Read this very very well - we will talk tomorrow
The primary use of the proceeds of the rights offering is for Hydraulic fraccing at the Karl 101 to increase production to commercial levels, to prepare the well for production and to complete payments for the drilling of the well. If the maximum CAD$15 million is raised, the Company plans to install compression at Beaver River in Canada to increase production and further investigate shale gas potential.
STEPS IN ORDER
1. A Stock consolidation of 5-1 is planned as the first action which will set a price five times the trading price on the consolidation date and to reduce the amount of shares outstanding by a factor of five. For example: if the pre-consolidation price is
.04 per share on the consolidation date the new price will be
.20. If a shareholder owns 100,000 shares before the consolidation then immediately following the consolidation, the number of shares owned will be 20,000. The consolidation does not affect the valuation of the Company.
2. Issue a prospectus that announces the specific dates to raise a minimum of CAD$10 million to a maximum of CAD$15 million through a rights issue in August/September, 2011. The Subscription Period will likely be from late July to late August 2011 and new shares will be listed in September 2011. Other key dates mentioned are the 'Ex-rights date' and the 'Settlement Date'.
Shareholders will be given the right to purchase 1.8176 shares at CAD
.09 for each share held on the 'Ex --Rights' date. Shareholders can also elect to subscribe for 'additional rights', to take a pro rata allocation of any rights not taken by other shareholders. Questerre has committed to provide CAD$2 million to the Company at this price of CAD
.09.
If shareholders don't want to buy the new shares they can sell their rights as they will be tradable (i.e. listed) both at the Oslo Exchange and TSX Venture Exchange during the subscription period. The rights are free to registered shareholders up to the ex-rights date, so when sold this is a clear profit to shareholders.
A standby guarantee has been established to ensure that CAD$8 million is available to make up any shortfall after shareholders exercise their rights and after the allocation of additional subscription rights. This is at the same price of CAD$ 0.09. This is equivalent to a 'put option' whereby guarantors are obliged to invest up to CAD$8 million but they have no title to invest if the subscription rights are subscribed for at amounts totalling the minimum amount of CAD$8 million. Also if all the rights are exercised (either by shareholders through their rights or additional rights, or investors who buy the rights during the subscription period) then the guarantors get no shares. If the guarantors do receive shares the consortium is mostly of large institutions who it is anticipated will continue to support the Company thereafter.
3. The maximum rights issue of CAD$ 15 million will give the shareholders the right to subscribe for a total of 166,666,667 common shares on a post consolidation basis. The shares subscribed in the rights issue will be registered added to existing outstanding shares and the number of outstanding shares after the right issue will be raised to 258,362,099.
4. Trade debt will be repaid and the fraccing program will commence almost immediately.
BOARD CONSIDERATIONS FAVOURING A RIGHTS ISSUE WITH A STANDBY GUARANTEE
• Prior to announcing this transaction, Transeuro was in a challenging financial position with negative working capital and cash to continue operations for around 4 months. Arranging for a minimum of CAD$ 10 million financing has therefore been of paramount importance to ensure continued operations of the Company and to maintain the assets of the Company. The Company in its prior announcements has informed that new funding was necessary, particularly when the Karl 101 well proved to require more aggressive drilling techniques such as hydraulic fraccing.
• The Board has worked under the assumption that securing funds from institutional investors would be positive for the Company and without immediate funding the Company might risk the loss of some or all of its Ukraine assets, or bankruptcy. Management has discussed the Company's funding requirements with numerous investment banks in both Europe and North America and with possible farm in partners. Of the options presented by management the Board has considered that the best way to refinance is to establish a standby guarantee consortium prior to announcing a rights issue, to ensure the critical minimum funding for the company at this stage, to try and avoid destruction of shareholder value and to avoid selling assets at unacceptable valuations. In the current market conditions it seemed likely to the Board that an announcement of a rights issue without a guarantee consortium could have had a negative effect on the Company's share price and essentially funding might not be secured. The Board believes that by giving existing shareholders tradable subscription rights, shareholder protection and accretion have been maximised in a difficult situation.
• The Board believes that new funding for the Company, backed by a consortium of mostly institutional investors, is positive for the Company and its shareholders. The Board therefore expects the rights to trade actively, at levels that offer existing shareholders some dilution protection for those not wanting to take part in this rights issue. A standby guarantee also secures the minimum funding in the event that market conditions deteriorate further during the subscription period.