Filed pursuant to
General Instruction II.L of
Form F-10; File No. 333-107303.
PROSPECTUS SUPPLEMENT
TO THE BASE SHELF PROSPECTUS DATED JULY 18, 2003
NEW ISSUE
PAN AMERICAN SILVER CORP.
[LOGO] US$75,000,000
5.25% CONVERTIBLE UNSECURED SENIOR SUBORDINATED DEBENTURES
This prospectus supplement is being filed in respect of the offering (the
"Offering") of US$75,000,000 convertible unsecured senior subordinated
debentures (the "Debentures") of Pan American Silver Corp. (the "Company"). The
Debentures offered hereby will mature on July 31, 2009 and will bear interest at
a rate per annum of 5.25%. Interest on the Debentures is payable semi-annually
on January 31 and July 31 in each year commencing on January 31, 2004. The
Debentures will be issued and sold in denominations of US$1,000 and integral
multiples thereof. On or after July 31, 2006, the Debentures may be redeemed in
whole or in part by the Company, at its option on not more than 60 and not less
than 30 days prior notice and subject to regulatory approval, at a price equal
to par, plus accrued and unpaid interest, if any, provided that the weighted
average trading price of the common shares in the capital of the Company (the
"Common Shares") on the Nasdaq National Market ("NASDAQ") for the 20 consecutive
trading days ending five trading days preceding the date of the redemption
notice equals at least 125% of the conversion price, which is initially US$9.57.
On redemption or upon maturity, provided that no default or event of default has
occurred and is continuing, the Company may, at its option, on not more than 60
and not less than 30 days prior notice and subject to regulatory approval, elect
to satisfy its obligation to repay the principal amount of the Debentures by
issuing and delivering that number of freely tradable Common Shares obtained by
dividing the principal amount of the outstanding Debentures which are to be
redeemed or have matured, as the case may be, by 95% of the weighted average
trading price of the Common Shares on NASDAQ for the 20 consecutive trading days
ending five trading days preceding the date fixed for redemption or maturity, as
the case may be. The Debentures will rank subordinate to all current and future
Senior Indebtedness (as defined herein) and will rank at least PARI PASSU with
all other unsecured indebtedness. The Company has agreed that neither it nor its
subsidiaries will issue, by public offering or private placement, any unsecured
bonds, debentures, notes or other capital markets debt instruments unless all
such debt is, by its terms, subordinate to the Debentures. See "Description of
the Debentures -- Subordination".
CONVERSION PRIVILEGE
Each US$1,000 principal amount of Debentures will be convertible into Common
Shares at the option of the holder at any time prior to the earlier of the
close of business on July 31, 2009 and the last business day immediately
preceding any date fixed for redemption, into 104.4932 Common Shares
(subject to adjustment in certain events), representing a conversion price
of US$9.57.
The closing price of the Common Shares on July 22, 2003 on the Toronto Stock
Exchange (the "TSX") was Cdn.$10.48 per Common Share and on NASDAQ was $7.41 per
Common Share. The TSX has conditionally approved the listing of the Debentures
and the listing of the Common Shares issuable upon conversion of the Debentures.
The Company has notified NASDAQ of the proposed issuance of the Debentures and
the Common Shares issuable upon conversion of the Debentures. There is no
current intention to list the Debentures on NASDAQ. The price for this Offering
was determined by negotiation between the Company and BMO Nesbitt Burns Inc.,
CIBC World Markets Inc. and Canaccord Capital Corporation (collectively, the
"Underwriters").
THE EARNINGS COVERAGE RATIOS OF THE COMPANY FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2002 AND THE 12-MONTH PERIOD ENDED MARCH 31, 2003 ARE EACH LESS
THAN ONE-TO-ONE. SEE "PRO FORMA EARNINGS COVERAGE".
AN INVESTMENT IN THE DEBENTURES IS SUBJECT TO A NUMBER OF RISKS THAT SHOULD BE
CONSIDERED BY A PROSPECTIVE PURCHASER. SEE "RISK FACTORS".
PRICE UNDERWRITERS' NET PROCEEDS
TO THE PUBLIC(1) FEE TO THE COMPANY(1)(2)
---------------- ------------- --------------------
Per Debenture............................................... US$1,000 US$30 US$970
Total....................................................... US$75,000,000 US$2,250,000 US$72,750,000
------------------------------
(1) Plus accrued interest, if any, from the date of closing of the Offering.
(2) Before deducting expenses of this Offering, estimated to be US$400,000,
which, together with the Underwriters' Fee, will be paid from the general
funds of the Company.
The Company has granted the Underwriters an option, exercisable at any time up
to 30 days following the closing of the Offering, to purchase additional
Debentures on the same terms, to a maximum principal amount of US$11,250,000 to
cover over-allotments (the "Over-Allotment Option"). If the Over-Allotment
Option is exercised in full, the total "Price to the Public", "Underwriting
Commission" and "Net Proceeds" to the Company will be
US$86,250,000, US$2,587,500 and US$83,662,500, respectively, before deducting
expenses of the Offering. See "Plan of Distribution" and "Use of Proceeds".
Delivery of the Debentures will be made in book-entry form only through The
Canadian Depository for Securities Limited ("CDS") on July 30, 2003, or such
later date as the Company and the Underwriters may agree, but not later than
August 31, 2003.
------------------------------
THIS OFFERING IS MADE BY A CANADIAN ISSUER THAT IS PERMITTED, UNDER A
MULTIJURISDICTIONAL DISCLOSURE SYSTEM ADOPTED BY THE UNITED STATES, TO PREPARE
THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IN ACCORDANCE WITH
THE DISCLOSURE REQUIREMENTS OF CANADA. PROSPECTIVE INVESTORS SHOULD BE AWARE
THAT SUCH REQUIREMENTS ARE DIFFERENT FROM THOSE OF THE UNITED STATES. CERTAIN OF
THE FINANCIAL STATEMENTS INCLUDED OR INCORPORATED HEREIN HAVE BEEN PREPARED IN
ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, AND MAY BE
SUBJECT TO CANADIAN AUDITING AND AUDITOR INDEPENDENCE STANDARDS, AND THUS MAY
NOT BE COMPARABLE TO FINANCIAL STATEMENTS OF UNITED STATES COMPANIES.
PROSPECTIVE INVESTORS SHOULD BE AWARE THAT THE ACQUISITION OF THE SECURITIES
DESCRIBED HEREIN MAY HAVE TAX CONSEQUENCES BOTH IN THE UNITED STATES AND IN
CANADA. SUCH CONSEQUENCES FOR INVESTORS WHO ARE RESIDENT IN, OR CITIZENS OF, THE
UNITED STATES MAY NOT BE DESCRIBED FULLY HEREIN.
THE ENFORCEMENT BY INVESTORS OF CIVIL LIABILITIES UNDER THE FEDERAL SECURITIES
LAWS MAY BE AFFECTED ADVERSELY BY THE FACT THAT THE COMPANY IS INCORPORATED OR
ORGANIZED UNDER THE LAWS OF BRITISH COLUMBIA, CANADA, THAT SOME OR ALL OF ITS
OFFICERS AND DIRECTORS MAY BE RESIDENTS OF CANADA, THAT SOME OR ALL OF THE
UNDERWRITERS OR EXPERTS NAMED IN THE REGISTRATION STATEMENT MAY BE RESIDENTS OF
CANADA AND THAT A SUBSTANTIAL PORTION OF THE ASSETS OF THE COMPANY AND SAID
PERSONS MAY BE LOCATED OUTSIDE THE UNITED STATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT
RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
BMO NESBITT BURNS
CANACCORD CAPITAL CORPORATION CIBC WORLD MARKETS
------------------
The date of this Prospectus is July 23, 2003.
TABLE OF CONTENTS
PAGE
--------
DOCUMENTS INCORPORATED BY REFERENCE......................... S-3
PRESENTATION OF FINANCIAL INFORMATION AND EXCHANGE RATE
DATA...................................................... S-4
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION.......... S-5
CERTAIN AVAILABLE INFORMATION............................... S-6
SUMMARY OF THE OFFERING..................................... S-7
RISK FACTORS................................................ S-10
PRO FORMA EARNINGS COVERAGE................................. S-14
DESCRIPTION OF THE DEBENTURES............................... S-16
INCOME TAX CONSIDERATIONS................................... S-30
USE OF PROCEEDS............................................. S-39
PLAN OF DISTRIBUTION........................................ S-39
TRUSTEE, TRANSFER AGENT AND REGISTRAR....................... S-40
LEGAL MATTERS............................................... S-40
S-2
You should rely only on the information contained or incorporated by
reference in this prospectus supplement. The Company has not authorized anyone
to provide you with information that is different. This prospectus supplement
may only be used where it is legal to sell the Debentures. The information in
this prospectus supplement is only accurate as of the date of this prospectus
supplement, the date of the accompanying short form base shelf prospectus and
the respective dates of the documents incorporated by reference herein and
therein, regardless of the time of delivery of this prospectus supplement or any
sale of the Debentures.
DOCUMENTS INCORPORATED BY REFERENCE
INFORMATION HAS BEEN INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT
FROM DOCUMENTS FILED WITH SECURITIES COMMISSIONS OR SIMILAR AUTHORITIES IN
CANADA. Copies of the documents incorporated by reference in this prospectus
supplement may be obtained on request without charge from the Controller and
Corporate Secretary of the Company at 1500-625 Howe Street, Vancouver, British
Columbia, V6C 2T6 (telephone: (604) 684-1175). These documents are also
available through the Internet on the System for Electronic Document Analysis
and Retrieval ("SEDAR"), which can be accessed at www.sedar.com.
The following documents, filed with the securities commissions or similar
regulatory authorities in the Provinces of British Columbia, Alberta, Manitoba
and Ontario are specifically incorporated by reference into and form an integral
part of this prospectus supplement and the accompanying short form base shelf
prospectus:
(a) the Annual Information Form of the Company, dated May 20, 2003;
(b) the audited consolidated financial statements of the Company and the
notes thereon as at and for the years ended December 31, 2001 and 2002,
together with the auditors' report thereon as set out in the Company's
annual report as well as the reconciliation of such statements to
United States generally accepted accounting principles ("U.S. GAAP") in
accordance with Item 18 of Form 20-F, filed on SEDAR on July 3, 2003;
(c) the unaudited consolidated financial statements of the Company and the
notes thereto as at and for the three months ended March 31, 2003,
together with management's discussion and analysis of financial condition
and results of operations for the three months ended March 31, 2003;
(d) management's discussion and analysis of financial condition and results
of operations for the financial year ended December 31, 2002 as set out
in the Company's annual report;
(e) the information circular of the Company, dated April 9, 2003, in
connection with the Company's May 12, 2003 annual general meeting of
members, other than the sections entitled "Corporate Governance",
"Executive Compensation -- Compensation Committee", "Executive
Compensation -- Report on Executive Compensation" and "Executive
Compensation -- Performance Graph";
(f) a material change report of the Company, dated February 27, 2003,
relating to the completion of its acquisition of Corner Bay Silver Inc.
("Corner Bay");
(g) a material change report of the Company, dated February 27, 2003,
relating to consolidated production figures from 2002;
(h) a material change report of the Company, dated March 13, 2003, relating
to financial and operational results for the fourth quarter and year
ended December 31, 2002;
(i) a material change report of the Company, dated May 22, 2003, relating to
financial and operational results for the first quarter of 2003;
S-3
(j) a material change report of the Company, dated July 7, 2003, relating to
filing of the preliminary short form base shelf prospectus of the Company
dated July 7, 2003; and
(k) a material change report of the Company, dated July 22, 2003, relating
to the announcement of the offering of the Debentures.
Any documents of the types referred to above, including any material change
reports (excluding confidential material change reports), interim unaudited
consolidated financial statements of the Company (including management's
discussion and analysis of financial condition and results of operations in the
quarterly reports for such periods), annual audited consolidated financial
statements of the Company, including the auditors' report on and the notes to
such financial statements, any exhibits to interim or annual consolidated
financial statements and information circulars (excluding the sections entitled
"Corporate Governance", "Executive Compensation -- Compensation Committee",
"Executive Compensation -- Report of the Compensation Committee" and "Executive
Compensation -- Performance Graph" or similar sections permitted to be excluded
under National Instrument 44-101 -- Short Form Prospectus Distributions), filed
by the Company with a securities commission or similar regulatory authority in
Canada after the date of this prospectus supplement and prior to the termination
of the Offering shall be deemed to be incorporated by reference into this
prospectus supplement. Any document filed by the Company with the United States
Securities and Exchange Commission (the "SEC") or Report of Foreign Private
Issuer on Form 6-K furnished to the SEC pursuant to the United States Securities
Exchange Act of 1934, as amended (the "Exchange Act"), after the date of this
prospectus supplement shall also be deemed to be incorporated by reference into
this prospectus supplement if and to the extent provided in such document.
ANY STATEMENT CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR IN A DOCUMENT
INCORPORATED OR DEEMED TO BE INCORPORATED BY REFERENCE IN THIS PROSPECTUS
SUPPLEMENT SHALL BE DEEMED TO BE MODIFIED OR SUPERSEDED FOR THE PURPOSES OF THIS
PROSPECTUS SUPPLEMENT TO THE EXTENT THAT A STATEMENT CONTAINED IN THIS
PROSPECTUS SUPPLEMENT OR IN ANY OTHER SUBSEQUENTLY FILED DOCUMENT WHICH ALSO IS
OR IS DEEMED TO BE INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT
MODIFIES OR SUPERSEDES THAT STATEMENT. THE MODIFYING OR SUPERSEDING STATEMENT
NEED NOT STATE THAT IT HAS MODIFIED OR SUPERSEDED A PRIOR STATEMENT OR INCLUDE
ANY OTHER INFORMATION SET FORTH IN THE DOCUMENT THAT IT MODIFIES OR SUPERSEDES.
THE MAKING OF A MODIFYING OR SUPERSEDING STATEMENT IS NOT TO BE DEEMED AN
ADMISSION FOR ANY PURPOSES THAT THE MODIFIED OR SUPERSEDED STATEMENT, WHEN MADE,
CONSTITUTED A MISREPRESENTATION, AN UNTRUE STATEMENT OF MATERIAL FACT OR AN
OMISSION TO STATE A MATERIAL FACT THAT IS REQUIRED TO BE STATED OR IS NECESSARY
TO MAKE A STATEMENT NOT MISLEADING IN LIGHT OF THE CIRCUMSTANCES IN WHICH IT WAS
MADE. ANY STATEMENT SO MODIFIED OR SUPERSEDED SHALL NOT CONSTITUTE A PART OF
THIS PROSPECTUS SUPPLEMENT, EXCEPT AS SO MODIFIED OR SUPERSEDED.
PRESENTATION OF FINANCIAL INFORMATION AND EXCHANGE RATE DATA
The Company presents its consolidated financial statements in U.S. dollars.
All references in this prospectus to "dollars" or "$" are to U.S. dollars and
all references to "Cdn$" are to Canadian dollars, unless otherwise noted. Except
as otherwise indicated, all financial statements and financial data contained
in, or incorporated by reference into, this prospectus supplement have been
prepared in accordance with generally accepted accounting principles in Canada
("Canadian GAAP") which differ in certain significant respects from U.S. GAAP.
For a description of the material differences between Canadian GAAP and
U.S. GAAP see note 16 to the Company's audited consolidated financial statements
for the years ended December 31, 2002 and 2001, note 7 to the Company's
unaudited interim consolidated financial statements for the three months ended
March 31, 2003, each incorporated by reference into this prospectus supplement,
and note 15 to the audited consolidated financial statements of Corner Bay
Silver Inc., for the years ended June 30, 2002 and 2001 included in the
accompanying base prospectus.
S-4
On July 22, 2003, the noon buying rate in New York City for cable transfers
as certified for customs purposes by the Federal Reserve Bank of New York was
US$1.00 = Cdn.$1.4106. For further information on historic exchange rates of the
Canadian dollar to the U.S. dollar, see "Presentation of Financial Information
and Exchange Rate Data" in the accompanying base prospectus.
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Some of the statements included or incorporated by reference in this
prospectus supplement constitute "forward-looking statements" within the meaning
of the United States Private Securities Litigation Reform Act of 1995. When used
herein, the words "anticipate", "believe", "estimate", "expect", "target",
"plan", "budget", "may", "schedule" and similar words or expressions, identify
forward-looking statements. These forward-looking statements relate to, among
other things:
- the sufficiency of the Company's current working capital and anticipated
operating cash flow;
- the sufficiency of the mineral reserves and resources at Quiruvilca,
Huaron, La Colorada, Alamo Dorado and other properties;
- the estimated cost of and availability of funding for ongoing capital
improvement programs;
- the estimated cost of the proposed development of the La Colorada and
Alamo Dorado projects;
- estimated exploration expenditures to be incurred on the Company's various
silver exploration properties;
- the implementation of the Company's business strategy;
- compliance with environmental standards;
- forecast capital and non-operating spending; and
- levels of silver and other metals production, production costs and metal
prices.
These statements reflect the Company's current views with respect to future
events and are necessarily based upon a number of assumptions and estimates that
are inherently subject to significant uncertainties and contingencies. Many
factors, both known and unknown, could cause actual results, performance or
achievements to be materially different from the results, performance or
achievements that are or may be expressed or implied by such forward-looking
statements including, without limitation, the factors identified in the
Company's Annual Information Form, dated May 20, 2003, under the caption "Trends
and Uncertainties." Investors are cautioned against attributing undue certainty
to forward-looking statements. Although the Company has attempted to identify
important factors that could cause actual results to differ materially, there
may be other factors that cause results not to be anticipated, estimated or
intended. The Company does not intend, and does not assume any obligation, to
update these forward-looking statements to reflect changes in assumptions or
changes in circumstances or any other events affecting such statements, other
than as required by applicable law.
S-5
CERTAIN AVAILABLE INFORMATION
The Company is subject to the informational reporting requirements of the
Exchange Act, and in accordance therewith files reports and other information
with the SEC. Under a multijurisdictional disclosure system adopted by the
United States, the Company is permitted to prepare such reports and other
information in accordance with the disclosure requirements of Canada, which are
different from those of the United States. As a foreign private issuer, the
Company is exempt from the rules under the Exchange Act prescribing the
furnishing and content of proxy statements, and its officers, directors and
principal shareholders are exempt from the reporting and short-swing profit
recovery rules contained in Section 16 of the Exchange Act. Under the Exchange
Act, the Company is not required to publish financial statements as frequently
or as promptly as U.S. companies.
The Company files annual reports with the SEC on Form 40-F, which include:
- the Company's Annual Information Form;
- management's discussion and analysis of financial condition and results of
operations;
- the Company's consolidated financial statements, which have been prepared
in accordance with Canadian GAAP and reconciled to U.S. GAAP; and
- other information specified by the Form 40-F.
The Company also furnishes the following types of information to the SEC
under cover of Form 6-K:
- material information the Company otherwise makes publicly available in
reports that it files with securities regulatory authorities in Canada;
- material information that the Company files with, and which is made public
by, the TSX; and
- material information that the Company distributes to its shareholders
in Canada.
Investors may read and copy any document the Company files with, or
furnishes to, the SEC at the SEC's public reference room at Room 1024, 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549. Copies of the material can also
be obtained from the SEC's public reference room in Washington, D.C. by paying a
fee. Please call the SEC at 1-800-SEC-0330 for further information on the public
reference room. The SEC also maintains a website (www.sec.gov) that makes
available reports and other information that the Company files or furnishes
electronically with it.
S-6
SUMMARY OF THE OFFERING
THE FOLLOWING IS A BRIEF DESCRIPTION OF SOME TERMS OF THIS OFFERING. FOR A
MORE COMPLETE DESCRIPTION OF THE TERMS OF THE DEBENTURES, SEE "DESCRIPTION OF
THE DEBENTURES".
ISSUER: Pan American Silver Corp. is principally engaged in the
exploration for, and the acquisition, development and
operation of silver properties.
OFFERING: US$75 million principal amount of 5.25% convertible
unsecured senior subordinated debentures due 2009
(US$86.25 million if the Over-Allotment Option is exercised
in full).
MATURITY: July 31, 2009.
INTEREST: 5.25% per annum payable semi-annually on January 31 and
July 31 each year, beginning on January 31, 2004. The
Company has the option to fund interest payments by
delivering Common Shares to the Trustee for sale on the open
market. See "Description of the Debentures -- Share
Payment Option".
SUBORDINATION: The Debentures will be subordinated and junior in right of
payment to all present and future Senior Indebtedness of the
Company. "Senior Indebtedness" is defined as (1) all
indebtedness secured by a lien or other encumbrance;
(2) all other indebtedness, including monetary obligations
under credit facilities, with any bank, insurance company,
investment fund, credit union or other financial
institution; (3) any interest rate agreement or currency
agreement; (4) indebtedness incurred specifically for the
development of a particular mineral property with or without
recourse to the Company; (5) all obligations to reimburse
any bank or other person in respect of amounts paid under
letters of credit, acceptances or other similar instruments;
(6) all trade and other accounts payable for goods,
materials or services purchased in the ordinary course of
business; and (7) all other indebtedness of the Company
unless, in the case of any particular indebtedness, the
instrument creating or evidencing the same expressly
provides that such indebtedness shall not be senior in right
of payment to the Debentures. "Senior Indebtedness" shall
not include (A) any indebtedness to the extent incurred in
violation of any covenant under the Indenture; (B) any
liability for foreign, federal, provincial or local taxes,
subject to applicable law; (C) indebtedness that is
subordinate or junior in right of payment to the Debentures;
(D) any indebtedness to any employee, officer or director
of the Company or any of its subsidiaries, subject to
applicable law; and (E) the Debentures.
The Company has agreed that, so long as any of the
Debentures are issued and outstanding, neither it nor its
subsidiaries will issue by public offering or private
placement (whether under a prospectus or registration
statement or pursuant to an exemption from the requirements
therefor) any unsecured bonds, debentures, notes or other
similar instruments unless all such debt is, by its terms,
subordinate to the Debentures.
CONVERSION RIGHTS: The Debentures are convertible, at the option of the holder,
at any time on or prior to maturity into Common Shares at an
initial conversion price of $9.57 per Common Share which is
equal to a conversion rate of 104.4932 Common Shares per
$1,000 principal amount of Debentures.
S-7
Upon conversion, the receipt by a holder of Common Shares
will satisfy all obligations to pay principal and accrued
but unpaid interest, except if a Debenture is called for
redemption upon a Change of Control or otherwise in which
case a holder will receive a cash payment for accrued and
unpaid interest to but excluding the date of conversion. The
conversion price is subject to adjustment in certain
circumstances. As a result, a holder that converts his or
her Debentures prior to the record date for a periodic
interest payment will not receive any interest for such
period. See "Description of the
Debentures -- Conversion Rights".
OPTIONAL REDEMPTION: The Company may redeem all or any portion of the Debentures
at any time on or after July 31, 2006 on at least 30 days
notice but not more than 60 days notice provided that the
weighted average trading price of the Common Shares on
NASDAQ for the 20 consecutive trading days ending five
trading days prior to the date on which notice of redemption
is given, is at least 125% of the conversion price then in
effect. The redemption price payable will be the principal
amount of the Debentures plus all accrued but unpaid
interest. See "Description of the Debentures -- Redemption".
OPTIONAL PAYMENT IN COMMON On redemption or maturity, provided that no default or event
SHARES ON REDEMPTION OR of default has occurred and is continuing, the Company may
MATURITY: (at its option) on not less than 30 days notice and not more
than 60 days notice, elect to satisfy its obligation to
repay the principal amount of the Debentures by issuing and
delivering that number of freely-tradable Common Shares
obtained by dividing the principal amount of the outstanding
Debentures to be redeemed or which have matured, by 95% of
the weighted average trading price of the Common Shares on
NASDAQ for the 20 consecutive trading days ending five
trading days preceding the date fixed for redemption or
maturity, as the case may be. All accrued but unpaid
interest will be paid in cash. See "Description of the
Debentures -- Share Payment Option".
CHANGE OF CONTROL: In the event of any Change of Control of the Company, the
Company will be required, within 35 days after the
occurrence of a Change of Control, to make an offer to
redeem all outstanding Debentures at a price equal to 101%
of the principal amount of such Debentures plus accrued but
unpaid interest. In addition, if the Change of Control
occurs on or before July 31, 2006, the holder will also
receive the present value of the amount of interest that
would have been paid if the Debentures had been outstanding
until July 31, 2006. If 90% or more of the aggregate
principal amount of the Debentures outstanding on the date
of the giving of notice of the Change of Control have been
tendered to the Company for redemption, the Company will
have the right and obligation to redeem all remaining
Debentures on the same terms. See "Description of the
Debentures -- Change of Control" for a full description of
what is meant by the term "Change of Control".
SINKING FUND: None.
ADDITIONAL AMOUNTS AND TAX Any payments made by the Company with respect to the
REDEMPTION: Debentures will be made without withholding or deduction for
Canadian taxes unless required by law. If the Company is
required by law to withhold or deduct
S-8
for Canadian taxes with respect to a payment to the holders
of Debentures as a result of a change in law or policy that
arises after the date of issuance of the Debenture, the
Company will pay the additional amount necessary so that the
net amount received by the holders of Debentures after the
withholding or deduction is not less than the amount they
would have received in the absence of the withholding or
deduction. If the Company becomes obligated to pay such
additional amounts, it shall have the right to redeem all,
but not less than all, of the Debentures at an amount in
cash equal to par plus accrued and unpaid interest. See
"Description of the Debentures -- Additional Amounts" and
"Description of the Debentures -- Redemption for Changes in
Canadian Tax Law".
USE OF PROCEEDS: The estimated net proceeds to the Company from the sale of
the Debentures offered hereby, after payment of the
Underwriters' fee and the estimated expenses of this
Offering, will be US$72,350,000 or, if the Over-Allotment
Option is exercised in full, US$83,262,500. The net proceeds
from the sale of the Debentures will be used by the Company
to fund development of the Alamo Dorado project, future
capital, development and exploration programs, working
capital requirements and for other general corporate
purposes. See "Use of Proceeds".
PRO FORMA EARNINGS COVERAGE: On a pro forma basis after giving effect to this offering,
even assuming no exercise of the Over-Allotment Option, the
Company's earnings for both the fiscal year ended
December 31, 2002 and the 12 month period ended March 31,
2003 were insufficient to cover the interest obligations for
such periods. See "Pro Forma Earnings Coverage".
DELIVERY AND FORM: The Debentures will be issued in "book-entry only" form.
This means they will be issued in the form of fully
registered global debentures held by, or on behalf of, the
Canadian Depository for Securities Limited and, if
necessary, The Depository Trust Company, or their respective
successors as custodians for their participants. See
"Description of the Debentures -- Book Entry, Delivery
and Form".
LISTING: The TSX has conditionally approved the listing of the
Debentures and any Common Shares issuable upon conversion
thereof. The Company has notified NASDAQ of the proposed
issuance of the Debentures and the Common Shares issuable
upon conversion thereof. The Common Shares are listed on the
TSX under the symbol "PAA" and on NASDAQ under the
symbol "PAAS".
RISK FACTORS: See "Risk Factors" and the other information in this
prospectus supplement and the documents incorporated herein
for a discussion of the factors you should carefully
consider before deciding to invest in the Debentures.
S-9
RISK FACTORS
PROSPECTIVE INVESTORS IN THIS OFFERING OF DEBENTURES SHOULD CONSIDER, IN
ADDITION TO THE INFORMATION CONTAINED IN THE ACCOMPANYING BASE PROSPECTUS DATED
JULY 18, 2003 AND THE RISK FACTORS NOTED BELOW, THE RISKS DESCRIBED IN THE
ANNUAL INFORMATION FORM OF THE COMPANY AND MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION OF THE COMPANY THAT ARE
INCORPORATED BY REFERENCE INTO THIS PROSPECTUS SUPPLEMENT.
LEVEL OF INDEBTEDNESS
After giving effect to the offering of the Debentures (assuming the
Over-Allotment Option is not exercised) and the application of the net proceeds
therefrom as described under "Use of Proceeds", as of March 31, 2003, the
Company would have had approximately $104.5 million of consolidated indebtedness
(including trade payables). In addition, the terms of the Company's bank
agreements and the Indenture governing the Debentures permit the Company and its
subsidiaries to incur additional debt.
The Company's substantial debt may have important consequences to holders of
the Debentures. For instance, it could:
- make it more difficult for the Company to satisfy its financial
obligations, including those relating to the Debentures;
- require the Company to dedicate a substantial portion of any cash flow
from operations to the payment of interest and principal due under its
debt, including the Debentures, which will reduce funds available for
other business purposes;
- increase its vulnerability to general adverse economic and industry
conditions, including a decrease in the price of silver;
- limit its flexibility in planning for, or reacting to, changes in its
business;
- place it at a competitive disadvantage compared with its competitors that
have less debt and greater financial resources; and
- limit its ability to obtain additional financing required to fund working
capital and capital expenditures and for other general corporate purposes.
The Company's ability to make payments on its indebtedness and to fund its
operations, working capital and capital expenditures, will depend on its ability
to generate cash in the future. This is subject to general economic, industry,
financial, competitive, legislative, regulatory, and other factors that are
beyond the Company's control. In particular, global or regional economic
conditions could cause the price of silver to fall and hamper the Company's
ability to repay its indebtedness, including the Debentures. The Company's
operations may not generate sufficient cash flow and borrowings may not be
available in an amount sufficient to enable the Company to pay its indebtedness,
including the Debentures, or to fund its other cash needs. The Company may need
to refinance all or a portion of its indebtedness, including the Debentures, on
or before maturity, but such refinancing may be unavailable to it on
commercially reasonable terms, or at all, to meet its obligations or to
successfully execute its business strategy.
PRIOR RANKING INDEBTEDNESS
The Debentures will be subordinate to all present and future Senior
Indebtedness (as defined below) of the Company.
The Indenture will not limit the ability of the Company to incur additional
Senior Indebtedness (defined as secured debt and bank/institutional debt,
project debt and trade debt, whether secured or
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unsecured) or indebtedness that is by its terms subordinate to the Debentures.
The Indenture does not contain any provisions specifically intended to protect
the holders of the Debentures in the event of a future leveraged transaction
involving the Company. In the event of any distribution or payment of the
Company's assets in any foreclosure, dissolution, winding-up, liquidation,
reorganization, or other bankruptcy proceeding, holders of secured indebtedness
will have prior claim to those of the Company's assets that constitute their
collateral. Holders of the Debentures will participate ratably with all holders
of the Company's unsecured indebtedness that is deemed to be of the same class
as the Debentures, and potentially with all of the Company's other general
creditors, based upon the respective amounts owed to each holder or creditor, in
the Company's remaining assets. In any of the foregoing events, there can be no
assurance that there will be sufficient assets to pay amounts due on the
Debentures.
