the date which is 18 months after 7 January RISKS RELATING TO THE BUSINESS OF THE COMPANY 2.1 New company The Company was established in Guernsey on 20 November 2007 and had no previous operating history. The Company is subject to some of the business risks and uncertainties associated with a new business enterprise, including the risk that the Company will not achieve its investment objective and that the value of investments in the Company could decline substantially. There can be no assurance that the Company will be able to achieve any of the returns referred to in this document. 8

9 2.2 Risk of limited number of investments The Company may participate in a limited number of investments and, as a consequence, the aggregate return of the Company may be substantially adversely affected by the unfavourable performance of a single investment. Although the convertible secured debenture structure, which is intended to be used by the Company to invest in investee companies, seeks to reduce the impact of that unfavourable performance, there is no certainty that it will be able to do so. 2.3 Lack of additional funds Following its initial investment in an investee company, the Company may have the opportunity to increase its investment in subsequent operations or may be asked to provide additional funds. There is no assurance that the Company will make follow on investments or that the Company will have sufficient resources to make those investments. Any decision not to make follow on investments or the Company s inability to make them may have a substantial negative impact on an investee company in need of that investment or may result in missed opportunities for the Company. 2.4 Uncertain nature of investments The Company may enter into high risk investment opportunities. Investee companies in which the Company invests may not achieve their expected operational objectives and might experience substantial fluctuations in their operating results. The Company will be subject to the risks associated with the underlying businesses engaged in by investee companies, including market conditions, changes in regulatory environments, general economic and political conditions, the loss of key management personnel and other factors. 2.5 Risks relating to Investment Managers The Investment Managers are members of the Quorum Group and have been established to act as the investment managers to the Company. While the Quorum Group is a 21 year old strategic private equity firm, the Company is the Investment Managers first client and the Investment Managers do not have a track record of carrying out the activities which they will be performing on behalf of the Company. The Investment Managers may be unable to find a suitable number of attractive opportunities to meet the Company s investment objective. The Company relies on the ability of the Investment Managers to identify, monitor, negotiate and structure the investments to be made by the Company. The success of the Company depends on the ability of the Investment Managers to identify, select, effect and realise appropriate investments. There is no guarantee that suitable investments will be or can be acquired or that investments will be successful. The success of the Company will depend, in substantial part, on the skill and expertise of the investment professionals employed by the Investment Managers and there can be no assurance that these individuals will continue to be employed by the Investment Managers or to function on behalf of the Company. Any past performance of other funds or accounts managed by members of the Quorum Group cannot be construed as an indicator of future results. Investors should also note that one of the principals of the Investment Managers, Michael Abougoush, has taken a part time role with one of the investee companies, SQFive Intelligent Oilfields Solutions Ltd, in which he has a minority equity position. He is released from discussions on this investment but it does nevertheless constitute a conflict of interest. 2.6 Long-term Investments Although investments by the Company are expected to generate current income, the return of capital and the realisation of capital gains, if any, from an investment generally will occur only on the partial or complete disposition of that investment. While the Company s investment policies do not require investments to be exited within any fixed periods of time, the normal terms of the convertible secured debentures through which the Company will invest in investee companies provide that the money is lent for a term of slightly in excess of five years with a matching option and, therefore, investments will almost always be exited within five years and one month of the date of the investment. 9

10 2.7 Illiquidity of Investments The Company intends to invest in companies the securities of which are not, at the time of investment, and may never be, publicly traded. These investments may be difficult to value and to sell or otherwise liquidate and the risk of investing in those companies is generally greater than the risk of investing in publicly traded companies. The Company will be required to value such investments at fair value, under IFRS, which will be determined using principles from the International Private Equity and Venture Capital Valuation Guidelines. However there can be no certainty that such fair value will be achieved in the case of an immediate realisation for cash. Companies whose securities are not publicly traded are not subject to the same disclosure and reporting requirements that are generally applicable to companies with publicly traded securities. In addition, there can be no assurance that companies in which the Company invests will eventually list their securities on a securities exchange. To the extent that there is no liquid trading market for investments, the Company may be unable to liquidate investments or may be unable to do so at a profit. Furthermore, there can be no assurances that private purchasers for the Company s investments will be found. In addition, in certain circumstances governmental or regulatory approvals may be required for the Company to dispose of an investment or the Company may be prohibited by contract or for legal or regulatory reasons from selling an investment for a period of time. 2.8 Risks relating to convertible secured debentures The Investment Managers will seek to effect investments for the Company using convertible secured debenture structures. There is a possibility that the investee company may fail to pay on time any of the principal amount due under the debenture or any accrued interest or other amounts due under the debenture pursuant to its terms. On insolvency, if the value of the charged assets of the investee company is less than the amount of the debt, the Company may have to claim the outstanding balance as an unsecured creditor (or under any valid floating charge in its favour). 