As filed with the Securities and Exchange Commission on May 3, 2006
Registration No. 333-133746
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 1 to
FORM F-10
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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GOLD RESERVE INC.
(Exact name of Registrant as specified in its charter)
Yukon Territory 1040 Not Applicable
(Province or other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification Number,
Incorporation or Classification if any)
Organization) Code Number)
926 West Sprague Ave., Suite 200
Spokane, WA 99201
(509) 623-1500
(Address and telephone number of Registrant's principal executive offices)
----------------------
Rockne J. Timm
President
Gold Reserve Corporation
926 West Sprague Ave., Suite 200
Spokane, WA 99201
(509) 623-1500
(Name, address (including zip code) and telephone number (including area code)
of agent for service in the United States)
Copies to:
John Galbavy Charles L.K. Higgins Jonathan B. Newton Kevin Rooney Christopher J. Barry
Gold Reserve Inc. Fasken Martineau DuMoulin LLP Baker & McKenzie LLP Heenan Blaikie LLP Dorsey & Whitney LLP
926 West Sprague Ave. Toronto Dominion Centre Pennzoil Place, South Tower Royal Bank Plaza U.S. Bank Centre
Suite 200 66 Wellington St. W., #4200 711 Louisiana St., Suite 3400 Suite 2600 1420 Fifty Ave., Suite 3400
Spokane, WA 99201 Toronto Ontario M5K 1N6 Houston, TX 77002 Toronto, ON M5S 2J4 Seattle, WA 98101-4010
(509) 623-1500 (416) 865-4392 (713) 427-5000 (416) 360-6336 (206) 903-8815
----------------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the Registration Statement becomes effective.
Province of Ontario, Canada
(Principal jurisdiction regulating this offering)
It is proposed that this filing shall become effective (check appropriate
box below):
A.[_] upon filing with the Commission, pursuant to Rule 467(a) (if in
connection with an offering being made contemporaneously in the United
States and Canada).
B.[X] at some future date (check appropriate box below)
1.[_] pursuant to Rule 467(b) on ( ) at ( ) (designate a time not sooner
than seven calendar days after filing).
2.[_] pursuant to Rule 467(b) on ( ) at ( ) (designate a time seven
calendar days or sooner after filing) because the securities
regulatory authority in the review jurisdiction has issued a receipt
or notification of clearance on ( ).
3.[_] pursuant to Rule 467(b) as soon as practicable after notification of
the Commission by the Registrant or the Canadian securities
regulatory authority of the review jurisdiction that a receipt or
notification of clearance has been issued with respect hereto.
4.[X] after the filing of the next amendment to this Form (if preliminary
material is being filed).
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to the home jurisdiction's shelf
prospectus offering procedures, check the following box. [_]
CALCULATION OF REGISTRATION FEE
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Title of each Class of Proposed Maximum
Securities to be Aggregate Offering Amount of
Registered Price (1)(2) Registration Fee
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Class A common shares,
no par value $30,987,900 (3) $3,316 (4)
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Class A common shares,
no par value $15,584 (5) $2 (6)
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Class A common share
purchase rights N/A N/A (7)
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(1) Includes Class A common shares that the Underwriters have the option to
purchase to cover over-allotments, if any.
(2) Rule 457(o) permits the registration fee to be calculated on the basis of
the maximum offering price of all of the securities listed and, therefore,
the table does not specify by each class information as to the amount to
be registered or the proposed maximum offer price per security.
(3) Determined based on the initial proposed maximum aggregate offering price in
Canadian dollars of $34,500,000 using an exchange rate of US$0.8982 per
Cdn.$1.00.
(4) Previously paid.
(5) Determined based on the additional amount of proposed maximum aggregate
offering price in Canadian dollars of $17,250 using an exchange rate of
US$0.9034 per Cdn.$1.00.
(6) Paid herewith.
(7) In accordance with Rule 457(g), no additional registration fee is required
in respect of the Class A common share purchase rights.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registration
Statement shall become effective as provided in Rule 467 under the Securities
Act of 1933 or on such date as the Commission, acting pursuant to Section 8(a)
of the Act, may determine.
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PART I
INFORMATION REQUIRED TO BE DELIVERED TO OFFEREES OR PURCHASERS
I-1
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+Information contained herein is subject to completion or amendment. A +
+registration statement relating to these securities has been filed with the +
+Securities and Exchange Commission. These securities may not be sold nor may +
+offers to buy be accepted prior to the time the registration statement +
+becomes effective. This prospectus shall not constitute an offer to sell or +
+the solicitation of an offer to buy nor shall there be any sale of these +
+securities in any State in which such offer, solicitation or sale would be +
+unlawful prior to registration or qualification under the securities laws of +
+such State. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated May 3, 2006
AMENDED AND RESTATED SHORT FORM PROSPECTUS
[LOGO GOLD RESERVE INC.]
Cdn.$30,015,000
3,335,000 Class A Common Shares
This short form prospectus relates to the offering (the "Offering") by Gold
Reserve Inc. (the "Company" or "Gold Reserve") of 3,335,000 Class A common
shares ("Common Shares") of the Company at a price of Cdn.$9.00 per Common
Share. The offering price of the Common Shares was determined by negotiation
between the Company and Sprott Securities Inc. and RBC Dominion Securities Inc.
(the "Underwriters"). The Underwriters are acting as underwriters in respect of
the Offering in Canada and the Underwriters' U.S. affiliates are acting as
underwriters in respect of the Offering in the United States. The outstanding
Common Shares are listed for trading on the Toronto Stock Exchange (the "TSX")
and the American Stock Exchange (the "AMEX") under the symbol "GRZ". On May 2,
2006, the last trading day prior to the date of this short form prospectus, the
closing price of the Common Shares on the TSX and AMEX was Cdn.$9.67 and
US$8.73, respectively. Applications have been made to have the Common Shares
qualified for distribution by this short form prospectus listed on the TSX and
AMEX. Listing will be subject to the Company fulfilling all of the listing
requirements of the TSX and AMEX.
Investing in the Common Shares involves risks. See "Risk Factors" beginning on
page 9.
Price to Net Proceeds to
Public Underwriters' Fee the Company(1)
---------- ----------------- ----------------
Per Class A Common Share....... Cdn.$9.00 Cdn.$0.45 Cdn.$8.55
Total(2)....................... Cdn.$30,015,000 Cdn.$1,500,750 Cdn.$28,514,250
- -----
(1) Before deducting the expenses of the Offering, which are estimated to be
approximately Cdn.$450,000, that will be paid by the Company from the
proceeds of the Offering.
(2) The Company has granted to the Underwriters an option (the "Over-Allotment
Option") exercisable at any time, in whole or in part, for a period of 30
days following the closing of the Offering, to purchase up to an additional
500,250 Common Shares at the same price as set forth above. This prospectus
qualifies the grant of the Over-Allotment Option and the distribution of the
Common Shares issuable upon exercise of the Over-Allotment Option. If the
Over-Allotment Option is exercised in full, the total "Price to the Public",
"Underwriters' Fee" and "Net Proceeds to the Company" will be
Cdn.$34,517,250, Cdn.$1,725,862.50, and Cdn.$32,791,387.50, respectively.
See "Plan of Distribution".
The public offering price of the Common Shares offered in Canada and the United
States is payable in Canadian dollars only.
Definitive certificates representing the Common Shares are expected to be
available for delivery at closing of the Offering, which is anticipated to be
on or about May 15, 2006 or such other date as may be agreed upon by the
Company and the Underwriters but in any event no later than may 30, 2006.
This offering is made by a foreign issuer that is permitted, under a
multijurisdictional disclosure system adopted by the United States, to prepare
this prospectus in accordance with Canadian disclosure requirements.
Prospective investors should be aware that such requirements are different from
those of the United States. Financial statements included or incorporated
herein have been prepared in accordance with Canadian generally accepted
accounting principles, and are subject to Canadian auditing and auditor
independence standards, and thus may not be comparable to financial statements
of United States companies. See "Additional Report with Respect to
Supplementary Information".
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. Prospective investors
should read the tax discussion under "Certain United States Federal Income Tax
Considerations".
The enforcement by investors of civil liabilities under the federal securities
laws may be affected adversely by the fact that the Company is incorporated
under the laws of Yukon Territory, Canada, that some of its directors are
residents of Canada, that some or all of the underwriters or experts named in
the registration statement are residents of a foreign country, and that a
substantial portion of the assets of the Company and said persons are located
outside the United States.
These securities have not been approved or disapproved by the Securities and
Exchange Commission nor has the Commission passed upon the accuracy or adequacy
of this prospectus. Any representation to the contrary is a criminal offense.
SPROTT SECURITIES RBC CAPITAL MARKETS
(U.S.A.) LIMITED
The date of this prospectus is May 3, 2006
TABLE OF CONTENTS
Page
----
CAUTIONARY NOTE TO UNITED STATES INVESTORS................................. 2
CURRENCY AND EXCHANGE RATE INFORMATION..................................... 3
ELIGIBILITY FOR INVESTMENT................................................. 3
DOCUMENTS INCORPORATED BY REFERENCE........................................ 3
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS.................. 4
THE COMPANY................................................................ 5
RECENT DEVELOPMENTS........................................................ 8
RISK FACTORS............................................................... 9
USE OF PROCEEDS............................................................ 18
CONSOLIDATED CAPITALIZATION................................................ 18
DESCRIPTION OF SHARE CAPITAL............................................... 18
DESCRIPTION OF THE SECURITIES BEING DISTRIBUTED............................ 19
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS................................. 19
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS.................... 21
PLAN OF DISTRIBUTION....................................................... 26
LEGAL MATTERS.............................................................. 28
INTEREST OF EXPERTS........................................................ 28
AUDITORS, TRANSFER AGENT AND REGISTRAR..................................... 29
DOCUMENTS FILED AS PART OF THE REGISTRATION STATEMENT...................... 29
ADDITIONAL INFORMATION..................................................... 29
ENFORCEABILITY OF CIVIL LIABILITIES........................................ 29
INTERNATIONAL ISSUER....................................................... 30
STATUTORY RIGHTS OF WITHDRAWAL AND RESCISSION.............................. 30
AUDITORS' REPORT WITH RESPECT TO SUPPLEMENTARY INFORMATION................. F-1
Investors should rely only on the information contained in or incorporated
by reference into this short form prospectus. The Company has not authorized
anyone to provide investors with different information. Neither the Company
nor the Underwriters are making an offer of these securities in any
jurisdiction where the offer is not permitted. Investors should not assume
that the information contained in this short form prospectus is accurate as of
any date other than the date on the front of this prospectus. The Company's
business, operating results, financial condition and prospects may have
changed since that date.
Unless otherwise indicated, all information in this prospectus assumes no
exercise of the Over-Allotment Option.
CAUTIONARY NOTE TO UNITED STATES INVESTORS
This prospectus, including the documents incorporated by reference herein,
has been prepared in accordance with the requirements of securities laws in
effect in Canada, which differ from the requirements of United States
securities laws. Without limiting the foregoing, this prospectus, including
the documents incorporated by reference herein, uses the terms "measured",
"indicated" and "inferred" resources. U.S. investors are advised that, while
such terms are recognized and required by Canadian securities laws, the United
States Securities and Exchange Commission (the "SEC") does not recognize them,
including under its Industry Guide 7. As further described in the Company's
annual information form incorporated herein by reference, under U.S.
standards, mineralization may not be classified as a "reserve" unless the
determination has been made that the mineralization could be economically and
legally produced or extracted at the time the reserve determination is made.
See "Documents Incorporated by Reference". U.S. investors are cautioned not to
assume that all or any part of measured or indicated resources will ever be
converted into reserves. Further, "inferred resources" have a great amount of
uncertainty as to their existence and as to whether they can be mined legally
or economically. It cannot be assumed that all or any part of the "inferred
resources" will ever be upgraded to a higher category. Therefore, U.S.
investors are also cautioned not to assume that all or any part of the
inferred resources exist, or that they can be mined legally or economically.
Disclosure of "contained ounces" is permitted disclosure under Canadian
regulations, however, the SEC normally only permits issuers to report
"resources" as in place tonnage and grade without reference to unit measures.
Accordingly, information concerning descriptions of mineralization, resources
and reserves contained in this prospectus or in the documents incorporated by
reference, may not be comparable to information made public by U.S. companies
subject only to the reporting and disclosure requirements of the SEC.
National Instrument 43-101 Standards of Disclosure for Mineral Projects
("NI 43-101") is a rule developed by the Canadian Securities Administrators
that establishes standards for all public disclosure an issuer makes of
scientific
2
and technical information concerning mineral projects. Unless otherwise
indicated, all resource estimates contained in or incorporated by reference in
this prospectus have been prepared in accordance with NI 43-101 and the
Canadian Institute of Mining, Metallurgy and Petroleum Classification System
and not the SEC's Industry Guide 7. These standards differ significantly from
the requirements of the SEC (including under its Industry Guide 7), and
resource information contained herein and incorporated by reference herein may
not be comparable to similar information disclosed by U.S. companies or in a
U.S.-style prospectus.
CURRENCY AND EXCHANGE RATE INFORMATION
Unless otherwise indicated, all references to "$", "Cdn.$" or "dollars" in
this short form prospectus refer to Canadian dollars and references to "US$"
or "U.S. dollars" in this short form prospectus refer to United States
dollars.
The Company's accounts are maintained in United States dollars but prepared
in accordance with Canadian generally accepted accounting principles.
The following table sets forth the rate of exchange for one Canadian
dollar, expressed in U.S. dollars, for each period indicated, the average of
such exchange rates, and the exchange rate at the end of such period, based
upon the noon buying rates provided by the Bank of Canada:
Year Ended December 31
-------------------------------------------------
2005 2004 2003 2002 2001
--------- --------- --------- --------- ---------
U.S. dollars per one Canadian dollar
Average rate for period....... US$0.8254 US$0.7684 US$0.7138 US$0.6369 US$0.6458
Rate at end of period......... US$0.8598 US$0.8319 US$0.7713 US$0.6339 US$0.6278
The noon rate of exchange on May 2, 2006 as reported by the Bank of Canada
for the conversion of Canadian dollars into United States dollars was
Cdn.$1.00 equals US$0.9034.
ELIGIBILITY FOR INVESTMENT
In the opinion of Fasken Martineau DuMoulin LLP, counsel to Gold Reserve,
and Heenan Blaikie LLP, counsel to the Underwriters, the Common Shares offered
hereby, if issued on the date hereof, would be qualified investments under the
Income Tax Act (Canada) and the regulations thereunder ("Tax Act") for trusts
governed by registered retirement savings plans, registered retirement income
funds, deferred profit sharing plans and registered education savings plans.
DOCUMENTS INCORPORATED BY REFERENCE
Information has been incorporated by reference in this short form
prospectus from documents filed with securities commissions or similar
authorities in Canada and forms an integral part of this short form
prospectus. Copies of the documents incorporated herein by reference may be
obtained on request without charge from Mary Smith, Secretary of Gold Reserve,
at 926 West Sprague Avenue, Suite 200, Spokane, Washington 99201, U.S.A.
(Telephone: (509) 623-1500). These documents are also available electronically
at www.sedar.com. The following documents filed with the securities
commissions or similar authorities in Canada are specifically incorporated by
reference and form an integral part of this short form prospectus. You should
review them prior to making an investment decision:
(a) annual information form of Gold Reserve in the form of Form 20-F (the
"AIF") for the year ended December 31, 2005;
(b) audited annual consolidated comparative financial statements of Gold
Reserve for the year ended December 31, 2005 and the auditors' report
thereon, together with management's discussion and analysis for the
year ended December 31, 2005;
(c) management information circular dated April 14, 2005 prepared in
connection with Gold Reserve's annual and special meeting of
shareholders held on June 2, 2005;
3
(d) management information circular dated January 31, 2006 prepared in
connection with Gold Reserve's special meeting of shareholders held on
March 22, 2006; and
(e) the summary, being pages 1.1 to 1.13 inclusive, of NI 43-101 Technical
Report Gold and Copper Project Brisas Project dated February 24, 2005
as prepared by Pincock, Allen & Holt.
Any document of the type referred to in items (a) to (d) above and any
material change reports (other than confidential material change reports)
filed by the Company with the securities commissions or similar authorities in
Canada after the date of this short form prospectus and prior to the
completion or termination of the Offering shall be deemed to be incorporated
by reference into and form an integral part of this short form prospectus. The
documents incorporated or deemed incorporated by reference herein contain
meaningful and material information relating to the Company and prospective
investors of Common Shares should review all information contained in this
short form prospectus and the documents incorporated by reference before
making an investment decision. Any information that is intended to be
incorporated by reference to the Company's SEC filings will only be
incorporated by reference if expressly referenced as such in the Company's
Registration Statement on Form F-10 filed with the SEC with respect to the
Offering (and of which this short form prospectus forms a part) or as
expressly referenced as such in any Report on Form 6-K furnished to the SEC
(or other applicable filing).
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein or in any subsequently filed document which
also is or is deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for the purposes of this short form prospectus to
the extent that a statement contained herein, or in any other subsequently
filed document which also is incorporated or is deemed to be incorporated by
reference herein, modifies or supersedes such 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 shall not be deemed an admission for any purposes that the modified
or superseded statement, when made, constituted a misrepresentation, an untrue
statement of a material fact or an omission to state a material fact that is
required to be stated or that is necessary to make a statement not misleading
in light of the circumstances under which it was made. Any statement so
modified or superseded shall not be deemed in its unmodified or prior form to
constitute a part of this short form prospectus.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The information presented or incorporated by reference in this short form
prospectus contains both historical information and forward-looking statements
(including within the meaning of Section 27A of the United States Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the United
States Securities Exchange Act of 1934, as amended (the "U.S. Exchange Act").
These forward-looking statements involve risks and uncertainties, as well as
assumptions that, if they never materialize, prove incorrect or materialize
other than as currently contemplated, could cause the results of the Company
and its consolidated subsidiaries to differ materially from those expressed or
implied by such forward-looking statements.
Numerous factors could cause actual results to differ materially from those
in the forward-looking statements, including without limitation, concentration
of operations and assets in Venezuela; corruption and uncertain legal
enforcement; requests for improper payments; regulatory, political and economic
risks associated with Venezuelan operations (including changes in previously
established legal regimes, rules or processes); the ability to obtain or
maintain the necessary permits or additional funding for the development of the
Brisas Project; in the event any key findings or assumptions previously
determined by the Company or the Company's consultants in conjunction with the
feasibility study concerning the Brisas Project prepared in 2005 (as updated or
modified from time to time) (the "Bankable Feasibility Study") significantly
differ or change as a result of actual results in the Company's expected
construction and production at the Brisas Project (including capital and
operating cost estimates); risk that actual mineral reserves may vary
considerably from estimates presently made; impact of currency, metal prices and
metal production volatility; fluctuations in energy prices; changes in proposed
development plans (including technology used); the Company's dependence upon the
abilities and continued participation of certain key employees; and risks
normally incident to the operation and development of mining properties. This
list is not exhaustive of the factors that may affect any of the Company's
forward-looking statements.