SUBORDINATION IN RIGHT OF PAYMENT TO THE OBLIGATIONS OF SUBSIDIARIES
A significant portion of the Company's operations is conducted by its
subsidiaries, which own most of the Company's consolidated assets. The operating
cash flow of the Company's subsidiaries and the payment of funds by them to the
Company in the form of loans, dividends or otherwise could, in certain
circumstances, affect the Company's operating cash flow and its ability to
service its indebtedness, including the Debentures. The Company's subsidiaries
are separate legal entities that have no obligation to pay any amounts due
pursuant to the Debentures or to make any funds available for that purpose,
whether by dividend, interest, loans, advances or other payments. In addition,
their ability to pay dividends and make loans, advances and other payments to
the Company may be restricted by contractual restrictions, which may include
requirements to maintain minimum levels of working capital and other assets.
A holder's right to receive payments under the Debentures will be
effectively subordinate to all current and future debts and liabilities of the
Company's subsidiaries. In the event of a bankruptcy, liquidation, winding up,
reorganization or similar proceeding relating to a subsidiary, the Company's
right to receive assets of that subsidiary and a holder's consequent right to
participate in a distribution of those assets will rank behind that subsidiary's
creditors, including trade creditors. As of March 31, 2003, the indebtedness
(including trade payables), excluding intercompany indebtedness, of the
Company's subsidiaries was $29.5 million. The Company's subsidiaries may also
incur additional debt and liabilities in the future.
RIGHT OF EARLY REDEMPTION
Purchasers of the Debentures should be aware that the Company may redeem all
or part of the Debentures at any time on and after July 31, 2006 subject to
certain conditions and at any time in the event of certain changes in Canadian
tax laws at a price equal to the principal amount of the Debentures redeemed
plus accrued and unpaid interest. The Company may, in some circumstances, also
elect to satisfy the redemption price in cash or by delivering Common Shares in
lieu of cash. See "Description of The Debentures -- Redemption".
BANKRUPTCY AND RELATED LAWS
The Company is incorporated under the laws of British Columbia and its
principal operating assets are located outside of Canada and the United States.
Under bankruptcy laws in the United States, courts typically have jurisdiction
over a debtor's property, wherever located, including property situated in other
countries.
The rights of the Trustee to enforce remedies are likely to be significantly
impaired by the restructuring provisions of applicable Canadian federal
bankruptcy, insolvency and other restructuring legislation if the benefit of
such legislation is sought with respect to the Company. For example, both
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the BANKRUPTCY AND INSOLVENCY ACT (Canada) and the COMPANIES' CREDITORS
ARRANGEMENT ACT (Canada) contain provisions enabling "an insolvent person" to
obtain a stay of proceedings as against its creditors and others and to prepare
and file a proposal for consideration by all or some of its creditors to be
voted on by the various classes of its creditors. Such a restructuring proposal,
if accepted by the requisite majorities of creditors and if approved by the
court, would be binding on persons who might not otherwise be willing to accept
it. Moreover, this "proposal" legislation permits, in certain circumstances, the
insolvent debtor to retain possession and administration of its property, even
though it may be in default under the applicable debt instrument.
The powers of the court under the BANKRUPTCY AND INSOLVENCY ACT (Canada) and
particularly under the COMPANIES' CREDITORS ARRANGEMENT ACT (Canada) have been
exercised broadly to protect a restructuring entity from actions taken by
creditors and other parties. Accordingly, it is impossible to predict if
payments under the Debentures would be made following commencement of or during
such a proceeding, whether or when the Trustee could exercise its rights under
the Indenture or whether and to what extent holders of the Debentures would be
compensated for any delay, if any, in payments of principal and interest.
COMMON SHARE PRICE VOLATILITY
The Company expects the market price of the Debentures to be significantly
affected by the market price of its Common Shares. This may result in greater
volatility in the trading value of the Debentures than would be expected for
nonconvertible securities issued by the Company. In addition, the Debentures
have a number of features, which, if not met, could result in a holder receiving
less than the value of the Common Shares into which a Debenture is otherwise
convertible. These features could adversely affect the value and trading prices
of the Debentures.
The trading price of the Common Shares has been and may continue to be
subject to large fluctuations and, therefore, the trading price of the
Debentures may fluctuate significantly, which may result in losses to investors.
The price of the Common Shares may increase or decrease in response to a number
of events and factors, including:
- trends in the silver mining industry and the markets in which the Company
operates;
- changes in the market price of the commodities the Company sells;
- current events affecting the economic situation in Canada and the
United States;
- changes in financial estimates and recommendations by securities analysts;
- acquisitions and financings;
- quarterly variations in operating results;
- the operating and share price performance of other companies that
investors may deem comparable; and
- purchase or sales of blocks of the Common Shares.
This volatility may adversely affect the prices of the Common Shares and the
Debentures regardless of the Company's operating performance.
FAILURE OF AN ACTIVE TRADING MARKET FOR THE DEBENTURES TO DEVELOP
The Debentures are a new issue of securities for which there is currently no
trading market. Although the TSX has conditionally approved the listing of the
Debentures, no assurance can be given that an active trading market for the
Debentures will develop or be sustained. If an active market for the Debentures
fails to develop or be sustained, the Debentures could trade at prices that may
be
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lower than the initial offering price of the Debentures. Whether or not the
Debentures will trade at lower prices depends on many factors, including:
- prevailing interest rates and the markets for similar securities;
- the market price of the Common Shares;
- general economic conditions; and
- the Company's financial condition, historic financial performance and
future prospects.
INABILITY TO FUND PURCHASE OF DEBENTURES
Upon the occurrence of certain specific kinds of change of control events
occurring before maturity of the Debentures, the Company will be required to
make an offer to redeem all outstanding Debentures. However, it is possible that
following a change of control the Company will not have sufficient funds at that
time to make the required redemption of outstanding Debentures. See "Description
of the Debentures -- Change of Control".
CONVERSION FOLLOWING CERTAIN TRANSACTIONS
In the case of certain transactions, each Debenture will become convertible
into the securities, cash or property receivable by a holder of Common Shares in
the kind and amount of securities, cash or property into which the Debenture was
convertible immediately prior to the transaction. This change could
substantially lessen or eliminate the value of the conversion privilege
associated with the Debentures in the future. For example, if the Company were
acquired in a cash merger, each Debenture would become convertible solely into
cash and a holder may not be able to reinvest the cash to receive an equivalent
rate of return and will lose the opportunity to participate in any increase in
the value of the Common Shares, if any. See "Description of the
Debentures -- Conversion Rights".
EARNINGS COVERAGE DEFICIENCY
On a pro forma basis after giving effect to this Offering, even assuming no
exercise of the Over-Allotment Option, the Company's earnings for both the
fiscal year ended December 31, 2002 and the 12 month period ended March 31, 2003
were insufficient to cover the interest obligations for such periods. See
"Pro Forma Earnings Coverage". There can be no assurance that the Company will,
in the future, have sufficient funds to make such payments.
EMPLOYEE RELATIONS
Certain of the Company's employees and the employees of Peruvian mining
contractors indirectly employed by the Company are represented by unions. At
July 23, 2003, there were 71 employees represented by the Sindicato de
Trebajadores de Pan American Silver S.A.C. -- Mina Quiruvilca (the "Quiruvilca
Union") and 266 employees represented by the Sindicato de Trebajadores de Shorey
y Anexos (the "Shorey Union"). There are also 17 employees at the Huaron mine
who are members of a "union committee" who have rights pursuant to an agreement
dated January 1, 2003. The Company has experienced labour strikes and work
stoppages in the past. The labour agreements with the Quiruvilca Union and the
Shorey Union expired on January 1, 2003, and ordinary course negotiations to
renew the contracts are ongoing. There can be no assurance that these contracts
will be renewed on terms favourable to the Company, if at all and the Company
may experience future work stoppages.
ACQUISITIONS
An element of the Company's business strategy is to make selected
acquisitions. For example, the Company recently completed the acquisition of
Corner Bay Silver Inc. in February 2003. The Company
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expects to continue to evaluate acquisition opportunities on a regular basis and
intends to pursue those opportunities that it believes are in its long-term best
interests. The success of the Company's acquisitions will depend upon its
ability to effectively manage the operations of entities it acquires and to
realize other anticipated benefits. The process of managing acquired businesses
may involve unforeseen difficulties and may require a disproportionate amount of
management resources. There can be no assurance that the Company will be able to
successfully manage the operations of businesses it acquires or that the
anticipated benefits of its acquisitions will be realized. In addition, the
Company may issue additional Common Shares in connection with aquisitions. These
share issuances may cause dilution to holders of Debentures to the extent they
wish to or are required to, acquire Common Shares in replacement of the
principal amount of the Debentures.
HEDGING ACTIVITIES
From time to time, the Company engages in hedging activities in connection
with base metals, such as forward sales contracts and commodity put and call
option contracts, to minimize the effect of declines in metal prices on our
operating results. While these hedging activities may protect the Company
against low metal prices, they may also limit the price the Company can receive
on hedged products. As a result, the Company may be prevented from realizing
possible revenues in the event that the market price of a metal exceeds the
price stated in a forward sale or call option contract. As of March 31, 2003,
the Company's forward contract position had a value of $264,000. In addition,
the Company may experience losses if a counterparty fails to purchase under a
contract when the contract price exceeds the spot price of a commodity. The
Company's current policy is to not hedge the price of silver and therefore it is
fully exposed to declines in silver prices.
ENFORCING CIVIL LIABILITIES IN THE UNITED STATES
The Company is organized under the laws of the Province of British Columbia,
and its principal executive office is located in British Columbia. Many of the
Company's directors, controlling persons, officers and the experts named in this
prospectus are residents of Canada, and a substantial portion of the their
assets and a majority of the Company's assets are located outside the
United States. As a result, it may be difficult for U.S. investors to effect
service of process within the United States upon the directors, controlling
persons, officers and the experts who are not residents of the United States or
to enforce against them judgments of United States courts based upon civil
liability under the federal securities laws of the United States. There is doubt
as to the enforceability in Canada against the Company or against any of its
directors, controlling persons, officers or experts who are not residents of the
United States, of original actions or actions for enforcement of judgments of
United States courts of liabilities based solely upon the federal securities
laws of the United States.
PRO FORMA EARNINGS COVERAGE
The following consolidated financial earnings deficiency figures and cash
flow coverage ratios are calculated, on a pro forma basis, for the fiscal year
ended December 31, 2002 and the 12 month period ended March 31, 2003. In
addition, all figures and ratios give effect to all long-term financial
liabilities of the Company and the repayment, redemption or retirement thereof
since those dates, respectively as well as the issuance of US$75,000,000
principal amount of Debentures hereunder. All amounts are
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calculated assuming there is no exercise of the Over-Allotment Option. All
deficiency figures and coverage ratios have been calculated based on
Canadian GAAP.
FISCAL YEAR ENDED 12 MONTHS ENDED
DECEMBER 31, 2002 MARCH 31, 2003
------------------ ---------------
(US$ MILLIONS EXCEPT RATIOS)
Pro forma interest requirements(1).......................... 4.9 4.8
Earnings (loss) before interest expense and taxes........... (32.7) (32.8)
Pro forma earnings coverage deficiency(2)................... (37.6) (37.6)
Earnings (loss) before interest, taxes, asset writedowns and
special reclamation provisions............................ (5.5) (6.4)
Pro forma earnings coverage deficiency before interest,
taxes, asset writedowns and special reclamation
provisions(3)............................................. (10.4) (11.2)
Cash flow from operating, financing and investment
activities before interest and taxes paid................. 7.8 (6.5)
Pro forma cash flow coverage ratio(4)....................... 1.59 times --
------------------------
(1) Pro forma interest requirements equals the interest expense on all debt
after giving effect to the issuance of the Debentures but assuming no
exercise of the Over-Allotment Option.
(2) Pro forma earnings coverage deficiency is the dollar amount of earnings
required to attain an earnings coverage ratio of one-to-one. Earnings
coverage ratio is equal to net income before pro forma interest expense and
income taxes divided by pro forma interest expense on all debt.
(3) Pro forma earnings coverage deficiency before interest, taxes and unusual
items is the dollar amount of earnings required to attain an earnings
coverage ratio before interest, taxes and unusual items of one-to-one.
Pro forma earnings coverage ratio before interest, taxes and unusual items
is equal to net income before pro forma interest expense, income taxes and
write-down of the Company's investment in the Quiruvilca mine and accrual
for future reclamation costs for the Quiruvilca Mine divided by pro forma
interest expense on all debt.
(4) Cash flow coverage ratio is equal to cash flow from operating, financing and
investment activities before interest paid and income taxes divided by pro
forma interest expense on all debt.
The foregoing table illustrates that the Company's earning coverage ratio
for the indicated periods, on a pro forma basis, would have been insufficient to
meet its interest obligations if the Debentures had been outstanding during such
periods.
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DESCRIPTION OF THE DEBENTURES
The Debentures will be issued under a trust indenture to be dated as of the
closing date (the "Indenture") between the Company and Computershare Trust
Company of Canada, as trustee (the "Trustee"). The Indenture will be subject to
the provisions of the COMPANY ACT (British Columbia) and the United States Trust
Indenture Act of 1939, as amended (the "TIA"), to the extent set forth in
Rule 4d-9 thereunder.
The following summary of certain provisions of the Debentures and the
Indenture does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all of the provisions of the Debentures and the
Indenture, including the definitions therein of certain terms that are not
otherwise defined in this prospectus supplement. Wherever particular provisions
or defined terms of the Indenture (or of the Form of Debentures, which is a part
thereof) are referred to, such provisions or defined terms are incorporated
herein by reference.
GENERAL
The Debentures will be subordinated unsecured general obligations of the
Company and are convertible into Common Shares, at the option of the holders, as
described under "Description of the Debentures -- Conversion Rights". The
Debentures will be limited in aggregate principal amount to $75,000,000
($86,250,000 if the Over-Allotment Option is exercised in full) and will mature
on July 31, 2009, unless earlier, converted or redeemed by the Company as
described herein. The principal amount of each Debenture will be $1,000 and will
be payable at the office of the Trustee.
The Debentures will bear interest at the rate of 5.25% per annum on the
principal amount from July 30, 2003, or from the most recent date to which
interest has been paid or provided for until the Debentures are paid in full,
converted or funds are made available for payment in full of the Debentures in
accordance with the Indenture. Interest will be payable at the date of maturity
(or earlier redemption or, in some circumstances, conversion) and semi-annually
on January 31 and July 31 of each year (each an "Interest Payment Date"),
commencing on January 31, 2004. In all cases, interest payments will be made to
holders of record at the close of business on January 15 and July 15 preceding
each Interest Payment Date (each, a "Regular Record Date"). Any interest
payments will be payable in cash or, at the option of the Company, by delivery
of Common Shares to the Trustee for sale on the open market to fund the
Company's cash obligation with respect to the payment of interest on the
Interest Payment Date (See "Description of the Debentures -- Share Payment
Option -- Payment of Interest"). Each payment of interest on the Debentures will
include interest accrued to, but excluding, the applicable Interest Payment Date
or the date of maturity (or earlier redemption or, in some circumstances,
conversion), as the case may be. Any payment of principal and cash interest
required to be made on any day that is not a business day will be made on the
next succeeding business day (and without any interest or other payment in
respect of any such delay). Interest will be computed on the basis of a
365-day year.
In the event of conversion, redemption, or maturity, interest will cease to
accrue on that Debenture, except as provided in the Indenture; provided,
however, if the Company defaults on its obligation to deliver Common Shares and
cash in lieu of fractional shares upon conversion, redemption or maturity, as
applicable, or defaults on its obligation to deliver cash upon redemption or
maturity, as applicable, interest will continue to accrue on that Debenture
until such default has been cured, in all cases, subject to the terms and
conditions of the Indenture. The Company may not re-issue a Debenture that has
matured or has been converted, redeemed or otherwise cancelled.
The Indenture also does not contain any covenants or other provisions to
protect holders of the Debentures in the event of a highly leveraged transaction
or a Change of Control, except to the extent described under "Description of the
Debentures -- Change of Control".
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SUBORDINATION
The Indenture will provide that the Debentures will be subordinated and
junior in right of payment to all present and future Senior Indebtedness of the
Company. "Senior Indebtedness" is defined as (1) all indebtedness secured by a
lien or other encumbrance; (2) all other indebtedness including monetary
obligations under credit facilities, with any bank, insurance company,
investment fund, credit union or other financial institution; (3) any interest
rate agreement or currency agreement; (4) indebtedness incurred specifically for
the development of a particular mineral property with or without recourse to the
Company; (5) all obligations to reimburse any bank or other person in respect of
amounts paid under letters of credit, acceptances or other similar instruments;
(6) all trade and other accounts payable for goods, materials or services
purchased in the ordinary course of business; and (7) all other indebtedness of
the Company unless, in the case of any particular indebtedness, the instrument
creating or evidencing the same expressly provides that such indebtedness shall
not be senior in right of payment to the Debentures. "Senior Indebtedness" shall
not include (A) any indebtedness to the extent incurred in violation of any
covenant under the Indenture; (B) any liability for foreign, federal, provincial
or local taxes, subject to applicable law; (C) indebtedness that is subordinate
or junior in right of payment to the Debentures; (D) any indebtedness to any
employee, officer or director of the Company or any of its subsidiaries, subject
to applicable law; and (E) the Debentures.
The Debentures will rank PARI PASSU with all other present or future
unsecured indebtedness that is not Senior Indebtedness and that is not expressly
subordinate to the Debentures.
The Company has agreed that, so long as Debentures are issued and
outstanding, neither it nor its subsidiaries will issue by public offering or
private placement (whether under a prospectus or registration statement or
pursuant to an exemption from the requirements therefor) any unsecured bonds,
debentures, notes or other capital markets debt securities unless all such
indebtedness is by its terms expressly subordinate to the Debentures.
After giving effect to the offering of the Debentures (assuming the
Over-Allotment Option is not exercised) and the application of the net proceeds
as described under "Use of Proceeds", as of March 31, 2003, the Company would
have had approximately $104.5 million of consolidated indebtedness (including
trade payables), of this $8.7 million would have been secured indebtedness of
the Company and $20.8 million would have been unsecured indebtedness of the
Company's subsidiaries.
In addition, the Debentures will effectively be subordinated to all existing
and future liabilities of the Company's subsidiaries. Any rights of the Company
to receive assets of any subsidiary upon its liquidation or reorganization and
the consequent right of holders of the Debentures to participate in those assets
will be subject to the claims of that subsidiary's creditors, including trade
creditors, except to the extent that the Company is recognized as a creditor of
that subsidiary, in which case the Company's claim would still be subordinate to
any security interests in the assets of that subsidiary.
CONVERSION RIGHTS
A holder of a Debenture is entitled to convert the Debenture into Common
Shares at any time on or prior to the close of business on the last business day
prior to the date of maturity, provided that if a Debenture is called for
redemption, the holder is entitled to convert it at any time before the close of
business on the last business day prior to the redemption date. In the case of a
Change of Control (as defined below), a Debenture in respect of which a holder
has delivered a notice accepting a Debenture Offer (as defined below) may be
converted only if such notice is withdrawn by a written notice of withdrawal
delivered by the holder to the Trustee prior to the close of business on the
Change of Control redemption date, in accordance with the terms of
the Indenture.
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The receipt by a holder of Common Shares upon a conversion will satisfy all
obligations to pay principal and accrued but unpaid interest, except if a
Debenture is called for redemption upon a Change of Control or otherwise, in
which case a holder will receive a cash payment for accrued but unpaid interest
to but excluding the date of conversion.
The initial conversion price for the Debentures is $9.57 per Common Share
(the "Conversion Price"), which is equal to a conversion rate of 104.4932 shares
per $1,000 principal amount of Debentures. The Conversion Price is subject to
adjustment upon the occurrence of certain events as described below. A holder
otherwise entitled to a fractional Common Share will receive cash in
United States dollars in an amount equal to the Conversion Price on the trading
day immediately preceding the conversion date. A holder may convert a portion of
that holder's Debentures so long as that portion is $1,000 principal amount or
an integral multiple of $1,000. A holder who converts his or her Debentures
prior to the record date for a periodic interest payment will not receive any
interest for such period.
A certificate for the number of Common Shares into which any Debenture is
converted and any cash payment to be made instead of any fractional shares will
be delivered as soon as practicable, but in any event no later than the fifth
business day following the conversion date. For a summary of the Canadian and
United States federal income tax treatment of a holder receiving Common Shares
upon conversion, see "Income Tax Considerations -- Certain Canadian Federal
Income Tax Considerations -- Exercise of Conversion Right" and "Income Tax
Considerations -- Certain United States Federal Income Tax
Considerations -- Conversion of the Debentures," respectively.
The Conversion Price is subject to adjustment in some events, including:
- the issuance of Common Shares as a dividend or a distribution with respect
to the Common Shares;
- subdivisions and combinations of the Common Shares;
- the issuance to all holders of Common Shares of certain rights to
purchase, for a period not exceeding 45 days, Common Shares at less than
95% of the Current Market Price of a Common Share (as defined under
"Description of the Debentures -- Share Payment Option" below);
- the distribution to holders of Common Shares of evidences of the Company's
indebtedness, capital stock, cash or assets (including securities, but
excluding Common Share distributions covered above, those rights,
dividends and distributions referred to above, and dividends and
distributions paid exclusively in cash, excepts as set out below);
- the payment of dividends or other distributions in cash to holders of
Common Shares to the extent that the aggregate amount of such cash
dividends or other distributions in any 12 month period exceeds 1% of the
Current Market Price; and
- an issuer bid, tender offer or exchange offer is made for all or any
portion of the Common Shares by the Company or any of its subsidiaries to
the extent the consideration paid to such holders exceeds 5% of the
Company's aggregate market capitalization.
However, adjustment of the Conversion Price is not necessary if holders may
participate in the transactions otherwise giving rise to an adjustment on a
basis as though and to the same effect as if such holders had converted their
Debentures into Common Shares prior to the record date for such transaction.
No adjustment to the Conversion Price will be required unless such
adjustment would require a change of at least 1% in the Conversion Price then in
effect at such time. Any adjustment that would otherwise be required to be made
shall be carried forward and taken into account in any subsequent adjustment.
Except as stated above, the Conversion Price will not be adjusted for the
issuance of the Common Shares or any securities convertible into or exchangeable
for the Common Shares or carrying the right to purchase any of the foregoing.
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A U.S. person may, in certain circumstances, be deemed to have received a
distribution subject to United States federal income tax as a dividend, upon a
taxable distribution to holders of Common Shares that results in an adjustment
to the Conversion Price. See "Income Tax Considerations -- Certain Material
United States Federal Income Tax Considerations".
The Company may, from time to time, to the extent permitted by law and
subject to receipt of all necessary regulatory approvals, decrease the
Conversion Price by any amount for a period of at least 20 business days if the
Company's Board of Directors has determined in good faith (to be evidenced by a
resolution of the Board of Directors) that such decrease would be in the best
interests of the Company. The Company will give notice of such a decrease to the
Trustee at least 15 days before such decrease becomes effective.
In the event that the Company becomes a party to any transaction, including,
and with some exceptions:
- any recapitalization or reclassification of the Common Shares;
- any consolidation, amalgamation or combination of the Company with, or
merger of the Company into, any other Person, or any merger of another
Person into the Company; or
- any sale, transfer or lease of all or substantially all of the
Company's assets;
pursuant to which the Common Shares are converted into the right to receive
other securities, cash or other property (each of the above being referred to as
a "Transaction"), then the holders of Debentures then outstanding will have the
right to convert the Debentures only into the kind and amount of securities,
cash or other property receivable upon the consummation of that Transaction by a
holder of the number of Common Shares issuable upon conversion of those
Debentures immediately prior to that Transaction. The holders of Debentures will
have no voting rights with respect to any Transaction.
However, if a Transaction occurs on or before the date which is five years
after the issuance of the Debentures, the consideration into which the
Debentures will be convertible will be limited to the Common Shares or other
prescribed securities (within the meaning of the INCOME TAX ACT (Canada)) of the
Company as specified by the Board of Directors, which includes shares not
redeemable by the holder within five years after the issuance of the Debentures.
As a result, in these circumstances, the consideration issuable on the exercise
of the conversion right could differ from the consideration received by the
holders of Common Shares pursuant to the Transaction, and the conversion rate
could be adjusted so that the consideration into which the Debentures are
convertible after the Transaction is, immediately following the date of the
Transaction, equivalent in value to the value, immediately following the date of
the Transaction, of the consideration a holder would have been entitled to
receive had the holder converted the Debentures into Common Shares immediately
prior to the Transaction. In addition, if the Transaction entails the exchange
of substantially all of the Common Shares for cash (or securities that are
redeemable for cash within 60 days of issue), the Debentures may cease to be
convertible, potentially making it desirable for the holder to exercise its
conversion right prior to the applicable date for such Transaction.
Where, as a result of a Transaction, the Debentures become convertible into
the kind and amount of securities, cash or property receivable by a holder of
the number of Common Shares issuable upon conversion of those Debentures
immediately prior to that Transaction, the value of the conversion privilege
associated with the Debentures in the future could be substantially lessened or
eliminated. For example, if all of the Common Shares were to be acquired for
cash consideration, each Debenture would become convertible solely into cash and
would no longer be convertible into securities whose value would vary depending
on the Company's future prospects and other factors.
In the event of a taxable distribution to holders of the Common Shares that
results in an adjustment of the Conversion Price, or in which holders otherwise
participate, or in the event the Conversion Price is decreased at the Company's
discretion, the holders of the Debentures may, in some
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circumstances, be deemed to have received a distribution subject to
United States federal income tax as a dividend. Moreover, in some other
circumstances, the absence of an adjustment to the Conversion Price may result
in a dividend to holders of Common Shares taxable under United States federal
income tax law. See "Income Tax Considerations -- Certain United States Federal
Income Tax Considerations -- Adjustments in the Conversion Price of
the Debentures".
REDEMPTION
OPTIONAL REDEMPTION
Except to the extent described under "Redemption for Changes in Canadian Tax
Laws" and "Change of Control", the Debentures will not be redeemable prior to
July 31, 2006. On or after July 31, 2006, the Debentures will be redeemable in
whole at any time or in part from time to time, on at least 30 days' but not
more than 60 days' prior notice of redemption given to holders of Debentures, at
a redemption price equal to par plus accrued and unpaid interest thereon to but
excluding the redemption date, provided that the Current Market Price (as
defined below) is at least 125% of the Conversion Price. Any redemption of
Debentures must be in integral multiples of $1,000 principal amount. The
redemption price will be payable in cash or, at the option of the Company, the
redemption price may be paid by delivery of freely tradeable Common Shares,
except as to any fractional amount which shall be paid in cash in lieu thereof.
Any accrued but unpaid interest will be payable in cash. See "Description of the
Debentures -- Share Payment Option".
If fewer than all of the Debentures are to be redeemed, the Trustee will
select the Debentures to be redeemed in principal amounts of $1,000 or integral
multiples of $1,000, PRO RATA or by another method that complies with the
requirements of the TSX, or any stock exchange on which the Debentures are
listed or quoted and that the Trustee shall deem equitable. If a portion of a
holder's Debentures is selected for partial redemption and that holder converts
all or a portion of such Debentures prior to the redemption, the converted
portion will be deemed, solely for purposes of determining the aggregate
principal amount of the Debentures to be redeemed by the Company, to form a
portion of those Debentures selected for redemption.
There is no sinking fund for the Debentures.
REDEMPTION FOR CHANGES IN CANADIAN TAX LAW
In addition, the Debentures are redeemable, in whole but not in part, at the
option of the Company for cash in United States dollars at any time upon not
less than 30 days' nor more than 60 days' notice at a redemption price equal to
par plus accrued and unpaid interest thereon to but excluding the redemption
date, in the event that the Company has become or would become obligated to pay,
on the next date on which any amount would be payable under or with respect to
the Debentures, any Additional Amounts (as defined below) as a result of any
change in, or amendment to, the laws (or any regulations promulgated thereunder)
of Canada (or any political subdivision or taxing authority thereof or therein),
or any change in, or amendment to, any official position regarding the
application or interpretation of such laws or regulations, which change or
amendment is announced or becomes effective on or after the date of this
prospectus supplement; provided that the Company determines that the obligation
to pay such Additional Amounts cannot be avoided by the use of reasonable
measures available to the Company (not including substitution of the obligor
under the Debentures).
No Debentures may be redeemed by the Company pursuant to the provisions
described above if there has occurred and is continuing an Event of Default
described under "Description of Debentures -- Events of Default".
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SHARE PAYMENT OPTION
PAYMENT OF PRINCIPAL ON REDEMPTION OR AT MATURITY
For so long as the Common Shares are listed on NASDAQ or a stock exchange in
the United States or Canada, the Company may at its option and subject to
receiving all applicable regulatory approvals, unless an Event of Default has
occurred and is continuing, elect to satisfy all or a portion of its obligations
to pay the outstanding principal amount of Debentures upon redemption or
maturity for any reason (other than redemption for changes in Canadian tax
laws), by issuing and delivering to the registered holder, for each
$1,000 principal amount of Debentures, that number of fully paid and
non-assessable and freely tradeable (in the United States and Canada) Common
Shares equal to the principal amount divided by 95% of the Current Market Price
(as defined below) of the Common Shares on the date of redemption or maturity,
as applicable (the "Share Payment Option"), together with a cash amount equal to
the amount of all accrued and unpaid interest. No fractional Common Shares will
be issued to the holders of Debentures, but, in lieu thereof, the Company will
make a cash payment.
To exercise the Share Payment Option, the Company must give not less than
30 days' and not more than 60 days' prior notice of such election to the Trustee
and the affected registered holders.
"Current Market Price" of the Common Shares means an amount equal to the
weighted average trading price of the Common Shares on NASDAQ (or, if the Common
Shares are not listed on the NASDAQ, then the TSX or such other stock exchange
in Canada or in the United States on which the Common Shares are then listed)
for 20 consecutive trading days ending five trading days prior to the date
of determination.
PAYMENT OF INTEREST
Subject to receiving applicable regulatory approvals, the Company shall have
the right to elect, from time to time, to issue and deliver Common Shares to the
Trustee (the "Share Interest Payment Election") for sale in the open market to
raise funds in order to satisfy its obligation to pay interest on the Debentures
(the "Interest Obligation").
Neither the Company's making of the Share Interest Payment Election nor the
consummation of sales of the Common Shares will (i) result in the holders of the
Debentures not being entitled to receive, in accordance with the foregoing
procedures, on the applicable Interest Payment Date cash in an aggregate amount
equal to the interest payable on such Interest Payment Date or (ii) entitle such
holders to receive any Common Shares in satisfaction of the Company's obligation
to pay such interest.