2.9 Gearing Pursuant to its Articles, the Company may borrow provided the borrowings do not exceed 50 per cent. of the Company s adjusted capital and reserve without the prior sanction of Shareholders by ordinary resolution. Where the cost of the Company s borrowings exceeds the Company s return, the borrowings will have a negative effect on the Company s performance and the Company may be required to repay any loans out of its assets Non-controlling investments The Company may hold non-controlling interests in investee companies and, therefore, may have a limited ability to protect its position in those companies, although as a condition of investment in a company, it is expected that appropriate rights will be sought to protect the Company s investment Material non-public information By reason of their responsibilities in connection with other activities as fund managers, certain officers or employees of the Investment Managers may acquire confidential or material nonpublic information or be restricted from initiating transactions in certain securities. As a result, the Company may not be able to initiate a transaction that it otherwise might have initiated and may not be able to sell an investment that it otherwise might have sold Risks relating to retaining Key Principals The development of the Quorum Group s business is substantially attributable to the Key Principals. The future success of the Quorum Group will depend, in large part, on the continued involvement of these and other key employees. If one or more of these Key Principals were to resign or become unable to perform their duties, if the Quorum Group were to lose one or more of its key staff or if the Quorum Group were to experience difficulty recruiting sufficient numbers of staff with adequate expertise to replace departing personnel, it could have a material 10

11 adverse effect on the Quorum Group s business, financial position, results of operations and business prospects, with an associated adverse impact on the Company. The development of the Quorum Group depends on it being able to retain and motivate key employees Legal and regulatory risks Legal and regulatory changes could occur during the life of the Company that may adversely affect the Company, its investee companies or the Quorum Group Tax related risk There may be, in certain circumstances, withholding or other taxes on the profits or other returns derived from the Company s investments which may change from time to time and which could have a material adverse effect on the Company s performance. Given the long periods for which investments will be held, this may extend to situations where the tax treatment of one of the Company s investments changes during the life of the investment, which may adversely affect returns. The operations and activities of the Company in jurisdictions outside Guernsey or the activities of its service providers could expose the Company to corporate income taxes outside Guernsey which may substantially adversely affect the Company s business, financial condition and prospects. The Company does not expect to have any material corporate income tax exposure in the UK or other jurisdictions in which it makes investments. However, this conclusion will depend, in part, on the manner in which the Company makes its investments in these jurisdictions, and the actions of its agents. There can be no guarantee that the activities of the Company s employees, officers, service providers and/or agents will not expose the Company to corporate income taxes in these jurisdictions on part or all of its income which could have a substantial adverse effect on the Company s business, financial condition and prospects. The tax regimes applying in Guernsey, the UK and any country in which the Company invests, may change, in so doing affecting the Company s tax treatment in these jurisdictions. For further information on tax, please refer to paragraph 10 of Part XII of this document Investor tax risk Investors should take their own tax advice as to the consequences of making an investment in the Company, as well as receiving returns from it. In particular, investors should be aware that investment in the Company can be treated in different ways in different jurisdictions Regulatory regime and permits The profitability of the Company will be in part dependent on the continuation of a favourable regulatory climate with respect to its investments. The failure to obtain, or to continue to comply with, all necessary approvals, licences or permits, including renewals or modifications, may adversely affect the Company s performance, as could delays caused in obtaining those consents due to objections from third parties. 3 RISKS RELATING TO INVESTEE COMPANIES 3.1 Leverage The Company s investments may include companies whose capital structures have significant leverage. The leveraged capital structure of those investee companies will increase their exposure to adverse economic factors, such as rising interest rates, downturns in the economy or deterioration in the condition of the investee company or its industry. 3.2 Investments in less established companies The Company will invest some of its assets in smaller, less established companies. Investments in these companies may involve greater risks than are generally associated with investments in more established companies. The securities of these less established companies may be subject to more abrupt and erratic market price movements than larger, more established companies, since trading volumes for the securities of these less established companies are generally quite low. Less established companies tend to have a lower capitalisation and fewer resources and, therefore, are often more vulnerable to financial failure. These companies may also have shorter operating histories on which to judge future performances. 11