4
Statements concerning reserves and mineral resource estimates may also be
deemed to constitute forward-looking statements to the extent that they
involve estimates of the mineralization that is expected to be encountered if
the property is developed, and in the case of mineral reserves, such
statements reflect the conclusion based on certain assumptions that the
mineral deposit can be economically exploited.
The words "believe," "anticipate," "expect," "intend," "estimate," "plan,"
"assume," "positioned," "may," "could" and other similar expressions that are
predictions of or indicate future events and future trends that do not relate
to historical matters, identify forward-looking statements. Any such forward-
looking statements are not intended to give any assurances as to future
results.
Investors are cautioned not to put undue reliance on forward-looking
statements, and should not infer that there has been no change in the affairs
of the Company since the date of this short form prospectus or the documents
incorporated by reference herein that would warrant any modification of any
forward-looking statement made in this document, other documents filed
periodically with securities regulators or documents presented on the
Company's website. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by this notice. The Company disclaims any intent
or obligation to update publicly these forward-looking statements, whether as
a result of new information, future events or otherwise. Investors are urged
to read the Company's filings with U.S. and Canadian securities regulatory
agencies, which can be viewed on-line at www.sedar.com or www.sec.gov.
Additionally, investors can request a copy of any of these filings directly
from the Company as described elsewhere herein. See "Documents Incorporated by
Reference".
THE COMPANY
Overview
Name, Address and Incorporation
Gold Reserve is a mining company engaged in the exploration and development
of precious metal properties. The Company was incorporated in 1998 under the
laws of the Yukon Territory, Canada and is the successor issuer to Gold
Reserve Corporation, a Montana corporation formed in 1956. Gold Reserve's
registered agent is Austring, Fendrick, Fairman & Parkkari, The Drury
Building, 3801 Third Avenue, Whitehorse, Yukon Y1A 4Z7. Telephone and fax
numbers for Gold Reserve's registered office are (867) 668-4405 and (867) 668-
3710, respectively. Venezuelan administrative and technical offices are
located in Caracas and Puerto Ordaz, Venezuela. Telephone and fax numbers for
the Company's administrative office located in Spokane, Washington are (509)
623-1500 and (509) 623-1634, respectively. The Company also maintains
technical staff in Toronto, Canada and Denver, Colorado.
The Company is presently focused primarily on its most significant asset,
the "Brisas Project", an advanced stage development project, and to a lesser
extent on the exploration of its Choco 5 property, both located in Bolivar
State, Venezuela. The Company has no commercial production at this time.
The Brisas Project Bankable Feasibility Study was completed in early 2005.
Following receipt of the Bankable Feasibility Study, the Company's board of
directors approved a plan to proceed with financing and, if successful,
construction of the Brisas Project based on the results of the study. As a
prerequisite to the Company obtaining formal commitments to finance
construction of the Brisas Project, the Company must resolve pending non-
mining concession land issues and obtain the required permits for the
construction and operation of the Brisas Project described below. Initial
capital costs to construct and place the Brisas Project into production are
currently contemplated to be US$638 million (up from approximately US$552
million in the Bankable Feasibility Study) excluding value added taxes and
import duties, which management believes could total as much as US$69 million.
Management is in the process of preparing applications for all possible tax
exonerations in Venezuela for such amounts and expects to obtain such
exonerations prior to construction of the Brisas Project. There can be no
assurances that such exonerations will be obtained, the primary result of
which would be to increase initial capital costs.
Organizational Structure
References throughout this short form prospectus to the "Company" or the
terms "we," "us" and "our," except as otherwise indicated herein, refer
primarily to Gold Reserve Inc., Gold Reserve Corporation (incorporated in
5
Montana), Gold Reserve de Barbados Ltd. (domiciled in Canada, the U.S. and
Barbados, respectively), Gold Reserve de Venezuela, C.A., Compania Aurifera
Brisas del Cuyuni, C.A. ("BRISAS") (both domiciled in Venezuela), and Great
Basin Energies, Inc. ("Great Basin") and MGC Ventures Inc. ("MGC Ventures")
(both domiciled in the U.S.). Great Basin and MGC Ventures have no current
business activities. All of the consolidated companies noted above are wholly
owned except for Great Basin and MGC Ventures, each of which are approximately
47% owned.
Summary Description of the Business
The Company's primary mining asset, the Brisas Project, is a gold/copper
deposit located in the Kilometre 88 mining district of the State of Bolivar in
southeastern Venezuela. Approximately US$100 million has been expended
(including costs capitalized and costs expensed in the period incurred) on the
Brisas Project since its acquisition by the Company in 1992. In 2005, the
Company, with the assistance of a number of independent consultants, completed
a Bankable Feasibility Study for the Brisas Project. Based on the conclusions
contained in the Bankable Feasibility Study, the board of directors approved
proceeding with the financing and construction of the mine.
The Brisas Project consists of the following: a 500-hectare land parcel
consisting of the Brisas alluvial concession and the Brisas hardrock
concession beneath the alluvial concession (the "Brisas concessions").
Together these concessions contain substantially all of the mineralization
identified in the Bankable Feasibility Study. The Brisas Project also includes
a number of other existing or pending applications for concessions,
alfarjetas, Corporacion Venezolana de Guayana ("CVG") work contracts, land use
permits and easements, adjacent to or near the Brisas concessions, totalling
another 13,000 hectares.
The Company's original Brisas Project operating plan was approved by the
Ministry of Energy and Mines (now the Ministry of Basic Industries and Mines
("MIBAM")) in 2003 and, since that approval, the Company has submitted to
MIBAM a number of modifications in order to minimize impact to the environment
and optimize economics of the Brisas Project. Contained within the approved
operating plan are the existing or pending applications for concessions,
alfarjetas, CVG work contracts, land use permits and easements, adjacent to or
near the Brisas concessions described above. These additional land parcels
comprise the bulk of the land required for the mining and milling facility and
related infrastructure contemplated in the Bankable Feasibility Study. A
number of these parcels are integral to the Company's proposed operating plan
and others may be necessary for future needs. Failure to obtain one or more of
these rights or properties could have a material adverse effect on the
Company.
In addition to the pending land use issues related to project
infrastructure needs, the Company has a number of permits relating to the
Brisas Project pending before MIBAM, the Venezuelan Ministry of the
Environment and Natural Resources ("MARN") and other regulatory or government
agencies. Most importantly, the Company must obtain the Administrative
Authorization to Affect Natural Resources for Construction of Infrastructure
and Exploitation of Alluvial and Vein Deposits of Gold and Copper from MARN,
which is issued in part based on MIBAM's approval of the project operating
plan as well as the Company's Venezuelan Environmental and Social Impact
Assessment (V-ESIA), which was submitted in August 2005. Receipt of this
material permit is required before the Company can commence construction and
operation at the Brisas Project. The Company requires significant financing to
commence such construction and any financing relating to the Brisas Project is
expected to be subject to the receipt of this material permit. The Company's
current financial plan is to seek the required financing after the receipt of
the material permit, although the financial plan is subject to change with
potential changes in the price of the Common Shares and gold and copper
prices.
The Company is dependent on the Venezuelan regulatory authorities issuing the
Company the required operational and land use permits before it may begin
construction on, and operate, the Brisas Project. Obtaining these required
permits is also necessary in order for the Company to adequately identify and
obtain suitable financing for the Brisas Project. Further, the Company
previously filed an administrative protest with MARN with respect to a water
diversionary plan that includes a structure to divert water proposed by a third
party for a property adjacent to the northern boundary of the Brisas Project,
construction of which could impair the Company's proposed set-back arrangement
for its northern boundary as described in the Company's original operating plan.
A number of these pending items have been outstanding for some time. The
resolution of these pending issues may be further delayed or withheld for
reasons within or outside of the Company's control or in response to the
Company's lawful actions, including policy decisions of the Venezuelan
government or its regulators or agents that have no legal basis, unexpected
changes in laws or regulations, arbitrary decisions by relevant officials,
corruption, requests for improper payments, favoritism towards other companies
or persons or any other actions that may result from the changing and uncertain
regulatory environment with respect to mining rights.
As of April 28, 2006, the Company had approximately US$19.5 million in cash
and investments. The Company currently does not generate revenue from
operations and has historically financed operating activities primarily from
6
the sale of Common Shares or other equity securities. In the near-term,
management believes that cash and investment balances, together with the
proceeds of this Offering, are sufficient to enable the Company to fund its
pre-construction activities through 2007. These pre-construction activities
are expected to consist of detailed project engineering, development and
implementation of project related contracts such as engineering, procurement
and construction management, port facilities, concentrate sales contracts,
electricity and fuel supply contracts, and a number of other agreements
related to the construction and operation of the Brisas Project, pursuing the
required permits and identifying suitable funding sources for construction of
the Brisas Project. Management can provide no assurances that it will be able
to obtain the substantial additional financing that will be needed to
construct the Brisas Project. Failure to raise the required funds will mean
the Company is unable to construct and operate the Brisas Project, which would
have a material adverse effect on the Company.
In May 2005, Pincock, Allen & Holt of Denver, Colorado ("PAH") calculated
the updated mineral resource and reserve estimates summarized in the tables
below in accordance with NI 43-101 for the Brisas Project. The Bankable
Feasibility Study described earlier has not yet been updated with this new
data. A supplement to the Bankable Feasibility Study was completed in November
2005 based on the May 2005 reserves, new waste dump designs and a larger pit
volume. The results are very similar to the Bankable Feasibility Study
results.
BRISAS MINERAL RESERVE AS AT MAY 2005
The Brisas Project is estimated to contain a proven and probable mineral
reserve of approximately 10.1 million ounces of gold and 1.29 billion pounds
of copper as summarized in the following table:
Reserve Waste Total
tonnes Au Grade Cu Grade Au oz. Cu lb. tonnes tonnes Strip
Class (millions) (gpt) (%) (thousands) (millions) (millions) (millions) Ratio
- ----- ---------- -------- -------- ----------- ---------- ---------- ---------- -----
Proven...... 206.9 0.726 0.125 4,829 570
Probable.... 239.3 0.683 0.136 5,255 720
----- ----- ----- ------ ----- ----- ------- ----
Total....... 446.2 0.703 0.131 10,084 1,290 963.8 1,410.0 2.16
===== ===== ===== ====== ===== ===== ======= ====
The mineral reserve (within a pit design) has been estimated in accordance
with NI 43-101. The mineral reserve was estimated using average recovery rates
for gold and copper of approximately 83% and 87% respectively, metal prices of
US$350 per ounce gold and US$0.90 per pound copper and an internal revenue
cut-off of US$3.00 per tonne. The qualified persons involved in the property
evaluation and resource and reserve estimate were Raul Borrastero, C.P.G. and
Susan Poos, P.E. (both formerly of PAH) and Brad Yonaka, Exploration Manager
for Gold Reserve.
BRISAS MINERAL RESOURCE ESTIMATE AS AT MAY 2005
The Brisas Project is estimated to contain a measured and indicated mineral
resource of 12.4 million ounces of gold and approximately 1.6 billion pounds
of copper (based on 0.4 gram per tonne gold equivalent cut-off).
Cautionary Note to U.S. Investors concerning estimates of Measured and
Indicated Resources. This section uses the terms "measured" and "indicated
resource". The Company advises investors that while the terms "measured" and
"indicated resource" are recognized and required by Canadian regulations, the
SEC does not recognize them. Investors are cautioned not to assume that the
mineralization not already categorized as mineral reserves, will ever be
converted into reserves. Disclosure of contained ounces is permitted under
Canadian regulations, however, the SEC generally permits resources to be
reported only as in place tonnage and grade. See "Cautionary Note to United
States Investors".
7
The May 2005 estimated, measured and indicated mineral resource utilizing
an off-site smelter process is summarized in the following table:
(kt
=1,000 Measured and
tonnes) Measured Indicated Indicated
Au Eq ------------------- ------------------- --------------------
Cut-off Au Cu Au Cu Au Cu
Grade kt (gpt) (%) kt (gpt) (%) kt (gpt) (%)
------- ------- ----- ----- ------- ----- ----- ------- ------ -----
0.40 250,184 0.689 0.119 332,314 0.640 0.132 582,498 0.661 0.126
(In Measured and
Millions) Measured Indicated Indicated
Au Eq ------------------- ------------------- --------------------
Cut-off Au Cu Au Cu Au Cu
Grade oz. lb. oz. lb. oz. lb.
- --------- ------- ----- ----- ------- ----- ----- ------- ------ -----
0.40 -- 5.541 656 -- 6.837 966 -- 12.378 1,622
The inferred mineral resource, based on an off-site smelter process (0.4
gram per tonne gold equivalent cut-off), is estimated at 129.0 million tonnes
containing 0.594 grams gold per tonne and 0.122 percent copper, or 2.46
million ounces of gold and 346 million pounds of copper. The mineral resource
estimate has been calculated in accordance with NI 43-101. The mineral
resource and gold equivalent (AuEq) cut-off is based on US$350 per gold ounce
and US$0.90 per pound copper. The qualified persons involved in the property
evaluation and resource and reserve estimate were Raul Borrastero, C.P.G. and
Susan Poos P.E. (both formerly of PAH) and Brad Yonaka, Exploration Manager
for Gold Reserve.
Cautionary Note to U.S. Investors concerning estimates of Inferred
Resources. This section uses the term "inferred" resources. The Company
advises investors that while the term "inferred resource" is recognized and
required by Canadian regulations, the SEC does not recognize such terms. An
"inferred resource" has a great amount of uncertainty as to its existence and
its economic and legal feasibility. Under Canadian disclosure rules, estimates
of inferred mineral resources may not form the basis of feasibility or
prefeasibility studies, except in rare cases. Investors are cautioned not to
assume that part or all of an inferred resource exists, is economically or
legally mineable or that all or any part of an inferred mineral resource will
ever be upgraded to a higher category. Disclosure of contained ounces is
permitted under Canadian regulations, however, the SEC generally permits
resources to be reported only as in place tonnage and grade. See "Cautionary
Note to United States Investors".
RECENT DEVELOPMENTS
Receipt of Permit for Detailed Engineering Activities on Brisas Project
On January 4, 2006, the Company announced that the Government of Venezuela
through MARN, granted the Company's subsidiary BRISAS, operator of the Brisas
Project, additional permits for the Company's continuing detailed engineering
activities related to the development of the Brisas Project.
The permits are for geotechnical drilling to support detailed engineering
work related to pit slope analysis, crusher design, process facility design,
tailing dam design, and overall site development for the Brisas Project, which
is anticipated to utilize conventional open pit mining methods with the
processing of ore at full production of 70,000 tonnes per day, yielding an
average annual production of 486,000 ounces of gold and 63 million pounds of
copper over an estimated mine life determined currently by the Company to be
approximately 18 years.
Receipt of Permit to Impact Natural Resources
On March 16, 2006, the Company announced that MARN had issued to the
Company's subsidiary BRISAS the "Permit to Impact Natural Resources" for the
quarry on the Barbarita property, which is expected to provide aggregate for
the Company's adjacent Brisas Project. Aggregate is required for the
construction and operating phase of the Brisas Project. The Barbarita property
is located approximately 5 kilometres from the Brisas Project site and near
the planned mill site.
Special Meeting of Shareholders
On March 22, 2006, shareholders of the Company passed resolutions
approving: (i) the continuation of and amendment to the Company's shareholder
rights plan; (ii) certain amendments to the Company's Equity Incentive
8
Plan; and (iii) the extension of the expiry date from June 8, 2006 to December
31, 2006 of certain outstanding options held by insiders of the Company, and
providing the board of directors discretion to further extend the expiry date
to no later than June 8, 2008.
Contracts with SNC-Lavalin Engineers & Constructors, Inc.
On April 24, 2006, the Company announced the completion of the initial
engineering definition phase of the Brisas Project and the signing of the
Engineering Procurement ("EP") and Construction Management ("CM") contracts
with SNC-Lavalin Engineers & Constructors, Inc. and its affiliates
(collectively, "SNC"). The scope of work for the contracts includes detailed
engineering, procurement and construction management for the process,
infrastructure, tailings and camp facilities as further defined in the EP&CM
contracts. Commencement of construction activities at the Brisas Project will
commence after receipt of the Administrative Authorization to Affect Natural
Resources for Construction of Infrastructure and Exploitation of Gold and
Copper Deposits from MARN and after obtaining the necessary financing for
construction. The estimated cost of the EP contract is approximately
US$22.8 million and for the CM contract approximately US$16.3 million for a
total of approximately US$39.1 million. The Company has the right to terminate
for convenience such contracts at any time with notice and upon payment to SNC
by the Company of any unpaid amounts that have accrued under the terms of the
contracts to the date of termination plus the demobilization costs and
expenses of SNC. Construction is estimated to take 24 to 30 months from date
of commencement.
Capital Costs
The Company has estimated initial capital costs for the Brisas Project to
now total approximately US$638 million compared to the Bankable Feasibility
Study capital costs of US$552 million. The primary components of the initial
capital cost increases are: US$29 million for flotation and grinding, US$16.1
million for primary crushing and conveying, US$14.6 million for camp and
temporary services, US$7.3 million for port facility for concentrate shipping
and US$10.4 million for contingency purposes. Value added tax of 14% on
approximately 80% of the capital costs is not included in the current or
previous capital cost estimates as it is expected to be exonerated and/or
recovered pursuant to Venezuelan tax regulations. The working capital, life of
mine capital, equipment capital costs, closure costs and environmental
management plans for the project are now being updated. This analysis is
expected to be completed in the next five to six weeks. Thereafter, the
Company is expected to provide an updated project economic model for the
Brisas Project.
RISK FACTORS
An investment in the Common Shares is speculative and involves a high
degree of risk due to the nature of the Company's business and the present
stage of exploration and development of its mineral properties. The following
risk factors, as well as risks not currently known to the Company, could
materially adversely affect the Company's future business, operations and
financial condition and could cause them to differ materially from the
estimates described in forward-looking statements relating to the Company.
Prospective investors should carefully consider the following risk factors
along with the other matters set out or incorporated by reference in this
short form prospectus, including under the heading "Risk Factors" in the AIF.
Risks Relating to Gold Reserve and its Industry
The Company's mining assets are concentrated in a foreign country and, as a
result, the Company's operations are subject to inherent local risks.
The Company's exploration and development activities in Venezuela are
affected by certain factors including those listed below, some of which are
beyond the Company's control, any one of which could have a material adverse
affect on the Company's financial position and results of operations.