CHANGE OF CONTROL
Within 35 days following the occurrence of a change of control of the
Company involving the acquisition of beneficial voting control or direction over
66 2/3% or more of the issued and outstanding Common Shares (a "Change of
Control"), the Company will be required to make an offer in writing to redeem
all of the Debentures then outstanding (the "Debenture Offer"), at a cash price
equal to the sum of: (i) 101% of the principal amount thereof (ii) accrued and
unpaid interest; and (iii) in the event that the Change of Control occurs on or
before July 31, 2006, the present value of the amount of interest which would
have accrued and been paid on the Debentures if the Debentures were outstanding
until July 31, 2006 (the "Debenture Offer Price"). The present value of the
amount of interest that would have accrued and been paid on the Debentures will
be computed using a discount rate equal to the US Treasury Yield. The
"US Treasury Yield" means the yield to maturity (as published by the Federal
Reserve, or any other publicly available source for such market data, at the
time of computation) of US Treasury securities with a constant maturity equal to
the then remaining term to July 31, 2006, provided, however, that if the then
remaining term to July 31, 2006 is not equal to the constant maturity of a
US Treasury security for which a yield to maturity is available, the
US Treasury Yield shall be obtained by linear interpolation (calculated to the
nearest one-twelfth of a
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year) from the weekly average yields of US Treasury securities for which such
yields are given, except that if the then remaining term of July 31, 2006 is
less than one year, the weekly average yield on US Treasury securities adjusted
to a constant maturity of one year shall be used.
The Indenture contains notification and redemption provisions requiring the
Company to give written notice to the Trustee of the occurrence of a Change of
Control within 35 days of such event together with the Debenture Offer. The
Trustee will thereafter promptly mail to each holder of Debentures a notice of
the Change of Control together with a copy of the Debenture Offer to redeem all
the outstanding Debentures.
The Company will comply with the provisions of Rule 13e-4 and any other
tender offer rules under the Exchange Act or other relevant Canadian and
United States federal, provincial and state securities legislation that may then
be applicable in connection with any Debenture Offer.
If 90% or more of the aggregate principal amount of the Debentures
outstanding on the date of the giving of notice of the Change of Control have
been tendered to the Company for redemption pursuant to the Debenture Offer, the
Company will have the right and obligation to redeem all the remaining
Debentures at the Debenture Offer Price. Notice of such redemption must be given
by the Company to the Trustee within 10 days following the expiry of the
Debenture Offer, and as soon as possible thereafter, by the Trustee to the
holders of the Debentures not tendered pursuant to the Debenture Offer.
If a Change of Control was to occur, there can be no assurance that the
Company would have funds sufficient to pay the Debenture Offer Price for all of
the Debentures that might be delivered by holders seeking to accept a Debenture
Offer. Further, payment of the Debenture Offer Price for the Debentures may be
subordinated to the prior payment of Senior Indebtedness as described under
"Description of the Debentures -- Subordination". In addition, the Company's
ability to purchase Debentures with cash may be limited by the terms of its
current and future debt agreements.
The obligations of the Company arising upon a Change of Control will also be
satisfied if a third party makes the Debenture Offer in the manner and at the
times and otherwise in compliance with the requirements applicable to a
Debenture Offer made by the Company. The failure of the Company (or a third
party, in the case of a Debenture Offer made by a third party) to make or
consummate the Debenture Offer or pay the Debenture Offer Price when due will
give the Trustee and the holders the rights described under "Description of the
Debentures -- Events of Default".
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company, without the consent of any holders of outstanding Debentures,
is entitled to amalgamate with, consolidate with or merge into, or sell,
transfer, assign or lease all or substantially all the Company's assets to any
individual, corporation, partnership, limited liability company, joint venture,
association, trust, unincorporated organization or government or any agency or
political subdivision thereof (each a "Person") provided that:
- the Person, if other than the Company, formed by a consolidation or into
which the Company is merged, or the Person, if other than one of the
Company's subsidiaries, which receives the transfer of all or
substantially all the Company's assets, expressly assumes the Company's
obligations on the Debentures and under the Indenture;
- the Trustee is satisfied that the transaction will not result in the
successor Person being required to make any deduction or withholding on
account of certain Canadian taxes from any payments in respect of
the Debentures;
- immediately before or after giving effect to the consolidation, merger,
transfer, assignment or lease, no Event of Default (as defined below), and
no event which, after notice or lapse of time or both, would become an
Event of Default, has happened and is continuing; and
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- an officer's certificate and an opinion of counsel, each stating that the
amalgamation, consolidation, merger, transfer, assignment or lease
complies with the provisions of the Indenture, have been delivered by the
Company to the Trustee.
Upon the assumption of the Company's obligations by another Person in these
circumstances, the Company will be discharged from its obligations with respect
to the Debentures in accordance with the terms and conditions of the Indenture.
In addition, certain of these transactions could constitute a Change of Control,
requiring the Company to make a Debenture Offer.
EVENTS OF DEFAULT
The Indenture provides that if an Event of Default specified in the
Indenture occurs and is continuing, either the Trustee or the holders of not
less than 25% in aggregate principal amount of the Debentures then outstanding
may declare the principal amount of and accrued interest to the date of that
declaration on all the Debentures to be immediately due and payable. In the case
of some events of bankruptcy or insolvency, the principal amount of, and accrued
interest on, all the Debentures to the date of the occurrence of that event
automatically will become and immediately will be due and payable.
Under some circumstances, the holders of a majority in aggregate principal
amount of the Debentures may rescind any acceleration with respect to the
Debentures and its consequences. Interest will continue to accrue and be payable
on demand upon a default in:
- the payment of:
- principal or interest when due,
- redemption amounts, or
- the Debenture Offer Price;
- the delivery of Common Shares to be delivered on conversion of the
Debentures; or
- the payment of cash in lieu of fractional shares to be paid on conversion
of the Debentures.
Under the Indenture, Events of Default include:
- failure by the Company to pay principal on the Debentures in cash or
pursuant to the Share Payment Option when due, whether at maturity, upon
redemption, or otherwise and such default continues for five business
days;
- failure by the Company to pay interest on the Debentures in cash when due
and such default continues for a period of 15 business days;
- failure by the Company to pay the Debenture Offer Price when due;
- failure by the Company to deliver Common Shares together with cash in
United States dollars in lieu of fractional shares, when those Common
Shares or cash in United States dollars in lieu of fractional shares, are
required to be delivered following conversion of a Debenture and that
default continues for 10 days;
- failure by the Company to make a Debenture Offer within 35 days of the
occurrence of the Change of Control;
- failure by the Company to comply with any material term, covenant or other
agreements in the Debentures or the Indenture for a period of 30 days
after the receipt by the Company of written notice to remedy that default
from the Trustee or from holders of not less than 25% in aggregate
principal amount of the Debentures then outstanding;
- a failure by the Company to pay when due at maturity or upon a default,
event of default or similar condition under any bond, note, debenture or
other evidence of indebtedness for money borrowed by the Company or any of
its subsidiaries having an aggregate outstanding principal
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amount in excess of $10 million, not including any amounts the Company may
owe under reimbursement or similar obligations to banks, sureties or other
entities that have issued letters of credit, surety bonds, performance
bonds or other guarantees to the extent any demands made under any such
reimbursement or similar obligation relate to a draw under the related
letter of credit or other instrument, which draw is being contested in
good faith by the Company through appropriate proceedings, which default
shall have resulted in that indebtedness being accelerated without that
indebtedness being discharged or that acceleration having been rescinded
or annulled within five business days after the Company's receipt of the
notice of default from the Trustee or receipt by the Company and the
Trustee of the notice of default from the holders of not less than 25% in
aggregate principal amount of the Debentures then outstanding, unless that
default has been cured or waived within 30 days; and
- certain events of bankruptcy or insolvency affecting the Company or any of
its "significant subsidiaries" as that term is defined in Regulation S-X
under the U.S. Securities Act, or any group or two or more subsidiaries
that, taken as a whole, would constitute a significant subsidiary of
the Company.
The Indenture will provide that the Trustee will, within 30 days after the
occurrence of any continuing default known to the Trustee, mail to all holders
of the Debentures notice of all defaults of which the Trustee is aware unless
those defaults have been cured or waived by the holders before the giving of
that notice. The Trustee may withhold notice as to any default, except in the
case of a default under any of the first six bullets above, if it determines in
good faith that withholding the notice is in the interests of the holders. The
term "default" for the purpose of this paragraph means any event that is, or
after notice or lapse of time or both would become, an Event of Default with
respect to the Debentures.
If certain events of default specified in the last bullet point above occur
and are continuing, then automatically the principal amount of the Debentures
plus accrued and unpaid interest through such date shall become immediately due
and payable without any action by the Trustee or any holder. If any other event
of default occurs and is continuing (the default not having been cured or waived
as provided under "Modification and Waiver" below), the Trustee or the holders
of at least 50% in aggregate principal amount of the Debentures then outstanding
may declare the Debentures due and payable at their principal amount plus
accrued and unpaid interest, and thereupon the Trustee may, at its discretion,
proceed to protect and enforce the rights of the holders of Debentures by
appropriate judicial proceedings. Such declaration may be rescinded or annulled
with the written consent of the holders of a majority in aggregate principal
amount of the Debentures then outstanding upon the conditions provided in
the Indenture.
The holders of a majority in aggregate principal amount of the outstanding
Debentures may direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee or exercising any trust or power
conferred on the Trustee provided that the direction must not be in conflict
with any law or the Indenture. In addition, the direction is subject to some
other limitations. The Trustee may refuse to perform any duty or exercise any
right or power or expend or risk its own funds or otherwise incur any financial
liability unless it receives indemnity satisfactory to it against any loss,
liability or expense. No holder of any Debenture will have any right to pursue
any remedy with respect to the Indenture or the Debentures, unless:
- that holder has previously given the Trustee written notice of a
continuing Event of Default;
- the holders of at least 25% in aggregate principal amount of the
outstanding Debentures have made a written request to the Trustee to
pursue the relevant remedy;
- the holder giving that written notice has, or the holders making that
written request have, offered to the Trustee reasonable security or
indemnity against any loss, liability or expense satisfactory to it; and
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- the Trustee has failed to comply with the written request within 45 days
after receipt of that notice, request and offer of security or indemnity.
The right of any holder:
- to receive payment of principal, any redemption amounts, the Debenture
Offer Price or interest in respect of the Debentures held by that holder
on or after the respective due dates expressed in the Debentures;
- to convert those Debentures; or
- to bring suit for the enforcement of any payment of principal, any
redemption amounts, the Change of Control Purchase Price or interest in
respect of those Debentures held by that holder on or after the respective
due dates expressed in the Debentures, or the right to convert
will not be impaired or adversely affected without that holder's consent.
The holders of Debentures, by extraordinary resolution, may waive any
existing default and its consequences except:
- any default in any payment on the Debentures;
- any default with respect to the conversion rights of the Debentures; or
- any default in respect of the covenants or provisions in the Indenture
that may not be modified without the consent of the holder of each
Debenture as described in "Modification and Waiver" below.
An "extraordinary resolution" is a resolution either passed at a meeting by
66 2/3% principal amount of Debentures represented at the meeting or a
resolution in writing signed by the holders of an aggregate 66 2/3% principal
amount of Debentures outstanding at that time.
When a default is waived, it is deemed cured and will cease to exist, but
that waiver does not extend to any subsequent or other default or impair any
consequent right. The Company will be required to furnish to the Trustee
annually a statement as to any default by the Company in the performance and
observance of the Company's obligations under the Indenture. In addition, the
Company will be required to file with the Trustee written notice of the
occurrence of any default or Event of Default within five business days of the
Company becoming aware of the occurrence of any default or Event of Default.
MODIFICATION AND WAIVER
The Indenture or the Debentures may not be modified or amended by the
Company without the consent of each holder affected thereby to, among
other things:
- reduce the principal amount, Debenture Offer Price or any redemption
amounts with respect to any Debenture, or extend the stated maturity of
any Debenture or alter the manner of payment or rate of interest on any
Debenture or make any Debenture payable in money or securities other than
that stated in the Debenture;
- make any change that adversely affects the right of a holder to convert
any Debenture or to receive Additional Amounts with respect to
a Debenture;
- make any change that affects in a manner adverse to the interests of the
holders the obligation of the Company to make a Debenture Offer;
- impair the right to institute suit for the enforcement of any payment with
respect to, or conversion of, the Debentures; or
- make any change that would result in the Company being required to make
any deduction or withholding from payments made in respect of
the Debentures.
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The Indenture or the Debentures may be modified or amended, subject to the
provisions described above, by the Company and the Trustee with the consent, by
extraordinary resolution of the Debenture holders.
Without the consent of any holder of Debentures, the Company and the Trustee
may amend the Indenture to:
- cure any ambiguity, defect or inconsistency, provided, however, that the
amendment to cure any ambiguity, defect or inconsistency does not, in the
good faith opinion of the Company's Board of Directors evidenced by a
resolution of the Company's Board of Directors certified to the Trustee,
materially adversely affect the rights of any holder of Debentures;
- provide for the assumption by a successor of the Company's obligations
under the Indenture;
- make any change to comply with any exemption from qualification under the
TIA, or to comply with Canadian federal or provincial legislation relating
to trust indentures;
- add to the Company's covenants or the Company's obligations under the
Indenture for the protection of holders of the Debentures;
- surrender any right, power or option conferred by the Indenture on
the Company;
- decrease the Conversion Price by any amount as contemplated in the
Indenture; or
- make any other change that does not adversely affect the rights of any
holder of Debentures.
ADDITIONAL AMOUNTS
The Indenture will provide that if the Company is required to make any
withholding or deduction for or on account of any Canadian taxes from any
payment made under or with respect to the Debentures, the Company will pay such
additional amounts of interest ("Additional Amounts") as may be necessary so
that the net amount received by each holder (including Additional Amounts) will
not be less than the amount the holder would have received had such Canadian
taxes not been withheld or deducted; except that no Additional Amounts will be
payable with respect to a payment made to a holder (i) with which the Company
does not deal at arm's length (within the meaning of the INCOME TAX ACT
(Canada)) at the time of making such payment, (ii) which is subject to such
Canadian taxes by reason of its being connected with Canada otherwise than by
the mere holding of the Debentures or the receipt of payments thereunder, or
(iii) which fails to comply with any administrative requirements necessary as a
precondition to exemption from Canadian withholding taxes. The Indenture also
requires the Company to provide to each holder certified copies of tax receipts
or other satisfactory evidence of the payment by the Company of the applicable
Canadian taxes within 30 days after the date of such payment.
For a description of the exemption from Canadian withholding taxes
applicable to payments under or with respect to the Debentures, see "Income Tax
Considerations -- Certain Canadian Federal Income Tax Considerations". If, as a
result of a change to Canadian withholding tax laws, the Company has become or
would become obligated to pay, on the next date on which any amount would be
payable under or with respect to the Debentures, any Additional Amounts, the
Company may redeem all, but not less than all, the Debentures at a redemption
price equal to par plus accrued and unpaid interest to but excluding the
redemption date. See "Description of the Debentures -- Redemption -- Redemption
for Changes in Canadian Tax Law".
NOTICES
Except as otherwise provided in the Indenture, notices to holders of
Debentures will be given by mail to the addresses of holders of the Debentures
as they appear in the securities register.
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REPLACEMENT OF DEBENTURES
Any mutilated Definitive Debenture (as defined below) will be replaced by
the Company at the expense of the holder upon surrender of that Definitive
Debenture to the Trustee. Definitive Debentures that become destroyed, stolen or
lost will be replaced by the Company at the expense of the holder upon delivery
to the Trustee or evidence of the destruction, loss or theft of the Definitive
Debentures satisfactory to the Company and the Trustee. In the case of a
destroyed, lost or stolen Definitive Debenture, an indemnity and surety bond
satisfactory to the Trustee and the Company may be required at the expense of
the holder of that Definitive Debenture before a replacement Debenture will
be issued.
BOOK ENTRY, DELIVERY AND FORM
The Debentures will be issued in the form of fully registered global
debentures (the "Global Debentures") held by, or on behalf of, CDS and, if
necessary, The Depository Trust Company, or their respective successors
(together, the "Depositories") as custodians for their participants.
All Debentures will be represented in the form of Global Debentures
registered in the name of the Depositories or their nominees. Purchasers of
Debentures represented by Global Debentures will not receive Debentures in
definitive form. Rather, the Debentures will be represented only in book-entry
form (unless the Company, in its sole discretion, elects to prepare and deliver
definitive Debentures in fully registered form). Beneficial interests in the
Global Debentures, constituting ownership of the Debentures, will be represented
through book-entry accounts of institutions (including the Underwriters) acting
on behalf of beneficial owners, as direct and indirect participants of the
Depositories ("participants"). Each purchaser of a Debenture represented by a
Global Debenture will receive a customer confirmation of purchaser from the
Underwriter or Underwriters from whom the Debenture is purchased in accordance
with the practices and procedures of the selling Underwriters or Underwriters.
The practices of the Underwriters may vary but generally customer confirmations
are issued promptly after execution of a customer order. The Depositories will
be responsible for establishing and maintaining book-entry accounts for their
participants having interests in Global Debentures.
If: (i) required to do so by law; (ii) the book-based system ceases to
exist; (iii) the Company determines that the Depositories are no longer willing
or able to discharge their responsibilities as depository properly and the
Company is unable to locate a qualified successor; or (iv) the Company, at its
option, elects to terminate the record entry system through the Depositories for
any reason, the Company (with the consent of the Trustee, which consents shall
not be unreasonably withheld) shall have the right to terminate the book entry
system and provide that beneficial owners of Debentures representing by Global
Debentures at such time will receive Debentures in registered and definitive
form ("Definitive Debentures").
TRANSFER AND EXCHANGE OF DEBENTURES
Transfers of beneficial ownership in Debentures represented by Global
Debentures will be effected through records maintained by the Depositories for
such Global Debentures or their nominees (with respect to interests of
participants) and on the records of participants (with respect to interests of
persons other than participants). Unless the Company elects, in its sole
discretion, to prepare and deliver Definitive Debentures, beneficial owners who
are not participants but who desire to purchase, sell or otherwise transfer
ownership of, or other interests in, Global Debentures may do so only through
participants.
The ability of a beneficial owner of an interest in Debentures represented
by a Global Debenture to pledge the Debenture or otherwise take action with
respect to such owner's interest in such Debenture (other than through a
participant) may be limited due to a lack of a physical certificate.
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Registered holders of Definitive Debentures may only transfer such
Debentures upon payment of taxes or other charges incidental thereto, if any, by
executing and delivering a form of transfer together with such Debentures to the
Trustee at its principal offices in the Cities of Vancouver or Toronto whereupon
new Debentures will be issued in authorized denominations in the same aggregate
principal amount as the Debentures so transferred, registered in the name of the
transferee(s). No transfer of a Debenture will be registered during the period
beginning 15 days before the day of the mailing of a notice of redemption or
conversion by the Company and ending at the close of business on the day of such
mailing or during the periods commencing on any record date for the payment of
interest and ending on the next following Interest Payment Date.
PAYMENTS
Payments of interest and principal on each Global Debenture will be made to
the Depositories or their nominees, as the case may be, as the registered holder
of the Global Debenture. As long as a Depository or its nominee is the
registered owner of a Global Debentures, such Depository or its nominee, as the
case may be, will be considered the sole legal owner of the Global Debenture for
purposes of receiving payments of interest and principal on the Debenture and
for all other purposes under the Indenture and Debenture. Interest payments may
be made by electronic funds transfer on the day interest is payable and
delivered to the Depository or its nominee.
The Company understands that each Depository or its nominee, upon receipt of
any payment of interest or principal in respect of a Global Debenture, will
credit participants' accounts (on the date interest or principal is payable)
with payments in amounts proportionate to their respective beneficial interest
in the principal amount of such Global Debenture as shown on the records of such
Depository or its nominee. The Company also understands that payments of
interest and principal by participants to the owners of beneficial interest in
such Global Debentures will be governed by standing instructions and customary
practices, as is the case with securities held for the accounts of customers in
bearer form or registered in "street name" and will be the responsibility of
such participants. The responsibility and liability of the Company in respect of
payments on Debentures represented by Global Debentures is limited solely and
exclusively, while the Debentures are registered in Global Debenture form, to
making payment of any interest and principal due on such Global Debenture to a
Depository or its nominee.
If Definitive Debentures are issued instead of, or in place of, Global
Debentures, payments of interest on each Definitive Debenture will be made by
electronic funds transfer, if agreed to by the holder, or by cheque dated the
Interest Payment Date and mailed to the address of the holder appearing in the
register maintained by the Trustee for the Debentures, at the close of business
on the Regular Record Date. Payment of principal at maturity will be made at the
principal office of the Trustee in the City of Vancouver (or in such other city
or cities as may from time to time be designated by the Company) against
surrender of the Definitive Debentures. If the due date for payment of any
amount of principal or interest on any Definitive Debenture is not, at the place
of payment, a business day (being a day other than a Saturday, Sunday or a day
on which financial institutions at the place of payment are authorized or
obligated by law or regulation to close) such payment will be made on the next
business day and the holder of such Definitive Debenture shall not be entitled
to any further interest or other payment in respect of such delay.
REPORTS TO HOLDERS
The Company shall file with the Trustee and provide Holders, within 15 days
after the filing thereof with the Ontario Securities Commission and the
U.S. Securities and Exchange Commission (the "SEC"), copies of its annual
financial statements and the information, documents and other reports that the
Company is required to both (a) file with the Ontario Securities Commission or
with the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act and
(b) mail to shareholders. Notwithstanding that the Company may not be required
to remain subject to the reporting requirements of the Ontario
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Securities Commission or the SEC, the Company shall continue to file with the
Ontario Securities Commission and the SEC, as applicable and provide to the
Trustee, and furnish to Holders without cost (a) within 140 days after the end
of each fiscal year, an annual financial statement, and (b) within 60 days after
the end of each of the first three fiscal quarters of each fiscal year, interim
financial statements which shall, at a minimum, contain such information
required to be provided in quarterly reports to security holders of a company
with securities listed on the TSX, whether or not the Company has any of its
securities so listed. Each of such reports will be prepared in accordance with
Canadian disclosure requirements and either Canadian GAAP or U.S. GAAP (whether
or not the Company is a public reporting company at the time). The Company shall
also make such reports available to prospective purchasers of the Debentures
upon their request.
GOVERNING LAW
The Indenture and the Debentures will be governed by, and construed in
accordance with, the laws of the Province of British Columbia applicable to
contracts executed and to be performed entirely in such Province.
ENFORCEABILITY OF JUDGMENTS
Since substantially all of the assets of the Company and its subsidiaries
are outside the United States, any judgment obtained in the United States
against the Company, including judgments with respect to amounts payable under
the Debentures, may not be collectible within the United States.
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INCOME TAX CONSIDERATIONS
CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Borden Ladner Gervais LLP, counsel for the Company, and
Blake, Cassels & Graydon LLP, counsel for the underwriters, the following is a
general summary of the principal Canadian federal income tax considerations
generally applicable to a holder of Debentures (a "Holder") who acquires
Debentures under this prospectus and who, at all relevant times, for purposes of
the INCOME TAX ACT (Canada) (the "Canadian Tax Act"), holds the Debentures and
Common Shares acquired under the terms of the Debentures as capital property and
deals with the Company at arm's length. Generally, Debentures and Common Shares
will be considered to be capital property to a Holder provided that the Holder
does not hold the Debentures or Common Shares in the course of carrying on a
business and has not acquired them as an adventure in the nature of trade.
Debentures and Common Shares held by certain "financial institutions" (as
defined in the Canadian Tax Act) will generally not be capital property to such
holders and will be subject to special "mark-to-market rules" contained in the
Canadian Tax Act. This summary does not take into account these mark-to-market
rules. Holders which are financial institutions for purposes of these rules or
which otherwise do not hold their Debentures or Common Shares as capital
property should consult their own tax advisors.
This summary is based on the current provisions of the Canadian Tax Act and
the regulations thereunder, all specific proposals to amend the Canadian
Tax Act and the regulations thereunder publicly announced by the Minister of
Finance (Canada) prior to the date hereof, and counsel's understanding of the
administrative practices of the Canada Customs and Revenue Agency (the "CCRA").
This summary is not exhaustive of all possible Canadian federal income tax
considerations and, except as mentioned above, does not anticipate any changes
in law whether by legislative, governmental or judicial decision or action, nor
does it take into account provincial, territorial or foreign tax considerations,
which may differ significantly from those discussed herein.
THIS SUMMARY IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, NOR
SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR HOLDER AND
NO REPRESENTATION WITH RESPECT TO THE INCOME TAX CONSEQUENCES TO ANY PARTICULAR
HOLDER IS MADE. CONSEQUENTLY, PROSPECTIVE PURCHASERS OF DEBENTURES SHOULD
CONSULT THEIR OWN TAX ADVISORS FOR ADVICE WITH RESPECT TO THE TAX CONSEQUENCES
TO THEM OF HOLDING AND DISPOSING OF DEBENTURES AND COMMON SHARES ACQUIRED UNDER
THE TERMS OF THE DEBENTURES, INCLUDING THE APPLICATION AND EFFECT OF THE INCOME
AND OTHER TAX LAWS OF ANY COUNTRY, PROVINCE, STATE OR LOCAL TAX AUTHORITY.
For purposes of the Canadian Tax Act, all amounts relating to the
acquisition, holding or disposition of Debentures or Common Shares, including
interest, dividends, adjusted cost base and proceeds of disposition, must be
converted into Canadian dollars based on the United States-Canadian dollar
exchange rate applicable to the effective date of the related acquisition,
disposition or recognition of income.
RESIDENTS OF CANADA
The following summary is generally applicable to a Holder who, at all
relevant times, for purposes of the Canadian Tax Act and any applicable income
tax treaty or convention, is or is deemed to be a resident of Canada. Certain
Holders whose Debentures or Common Shares acquired under the terms of the
Debentures might not otherwise qualify as capital property may make an
irrevocable election in accordance with subsection 39(4) of the Canadian
Tax Act to have the Debentures and Common Shares and every "Canadian security"
(as defined in the Canadian Tax Act) owned by such Holder in the taxation year
of the election and in all subsequent years deemed to be capital property.
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TAXATION OF INTEREST ON DEBENTURES
A Holder that is a corporation, partnership, unit trust or trust of which a
corporation or partnership is a beneficiary will be required to include in
computing its income for a taxation year any interest on a Debenture that
accrues to the Holder to the end of that taxation year or becomes receivable or
is received by it before the end of that taxation year, except to the extent
that such amount was included in the Holder's income for a preceding
taxation year.
Any other Holder, including an individual, will be required to include in
computing income for a taxation year any interest on a Debenture received or
receivable by such Holder in that taxation year (depending upon the method
regularly followed by the Holder in computing income), except to the extent that
such amount was included in the Holder's income for a preceding taxation year.
A Holder that is a "Canadian-controlled private corporation" (as defined in
the Canadian Tax Act) may be liable for a refundable tax of 6 2/3% on certain
investment income, including interest.
Where a Holder is required to include in computing income, interest on
Debentures that accrued in respect of the period prior to their date of
acquisition by the Holder, the Holder will be entitled to a deduction in
computing income of an equivalent amount. The adjusted cost base to the Holder
of the Debentures will be reduced by the amount which is so deductible.
Any amount paid by the Company as a penalty or bonus because of early
repayment of all or part of the principal amount of a Debenture will be deemed
to be interest received at that time by the Holder to the extent that such
amount can reasonably be considered to relate to, and does not exceed the value
at the time of the payment of, the interest that would have been paid or payable
by the Company on the Debenture for a period ending after the payment of
such amount.
If the Company were to satisfy an Interest Obligation in the manner
described above under "Description of Debentures -- Share Payment
Option -- Payment of Interest" or through the issuance of shares on a conversion
as described above under "Description of the Debentures -- Conversion Rights",
the Canadian federal income tax consequences to a Holder would be unlikely to
differ from those described above.
EXERCISE OF CONVERSION RIGHT
A Holder that converts a Debenture into Common Shares pursuant to the
Holder's right of conversion will generally be deemed not to have disposed of
the Debenture pursuant to section 51 of the Canadian Tax Act and accordingly
will not be considered to realize a capital gain or capital loss on such
conversion. The cost to such Holder of the Common Shares acquired on the
conversion will be equal to the Holder's adjusted cost base of the Debenture
immediately before the conversion. The adjusted cost base to the Holder of the
Common Shares acquired on the conversion will be averaged with the adjusted cost
base of all other Common Shares held by the Holder as capital property.
Under the current administrative practice of the CCRA, a Holder who, upon
conversion of a Debenture, receives an amount not in excess of $200 in lieu of a
fraction of a Common Share may either treat this amount as proceeds of
disposition of a portion of a Debenture, thereby realizing a capital gain or
capital loss, or alternatively may reduce the adjusted cost base of the Common
Shares that the Holder receives on the conversion by the amount of cash
received. If the cash consideration exceeds $200, the Holder must treat the
amount as proceeds of disposition of a portion of a Debenture, thereby realizing
a capital gain or capital loss.
REDEMPTION OR REPAYMENT OF DEBENTURES
If the Company satisfies its obligations under a Debenture by issuing Common
Shares to the Holder and making any cash payment in lieu of a fraction of a
Common Share as described above
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under "Description of Debentures -- Share Repayment Option -- Payment of
Principal at Maturity or on Redemption" and the Holder does not exercise the
conversion privilege prior to such redemption or repayment, the Holder's
proceeds of disposition of the Debenture will be equal to the fair market value
of the Common Shares (other than Common Shares received in satisfaction of
accrued interest) and cash so received, so that the Holder may realize a capital
gain or capital loss on the disposition of the Debenture. The cost to the Holder
of Common Shares so received will be equal to the fair market value of such
Common Shares. The adjusted cost base to the Holder of Common Shares so received
will be averaged with the adjusted cost base of all other Common Shares held by
the Holder as capital property.
OTHER DISPOSITIONS OF DEBENTURES
A disposition or deemed disposition of a Debenture will generally give rise
to a capital gain (or capital loss) to the extent that the Holder's proceeds of
disposition (adjusted as described below), net of any reasonable costs of
disposition, exceed (or are less than) the adjusted cost base of the Debenture
to the Holder immediately before the disposition.
Upon such a disposition or deemed disposition of a Debenture, a Holder will
generally also be required to include in computing income the amount of interest
accrued on the Debenture from the date of the last interest payment to the date
of disposition to the extent that such amount has not otherwise been included in
computing the Holder's income for the taxation year or a previous taxation year.
A Holder's proceeds of disposition will then be reduced by this amount.
CAPITAL GAINS OR LOSSES REALIZED ON DISPOSITIONS OF DEBENTURES
One-half of the amount of any capital gain (a "taxable capital gain")
realized by a Holder in a taxation year must be included in computing the
Holder's income in that year. One-half of the amount of any capital loss (an
"allowable capital loss") realized by a Holder in a taxation year generally may
be deducted from taxable capital gains realized by the Holder in that year.
Allowable capital losses in excess of taxable capital gains may be carried back
and deducted in any of the three preceding taxation years or carried forward and
deducted in any following taxation year against taxable capital gains realized
in such years to the extent and under the circumstances described in the
Canadian Tax Act.