12 3.3 Volatility of oil and natural gas prices Historically, oil and natural gas prices have fluctuated widely and are affected by numerous factors over which the Company has no control, including world production levels, international economic trends, currency exchange rate fluctuations, expectations for inflation, speculative activity, consumption patterns and global or regional political events. The aggregate effect of these factors is impossible to predict. 3.4 Risks and hazards Development, drilling and production activities for which investee companies develop technologies and which the clients of the investee companies carry out, involve significant risks beyond the investee companies control. Risks such as delays in the construction and commissioning of development, drilling and production activities or other logistical or technical difficulties, lack of access to key infrastructure, adverse weather conditions, environmental hazards, industrial accidents, occupational and health hazards, technical failures, labour disputes, unusual or unexpected geological formations, explosions and other acts of God are inherent in the oil and gas industry. The occurrence of any of these incidents could result in substantial losses to the investee companies due to injury or loss of life, severe damage to, or destruction of, property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties and suspension of operations. Damages occurring as a result of these risks may give rise to claims against the investee companies which may not be covered, in whole or part, by insurance. 3.5 Industry consolidation Consolidation among oil and gas companies may result in fewer potential clients for the investee companies. These may lead to increased competition to secure customers and contracts. Furthermore, mergers and acquisitions may result in the acquisition of a client of an investee company by an entity which has established relations with a competitor of the investee company. The reduction in demand for the investee companies products and services as a result of merger and acquisition activity may have a material adverse effect on the investee companies financial performance and condition and, thus, have an adverse effect on the Company. 3.6 Operations in areas of instability Investee companies may have international operations in areas which are susceptible to political, social and economic instability. Material risks for the investee companies operating in these areas are: * longer collection times for accounts receivable; * disruption to operations, including strikes, civil actions or political interference; * restrictions on the movements of personnel and/or equipment; * restrictive actions by local governments, including the imposition of tariffs and limitations on imports and/or exports; * the imposition of sanctions on foreign oil-producing states by the UK government, the EU Commission, the US government or other governments; * expropriation of assets; and * limited access to markets for periods of time. Any of the above factors could result in disruptions to investee companies businesses, increased costs, liability for liquidated damages or reduction in future growth opportunities. Potential losses caused by these disruptions may not be covered by contractual protections or insurance. 3.7 Ability to recruit skilled personnel Demand worldwide for engineers, operational staff and other technical and management personnel is currently high and supply is limited, particularly in the case of skilled and experienced engineers and field service personnel in Western Europe and the US. The future 12

13 growth and profitability of investee companies may be affected by their ability to meet their operational requirements due to the scarcity of appropriately skilled personnel or by potential increases in compensation costs associated with attracting and retaining these personnel. 3.8 Cyclicality of capital expenditure and operation expenditure cycles in the upstream oil and gas industry Levels of capital expenditure historically have been cyclical and unpredictable. Lower capital expenditure incurred by the oil and gas industry in the development of discovered oil and gas reserves may result in lower demand for investee companies products and services, which may adversely affect their financial performance. Other products and services of investee companies may be more closely linked to the level of operating expenditure by the oil and gas companies on developed and producing fields. Changes in the level of operating expenditure are less cyclical; however, they may still adversely affect the investee companies financial performance. 3.9 Health, safety and environmental risks across the energy sector Investee companies may be subject to strict health and safety laws and regulations which could change in the future in a manner that will adversely affect investee companies. Breaches of these laws can occur, and expose investee companies to fines, penalties and/or prosecution by governmental authorities for failure to comply with these laws. This could adversely affect investee companies future revenues, profits and financial position and their ability to generate new business. Investee companies may be subject to laws and regulations governing activities that may have adverse environmental effects, such as discharges into the air and water, and the handling, storage and disposal of hazardous wastes and chemicals. In many jurisdictions, these laws are complex, change frequently and tend to become more stringent over time. Environmental laws and regulations may also impose