Political and Economic Environment
The Company's foreign operations are subject to political and economic
risks, including:
. the effects of local political, labor and economic developments,
instability and unrest;
. significant or abrupt changes in the applicable regulatory or legal
climate;
. corruption, requests for improper payments, or other actions that may
violate Canadian and U.S. foreign corrupt practices acts, uncertain
legal enforcement and physical security;
9
. invalidation or rescission of governmental orders, permits, agreements
or property rights;
. exchange controls and export or sale restrictions;
. currency fluctuations and repatriation restrictions;
. disadvantages of competing against companies from countries that are not
subject to Canadian and U.S. laws and regulations; and
. laws or policies of foreign countries and Canada affecting trade,
investment and taxation.
Certain Permits are Required Prior to Obtaining Financing and Beginning
Construction on the Brisas Project
The Company is dependent on the Venezuelan regulatory authorities issuing
the Company the required operational and land use permits before it may begin
construction on, and operate, the Brisas Project. Most importantly, the
Company must obtain the Administrative Authorization to Affect Natural
Resources for Construction of Infrastructure and Exploitation of Alluvial and
Vein Deposits of Gold and Copper from MARN, which is typically issued
subsequent to a company obtaining approval of its operating plan by MIBAM.
The Company's original operating plan was approved by MEM (now MIBAM) in
2003. Since approval of the original operating plan, the Company has submitted
to MIBAM a number of modifications to the plan in order to minimize impact to
the environment and optimize economics of the Brisas Project, including an
increase in milling capacity up to 70,000 tons per day and relocation of
certain surface facilities and infrastructure.
Management can give no assurance that the issuance of items the Company
still requires for proceeding with the Brisas Project will not be delayed or
withheld, or any existing rights or approvals already issued or granted to the
Company for its operations in Venezuela will not be rescinded, or otherwise
challenged. The reasons for any such action could relate to a number of
factors noted herein, which are mostly outside of the Company's control or in
response to the Company's lawful actions and, as a result, management is
unable to provide any assurance as to if and when the remaining required
Venezuelan permits will be issued to the Company. Failure to obtain any of
these required permits will result in the Company not being able to construct
and operate the Brisas Project, which will result in a material adverse affect
on the Company's operations and investments in Venezuela and continued
operating losses.
Government Review of Contracts and Concessions for Compliance
In early 2005, Venezuela's Minister of MIBAM, Victor Alvarez, announced
that Venezuela would review all foreign investments in non-oil basic
industries, including gold projects. In September 2005, Venezuelan President
Hugo Chavez announced that the Venezuelan government planned to revoke gold
and diamond concessions and/or contracts and also that he planned to create a
new state mining company as part of an effort to increase government control
over the sector. President Chavez did not specify which concessions and/or
contracts would be revoked, but later Minister Alvarez said inactive and out
of compliance mines would be handed over to small mining cooperatives
supported by the government through a new government mining corporation. The
date for the completion of the review and the announcement of the results of
this review has been deferred several times and it is unclear when such
announcement will take place or whether the final policy when announced will
be consistent with prior public statements. The Company believes, based on
communications with the relevant regulatory agencies, that all of the
Company's properties are in compliance with applicable regulations, including
the Company's required and voluntary commitments to various social, cultural
and environmental programs in the immediate and surrounding areas near the
Brisas Project. However, due to the uncertainty regarding the creation of the
new state mining company and expected changes in the mining law, the Company
cannot provide any assurance that the creation of a state mining company will
not adversely affect the Company's ability to develop and operate the
Company's Venezuelan properties.
Currency and Exchange Controls
In 2003, the Central Bank of Venezuela enacted exchange control regulations
as a measure to protect international reserves. The exchange rate was fixed at
approximately 1,600 Bolivars per one U.S. dollar until February 2004 when it
was adjusted to 1,920 Bolivars per one U.S. dollar. In March 2005, the
exchange rate was increased to approximately 2,150 Bolivars per one U.S.
dollar, which is unchanged as of the date of this prospectus. In February
2005, the Venezuelan government announced new regulations concerning exports
from Venezuela, which required, effective April 1, 2005, all goods and
services to be invoiced in the currency of the country of destination or in
U.S. dollars. To
10
date these regulations have not adversely affected the Company's operations as
the Company primarily transfers funds into Venezuela for its operations.
However, this will change in the future to the extent that the Company begins
production and exports gold from Venezuela and the Company is unable to
predict future the impact, if any, at this time. Future fluctuations of the
Venezuelan Bolivar against the U.S. dollar and exchange controls could
negatively impact the Company's financial condition.
Small Miners
A significant number of unauthorized small miners have occupied various
properties near the Brisas Project. However, there are no unauthorized small
miners currently located on the Brisas Project. The methods used by the small
miners to extract gold from surface material are typically environmentally
unsound and in general their presence can be disruptive to the rational
development of a mining project such as the Brisas Project. The Company
maintains security guards and has implemented other procedures to mitigate the
risk that the small miners might try to occupy the Brisas Project, although
management can give no assurances that such activities will not occur in the
future.
Imataca Forest Reserve
The Brisas Project is located within the boundaries of the Imataca Forest
Reserve (the "Imataca") in an area presently approved by Presidential Decree
for mining activities. On September 22, 2004, after public consultation,
Presidential Decree 3110 ("Decree 3110") was published in the Official Gazette
identifying approximately 13% of the Imataca in the State of Bolivar to be
used for various activities, including mining. Decree 3110 was issued in
response to: (i) legal challenges to prior Presidential Decree 1850 ("Decree
1850") published in the Official Gazette on May 28, 1997 which opened an even
larger part of the Imataca to mining and other activities, and (ii) to a
Venezuelan Supreme Court prohibition issued on November 11, 1997 that
prohibited MEM (now MIBAM) from granting concessions, authorizations and any
other acts relating to mining activities, exploration, exploitation and
infrastructure in the Imataca pertaining to Decree 1850 until the Court rules
on the merits of the nullity action.
The Company has been advised that the legal proceeding before the
Venezuelan Supreme Court became moot upon the issuance of Decree 3110. Since
the issuance of Decree 3110, MIBAM and its predecessor MEM have, on a
selective basis, issued concessions, authorizations and other acts relating to
mining activities, exploration, exploitation and infrastructure in the
Imataca. However, the pending legal proceeding has not been formally concluded
in the Court and therefore management can give no assurances that MIBAM and
MARN's willingness to issue the required permits to construct and operate the
Brisas Project will not be adversely affected in the future by this pending
legal proceeding.
Venezuelan Environmental Laws and Regulations
Venezuela maintains environmental laws and regulations for the mining
industry that impose specific obligations on companies doing business in the
country. MARN, which administers Venezuelan environmental laws and
regulations, proscribes certain mining recovery methods deemed harmful to the
environment and monitors mining activities to ensure compliance. Venezuela's
environmental legislation provides for the submission and approval of
environmental impact statements for certain operations and provides for
restrictions and prohibitions on spills, releases, or emissions of various
substances produced in association with certain mining industry operations,
such as seepage from tailings disposal areas which could result in
environmental pollution. Insurance covering losses or obligations related to
environmental liabilities is not maintained and will only be maintained in the
future if available on a cost-effective basis. Although the Company has
adopted a high standard of environmental compliance, failure to comply with or
unanticipated changes in such laws and regulations in the future could have a
material adverse impact on the Company.
Challenges to Mineral Property Titles or Contract Rights
Acquisition of title or contract rights to mineral properties is a very
detailed and time-consuming process under Venezuelan law. Mining properties
sometimes contain claims or transfer histories that examiners cannot verify,
and transfers can often be complex. The Company believes it has the necessary
title and/or rights to all of the properties for which it holds concessions or
other contracts and leases. However, the Company does not know whether someone
will challenge or impugn title or contract rights to such properties in the
future or whether such challenges will be by third parties or a government
agency.
11
In addition to the Brisas Project alluvial and hardrock concessions,
management has also applied to the appropriate government agencies for various
concessions, alfarjetas, land use permits and easements allowing the use of
certain land parcels contiguous to and nearby the Brisas Project for
infrastructure needs. Although these applications for infrastructure needs
were contained in an operating plan that has already been approved by the
appropriate regulatory agencies, management can give no assurances when such
applications will be issued, if ever. From 1992 to late 1994 the Company was
involved in a lawsuit relating to ownership of the Brisas Project. The Company
successfully defended its ownership rights in the Venezuelan courts and
subsequently settled the lawsuit for a substantial sum. A claim that the
Company does not have title or contract rights to a property could have an
adverse impact on the Company's business in the short-term and a successful
claim or the failure of the Venezuelan government to approve the required
permits could have a material adverse impact on the future results of the
Company.
Compliance with Other Laws and Regulations
In addition to protection of the environment, the Company's activities are
subject to extensive laws and regulations governing health and worker safety,
employment standards, waste disposal, protection of historic and
archaeological sites, mine development and protection of endangered and
protected species and other matters. Obtaining the necessary permits is
critical to the Company's business. Obtaining and maintaining permits can be a
complex, time consuming process and as a result the Company cannot assess
whether necessary permits will be obtained or maintained on acceptable terms,
in a timely manner or at all. Any failure to comply with applicable laws and
regulations or failure to obtain or maintain permits, even if inadvertent,
could result in the interruption of the Company's operations or material
fines, penalties or other liabilities.
Obtaining funding for project planning, construction and development and
related operating activities is essential to the Company's future plans.
The board of directors approved a plan to proceed with financing and, if
successful, construction of the Brisas Project based on the results of the
Bankable Feasibility Study completed in early 2005. The Company has estimated
initial capital in costs for the Brisas Project to now total approximately
US$638 million compared to the capital cost estimate contained in the Bankable
Feasibility Study of US$552 million, excluding value added taxes and import
duties which could total as much as US$69 million. Although management is in
the process of preparing applications for tax exonerations or payment holidays
for certain taxes including value added tax and import duty tax on the initial
capital costs, which are provided by law, there can be no assurances that such
exonerations will be obtained, the primary result of which would be to
increase initial capital. The timing and extent of funding such investment
depends on a number of important factors, including the receipt of required
permits, actual timetable of the Company's development plan, the price of gold
and copper, results of the Company's efforts to obtain financing, the
political and economic conditions in Venezuela, the ultimate capital costs of
the project including the Company's ability to obtain tax exonerations or
payment holidays and the Company's share price.
As of April 28, 2006, the Company had approximately US$19.5 million in cash
and investments. The Company currently does not generate revenue from
operations and has historically financed operating activities primarily from
the sale of Common Shares or other equity securities. In the near-term,
management believes that cash and investment balances are sufficient to enable
the Company to fund its pre-construction activities through 2007 (excluding
any substantial Brisas Project construction activities). These pre-
construction activities are expected to consist of detailed project
engineering, development and implementation of project related contracts such
as engineering, procurement and construction management, port facilities,
concentrate sales contracts, electricity and fuel supply contracts, and a
number of other agreements related to the construction and operation of the
Brisas Project, obtaining the required permits and identifying suitable
funding sources.
Management provides no assurances that it will be able to obtain the
substantial additional financing that will be needed to construct the Brisas
Project. Failure to raise the required funds will mean the Company is unable
to construct and operate the Brisas Project, which would have a material
adverse effect on the Company.
The actual cost and time of placing the Brisas Project into production
could differ significantly from the Company's estimates.
Many factors are involved in the determination of the economic viability of
mining a mineralized deposit, including the delineation of satisfactory mineral
reserve estimates, the level of estimated metallurgical recoveries,
12
capital and operating cost estimates, construction, operation, permit and
environmental requirements, and the estimate of future gold prices. Capital
and operating cost estimates are based upon many factors, including
anticipated tonnage and grades of ore to be mined and processed, the
configuration of the ore body, ground and mining conditions and anticipated
environmental and regulatory compliance costs.
Each of these factors involves uncertainties and the making of assumptions
and, as a result, the Company cannot give any assurance that the overall
feasibility study will prove accurate in preparation, construction and
development of the Brisas Project or that any key finding or underlying
assumption will not prove to be inaccurate, including for reasons outside the
control of management, including changes in costs as a result of the passage of
time between the completion of the Bankable Feasibility Study and the Company's
estimates and the date construction commences. It is not unusual in new mining
operations to experience unexpected problems during development. As a result,
the actual cost and time of placing the Brisas Project into production could
differ significantly from estimates contained in the Bankable Feasibility Study
and other estimates by the Company. Likewise, if and after the Brisas Project is
developed, actual operating results may differ from those anticipated in the
feasibility study.
Future results depend on the Brisas Project.
The Company is dependent on the Brisas Project, which is a development
stage project and which may never be developed into a commercially viable ore
body. Any adverse event affecting this property, or the Company's ability to
finance and/or construct and operate this property, would have a material
adverse impact on the future results of the Company.
The Company's mineral resource and reserve estimates may vary from
estimates in the future.
As part of the completion of the Bankable Feasibility Study, the Company's
methods and procedures for gathering geological, geotechnical, and assaying
information were evaluated by independent consultants who concluded, along
with management, that the Company's methods and procedures met generally
accepted industry standards for a bankable feasibility level of study.
Notwithstanding the conclusions of management and its qualified consultants,
mineral reserve estimation is an interpretive process based on drilling
results and experience as well as estimates of mineralization characteristics
and mining dilution, metal prices, costs of mining and processing, capital
expenditures and many other factors. Grades of mineralization processed at any
time may also vary from mineral reserve estimates due to geologic variations
within areas mined. Actual quality and characteristics of deposits cannot be
fully assessed until mineralization is actually mined and, as a result,
mineral reserves change over time to reflect actual experience.
Risks inherent in the mining industry could have a significant impact on
the Company's future operations.
Gold and copper projects are subject to all of the risks inherent in the
mining industry, including environmental hazards, industrial accidents, fires,
labor disputes, legal regulations or restrictions, unusual or unexpected
geologic formations, cave-ins, flooding, and periodic interruptions due to
inclement weather. These risks could result in damage to, or destruction of,
mineral properties and production facilities, personal injury, environmental
damage, delays, monetary losses and legal liability. Insurance covering such
catastrophic liabilities is not maintained and will only be maintained in the
future if available on a cost-effective basis.
Operating losses are expected to continue until the Company constructs or
acquire an operating mine.
The Company has experienced losses from operations for each of the last
five years and expect this trend to continue until the Brisas Project is
operational as the result of, among other factors, expenditures associated
with the corporate activities on the Brisas Project, as well as other
unrelated non-property expenses, which are recorded in the consolidated
statement of operations. Such losses may increase in the short-term if the
Company obtains additional financing and subsequently begin construction of
the Brisas Project. This trend is expected to reverse if and when gold and
copper are produced at the Brisas Project in commercial quantities at a prices
equal to or in excess of the prices assumed in the feasibility study. However,
management can give no assurances that this trend will be reversed in the
future, as a result of the operation of the Brisas Project or if the Company
acquires a profitable operating mine.
13
The Company may incur costs in connection with future reclamation
activities that may have a material adverse effect on the Company's
earnings and financial condition.
The Company is required to obtain government approval of its plan to
reclaim the Brisas Project after the minerals have been mined from the site.
The Brisas Project reclamation plan has already been incorporated into the
environmental studies submitted to MARN. Reclaiming the Brisas Project will
take place during and after the active life of the mine. In accordance with
applicable laws, bonds or other forms of financial assurances have been and
will be provided by the Company for the reclamation of the mine. The Company
may incur costs in connection with these reclamation activities in excess of
such bonds or other financial assurances, which costs may have a material
adverse effect on the Company's earnings and financial condition. The Company
expects to establish a reserve for future site closure and mine reclamation
costs based on the estimated costs to comply with existing reclamation
standards. There can be no assurance that the Company's reclamation and
closure accruals will be sufficient or that the Company will have sufficient
financial resources to fund such reclamation and closure costs in the future.
The volatility of the price of gold and copper could have a negative impact
upon the Company's current and future operations.
The price of gold and copper has a significant influence on the market price
of the Common Shares and the Company's business activities. Fluctuation in gold
and copper prices directly affects, among other things, the overall economic
viability of the project, the Company's ability to obtain sufficient financing
required to construct the Brisas Project, including the terms of any such
financing, and the calculation of reserve estimates. The price of gold is
affected by numerous factors beyond the Company's control, such as the level of
inflation, fluctuation of the United States dollar and foreign currencies,
global and regional demand, sale of gold by central banks and the political and
economic conditions of major gold producing countries throughout the world.
Copper prices also fluctuate and are generally affected by global and regional
demand and existing inventories. As of May 2, 2006, the closing spot price for
gold in New York was US$668.80 per ounce and the closing spot price in
London for copper was US$3.30 per pound. The following table sets forth the
average of the daily closing price for gold and copper for the periods
indicated as reported by the London Metal Exchange:
Year Ended December 31,
--------------------------------------------------
5 Yr. Avg. 2005 2004 2003 2002 2001
---------- ------- ------- ------- ------- -------
Gold (US$ per ounce)......... US$ 360 US$ 445 US$ 410 US$ 363 US$ 310 US$ 271
Copper (US$ per pound)....... US$1.04 US$1.67 US$1.37 US$0.81 US$0.71 US$0.72
Future hedging activities could negatively impact future operating results.
The Company has not entered into forward contracts or other derivative
instruments to sell gold or copper that it might produce in the future.
Although the Company has no near term plans to enter such transactions, it may
do so in the future if required for project financing. Forward contracts
obligate the holder to sell hedged production at a price set when the holder
enters into the contract, regardless of what the price is when the product is
actually mined. Accordingly, there is a risk that the price of the product is
higher at the time it is mined than when the Company entered into the
contracts, so that the product must be sold at a price lower than could have
been received if the contract was not entered. The Company may enter into
option contracts for gold and copper to mitigate the effects of such hedging.
14
Changes in critical accounting estimates could adversely affect the
financial results of the Company.
The Company's most significant accounting estimate relates to the carrying
value of its Brisas Project, which is more fully discussed in the Company's
annual financial statements and related footnotes. Management regularly
reviews the net carrying value of its mineral properties. Estimates of mineral
prices, recoverable proven and probable reserves, and operating, capital and
reclamation costs are subject to certain risks and uncertainties which may
effect the recoverability of mineral property costs. Where estimates of future
net cash flows are not available and where other conditions suggest
impairment, management assesses if carrying value can be recovered. Although
management has made its best estimate of these factors as it relates its
mineral properties, it is possible that changes could occur in the near-term,
which could adversely affect the future net cash flows to be generated from
the properties.
Material weaknesses relating to the Company's internal controls over
financial reporting could adversely affect the Company's financial results
or condition and share price.