A capital gain realized by an individual may give rise to a liability for
alternative minimum tax. A Holder that is a "Canadian-controlled private
corporation" (as defined in the Canadian Tax Act) may be liable for a refundable
tax of 6 2/3% on certain investment income, including taxable capital gains.
COMMON SHARES
Dividends declared and paid on a Holder's Common Shares will be included in
the Holder's income as taxable dividends received from a taxable Canadian
corporation. The normal gross-up and dividend tax credit rules will apply to
dividends received by a Holder who is an individual and dividends received by a
Holder which is a corporation will normally be deductible in computing its
taxable income. Certain corporations may be liable to pay a refundable tax under
Part IV of the Canadian Tax Act on such dividends.
A disposition or deemed disposition of a Common Share will generally result
in the Holder realizing a capital gain (or capital loss) to the extent that the
proceeds of disposition of the Common Share exceed (or are less than) the
aggregate of the Holder's adjusted cost base of the Common Share and any
reasonable costs related to the disposition. The general tax treatment of
capital gains and capital losses is discussed above under the heading "Residents
of Canada -- Capital Gains or Losses Realized on Dispositions of Debentures".
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In the case of a Holder that is a corporation, the amount of any capital
loss otherwise determined resulting from the disposition or deemed disposition
of a Common Share may be reduced by the amount of dividends previously received
or deemed to have been received thereon in accordance with detailed rules
contained in the Canadian Tax Act in this regard. Analogous rules apply where a
corporation is a member of a partnership or a beneficiary of a trust that owns
Common Shares or where a partnership or trust, of which a corporation is a
member or beneficiary, itself is a member of a partnership or a beneficiary of a
trust that owns Common Shares. Holders to whom these rules may be relevant
should consult their own tax advisors.
NON-RESIDENTS OF CANADA
The following summary is generally applicable to a Holder who, at all
relevant times, for purposes of the Canadian Tax Act and any applicable income
tax treaty or convention, is or is deemed to be a non-resident of Canada and
does not use or hold and is not deemed to use or hold the Debentures or Common
Shares acquired under the terms of the Debentures in carrying on a business in
Canada (a "Non-Resident Holder"). Special rules, which are not discussed below,
may apply to a Non-Resident Holder which is an insurer that carries on business
in Canada and elsewhere.
The term "US Holder," for the purposes of this summary, means a Non-Resident
Holder who, for purposes of the Canada-United States Income Tax Convention
(1980) (the "Convention"), is at all relevant times a resident of the
United States and does not use or hold and is not deemed to use or hold the
Debentures or the Common Shares in connection with carrying on a business in
Canada through a permanent establishment or fixed base in Canada.
TAXATION OF INTEREST ON DEBENTURES
A Non-Resident Holder will not be subject to Canadian withholding tax in
respect of amounts paid or credited by the Company as, on account or in lieu of
payment of, or in satisfaction of, the principal of the Debentures or interest
thereon including in respect of a payment of a Change of Control
Purchase Price.
EXERCISE OF CONVERSION RIGHT
The conversion of a Debenture into Common Shares pursuant to a Non-Resident
Holder's right of conversion will generally be deemed not to constitute a
disposition of the Debenture pursuant to section 51 of the Canadian Tax Act and,
accordingly, the Non-Resident Holder will not realize a capital gain or capital
loss on such conversion.
DISPOSITION OF DEBENTURES AND COMMON SHARES
A Non-Resident Holder will not be subject to tax under the Canadian Tax Act
in respect of any capital gain realized by such Non-Resident Holder on a
disposition of a Debenture or a Common Share acquired under the terms of the
Debentures, as the case may be, unless the Debenture or Common Share constitutes
"taxable Canadian property" (as defined in the Canadian Tax Act) of the
Non-Resident Holder at the time of disposition and the Holder is not entitled to
relief under an applicable income tax treaty or convention. As long as the
Common Shares are then listed on a prescribed stock exchange (which currently
includes the TSX and Nasdaq), the Debentures and the Common Shares generally
will not constitute taxable Canadian property of a Non-Resident Holder, unless
at any time during the 60-month period immediately preceding the disposition the
Non-Resident Holder, persons with whom the Non-Resident Holder did not deal at
arm's length, or the Non-Resident Holder together with all such persons, owned
or was considered to own 25% or more of the issued shares of any class or series
of shares of the capital stock of the Company. In this case, both
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the Debentures and the Common Shares will constitute taxable Canadian property
to the Non-Resident Holder.
If the Debentures or the Common Shares are taxable Canadian property to a
Non-Resident Holder that is a US Holder at the time of disposition, any capital
gain realized on the disposition or deemed disposition of such Debentures or
Common Shares will, according to the Convention, generally not be subject to
Canadian federal income tax unless the value of the shares of the Company at the
time of the disposition of the Debentures or Common Shares is derived
principally from "real estate situated in Canada" within the meaning set out in
the Convention. A Non-Resident Holder whose Debentures or Common Shares are
taxable Canadian property should consult their own advisors.
TAXATION OF DIVIDENDS ON COMMON SHARES
Under the Canadian Tax Act, dividends on Common Shares paid or credited to a
Non-Resident Holder will be subject to Canadian withholding tax at the rate of
25% of the gross amount of the dividends. This withholding tax may be reduced
pursuant to the terms of an applicable income tax treaty or convention between
Canada and the country of residence of a Non-Resident Holder. Under the
Convention, a Non-Resident Holder that is a US Holder will generally be subject
to Canadian withholding tax at a rate of 15% of the amount of such dividends. In
addition, under the Convention, dividends may be exempt from Canadian
non-resident withholding tax if paid to certain US Holders that are qualifying
religious, scientific, literary, educational or charitable tax-exempt
organizations and qualifying trusts, companies, organizations or arrangements
operated exclusively to administer or provide pension, retirement or employee
benefits that are exempt from tax in the United States and that have complied
with specific administrative procedures.
CERTAIN MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes certain material United States federal
income tax consequences of the ownership, disposition and conversion of the
Debentures and the Common Shares into which Debentures may be converted, to
U.S. Holders, defined below, who purchase Debentures at the initial price
pursuant to the offering, and does not address any tax considerations applicable
to subsequent purchasers of the Debentures. This summary is based upon the
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
applicable Treasury Regulations promulgated and proposed thereunder, judicial
authority and administrative interpretations of the foregoing, all of which are
subject to change, possibly on a retroactive basis. This summary applies only to
U.S. Holders that hold Debentures (and Common Shares into which Debentures may
be converted) as "capital assets" within the meaning of Section 1221 of the
Code. This discussion does not address all of the tax considerations that may be
applicable to a U.S. Holder's particular circumstances or to U.S. Holders that
may be subject to special tax rules such as banks, holders subject to the
alternative minimum tax, tax-exempt organizations, persons that have a
functional currency other than the U.S. dollar, persons holding Debentures or
Common Shares in a tax-deferred or tax-advantaged account, persons who are
partners, shareholders or beneficiaries of an entity that holds the Debentures
or Common Shares, insurance companies, non-United States persons or entities,
dealers in securities or currencies, persons that will hold Debentures as a
position in a hedging transaction, "straddle" or "conversion transaction" for
tax purposes, persons deemed to sell Debentures or Common Shares under the
constructive sale provisions of the Code, or persons who actually or
constructively own 10% or more of the Common Shares. This summary does not
consider the effect of the United States federal estate or gift tax laws or the
tax laws of any applicable foreign, state, local or other jurisdiction.
For purposes of this summary, "U.S. Holders" includes: (i) individual
citizens or residents of the United States, (ii) corporations or other entities
taxable as corporations that are created or organized in or under the laws of
the United States or of any political subdivision thereof; (iii) estates, the
incomes of which are subject to United States federal income taxation regardless
of the source of such
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income; or (iv) trusts subject to the primary supervision of a United States
court and the control of one or more United States persons or trusts that have
elected to be treated as United States persons under applicable Treasury
Regulations.
The Company has not sought any ruling from the Internal Revenue Service with
respect to the statements made and the conclusions reached in the following
summary. Accordingly, there can be no assurance that the IRS will not challenge
such statements and conclusions or that a court will not sustain such a
challenge.
INVESTORS CONSIDERING THE PURCHASE OF DEBENTURES SHOULD CONSULT THEIR OWN
TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE UNITED STATES FEDERAL INCOME
TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES ARISING
UNDER THE UNITED STATES FEDERAL ESTATE OR GIFT TAX RULES OR UNDER THE LAWS OF
ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX
TREATY.
TAXATION OF INTEREST
Interest paid on the Debentures (including any Canadian taxes withheld
therefrom and any additional amounts paid) will be included in the income of a
U.S. Holder as ordinary income at the time it is treated as received or accrued,
in accordance with such U.S. Holder's regular method of accounting for
United States federal income tax purposes. Such interest will be treated as
income from outside the United States, and generally will be treated as "passive
income" or "financial services income", for United States foreign tax credit
purposes. A U.S. Holder may be entitled to a United States foreign tax credit or
a deduction for any Canadian taxes withheld, although the amount of such credit
or deduction may be limited by the Code. The Code applies various limitations on
the amount of foreign taxes that may be claimed as a credit by U.S. taxpayers.
Because of the complexity of those limitations, U.S. Holders should consult
their own tax advisors with respect to the amount of foreign taxes that can be
claimed as a credit. Alternatively, a U.S. Holder may be entitled to a deduction
for foreign taxes.
In certain circumstances, the Company may be obligated to pay a holder
amounts in excess of stated interest and principal on the Debentures. For
example, a holder may require the Company to redeem any and all of his or her
Debentures for an amount equal to 101% of the principal amount plus accrued and
unpaid interest in the event of a Change of Control. Under Treasury Regulations,
the possibility of an additional payment under a Debenture may be disregarded
for purposes of determining the amount of interest or original issue discount
income to be recognized by a holder in respect of such instrument (or the timing
of such recognition) if the likelihood of the payment, as of the date the
Debentures are issued, is remote. The Company believes that the likelihood of a
payment with respect to the Debentures as a result of a "Change of Control", or
any other payment in excess of stated interest and principal, is remote and does
not intend to treat these possibilities as affecting the yield to maturity of
any Debenture. The Company's determination that this likelihood is remote is
binding on a U.S. Holder unless the U.S. Holder discloses a contrary position in
a timely filed tax return for the taxable year in which the U.S. Holder acquires
the Debenture. In the event any such contingency occurs, it could affect the
amount and timing of the income that must be recognized by a U.S. Holder of
Debentures. There can be no assurance that the IRS will agree with the position
taken by the Company.
SALE, EXCHANGE OR REDEMPTION OF THE DEBENTURES
Upon the sale, exchange (other than a conversion) or redemption of a
Debenture, a U.S. Holder generally will recognize capital gain or loss equal to
the difference between (i) the amount of cash proceeds and the fair market value
of any property received on the sale, exchange or redemption
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(except to the extent such amount is attributable to accrued interest income not
previously included in income, which will be taxable as ordinary income, or is
attributable to accrued interest that was previously included in income, which
amount may be received without generating further income) and (ii) such
U.S. Holder's adjusted tax basis in the Debenture. A U.S. Holder's adjusted tax
basis in a Debenture generally will equal the cost of the Debenture to such
U.S. Holder, less any principal payments received by the U.S. Holder. Such
capital gain or loss will be long-term capital gain or loss if the
U.S. Holder's holding period in the Debentures is more than one year at the time
of sale, exchange or redemption. The deductibility of capital losses is subject
to limitations. Such gain or loss generally will be treated as income or loss
from within the United States for United States foreign tax credit purposes.
ADJUSTMENTS IN THE CONVERSION PRICE OF THE DEBENTURES
The conversion price of the Debentures is subject to adjustment under
certain circumstances. Under Section 305 of the Code and the Treasury
Regulations issued thereunder, there may be a taxable constructive distribution
to U.S. Holders, resulting in ordinary income to the extent of the Company's
current and accumulated earnings and profits (as determined under United States
federal income tax principles), if, and to the extent that, certain adjustments
in the conversion price increase such U.S. Holder's proportionate interest in
the earnings and profits and assets of the Company. Such adjustment may occur in
limited circumstances (particularly an adjustment to reflect a taxable dividend
distribution with respect to the Common Shares) and in such case a constructive
distribution would arise, whether or not the U.S. Holders ever convert the
Debentures. Generally, a U.S. Holder's tax basis in a Debenture will be
increased by the amount of any such constructive distribution.
CONVERSION OF THE DEBENTURES
A U.S. Holder generally will not recognize any income, gain or loss upon
conversion of a Debenture into Common Shares except with respect to (i) cash
received in lieu of a fractional Common Share and (ii) any payments (including
the receipt of Common Shares) in respect of accrued but unpaid interest. A
U.S. Holder's tax basis in the Common Shares received on conversion of a
Debenture will be the same as such U.S. Holder's adjusted tax basis in the
Debenture at the time of conversion (reduced by any basis allocable to a
fractional share interest), and the holding period for the Common Shares
received on conversion will generally include the holding period of the
Debenture converted. However, a U.S. Holder's tax basis in Common Shares
considered attributable to accrued interest generally will equal the amount of
such accrued interest included in income, and the holding period for such shares
will begin on the date of conversion.
Cash received in lieu of a fractional Common Share upon conversion will be
treated as a payment in exchange for the fractional Common Share. Accordingly,
the receipt of cash in lieu of a fractional Common Share generally will result
in capital gain or loss (measured by the difference between the cash received
for the fractional share and the holder's adjusted tax basis in the fractional
Common Share).
SALE OF COMMON SHARES
Subject to the passive foreign investment company ("PFIC") rules discussed
below, upon the sale or exchange of Common Shares a U.S. Holder generally will
recognize capital gain or loss equal to the difference between (i) the amount of
cash proceeds and the fair market value of any property received upon the sale
or exchange and (ii) such U.S. Holder's adjusted tax basis in the Common Shares.
Such capital gain or loss will be long-term capital gain or loss if the
U.S. Holder's holding period in the Common Shares is more than one year at the
time of the sale or exchange. A U.S. Holder's basis and holding period in Common
Shares received upon conversion of a Debenture are determined as discussed above
under "Conversion of the Debentures". The deductibility of capital losses is
subject to
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limitations. Such gain or loss generally will be treated as income or loss from
within the United States for United States foreign tax credit purposes.
DIVIDENDS
Subject to the PFIC rules discussed below, distributions (including any
Canadian taxes withheld therefrom), if any, made on the Common Shares after a
conversion generally will be included in the income of a U.S. Holder as ordinary
dividend income to the extent of the Company's current and accumulated earnings
and profits, as determined under United States federal income tax principles. A
corporate U.S. Holder will not be entitled to a dividends received deduction
generally available upon the receipt of dividends distributed by United States
corporations. Distributions in excess of the Company's current and accumulated
earnings and profits will be treated as a return of capital to the extent of the
U.S. Holder's basis in the Common Shares and thereafter as capital gain.
Dividends will be treated as income from outside the United States, but
generally will be treated as "passive income" or "financial services income",
for United States foreign tax credit purposes. A U.S. Holder may be entitled to
a United States foreign tax credit or deduction for any Canadian tax withheld,
although the amount of such credit or deduction may be limited by the Code.
PAYMENTS IN CANADIAN DOLLARS
If any dividends are paid in a currency other than the U.S. dollar, the
amount includible in gross income will be the U.S. dollar value of such
dividend, calculated by reference to the exchange rate in effect on the date of
receipt of the payment, regardless of whether the payment is actually converted
into U.S. dollars. If any Canadian dollars received are later converted into
U.S. dollars, U.S. Holders may realize gain or loss on the conversion. Gain or
loss, if any, realized as a result of currency exchange fluctuations during the
period from the date of inclusion of the payment in income to the date of
conversion of the payment into U.S. dollars will be treated as ordinary income
or loss. This gain or loss generally will be from sources within the
United States for United States foreign tax credit purposes. U.S. Holders should
consult their own tax advisors concerning the possibility of foreign currency
gain or loss if any such currency is not converted into U.S. dollars on the date
of receipt.
PASSIVE FOREIGN INVESTMENT COMPANY STATUS
Special United States federal income tax rules apply to United States
persons owning shares of a PFIC. As described below, the Company does not
believe that it currently is a PFIC, nor does the Company anticipate becoming a
PFIC in the foreseeable future. However, there can be no assurance that the IRS
will not successfully challenge the Company's position or that the Company will
not become a PFIC at some future time as a result of changes in its assets,
income or business operations.
A non-U.S. corporation generally will be classified as a PFIC for
United States federal income tax purposes in any taxable year in which, after
applying relevant look-through rules with respect to the income and assets of
subsidiaries, either at least 75% of its gross income is "passive income", or on
average at least 50% of the gross value of its assets is attributable to assets
that produce passive income or are held for the production of passive income.
For this purpose, passive income generally includes, among other things,
dividends, interest, certain rents and royalties and gains from the disposition
of passive assets. Net gains from commodities transactions are generally treated
as passive income, potentially triggering PFIC status, unless derived in the
active conduct of business as a producer, processor, merchant or handler of
commodities where a corporation's gross receipts from such qualified activities
exceed 85% of its total gross receipts.
If the Company is classified as a PFIC for any taxable year during which a
U.S. Holder holds Common Shares or Debentures, such U.S. Holder generally will
be taxed at ordinary income tax rates on any gain realized on the sale or
exchange of the Common Shares or Debentures and will also be
S-37
subject to a special interest charge with respect to any such gain and certain
dividends received. Rather than being subject to this tax regime, a U.S. Holder
of Common Shares may:
- make a "qualified electing fund" election, as defined in the Code, to be
taxed currently on its pro rata portion of the Company's income and gain,
whether or not such income or gain is distributed in the form of dividends
or otherwise, or
- make a "mark-to-market" election and thereby agree, for the year of the
election and each subsequent tax year, to recognize ordinary gain or, to
the extent of prior ordinary gain, ordinary loss based on the increase or
decrease in market value for such taxable year. The U.S. Holder of Common
Shares' basis in its Common Shares would be adjusted to reflect any such
income or loss amounts.
A U.S. Holder of Debentures will not be eligible to make a "qualified
electing fund" election while the U.S. Holder holds Debentures and therefore
will be unable to make a timely election. It is unclear whether a U.S. Holder of
Debentures will be eligible to make a "mark-to-market" election. U.S. Holders of
Debentures should consult their own tax advisors regarding the federal income
tax consequences that would arise if the Company were treated as a PFIC while a
U.S. Holder held Debentures.
BACKUP WITHHOLDING TAX
A "backup" withholding tax may apply to certain payments of principal and
interest and dividends as well as proceeds from a sale or exchange of Debentures
or Common Shares made to certain non-corporate U.S. Holders if certain
information reporting requirements are not met. Backup withholding tax, if any,
would be credited against a U.S. Holder's United States federal income tax
liability. U.S. Holders should consult their own tax advisors as to their
qualification for exemption from any backup withholding tax and the procedure
for obtaining such exemption.
THE PRECEDING DISCUSSION OF CERTAIN UNITED STATES FEDERAL INCOME TAX
CONSIDERATIONS IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE.
ACCORDINGLY, EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS TAX ADVISOR AS TO THE
PARTICULAR UNITED STATES FEDERAL, STATE, AND LOCAL TAX CONSEQUENCES OF
PURCHASING, HOLDING AND DISPOSING OF THE DEBENTURES AND COMMON SHARES. TAX
ADVISORS SHOULD ALSO BE CONSULTED AS TO THE UNITED STATES ESTATE AND GIFT TAX
CONSEQUENCES AND THE FOREIGN TAX CONSEQUENCES OF PURCHASING, HOLDING AND
DISPOSING OF THE DEBENTURES AND COMMON SHARES AS WELL AS THE CONSEQUENCES UNDER
THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION OR UNDER ANY
APPLICABLE TAX TREATY.
S-38
USE OF PROCEEDS
The estimated net proceeds to the Company from the sale of the Debentures
offered hereby, after payment of the Underwriters' fee and the estimated
expenses of this Offering, will be US$72,350,000 or, if the Over-Allotment
Option is exercised in full, US$83,262,500. The net proceeds from the sale of
the Debentures will be used by the Company to fund development of the Alamo
Dorado project, future capital, development and exploration programs, working
capital requirements and for other general corporate purposes. Pending the uses
described above, the Company may invest all or a portion of the net proceeds
derived from the sale of the Debentures in short-term interest bearing
securities.
There may be circumstances where, for business reasons, a reallocation of
the proceeds from the sale of Debentures offered by this prospectus supplement
may be necessary. The Company will only redirect such proceeds to its other
properties and will do so only on the basis of a written recommendation from an
independent, professional geologist or engineer.
PLAN OF DISTRIBUTION
Pursuant to an agreement (the "Underwriting Agreement") dated July 21, 2003,
among the Company and the Underwriters, the Company has agreed to sell and the
Underwriters have severally agreed to purchase on or about July 30, 2003, but in
any event not later than August 31, 2003, all but not less than all of the
US$75,000,000 principal amount of Debentures for an aggregate price of
$75,000,000. The Underwriters will be paid an aggregate commission of $2,250,000
for their services rendered in connection with this Offering, which will be paid
out of the general funds of the Company.
The obligations of the Underwriters under the Underwriting Agreement are
several and not joint and may be terminated upon the occurrence of certain
stated events. The Underwriters are, however, obligated to take up and pay for
all of the Debentures if any of such Debentures are purchased under the
Underwriting Agreement.
The Company has granted the Underwriters an option to purchase additional
Debentures up to a maximum of $11,250,000 to cover over-allotments (the
"Over-Allotment Option"). The Underwriters may exercise the Over-Allotment
Option in whole or in part at any time on or before the close of business on the
30th day following the closing of this Offering for the purposes of covering
over-allotments, if any. To the extent that the Over-Allotment Option is
exercised, the additional Debentures will be purchased by the Underwriters for
the principal amount of the Debentures, plus accrued interest, if any, from
July 30, 2003 to the closing date of the issuance of Debentures pursuant to the
Over-Allotment Option, and otherwise on the same terms. If the Over-Allotment
Option is exercised in full, the total aggregate underwriting commission to be
paid to the Underwriters will be US$2,587,500. This prospectus supplement
qualifies the distribution of the Debentures to be issued on exercise of the
Over-Allotment Option.
The Company has agreed to indemnify the Underwriters and their directors,
officers, employees and agents against certain liabilities, including civil
liabilities under the United States Securities Act of 1933, as amended (the
"U.S. Securities Act"), and applicable Canadian securities legislation, or to
contribute to any payments the Underwriters may be required to make in respect
thereof.
Subscriptions for Debentures offered hereby will be received subject to
rejection or allotment in whole or in part and the right is reserved to close
the subscription books at any time without notice.
Pursuant to policy statements of the Ontario Securities Commission, the
Underwriters may not, throughout the period of distribution under this
prospectus, bid for or purchase Debentures or Common Shares. The foregoing
restriction is subject to certain exceptions, as long as the bid or purchase is
not engaged in for the purpose of creating actual or apparent active trading in
or raising the price of such securities. These exceptions include a bid or
purchase permitted under the by-laws and rules of the TSX as well as applicable
rules of Regulation M under the U.S. Securities Act, relating
S-39
to market stabilization and passive market making activities and a bid or
purchase made for and on behalf of a customer where the order was not solicited
during the period of distribution. Subject to the foregoing and applicable laws,
the Underwriters may, in connection with this Offering, over-allot or effect
transactions which stabilize or maintain the market price of the Debentures at
levels other than those which otherwise might prevail on the open market. Such
transactions, if commenced, may be discontinued at any time.
The terms of the Offering, including the offering price of the Debentures,
was determined by negotiation between the Company and the Underwriters.
The Offering will be made concurrently in the provinces of British Columbia,
Alberta, Manitoba and Ontario and in the United States pursuant to the
multijurisdictional disclosure system implemented by securities regulatory
authorities in Canada and the United States. Any sales in the United States will
be made through United States registered broker-dealer affiliates of the
Underwriters.
The Debentures are a newly-listed security with no established trading
market. The TSX has conditionally approved the listing of the Debentures and the
Common Shares issuable upon the conversion of the Debentures. The Company has
notified NASDAQ of the proposed issuance of the Debentures and the Common Shares
issuable upon conversion of the Debentures. There is no current intention to
list the Debentures on NASDAQ.
The Company has agreed in the Underwriting Agreement that it will not
(subject to certain exceptions) issue or agree to issue any equity securities or
other securities convertible into equity securities until 90 days from closing
of the Offering, without the prior consent of BMO Nesbitt Burns Inc.
TRUSTEE, TRANSFER AGENT AND REGISTRAR
The trustee under the Indenture and the registrar and transfer agent for the
Common Shares is Computershare Trust Company of Canada through its offices in
Vancouver and Toronto.
LEGAL MATTERS
Certain Canadian and U.S. legal matters relating to the Debentures offered
hereby will be passed upon for the Company by Borden Ladner Gervais LLP and
Skadden, Arps, Slate, Meagher & Flom LLP, respectively, and for the Underwriters
by Blake, Cassels & Graydon LLP and Shearman & Sterling LLP, respectively. As of
the date of this prospectus supplement, the partners and associates of Borden
Ladner Gervais LLP and Blake, Cassels & Graydon LLP, collectively, beneficially
own less than 1% of the outstanding Debentures or Common Shares of the Company.
S-40
PROSPECTUS
PAN AMERICAN SILVER CORP.
[LOGO] US$100,000,000
COMMON SHARES
DEBT SECURITIES
WARRANTS
Pan American Silver Corp. (the "Company") may offer for sale, from time to
time, common shares ("Common Shares"), debt securities ("Debt Securities") or
warrants to purchase Common Shares or Debt Securities ("Warrants") of the
Company (collectively, the "Securities") or any combination thereof up to an
aggregate initial offering price of US$100,000,000 (or its equivalent in
Canadian dollars or any other currency or currency unit used to denominate the
Securities), during the 25-month period that this short form base shelf
prospectus (the "Prospectus"), including any amendments hereto, remains valid.
The specific variable terms of any offering of the Securities, will be set
forth in a shelf prospectus supplement (a "Prospectus Supplement") including,
where applicable: (i) in the case of Common Shares, the number of Common Shares
offered, the offering price and any other specific terms; (ii) in the case of
Debt Securities, the title of the Debt Securities, aggregate principal amount,
currency or the currency unit for which such Debt Securities may be purchased,
maturity, interest provisions, authorized denominations, offering price, any
redemption terms, any sinking fund provisions, any exchange or conversion terms,
whether payment on the Debt Securities will be senior or subordinated to the
Company's other liabilities and obligations and any other specific terms; and
(iii) in the case of Warrants, the designation, number and terms of the Common
Shares or Debt Securities purchasable upon exercise of the Warrants, any
procedures that will result in the adjustment of those numbers, the exercise
price, dates and periods of exercise, and the currency or the currency unit in
which the exercise price must be paid and any other specific terms. The Company
reserves the right to include in a Prospectus Supplement specific variable terms
pertaining to the Securities that are not within the options and parameters set
forth in this Prospectus.
All shelf information permitted under applicable laws to be omitted from
this Prospectus will be contained in one or more Prospectus Supplements that
will be delivered to purchasers together with this Prospectus. Each Prospectus
Supplement will be incorporated by reference into this Prospectus for the
purposes of securities legislation as of the date of the Prospectus Supplement
and only for the purposes of the distribution of the Securities to which the
Prospectus Supplement pertains.
The Company may offer and sell Securities to or through underwriters or
dealers, directly to one or more purchasers pursuant to applicable statutory
exemptions, or through agents designated from time to time. The Prospectus
Supplement relating to a particular offering of Securities will identify each
underwriter, dealer or agent engaged in connection with the offering and sale of
Securities and will set forth the plan of distribution for such Securities,
including the proceeds to the Company and any fees, discounts, concessions or
other compensation payable to the underwriters, dealers or agents, and any other
material terms of the plan of distribution.
The Common Shares of the Company are listed on the Toronto Stock Exchange
(the "TSX") and the Nasdaq National Market ("Nasdaq"). On July 17, 2003, the
closing price of the Common Shares on the TSX was Cdn$10.39 per Common Share and
the closing price of the Common Shares on Nasdaq was US$7.36 per Common Share.
THE EARNINGS COVERAGE RATIOS OF THE COMPANY FOR THE YEAR ENDED DECEMBER 31,
2002 AND THE 12-MONTH PERIOD ENDED MARCH 31, 2003 ARE LESS THAN ONE-TO-ONE. SEE
"EARNINGS COVERAGE".
------------------------------
THIS OFFERING IS MADE BY A CANADIAN ISSUER THAT IS PERMITTED, UNDER A
MULTIJURISDICTIONAL DISCLOSURE SYSTEM ADOPTED BY THE UNITED STATES, TO PREPARE
THIS PROSPECTUS IN ACCORDANCE WITH THE DISCLOSURE REQUIREMENTS OF CANADA.
PROSPECTIVE INVESTORS SHOULD BE AWARE THAT SUCH REQUIREMENTS ARE DIFFERENT FROM
THOSE OF THE UNITED STATES. CERTAIN OF THE FINANCIAL STATEMENTS INCLUDED OR
INCORPORATED HEREIN HAVE BEEN PREPARED IN ACCORDANCE WITH CANADIAN GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES, AND MAY BE SUBJECT TO CANADIAN AUDITING AND
AUDITOR INDEPENDENCE STANDARDS, AND THUS MAY NOT BE COMPARABLE TO FINANCIAL
STATEMENTS OF UNITED STATES COMPANIES.
PROSPECTIVE INVESTORS SHOULD BE AWARE THAT THE ACQUISITION OF THE SECURITIES
DESCRIBED HEREIN MAY HAVE TAX CONSEQUENCES BOTH IN THE UNITED STATES AND IN
CANADA. SUCH CONSEQUENCES FOR INVESTORS WHO ARE RESIDENT IN, OR CITIZENS OF, THE
UNITED STATES MAY NOT BE DESCRIBED FULLY HEREIN.
THE ENFORCEMENT BY INVESTORS OF CIVIL LIABILITIES UNDER THE FEDERAL
SECURITIES LAWS MAY BE AFFECTED ADVERSELY BY THE FACT THAT THE COMPANY IS
INCORPORATED OR ORGANIZED UNDER THE LAWS OF BRITISH COLUMBIA, CANADA, THAT SOME
OR ALL OF ITS OFFICERS AND DIRECTORS MAY BE RESIDENTS OF CANADA, THAT SOME OR
ALL OF THE UNDERWRITERS OR EXPERTS NAMED IN THE REGISTRATION STATEMENT MAY BE
RESIDENTS OF CANADA AND THAT A SUBSTANTIAL PORTION OF THE ASSETS OF THE COMPANY
AND SAID PERSONS MAY BE LOCATED OUTSIDE THE UNITED STATES.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------------
The date of this Prospectus is July 18, 2003.
