Prospectus re Admission to the Official List - Heritage Oil

10. LIQUIDITY AND CAPITAL RESOURCESThe Group’s financial strategy has been to fund its capital expenditure programme and any potentialacquisitions by selling non-core assets, reinvesting funds from operations, using existing treasury resources,finding new credit facilities and, when considered appropriate, either issuing unsecured convertible bondsor additional HOC Common Shares.10.1 Capital ResourcesNine-Month Period Ended 30 September 2007 Prepared in Accordance with IFRSAs at 30 September 2007, the Group had a working capital surplus of $52,828,354 (30 September 2006—$38,325,134), including cash and cash equivalents of $61,894,711. On 16 February 2007, the Group raised$165 million by completing the private placement of convertible bonds described below. Proceeds wereused to finance the redemption of outstanding 10 per cent. convertible bonds on 28 March 2007, for$82.5 million plus interest and the remainder was added to working capital to be used for generalcorporate funding purposes.In October 2007, the Group received a loan of US$9.45 million to refinance the acquisition of a corporatejet. Interest on the loan is variable at a rate of LIBOR plus 1.6 per cent. The loan, which is secured on thecorporate jet, is scheduled to be repaid by 19 consecutive quarterly instalments of principal. Eachinstalment equals to $117,500 with the final instalment being $7,217,500. HOC provided a corporateguarantee to the lender in respect of this loan.On 14 November 2007, HOC completed an equity offering, whereby 3,000,000 HOC Common Shares wereissued from treasury at a price of Cdn$60.50 per Common Share for gross proceeds of Cdn$181.5 million.Year Ended 31 December 2006 Prepared in Accordance with IFRSAs at 31 December 2006, the Group had a working capital surplus of $44,467,745.Year Ended 31 December 2005 Prepared in Accordance with IFRSAs at 31 December 2005, the Group had a working capital surplus of $5,686,214.Year Ended 31 December 2004 Prepared in Accordance with Canadian GAAPAs at 31 December 2004, the Group had a working capital surplus of $19,125,890.10.2 DebtNine-Month Period Ended 30 September 2007 Prepared in Accordance with IFRSOn 17 January 2007, the Group gave notice that it had exercised its option to redeem the 550 outstandingunsecured convertible bonds at 150 per cent. of par value for total proceeds of $82.5 million plus accruedinterest which was paid on 28 March 2007. Fifty of the 600 unsecured convertible bonds, with a total parvalue of $5 million, were converted into 277,778 HOC Common Shares at an exercise price of $18 pershare subsequent to 31 December 2006. As a result of this conversion, a total amount of $7,104,327 wastransferred to Share Capital from convertible bonds and derivative liability component of convertiblebonds.On 16 February 2007, HOC raised $165 million gross by completing the private placement of convertiblebonds. HOC issued 1,650 unsecured convertible bonds, at par, which have a maturity of five years and oneday and an annual coupon of 8 per cent. paid semi-annually. The bonds are convertible into HOCCommon Shares at a price of $47 per share. HOC may redeem, in whole or part, the bonds for cash at anytime on or before 16 February 2008, at 150 per cent. of par value. Bondholders have a put option requiringHOC to redeem the bonds at par, plus accrued interest, in the event of a change of control of HOC orrevocation or surrender of the Zapadno Chumpasskoye licence in Russia. In the event of a change ofcontrol and redemption of the bond or exercise of the conversion rights a cash payment of up to $19,700 oneach bond will be made to the bondholder, the amount of which depends upon the date of redemption andmarket value at the date of any change of control event. Under the conditions of the HOC Bonds, HOC isrequired to take (or to procure that there is taken) all necessary action to ensure that immediately uponcompletion of the Plan of Arrangement, at its option, either (a) the Company is substituted under thebonds as principal debtor in place of HOC or becomes a guarantor under the bonds and, in either case, to157