The Company must, for its fiscal year ending December 31, 2006, begin to
comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002
("Sarbanes-Oxley"), which among other things requires the Company's external
auditors to issue an opinion on the adequacy of management's assessment and
their own assessment of the effectiveness of internal controls over financial
reporting. Management believes that there are no reportable material
weaknesses in the Company's internal controls as defined by Section 404 of
Sarbanes-Oxley as of the date of this prospectus. However, there can be no
assurance that material weaknesses regarding the Company's internal controls
will not be discovered in the future, which could result in costs to remediate
such controls or inaccuracies in the Company's financial statements. A
material weakness in controls over financial reporting may result in increased
difficulty or expense in transactions such as financings, or a risk of adverse
reaction by the market generally that would result in a decrease of the
Company's stock prices.
Acquiring and retaining key personnel in the future could have a
significant impact on future operating results.
The Company is and will be dependent upon the abilities and continued
participation of key management personnel, as well as the significant number
of new personnel that will be necessary to manage any construction and
operations of the Brisas Project. If the services of the Company's key
employees were lost or the Company is unable to obtain the new personnel
necessary to construct, manage and operate the Brisas Project, it could have a
material adverse effect on future operations.
Management anticipates that if and when it constructs the Brisas Project
and puts it into production, the Company will experience significant growth
in its operations resulting in increased demands on its management,
internal controls and operating and financial systems.
Management anticipates that if and when it constructs the Brisas Project
and puts it into production, the Company will experience significant growth in
its operations resulting in increased demands on its management, internal
controls and operating and financial systems. There can be no assurance that
management will successfully meet these demands and effectively attract and
retain additional qualified personnel to manage its anticipated growth. The
failure to manage growth effectively could have a material adverse impact on
the Company's business, financial condition and results of operations.
Risks Relating to the Common Shares
Gold Reserve may raise funds for future operations through the issuance of
Common Shares or securities convertible into Common Shares, including
warrants or debt instruments, and such financing may result in the dilution
of present and prospective shareholdings.
The Company will need to raise significant funds (currently estimated at
US$638 million) to finance the construction and the commencement of operations
at the Brisas Project. In order to finance future operations, the Company will
likely be required to raise funds through the issuance of Common Shares or
securities convertible into Common Shares such as warrants or debt
instruments. The Company may also seek third party financing. The Company
cannot predict the size of future issuances of Common Shares or securities
convertible into Common Shares such as warrants or debt instruments or the
effect, if any, that future issuances and sales of the these securities and
debt instruments will have on the market price of the Common Shares or if such
financing will be available on terms
15
acceptable to the Company, or at all. Any such transaction would result in
dilution, likely substantial, to present and prospective holders of Common
Shares.
The price of the Common Shares may be volatile.
The Common Shares are publicly traded and are subject to various factors
that have historically made their price volatile.
The market price of the Common Shares on the TSX and AMEX could fluctuate
significantly, in which case Common Shares purchased pursuant to this Offering
may not be able to be resold at or above the offering price. The market price
of the Common Shares may fluctuate based on a number of factors, including:
. the Company's operating performance, and financial condition and the
performance of competitors and other similar companies;
. the public's reaction to the Company's press releases, other public
announcements and the Company's filings with the various securities
regulatory authorities;
. the price of gold and copper and other metal prices, as well as metal
production volatility;
. the fact the Company's primary asset is located in Venezuela;
. changes in recommendations by research analysts who track the Common
Shares or the shares of other companies in the resource sector;
. changes in general economic conditions;
. the number of the Common Shares to be publicly traded after this
Offering;
. the arrival or departure of key personnel;
. acquisitions, strategic alliances or joint ventures involving the
Company or its competitors;
. other factors listed under "Cautionary Statement Regarding Forward-
Looking Statements";
. the public's reaction to press releases and other public announcements
of the Company's competitors regarding mining development or other
matters;
. economic and political developments in North America and Venezuela,
including any new regulatory rules or actions;
. general worldwide and overall market perceptions of the attractiveness
of particular industries; and
. the dilutive effect of the sale of significantly more Common Shares in
order to finance the Company's activities.
In addition, the market price of the Common Shares are affected by many
variables not directly related to the Company's performance and are therefore
not within the Company's control, including other developments that affect the
market for all resource sector shares, the breadth of the public market for
the Common Shares, and the attractiveness of alternative investments. The
effect of these and other factors on the market price of the Common Shares on
the TSX and the AMEX has historically made the Company's share price volatile
and suggests that the Company's share price will continue to be volatile in
the future.
The Company does not intend to pay any cash dividends in the foreseeable
future.
The Company has not declared or paid any dividends on its Common Shares
since the date the Company was incorporated. The Company intends to retain its
earnings, if any, to finance the growth and development of the business and
does not intend to pay cash dividends on the Common Shares in the foreseeable
future. Any return on an investment in the Common Shares will likely only come
from the appreciation, if any, in the value of the Common Shares. The Company
cannot assure you of any such appreciation. The payment of future cash
dividends, if any, will be reviewed periodically by the Company's board of
directors and will depend upon, among other things, conditions then existing
including earnings, financial condition and capital requirements, restrictions
in financing agreements, business opportunities and conditions and other
factors.
16
The Company determined that it is a "passive foreign investment company"
under the U.S. Internal Revenue Code and, as a result, there may be adverse
U.S. tax consequences for certain investors.
Potential investors that are U.S. Holders, as defined under "Certain United
States Federal Income Tax Considerations - U.S. Holders," should be aware that
the Company has determined that the Company was a "passive foreign investment
company" under Section 1297(a) of the U.S. Internal Revenue Code for taxable
year ended December 31, 2005 and expects to be a "passive foreign investment
company" for the taxable year ending December 31, 2006. As a result, a U.S.
Holder may be subject to adverse U.S. federal income tax consequences, such as
(i) being subject to U.S. federal income tax at the highest rates applicable
to ordinary income on at least a portion of any "excess distribution" and gain
on the sale of Common Shares, as well as incurring an interest charge on the
tax due thereon, or (ii) at the election of the U.S. Holder, current taxation
on either (A) certain income or gains of the Company, regardless of whether
any cash representing such income or gain has been distributed, or (B) any
increase in the fair market value of the Common Shares as of the taxable year
end, regardless of whether such gain has been realized on a disposition of
such Common Shares. These potential adverse U.S. federal income tax
consequences are described more fully under "Certain United States Federal
Income Tax Considerations - U.S. Federal Income Tax Consequences of the
Acquisition, Ownership, and Disposition of Common Shares".
The determination of whether the Company will be a "passive foreign
investment company" for a future taxable year depends on (i) the application
of complex U.S. federal income tax rules, which are subject to differing
interpretations, and (ii) the assets and income of the Company over the course
of each such taxable year. As a result, the Company's status as a "passive
foreign investment company" in any future taxable year cannot be predicted
with certainty as of the date of this prospectus. Accordingly, there can be no
assurance that the Company will not be a "passive foreign investment company"
for any future taxable year.
The "passive foreign investment company" rules are complex. A potential
investor should consult its own financial advisor, legal counsel, or
accountant regarding the application of the "passive foreign investment
company" rules on an investment in Common Shares.
Investors in Canada or in other jurisdictions outside of the United States
may have difficulty bringing actions and enforcing judgments against Gold
Reserve, its directors and some of the experts named in this prospectus
based on civil liability provisions of Canadian securities laws.
Investors in Canada or in other jurisdictions outside of the United States
may have difficulty bringing actions and enforcing judgments against Gold
Reserve, its directors that are not residents of Canada or who are residents
of other jurisdictions and some of the experts named in this prospectus based
on civil liability provisions of Canadian securities laws.
Despite being organized under the laws of the territory of the Yukon, a
majority of the directors and officers and the experts named in this
prospectus reside principally in the United States and all or a substantial
portion of their assets and all or a substantial portion of the Company's
assets are located outside of Canada. Consequently, it may be difficult for
holders of Common Shares to effect service of process within Canada upon the
Corporation's directors, officers or experts who are not residents of Canada.
Furthermore, it may not be possible to enforce against the Corporation or such
directors, officers or experts, in the United States, judgments obtained in
Canadian courts, including judgments based upon the civil liability provisions
of the Canadian securities law, because a substantial portion of the Company's
assets and the assets of these persons are located outside of Canada. The
Company believes that a monetary judgment of a Canadian court predicated
solely upon the civil liability provisions of Canadian securities laws would
likely be enforceable in the United States if the Canadian court in which the
judgment was obtained had a basis for jurisdiction in the matter that was
recognized by a U.S. court for such purposes. The Company cannot assure you
that this will be the case. It is unlikely that an action could be brought in
the United States in the first instance on the basis of liability predicated
solely upon the civil liability provisions of Canadian securities laws.
The Company has broad discretion in the use of the net proceeds from the
Offering and may not use the proceeds effectively.
The Company proposes to use the net proceeds from the Offering primarily to
fund ongoing development of the Brisas Project, to fund the Company's initial
obligations under the EP and CM contracts with SNC, and, to a lesser extent to
fund ongoing exploration of the Choco 5 project. See "Use of Proceeds". In doing
so, the Company will have broad discretion in the application of the proceeds
and could spend the proceeds in ways that do not improve the
17
Company's business prospects or enhance the value of the Common Shares. The
failure to apply these funds effectively could result in financial losses that
could have a material adverse effect on the Company's business, cause the price
of the Common Shares to decline and delay the development and productivity of
the Company's mining operations.
The Company is a "foreign private issuer" for purposes of U.S. securities
laws and is subject to different U.S. rules and regulations than a domestic
U.S. issuer, which may limit the information publicly available to the
Company's shareholders.
As a foreign private issuer, the Company is not required to comply with all
the periodic disclosure requirements of the U.S. Exchange Act and therefore
there may be less publicly available information about the Company than if the
Company was a U.S. domestic issuer. In addition, the Company's officers,
directors and principal shareholders are exempt from the reporting and "short
swing" profit recovery provisions of Section 16 of the U.S. Exchange Act and
the rules thereunder. Therefore, the Company's shareholders may not know on a
timely basis when the Company's officers, directors and principal shareholders
purchase or sell Common Shares.
USE OF PROCEEDS
The gross proceeds to the Company from the sale of the Common Shares will be
Cdn.$30,015,000. The net proceeds to the Company will be Cdn.$28,064,250 after
payment of the Underwriters' fee of Cdn.$1,500,750 and after deducting the
estimated expenses of the Offering, including expenses related to the
preparation and filing of this short form prospectus (Cdn.$32,341,387.50
assuming the exercise of the Over-Allotment Option in full). The Company
proposes to use the net proceeds from the Offering primarily to fund ongoing
development of the Brisas Project, to fund the Company's initial obligations
under the EP and CM contracts with SNC, and, to a lesser extent to fund ongoing
exploration of the Choco 5 project.
CONSOLIDATED CAPITALIZATION
Since December 31, 2005, the date of the financial statements for the
Company's most recently completed financial year, there have been no material
changes in the capitalization of the Company. The following table sets forth
the consolidated capitalization of the Company as at December 31, 2005 and at
December 31, 2005 after giving effect to the Offering, but not the exercise of
the Over-Allotment Option. This table should be read in conjunction with the
audited consolidated financial statements of the Company for the financial
year ended December 31, 2005, including the notes thereto and management's
discussion and analysis of results of operations and financial conditions for
such period, each incorporated by reference in this short form prospectus.
As at December 31,
As at 2005, after giving
December 31, effect to the
Designation 2005 Offering(1)
- ----------- -------------- ------------------
Common Shares and Equity Units............... US$140,512,063 US$ 165,865,306
(Authorized - Unlimited).................. (35,196,287 (38,531,287 Common
Common Shares and Shares and
1,110,020 Equity 1,110,020 Equity
Units Units
outstanding) outstanding)
Less Common Shares and Equity Units
held by affiliates............................ US$ (674,598) US$ (674,598)
Stock options.................................. US$ 1,867,537 US$ 1,867,537
Accumulated deficit............................ US$(61,983,016) US$(61,983,016)
KSOP debt...................................... US$ (84,220) US$ (84,220)
-------------- --------------
Total Shareholders' Equity..................... US$ 79,637,766 US$104,991,009
============== ==============
- -------
(1) After deducting the Underwriters' fee and expenses of the Offering but not
giving effect to the exercise of the Over-Allotment Option.
DESCRIPTION OF SHARE CAPITAL
The Company is authorized to issue an unlimited number of Class A common
shares without par value of which 35,324,977 Class A common shares were issued
and outstanding at May 1, 2006. Shareholders are entitled to receive notice of
and attend all meetings of shareholders with each Class A common share held
entitling the holder to one
18
vote on any resolution to be passed at such shareholder meetings. Shareholders
are entitled to dividends if, as and when declared by the board of directors
of the Company. Shareholders are entitled upon liquidation, dissolution or
winding up of the Company to receive the remaining assets of the Company
available for distribution to shareholders. The Common Shares include
associated Common Share purchase rights under the Company's Shareholder Rights
Plan Agreement, as amended and restated as of January 29, 2006, which
agreement is attached to the AIF.
In February 1999, Gold Reserve Corporation became a subsidiary of the
Company, the successor issuer (the "Reorganization"). Generally, each
shareholder of Gold Reserve Corporation received one Class A common share of
the Company for each common share owned in Gold Reserve Corporation. Certain
U.S. holders elected, for tax reasons, to receive equity units in lieu of
Class A common shares. An equity unit, comprised of one Class B common share
of the Company and one Gold Reserve Corporation Class B common share, is
substantially equivalent to a Class A common share and is generally
immediately convertible into Class A common shares. Equity units, of which
1,085,099 were issued and outstanding at May 1, 2006, are not listed for
trading on any stock exchange, but subject to compliance with applicable
federal, provincial and state securities laws, may be transferred.
DESCRIPTION OF THE SECURITIES BEING DISTRIBUTED
The Offering consists of 3,335,000 Common Shares. The Company has also granted
to the Underwriters the Over-Allotment Option to purchase up to an additional
500,250 Common Shares. Refer to "Description of Share Capital" for a description
of the authorized share capital of the Company.
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
Purchasers Resident in Canada
In the opinion of Fasken Martineau DuMoulin LLP, counsel to Gold Reserve,
and Heenan Blaikie LLP, counsel to the Underwriters, the following is, as of
the date hereof, a general summary of the principal Canadian federal income
tax considerations applicable to a prospective purchaser of Common Shares to
be issued pursuant to this Offering. This summary is applicable only to a
purchaser who, at all relevant times, is resident in Canada, deals at arm's
length and is not affiliated with Gold Reserve, and who will acquire and hold
such Common Shares as capital property (a "Holder"), all within the meaning of
the Tax Act. Any Common Shares will generally be considered to be capital
property to a Holder unless the Holder holds such securities in the course of
carrying on a business or has acquired them in a transaction or transactions
considered to be an adventure in the nature of trade. Certain Holders whose
Common Shares might not otherwise qualify as capital property may be entitled
to make the irrevocable election provided by subsection 39(4) of the Tax Act
to have the Common Shares and every other "Canadian security" (as defined by
the Tax Act) owned by such Holder in the taxation year of the election and in
all subsequent taxation years deemed to be capital property.
This summary does not apply to a Holder that is a "financial institution"
for purposes of the mark-to-market provisions of the Tax Act or a "specified
financial institution" for purposes of the Tax Act.
This summary is based upon the current provisions of the Tax Act and the
regulations thereunder, specific proposals to amend the Tax Act (the "Tax
Proposals") which have been announced by or on behalf the Minister of Finance
(Canada) prior to the date hereof, and counsel's understanding of the current
published administrative policies and assessing practices of the Canada
Revenue Agency (the "CRA"). This summary assumes that the Tax Proposals will
be enacted in the form proposed and does not take into account or anticipate
any other changes in law, whether by way of judicial, legislative or
governmental decision or action, nor does it take into account provincial,
territorial or foreign income tax legislation or considerations, which may
differ from the Canadian federal income tax considerations discussed herein.
No assurances can be given that such Tax Proposals will be enacted as proposed
or at all, or that legislative, judicial or administrative changes will not
modify or change the statements expressed herein.
This summary is not exhaustive of all possible Canadian federal income tax
considerations applicable to an investment in Common Shares, and does not
describe the income tax considerations relating to the deductibility of
interest on money borrowed by a Holder. The following description of income
tax matters is of a general nature only and is not intended to be, nor should
it be construed to be, legal or income tax advice to any particular Holder.
Holders are urged to consult their own income tax advisors with respect to the
tax consequences applicable to them based on their own particular
circumstances.
19
Disposition of Common Shares
A Holder who disposes of or is deemed to have disposed of a Common Share
will realize a capital gain (or incur a capital loss) equal to the amount by
which the proceeds of disposition in respect of the Common Share exceed (or
are exceeded by) the aggregate of the adjusted cost base of such Common Share
and any reasonable expenses associated with the disposition. The adjusted cost
base of Common Shares to a holder will be the average cost of all Common
Shares held by the holder at the time.
One-half of any capital gain (a "taxable capital gain") must be included in
income and one-half of any capital loss may be used to offset taxable capital
gains incurred in the year, in any of the three prior years or in any
subsequent year in the circumstances and to the extent provided in the Tax
Act. A capital loss realized from the disposition of a Common Share by a
Holder that is a corporation may in certain circumstances be reduced by the
amount of dividends that have been previously received or deemed to have been
received by the Holder on such shares. Similar rules may apply where a
corporation is, directly or through a trust or partnership, a member of a
partnership or a beneficiary of a trust that owns Common Shares.
Capital gains realized by an individual and certain trusts may result in
the individual or trust paying alternative minimum tax under the Tax Act.
A Holder that is, throughout the relevant taxation year, a "Canadian-
controlled private corporation" (as defined in the Tax Act) may be liable to
pay an additional refundable tax of 6 2/3% on its "aggregate investment
income" for the year, which is defined to include an amount in respect of
taxable capital gains.
Taxation of Dividends Received by Holders of Common Shares
A Holder of Common Shares will be subject to the normal treatment under the
Tax Act applicable to dividends received from a taxable Canadian corporation.
Dividends (including deemed dividends) received on Common Shares by a
Holder who is an individual (and certain trusts) will be included in income
and be subject to the gross-up and dividend tax credit rules normally
applicable to taxable dividends received by an individual from taxable
Canadian corporations. Taxable dividends received by such Holders may give
rise to alternative minimum tax under the Tax Act.
Dividends (including deemed dividends) received on Common Shares by a
Holder that is a corporation will be included in income and normally
deductible in computing such corporation's taxable income. However, the Tax
Act will generally impose a 33 1/3% refundable tax on such dividends received
by a corporation that is a private corporation or a subject corporation for
purposes of Part IV of the Tax Act to the extent that such dividends are
deductible in computing the corporation's taxable income.
On November 23, 2005, the Minister of Finance released proposals to amend
the Tax Act which would provide an enhanced gross-up and dividend tax credit
on eligible dividends paid to eligible shareholders. There can be no assurance
that the new federal government, which was elected on January 23, 2006, will
seek enactment of this proposal.