TABLE OF CONTENTS
PAGE
--------
DOCUMENTS INCORPORATED BY REFERENCE......................... 3
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION.......... 5
CERTAIN AVAILABLE INFORMATION............................... 5
PRESENTATION OF FINANCIAL INFORMATION AND EXCHANGE RATE
DATA...................................................... 6
THE COMPANY................................................. 7
BUSINESS OF THE COMPANY..................................... 7
RECENT DEVELOPMENTS......................................... 7
USE OF PROCEEDS............................................. 8
EARNINGS COVERAGE........................................... 9
DESCRIPTION OF SHARE CAPITAL................................ 10
DESCRIPTION OF WARRANTS..................................... 10
DESCRIPTION OF DEBT SECURITIES.............................. 11
PLAN OF DISTRIBUTION........................................ 21
CHANGES TO CONSOLIDATED CAPITALIZATION...................... 23
RISK FACTORS................................................ 23
AUDITORS, TRANSFER AGENT AND REGISTRAR...................... 24
EXPERTS..................................................... 24
DOCUMENTS FILED AS PART OF THE U.S. REGISTRATION
STATEMENT................................................. 24
CANADIAN PURCHASERS' STATUTORY RIGHTS....................... 24
INDEX TO FINANCIAL STATEMENTS............................... F-1
2
DOCUMENTS INCORPORATED BY REFERENCE
INFORMATION HAS BEEN INCORPORATED BY REFERENCE IN THIS PROSPECTUS FROM
DOCUMENTS FILED WITH SECURITIES COMMISSIONS OR SIMILAR AUTHORITIES IN CANADA.
Copies of the documents incorporated by reference in this Prospectus may be
obtained on request without charge from the Controller and Corporate Secretary
of the Company at 1500-625 Howe Street, Vancouver, British Columbia, V6C 2T6
(telephone: (604) 684-1175). These documents are also available through the
Internet on the System for Electronic Document Analysis and Retrieval ("SEDAR"),
which can be accessed at www.sedar.com.
The following documents, filed with the securities commissions or similar
regulatory authorities in the Provinces of British Columbia, Alberta, Manitoba,
Ontario and Quebec, are specifically incorporated by reference into and form an
integral part of this Prospectus:
(a) the Annual Information Form of the Company, dated May 20, 2003;
(b) the audited consolidated financial statements of the Company and the
notes thereon as at and for the years ended December 31, 2001 and 2002,
together with the auditors' report thereon as set out in the Company's
annual report;
(c) the unaudited consolidated financial statements of the Company and the
notes thereto as at and for the three months ended March 31, 2003,
together with management's discussion and analysis of financial condition
and results of operations for the three months ended March 31, 2003;
(d) management's discussion and analysis of financial condition and results
of operations for the financial year ended December 31, 2002 as set out
in the Company's annual report;
(e) the information circular of the Company, dated April 9, 2003, in
connection with the Company's May 12, 2003 annual general meeting of
members, other than the sections entitled "Corporate Governance",
"Executive Compensation -- Compensation Committee", "Executive
Compensation -- Report on Executive Compensation" and "Executive
Compensation -- Performance Graph";
(f) a material change report of the Company, dated February 27, 2003,
relating to the completion of its acquisition of Corner Bay Silver Inc.
("Corner Bay");
(g) a material change report of the Company, dated February 27, 2003,
relating to consolidated production figures from 2002;
(h) a material change report of the Company, dated March 13, 2003, relating
to financial and operational results for the fourth quarter and year
ended December 31, 2002; and
(i) a material change report of the Company, dated May 22, 2003, relating to
financial and operational results for the first quarter of 2003; and
(j) a material change report of the Company, dated July 7, 2003, relating to
filing of the preliminary short form base shelf prospectus of the Company
dated July 7, 2003.
Any documents of the types referred to above, including any material change
reports (excluding confidential material change reports), interim unaudited
consolidated financial statements of the Company (including management's
discussion and analysis of financial condition and results of operations in the
quarterly reports for such periods), annual audited consolidated financial
statements of the Company, including the auditors' report on and the notes to
such financial statements, any exhibits to interim or annual consolidated
financial statements and information circulars (excluding the sections entitled
"Corporate Governance", "Executive Compensation -- Compensation Committee",
"Executive Compensation -- Report of the Compensation Committee" and "Executive
Compensation -- Performance Graph" or similar sections permitted to be excluded
under National
3
Instrument 44-101 -- Short Form Prospectus Distributions), filed by the Company
with a securities commission or similar authority in Canada after the date of
this Prospectus and prior to the termination of the offering under any
Prospectus Supplement shall be deemed to be incorporated by reference into this
Prospectus. Any document filed by the Company with the United States Securities
and Exchange Commission (the "SEC") or Report of Foreign Private Issuer on
Form 6-K furnished to the SEC pursuant to the United States Securities Exchange
Act of 1934, as amended (the "Exchange Act"), after the date of this Prospectus
shall also be deemed to be incorporated by reference into this Prospectus if and
to the extent provided in such document.
In addition, the audited consolidated financial statements of the Company
and the notes thereon as at and for the years ended December 31, 2001 and 2002,
together with the auditors' report thereon, including a reconciliation to
United States generally accepted accounting principles in accordance with
Item 18 of Form 20-F, filed on SEDAR on July 3, 2003, are incorporated by
reference in this Prospectus.
ANY STATEMENT CONTAINED IN THIS PROSPECTUS OR IN A DOCUMENT INCORPORATED OR
DEEMED TO BE INCORPORATED BY REFERENCE IN THIS PROSPECTUS SHALL BE DEEMED TO BE
MODIFIED OR SUPERSEDED FOR THE PURPOSES OF THIS PROSPECTUS TO THE EXTENT THAT A
STATEMENT CONTAINED IN THIS PROSPECTUS OR IN ANY OTHER SUBSEQUENTLY FILED
DOCUMENT WHICH ALSO IS OR IS DEEMED TO BE INCORPORATED BY REFERENCE IN THIS
PROSPECTUS MODIFIES OR SUPERSEDES THAT STATEMENT. THE MODIFYING OR SUPERSEDING
STATEMENT NEED NOT STATE THAT IT HAS MODIFIED OR SUPERSEDED A PRIOR STATEMENT OR
INCLUDE ANY OTHER INFORMATION SET FORTH IN THE DOCUMENT THAT IT MODIFIES OR
SUPERSEDES. THE MAKING OF A MODIFYING OR SUPERSEDING STATEMENT IS NOT TO BE
DEEMED AN ADMISSION FOR ANY PURPOSES THAT THE MODIFIED OR SUPERSEDED STATEMENT,
WHEN MADE, CONSTITUTED A MISREPRESENTATION, AN UNTRUE STATEMENT OF MATERIAL FACT
OR AN OMISSION TO STATE A MATERIAL FACT THAT IS REQUIRED TO BE STATED OR IS
NECESSARY TO MAKE A STATEMENT NOT MISLEADING IN LIGHT OF THE CIRCUMSTANCES IN
WHICH IT WAS MADE. ANY STATEMENT SO MODIFIED OR SUPERSEDED SHALL NOT CONSTITUTE
A PART OF THIS PROSPECTUS, EXCEPT AS SO MODIFIED OR SUPERSEDED.
A Prospectus Supplement containing the specific terms of an offering of
Securities and other information in relation to such offering will be delivered
to purchasers of such Securities together with this Prospectus and will be
deemed to be incorporated by reference into this Prospectus as of the date of
such Prospectus Supplement solely for the purposes of the offering of Securities
covered by that Prospectus Supplement.
Upon a new annual information form and the related annual financial
statements being filed by the Company with, and where required, accepted by, the
applicable securities regulatory authorities during the currency of this
Prospectus, the previous annual information form, the previous annual financial
statements and all interim financial statements, material change reports and
information circulars and all Prospectus Supplements filed prior to the
commencement of the Company's financial year in which the new annual information
form was filed shall be deemed no longer to be incorporated into this Prospectus
for purposes of future offers and sales of Securities hereunder.
4
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Some of the statements included or incorporated by reference in this
Prospectus constitute "forward-looking statements" within the meaning of the
United States Private Securities Litigation Reform Act of 1995. When used in
this Prospectus, the words "anticipate", "believe", "estimate", "expect",
"target", "plan", "budget", "may", "schedule" and similar words or expressions,
identify forward-looking statements. These forward-looking statements relate to,
among other things:
- the sufficiency of the Company's current working capital and anticipated
operating cash flow;
- the sufficiency of the mineral reserves and resources at Quiruvilca,
Huaron, La Colorada, Alamo Dorado and other properties;
- the estimated cost of and availability of funding for ongoing capital
improvement programs;
- the estimated cost of the proposed development of the La Colorada and
Alamo Dorado projects;
- estimated exploration expenditures to be incurred on the Company's various
silver exploration properties;
- compliance with environmental standards;
- forecast capital and non-operating spending; and
- levels of silver and other metals production, production costs and metal
prices.
These statements reflect the Company's current views with respect to future
events and are necessarily based upon a number of assumptions and estimates that
are inherently subject to significant uncertainties and contingencies. Many
factors, both known and unknown, could cause actual results, performance or
achievements to be materially different from the results, performance or
achievements that are or may be expressed or implied by such forward-looking
statements including, without limitation, the factors identified in the
Company's Annual Information Form, dated May 20, 2003, under the caption "Trends
and Uncertainties." Investors are cautioned against attributing undue certainty
to forward-looking statements. Although the Company has attempted to identify
important factors that could cause actual results to differ materially, there
may be other factors that cause results not to be anticipated, estimated or
intended. The Company does not intend, and does not assume any obligation, to
update these forward-looking statements to reflect changes in assumptions or
changes in circumstances or any other events affecting such statements, other
than as required by applicable law.
CERTAIN AVAILABLE INFORMATION
The Company has filed with the SEC a registration statement on Form F-10
(the "Registration Statement") under the United States Securities Act of 1933,
as amended (the "1933 Act"), with respect to the Securities. This Prospectus,
which constitutes a part of that Registration Statement, does not contain all of
the information set forth in such Registration Statement and its exhibits, to
which reference is made for further information. See "Documents Filed as Part of
the U.S. Registration Statement".
The Company is subject to the informational reporting requirements of the
Exchange Act, and in accordance therewith files reports and other information
with the SEC. Under a multijurisdictional disclosure system adopted by the
United States, the Company is permitted to prepare such reports and other
information in accordance with the disclosure requirements of Canada, which are
different from those of the United States. As a foreign private issuer, the
Company is exempt from the rules under the Exchange Act prescribing the
furnishing and content of proxy statements, and its officers, directors and
principal shareholders are exempt from the reporting and short-swing profit
recovery rules
5
contained in Section 16 of the Exchange Act. Under the Exchange Act, the Company
is not required to publish financial statements as frequently or as promptly as
U.S. companies.
The Company files annual reports with the SEC on Form 40-F, which includes:
- the Company's Annual Information Form;
- management's discussion and analysis of financial condition and results of
operations;
- the Company's consolidated financial statements, which have been prepared
in accordance with generally accepted accounting principles in Canada
("Canadian GAAP") and reconciled to generally accepted accounting
principles in the United States ("U.S. GAAP"); and
- other information specified by the Form 40-F.
The Company also furnishes the following types of information to the SEC
under cover of Form 6-K:
- material information the Company otherwise makes publicly available in
reports that it files with securities regulatory authorities in Canada;
- material information that the Company files with, and which is made public
by, the TSX; and
- material information that the Company distributes to its shareholders in
Canada.
Investors may read and copy any document the Company files with, or
furnishes to, the SEC at the SEC's public reference room at Room 1024, 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549. Copies of the material can also
be obtained from the SEC's public reference room in Washington, D.C. by paying a
fee. Please call the SEC at 1-800-SEC-0330 for further information on the public
reference room. The SEC also maintains a website (www.sec.gov) that makes
available reports and other information that the Company files or furnishes
electronically with it.
PRESENTATION OF FINANCIAL INFORMATION AND EXCHANGE RATE DATA
IN THIS PROSPECTUS, REFERENCES TO "US$" ARE TO UNITED STATES DOLLARS AND
REFERENCES TO "CDN$" ARE TO CANADIAN DOLLARS. ALL DOLLAR AMOUNTS SET FORTH IN
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS OF THE COMPANY INCORPORATED BY REFERENCE INTO THIS
PROSPECTUS ARE STATED IN UNITED STATES DOLLARS, EXCEPT WHERE OTHERWISE
INDICATED.
The following table sets forth, for each period indicated, the exchange
rates of the Canadian dollar to the U.S. dollar for the end of each period
indicated and the high, low and average exchange rates for each of such periods
(such rates, which are expressed in Canadian dollars are based on the noon
buying rates for U.S. dollars reported by the Bank of Canada).
YEAR ENDED DECEMBER 31,
THREE MONTHS ENDED ---------------------------------------
MARCH 31, 2003 2002 2001 2000
------------------ ----------- ----------- -----------
High................................ Cdn$1.5747 Cdn$1.6155 Cdn$1.6021 Cdn$1.5590
Low................................. 1.4656 1.5123 1.4936 1.4341
Average............................. 1.5102 1.5704 1.5484 1.4850
End of Period....................... 1.4693 1.5776 1.5926 1.5002
On July 17, 2003, the noon buying rate was US$1.00 = Cdn$1.3971.
6
THE COMPANY
Pan American Silver Corp. is a company incorporated under the COMPANY ACT
(British Columbia). The Company's head office is located at 1500 - 625 Howe
Street, Vancouver, British Columbia, V6C 2T6 and its registered and records
office is located at 900 Waterfront Centre, 200 Burrard Street, Vancouver,
British Columbia, V7X 1T2. In this Prospectus, the term "Pan American" refers to
the Company and its principal subsidiaries.
A description of the Company's principal subsidiaries as at its most recent
financial year end is set out under the heading "Subsidiaries" on page 3 of the
Company's annual information form which is incorporated by reference in this
Prospectus.
BUSINESS OF THE COMPANY
Pan American is principally engaged in the exploration for, and the
acquisition, development and operation of silver properties.
Pan American: (i) owns and operates the producing Quiruvilca silver mine in
Peru; (ii) owns and operates the producing Huaron silver mine in Peru;
(iii) owns and operates the producing La Colorada silver mine and development
project located in Mexico (Pan American completed a significant expansion of the
La Colorada mine in June of 2003 and silver production is expected to increase
over the balance of 2003); and (iv) mines and sells silver-rich pyrite
stockpiles at a small-scale operation in central Peru. Pan American also either
holds an interest in or may earn an interest in non-producing silver resource
and silver exploration properties in Peru, Argentina, the United States, Russia
and Mexico, including the significant Alamo Dorado deposit in Mexico on which
the Company is preparing a feasibility study.
RECENT DEVELOPMENTS
In July of 2003, Pan American initiated a technical and economic evaluation
of a possible expansion of the Huaron mine in Peru, which would increase this
mine's production.
Pan American substantially completed a major expansion at its La Colorada
silver mine in Mexico during June of 2003. The expansion included the
construction of a 600 tonne per day oxide mill, which will add to the mine's
current production from the existing 200 tonne per day sulphide mill. Production
is expected to reach design capacity within a few months following the end of
June of 2003. The expansion was completed ahead of schedule and approximately 5%
under the original US$20 million budget.
A 6,000 metre infill drilling program has been completed on Pan American's
50%-owned Manantial Espejo silver-gold exploration property in Argentina. The
results have confirmed the size of the deposit and increased Pan American's
confidence in its geological model, leading Pan American and its joint venture
partner, Silver Standard Resources Inc., to accelerate the commissioning of a
feasibility study on the property. The study will be initiated in the fourth
quarter of 2003 for completion in the fall of 2004. Over the remainder of 2003,
geotechnical and environmental work will proceed on the project to facilitate
permitting.
On February 20, 2003, the Company acquired all of the issued and outstanding
shares of Corner Bay Silver Inc. ("Corner Bay") pursuant to a plan of
arrangement under the Canada Business Corporations Act. Under this plan of
arrangement, each Corner Bay share was exchanged for 0.3846 Common Shares of the
Company plus 0.1923 warrants of the Company, resulting in the issuance of a
total of 7,636,659 Common Shares and 3,818,330 warrants of the Company. Each
whole warrant will allow the holder to purchase one Common Share of the Company
for a price of Cdn$12.00 at any time over a five-year exercise period. Pan
American also issued options to purchase up to 553,846 Common Shares (having
exercise prices of between Cdn$4.55 and Cdn$12.00 and having exercise periods of
7
between one and five years from the date of grant) in consideration for the
termination of 960,000 fully vested stock options held by employees and
shareholders of Corner Bay. Corner Bay, through its subsidiary corporations,
owns the Alamo Dorado silver-gold deposit in Mexico. The Alamo Dorado project is
described under the heading "Narrative Description of the
Business -- Development Projects -- Alamo Dorado Project" on pages 32
through 38 of the Company's annual information form which is incorporated by
reference in this Prospectus.
In May of 2003, Pan American completed a seven-hole drill program on the
Alamo Dorado project and is undertaking metallurgical testing to update a 2002
feasibility study completed by AMEC E&C Services, Inc. The updated feasibility
study will examine the economic merits of processing ore from the Alamo Dorado
deposit in a conventional oxide leaching mill circuit versus heap leach
processing. The update will also examine the economic merits of a combination
mill for high grade ore and heap leach for low grade ore. The updated study is
expected to be completed in the fourth quarter of 2003. Until this study is
completed and a production decision made, the acquisition of Corner Bay and the
Alamo Dorado project is not expected to have any material effect on the
operating results and financial position of Pan American.
USE OF PROCEEDS
Unless otherwise indicated in the applicable Prospectus Supplement, the net
proceeds from the sale of Securities will be used by the Company to fund
development of the Alamo Dorado project, the expansion of the Huaron mine, other
ongoing development and exploration programs and working capital requirements
and for other general corporate purposes. The Company may, from time to time,
issue Common Shares and other securities otherwise than through the offering of
Securities pursuant to this Prospectus.
8
EARNINGS COVERAGE
The following consolidated financial earnings deficiency figures and cash
flow coverage ratios are calculated for the year ended December 31, 2002 and the
12-month period ended March 31, 2003 and give effect to all long-term financial
liabilities of Pan American and the repayment, redemption or retirement thereof
since those dates, respectively. The earnings coverage deficiencies, cash flow
ratios and the amount of earnings, cash flow and interest expense set forth
below do not purport to be indicative of earnings coverage deficiencies or
ratios or cash flow coverage ratios for any future periods. The deficiency
figures and coverage ratios have been calculated based on Canadian GAAP. These
coverage deficiencies, coverage ratios, earnings, cash flow or interest expense
do not give effect to the issuance of any Debt Securities that may be issued
pursuant to this Prospectus and any Prospectus Supplement, since the aggregate
principal amounts and the terms of such Debt Securities are not presently known.
YEAR ENDED 12 MONTHS ENDED
DECEMBER 31, 2002 MARCH 31, 2003
------------------ ---------------
Earnings coverage deficiency(1)............................. $(33,658,000) $(33,699,000)
Earnings coverage deficiency before unusual items(2)........ $ (6,440,000) $ (7,247,000)
Cash flow coverage/(deficiency)(3)(4)....................... 7.94(3) $ (7,360,000)(4)
------------------------
(1) Earnings coverage deficiency is the dollar amount of earnings required to
attain an earnings coverage ratio of one-to-one. Earnings coverage ratio is
equal to net income before interest expense and income taxes divided by
interest expense on all debt.
(2) Earnings coverage deficiency before unusual items is the dollar amount of
earnings required to attain an earnings coverage ratio before unusual items
of one-to-one. Earnings coverage ratio before unusual items is equal to net
income before interest expense, income taxes and write-down of the Company's
investment in the Quiruvilca mine and accrual for future reclamation costs
for the Quiruvilca Mine divided by interest expense on all debt.
(3) Cash flow coverage is equal to cash flow from operating, financing and
investment activities before interest expense and income taxes divided by
interest expense on all debt.
(4) Cash flow deficiency is the dollar amount of cash flow required to attain a
cash flow coverage ratio of one-to-one. Cash flow coverage ratio is equal to
cash flow from operating, financing and investment activities before
interest expense and income taxes divided by interest expense on all debt.
The Company's interest expense requirements amounted to approximately
$988,000 for the year ended December 31, 2002. The Company's losses before
interest expense and income tax for the year ended December 31, 2002 were
approximately $32,670,000, which is a deficiency of approximately $33,658,000 of
the earnings amount necessary to attain a earnings coverage ratio of one-to-one
for this period.
The Company's interest expense requirements amounted to approximately
$881,000 for the 12 months ended March 31, 2003. The Company's losses before
interest expense and income tax for the 12 months ended March 31, 2003 were
approximately $32,818,000, which is a deficiency of approximately $33,699,000 of
the earnings amount necessary to attain a earnings coverage ratio of one-to-one
for this period.
If the Company offers any Debt Securities having a term to maturity in
excess of one year under this Prospectus and a Prospectus Supplement, the
Prospectus Supplement will include earnings coverage ratios giving effect to the
issuance of such Debt Securities.
9
DESCRIPTION OF SHARE CAPITAL
The Company is authorized to issue 100,000,000 Common Shares, without par
value, of which 52,127,284 are issued and outstanding as at the date of this
Prospectus. There are options outstanding to purchase up to 2,398,036 Common
Shares at prices ranging from $3.10 to $8.18 and warrants outstanding to
purchase up to 4,355,439 Common Shares at prices ranging from Cdn$3.26 to
Cdn$12.00. Holders of Common Shares are entitled to one vote per common share at
all meetings of shareholders, to receive dividends as and when declared by the
directors of the Company and to receive a PRO RATA share of the assets of the
Company available for distribution to the shareholders in the event of the
liquidation, dissolution or winding-up of the Company. There are no pre-emptive,
conversion or redemption rights attached to the Common Shares.
DESCRIPTION OF WARRANTS
GENERAL
The Company may issue Warrants to purchase Common Shares or Debt Securities.
The Company may issue Warrants independently or together with other Securities,
and Warrants sold with other Securities may be attached to or separate from the
other Securities. Warrants will be issued under and governed by the terms of one
or more warrant indentures (each a "Warrant Indenture") between the Company and
a warrant trustee (the "Warrant Trustee") that the Company will name in the
relevant Prospectus Supplement. Each Warrant Trustee will be a financial
institution organized under the laws of Canada or any province thereof and
authorized to carry on business as a trustee.
Selected provisions of the Warrants and any Warrant Indenture are summarized
below. The statements made in this Prospectus relating to any Warrant Indenture
and Warrants to be issued thereunder are summaries of certain anticipated
provisions thereof and are subject to, and are qualified in their entirety by
reference to, all provisions of the applicable Warrant Indenture and the
Prospectus Supplement describing such Warrant Indenture.
The Prospectus Supplement relating to any Warrants the Company offers will
describe the Warrants and include specific terms relating to their offering. All
such terms will comply with the requirements of the TSX and Nasdaq relating to
Warrants. The Prospectus Supplement will include some or all of the following:
- the title of the Warrants;
- the aggregate number of Warrants offered;
- the price, if any, at which the Warrants will be offered;
- the designation, number and terms of the Common Shares or Debt Securities
purchasable upon exercise of the Warrants, and the procedures that will
result in the adjustment of those numbers;
- the exercise price of the Warrants;
- the dates or periods during which the Warrants are exercisable;
- the designation and terms of any securities with which the Warrants are
issued;
- if the Warrants are issued as a unit with another security, the date on
and after which the Warrants and the other security will be separately
transferable;
- if the exercise price is not payable in U.S. dollars, the currency or
currency units in which the exercise price is denominated;
- any minimum or maximum amount of Warrants that may be exercised at any one
time;
10
- any terms, procedures and limitations relating to the transferability,
exchange or exercise of the Warrants;
- the identity of the Warrant Trustee;
- whether the Warrants will be listed on any exchange; and
- any other terms of the Warrants.
Warrant certificates will be exchangeable for new Warrant certificates of
different denominations at the office or offices indicated in the Warrant
Indenture and the Prospectus Supplement. Prior to the exercise of their
Warrants, holders of Warrants will not have any of the rights of holders of the
Common Shares or Debt Securities issuable upon exercise of the Warrants.
MODIFICATIONS
The Company may amend any Warrant Indenture and the Warrants, without the
consent of the holders of the Warrants, to cure any ambiguity, to cure, correct
or supplement any defective or inconsistent provision, or in any other manner
that will not materially and adversely affect the interests of holders of
outstanding Warrants.
ENFORCEABILITY
The Warrant Trustee will act solely as the Company's agent. The Warrant
Trustee will not have any duty or responsibility if the Company defaults under
the Warrant Indenture or the Warrant certificates. A Warrant holder may, without
the consent of the Warrant Trustee, enforce by appropriate legal action on its
own behalf the holder's right to exercise the holder's Warrants.
DESCRIPTION OF DEBT SECURITIES
The Company may issue Debt Securities in one or more series under one or
more indentures (each, a "Trust Indenture"), each to be entered into between the
Company and a trustee (each, a "Debt Securities Trustee"). Each Debt Securities
Trustee will be a financial institution organized under the laws of Canada or
any province thereof and authorized to carry on business as a trustee. Each
Trust Indenture will be subject to and governed by the COMPANY ACT (British
Columbia) and the United States Trust Indenture Act of 1939, as amended. A copy
of the form of Trust Indenture will be filed with Canadian securities regulatory
authorities and as an exhibit to the Registration Statement. The following
description sets forth certain general terms and provisions of Debt Securities
and is not intended to be complete. The statements made in this Prospectus
relating to any Trust Indenture and Debt Securities to be issued thereunder are
summaries of certain anticipated provisions thereof and are subject to, and are
qualified in their entirety by reference to, all provisions of the applicable
Trust Indenture and the Prospectus Supplement describing such Trust Indenture.
The Prospectus Supplement relating to any Debt Securities the Company offers
will describe the Debt Securities and include specific terms relating to their
offering. All such terms will comply with the requirements of the TSX and Nasdaq
relating to Debt Securities.
GENERAL
The Company may issue Debt Securities that may consist of debentures,
convertible debentures, notes, bonds and/or other similar evidences of
indebtedness from time to time in separate series. The Prospectus Supplement for
any series of Debt Securities the Company offers will describe the specific
terms of the Debt Securities and may include, but is not limited to, any of the
following:
- the title of the Debt Securities;
- any limit on the aggregate principal amount of the Debt Securities;
11
- the price at which the Debt Securities will be issued (or the manner of
determination thereof, if offered on a non-fixed price basis and whether
at par, at a discount or at a premium);
- the date or dates on which the Company may issue the Debt Securities;
- the currency of issue of the Debt Securities;
- whether payment on the Debt Securities will be senior or subordinated to
the Company's other liabilities or obligations and the terms and
provisions of such subordination;
- whether the payment of the Debt Securities will be guaranteed by any other
person and the terms and provisions of any such guarantee;
- whether the Debt Securities will be secured by assets of Pan American or
any other person and the terms of such security;
- the date or dates on which the Company will pay the principal and any
premium on the Debt Securities and the portion (if less than the principal
amount) of Debt Securities to be payable upon a declaration of
acceleration of maturity;
- whether and under what circumstances the date or dates on which the
Company will pay the principal and any premium on the Debt Securities may
be extended;
- whether the Debt Securities will bear interest, whether the interest is
payable in cash, securities or a combination thereof, the interest rate or
the method of determining the interest rate (which may be fixed or
variable), the date from which interest will accrue, the dates on which
the Company will pay interest and the record dates for interest payments;
- the place or places the Company will pay principal, any premium and
interest and the place or places where Debt Securities can be presented
for registration of transfer or exchange;
- whether and under what circumstances the Company will be required to pay
any additional amounts for withholding or deduction for Canadian taxes
with respect to the Debt Securities, and whether the Company will have the
option to redeem the Debt Securities rather than pay the additional
amounts;
- whether and under what circumstances the Company will be obligated to
redeem or repurchase the Debt Securities pursuant to any sinking or
purchase fund or other provisions, or at the option of a holder;
- whether and under what circumstances the Company may redeem the Debt
Securities at its option;
- the terms and conditions, if any, upon which the Company may redeem or
repurchase the Debt Securities prior to maturity and the price or prices
at which the Debt Securities will be redeemed or repurchased;
- the denominations in which the Company will issue any Debt Securities;
- whether the Company will make payments on the Debt Securities in a
currency or currency unit other than United States dollars or by delivery
of Common Shares or other property;
- whether payments on the Debt Securities will be payable with reference to
any index or formula;
- whether the Company will issue the Debt Securities as global securities
and, if so, the identity of the depositary for the global securities;
- whether the Company will issue the Debt Securities as bearer securities,
registered securities or both;
12
- any changes or additions to events of default or covenants;
- the applicability of, and any changes or additions to, the provisions for
defeasance described under "Defeasance" below;
- whether the holders of any series of Debt Securities have special rights
if specified events occur;
- the terms for any conversion or exchange of the Debt Securities for any
other securities;
- provisions as to modification, amendment or variation of any rights or
terms attaching to the Debt Securities;
- the identity of the Debt Securities Trustee;
- whether the Debt Securities will be listed on any exchange; and
- any other terms of the Debt Securities.
Unless stated otherwise in the applicable Prospectus Supplement, no holder
will have the right to require the Company to repurchase the Debt Securities and
there will be no increase in the interest rate if the Company becomes involved
in a highly leveraged transaction or if there is a change of control of the
Company.
The Company may issue Debt Securities bearing no interest or interest at a
rate below the prevailing market rate at the time of issuance, and offer and
sell these Debt Securities at a discount below their stated principal amount.
The Company may also sell any of the Debt Securities for a currency or currency
unit other than United States dollars, and payments on the Debt Securities may
be payable in a currency or currency unit other than United States dollars. In
any of these cases, the Company will describe any Canadian and United States
federal income tax consequences and other special considerations in the
applicable Prospectus Supplement.
The Company may issue Debt Securities with terms different from those of
Debt Securities previously issued and, without the consent of the holders
thereof, the Company may reopen a previous issue of a series of Debt Securities
and issue additional Debt Securities of such series (unless the reopening was
restricted when such series was created).
FORM, DENOMINATIONS AND EXCHANGE
Debt Securities of a series may be issuable solely as registered securities,
solely as bearer securities or as both registered securities and bearer
securities. The Trust Indenture may also provide that Debt Securities of a
series will be issuable in global form. Unless otherwise indicated in the
Prospectus Supplement, bearer securities will have interest coupons attached.
Registered Debt Securities of any series will be exchangeable for other
registered Debt Securities of the same series and of a like aggregate principal
amount and tenor in different authorized denominations. If (but only if)
provided in the Prospectus Supplement and Trust Indenture, bearer Debt
Securities (with all unmatured coupons, except as provided below, and all
matured coupons in default) of any series may be exchanged for registered Debt
Securities of the same series in any authorized denominations and of a like
aggregate principal amount and tenor. In such event, bearer Debt Securities
surrendered in a permitted exchange for registered Debt Securities between a
regular record date or a special record date and the relevant date for payment
of interest shall be surrendered without the coupon relating to such date for
payment of interest, and interest will not be payable on such date for payment
of interest in respect of the registered security issued in exchange for such
bearer security, but will be payable only to the holder of such coupon when due
in accordance with the terms of the Trust Indenture.