obligations to investigate and remediate, or pay for the investigation or remediation of, environmental contamination, and/or pay compensation for related damages Risks relating to intellectual property rights Some of the investee companies technologies, products and services, and the processes they use to produce or provide them, may have been granted trademark, service mark or patent protection (or have applications pending) or are otherwise capable of protection. Investee companies businesses may be adversely affected if their intellectual property rights are unenforceable, those rights that have been granted protection are not sufficient to protect their technology, their applications for protection are denied, their products infringe the intellectual property rights of others, their other intellectual property rights which are not capable of being granted protection are not otherwise adequately protected or if certain licences are withdrawn. Investee companies competitors may be able to develop technology independently that is similar to that of an investee company without infringing the investee company s intellectual property rights. An investee company may have to spend substantial time and money defending its intellectual property rights Susceptibility to oil and gas prices A substantial or an extended decline in oil and gas prices would be likely to cause a significant decline in the level of activity in the upstream oil and gas industry. The level of activity in the exploration, appraisal and development of new fields may be significantly reduced, while the level of activity in the exploitation of developed fields in the production phase, where a significant investment has already been made, is likely to be less affected. This reduction of activity could lead to a decline in the demand for some of the investee companies services and products. A substantial increase in oil and gas prices may give rise to increased levels of activity in exploration, appraisal and development activities by the oil companies. However, due to the long-term nature of new projects, the reaction of the oil and gas companies to an increase in oil and gas prices may not be immediate. In addition, the level of activity in exploitation of developed fields in the production phase may not increase significantly. These changes in activity levels could result in the demand for investee companies products and services not having a direct correlation to an increase in oil and gas prices. 13

14 Oil and gas prices are affected by numerous factors including: * the activities of speculators and investors in buying and selling oil and gas and oil and gas futures; * worldwide demand for energy; * national government political requirements and the ability of OPEC to set and maintain production levels for oil; * the level of worldwide oil and gas exploration and production activity; * the cost of exploring for, producing and delivering oil and gas; and * technological advances affecting energy consumption Energy demand may change as a result of economic downturn Energy demand is strongly related to economic activity. In the event of an economic downturn, the demand for energy is likely to reduce and will be likely to adversely affect the investee companies financial performance Past market performance should not be relied on as an indicator of future growth Energy markets, particularly in oil and gas, have experienced strong growth in recent years due in part to the tight supply and demand, which has driven strong growth in oil and gas-related services. Any excess in energy supply or any large reduction in demand could cause oil and gas prices to drop Technological advances affecting energy consumption Demand for investee companies products and services will be directly linked to consumption of oil and gas. With technological advances, it is likely that more efficient means of consumption will be discovered. The effect of this may be to reduce the overall demand for oil and gas and the price of oil and gas in areas using those technologies which could have a material adverse effect on investee companies future financial performance and condition Social and political factors The combination of high oil prices and climate change concerns has made environmentally friendly innovations more economic. The overall consequence of this will potentially be a shift in demand from oil and gas towards alternative energy sources. The effect of this on investee companies focused on the oil and gas sector would be to reduce the demand for their products and services. Given the finite nature of the oil and gas resources, there will be a shift to alternative energy sources. However, the speed and manner in which that process will take place is uncertain. Governments are playing a key part in increasing energy consumption from renewable resources Market acceptance of new alternative technologies The implications of new alternative energy technologies for investee companies will depend on how these new technologies are received by the market. High compliance costs and operational difficulties may reduce the desire of the industry to use these technologies. 4 RISKS RELATING TO THE SHARES 4.1 Risks relating to fluctuations in the price of the Shares and the liquidity of the investment in the Shares There may not be a liquid market for the Shares and any investment in the Shares should be viewed as a long-term investment. The market price of the Shares may not, due to the presence of a discount, wholly or mainly reflect the value of the underlying investments of the Company, and may also be subject to wide fluctuations in response to many factors (some of which may be beyond the Company s control), including variations in the operating results of the Company, divergence in financial results from stock market expectations, changes in earnings estimates by analysts, a perception that other market sectors may have higher growth prospects, general economic conditions, the failure to acquire additional assets, legislative changes in the Company s investment sector and other events and factors outside the Company s control. 14