Purchasers Resident in the United States
The following is a general summary of the principal Canadian federal income
tax considerations under the Tax Act generally applicable to the holding and
disposition of Common Shares by a holder who, at all relevant times for
purposes of the Tax Act, is not resident or deemed to be resident in Canada,
deals at arm's length with the Company, holds the common shares as capital
property and does not use or hold, and is not deemed to use or hold the common
shares in the course of carrying on, or otherwise in connection with, a
business in Canada and who, for purposes of the Canada-United States Income
Tax Convention (the "Treaty"), is a resident of the United States. United
States limited liability companies (LLCs) generally are not considered
residents of the United States for the purposes of the Treaty. Generally,
Common Shares will be considered to be capital property to a holder thereof
provided that the holder does not use the Common Shares in the course of
carrying on a business and such holder has not acquired them in one or more
transactions considered to be an adventure or concern in the nature of trade.
This summary does not deal with special situations, such as particular
circumstances of traders or dealers in securities, limited liability
companies, tax-exempt entities, insurers, and financial institutions. For
purposes of the Tax Act, all amounts relevant in computing a
20
holder's liability under the Tax Act must be computed in Canadian dollars.
Amounts denominated in U.S. dollars including adjusted cost base and proceeds
of disposition must be converted into Canadian dollars based on the prevailing
exchange rate at the relevant time.
Dividends
Dividends on Common Shares paid or credited to a U.S. Holder (as defined
below) by the Company are subject to Canadian withholding tax. Under the
Treaty, the rate of withholding tax on dividends paid or credited to a
U.S. Holder is generally limited to 15% of the gross amount of the dividend
(or 5% in the case of a U.S. Holder that is a corporation beneficially owning
at least 10% of the Company's voting shares). Under the Treaty, dividends
paid by the Company to certain religious, scientific, charitable, certain
other tax-exempt organizations and certain pension organizations that are
resident in, and exempt from tax in, the United States are exempt from
Canadian withholding tax.
Dispositions
A U.S. Holder will generally not be subject to tax under the Tax Act in
respect of a capital gain realized on the disposition of a Common Share,
unless the Common Share constitutes "taxable Canadian property" as defined in
the Tax Act at the time of disposition. The Common Share will generally not be
taxable Canadian property to a U.S. Holder at the time of disposition provided
the Common Shares are listed on a prescribed stock exchange (which includes
the TSX and the AMEX) at that time and, during the 60 month period ending at
the time of disposition of the Common Share, the U.S. Holder, persons with
whom the U.S. Holder did not deal at arm's length, or the U.S. Holder together
with such persons, did not own 25% or more of the Company's issued shares of
any class or series of capital stock. Even if a Common Share constitutes
taxable Canadian property to a U.S. Holder, by reason of the Treaty, no tax
will generally be payable under the Tax Act on a capital gain realized by the
U.S. Holder on the disposition of such shares provided the value of such
shares at the time of disposition is not derived principally from real
property situated in Canada. The Company has advised counsel that, at the date
of this short form prospectus, the value of the Common Shares is not derived
principally from real property situated in Canada within the meaning of the
Treaty. Provided that the Common Shares are not taxable Canadian property to a
U.S. Holder, there are no clearance certificate requirements imposed by the
Tax Act on that U.S. Holder in respect of a disposition of Common Shares.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain material U.S. federal income tax
consequences to a U.S. Holder (as defined below) arising from and relating to
the acquisition, ownership, and disposition of Common Shares acquired pursuant
to this prospectus.
This summary is for general information purposes only and does not purport
to be a complete analysis or listing of all potential U.S. federal income tax
consequences that may apply to a U.S. Holder as a result of the acquisition,
ownership, and disposition of Common Shares. In addition, this summary does
not take into account the individual facts and circumstances of any particular
U.S. Holder that may affect the U.S. federal income tax consequences of the
acquisition, ownership, and disposition of Common Shares. Accordingly, this
summary is not intended to be, and should not be construed as, legal or U.S.
federal income tax advice with respect to any U.S. Holder. Each U.S. Holder
should consult its own financial advisor, legal counsel, or accountant
regarding the U.S. federal income tax consequences of the acquisition,
ownership, and disposition of Common Shares.
Authorities
This summary is based on the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury Regulations promulgated thereunder (whether final or
temporary), published rulings of the Internal Revenue Service (the "IRS"),
published administrative positions of the IRS, the Convention Between Canada
and the United States of America with Respect to Taxes on Income and on
Capital, signed September 26, 1980, as amended (the "Canada-U.S. Tax
Convention"), and U.S. court decisions that are applicable and, in each case,
as in effect and available, as of the date of this prospectus. All of the
authorities on which this summary is based are subject to differing
interpretations and could be changed in a material and adverse manner at any
time, and any such change could be applied on a retroactive basis. In such
event, the U.S. federal income tax consequences applicable to a U.S. Holder of
the Common Shares
21
could differ from those described in this summary. This summary does not
discuss the potential effects, whether adverse or beneficial, of any proposed
legislation that, if enacted, could be applied on a retroactive basis.
U.S. Holders
For purposes of this summary, a "U.S. Holder" is a beneficial owner of
Common Shares that, for U.S. federal income tax purposes, is (a) an individual
who is a citizen or resident of the U.S. (including certain former citizens
and former long-term residents), (b) a corporation, or any other entity
classified as a corporation for U.S. federal income tax purposes, that is
created or organized in or under the laws of the U.S. or any political
subdivision thereof, including the District of Columbia, (c) an estate if the
income of such estate is subject to U.S. federal income tax regardless of the
source of such income, or (d) a trust if (i) such trust has validly elected to
be treated as a U.S. person for U.S. federal income tax purposes or (ii) a
U.S. court is able to exercise primary supervision over the administration of
such trust and one or more U.S. persons have the authority to control all
substantial decisions of such trust.
Non-U.S. Holders
For purposes of this summary, a "non-U.S. Holder" is a beneficial owner of
Common Shares other than a U.S. Holder. A non-U.S. Holder should consult its
own financial advisor, legal counsel, or accountant regarding the U.S. federal
income tax consequences (including the potential application of and operation
of any income tax treaties) of the acquisition, ownership, and disposition of
Common Shares.
U.S. Holders Subject to Special U.S. Federal Income Tax Rules Not Addressed
This summary does not address the U.S. federal income tax consequences of
the acquisition, ownership, and disposition of Common Shares to U.S. Holders
that are subject to special provisions under the Code, including the following
U.S. Holders: (a) U.S. Holders that are tax-exempt organizations, qualified
retirement plans, individual retirement accounts, or other tax-deferred
accounts; (b) U.S. Holders that are financial institutions, insurance
companies, real estate investment trusts, or regulated investment companies;
(c) U.S. Holders that are dealers in securities, commodities or currencies, or
U.S. Holders that are traders in securities or commodities that elect to apply
a mark-to-market accounting method; (d) U.S. Holders that have a "functional
currency" other than the U.S. dollar; (e) U.S. Holders that are liable for the
alternative minimum tax under the Code; (f) U.S. Holders that own Common
Shares as part of a straddle, hedging transaction, conversion transaction,
constructive sale, or other arrangement involving more than one position;
(g) U.S. Holders that acquired Common Shares in connection with the exercise
of employee stock options or otherwise as compensation for services; (h) U.S.
Holders that hold Common Shares other than as a capital asset within the
meaning of Section 1221 of the Code; or (i) U.S. Holders that own (directly,
indirectly, or constructively) 10% or more, by voting power or value, of the
outstanding shares of the Company. U.S. Holders that are subject to special
provisions under the Code, including U.S. Holders described immediately above,
should consult their own financial advisor, legal counsel or accountant
regarding the U.S. federal income tax consequences of the acquisition,
ownership, and disposition of Common Shares.
If an entity that is classified as a partnership (or "pass-through" entity)
for U.S. federal income tax purposes holds Common Shares, the U.S. federal
income tax consequences to such partnership (or "pass-through" entity) and the
partners of such partnership (or owners of such "pass-through" entity)
generally will depend on the activities of the partnership (or "pass-through"
entity) and the status of such partners (or owners). Partners of entities that
are classified as partnerships (or owners of "pass-through" entities) for U.S.
federal income tax purposes should consult their own financial advisor, legal
counsel or accountant regarding the U.S. federal income tax consequences of
the acquisition, ownership, and disposition of Common Shares.
Tax Consequences Other than U.S. Federal Income Tax Consequences Not Addressed
This summary does not address the consequences arising under U.S. federal
estate, gift or excise tax laws or the tax laws of any applicable foreign,
state, local or other jurisdiction to U.S. Holders of the acquisition,
ownership, and disposition of Common Shares. Each U.S. Holder should consult
its own financial advisor, legal counsel, or accountant regarding the
consequences of any of these laws on the acquisition, ownership, and
disposition of Common Shares.
22
U.S. Federal Income Tax Consequences of the Acquisition, Ownership, and
Disposition of Common Shares
Distributions
For U.S. federal income tax purposes, the amount of distributions made on
the Common Shares generally will equal the amount of cash and the fair market
value of any property distributed and also will include the amount of any
Canadian taxes withheld as described above under "Canadian Federal Income Tax
Considerations - Purchasers Resident in the United States". Except as
discussed below under "Passive Foreign Investment Company", an amount of the
distribution will be treated as a dividend, taxable to a U.S. Holder as
ordinary income, to the extent of the Company's current or accumulated
earnings and profits allocable to such U.S. Holder. To the extent that an
amount received by a U.S. Holder exceeds the allocable share of the Company's
current and accumulated earnings and profits, such excess will be treated as a
return of capital to the extent of the U.S. Holder's tax basis in its Common
Shares and then, to the extent in excess of such U.S. Holder's tax basis, as
gain from the sale or exchange of such Common Shares generally taxable as
capital gain. (See discussion below under "Disposition.") The amount treated
as a dividend will not be eligible for the dividends received deduction
generally allowed to U.S. corporate shareholders on dividends received from
U.S. corporations.
In the case of non-corporate U.S. Holders, the U.S. federal income tax rate
applicable to dividends received in taxable years beginning prior to 2009 may
be lower than the rate applicable to other categories of ordinary income if
certain conditions are met. Dividends will not qualify for the reduced rate,
however, if the Company is treated, for the tax year in which the dividends
are paid or the preceding tax year, as a "passive foreign investment company"
for U.S. federal income tax purposes. For the taxable year ended December 31,
2005, the Company was considered a "passive foreign investment company". (See
discussion below under "Passive Foreign Investment Company.") There can be no
assurance that the Company will not be a "passive foreign investment company"
in future taxable years. Accordingly, if the Company continues to be
considered a "passive foreign investment company," a dividend paid by the
Company to a U.S. Holder generally will not qualify for the lower U.S. federal
income tax rate. The U.S. federal income tax rules applicable to dividends are
complex and each U.S. Holder should consult it own financial advisor, legal
counsel or accountant regarding the dividend rules.
The amount of any distribution paid in foreign currency will be included in
a U.S. Holder's gross income in an amount equal to the U.S. dollar value of
the foreign currency calculated by reference to the spot rate in effect on the
date of receipt by the U.S. Holder, regardless of whether the foreign currency
is converted into U.S. dollars. If the foreign currency is converted into U.S.
dollars on the date of receipt, a U.S. Holder generally should not be required
to recognize foreign currency gain or loss in respect of the distribution. If
the foreign currency received in the distribution is not converted into U.S.
dollars on the date of receipt, a U.S. Holder will have a tax basis in the
foreign currency equal to its U.S. dollar value on the date of receipt. Any
gain or loss recognized upon a subsequent conversion or other disposition of
the foreign currency will be treated as U.S. source ordinary income or loss.
A non-U.S. Holder generally will not be subject to U.S. federal income tax
or withholding tax on distributions with respect to the Common Shares that are
treated as a dividend for U.S. federal income tax purposes unless such
dividends are effectively connected with the conduct of a trade or business
within the U.S. by the non-U.S. Holder (and are attributable to a permanent
establishment maintained in the U.S. by such non-U.S. Holder if an applicable
income tax treaty so requires as a condition for such non-U.S. Holder to be
subject to U.S. federal taxation on a net income basis in respect of income
from the Common Shares), in which case the non-U.S. Holder generally will be
subject to U.S. federal income tax in respect of such dividends in the same
manner as a U.S. Holder. Any such effectively connected dividends received by
a corporate non-U.S. Holder also may, under certain circumstances, be subject
to an additional "branch profits tax" at a 30% rate or such lower rate as may
be specified by an applicable income tax treaty. A non-U.S. Holder generally
will not be subject to U.S. federal income tax or withholding tax on
distributions that are treated as capital gain for U.S. federal income tax
purposes unless such non-U.S. Holder would be subject to U.S. federal income
tax on gain realized on the sale or other disposition of the Common Shares.
See discussion below under "Dispositions".
Subject to certain limitations, a U.S. Holder may elect to claim a credit
against its U.S. federal income tax liability for any Canadian tax paid with
respect to, or withheld from, any dividends paid on the Common Shares. A U.S.
Holder who does not make such an election instead may deduct the Canadian tax
paid or withheld, but only for a year in which such U.S. Holder elects to do
so with respect to all creditable foreign taxes paid by such U.S. Holder. The
availability of the foreign tax credit is subject to complex limitations that
depend on the proportionate share that a U.S. Holder's "foreign source"
taxable income bears to such U.S. Holder's worldwide taxable income with
respect to each separate category of income described below.
23
For U.S. foreign tax credit purposes, for taxable years beginning before
January 1, 2007, dividends on the Common Shares will generally constitute
foreign source "passive income" or, in the case of certain U.S. Holders,
"financial services income." However, for taxable years beginning after
December 31, 2006, dividends paid on the Common Shares generally will be
treated as "passive income" (or "general income" for certain U.S. Holders).
If, and for so long as, the Company is a United States-owned foreign
corporation (as defined below), dividends paid by the Company on the Common
Shares may, subject to certain exceptions and elections, instead be treated
for U.S. foreign tax credit purposes as partly foreign source "passive income"
(or "financial services income" for certain U.S. Holders) for taxable years
beginning before January 1, 2007 or "passive income" (or "general income" for
certain U.S. Holders) for taxable years beginning after December 31, 2006, and
partly U.S.-source income, in proportion to the earnings and profits of the
Company in the year of such distribution allocable to foreign and U.S.
sources, respectively. The Company will be treated as a United States-owned
foreign corporation if stock representing 50% or more of the voting power or
value of the stock of the Company is held, directly or indirectly, by U.S.
Holders. No assurance can be given as to whether the Company is or will become
a United States-owned foreign corporation.
The rules relating to the U.S. foreign tax credit are complex, and each
U.S. Holder should consult its own financial advisor, legal counsel or
accountant to determine whether and to what extent it would be entitled to a
foreign tax credit.
Dispositions
Subject to the discussion below under "Passive Foreign Investment Company,"
a U.S. Holder's sale, exchange or other disposition of the Common Shares
generally will result in the recognition by the U.S. Holder of U.S. source
taxable capital gain or loss in an amount equal to the difference between the
U.S. dollar value of the amount of cash and fair market value of any property
received upon the sale, exchange or other disposition and such U.S. Holder's
adjusted tax basis in the Common Shares. Such capital gain or loss will be
long-term if the U.S. Holder's holding period in the Common Shares is more
than one year at the time of the sale, exchange or other disposition. Long-
term capital gain recognized by certain non-corporate U.S. Holders generally
will be subject to U.S. federal income tax rates lower than the rates
applicable to ordinary income. The deductibility of capital losses is subject
to limitations. Each U.S. Holder should consult its own financial advisor,
legal counsel or accountant regarding the treatment of capital gains and
losses.
A non-U.S. Holder will not be subject to U.S. federal income tax or
withholding tax on gain realized on the sale or other disposition of the
Common Shares unless (i) the gain is effectively connected with the conduct of
a trade or business by the non-U.S. Holder in the U.S. (and is attributable to
a permanent establishment maintained in the U.S. by such non-U.S. Holder if an
applicable income tax treaty so requires as a condition for such non-U.S.
Holder to be subject to U.S. federal income taxation on a net income basis in
respect of income from the Common Shares), or (ii) such non-U.S. Holder is an
individual who is present in the U.S. for 183 days or more in the taxable year
of the sale, and certain other conditions are met. Effectively connected gains
realized by a corporate non-U.S. Holder may also, under certain circumstances,
be subject to an additional "branch profits tax" at a 30% rate or such lower
rate as may be specified by an applicable income tax treaty.
Controlled Foreign Corporation Status
Under Section 951(a) of the Code, each "United States shareholder" of a
"controlled foreign corporation" ("CFC") must include in its gross income for
U.S. federal income tax purposes its pro rata share of the CFC's "subpart F
income," even if the subpart F income is not actually distributed to the
"United States shareholder." In addition, gain on the sale of stock in a CFC
realized by a "United States shareholder" is treated as ordinary income,
potentially eligible for the reduced tax rate applicable to certain dividends,
to the extent of such shareholder's proportionate share of the CFC's
undistributed earnings and profits accumulated during such shareholder's
holding period for the stock. Section 951(b) of the Code defines a "United
States shareholder" as any U.S. corporation, citizen, resident or other U.S.
person who owns (directly or through certain deemed ownership rules) 10% or
more of the total combined voting power of all classes of stock of a foreign
corporation. In general, a foreign corporation is treated as a CFC only if
such "United States shareholders" collectively own more than 50% of the total
combined voting power or total value of the foreign corporation's stock. Under
these rules, the Company does not expect to be a CFC but there can be no
assurance that the Company will not become a CFC. If the Company is treated as
a CFC, the Company's status as a CFC should have no adverse effect on any
shareholder of the Company that is not a "United States shareholder."
24
Passive Foreign Investment Company
If the Company is a "passive foreign investment company" (as defined
below), the preceding sections of this summary may not describe the U.S.
federal income tax consequences to U.S. Holders of the acquisition, ownership,
and disposition of Common Shares.
Sections 1291 through 1298 of the Code contain special rules applicable
with respect to foreign corporations that are "passive foreign investment
companies" ("PFICs"). A company will be considered a PFIC if 75% or more of
its gross income (including a pro rata share of the gross income of any
company (United States or foreign) in which the company is considered to own
25% or more of the shares by value) in a taxable year is passive income (the
"Income Test"). Alternatively, a foreign company will be considered a PFIC if
at least 50% of the assets (averaged over the four quarter ends for the year)
of the company (including a pro rata share of the assets of any company of
which the company is considered to own 25% or more of the shares by value) in
a taxable year are held for the production of, or produce, passive income (the
"Asset Test").