13
The applicable Prospectus Supplement may indicate the place or places to
register a transfer of Debt Securities. Except for certain restrictions set
forth in the Trust Indenture, no service charge will be made for any
registration of transfer or exchange of the Debt Securities, but the Company
may, in certain instances, require a sum sufficient to cover any tax or other
governmental charges payable in connection with these transactions.
The Company shall not be required to: (i) issue, register the transfer of or
exchange Debt Securities of any series during a period beginning at the opening
of business 15 days before any selection of Debt Securities of that series is to
be redeemed and ending at the close of business on: (A) if Debt Securities of
the series are issuable only as registered securities, the day of mailing of the
relevant notice of redemption; or (B) if Debt Securities of the series are
issuable as bearer securities, the day of the first publication of the relevant
notice of redemption or, if Debt Securities of the series are also issuable as
registered securities and there is no publication, the mailing of the relevant
notice of redemption; (ii) register the transfer of or exchange any registered
Debt Security, or a portion thereof, called for redemption, except the
unredeemed portion of any registered security being redeemed in part;
(iii) exchange any bearer Debt Security selected for redemption, except that, to
the extent provided with respect to such bearer security, such bearer security
may be exchanged for a registered Debt Security of that series and like tenor,
provided that such registered security shall be immediately surrendered for
redemption with written instruction for payment consistent with the provisions
of the Trust Indenture; or (iv) issue, register the transfer of or exchange any
Debt Securities which have been surrendered for repayment at the option of the
holder, except the portion, if any, thereof not to be so repaid.
PAYMENT
Unless stated otherwise in the Prospectus Supplement and the Trust
Indenture, the Company will make payments on the Debt Securities at the relevant
office or agency of the Debt Securities Trustee or the Company can make payments
by: (i) cheque mailed or delivered to the person entitled at the address
appearing in the security register of the Debt Securities Trustee; or (ii) wire
transfer to an account in the United States or Canada of the person entitled to
receive payments. Unless stated otherwise in the applicable Prospectus
Supplement, the Company will make payment to the persons in whose names the Debt
Securities are registered on the close of business on the day or days specified
in the Trust Indenture. The Company will make Debt Securities payments in other
forms at a place designated by the Company and specified in the applicable
Prospectus Supplement and Trust Indenture.
GLOBAL SECURITIES
The registered Debt Securities of a series may be issued in whole or in part
in global form (a "Global Security") and will be registered in the name of and
be deposited with a depositary (the "Depositary"), or its nominee, each of which
will be identified in the Prospectus Supplement. Unless and until exchanged, in
whole or in part, for Debt Securities in definitive registered form, a Global
Security may not be transferred except as a whole by the Depositary for such
Global Security to a nominee of the Depositary, by a nominee of the Depositary
to the Depositary or another nominee of the Depositary or by the Depositary or
any such nominee to a successor of the Depositary or a nominee of the successor.
The specific terms of the depositary arrangement with respect to any portion
of a particular series of Debt Securities to be represented by a Global Security
will be described in the Prospectus Supplement relating to such series and the
Trust Indenture. The Company anticipates that the following provisions will
apply to all depositary arrangements.
Upon the issuance of a Global Security, the Depositary therefor or its
nominee will credit, on its book entry and registration system, the respective
principal amounts of the Debt Securities represented
14
by the Global Security to the accounts of such persons having accounts with such
Depositary or its nominee ("Participants"). Such accounts shall be designated by
the underwriters, dealers or agents participating in the distribution of the
Debt Securities or by the Company if such Debt Securities are offered and sold
directly by the Company. Ownership of beneficial interests in a Global Security
will be limited to participants or persons that may hold beneficial interests
through participants. Ownership of beneficial interests in a Global Security
will be shown on, and the transfer of that ownership will be effected only
through, records maintained by the Depositary therefor or its nominee (with
respect to interest of Participants) or by Participants or persons that hold
through Participants (with respect to interests of persons other than
Participants). The laws of some states in the United States may require that
certain purchasers of securities take physical delivery of such securities in
definitive form.
So long as the Depositary for a Global Security or its nominee is the
registered owner of the Global Security, such Depositary or such nominee, as the
case may be, will be considered the sole owner or holder of the Debt Securities
represented by the Global Security for all purposes under the Trust Indenture.
Except as provided below, owners of beneficial interests in a Global Security
will not be entitled to have Debt Securities of the series represented by the
Global Security registered in their names, will not receive or be entitled to
receive physical delivery of Debt Securities of such series in definitive form
and will not be considered the owners or holders thereof under the Trust
Indenture.
Any payments of principal of, premium, if any, and interest on Global
Securities registered in the name of a Depositary or its nominee will be made to
the Depositary or its nominee, as the case may be, as the registered owner of
the Global Security representing such Debt Securities. None of the Company, the
Debt Securities Trustee or any paying agent for Debt Securities represented by
the Global Securities will have any responsibility or liability for any aspect
of the records relating to or payments made on account of beneficial ownership
interests of the Global Security or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests.
The Company expects that the Depositary for a Global Security or its
nominee, upon receipt of any payment of principal, premium or interest, will
immediately credit Participants' accounts with payments in amounts proportionate
to their respective beneficial interests in the principal amount of the Global
Security as shown on the records of such Depositary or its nominee. The Company
also expects that payments by Participants to owners of beneficial interests in
a Global Security held through such Participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in "street name", and will be the
responsibility of such Participants.
If a Depositary for a Global Security representing a particular series of
Debt Securities is at any time unwilling or unable or no longer qualified to
continue as depositary and a successor depositary is not appointed by the
Company within 90 days, the Company will issue Debt Securities of such series in
definitive form in exchange for a Global Security representing such series of
Debt Securities. In addition, the Company may at any time and in its sole
discretion determine not to have Debt Securities of a series represented by a
Global Security and, in such event, will issue Debt Securities of a series in
definitive form in exchange for all of the Global Securities representing the
series of Debt Securities.
MERGER, AMALGAMATION OR CONSOLIDATION
The Trust Indenture will provide that the Company may not consolidate with
or amalgamate or merge with or into any other person or convey, transfer or
lease its properties and assets substantially as an entirety to another person,
unless among other items:
- the Company is the surviving person, or the resulting, surviving or
transferee person, if other than the Company, is organized and existing
under the laws of Canada, any province or territory thereof, the
United States, any state thereof or the District of Columbia, or, if the
15
amalgamation, merger, consolidation or other transaction would not impair
the rights of holders, any other country;
- the successor person assumes all obligations of the Company under the Debt
Securities and the Trust Indenture; and
- the Company or such successor person will not be in default under the
Trust Indenture immediately after the transaction.
When such a person assumes the Company's obligations in such circumstances,
subject to certain exceptions, the Company shall be discharged from all
obligations under the Debt Securities and the Trust Indenture.
TAX REDEMPTION
If and to the extent specified in an applicable Prospectus Supplement and
Trust Indenture, the Debt Securities of a series will be subject to redemption
at any time, in whole but not in part at a redemption price equal to the
principal amount thereof together with accrued and unpaid interest to the date
fixed for redemption, upon the giving of a notice as described below: if
(i) the Company determines that (A) as a result of any change in or amendment to
the laws (or any regulations or rulings promulgated thereunder) of Canada or of
any political subdivision or taxing authority thereof or therein affecting
taxation, or any change in official position regarding application or
interpretation of such laws, regulations or rulings (including a holding by a
court of competent jurisdiction), which change or amendment is announced or
becomes effective on or after a date specified in the applicable Prospectus
Supplement and Trust Indenture if any date is so specified, the Company has or
will become obligated to pay, on the next succeeding date on which interest is
due, Additional Amounts with respect to any Debt Security of such series as
described below under "Canadian Withholding Taxes"; or (B) on or after a date
specified in the applicable Prospectus Supplement, any action has been taken by
any taxing authority of, or any decision has been rendered by a court of
competent jurisdiction in, Canada or any province or territory thereof,
including any of those actions specified in (A) above, whether or not such
action was taken or decision was rendered with respect to the Company, or any
change, amendment, application or interpretation shall be officially proposed,
which, in any such case, in the written opinion to the Company of legal counsel
of recognized standing, will result in the Company becoming obligated to pay, on
the next succeeding date on which interest is due, Additional Amounts with
respect to any Debt Securities of such series; and (ii) in any such case, the
Company in its business judgment determines that such obligation cannot be
avoided by the use of reasonable measures available to the Company; provided
however, that (a) no such notice of redemption may be given earlier than
90 days prior to the earliest date on which the Company would be obligated to
pay such Additional Amounts were a payment in respect of the Debt Securities
then due, and (b) at the time such notice of redemption is given, such
obligation to pay such Additional Amounts remains in effect.
In the event that the Company elects to redeem the Debt Securities of such
series pursuant to the provisions set forth in the preceding paragraph, the
Company shall deliver to the Debt Securities Trustee a certificate, signed by an
authorized officer, stating that the Company is entitled to redeem the Debt
Securities of such series pursuant to their terms.
CANADIAN WITHHOLDING TAXES
If and to the extent specified in an applicable Prospectus Supplement and
Trust Indenture, all payments made by or on behalf of the Company under or with
respect to the Debt Securities will be made free and clear of and without
withholding or deduction for or on account of any present or future tax, duty,
levy, impost, assessment or other government charge (including penalties,
interest and other liabilities related thereto) imposed or levied by or on
behalf of the Government of Canada or of
16
any province or territory thereof or by any authority or agency therein or
thereof having power to tax ("Canadian Taxes") unless the Company is required to
withhold or deduct Canadian Taxes by law or by the interpretation or
administration thereof by the relevant government authority or agency.
If the Company is so required to withhold or deduct any amount for or on
account of Canadian Taxes from any payment made under or with respect to the
Debt Securities, the Company will pay as additional interest such additional
amounts ("Additional Amounts") as may be necessary so that the net amount
received by each holder of Debt Securities after such withholding or deduction
(including with respect to Additional Amounts) will not be less than the amount
the holder of Debt Securities would have received if such Canadian Taxes had not
been withheld or deducted (a similar payment will also be made to holders of
Debt Securities (other than Excluded Holders as defined herein) that are exempt
from withholding but required to pay tax under Part XIII of the INCOME TAX ACT
(Canada) (the "Tax Act") directly on amounts otherwise subject to withholding);
provided, however, that no Additional Amounts will be payable with respect to a
payment made to a holder of Debt Securities (an "Excluded Holder") in respect of
the beneficial owner thereof:
(1) with which the Company does not deal at arm's length (for purposes
of the Tax Act) at the time of the making of such payment;
(2) which is subject to such Canadian Taxes by reason of its failure to
comply with any certification, identification, information, documentation or
other reporting requirement if compliance is required by law, regulation,
administrative practice or an applicable treaty as a precondition to
exemption from, or a reduction in the rate of deduction or withholding of,
such Canadian Taxes; or
(3) which is subject to such Canadian Taxes by reason of its carrying on
business in or being connected with Canada or any province or territory
thereof otherwise than by the mere holding of Debt Securities or the receipt
of payment thereunder.
The Company will make such withholding or deduction and remit the full
amount deducted or withheld to the relevant authority as and when required in
accordance with applicable law. The Company will pay all taxes, interest and
other liabilities which arise by virtue of any failure of the Company to
withhold, deduct and remit to the relevant authority on a timely basis the full
amounts required in accordance with applicable law. The Company will furnish to
the holder of the Debt Securities, within 30 days after the date the payment of
any Canadian Taxes is due pursuant to applicable law, certified copies of tax
receipts evidencing such payment by the Company.
The foregoing obligations shall survive any termination, defeasance or
discharge of the Trust Indenture.
PROVISION OF FINANCIAL INFORMATION
Unless stated otherwise in an applicable Prospectus Supplement and Trust
Indenture, the Company will file with the Debt Securities Trustee and mail to
all holders of Debt Securities, as their names and addresses appear in the
security register, copies of its annual report or the information, documents and
other reports that the Company is required to provide to its shareholders
pursuant to the applicable Canadian securities legislation and the COMPANY ACT
(British Columbia) and information filed by the Company with the SEC. The
Company will agree to continue to provide the Debt Securities Trustee and
holders (a) within 140 days after the end of each financial year, an annual
report; and (b) within 60 days after the end of each of the first three
financial quarters of each financial year, quarterly reports, even if the
Company is no longer required to do so under the Canadian securities legislation
or the COMPANY ACT (British Columbia) and information filed by the Company with
the SEC. The information contained in these reports will be, at a minimum, the
information required to be provided
17
in annual and quarterly reports by law in Canada to security holders of a
corporation with securities listed on the TSX whether or not the Company has any
of its securities listed on such stock exchange.
EVENTS OF DEFAULT
When the Company uses the term "event of default" in this Prospectus, the
Company means:
- the Company fails to pay principal of, or any premium on, any Debt
Securities of that series when it is due;
- the Company fails to pay interest or any additional amounts on any Debt
Securities of that series for 30 days from the date such amounts are due;
- the Company fails to comply with any of its other agreements in the Trust
Indenture that affect or are applicable to the Debt Securities for
60 days after the Company receives written notice from the Debt Securities
Trustee or after the Company and the Debt Securities Trustee receive
written notice from the holders of at least 25% in aggregate principal
amount of the outstanding Debt Securities;
- certain events involving its bankruptcy, insolvency or
reorganization; and
- any other event of default provided for that series of Debt Securities in
the Trust Indenture.
An event of default under one series of Debt Securities will not necessarily
be an event of default under another series. The Debt Securities Trustee may
withhold notice to the holders of Debt Securities of any event of default
(except in the payment of principal or interest) if in good faith it considers
it in the interests of the holders to do so.
If an event of default for any series of Debt Securities occurs and
continues, the Debt Securities Trustee or the holders of at least 25% in
aggregate principal amount of the Debt Securities of that series, subject to any
subordination provisions, may require the Company to repay immediately:
- the entire principal of the Debt Securities of the series; or
- if the Debt Securities are discounted securities, that portion of the
principal as is described in the applicable Prospectus Supplement and
Trust Indenture.
If an event of default relates to events involving the Company's bankruptcy,
insolvency or reorganization, the principal of all Debt Securities will become
immediately due and payable without any action by the Debt Securities Trustee or
any holder. Subject to certain conditions, the holders of a majority of the
aggregate principal amount of the Debt Securities of the affected series can
rescind this accelerated payment requirement.
If Debt Securities are discounted securities, the applicable Prospectus
Supplement will contain provisions relating to the acceleration of maturity of a
portion of the principal amount of the discounted securities upon the occurrence
or continuance of an event of default.
Other than its duties in case of an event of default, the Debt Securities
Trustee is not obligated to exercise any of its rights or powers under the Trust
Indenture at the request, order or direction of any holders, unless the holders
offer the Debt Securities Trustee reasonable indemnity. If they provide this
reasonable indemnity, the holders of a majority in principal amount of any
series of Debt Securities may, subject to certain limitations, direct the time,
method and place of conducting any proceeding or any remedy available to the
Debt Securities Trustee, or exercising any power conferred upon the Debt
Securities Trustee, for any series of Debt Securities.
The Company will be required to furnish to the Debt Securities Trustee a
statement annually as to its compliance with all conditions and covenants under
the Trust Indenture and, if the Company is not in compliance, the Company must
specify any events of default.
18
No holder of Debt Securities of any series will have any right to institute
any proceeding with respect to the Trust Indenture, or for the appointment of a
receiver or a trustee, or for any other remedy, unless:
(1) the holder has previously given to the Debt Securities Trustee
written notice of a continuing event of default with respect to the Debt
Securities of the affected series;
(2) the holders of at least 25% in principal amount of the outstanding
Debt Securities of the series affected by an event of default have made a
written request, and the holders have offered reasonable indemnity, to the
Debt Securities Trustee to institute a proceeding as trustee; and
(3) the Debt Securities Trustee has failed to institute a proceeding,
and has not received from the holders of a majority in aggregate principal
amount of the outstanding Debt Securities of the series affected by an event
of default a direction inconsistent with the request, within 60 days after
their notice, request and offer.
However, the above limitations do not apply to a suit instituted by a holder
of Debt Securities for the enforcement of payment of principal of, or any
premium or interest on, the Debt Securities on or after the applicable due date
specified in the Debt Securities.
DEFEASANCE
When the Company uses the term "defeasance" in this Prospectus, the Company
means discharge from some or all of its obligations under a Trust Indenture. If
the Company deposits with the Debt Securities Trustee sufficient cash or
government securities to pay the principal, interest, any premium and any other
sums due to the stated maturity date or a redemption date of the Debt Securities
of a series, then at its option:
- the Company will be discharged from its obligations with respect to the
Debt Securities of that series; or
- the Company will no longer be under any obligation to comply with certain
restrictive covenants under the Trust Indenture, and certain events of
default will no longer apply to the Company.
If this happens, the holders of the Debt Securities of the affected series
will not be entitled to the benefits of the Trust Indenture except for
registration of transfer and exchange of Debt Securities and the replacement of
lost, stolen or mutilated Debt Securities. These holders may look only to the
deposited fund for payment on their Debt Securities.
To exercise its defeasance option, the Company must deliver to the Debt
Securities Trustee:
(1) an opinion of counsel in Canada or a ruling from the Canada Customs
and Revenue Agency to the effect that the holders of the outstanding Debt
Securities of the affected series will not recognize income, gain or loss
for Canadian federal, provincial or territorial income or other tax purposes
as a result of a defeasance and will be subject to Canadian federal or
provincial income tax and other tax on the same amounts, in the same manner
and at the same times as would have been the case had the defeasance not
occurred;
(2) an opinion of counsel in the United States to the effect that the
holders of the outstanding Debt Securities of the affected series will not
recognize gain or loss for United States federal income tax purposes as a
result of a defeasance and will be subject to United States federal income
tax on the same amounts, in the same manner and at the same times as would
have been the case if the defeasance had not occurred; and
(3) a certificate of an officer of the Company and an opinion of
counsel, each stating that all conditions precedent provided for relating to
defeasance have been satisfied.
19
If the Company will be discharged from its obligations with respect to the
Debt Securities, and not just from its covenants, the U.S. opinion must be based
upon a ruling from or published by the United States Internal Revenue Service or
a change in law to that effect.
In addition to the delivery of the opinions described above, the following
conditions must be met before the Company may exercise its defeasance option:
- no event of default or event that, with the passing of time or the giving
of notice, or both, shall constitute an event of default shall have
occurred and be continuing for the Debt Securities of the affected series;
- the Company is not an "insolvent person" within the meaning of applicable
bankruptcy and insolvency legislation; and
- other customary conditions precedent are satisfied.
MODIFICATION AND WAIVER
The Company may modify a Trust Indenture with the consent of the holders of
a majority in aggregate principal amount of the outstanding Debt Securities of
each series affected by the modification. However, without the consent of each
holder affected, no modification may:
- change the stated maturity of the principal of (or premium, if any), or
any installment of interest, if any, on any Debt Securities;
- reduce the principal, premium, if any, or interest rate or any obligation
to pay any additional amounts;
- reduce the amount of principal of a Debt Security payable upon
acceleration of its maturity;
- change the place or currency of any payment;
- affect the holder's right, if any, to require the Company to repurchase
the Debt Securities at the holder's option;
- impair the right of the holders to institute a suit to enforce their
rights to payment;
- adversely affect any conversion or exchange right related to a series of
Debt Securities;
- change the percentage of Debt Securities required to modify the Trust
Indenture or to waive compliance with certain provisions of the Trust
Indenture; or
- reduce the percentage in principal amount of outstanding Debt Securities
necessary to take certain actions.
The holders of a majority in principal amount of outstanding Debt Securities
of any series may on behalf of the holders of all Debt Securities of that series
waive, in so far as only that series is concerned, past defaults under the Trust
Indenture and the Company's compliance with certain restrictive provisions of
the Trust Indenture. However, these holders may not waive a default in any
payment on any Debt Securities or compliance with a provision that cannot be
modified without the consent of each holder affected.
The Company may modify the Trust Indenture without the consent of the
holders to:
- evidence its successor under the Trust Indenture;
- add to covenants or surrender any right or power for the benefit of
holders;
- add events of default;
20
- provide for bearer securities to become registered securities under the
Trust Indenture and make other such changes to bearer securities that in
each case do not materially and adversely affect the interests of holders
of outstanding Debt Securities;
- establish the forms of the Debt Securities;
- appoint a successor trustee under the Trust Indenture;
- add provisions to permit or facilitate the defeasance or discharge of the
Debt Securities as long as there is no adverse affect on the holders;
- cure any ambiguity, correct or supplement any defective or inconsistent
provision, make any other provisions in each case that would not
materially and adversely affect the interests of holders of outstanding
securities and related coupons, if any; or
- to change or eliminate any provisions where such change takes effect when
there are no securities outstanding under the Trust Indenture.
GOVERNING LAW
The Trust Indenture and the Debt Securities will be governed by and
construed in accordance with the laws of the Province of British Columbia and
the federal laws of Canada applicable in British Columbia.
THE TRUSTEE
The Debt Securities Trustee under the Trust Indenture or its affiliates may
provide banking, registrar and transfer agency and other services to the Company
in the ordinary course of their business.
The Trust Indenture will contain certain limitations on the rights of the
Debt Securities Trustee, as long as it or any of its affiliates remains the
Company's creditor, to obtain payment of claims in certain cases or to realize
on certain property received on any claim as security or otherwise. If the Debt
Securities Trustee or any affiliate acquires any conflicting interest and an
event of default occurs with respect to the Debt Securities, the Debt Securities
Trustee must eliminate the conflict or resign.
PLAN OF DISTRIBUTION
GENERAL
The Company may offer and sell the Securities, separately or together:
(i) to one or more underwriters or dealers; (ii) through one or more agents; or
(iii) directly to one or more other purchasers. The Securities offered pursuant
to any Prospectus Supplement may be sold from time to time in one or more
transactions at: (i) a fixed price or prices, which may be changed from time to
time; (ii) market prices prevailing at the time of sale; (iii) prices related to
such prevailing market prices; or (iv) other negotiated prices. The Company may
only offer and sell the Securities pursuant to a Prospectus Supplement during
the 25-month period that this Prospectus, including any amendments hereto,
remains valid. The Prospectus Supplement for any of the Securities being offered
thereby will set forth the terms of the offering of such Securities, including
the type of Security being offered, the name or names of any underwriters,
dealers or agents, the purchase price of such Securities, the proceeds to the
Company from such sale, any underwriting commissions or discounts and other
items constituting underwriters' compensation and any discounts or concessions
allowed or re-allowed or paid to dealers. Only underwriters so named in the
Prospectus Supplement are deemed to be underwriters in connection with the
Securities offered thereby.
21
BY UNDERWRITERS OR DEALERS
If underwriters are used in the sale, the Securities will be acquired by the
underwriters for their own account and may be resold from time to time in one or
more transactions, including negotiated transactions, at a fixed public offering
price or at varying prices determined at the time of sale. Unless otherwise set
forth in the Prospectus Supplement relating thereto, the obligations of
underwriters to purchase the Securities will be subject to certain conditions,
but the underwriters will be obligated to purchase all of the Securities offered
by the Prospectus Supplement if any of such Securities are purchased. The
Company may agree to pay the underwriters a fee or commission for various
services relating to the offering of any Securities. Any such fee or commission
will be paid out of the general corporate funds of the Company.
If dealers are used, and if so specified in the applicable Prospectus
Supplement, the Company will sell such Securities to the dealers as principals.
The dealers may then resell such Securities to the public at varying prices to
be determined by such dealers at the time of resale. Any public offering price
and any discounts or concessions allowed or re-allowed or paid to dealers may be
changed from time to time.
BY AGENTS
The Securities may also be sold through agents designated by the Company.
Any agent involved will be named, and any fees or commissions payable by the
Company to such agent will be set forth, in the applicable Prospectus
Supplement. Any such fees or commissions will be paid out of the general
corporate funds of the Company. Unless otherwise indicated in the Prospectus
Supplement, any agent will be acting on a best efforts basis for the period of
its appointment.
DIRECT SALES
Securities may also be sold directly by the Company at such prices and upon
such terms as agreed to by the Company and the purchaser. In this case, no
underwriters, dealers or agents would be involved in the offering.
GENERAL INFORMATION
Underwriters, dealers or agents who participate in the distribution of
Securities may be entitled under agreements to be entered into with the Company
to indemnification by the Company against certain liabilities, including
liabilities under Canadian provincial and United States securities legislation,
or to contribution with respect to payments which such underwriters, dealers or
agents may be required to make in respect thereof. Such underwriters, dealers or
agents may be customers of, engage in transactions with, or perform services
for, the Company in the ordinary course of business.
In connection with any offering of Securities, underwriters may over-allot
or effect transactions which stabilize or maintain the market price of the
Securities offered at a level above that which might otherwise prevail in the
open market. Such transactions may be commenced, interrupted or discontinued at
any time.
In accordance with the rules of the National Association of Securities
Dealers, Inc., the Company will not pay a commission to a broker-dealer in
connection with any sale of Securities under this Prospectus that is in excess
of 6%.
22
CHANGES TO CONSOLIDATED CAPITALIZATION
Since December 31, 2002, the following changes have occurred to the share
and loan capital of the Company, on a consolidated basis:
- on February 20, 2003, the Company completed the acquisition of Corner Bay
Silver Inc. by issuing 7,636,659 Common Shares and 3,818,329 warrants to
purchase Common Shares (having an exercise price of Cdn$12.00 for a
five-year period ending February 20, 2008). The Company also granted
553,846 stock options to purchase Common Shares (having exercise prices of
between Cdn$4.55 and Cdn$12.00 and having exercise periods of between one
and five years from the date of grant) in consideration for the
termination of 960,000 fully vested stock options held by employees and
shareholders of Corner Bay;
- the Company issued 507,171 Common Shares pursuant to the exercise of stock
options;
- the Company issued 100,000 Common Shares pursuant to the exercise of
warrants;
- the Company reduced its $5.15 million loan on the Huaron property from
Banco de Credito del Peru by $812,000. The Huaron loan bears interest at
six-month LIBOR plus 3% and is repayable at the rate of $135,417 per
month;
- Pan American drew down $8,000,000 of its $10,000,000 La Colorada project
loan facility with International Finance Corporation ("IFC"). The IFC loan
bears interest at six-month LIBOR plus 3.50% until certain technical and
financial tests are achieved and six-month LIBOR plus 3.25% thereafter.
The IFC loan is repayable in semi-annual instalments of $1,000,000
commencing November 14, 2004. In addition to the interest payments on the
outstanding balance of the IFC loan, Pan American will be required to make
additional payments to IFC if the average price of silver for a year
exceeded $4.75 per ounce. Such payment would be equal to 20% of the
positive difference between the average price per ounce of silver for a
year and $4.75 multiplied by the number of ounces of silver produced by
the La Colorada mine divided by $10,000,000 and multiplied by the greater
of the loan balance at the end of the year or the originally scheduled
loan balance at the end of a year; and
- Pan American has sold forward 11,400 tonnes of zinc. These sales were
designated as a hedge and represent sales of 1,100 tonnes per month for
each of the months of June 2003 through and including February 2004 at a
price of $824 per tonne and sales of 500 tonnes per month for each of the
months of March 2004 through and including May 2004 at a price of $817 per
tonne. The difference between the average monthly London zinc cash
settlement price and the forward sales price will be credited or charged
to Pan American's revenue during the June 2003 through May 2004 period.
RISK FACTORS
Prospective investors in a particular offering of the Securities should
consider, in addition to information contained in the Prospectus Supplement
relating to that offering or in other documents incorporated by reference
herein, the risks described in the Company's Annual Information Form under the
heading "Narrative Description of the Business -- Trends and Uncertainties" and
in the Company's management's discussion and analysis of financial condition and
results of operations that are incorporated by reference herein as at the date
of the Prospectus Supplement relating to the particular offering of Securities.
23
AUDITORS, TRANSFER AGENT AND REGISTRAR
The auditors of the Company are Deloitte & Touche LLP, Four Bentall Centre,
2800 - 1055 Dunsmuir Street, Vancouver, British Columbia, V7X 1P4.
The transfer agent and registrar for the Common Shares of the Company is
Computershare Trust Company of Canada at its principal offices in Vancouver and
Toronto.
EXPERTS
The consolidated financial statements of the Company for the years ended
December 31, 2002 and 2001 which are incorporated in this Prospectus by
reference have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report, which is incorporated herein by reference, and have been
so incorporated in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The consolidated balance sheets of Corner Bay Silver Inc. as at June 30,
2002 and 2001 and the consolidated statements of operations and deficit and cash
flow of Corner Bay Silver Inc. for each of the years in the three year period
ended June 30, 2002 which are included in this Prospectus have been so included
in reliance on the report of PricewaterhouseCoopers LLP, independent auditors,
given on the authority of said firm as experts in accounting and auditing.
DOCUMENTS FILED AS PART OF THE U.S. REGISTRATION STATEMENT
The following documents have been filed with the SEC as part of the
Registration Statement of which this Prospectus forms a part: the documents
referred to under the heading "Documents Incorporated by Reference", the consent
of Deloitte & Touche LLP and the consent of PricewaterhouseCoopers LLP. If debt
securities are offered by a Prospectus Supplement, there will be filed with the
SEC a form of Trust Indenture and a Debt Securities Trustee's Statement of
Eligibility on Form T-1.
CANADIAN PURCHASERS' STATUTORY RIGHTS
Securities legislation in certain of the provinces provides purchasers with
the right to withdraw from an agreement to purchase the Securities offered
hereby within two business days after receipt or deemed receipt of a prospectus,
a Prospectus Supplement (including a pricing supplement) relating to Securities
purchased by a purchaser and any amendments thereto. In several of the
provinces, Securities legislation further provides a purchaser with remedies for
rescission or, in some jurisdictions, damages where the prospectus, a Prospectus
Supplement relating to Securities purchased by a purchaser and any amendments
thereto contain a misrepresentation or are not delivered to the purchaser but
such remedies must be exercised by the purchaser within the time limit
prescribed by the Securities legislation of the purchaser's province. The
purchaser should refer to any applicable provisions of the Securities
legislation of the purchaser's province for the particulars of these rights or
consult with a legal adviser.
24
INDEX TO FINANCIAL STATEMENTS
PAGE
--------
CONSOLIDATED FINANCIAL STATEMENTS OF CORNER BAY SILVER INC.