For the taxable year ended December 31, 2005, the Company determined that
it was a PFIC because it met the Income Test. In addition, the Company expects
that it will meet the Income Test for the taxable year ending December 31,
2006, and, as a result, will be treated as a PFIC for such taxable year. The
determination of whether the Company will be a PFIC for a subsequent taxable
year depends on (i) the application of complex U.S. federal income tax rules,
which are subject to differing interpretations, and (ii) the assets and income
of the Company over the course of each such taxable year. As a result, whether
the Company will be a PFIC for any subsequent taxable year cannot be predicted
with certainty as of the date of this prospectus. Accordingly, there can be no
assurance that the Company will not be a PFIC for any taxable year.
For taxable years in which the Company is a PFIC, each U.S. Holder, in
absence of an election by such holder to treat the Company as a "qualified
electing fund" (a "QEF" election), as discussed below, will, upon certain
distributions by the Company or upon disposition of the Common Shares at a
gain, be liable to pay U.S. federal income tax at the highest tax rate on
ordinary income in effect for each period to which the income is allocated
plus interest on the tax, as if the distribution or gain had been recognized
ratably over the U.S. Holder's holding period for the Common Shares while the
Company was a PFIC. Additionally, the Common Shares of a decedent U.S. Holder
who failed to make a QEF election will generally be denied the normally
available step-up of the tax basis for such Common Shares to fair market value
at the date of death and, instead, would have a tax basis equal to the
decedent's tax basis, if lower, in the Common Shares.
A U.S. Holder who owns the Common Shares during a period when the Company
is a PFIC will be subject to the foregoing PFIC rules, even if the Company
ceases to be a PFIC, unless such U.S. Holder makes a QEF election in the first
year in which the U.S. Holder owned the Common Shares and the Company was
considered a PFIC. A U.S. Holder who makes such a QEF election will be
entitled to treat any future gain on the sale of the Common Shares as capital
gain and will not be denied the tax basis step-up at death described above.
Additionally, a U.S. Holder who makes a QEF election will, for each taxable
year the Company is a PFIC, include in income a pro rata share of the ordinary
earnings of the Company as ordinary income and a pro rata share of any net
capital gain of the Company as long-term capital gain, subject to a separate
election to defer payment of taxes (such deferral is subject to an interest
charge.) The Company will comply with the applicable information reporting
requirements under the QEF rules.
A U.S. Holder who makes a QEF election for the first taxable year in which
the U.S. Holder owns Common Shares and in which the Company is a PFIC (and
complies with certain U.S. federal income tax reporting requirements) should
not have any material adverse U.S. federal income tax consequences if the
Company has no ordinary earnings or net capital gains during such taxable
year. The Company currently expects that it will not have any ordinary
earnings or net capital gains in future years in which it may be a PFIC.
However, no assurance can be given as to this expectation. Each U.S. Holder is
urged to consult its own financial advisor, legal counsel, or accountant
concerning the application of the U.S. federal income tax rules governing
PFICs in its particular circumstances.
Each U.S. Holder choosing to make a QEF election would be required annually
to file an IRS Form 8621 (Return by a shareholder of a Passive Foreign
Investment Company or Qualified Electing Fund) with such U.S. Holder's timely
filed U.S. federal income tax return (or directly with the IRS if the U.S.
Holder is not required to file an income tax return). A U.S. Holder choosing
to make a QEF election also must include with its income tax return a
shareholder election statement and the PFIC annual information statement that
the Company will provide. If the Company determines that it was a PFIC during
the taxable year, within two months after the end of each such taxable year
the
25
Company will supply the PFIC annual information statement necessary to make
the QEF election for such taxable year.
As an alternative to the QEF election, a U.S. Holder of certain publicly
traded PFIC stock can elect to mark the stock to market, recognizing as
ordinary income or loss each year an amount equal to the difference as of the
close of the taxable year between the fair market value of the PFIC stock and
the adjusted tax basis in the PFIC stock. Losses would be allowed only to the
extent of net mark-to-market gain previously included in income by the U.S.
Holder under the election for prior taxable years. If a mark-to-market
election is in effect on the date of a U.S. Holder's death, the otherwise
available step-up in tax basis to fair market value will not be available.
Instead, the tax basis of the Common Shares in the hands of a person who
acquires such Common Shares from the decedent will be the lesser of the
decedent's tax basis or the fair market value of the Common Shares.
Due to the complexity of the PFIC rules, a U.S. Holder should consult its
own financial advisor, legal counsel, or accountant regarding the Company's
status as PFIC and the eligibility, manner and advisability of making a QEF
election or a mark-to-market election and how the PFIC rules may affect the
U.S. federal income tax consequences of a U.S. Holder's acquisition,
ownership, and disposition of Common Shares.
Information Reporting; Backup Withholding Tax
In general, dividend payments or other taxable distributions on the
Company's Common Shares or proceeds from the disposition of Common Shares paid
by a U.S. paying agent or other U.S. intermediary to a non-corporate U.S.
Holder may be subject to information reporting to the IRS and possible U.S.
backup withholding at a current rate of 28%. Backup withholding generally
would not apply to a U.S. Holder that furnishes a correct taxpayer
identification number and makes any other required certifications or if the
U.S. Holder is otherwise exempt from backup withholding. U.S. Holders that are
required to establish their exempt status generally must provide such
certification on IRS Form W-9 (Request for Taxpayer Identification Number and
Certification). Certain non-U.S. Holders receiving payments in the U.S or
through certain U.S. financial intermediaries should establish their exemption
from information reporting or backup withholding by providing certification of
non-U.S. status on IRS Form W-8 BEN, as applicable.
Amounts withheld as backup withholding may be credited against the U.S.
Holder's U.S. federal income tax liability. Additionally, a U.S. Holder or
non-U.S. Holder may obtain a refund of any excess amounts withheld under the
backup withholding regime by timely filing the appropriate claim for refund
with the IRS and furnishing any required information. Copies of any
information returns filed with the IRS may be made available by the IRS, under
the provisions of a specific treaty or agreement, to the taxing authorities of
the country in which the non-U.S. Holder resides or is organized.
Each U.S. Holder and non-U.S. Holder should consult its own financial
advisor, legal counsel, or accountant regarding the information reporting and
backup withholding tax rules.
PLAN OF DISTRIBUTION
Pursuant to an underwriting agreement dated May 3, 2006 (the "Underwriting
Agreement") between Gold Reserve and the Underwriters, Gold Reserve has agreed
to issue and sell 3,335,000 Common Shares and the Underwriters have severally
agreed to purchase on the closing date of the Offering in the proportions set
out in the Underwriting Agreement, which is expected to be on or about May 15,
2006 or any other date as may be agreed upon by Gold Reserve and the
Underwriters, but in any event not later than May 30, 2006, subject to the
conditions stipulated in the Underwriting Agreement, all but not less than all
such Common Shares at a price of Cdn.$9.00 per Common Share, payable in cash
against delivery of certificates representing the Common Shares, in the number
of Common Shares set forth opposite the Underwriter's name:
Underwriter Number of Common Shares
- ----------- -----------------------
Sprott Securities Inc................................... 1,667,500
RBC Dominion Securities Inc............................. 1,667,500
---------
Total................................................... 3,335,500
=========
The offering price of the Common Shares was determined by negotiation
between Gold Reserve and the Underwriters. The Underwriting Agreement provides
that Gold Reserve will pay to the Underwriters, in consideration for their
services in connection with the Offering, a fee of Cdn.$0.45 per Common
Share, for an aggregate fee of Cdn.$1,500,750 or 5% of the gross proceeds of
the Offering.
26
Gold Reserve has also granted to the Underwriters an Over-Allotment Option,
exercisable for a period of 30 days from the date of the closing of the
Offering, to purchase up to an aggregate of 500,250 additional Common Shares, at
a price of Cdn.$9.00 per Common Share, payable in cash against delivery of
such additional shares. The Over-Allotment Option is exercisable in whole or
in any part only for the purpose of covering over-allotments, if any, made by
the Underwriters in connection with the Offering and for market stabilization
purposes. This prospectus qualifies the grant of the Over-Allotment Option and
the distribution of any Common Shares issued and sold upon the exercise of the
Over-Allotment Option.
The following table summarizes the compensation of the Offering payable by
the Company to the Underwriters:
Per Common Share Total
------------------------------------------ --------------------------------------------
Without Over-Allotment With Over-Allotment Without Over-Allotment With Over-Allotment
Option Option Option Option
---------------------- ------------------- ---------------------- ---------------------
Underwriters' Fee... Cdn.$0.45 Cdn.$0.45 Cdn.$1,500,750 Cdn.$1,725,862.50
The Company estimates that its total expenses of the Offering will be
Cdn.$450,000. The Company has agreed to reimburse the Underwriters for certain
of its expenses relating to the Offering.
The Common Shares are being offered to the public concurrently in all of the
provinces of Canada, other than Quebec, and in the United States pursuant to the
multi-jurisdictional disclosure system implemented by the securities regulatory
authorities in the United States and Canada. The Common Shares will be offered
in Canada and the United States by the Underwriters either directly or through
their U.S. registered broker-dealer affiliates or agents, as applicable. The
Underwriters may offer the Common Shares for sale in jurisdictions outside of
Canada and the United States provided such offer and sale will not require the
Company to comply with the registration, prospectus, filing, continuous
disclosure or other similar requirements under the applicable securities laws of
such other jurisdictions or pay any additional governmental filing fees which
relate to such other jurisdictions.
The Common Shares are listed on both the TSX and AMEX under the symbol
"GRZ". Applications have been made to have the Common Shares qualified for
distribution by this short form prospectus listed on the TSX and AMEX. Listing
will be subject to the Company fulfilling all of the listing requirements of
the TSX and AMEX.
The obligations of the Underwriters under the Underwriting Agreement may be
terminated upon the occurrence of certain stated events. Subject to the above,
the Underwriters are severally obligated to take up and pay for all Common
Shares they have obliged themselves to purchase if any of the Common Shares
are purchased under the Underwriting Agreement. The Underwriting Agreement
also provides that Gold Reserve will indemnify the Underwriters against
certain liabilities and expenses, including liability under applicable
securities laws, or contribute to payments the Underwriters may be required to
make in respect thereof. The closing of the Offering is conditional upon the
receipt of an opinion from the National Association of Securities Dealers,
Inc. that it has no objection to the proposed underwriting terms among the
Company, and the Underwriters, set forth in the Underwriting Agreement.
The public offering price for the Common Shares offered in Canada and in
the United States is payable in Canadian dollars only.
The Company has agreed that it will not, offer, sell, contract to sell,
pledge or otherwise dispose of, directly or indirectly, or file with the SEC,
a registration statement under the Securities Act or a prospectus under
applicable Canadian securities legislation relating to, any of the Common
Shares or securities convertible into or exchangeable for any of the Common
Shares without the prior written consent of Sprott Securities Inc. for a
period of 90 days after the date of the Underwriting Agreement, except for
grants of employee stock options by the Company or issuances of the Common
Shares pursuant to the exercise of employee stock options previously granted
by the Company and outstanding on the date hereof.
Pursuant to rules and policy statements of certain Canadian provincial
securities commissions, the Underwriters may not, throughout the period of
distribution, bid for or purchase Common Shares for their own account or for
accounts over which they exercise control or direction. The foregoing
restriction is subject to exceptions, on the condition that the bid or
purchase is not engaged in for the purpose of creating actual or apparent
active trading in, or
27
raising the price of, the Common Shares. These exceptions include bids or
purchases permitted under the Universal Market Integrity Rules for Canadian
Marketplaces administered by Market Regulation Services Inc. relating 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, the
Underwriters may over-allot or effect transactions that stabilize or maintain
the market price of the Common Shares at levels other than those that might
otherwise prevail on the open market. Such transactions, if commenced, may be
discontinued at any time.
The rules of the SEC may limit the ability of the Underwriters to bid for
or purchase Common Shares before the distribution of the Common Shares in the
Offering is completed. However, the Underwriters may engage in the following
activities in accordance with the rules:
. Stabilizing transactions permit bids to purchase the Common Shares so
long as the stabilizing bids do not exceed a specified maximum.
. Over-allotment transactions involve sales by the Underwriters of Common
Shares in excess of the number of Common Shares the Underwriters are
obligated to purchase, which creates a syndicate short position. The
Underwriters may close out any short position by purchasing Common
Shares in the open market.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common shares originally sold by the
syndicate member are purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may have the effect of preventing or mitigating a decline in the market
price of the Common Shares, and may cause the price of the Common Shares to be
higher than would otherwise exist in the open market absent such stabilizing
activities. As a result, the price of the Common Shares may be higher than the
price that might otherwise exist in the open market. These transactions may be
effected on the AMEX, the TSX or otherwise and, if commenced, may be
discontinued at any time.
Subscriptions for Common Shares 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. Certificates evidencing the
Common Shares will be available for delivery on the closing date of the
Offering.
LEGAL MATTERS
Certain legal matters relating to the Offering and to the Common Shares to
be distributed pursuant to this short form prospectus will be passed upon on
behalf of the Company by Fasken Martineau DuMoulin LLP, with respect to
Canadian legal matters, and by Baker & McKenzie LLP, with respect to U.S.
legal matters, and on behalf of the Underwriters by Heenan Blaikie LLP, with
respect to Canadian legal matters, and by Dorsey & Whitney LLP, with respect
to U.S. legal matters.
INTEREST OF EXPERTS
As of the date hereof, none of the partners and associates of Fasken
Martineau DuMoulin LLP and Heenan Blaikie LLP, or Pincock, Allen & Holt, Raul
Borrastero, C.P.G, Susan Poos, P.E., and Richard Addison, P.E., C Eng,
Eur.Ing, Richard J. Lambert, P.E., and Brad Yonaka, each being companies or
persons who have prepared reports relating to the Company's mineral
properties, or any director, officer, employee or partner thereof, as
applicable, received or has received a direct or indirect interest in the
property of the Company or of any associate or affiliate of the Company. As at
the date hereof, the aforementioned persons, and the directors, officers,
employees and partners in the aggregate, as applicable, of each of the
aforementioned companies and partnerships beneficially own, directly or
indirectly, less than one percent of the securities of the Company.
Neither the aforementioned persons, nor any director, officer, employee or
partner, as applicable, of the aforementioned companies or partnerships is
currently expected to be elected, appointed or employed as a director, officer
or employee of the Company or of any associate or affiliate of the Company.
28
AUDITORS, TRANSFER AGENT AND REGISTRAR
The auditors of the Company are PricewaterhouseCoopers LLP, Chartered
Accountants, of 250 Howe Street, Suite 700, Vancouver, British Columbia
V6C 3S7 who advise that they are independent of the Company within the Rules
of Professional Conduct of the Institute of Chartered Accountants of British
Columbia. The auditors are registered with the U.S. Public Accounting
Oversight Board.
The transfer agent and registrar for the common shares of the Company is
Computershare Investor Services Inc. at its principal offices in Toronto,
Ontario.
DOCUMENTS FILED AS PART OF THE REGISTRATION STATEMENT
The following documents have been or will be filed with the SEC as part of
the registration statement of which this prospectus forms a part: (i) the
documents referred to under the heading "Documents Incorporated by Reference";
(ii) the form of Underwriting Agreement; (iii) consent of PricewaterhouseCoopers
LLP; (iv) consent of Fasken Martineau DuMoulin LLP; (v) consent of Heenan
Blaikie LLP; (vi) consent of Pincock Allen & Holt; (vii) consent of Raul
Borrastero, C.P.G; (viii) consent of Susan Poos, P.E.; (ix) consent of Richard
Addison, P.E., C Eng, Eur.Ing; (x) consent of Richard J. Lambert, P.E.; (xi)
consent of Brad Yonaka, Exploration Manager for Gold Reserve; and (xi) powers of
attorney from directors and officers of Gold Reserve.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement on Form F-10
relating to the Common Shares. This short form prospectus, which constitutes a
part of the registration statement, does not contain all of the information
contained in the registration statement, certain items of which are contained
in the exhibits to the registration statement as permitted by the rules and
regulations of the SEC. Statements included or incorporated by reference in
this prospectus about the contents of any contract, agreement or other
document referred to are not complete, and in each instance you should refer
to the exhibits for a more complete description of the matter involved. Each
such statement is qualified in its entirety by such reference.
The Company is subject to the information requirements of the U.S. Exchange
Act and applicable Canadian securities legislation, and in accordance
therewith files reports and other information with the SEC and with the
securities regulators in Canada. Under a multi-jurisdictional disclosure
system adopted by the United States, documents and other information that the
Company files with the SEC may be prepared in accordance with the disclosure
requirements of Canada, which are different from those of the United States
(materially different in some circumstances). As a foreign private issuer, the
Company is exempt from the rules under the U.S. 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 provisions contained in Section 16 of the U.S. Exchange Act. In
addition, the Company is not required to publish financial statements as
promptly as U.S. companies.
You may read any document that the Company has filed with the SEC at the
SEC's public reference room in Washington, D.C. You may also obtain copies of
those documents from the public reference room of the SEC at 100 F Street,
N.E., Washington, D.C. 20549 by paying a fee. You should call the SEC at 1-
800-SEC-0330 or access its website at www.sec.gov for further information
about the public reference rooms. You may read and download documents the
Company has publicly filed with the SEC's Electronic Data Gathering and
Retrieval system at www.sec.gov. You may read and download any public document
that the Company has filed with the Canadian securities regulatory authorities
at www.sedar.com.
ENFORCEABILITY OF CIVIL LIABILITIES
The Company is a corporation existing under the Business Corporations Act
(Yukon). Some of the Company's directors and some of the experts named in this
prospectus, are residents of Canada or otherwise reside outside the United
States, and all or a substantial portion of their assets, and a substantial
portion of the Company's assets, are located outside the United States. The
Company has appointed an agent for service of process in the United States,
but it may be difficult for holders of Common Shares who reside in the United
States to effect service within the United States upon those directors and
experts who are not residents of the United States. It may also be difficult
for holders
29
of Common Shares who reside in the United States to realize in the United
States upon judgments of courts of the United States predicated upon the
Company's civil liability and the civil liability of its directors, officers
and experts under the United States federal securities laws. The Company has
been advised by its Canadian counsel, Fasken Martineau DuMoulin LLP, that a
judgment of a United States court predicated solely upon civil liability under
United States federal securities laws would probably be enforceable in Canada
if the United States court in which the judgment was obtained had a basis for
jurisdiction in the matter that would be recognized by a Canadian court for
the same purposes. The Company has also been advised by Fasken Martineau
DuMoulin LLP, however, that there is substantial doubt whether an action could
be brought in Canada in the first instance on the basis of liability
predicated solely upon United States federal securities laws.
The Company filed with the SEC, concurrently with its registration
statement on Form F-10 of which this prospectus is a part, an appointment of
agent for service of process on Form F-X. Under the Form F-X, the Company
appointed Gold Reserve Corporation, its Montana subsidiary, as its agent for
service of process in the United States in connection with any investigation
or administrative proceeding conducted by the SEC, and any civil suit or
action brought against or involving the Company in a United States court
arising out of or related to or concerning the offering of the Common Shares
under this prospectus.
INTERNATIONAL ISSUER
Although the Company resides in Canada, a substantial portion of its assets
are located outside of Canada. Although Gold Reserve has appointed Austring,
Fendrick, Fairman & Pakkari, The Drury Building, 3801 Third Avenue,
Whitehorse, Yukon Y1A 4Z7, as its agent for service of process in Canada, it
may not be possible for investors to collect from Gold Reserve judgements
obtained in Canadian courts predicated on the civil liability provisions of
securities legislation.
STATUTORY RIGHTS OF WITHDRAWAL AND RESCISSION
Securities legislation in certain of the provinces of Canada provides
purchasers with the right to withdraw from an agreement to purchase
securities. This right may be exercised within two business days after receipt
or deemed receipt of a prospectus and any amendment. In several of the
provinces, the securities legislation further provides a purchaser with
remedies for rescission or, in some jurisdictions, damages if the prospectus
and any amendment contains a misrepresentation or is not delivered to the
purchaser, provided that such remedies for rescission or damages are exercised
by the purchaser within the time limit prescribed by the securities
legislation of the purchaser's province. The purchaser should refer to
applicable provisions of the securities legislation of such purchaser's
province for the particulars of these rights or consult with a legal adviser.
30
AUDITORS' REPORT WITH RESPECT TO SUPPLEMENTARY INFORMATION
To the Board of Directors of
Gold Reserve Inc.
Our audit of the consolidated financial statements of Gold Reserve Inc.
referred to in our report to the Shareholders dated February 17, 2006 included
consideration of note 11, Differences Between Canadian and U.S. GAAP as at
December 31, 2005 and 2004 and for each of the years in the three-year period
ended December 31, 2005.
Management has also prepared supplementary disclosure under U.S. GAAP as at
December 31, 2005 and 2004 and for each of the years in the three-year period
ended December 31, 2005 ("Supplementary Information on Differences Between
Canadian and U.S. GAAP"). In our opinion, this Supplementary Information on
Differences Between Canadian and U.S. GAAP presents fairly, in all material
respects, the disclosures set forth therein when read in conjunction with the
related consolidated financial statements of the Company.
Vancouver, British Columbia, Canada /s/ PricewaterhouseCoopers
February 17, 2006 Chartered Accountants
F-1
U.S. GAAP RECONCILIATION TO FINANCIAL STATEMENTS
The Company prepares its consolidated financial statements in U.S. dollars
in accordance with Canadian GAAP, which principles differ in certain respects
from United States GAAP. The Company has previously reported its financial
statements in accordance with Item 17 under Form 20-F, including the U.S. GAAP
reconciliation requirements thereunder. In order to be eligible for use of the
SEC's registration statement on Form F-10, of which this short form prospectus
constitute a part, the Company must reconcile its financial statements
pursuant to Item 18 under Form 20-F, which requires more detailed
reconciliation with U.S. GAAP and the rules and regulations promulgated by the
SEC. This "U.S. GAAP Reconciliation to Financial Statements" section
supplements the Company's financial statements set forth in its AIF in order
to comply with Item 18 under Form 20-F. This section should be read in
conjunction with the financial statements of the Company set forth in the AIF.
The effect of the principal differences between U.S. and Canadian GAAP as
required by Item 18 of Form 20-F (and the rules and regulations of the SEC)
are summarized below.
Consolidated Summarized Balance Sheets
Canadian GAAP Change U.S. GAAP
------------- ------------ -------------
2005
Assets
Current assets(A)................... $ 22,797,616 $ 4,112,904 $ 26,910,520
Mineral property costs(C)........... 46,381,380 (41,034,321) 5,347,059
Other assets........................ 12,775,876 -- 12,775,876
------------ ------------ -------------
$ 81,954,872 $(36,921,417) $ 45,033,455
============ ============ =============
Liabilities......................... $ 2,317,106 $ -- $ 2,317,106
Shareholders' equity
Common shares & equity units(B)..... 140,512,063 (5,185,930) 135,326,133
Less, common shares & equity units
held by affiliates................. (674,598) -- (674,598)
Contributed surplus................. -- 1,489,156 1,489,156
Stock options(B).................... 1,867,537 3,922,652 5,790,189
Value assigned to warrants.......... -- 3,682,447 3,682,447
Accumulated deficit(B),(C).......... (61,983,016) (44,942,646) (106,925,662)
Accumulated other comprehensive
income(A).......................... -- 4,112,904 4,112,904
KSOP debt........................... (84,220) -- (84,220)
------------ ------------ -------------
79,637,766 (36,921,417) 42,716,349
------------ ------------ -------------
$ 81,954,872 $(36,921,417) $ 45,033,455
============ ============ =============
Canadian GAAP Change U.S. GAAP
------------- ------------ -------------
2004
Assets
Current assets(A)................... $ 33,057,053 3,043,978 $ 36,101,031
Mineral property costs(C)........... 41,034,321 (41,034,321) --
Other assets........................ 12,514,157 -- 12,514,157
------------ ------------ -------------
$ 86,605,531 $(37,990,343) $ 48,615,188
============ ============ =============
Liabilities......................... $ 2,429,473 $ -- $ 2,429,473
Shareholders' equity
Common shares & equity units(B)..... 136,907,516 (5,409,346) 131,498,170
Less, common shares & equity units
held by affiliates................. (674,598) -- (674,598)
Stock options(B).................... 1,004,197 7,071,690 8,075,887
Value assigned to warrants.......... -- 5,395,019 5,395,019
Accumulated deficit(B),(C).......... (52,955,734) (48,091,684) (101,047,418)
Accumulated other comprehensive
income(A).......................... -- 3,043,978 3,043,978
KSOP debt........................... (105,323) -- (105,323)
------------ ------------ -------------
84,176,058 (37,990,343) 46,185,715
------------ ------------ -------------
$ 86,605,531 $(37,990,343) $ 48,615,188
============ ============ =============
F-2
Consolidated Summarized Statements of Operations
2005 2004 2003
----------- ------------ ------------
Net Loss under Canadian GAAP.......... $(9,027,282) $ (5,482,629) $ (3,707,336)
Stock based compensation(B).......... 3,149,038 1,391,066 (7,704,726)
Mineral property costs(C)............ -- (6,268,328) --
----------- ------------ ------------
Net loss under U.S. GAAP.............. (5,878,244) (10,359,891) (11,412,062)
Other comprehensive income (loss)
Unrealized gain (loss) on available-
for-sale securities(A).............. 1,068,926 (70,147) 3,072,941
Reclassification adjustment for
(gain) loss included in net loss.... 55,957 -- (176,375)
Total comprehensive loss under U.S.
GAAP................................ $(4,753,361) $(10,430,038) $ (8,515,496)
----------- ------------ ------------
Basic and diluted net loss per share
under U.S. GAAP..................... $(.17) $(.35) $(.46)
=========== ============ ============
Consolidated Summarized Statements of Cash Flows
2005 2004 2003
----------- ------------ ------------
Cash flow used by operating activities
under Canadian GAAP.................. $(7,729,508) $ (3,958,108) $ (2,898,151)
Mineral property costs(C)............ -- (6,268,328) --
----------- ------------ ------------
Cash flow used by operating activities
under U.S. GAAP...................... $(7,729,508) $(10,226,436) $ (2,898,151)
=========== ============ ============
Cash flow (used) provided by investing
activities under Canadian GAAP....... $(2,691,289) $ (3,661,785) $ 2,731,267
Mineral property costs(C)............ -- 6,268,328 --
----------- ------------ ------------
Cash flow (used) provided by investing
activities under U.S. GAAP........... $(2,691,289) $ 2,606,543 $ 2,731,267
=========== ============ ============
- --------
(A) Under U.S. GAAP, marketable securities would be divided between held-to-
maturity securities and available-for-sale securities. Those securities
classified as available-for-sale would be recorded at market value and the
unrealized gain or loss would be recorded as part of comprehensive income.
(B) For U.S. GAAP purposes, the Company accounts for stock-based employee
compensation arrangements using the intrinsic value method prescribed in
Accounting Principles Board (APB) Opinion No.25, "Accounting for Stock
Issued to Employees." Under U.S. GAAP, when the exercise price of certain
stock options is amended (the "Repricing"), these options are accounted
for as variable compensation from the date of the effective Repricing.
Under this method, following the Repricing date, compensation expense is
recognized when the quoted market value of the Company's common shares
exceeds the amended exercise price. Should the quoted market value
subsequently decrease, a recovery of a portion, or all of the previously
recognized compensation expense will be recognized. For U.S. GAAP purposes,
the Company will adopt SFAS 123R, "Accounting for Stock Based Compensation"
effective January 1, 2006. SFAS 123R requires the use of the fair value
method of accounting for stock based compensation. This standard is
substantially consistent with the revised provisions of CICA 3870, which
was adopted by the Company for Canadian GAAP effective January 1, 2004. For
U.S.GAAP, the Company has not yet determined which acceptable method of
adoption it will apply.
(C) Under Canadian GAAP, the Company capitalizes mineral property exploration
and development costs after proven and probable reserves have been
established. The Company also capitalizes costs on properties where it has
found non-reserve material that does not meet all the criteria required for
classification as proven or probable reserves. Under U.S. GAAP, exploration
and development expenditures incurred on properties where mineralization has
not been classified as a proven and probable reserve under SEC rules, are
expensed as incurred. Accordingly, certain expenditures are capitalized for
Canadian GAAP purposes but expensed under U.S. GAAP.
Pro-forma stock based compensation
For U.S. GAAP purposes, the Company accounts for stock-based employee
compensation arrangements using the intrinsic value method. Had the fair value
method of accounting been used under U.S. GAAP, the net loss and net loss per
share would have been as follows:
2005 2004 2003
------------ ------------ ------------
Net loss under U.S. GAAP............. $ (5,878,244) $(10,359,891) $(11,412,062)
Variable plan accounting adjustment
included in net loss................ (2,285,698) (791,643) 7,704,726
Stock based compensation under the
fair value method................... (863,340) (599,423) (406,108)
------------ ------------ ------------
Pro-forma net loss under U.S. GAAP... $ (9,027,282) $(11,750,957) $ (4,113,444)
============ ============ ============
Pro-forma basic and diluted net loss
per share under U.S. GAAP........... $(.26) $(.40) $(.17)
============ ============ ============
F-3
Development Stage Enterprise
In August of 1992, the Company acquired the Brisas Project. Beginning in
1993 the Company decided to focus its efforts on the development of Brisas
thereby meeting the definition of a development stage enterprise under
Statement of Financial Accounting Standards No. 7 (FAS 7), Accounting and
Reporting by Development Stage Enterprises. The following additional
information is required under FAS 7.
Consolidated Summarized Statements of Operations - U.S. GAAP
For the period from January 1, 1993 to December 31, 2005
Other income..................................................... $(14,935,581)
Mineral property exploration and development..................... 39,505,080
General & administrative expense................................. 27,345,826
Other expense.................................................... 49,085,509
------------
Deficit accumulated during the development stage
from January 1, 1993 to December 31, 2005....................... 101,000,834
Accumulated deficit, December 31, 1992........................... 5,924,828
------------
Accumulated deficit, December 31, 2005........................... $106,925,662
============
Consolidated Summarized Statements of Cash Flows - U.S. GAAP
For the period from January 1, 1993 to December 31, 2005
Cash used by operating activities................................ $(73,097,165)
Cash used by investing activities................................ (12,432,736)
Cash provided by financing activities............................ 103,271,301
------------
Increase in cash and cash equivalents for the period
from January 1, 1993 to December 31, 2005....................... 17,741,400
Cash and cash equivalents at December 31, 1992................... 1,628,852
------------
Cash and cash equivalents at December 31, 2005................... $ 19,370,252
============
F-4
Additional Shareholders' Equity disclosure - U.S. GAAP
For the period from January 1, 1993 to December 31, 2005
Common Shares and Equity Units
Issued
----------------------------------
Shares
and units Value Value Comprehensive
Issue Common Equity held by Contributed assigned assigned Accumulated income
Price Shares Units Amount affiliates surplus to options to warrants Deficit (loss)
----- ---------- ------ ---------- ---------- ----------- ---------- ----------- ----------- -------------
Balance,
December 31,
1992........... 8,875,862 $ 8,290,819 $ (70,944) $ (5,924,828)
Stock issued for
cash
Private
placement...... 4.12 2,530,000 10,413,976
Exercise of
options........ 1.34 300,000 401,000
Exercise of
warrants....... 3.52 5,037 17,749
Stock issued for
services....... 3.89 12,552 48,851
Net loss........ (5,495,061)
Change in KSOP
debt...........
Reduction of
shareholders'
equity due to
change in
subsidiaries'
minority
interest....... (25,050)
- --------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31,
1993........... 11,723,451 $19,147,345 (70,944) (11,419,889)
Stock issued for
cash
Private
placement...... 9.82 2,000,000 19,630,530
Exercise of
options........ 2.32 295,967 687,494
Exercise of
warrants....... 6.07 2,134,250 12,962,750
Stock issued for
services....... 5.50 6,000 33,000
Stock issued to
KSOP........... 6.19 20,000 123,760
Stock issued for
litigation
settlement..... 6.15 2,750,000 16,912,500
Value attributed
to warrants
issued in
litigation
settlement..... 800,000
Net loss........ (26,297,415)
Increase in
common stock
held by
affiliates..... (433,332)
Effect of change
in accounting
For
investments.... 108,425
Decrease in
unrealized gain
on available-
for-sale
securities..... (29,408)
Change in KSOP
debt...........
Reduction of
shareholders'
equity due to
change in
subsidiaries'
minority
interest....... (843,986)
- --------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31,
1994........... 18,929,668 69,453,393 (504,276) (37,717,304) 79,017
Stock issued for
cash
Exercise of
options........ 2.74 167,835 460,162
Stock issued to
KSOP........... 5.60 50,000 280,195
Stock issued for
minority
interest in
subsidiaries... 7.43 1,329,185 9,882,028
Net loss........ (3,847,605)
Increase in
common stock
held by
affiliates..... (924,289)
Increase in
unrealized gain
on available-
for-sale
securities..... 6,943
Change in KSOP
debt...........
Reduction of
shareholders'
equity due to
change in
subsidiaries'
minority
interest....... (6,924)
- --------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31,
1995........... 20,476,688 80,068,854 (1,428,565) (41,564,909) 85,960
Stock issued for
cash
Exercise of
options........ 5.37 497,623 2,673,988
Exercise of
warrants....... 10.52 1,729,500 18,202,500
Net loss........ (7,908,701)
Decrease in
unrealized gain
on available-
for-sale
securities..... (83,210)
Change in KSOP
debt...........
Addition to
shareholders'
equity due to
change in
subsidiaries'
minority
interest....... 7,436
- --------------------------------------------------------------------------------------------------------------------------------
KSOP
debt
---------
Balance,
December 31,
1992........... $(50,000)
Stock issued for
cash
Private
placement......
Exercise of
options........
Exercise of
warrants.......
Stock issued for
services.......
Net loss........
Change in KSOP
debt........... 5,000
Reduction of
shareholders'
equity due to
change in
subsidiaries'
minority
interest.......
- --------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31,
1993........... $(45,000)
Stock issued for
cash
Private
placement......
Exercise of
options........
Exercise of
warrants.......
Stock issued for
services.......
Stock issued to
KSOP...........
Stock issued for
litigation
settlement.....
Value attributed
to warrants
issued in
litigation
settlement.....
Net loss........
Increase in
common stock
held by
affiliates.....
Effect of change
in accounting
For
investments....
Decrease in
unrealized gain
on available-
for-sale
securities.....
Change in KSOP
debt........... (103,760)
Reduction of
shareholders'
equity due to
change in
subsidiaries'
minority
interest.......
- --------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31,
1994........... (148,760)
Stock issued for
cash
Exercise of
options........
Stock issued to
KSOP...........
Stock issued for
minority
interest in
subsidiaries...
Net loss........
Increase in
common stock
held by
affiliates.....
Increase in
unrealized gain
on available-
for-sale
securities.....
Change in KSOP
debt........... (187,949)
Reduction of
shareholders'
equity due to
change in
subsidiaries'
minority
interest.......
- --------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31,
1995........... (336,709)
Stock issued for
cash
Exercise of
options........
Exercise of
warrants.......
Net loss........
Decrease in
unrealized gain
on available-
for-sale
securities.....
Change in KSOP
debt........... 150,001
Addition to
shareholders'
equity due to
change in
subsidiaries'
minority
interest.......
- --------------------------------------------------------------------------------------------------------------------------------
F-5
Common Shares and Equity Units Issued
-----------------------------------------------
Shares
and units Value Value
Issue Common Equity held by Contributed assigned assigned Accumulated
Price Shares Units Amount affiliates surplus to options to warrants Deficit
---------- ---------- ----------- ----------- ---------- ----------- ---------- ----------- -----------
Balance,
December 31,
1996........... 22,703,811 $100,952,778 $(1,428,565) (49,473,610)
Stock issued for
cash
Exercise of
options........ 5.75 124,649 716,716
Stock issued to
KSOP........... 5.02 89,683 450,000
Net loss........ (10,918,111)
Increase in
unrealized gain
on available-
for-sale
securities.....
Change in KSOP
debt...........
- -------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31,
1997........... 22,918,143 102,119,494 (1,428,565) (60,391,721)
Stock issued for
cash
Exercise of
options........ 1.90 223,624 425,883
Stock issued to
KSOP........... 3.00 50,000 150,000
Net loss........ (5,147,658)
Change in shares
held by
affiliates..... (1,034,323) 1,025,234
Decrease in
unrealized gain
(loss) on
available-for-
sale
securities.....
Change in KSOP
debt...........
- -------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31,
1998........... 23,191,767 101,661,054 (403,331) (65,539,379)
Stock issued for
cash
Exercise of
options........ 1.19 12,500 14,899
Stock issued for
services....... 0.84 70,000 58,760
Stock issued to
KSOP........... 1.13 300,000 337,500
Stock retired... 3.02 (1,629) (4,915)
Net loss........ (4,499,321)
Net common
shares
exchanged for
equity units... (1,584,966) 1,584,966
Decrease in
unrealized loss
on available-
for-sale
securities.....
Change in KSOP
debt...........
- -------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31,
1999........... 21,987,672 1,584,966 102,067,298 (403,331) (70,038,700)
Stock issued for
services....... 0.55 70,000 38,688
Net loss........ (2,807,648)
Equity units
exchanged for
common shares.. 138,570 (138,570)
Increase in
unrealized gain
on available-
for-sale
securities.....
Change in KSOP
debt...........