Auditors' Report............................................ F-3
Consolidated Balance Sheet as at December 31, 2002
(unaudited) and as at June 30, 2002 and June 30, 2001
(audited)................................................. F-4
Consolidated Statements of Operations and Deficit for the
six months ended December 31, 2002 and December 31, 2001
(unaudited) and for the years ended June 30, 2002,
June 30, 2001 and June 30, 2000 (audited)................. F-5
Consolidated Statements of Cash Flows for the six months
ended December 31, 2002 and December 31, 2001 (unaudited)
and for the years ended June 30, 2002, June 30, 2001, and
June 30, 2000 (audited)................................... F-6
Notes to Consolidated Financial Statements.................. F-7
SUPPLEMENTARY INFORMATION ABOUT MINERAL PROPERTY
EXPENDITURES FOR THE SIX MONTHS ENDED DECEMBER 31, 2002
(UNAUDITED)............................................... F-22
SUPPLEMENTARY INFORMATION ABOUT GENERAL AND ADMINISTRATIVE
COSTS FOR THE SIX MONTHS ENDED DECEMBER 31, 2002
(UNAUDITED)............................................... F-23
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF PAN
AMERICAN SILVER CORP...................................... F-24
Compilation Report.......................................... F-25
Pro Forma Consolidated Balance Sheet as at December 31, 2002
(unaudited)............................................... F-26
Pro Forma Consolidated Statement of Operations for the three
months ended March 31, 2003 (unaudited)................... F-27
Pro Forma Consolidated Statement of Operations for the year
ended December 31, 2002 (unaudited)....................... F-28
Notes to the Pro Forma Consolidated Financial Statements.... F-29
F-1
UNAUDITED AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF
CORNER BAY SILVER INC.
F-2
AUDITORS' REPORT
To the Directors of
Corner Bay Silver Inc.
We have audited the consolidated balance sheets of Corner Bay Silver Inc. as
at June 30, 2002 and 2001 and the consolidated statements of operations and
deficit and cash flows for each of the years in the three-year period ended
June 30, 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with Canadian and United States
generally accepted auditing standards. Those standards require that we plan and
perform an audit to obtain reasonable assurance whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at June 30, 2002
and 2001 and the results of its operations and its cash flows for each of the
years in the three-year period ended June 30, 2002 in accordance with Canadian
generally accepted accounting principles.
(Signed) PRICEWATERHOUSECOOPERS LLP
Chartered Accountants
Toronto, Ontario
September 6, 2002
COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCES
In the United States, reporting standards for auditors require the addition
of an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt on
the Company's ability to continue as a going concern, such as those described in
note 1 to the consolidated financial statements. Our report to the shareholders
dated September 6, 2002 is expressed in accordance with Canadian reporting
standards, which do not permit a reference to such events and conditions in the
auditors' report when they are adequately disclosed in the financial statements.
(Signed) PRICEWATERHOUSECOOPERS LLP
Chartered Accountants
Toronto, Ontario
September 6, 2002
F-3
CORNER BAY SILVER INC.
CONSOLIDATED BALANCE SHEETS
AS AT DECEMBER 31, 2002, JUNE 30, 2002 AND 2001
(EXPRESSED IN CANADIAN DOLLARS, UNLESS OTHERWISE STATED)
DECEMBER 31, JUNE 30, JUNE 30,
2002 2002 2001
------------- ----------- -----------
(UNAUDITED)
ASSETS
Current
Cash................................................ $ 4,831,220 $ 5,323,564 $ 4,022,422
Accounts receivable................................. 163,965 197,673 176,912
Prepaid expenses and deposits....................... 2,595 16,887 27,389
----------- ----------- -----------
4,997,780 5,538,124 4,226,723
Deposits -- reclamation bonds......................... 30,000 30,000 30,000
Investments -- quoted market value of $nil
(2001 -- $61,933) (note 8).......................... -- -- 43,353
Deferred exploration expenditure (note 3)............. 8,781,564 7,705,865 4,551,072
Property, plant and equipment (note 4)................ 3,893,658 3,896,461 96,870
----------- ----------- -----------
$17,703,002 $17,170,450 $ 8,948,018
=========== =========== ===========
LIABILITIES
Current
Accounts payable and accrued liabilities............ $ 1,355,103 $ 316,914 $ 387,963
----------- ----------- -----------
SHAREHOLDERS' EQUITY
Capital stock (note 5)................................ 25,499,004 24,314,504 14,813,154
Contributed surplus................................... 537,005 537,005 537,005
Deficit............................................... (9,688,110) (7,997,973) (6,790,104)
----------- ----------- -----------
16,347,899 16,853,536 8,560,055
----------- ----------- -----------
$17,703,002 $17,170,450 $ 8,948,018
=========== =========== ===========
Nature of operations and going concern (note 1)
Commitments (note 10)
APPROVED BY THE BOARD OF DIRECTORS
(Signed) JOHN H. WRIGHT, (Signed) ROSS J. BEATY,
Director Director
F-4
CORNER BAY SILVER INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(EXPRESSED IN CANADIAN DOLLARS, UNLESS OTHERWISE STATED)
FOR THE SIX MONTHS ENDED
DECEMBER 31, FOR THE YEARS ENDED JUNE 30,
------------------------- ---------------------------------------
2002 2001 2002 2001 2000
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
OTHER INCOME
Interest..................... $ 61,361 $ 49,739 $ 94,013 $ 127,474 $ 48,611
Other........................ 14,500 73,001 201,831 97,500 64,900
----------- ----------- ----------- ----------- -----------
75,861 122,740 295,844 224,974 113,511
OTHER EXPENSES
General and administrative... 1,765,998 497,925 1,467,007 798,073 521,338
Amortization................. -- 9,109 -- 25,312 19,251
----------- ----------- ----------- ----------- -----------
1,765,998 507,034 1,467,007 823,385 540,589
Gain on disposal of assets..... -- -- -- -- (14,465)
Gain on disposal of
investments.................. -- -- (5,805) -- --
Writedown of investments....... -- -- -- -- 22,606
Write-down of property, plant
and equipment................ -- -- 42,511 95,833 --
Write-down of deferred
exploration expenditure...... -- -- -- 373,627 1,088,239
----------- ----------- ----------- ----------- -----------
1,765,998 507,034 1,503,713 1,292,845 1,636,969
----------- ----------- ----------- ----------- -----------
Loss for the period............ (1,690,137) (384,294) (1,207,869) (1,067,871) (1,523,458)
Deficit, beginning of period... (7,997,973) (6,790,104) (6,790,104) (5,722,233) (4,198,775)
----------- ----------- ----------- ----------- -----------
Deficit, end of period......... $(9,688,110) $(7,174,398) $(7,997,973) $(6,790,104) $(5,722,233)
=========== =========== =========== =========== ===========
Basic and diluted loss per
share........................ $ (0.09) $ (0.02) $ (0.07) $ (0.08) $ (0.14)
Weighted average number of
shares outstanding........... 19,385,808 15,876,053 16,697,807 13,912,182 10,760,945
F-5
CORNER BAY SILVER INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN CANADIAN DOLLARS, UNLESS OTHERWISE STATED)
FOR THE SIX MONTHS ENDED
DECEMBER 31, FOR THE YEARS ENDED JUNE 30,
------------------------- ---------------------------------------
2002 2001 2002 2001 2000
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
CASH PROVIDED BY (USED IN)
Operating activities
Loss for the period $(1,690,137) $ (384,294) $(1,207,869) $(1,067,871) $(1,523,458)
Write-off of deferred
exploration expenditure.... -- -- -- 373,627 1,088,239
Writedown of investments..... -- -- -- -- 22,606
Amortization................. -- 9,109 -- 25,312 19,251
Write-off of property, plant
and equipment.............. -- -- 42,511 95,833 --
Gain on disposal of
investments................ -- -- (5,805) -- --
Gain on disposal of assets... -- -- -- -- (14,465)
----------- ----------- ----------- ----------- -----------
(1,690,137) (375,185) (1,171,163) (573,099) (407,827)
Net (increase) decrease in
non-cash working capital
balances related to
operations (note 11)......... 1,086,189 (184,805) (81,308) 82,054 237,610
----------- ----------- ----------- ----------- -----------
(603,948) (559,990) (1,252,471) (491,045) (170,217)
----------- ----------- ----------- ----------- -----------
Investing activities
Deferred exploration
expenditure and property,
plant and equipment
Expenditures............... (1,072,896) (1,415,279) (3,147,522) (1,460,057) (2,185,566)
Option receipts............ -- -- -- 5,975 25,000
Proceeds on disposal of
assets................... -- -- -- -- 28,057
Proceeds on disposal of
investments.............. -- -- 49,158 -- 73,486
Purchase of assets under
construction............... -- -- (400,000) -- --
Purchase of equipment........ -- -- (6,873) -- --
----------- ----------- ----------- ----------- -----------
(1,072,896) (1,415,279) (3,505,237) (1,454,082) (2,059,023)
----------- ----------- ----------- ----------- -----------
Financing activities
Issue of common shares....... 1,184,500 350,849 6,058,850 5,038,397 2,499,391
----------- ----------- ----------- ----------- -----------
Increase (decrease) in cash
during the period............ (492,344) (1,624,420) 1,301,142 3,093,270 270,151
Cash, beginning of the
period....................... 5,323,564 4,022,422 4,022,422 929,152 659,001
----------- ----------- ----------- ----------- -----------
Cash, end of the period........ $ 4,831,220 $ 2,398,002 $ 5,323,564 $ 4,022,422 $ 929,152
=========== =========== =========== =========== ===========
Supplemental cash flow information (note 11)
F-6
CORNER BAY SILVER INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001 (UNAUDITED) AND JUNE 30, 2002, 2001 AND 2000
(EXPRESSED IN CANADIAN DOLLARS)
1. NATURE OF OPERATIONS AND GOING CONCERN
The Company is in the process of exploring its mineral properties and is
establishing the amount of ore reserves that are economically recoverable from
the Mexico property. The recoverability of amounts shown for these properties
and related deferred exploration expenditures are dependent upon the discovery
of economically recoverable reserves, the preservation of the Company's interest
in the underlying mineral claims, the ability of the Company to obtain the
financing necessary to complete the development of the properties, and future
profitable production or, alternatively, upon the Company's ability to dispose
of its interest on an advantageous basis. Changes in future conditions could
require material writedowns of the carrying amounts of deferred exploration
expenditure.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in accordance
with Canadian generally accepted accounting principles (GAAP). Significant
differences from United States accounting principles are disclosed in Note 15.
BASIS OF CONSOLIDATION
These consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Corner Bay Resources Inc. and Pan MacKenzie
Resources Inc. (including its wholly owned subsidiary Minera Corner Bay S.A. de
C.V.).
DEFERRED EXPLORATION EXPENDITURE
The deferred exploration expenditure is recorded at cost, net of incidental
revenues generated from the particular properties. These net costs are deferred
until the properties to which they relate are placed into production, sold or
abandoned.
In March 2000, the Accounting Standards Board of the Canadian Institute of
Chartered Accountants (CICA) issued Accounting Guideline No. 11 entitled,
"Enterprises in the Development Stage" (AcG 11), and subsequently, on March 12,
2002, issued Emerging Issues Committee (EIC) 126 "Accounting by Mining
Enterprises for Exploration Costs." These guidelines address three distinct
issues: (i) capitalization of costs/expenditures (ii) impairment and
(iii) disclosure. Prior to their issuance, development state entities were
exempt from following certain aspects of Canadian generally accepted accounting
principles (GAAP). EIC 126 and AcG 11 require that all companies account for
transactions based on the underlying characteristics of the transactions rather
than the maturity of the enterprise. In addition, EIC 126 and AcG 11 require
specific disclosure of information by development stage companies. These
guidelines were effective for financial periods beginning on or after April 1,
2000, which affects the Company's financial years ended on or after
June 30, 2001.
EIC 126 and AcG 11 affect mining companies with respect to the deferral of
exploration costs. The appropriate accounting guidance is contained in
Section 3061, "Property, Plant and Equipment" of the CICA Handbook which
permits, but does not require, exploration costs to be capitalized as part of a
mining property, if the Company considers that such costs have the
characteristics of property, plant and equipment. Under this view, deferred
exploration expenditure would not automatically be subject to regular assessment
of recoverability, unless conditions such as those discussed in EIC 126 and
AcG 11 exist.
F-7
CORNER BAY SILVER INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001 (UNAUDITED) AND JUNE 30, 2002, 2001 AND 2000
(EXPRESSED IN CANADIAN DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
There would need to be an assessment of deferred exploration expenditure.
Assessment of the probability of recoverability of deferred exploration
expenditure from future operations will require the preparation of a projection
based on objective evidence of economic reserves such as a feasibility study.
The status of the Company's operations is such that, like most mining
companies in the exploration stage, it would not be practical to obtain a
feasibility study or provide other information that could be used to support
capitalization of deferred exploration expenditure under the alternative view.
EIC 126 and AcG 11 did not have a significant impact on the Company's
consolidated financial statements.
PROPERTY, PLANT AND EQUIPMENT
Land and exploration equipment are recorded at cost. Exploration equipment
is amortized on a reducing balance basis at various rates from 14% to 33%.
Amortization relating to equipment used on the mineral properties is capitalized
as part of the deferred exploration expenditure balance.
ASSETS UNDER CONSTRUCTION
Assets under construction consist of equipment to be commissioned at the
Mexico property site. The assets will be included as part of the equipment
balance once refurbished and transferred to the site. These assets are not being
amortized, as they are not currently ready for use.
FINANCIAL INSTRUMENTS
The carrying amounts of cash, receivables, prepaid expenses and deposits,
accounts payable and accrued liabilities approximate the fair values of those
financial instruments due to the short-term maturities of such instruments.
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash. The Company places its cash with high
credit quality financial institutions.
INCOME TAXES
The provision for future income taxes is based on the liability method.
Future income taxes arise from the recognition of the tax consequences of
temporary differences by applying statutory income tax rates applicable to
future years to differences between the financial statements' carrying amounts
and the income tax bases of certain assets and liabilities. The Company records
a valuation allowance against any portion of those future income tax assets that
it believes is not, more likely than not, to be realized.
STOCK-BASED COMPENSATION PLAN
The Company has one stock option plan, which is described in note 5. No
compensation expense is recognized for this plan when stock or stock options are
issued to employees. Any consideration paid on exercise of stock options or
purchase of stock is credited to capital stock.
F-8
CORNER BAY SILVER INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001 (UNAUDITED) AND JUNE 30, 2002, 2001 AND 2000
(EXPRESSED IN CANADIAN DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Effective July 1, 2002, the Company adopted the new recommendations of the
Canadian Institute of Chartered Accountants Handbook Section 3870, Stock-based
Compensation and Other Stock-based Payments. This section establishes standards
for the recognition, measurement and disclosure of stock-based compensation and
other stock-based payments in exchange for goods and services. The section
requires that all stock-based awards made to non-employees be measured and
recognized using a fair-value based method. The section encourages a fair-value
based method for all awards granted to directors, officers and employees, but
only requires the use of a fair value based method for direct awards of stock,
stock appreciation rights and awards that call for settlement in cash or other
assets.
For stock options granted to directors, officers and employees, the Company
has adopted the intrinsic value method of accounting for stock-based
compensation. Under this method compensation expense is recognized for the
excess, if any, of the quoted market price of the Company's common shares over
the common share option exercise price on the day that options are granted.
LOSS PER SHARE
Basic loss per share is computed by dividing the loss for the year by the
weighted average number of common shares outstanding during the year, including
contingently issuable shares that are included when the conditions necessary for
issuance have been met. Diluted earnings per share are calculated in a manner
similar to basic earnings per share, except the weighted average number of
shares outstanding are increased to include potential common shares from the
assumed exercise of options and warrants, if dilutive. The number of additional
shares included in the calculation is based on the treasury stock method for
options and warrants and on the as if converted method for convertible
securities.
During the year ended June 30, 2001, the Company changed its method of
accounting for earnings per share to comply with the revised standard issued by
the CICA Handbook, Section 3500, "Earnings per share". There was no difference
between the loss per share calculated under the new standard and the amount that
would have been calculated using the previous standard.
USE OF ESTIMATES
The preparation of financial statements in conformity with Canadian
generally accepted accounting principles (GAAP) requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses during the reporting period. Actual results
could differ from these estimates.
TRANSLATION OF FOREIGN CURRENCIES
As the Company considers all of its foreign operations to be fully
integrated, all items denominated in foreign currencies have been translated
using the temporal method. Under this method, monetary assets and liabilities
and non-monetary items carried at market values are translated at the year and
period end exchange rate. Other non-monetary items and revenue and expenses are
translated at approximate rates in effect at the dates of the transactions,
except depletion and amortization, which are translated at the same rates as the
related assets.
F-9
CORNER BAY SILVER INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001 (UNAUDITED) AND JUNE 30, 2002, 2001 AND 2000
(EXPRESSED IN CANADIAN DOLLARS)
3. MINERAL PROPERTIES
MEXICO MARITIMES CHIBOUGAMAU TOTAL
---------- --------- ----------- -----------
Balance -- June 30, 1999..................... $1,018,492 $ 401,611 $ 1,097,825 $ 2,517,928
Expenditures................................. 2,114,901 1,411 -- 2,116,312
Option receipts.............................. -- (25,000) (9,586) (34,586)
Writedown.................................... -- -- (1,088,239) (1,088,239)
---------- --------- ----------- -----------
Balance -- June 30, 2000..................... $3,133,393 $ 378,022 $ -- $ 3,511,415
Expenditures................................. 1,388,451 1,580 -- 1,390,031
Option receipts.............................. -- (5,975) -- (5,975)
Amortization of equipment capitalized........ 29,228 -- -- 29,228
Writedown.................................... -- (373,627) -- (373,627)
---------- --------- ----------- -----------
Balance -- June 30, 2001 4,551,072 -- -- 4,551,072
Expenditures................................. 3,147,522 -- -- 3,147,522
Amortization of equipment capitalized........ 7,271 -- -- 7,271
---------- --------- ----------- -----------
Balance -- June 30, 2002..................... 7,705,865 -- -- 7,705,865
Expenditures (Unaudited)..................... 534,911 -- -- 534,911
Purchase of concessions (Unaudited).......... 537,985 -- -- 537,985
Amortization of equipment capitalized
(Unaudited)................................ 2,803 -- -- 2,803
---------- --------- ----------- -----------
Balance -- December 31, 2002 (Unaudited)..... $8,781,564 $ -- $ -- $ 8,781,564
========== ========= =========== ===========
The Alamo Dorado silver/gold property is located in the northwestern state
of Sonora, Mexico. Paved roads connect the state capital of Hermosillo to the
town of Alamos, which is 67 kilometers northwest of the Alamo Dorado Project.
The 5,369 hectare property consists of the 504 hectare Alamo Ocho concession
held under option by the Company, and the 4,865 hectare Alamo Dorado concession,
which is owned 100% by the Company and surrounds the Alamo Ocho concession. The
Company can earn a 100% interest in Alamo Ocho by paying US$800,000 over six
years. Payments are made semi-annually, of which US$441,000 (unaudited) was paid
to December 31, 2002 (June 30, 2002, 2001 and 2000 were US$450,000, $325,000 and
$nil, respectively).
During the year ended June 30, 2002, the Company incurred $131,147 (2001 and
2000 -- $nil) in rental payments, and is committed to annual rental payments of
$114,150. During the six-month periods ended December 31, 2002 and 2001, the
Company incurred $35,906 and $23,491 (unaudited), respectively, in rental
payments.
F-10
CORNER BAY SILVER INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001 (UNAUDITED) AND JUNE 30, 2002, 2001 AND 2000
(EXPRESSED IN CANADIAN DOLLARS)
4. PROPERTY, PLANT AND EQUIPMENT
ACCUMULATED JUNE 30, 2002 ACCUMULATED JUNE 30, 2002
COST AMORTIZATION NET COST AMORTIZATION NET
---------- ------------ -------------- -------- ------------ --------------
Equipment............ $ 66,683 $14,722 $ 53,961 $129,415 $32,545 $96,870
Assets under
Construction....... 3,842,500 -- 3,842,500 -- -- --
---------- ------- ---------- -------- ------- -------
$3,911,183 $14,722 $3,896,461 $129,415 $32,545 $96,870
========== ======= ========== ======== ======= =======
ACCUMULATED DECEMBER 31, 2002
(UNAUDITED) COST AMORTIZATION NET
----------- ---------- ------------ ------------------
Equipment............ $ 139,917 $88,759 $ 51,158
Assets under
Construction....... 3,842,500 -- 3,842,500
---------- ------- ----------
$3,982,417 $88,759 $3,893,658
========== ======= ==========
During the six months ended December 31, 2002, the Company wrote off $nil
(December 31, 2001 -- $nil; years ended June 30, 2002, 2001 and 2000 of $42,511,
$95,833 and $nil, respectively) of property, plant and equipment.
During the six months ended December 31, 2002, the Company recorded
amortization of $2,803 (years ended June 30, 2002, 2001 and 2000 of $7,271,
$29,228 and $nil, respectively), which were capitalized as deferred exploration
expenditure.
5. CAPITAL STOCK
AUTHORIZED
Unlimited number of common shares, without nominal or par value.
F-11
CORNER BAY SILVER INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001 (UNAUDITED) AND JUNE 30, 2002, 2001 AND 2000
(EXPRESSED IN CANADIAN DOLLARS)
5. CAPITAL STOCK (CONTINUED)
ISSUED AND OUTSTANDING -- COMMON SHARES
NUMBER OF
SHARES
OUTSTANDING NET PROCEEDS
----------- ------------
Balance -- June 30, 1999............................ 9,899,115 $ 7,275,366
Shares issued for cash in private placement
September 21, 1999................................ 596,540 773,976
December 20, 1999................................. 400,000 1,198,435
Warrants exercised for cash during the year......... 545,454 409,080
Options exercised for cash during the year.......... 393,000 117,900
---------- -----------
Balance -- June 30, 2000............................ 11,834,109 9,774,757
Shares issued in prospectus
offering -- December 14, 2000..................... 3,666,667 4,978,397
Options exercised for cash.......................... 200,000 60,000
---------- -----------
Balance -- June 30, 2001............................ 15,700,776 14,813,154
Shares issued for cash in private placement --
February 19, 2002................................. 1,830,000 4,575,000
Warrants exercised for cash......................... 183,333 275,000
Options exercised for cash.......................... 612,000 1,208,850
Shares issued for assets under construction
purchased -- June 18, 2002 (note 11).............. 850,000 3,442,500
---------- -----------
Balance -- June 30, 2002............................ 19,176,109 24,314,504
Options exercised for cash (unaudited).............. 465,000 1,184,500
---------- -----------
Balance -- December 31, 2002 (unaudited)............ 19,641,109 $25,499,004
========== ===========
On September 21, 1999, the Company completed a private placement of 596,540
shares at a price of $1.30 per share.
On December 20, 1999, the Company completed a private placement of 400,000
units. Each unit consists of one common share at $3.00 and one-half common share
purchase warrant. Each whole purchase warrant entitles the holder to purchase
one additional common share at a price of $4.00 per common share at anytime
until December 20, 2001. Effective December 20, 2001, all options that had not
been exercised prior to this date expired.
On December 14, 2000, the Company publicly offered 3,666,667 units. Each
unit consisted of one common share at $1.50 and one-half common share purchase
warrant. Each whole purchase warrant entitles the holder to purchase one
additional common share at $2.25 per share at anytime until December 14, 2001.
In connection with the December 14, 2000 offering, the underwriters received
183,333 warrants of the Company. Each warrant entitles the underwriter to
purchase one common
F-12
CORNER BAY SILVER INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001 (UNAUDITED) AND JUNE 30, 2002, 2001 AND 2000
(EXPRESSED IN CANADIAN DOLLARS)
5. CAPITAL STOCK (CONTINUED)
share for $1.50 at any time until December 14, 2001. Effective December 14,
2001, all warrants that had not been exercised prior to this date expired. Refer
to the following warrants table.
On February 19, 2002, the Company completed a private placement of 1,830,000
shares at a price of $2.50 per share.
WARRANTS
NUMBER OF WEIGHTED
WARRANTS AVERAGE PRICE
---------- -------------
Balance -- June 30, 1999............................. -- $ --
Issued -- December 20, 1999.......................... 200,000 4.00
---------- -----
Balance -- June 30, 2000............................. 200,000 4.00
Issued -- December 14, 2000.......................... 2,016,666 2.18
---------- -----
Balance -- June 30, 2001............................. 2,216,666 2.34
Expired.............................................. (2,033,333) 2.42
Exercised............................................ (183,333) 1.50
---------- -----
Balance -- June 30, 2002............................. -- --
Expired.............................................. -- --
Exercised............................................ -- --
---------- -----
Balance -- December 31, 2002 (unaudited)............. -- $ --
========== =====
OPTIONS
On December 15, 1995, the shareholders of the Company approved the amended
stock option plan (dated November 1, 1995) (the Plan) which provides for the
issuance of 1.0 million stock options under the terms of the Plan. On
December 20, 1999 and December 15, 2000, the shareholders approved an amendment
to provide for the further issuance of an additional 1.4 and 2.0 million common
share options, respectively, under the terms of the Plan.
Under the Plan, the Company provides options to buy common shares of the
Company to directors, officers and service providers. The board of directors
grants such options for periods of up to ten years at prices not lower than the
market price at the date of granting.
No compensation expense is recognized when stock options are issued to
employees and directors. All consideration paid by employees from the exercise
of stock options or purchase of stock is credited to capital stock.
Compensation expense is recorded when stock options are issued to
non-employees and is recognized over the vesting period of the options.
Compensation expense is determined as the fair value of the options at the date
of grant using an option-pricing model. During the six months ended
December 31, 2002 and year ended June 30, 2002, no stock options were issued to
non-employees.
F-13
CORNER BAY SILVER INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001 (UNAUDITED) AND JUNE 30, 2002, 2001 AND 2000
(EXPRESSED IN CANADIAN DOLLARS)
5. CAPITAL STOCK (CONTINUED)
As at June 30, 2002, the Company had outstanding and exercisable stock
options as follows:
EXERCISE PRICE EXPIRY DATE
-------------- -----------
500,000............................................. $2.65 12/20/02
660,000............................................. 3.00 06/30/03
380,000............................................. 1.75 10/02/04
40,000.............................................. 1.80 12/12/04
60,000.............................................. $3.00 02/28/05
As at June 30, 2002, the Company had outstanding and exercisable stock
options as follows:
2002 2001 2000
WEIGHTED WEIGHTED WEIGHTED
NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OF AVERAGE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- -------- --------- --------
Outstanding
-- Beginning of year.............. 1,607,000 $2.60 1,707,000 $2.38 700,000 $0.30
Granted........................... 645,000 1.95 100,000 1.70 1,400,000 2.84
Exercised......................... (612,000) 1.98 (200,000) 0.30 (393,000) 0.30
--------- ----- --------- ----- --------- -----
Outstanding
-- End of year.................... 1,640,000 $2.57 1,607,000 $2.60 1,707,000 $2.38
========= ===== ========= ===== ========= =====
As at December 31, 2002, the Company had outstanding and exercisable stock
options as follows:
DECEMBER 31, 2002
--------------------
WEIGHTED
NUMBER OF AVERAGE
OPTIONS PRICE
--------- --------
Outstanding -- Beginning of period....................... 1,640,000 $2.57
Exercised (unaudited).................................... (465,000) 2.55
--------- -----
Outstanding -- End of period (unaudited)................. 1,175,000 $2.59
========= =====
6. INCOME TAXES
As at December 31, 2002, the Company has non-capital loss carry-forwards of
approximately $4,200,000, unaudited, (June 30, 2002 -- $2,500,000) available to
reduce future taxable income. These losses will expire between 2003 and 2009. In
addition, the Company has $7,300,000 in unclaimed exploration and development
expenses in Canada. No recognition is given in these consolidated financial
statements to any potential benefit from the utilization of these non-capital
losses or unclaimed exploration and development expenses.
F-14
CORNER BAY SILVER INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001 (UNAUDITED) AND JUNE 30, 2002, 2001 AND 2000
(EXPRESSED IN CANADIAN DOLLARS)
7. RELATED PARTY TRANSACTIONS
Certain geological, consulting and corporate services were provided to the
Company and its subsidiaries by seven directors and/or officers, and/or
companies controlled by directors and/or officers. The cost of such services
(including salaries) for the six months ended December 31, 2002 was $nil,
unaudited, (years ended June 30, 2002, 2001 and 2000 were $680,213, $354,989 and
$230,279, respectively). The services provided were at rates similar to those
charged to non-related parties.
The Company, as prime tenant of share corporate offices with the
above-mentioned related party companies, charge rent of $nil for the six months
ended December 31, 2002 (years ended June 30, 2002, 2001 and 2000 were $6,000,
$51,400 and $46,800, respectively) and had overhead recoveries of $nil for the
six months ended December 31, 2002 (years ended June 30, 2002, 2001 and 2000
were $7,500, $97,575 and $71,913, respectively).
8. INVESTMENT
As at December 31, 2002, the Company held nil (unaudited) (June 30, 2002,
2001 and 2000 -- nil, 309,665 and 309,665, respectively) shares of MSV
Resources Inc. The investment was disposed of during the year ended
June 30, 2002.
9. SEGMENT INFORMATION
Working capital balances are retained in Canada and principal property
balances are located as described in note 3.
10. COMMITMENTS
The Company leases office space under leases expiring November 30, 2004.
Future minimum lease payments are as follows:
YEAR ENDED JUNE 30
------------------
2003........................................................ $ 69,660
2004........................................................ 69,660
2005........................................................ 29,025
--------
$168,345
========
11. SUPPLEMENTAL CASH FLOW INFORMATION
During the six months ended December 31, 2002 and 2001 and the years ended
June 30, 2002, 2001 and 2000, the Company paid no income taxes or interest.
F-15
CORNER BAY SILVER INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001 (UNAUDITED) AND JUNE 30, 2002, 2001 AND 2000
(EXPRESSED IN CANADIAN DOLLARS)
11. SUPPLEMENTAL CASH FLOW INFORMATION (CONTINUED)
Net (increase) decrease in non-cash working capital balances related to
operations:
SIX MONTHS ENDED
DECEMBER 31, YEARS ENDED DECEMBER 31,
------------------------- ---------------------------------
2002 2001 2002 2001 2000
----------- ----------- --------- --------- ---------
(UNAUDITED) (UNAUDITED) (AUDITED) (AUDITED) (AUDITED)
Receivables............................. $ 33,708 $(150,298) $(20,761) $(17,438) $ 32,625
Prepaid expenses and deposits........... 14,292 18,147 10,502 (1,452) (21,502)
Accounts payable and accrued
liabilities........................... 1,038,187 (52,654) (71,049) 100,944 226,487
---------- --------- -------- -------- --------
$1,086,189 $(184,805) $(81,308) $ 82,054 $237,610
========== ========= ======== ======== ========
On June 18, 2002, assets under construction were acquired for $3,442,500,
through issuance of common shares (note 4). The purchase price was based on the
value of the common shares.
12. ACQUISITION OF COMPANY BY PAN AMERICAN SILVER CORP.
On May 21, 2002, the Company and Pan American Silver Corp. (Pan American)
announced a proposed plan of arrangement whereby Pan American would acquire all
of the issued and outstanding shares of the Company. On June 28, 2002, both
companies announced amended terms to the proposed plan of arrangement. The
amended proposal for a plan of arrangement is subject to approval of the
shareholders of the Company and Pan American and approval by the Ontario
Superior Court of Justice and various regulatory authorities. The shareholders
of the Company and Pan American approved the plan of arrangement on September 4
and 5, 2002, respectively. If remaining approvals are obtained and all material
covenants are satisfied in a timely fashion, the plan of arrangement would
become effective in September 2002.
Under the terms of the amended plan of arrangement, each Corner Bay
Silver Inc. common share would be exchanged for 0.3846 of a Pan American common
share and 0.1923 of a Pan American common share purchase warrant. Each whole Pan
American common share purchase warrant (the Pan American Warrant) provides the
holder with the rights to purchase a Pan American common share at CAN$12 for a
five-year period after the effective date of the plan of arrangement ("Plan of
Arrangement"). The Pan American Warrants will trade on the Toronto Stock
Exchange.
13. SUBSEQUENT EVENT
In July 2002, the principal mineral concession, which hosts the Alamo Dorado
concession, was purchased outright from the concession owners by paying the
remaining option payments in a final lump sum payment of US$345,000 (US$300,000
plus Impuesto Al Valor Agregado (IVA) taxes).
SUBSEQUENT EVENT (UNAUDITED)
The Company received regulatory approval on the plan on arrangement and on
February 20, 2003 the Company and Pan American Silver Corp. completed the Plan
of Arrangement.
F-16
CORNER BAY SILVER INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001 (UNAUDITED) AND JUNE 30, 2002, 2001 AND 2000
(EXPRESSED IN CANADIAN DOLLARS)
14. COMPARATIVES
Certain prior years' comparative numbers have been restated to reflect the
current year's presentation.
15. DIFFERENCE BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP)
Canadian GAAP varies in certain significant respects from the principles and
practices generally accepted in the United States ("U.S. GAAP"). The effect of
these principal measurement differences on the Company's consolidated financial
statements are quantified below and described in the accompanying notes.
CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED
DECEMBER 31 YEARS ENDED JUNE 30,
------------------------- ---------------------------------------
2002 2001 2002 2001 2000
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Loss for the period reported
under Canadian GAAP.......... $(1,690,137) $ (384,294) $(1,207,869) $(1,067,871) $(1,523,458)
Exploration expenses
adjustment................... (537,714) (1,415,279) (3,154,793) (1,039,657) (993,487)
----------- ----------- ----------- ----------- -----------
Loss for the period reported
under U.S. GAAP.............. $(2,227,851) $(1,799,573) $(4,362,662) $(2,107,528) $(2,516,945)
=========== =========== =========== =========== ===========
------------------------
(a) In accordance with U.S. GAAP, the Company would be required to charge all
costs of deferred exploration expenditures to earnings as operating expenses
as incurred until proven economic reserves are established. As a result of
accounting for these expenditures in this manner, the unaudited loss for the
six months ended December 31, 2002 and 2001 would be increased by $537,714
and $1,415,279, respectively, and loss for the years ended June 30, 2002,
2001 and 2000 would be increased by $3,154,793, $1,039,657 and $993,487,
respectively.
(b) The Company accounts for its share options using the intrinsic value method,
which in the Company's circumstances amounts does not result in different
from the amounts that would be determined under the provisions of the
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees," (APB 25) and related interpretations. Accordingly, no
compensation expense for its share option plan has been recognized or
recorded in the consolidated statement of operations and deficit for any of
the years presented. A company that does not adopt the fair value method
must disclose the cost of the stock compensation awards at their fair value
at the date the award is granted. The unaudited value of the Company's
options that were granted during six months ended December 31, 2002 was $nil
(2001 -- $17,846) (three years ended June 30, 2002 were $447,952, $37,605
and $878,747, respectively). The fair value for 2002 was estimated using the
Black-Scholes model with assumptions of a three-year expected term
volatility ranging from 50% to 56% and interest rates from 3.75% to 4.04%.
The fair value for
F-17
CORNER BAY SILVER INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001 (UNAUDITED) AND JUNE 30, 2002, 2001 AND 2000
(EXPRESSED IN CANADIAN DOLLARS)
15. DIFFERENCE BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) (CONTINUED)
2001 and 2000 was estimated using the Black-Scholes model with assumptions
of a two-year expected term, 60% volatility and interest rates ranging from
6.0% to 6.5%.
BASIC LOSS PER SHARE
SIX MONTHS ENDED
DECEMBER 31 YEARS ENDED JUNE 30,
------------------------- ---------------------------------------
2002 2001 2002 2001 2000
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Loss for the period under
U.S. GAAP.................... $(2,227,851) $(1,799,573) $(4,362,662) $(2,107,528) $(2,516,945)
Weighted average number of
Common shares outstanding.... 19,385,808 15,876,053 16,697,807 13,912,182 10,760,945
----------- ----------- ----------- ----------- -----------
Loss per share under
U.S. GAAP.................... $ (0.11) $ (0.11) $ (0.26) $ (0.15) $ (0.23)
=========== =========== =========== =========== ===========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
SIX MONTHS ENDED
DECEMBER 31 YEARS ENDED JUNE 30,
------------------------- ---------------------------------------
2002 2001 2002 2001 2000
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Loss for the period under
U.S. GAAP.................... $(2,227,851) $(1,799,573) $(4,362,662) $(2,107,528) $(2,516,945)
Other comprehensive earnings,
net of income taxes
Unrealized gain on marketable
securities................. -- -- -- 18,580 9,290
Realized (gain) loss on sale
of marketable securities... -- -- (18,580) -- 33,948
Writedown to fair value...... -- -- -- -- 22,606
----------- ----------- ----------- ----------- -----------
Comprehensive loss for the
period....................... $(2,227,851) $(1,799,573) $(4,381,242) $(2,088,948) $(2,451,101)
=========== =========== =========== =========== ===========
The consolidated statements of comprehensive loss provide a measure of all
changes in equity of the Company that result from transactions, other than those
with shareholders, and other economic events that occurred during the period.
Under U.S. GAAP, the Company's holding of marketable securities with quoted
market values that would be marked to market with the resulting unrealized gain
or loss being taken to the consolidated statement of comprehensive loss in the
relevant period.
F-18
CORNER BAY SILVER INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001 (UNAUDITED) AND JUNE 30, 2002, 2001 AND 2000
(EXPRESSED IN CANADIAN DOLLARS)
15. DIFFERENCE BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) (CONTINUED)
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED
DECEMBER 31 YEARS ENDED JUNE 30,
------------------------- ---------------------------------------
2002 2001 2002 2001 2000
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Operating activities........... $(1,138,859) $(1,975,269) $(4,399,993) $(1,900,413) $(2,258,579)
Investing activities........... (537,985) -- (357,715) (44,714) 29,339
Financing activities........... 1,184,500 350,849 6,058,850 5,038,397 2,499,391
----------- ----------- ----------- ----------- -----------
Increase (decrease) in cash and
cash equivalent during the
period....................... (492,344) (1,624,420) 1,301,142 3,093,270 270,151
Opening cash and cash
equivalents.................. 5,323,564 4,022,422 4,022,422 929,152 659,001
----------- ----------- ----------- ----------- -----------
Closing cash and cash
equivalents.................. $ 4,831,220 $ 2,398,002 $ 5,323,564 $ 4,022,422 $ 929,152
=========== =========== =========== =========== ===========
CONSOLIDATED BALANCE SHEETS
JUNE 30,
DECEMBER 31, ---------------------------
2002 2002 2001
------------- ------------ ------------
(UNAUDITED)
Investments under Canadian GAAP..................... $ -- $ -- $ 43,353
Unrealized gain on marketable securities............ -- -- 18,580
------------ ------------ ------------
Investments under US GAAP........................... $ -- $ -- $ 61,933
============ ============ ============
Deferred exploration expenditure under Canadian
GAAP.............................................. $ 8,781,564 $ 7,705,865 $ 4,551,072
Deferred exploration expenditure.................... (8,243,579) (7,705,865) (4,551,072)
------------ ------------ ------------
Deferred exploration expenditure under U.S. GAAP.... $ 537,985 $ -- $ --
============ ============ ============
Deficit under Canadian GAAP......................... $ (9,688,110) $ (7,997,973) $ (6,790,104)
Exploration expenditures............................ (8,243,579) (7,705,865) (4,551,072)
------------ ------------ ------------
Deficit under U.S. GAAP............................. $(17,931,689) $(15,703,838) $(11,341,176)
============ ============ ============
Cumulative comprehensive other income under
Canadian GAAP..................................... $ -- $ -- $ --
Unrealized gain (loss) on marketable securities..... -- -- 18,580
------------ ------------ ------------
Cumulative comprehensive other income under
U.S. GAAP......................................... $ -- $ -- $ 18,580
============ ============ ============
F-19
CORNER BAY SILVER INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001 (UNAUDITED) AND JUNE 30, 2002, 2001 AND 2000
(EXPRESSED IN CANADIAN DOLLARS)
15. DIFFERENCE BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) (CONTINUED)
NEW STANDARDS FOR U.S. GAAP
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 142, "Goodwill and Other
Intangible Assets". This new standard features new accounting rules for goodwill
and intangible assets. The Company does not foresee any impact on a cumulative
effect of an accounting change or on the carrying value of assets and
liabilities recorded in the consolidated balance sheets upon adoption.
SFAS No. 142 will be adopted on July 1, 2002.
Also issued in June 2001 was SFAS No. 143, "Accounting for Asset Retirement
Obligations." This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. It requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of a fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset. The Company is analyzing the impact of SFAS No. 143
and will adopt this standard on July 1, 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-lived Assets." This statement supersedes SFAS No. 121
and the accounting and reporting provisions of APB 30, and also amends ARB 51.
This statement will require one accounting model be used for long-lived assets
to be disposed of by sale, whether previously held and used or newly acquired,
and will broaden the presentation of discontinued operations to include more
disposal transactions. The Company is analyzing the impact of SFAS No. 144
and will adopt this standard on July 1, 2002.
Effective July 1, 2002, the Company will adopt, for United States reporting
purposes, SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64,
Amendments of SFAS No. 13, and Technical Corrections as of April 2002." This
statement rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment
of Debt," and an amendment of that statement, SFAS No. 64, "Extinguishment of
Debt Made to Satisfy Sinking-Fund Requirements".
This statement also rescinds SFAS No. 44, "Accounting for Intangible Assets
of Motor Carriers." This statement amends SFAS No. 13, "Accounting for Leases",
to eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings or describe their applicability
under changed conditions. The adoption of the new standard is not currently
expected to have a significant impact on the Company's results of operations or
financial position.
F-20
CORNER BAY SILVER INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001 (UNAUDITED) AND JUNE 30, 2002, 2001 AND 2000
(EXPRESSED IN CANADIAN DOLLARS)
15. DIFFERENCE BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) (CONTINUED)
NEW STANDARDS FOR U.S. GAAP, UNAUDITED TO DECEMBER 31, 2002
The Company adopted the following standards on July 1, 2002:
(i) the adoption of SFAS No. 142, Goodwill and Other Intangible Assets, did
not have a material affect on the Company's consolidated financial position or
results of operations.
(ii) the adoption of SFAS No. 143, Accounting for Asset Retirement
Obligations, did not have a material impact on the Company's results of
operations or shareholders' equity.
(iii) the adoption of SFAS No. 144, Accounting for the Impairment or
Disposal of Long-lived Assets, did not have a material affect on the Company's
consolidated financial position or results of operations.
(iv) the adoption of SFAS No. 145, Rescission of FASB Statements No. 4, 44
and 64, Amendments of SFAS No. 13, and Technical Corrections as of April 2002,
did not have a material affect on the Company's results of operations or its
financial position.
FINANCIAL ACCOUNTING STANDARDS BOARD (FASB)
On July 30, 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing or other exit or disposal activity.
SFAS No. 146 is to be applied retroactively to exit or disposal activities
initiated after December 31, 2002. The adoption of the new standard is not
currently expected to have a significant impact on the Company's result of
operations or financial position.
NEW STANDARD FOR CANADIAN GAAP
The CICA approved a new Handbook Section 3062, "Goodwill and Other
Intangible Assets," which require intangible assets with an indefinite life and
goodwill to be tested for impairment on annual basis. Goodwill and indefinite
life intangible assets will no longer be amortized. Intangible assets with
definite lives will continue to be amortized over their useful lives. The new
section is consistent with those recently approved by the FASB (SFAS No. 142).
The adoption of this new standard is not expected to have any material effect on
the Company's financial position, results of operations or cash flows.
Section 3026 was adopted on July 1, 2002 and the Company does not expect this
adoption to have a significant impact on the Company's results of operations or
financial position.
F-21
CORNER BAY SILVER INC.
SUPPLEMENTARY INFORMATION ABOUT MINERAL PROPERTY EXPENDITURES
FOR THE SIX MONTHS ENDED DECEMBER 31, 2002
(UNAUDITED)
Field office expenditures
Depreciation.............................................. $ 11,410
Office vehicles........................................... 774
General office............................................ 16,963
Office rent............................................... 6,629
Professional fees......................................... 38,686
Telephone................................................. 6,426
Insurance................................................. 1,040
Bank charges.............................................. 88
Travel, food and accommodation............................ 3,824
Field supplies............................................ 584
Drafting and reproduction costs........................... 90
Courier................................................... 210
--------
Total field office expenditures............................. 86,724
--------
Alamo Dorado expenditures
Surveying................................................. 198,050
Salaries and benefits..................................... 65,450
Temporary labour.......................................... 58,601
Site vehicles............................................. 27,786
General office............................................ 21,256
Professional fees......................................... 11,410
Telephone................................................. 5,611
Insurance................................................. 985
Freight................................................... 967
Travel, food and accommodation............................ 43,578
Assays.................................................... 1,881
Field supplies............................................ 10,466
Drafting and reproduction costs........................... 1,416
Courier................................................... 730
--------
Total Alamo Dorado expenditures............................. 448,187
--------
Deferred mineral property expenditures...................... $534,911
========
F-22
CORNER BAY SILVER INC.
SUPPLEMENTARY INFORMATION ABOUT GENERAL AND ADMINISTRATIVE COSTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2002
(UNAUDITED)
Salaries and benefits....................................... $ 243,383
Insurance................................................... 7,439
Bank charges................................................ 915
Transfer agent and filing fees.............................. 31,305
Accounting and legal........................................ 27,843
Office rent................................................. 39,977
Telephone................................................... 9,322
Meals and entertainment..................................... 6,493
Travel...................................................... 21,597
Advertising and news dissemination.......................... 29,336
Recovery of taxes........................................... (30,298)
General office.............................................. 8,904
Plan of arrangement costs................................... 212,321
Exchange gain............................................... (14,628)
----------
593,909
Provision for plan of arrangement costs
Severance................................................. 1,128,470
Accounting, legal and other............................... 43,619
----------
Total general and administrative costs...................... $1,765,998
==========
F-23
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF
PAN AMERICAN SILVER CORP.
F-24
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF
PAN AMERICAN SILVER CORP.
The following pro forma consolidated balance sheet of Pan American Silver
Corp. as at December 31, 2002 and the pro forma consolidated statements of
operations for the three months ended March 31, 2003 and the year ended
December 31, 2002 illustrate on a pro forma basis the effects of certain
transactions more fully described under "The Arrangement" included elsewhere
herein and give effect to significant assumptions described in the notes to the
pro forma consolidated financial statements.
COMPILATION REPORT
We have reviewed, as to compilation only, the accompanying pro forma
consolidated balance sheet of Pan American Silver Corp. as at December 31, 2002
and the pro forma consolidated statement of operations for the three months
ended March 31, 2003 and the year ended December 31, 2002, which have been
prepared for inclusion in the Short Form Base Shelf Prospectus dated July 18,
2003. In our opinion, the pro forma consolidated balance sheet and consolidated
statements of operations have been properly compiled to give effect to the
transactions and the assumptions described in the notes thereto.
(Signed) DELOITTE & TOUCHE LLP
Chartered Accountants
Vancouver, British Columbia
July 18, 2003
COMMENTS TO READERS IN THE UNITED STATES OF AMERICA
Under Canadian securities regulations, when pro forma financial statements
are included in a prospectus, an auditors' compilation report on the financial
statements is required to be included in the prospectus. Under applicable
securities regulations in the United States of America, such compilation reports
would not be included in such a prospectus.
(Signed) DELOITTE & TOUCHE LLP
Chartered Accountants
Vancouver, British Columbia
July 18, 2003
F-25
PAN AMERICAN SILVER CORP.
PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2002
(UNAUDITED)
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
PRO FORMA
PAN AMERICAN CORNER BAY PRO FORMA PAN AMERICAN
SILVER CORP. SILVER INC. NOTE 4 ADJUSTMENTS SILVER CORP.
------------ ------------ -------- ----------- ------------
(UNAUDITED) (UNAUDITED)
ASSETS
Cash and cash equivalents................... $ 10,185 $ 3,212 $ -- $ 13,397
Accounts receivable......................... 4,598 109 $ -- 4,707
Inventories................................. 4,637 $ -- $ -- 4,637
Prepaid expenses and other.................. 3,210 2 $ -- 3,212
--------- ------- ------- ---------
22,630 3,323 $ -- 25,953
PROPERTY, PLANT AND EQUIPMENT................. 59,447 2,588 -- 62,035
MINERAL PROPERTIES............................ 4,193 5,838 (a) 53,360 82,769
(b) 18,858
(c) 520
DIRECT SMELTING ORE........................... 4,303 -- -- 4,303
OTHER ASSETS.................................. 4,393 20 -- 4,413
--------- ------- ------- ---------
$ 94,966 $11,769 $72,738 $ 179,473
========= ======= ======= =========
LIABILITIES
CURRENT
Operating line of credit.................... $ 125 $ -- $ -- $ 125
Accounts payable and accrued liabilities.... 15,227 901 (c) 520 16,648
Advances for metal shipments................ 2,158 -- -- 2,158
Current portion of bank loans and capital
lease..................................... 1,638 -- -- 1,638
Current portion of severance indemnity and
commitments............................... 953 -- -- 953
Current portion of deferred revenue......... 130 -- -- 130
--------- ------- ------- ---------
20,231 901 520 21,652
DEFERRED REVENUE.............................. 923 -- -- 923
FUTURE INCOME TAXES........................... -- -- (b) 18,858 18,858
BANK LOANS AND CAPITAL LEASE.................. 3,942 -- -- 3,942
PROVISION FOR RECLAMATION..................... 12,971 -- -- 12,971
SEVERANCE INDEMNITIES AND COMMITMENTS......... 1,407 -- -- 1,407
--------- ------- ------- ---------
39,474 901 19,378 59,753
--------- ------- ------- ---------
SHAREHOLDERS' EQUITY
Share capital................................. 161,024 16,952 (a) 46,140 224,116
Additional paid in capital.................... 1,092 357 (a) 1,136 2,585
Contributed surplus........................... -- -- (a) (357) (357)
Deficit....................................... (106,624) (6,441) (a) 6,441 (106,624)
--------- ------- ------- ---------
55,492 10,868 53,360 119,720
--------- ------- ------- ---------
$ 94,966 $11,769 $72,738 $ 179,473
========= ======= ======= =========
(Signed) PAUL B. SWEENEY, (Signed) ROSS J. BEATY,
Director Director
F-26
PAN AMERICAN SILVER CORP.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003
(UNAUDITED)
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
PRO FORMA
PAN AMERICAN CORNER BAY PAN AMERICAN
SILVER CORP. SILVER INC. SILVER CORP.
------------ ----------- ------------
(NOTE 5)
REVENUE................................................. $ 7,822 $ 12 $ 7,834
---------- ---------- ----------
EXPENSES
Operating............................................. 7,429 -- 7,429
General and administration............................ 401 297 698
Depreciation and amortization......................... 471 -- 471
Reclamation........................................... 79 -- 79
Exploration........................................... 496 -- 496
Interest expense...................................... 159 -- 159
---------- ---------- ----------
9,035 297 9,332
---------- ---------- ----------
LOSS FROM OPERATIONS.................................... (1,213) (285) (1,498)
OTHER INCOME............................................ 109 -- 109
---------- ---------- ----------
NET LOSS FOR THE YEAR................................... $ (1,104) $ (285) $ (1,389)
========== ========== ==========
LOSS PER SHARE
Basic and fully diluted............................... $ (0.02) $ (0.01) $ (0.03)
========== ========== ==========
WEIGHTED-AVERAGE SHARES OUTSTANDING..................... 50,597,399 19,755,498 58,195,667
========== ========== ==========
F-27
PAN AMERICAN SILVER CORP.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002
(UNAUDITED)
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
PRO FORMA
PAN AMERICAN CORNER BAY PRO FORMA PAN AMERICAN
SILVER CORP. SILVER INC. NOTE 4 ADJUSTMENTS SILVER CORP.
------------ ----------- -------- ----------- ------------
(NOTE 5)
REVENUE............................... $ 45,093 $ -- $ -- $ 45,093
---------- ---------- ------ ----------
EXPENSES
Operating........................... 43,161 -- -- 43,161
General and administration.......... 1,698 997 -- 2,695
Depreciation and amortization....... 4,872 -- -- 4,872
Reclamation......................... 860 -- -- 860
Exploration......................... 1,206 -- (d) 343 1,549
Interest expense.................... 988 -- -- 988
Write-down of mineral properties and
reclamation....................... 27,218 28 -- 27,246
---------- ---------- ------ ----------
80,003 1,025 343 81,371
---------- ---------- ------ ----------
LOSS FROM OPERATIONS.................. (34,910) (1,025) (343) (36,278)
INTEREST INCOME....................... 269 --
OTHER INCOME.......................... 983 160
GAIN ON DISPOSAL OF INVESTMENTS....... -- 4 -- 4
---------- ---------- ------ ----------
NET LOSS FOR THE YEAR................. $ (33,658) $ (861) $ (343) $ (36,274)
========== ========== ====== ==========
LOSS PER SHARE
Basic and fully diluted............. $ (0.80) $ (0.04) $ -- $ (0.76)
========== ========== ====== ==========
WEIGHTED-AVERAGE SHARES OUTSTANDING... 41,849,413 19,385,808 -- 49,481,072
========== ========== ====== ==========
F-28
PAN AMERICAN SILVER CORP.
NOTES TO THE PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND DECEMBER 31, 2002
(UNAUDITED)
EXPRESSED IN UNITED STATES DOLLARS
1. BASIS OF PRESENTATION
The unaudited pro forma consolidated financial statements of Pan American
Silver Corp. ("Pan American") as at December 31, 2002 and for the three months
ended March 31, 2003 and the year ended December 31, 2002 have been prepared by
management after giving effect to the acquisition by Pan American of Corner Bay
Silver Inc. ("Corner Bay") These unaudited pro forma consolidated financial
statements have been compiled from and include:
(a) A pro forma balance sheet combining the audited balance sheet of Pan
American as at December 31, 2002 with the unaudited balance sheet of Corner Bay
as at December 31, 2002; and
(b) A pro forma statement of operations combining the audited statement of
operations of Pan American for the year ended December 31, 2002 with the
unaudited statement of operations of Corner Bay for the twelve month period
ended December 31, 2002.
(c) A pro forma statement of operations combining the unaudited statement of
operations of Pan American for the three months ended March 31, 2003 with the
unaudited statement of operations of Corner Bay for the three month period ended
March 31, 2003.
The pro forma balance sheet at December 31, 2002 has been prepared as if the
transactions described in Note 3 had occurred on December 31, 2002. The
pro forma statement of operations for the year ended December 31, 2002 and the
three months ended March 31, 2003 have been prepared as if the transactions
described in Note 3 had occurred on the first day of the respective financial
periods.
In addition to disclosures required under Canadian security regulations to
comply with the Securities and Exchange Commission regulations, the Company has
reconciled the pro forma information to US GAAP (see Note 6).
It is management's opinion that these pro forma consolidated financial
statements include all adjustments necessary for the fair presentation of the
transactions described in Note 3 in accordance with Canadian generally accepted
accounting principles applied on a basis consistent with Pan American's
accounting policies. The pro forma consolidated financial statements are not
intended to reflect the results of operations or the financial position of Pan
American which would have actually resulted had the proposed transactions been
effected on the dates indicated. Further, the pro forma financial information is
not necessarily indicative of the results of operations that may be obtained in
the future.
The unaudited pro forma financial statements should be read in conjunction
with the historical financial statements and notes thereto of Pan American and
Corner Bay described above.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited pro forma financial statements have been compiled using the
significant accounting policies as set out in the audited financial statements
of Pan American for the year ended December 31, 2002. The significant accounting
policies of Corner Bay conform in all material respects to those of Pan
American, except as described in and adjusted for in Note 4 (d).
F-29
PAN AMERICAN SILVER CORP.
NOTES TO THE PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003 AND DECEMBER 31, 2002
(UNAUDITED)
EXPRESSED IN UNITED STATES DOLLARS
3. BUSINESS COMBINATION
ACQUISITION OF CORNER BAY
On February 20, 2003, Pan American completed its proposed merger with Corner
Bay. Under the terms of the acquisition common shares of Corner Bay were,
directly or indirectly, exchanged for common shares of Pan American and warrants
to purchase Pan American common shares, on the basis of one Pan American common
share for every 2.60 Corner Bay shares and one Pan American warrant for every
5.20 Corner Bay common shares. Pan American also agreed to issue 553,846 stock
options to replace 960,000 fully vested stock options currently held by Corner
Bay employees and directors.
Each whole Pan American warrant will allow the holder to purchase a Pan
American common share for a price of Cdn.$12.00 for a five-year period ended
February 20, 2008.
As a result, Pan American issued 7,636,659 common shares to the shareholders
of Corner Bay, and 3,818,329 warrants to purchase common shares. The common
shares issued were valued at $54,203,000 which was derived from an issue price
of $11.30 translated at $0.6595 for each U.S. dollar, less a deemed 5% issue
cost of $2,707,000. The share purchase warrants were valued at $8,889,000, which
was derived from a warrant valued at $2.328 per warrant. The warrants were
valued using an option pricing model assuming a weighted average volatility of
the Company's share price of 35% and a weighted average annual risk free rate of
4.16%. The value of the stock options granted was determined to be $1,136,000.
F-30
PAN AMERICAN SILVER CORP.
NOTES TO THE PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003 AND DECEMBER 31, 2002
(UNAUDITED)
EXPRESSED IN UNITED STATES DOLLARS
3. BUSINESS COMBINATION (CONTINUED)
The business combination will be accounted for as an acquisition by Pan
American of Corner Bay and the purchase method of accounting will be applied.
The consideration given has been allocated to the fair value of net assets
acquired as follows:
AS AT
DECEMBER 31,
2002
------------
Fair value of net assets acquired
Current assets............................................ $ 3,323,000
Mineral properties........................................ 81,164,000
Other assets.............................................. 20,000
------------
84,507,000
Less: Current liabilities................................. (901,000)
Provision for future income tax liability............ (18,858,000)
------------
$ 64,748,000
============
Consideration given by Pan American
Issue of 7,636,659 common shares.......................... $ 54,203,000
Issue of 3,818,329 share purchase warrants................ 8,889,000
Issue of 553,846 replacement stock options................ 1,136,000
------------
64,228,000
Add: Estimated costs of acquisition....................... 520,000
------------
$ 64,748,000
============
The purchase consideration of $64,748,000 for 100% of Corner Bay exceeds the
carrying value of the net assets at December 31, 2002 by $53,880,000 which has
been applied to increase the carrying value of mineral properties. The resulting
future income tax liability of $18,858,000 has also been applied to increase the
carrying value of mineral properties. This allocation is preliminary.
The value of the common shares to be issued by Pan American was estimated
based on the average closing price of Pan American's common shares for the
period before and after the date that the terms of the transaction were agreed
and announced.
4. ADJUSTMENTS TO THE PRO FORMA FINANCIAL STATEMENTS
Adjustments to the pro forma balance sheet as at December 31, 2002 and the
pro forma consolidated statement of operations for the year then ended are as
follows:
(a) Effect the terms of the Plan of Arrangement, thereby eliminating the
shareholders' equity in Corner Bay and recording the cost of acquisition.
(b) Record future income tax on the acquisition of the mineral properties of
$18,858,000.
F-31
PAN AMERICAN SILVER CORP.
NOTES TO THE PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003 AND DECEMBER 31, 2002
(UNAUDITED)
EXPRESSED IN UNITED STATES DOLLARS
4. ADJUSTMENTS TO THE PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
(c) To accrue for acquisition costs of $520,000.
(d) Write off deferred exploration expenditures in Corner Bay to comply with
Pan American's accounting policy.
5. CORNER BAY SILVER INC.
The amounts used to complete the pro forma operating statements of Corner
Bay, which has a historical year end of June 30, have been determined as
follows:
(a) Year ended December 31, 2002
TWELVE TWELVE
SIX MONTHS SIX MONTHS MONTHS MONTHS
ENDED YEAR ENDED ENDED ENDED ENDED
DECEMBER 31, JUNE 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2002 2001 2002 2002
------------- ---------- ------------- ------------- -------------
(CDN.$) (CDN.$) (CDN.$) (CDN.$) (U.S.$)
Expenses
General and administrative..... $593,909 $1,467,007 $ 507,034 $1,553,882 $ 997,126
Write-off of mineral
properties................... -- 42,511 -- 42,511 27,279
-------- ---------- --------- ---------- ----------
593,909 1,509,578 507,034 1,596,393 1,024,405
Other income..................... (75,861) (295,844) (122,740) (248,965) (159,761)
Gain on disposal of
investments.................. -- (5,805) -- (5,805) (3,725)
-------- ---------- --------- ---------- ----------
Net loss for the period.......... $518,048 $1,207,869 $ 384,294 $1,341,623 $ 860,919
======== ========== ========= ========== ==========
(b) Three months ended March 31, 2003
The period from the acquisition date of February 20, 2003 to March 31, 2003
are included in the unaudited financial statements of Pan American for the three
months ended March 31, 2003. The pro forma adjustments include revenue and
expenses for the period from January 1, 2003 to February 20, 2003.
(c) The financial statements of Corner Bay are denominated in Canadian
dollars ("Cdn.$") and have been translated into United States dollars using the
following exchange rates:
EXCHANGE RATE
---------------------
Pro forma statements of operations for the year ended
December 31, 2002 and the three month period ended
March 31, 2003..................................... 1 Cdn.$ = U.S.$0.6417
Pro forma balance sheet as at December 31, 2002...... 1 Cdn.$ = U.S.$0.6648
F-32
PAN AMERICAN SILVER CORP.
NOTES TO THE PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003 AND DECEMBER 31, 2002
(UNAUDITED)
EXPRESSED IN UNITED STATES DOLLARS
6. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
The pro forma consolidated financial statements are prepared in accordance
with accounting principles generally accepted in Canada ("Canadian GAAP") which
differ in certain respects with accounting principles generally accepted in the
United States ("US GAAP"). The differences between Canadian GAAP and US GAAP as
they relate to Pan American and Corner Bay are disclosed in the historical
financial statements and notes thereto of the companies.
F-33