- -------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31,
2000........... 22,196,242 1,446,396 102,105,986 (403,331) (72,846,348)
Stock issued for
cash
Exercise of
options........ 0.78 5,500 4,285
Stock issued for
services....... 0.75 20,000 15,000
Stock issued to
KSOP........... 0.47 300,000 140,640
Net loss........ (2,258,191)
Change in common
stock held by
affiliates..... (271,267)
Equity units
exchanged for
common shares.. 133,380 (133,380)
Increase in
unrealized gain
on available-
for-sale
securities.....
Change in KSOP
debt...........
- -------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31,
2001........... 22,655,122 1,313,016 102,265,911 (674,598) (75,104,539)
Stock issued for
cash
Exercise of
options........ 0.72 18,000 12,960
Stock issued for
services....... 0.85 100,000 85,200
Stock issued to
KSOP........... 0.67 200,000 134,000
Variable plan
accounting for
options........ 1,162,804
Net loss........ (4,170,926)
Equity units
exchanged for
common shares.. 23,036 (23,036)
Decrease in
unrealized gain
on available-
for-sale
securities.....
Change in KSOP
debt...........
- -------------------------------------------------------------------------------------------------------------------------------
Comprehensive
income KSOP
(loss) debt
------------- ----------
Balance,
December 31,
1996........... 2,750 (186,708)
Stock issued for
cash
Exercise of
options........
Stock issued to
KSOP...........
Net loss........
Increase in
unrealized gain
on available-
for-sale
securities..... 8,250
Change in KSOP
debt........... (436,152)
- -------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31,
1997........... 11,000 (622,860)
Stock issued for
cash
Exercise of
options........
Stock issued to
KSOP...........
Net loss........
Change in shares
held by
affiliates.....
Decrease in
unrealized gain
(loss) on
available-for-
sale
securities..... (22,625)
Change in KSOP
debt........... 208,089
- -------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31,
1998........... (11,625) (414,771)
Stock issued for
cash
Exercise of
options........
Stock issued for
services.......
Stock issued to
KSOP...........
Stock retired...
Net loss........
Net common
shares
exchanged for
equity units...
Decrease in
unrealized loss
on available-
for-sale
securities..... (328,618)
Change in KSOP
debt........... 230,352
- -------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31,
1999........... (340,243) (184,419)
Stock issued for
services.......
Net loss........
Equity units
exchanged for
common shares..
Increase in
unrealized gain
on available-
for-sale
securities..... 437,875
Change in KSOP
debt........... 99,310
- -------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31,
2000........... 97,632 (85,109)
Stock issued for
cash
Exercise of
options........
Stock issued for
services.......
Stock issued to
KSOP...........
Net loss........
Change in common
stock held by
affiliates.....
Equity units
exchanged for
common shares..
Increase in
unrealized gain
on available-
for-sale
securities..... 62,368
Change in KSOP
debt........... 1,322
- -------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31,
2001........... 160,000 (83,787)
Stock issued for
cash
Exercise of
options........
Stock issued for
services.......
Stock issued to
KSOP...........
Variable plan
accounting for
options........
Net loss........
Equity units
exchanged for
common shares..
Decrease in
unrealized gain
on available-
for-sale
securities..... (118,816)
Change in KSOP
debt........... 19,003
- -------------------------------------------------------------------------------------------------------------------------------
F-6
Common Shares and Equity Units Issued
---------------------------------------
Shares
and units Value Value
Issue Common Equity held by Contributed assigned assigned Accumulated
Price Shares Units Amount affiliates surplus to options to warrants Deficit
----- ---------- --------- ----------- ---------- ----------- ---------- ----------- ------------
Balance,
December 31,
2002........... 22,996,158 1,289,980 102,498,071 (674,598) 1,162,804 (79,275,465)
Stock issued for
cash
Private
placement...... 1.95 4,042,000 7,888,508
Exercise of
options........ 0.74 400,000 294,605
Stock issued for
services....... 5.06 60,000 303,600
Stock issued to
KSOP........... 1.28 200,000 256,000
Value assigned
to warrants
issued......... 1,730,641
Variable plan
accounting for
options........ 7,704,726
Net loss........ (11,412,062)
Equity units
exchanged for
common shares.. 52,100 (52,100)
Increase in
unrealized gain
on available-
for-sale
securities.....
Change in KSOP
debt...........
- ------------------------------------------------------------------------------------------------------------------------
Balance,
December 31,
2003........... 27,750,258 1,237,880 111,240,784 (674,598) 8,867,530 1,730,641 (90,687,527)
Stock issued for
cash
Private
placement...... 3.61 5,361,000 19,337,034
Exercise of
warrants....... 4.28 21,100 90,211
Exercise of
options........ 0.89 373,954 333,310
Stock issued for
services....... 4.13 54,000 223,012
Stock issued to
KSOP........... 3.41 75,000 255,750
Value assigned
to warrants
issued......... 3,682,447
Variable plan
accounting for
options........ (791,643)
Assigned value
of exercised
warrants....... 18,069 (18,069)
Net loss........ (10,359,891)
Equity units
exchanged for
common shares.. 80,483 (80,483)
Decrease in
unrealized gain
on available-
for-sale
securities.....
Change in KSOP
debt...........
- ------------------------------------------------------------------------------------------------------------------------
Balance,
December 31,
2004........... 33,715,795 1,157,397 131,498,170 (674,598) 8,075,887 5,395,019 (101,047,418)
Stock issued for
cash
Exercise of
warrants....... 4.33 260,900 1,129,905
Exercise of
underwriter
compensation
options........ 3.00 202,100 605,468
Exercise of
underwriter
compensation
warrants....... 4.32 70,735 305,646
Exercise of
options........ 1.00 573,030 571,326
Stock issued for
services....... 2.92 251,350 733,231
Stock issued to
KSOP........... 3.45 75,000 258,971
Net loss........ (5,878,244)
Variable plan
accounting for
options........ (2,285,698)
Assigned value
of exercised
warrants...... 223,416 (223,416)
Assigned value
of expired
warrants....... 1,489,156 (1,489,156)
Equity units
exchanged for
common shares.. 47,377 (47,377)
Increase in
unrealized gain
on available-
for-sale
securities.....
Change in KSOP
debt...........
- ------------------------------------------------------------------------------------------------------------------------
Balance,
December 31,
2005........... $35,196,287 1,110,020 $135,326,133 (674,598) $1,489,156 $5,790,189 $3,682,447 $(106,925,662)
========================================================================================================================
Comprehensive
income KSOP
(loss) debt
------------- ---------
Balance,
December 31,
2002........... 41,184 (64,784)
- ------------------------------------------------------------------------------------------------------------------------
Stock issued for
cash
- ------------------------------------------------------------------------------------------------------------------------
Private
placement......
Exercise of
options........
Stock issued for
services.......
Stock issued to
KSOP...........
Value assigned
to warrants
issued.........
Variable plan
accounting for
options........
Net loss........
Equity units
exchanged for
common shares..
Increase in
unrealized gain
on available-
for-sale
securities..... 3,072,941
Change in KSOP
debt........... (39,568)
- ------------------------------------------------------------------------------------------------------------------------
Balance,
December 31,
2003........... 3,114,125 (104,352)
- ------------------------------------------------------------------------------------------------------------------------
Stock issued for
cash
- ------------------------------------------------------------------------------------------------------------------------
Private
placement......
Exercise of
warrants.......
Exercise of
options........
Stock issued for
services.......
Stock issued to
KSOP...........
Value assigned
to warrants
issued.........
Variable plan
accounting for
options........
Assigned value
of exercised
warrants.......
Net loss........
Equity units
exchanged for
common shares..
Decrease in
unrealized gain
on available-
for-sale
securities..... (70,147)
Change in KSOP
debt........... (971)
- ------------------------------------------------------------------------------------------------------------------------
Balance,
December 31,
2004........... 3,043,978 (105,323)
- ------------------------------------------------------------------------------------------------------------------------
Stock issued for
cash
- ------------------------------------------------------------------------------------------------------------------------
Exercise of
warrants.......
Exercise of
underwriter
compensation
options........
Exercise of
underwriter
compensation
warrants.......
Exercise of
options........
Stock issued for
services.......
Stock issued to
KSOP...........
Net loss........
Variable plan
accounting for
options........
Assigned value
of exercised
warrants.......
Assigned value
of expired
warrants.......
Equity units
exchanged for
common shares..
Increase in
unrealized gain
on available-
for-sale
securities..... 1,068,926
Change in KSOP
debt........... 21,103
- ------------------------------------------------------------------------------------------------------------------------
Balance,
December 31,
2005........... 4,112,904 (84,220)
F-7
[GOLD RESERVE LOGO]
PART II
INFORMATION NOT REQUIRED TO BE DELIVERED TO OFFEREES OR PURCHASERS
Indemnification of Directors and Officers.
The only statutes, charter provisions, bylaws, contracts or other
arrangements under which a director or officer of the Registrant is insured or
indemnified in any manner against liability which such officer of director may
incur in such capacity is Section 126 of the Yukon Business Corporations Act
and Sections 7.02 through 7.04 of the Registrant's Bylaws. Taken together, the
statutory and bylaw provisions generally allow the Registrant to indemnify its
directors or officers against liability and expenses provided the officer or
director seeking indemnity (1) was substantially successful on the merits in
the defense of the action or proceeding, (2) (a) acted honestly and in good
faith with a view to the best interest of the Registrant and (b) in the case
of a criminal or administrative action or proceeding that is enforced by a
monetary penalty, the officer or director had reasonable grounds for believing
the conduct was lawful, and (3) is fairly and reasonably entitled to
indemnity.
YUKON LAW
Section 126 of the Yukon Business Corporations Act is set forth in its
entirety as follows. All capitalized terms used herein but not otherwise
defined shall have the meanings as set forth in the Yukon Business
Corporations Act.
126. (1) Except in respect of an action by or on behalf of the corporation or
body corporate to procure a judgment in its favor, a corporation may
indemnify a director or officer of the corporation, a former director
or officer of the corporation or a person who acts or acted at the
corporation's request as a director or officer of a body corporate of
which the corporation is or was a shareholder or creditor, and his
heirs and legal representatives, against all costs, charges and
expenses, including an amount paid to settle an action or satisfy a
judgment, reasonably incurred by him in respect of any civil,
criminal or administrative action or proceeding to which he is made a
party by reason of being or having been a director or officer of that
corporation or body corporate, if:
(a) he acted honestly and in good faith with a view to the best
interests of the corporation; and
(b) in the case of a criminal or administrative action or proceeding
that is enforced by a monetary penalty, he had reasonable grounds
for believing that his conduct was lawful.
(2) A corporation may with the approval of the Supreme Court indemnify a
person referred to in subsection (1) in respect of an action by or on
behalf of the corporation or body corporate to procure a judgment in
its favor, to which he is made a party by reason of being or having
been a director or an officer of the corporation or body corporate,
against all costs, charges and expenses reasonably incurred by him in
connection with the action if he fulfils the conditions set out in
paragraphs (1)(a) and (b).
(3) Notwithstanding anything in this section, a person referred to in
subsection (1) is entitled to indemnity from the corporation in respect
of all costs, charges and expenses reasonably incurred by him in
connection with the defense of any civil, criminal or administrative
action or proceeding to which he is made a party by reason of being or
having been a director or officer of the corporation or body corporate,
if the person seeking indemnity:
(a) was substantially successful on the merits in his defense of the
action or proceeding;
(b) fulfills the conditions set out in paragraphs (1)(a) and (b); and
(c) is fairly and reasonably entitled to indemnity.
(4) A corporation may purchase and maintain insurance for the benefit of
any person referred to in subsection (1) against any liability incurred
by him:
(a) in his capacity as a director or officer of the corporation, except
when the liability relates to his failure to act honestly and in
good faith with a view to the best interests of the corporation, or
(b) in his capacity as a director or officer of another body corporate
if he acts or acted in that capacity at the corporation's request,
except when the liability relates to his failure to act honestly
and in good faith with a view to the best interests of the body
corporate.
II-1
(5) A corporation or a person referred to in subsection (1) may apply to
the Supreme Court for an order approving an indemnity under this
section and the Supreme Court may so order and make any further order
it thinks fit.
(6) On an application under subsection (5), the Supreme Court may order
notice to be given to any interested person and that person is entitled
to appear and be heard in person or by counsel.
Sections 7.02 through 7.04 of the Registrant's bylaws are set forth in
their entirety as follows. All capitalized terms used herein but not otherwise
defined shall have the meanings as set forth in the Registrant's bylaws.
7.02 Limitation of Liability
Subject to the Act, no director or officer, or former director or officer,
of the Corporation shall be liable for the acts, receipts, neglects or
defaults of any other director or officer or employee, or for the joining
in any receipt or act for conformity, or for any loss or damage or expense
happening to the Corporation through the insufficiency or deficiency of
title to any property acquired by the Corporation or for or on behalf of
the Corporation or for the insufficiency or deficiency of any security in
or upon which any of the money of or belonging to the Corporation shall be
placed or invested, or for any loss or damage arising from the bankruptcy,
insolvency or tortuous act of any person, firm or corporation including any
person, firm or corporation with whom or with which any moneys, securities
or effects shall be lodged or deposited, or for any loss, conversion,
misapplication or misappropriation of or any damage resulting from any
dealing with any moneys, securities or other assets of or belonging to the
Corporation or for any other loss, damage or misfortune whatsoever which
may happen in the execution of the duties of his respective office or trust
or in relation thereto unless the same shall happen by or through his
failure to exercise the powers and to discharge the duties of his office
honestly and in good faith with a view to the best interest of the
Corporation and to exercise the care, diligence and skill that a reasonably
prudent person would exercise in comparable circumstances. Any repeal or
modification of the foregoing provisions of this paragraph 7.02 shall not
adversely affect any limitation on the personal liability of a director or
officer of the Corporation arising from an act or omission occurring prior
to the time of such repeal or amendment. In addition to the circumstances
in which a director or officer of the Corporation is not personally liable
as set forth in the foregoing provisions of this paragraph 7.02, a director
or officer shall not be liable to the Corporation or its shareholders to
such further extent as permitted by any law hereafter enacted, including,
without limitation, any subsequent amendment to the Act.
7.03 Indemnity
Subject to the Act, the Corporation shall indemnify a director or officer,
a former director or officer, and a person who acts or acted at the
Corporation's request as a director or officer of a body corporate of which
the Corporation is or was a shareholder or creditor, and his heirs and
legal representatives, against all costs, charges and expenses, including
any amount paid to settle an action or satisfy a judgment, reasonably
incurred by him in respect of any civil, criminal or administrative action
or proceeding to which he is made a party by reason of being or having been
a director or officer of the Corporation or such body corporate, if:
(a) he acted honestly and in good faith with a view to the best interests
of the Corporation; and
(b) in the case of a criminal or administrative action or proceeding that
is enforced by a monetary penalty, he had reasonable grounds for
believing his conduct was lawful.
The Corporation shall indemnify the directors and officers of the
Corporation to the fullest extent permitted by law. The Corporation may
indemnify any employee or agent of the Corporation to the fullest extent
permitted by law. In addition to the circumstances in which a director or
officer of the Corporation is indemnified as set forth in the foregoing
provisions of this paragraph 7.03, a director or officer shall be
indemnified by the Corporation to such further extent as permitted by any
law hereafter enacted, including, without limitation, any subsequent
amendment to the Act.
7.04 Insurance
The Corporation may, subject to and in accordance with the Act, purchase
and maintain insurance for the benefit of any director or officer, or
former director or officer, of the Corporation as such against any
liability incurred
II-2
by him. The Corporation may provide such insurance to directors and
officers regardless of whether such directors and officers are indemnified
pursuant to paragraph 7.03 above.
The Underwriting Agreement contains provisions by which the Underwriters
agree to indemnify the Registrant, each of the directors and officers of the
Registrant and each person who controls the Registrant within the meaning of
the Securities Act of 1933, as amended, with respect to information furnished
by the Underwriters for use in this Registration Statement.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers or persons
controlling the Registrant pursuant to the foregoing provisions, the
Registrant has been informed that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933, as amended, and is, therefore, unenforceable.
II-3
EXHIBITS
Exhibit Description
------- -----------
3.1 Form of Underwriting Agreement
4.1 Annual information form of the Registrant in the form of Form
20-F for the year ended December 31, 2005 (incorporated by
reference to the Registrant's annual report on Form 20-F filed
with the Commission on April 3, 2006)
4.2 Audited annual consolidated comparative financial statements of
the Registrant for the year ended December 31, 2005 and the
auditors' report thereon, together with management's discussion
and analysis for the year ended December 31, 2005 (incorporated
by reference to the Registrant's annual report on Form 20-F
filed with the Commission on April 3, 2006)
4.3 Management information circular dated April 14, 2005 prepared in
connection with the Registrant's annual and special meeting of
shareholders held on June 2, 2005 (incorporated by reference to
the Registrant's Form 6-K furnished to the Commission May 2,
2006)
4.4 Management information circular dated January 31, 2006 prepared
in connection with the Registrant's special meeting of
shareholders held on March 22, 2006 (incorporated by reference
to the Registrant's Form 6-K furnished to the Commission May 2,
2006)
4.5 Summary, being pages 1.1 to 1.13 inclusive of NT 43-101 Technical
Report on the Brisas Project dated February 24, 2005 as prepared by
Pincock Allen of Holt (incorporated by reference to the Registrant's
Form 6-K furnished to the Commission May 2, 2006)
5.1 Consent of PricewaterhouseCoopers LLP
5.2* Consent of Fasken Martineau DuMoulin LLP
5.3* Consent of Heenan Blaikie LLP
5.4* Consent of Pincock Allen & Holt
5.5* Consent of Raul Borrastero, C.P.G.
5.6* Consent of Susan Poos, P.E.
5.7* Consent of Richard Addison, P.E., C Eng, Eur.Ing
5.8* Consent of Richard J. Lambert, P.E.
5.9# Consent of Brad Yonaka
6.1* Power of Attorney
- --------
* Previously filed.
# To be filed by amendment.
II-4
PART III
UNDERTAKING AND CONSENT TO SERVICE OF PROCESS
ITEM 1. UNDERTAKING.
The Registrant undertakes to make available, in person or by telephone,
representatives to respond to inquiries made by the Commission staff, and to
furnish promptly, when requested to do so by the Commission staff, information
relating to the securities registered pursuant to Form F-10 or to transactions
in said securities.
ITEM 2. CONSENT TO SERVICE OF PROCESS.
(a) Prior to the filing of this Amendment No. 1 to Form F-10, the Registrant
filed with the Commission a written irrevocable consent and power of
attorney on Form F-X.
(b) Any change to the name or address of the agent for service of the
Registrant will be communicated promptly to the Commission by amendment
to Form F-X referencing the file number of the relevant registration
statement.
III-1
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form F-10 and has duly caused this Amendment
No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Spokane, State of
Washington, on May 3, 2006.
GOLD RESERVE INC.
By: /s/ Rockne J. Timm
------------------------------------
Rockne J. Timm
Chief Executive Officer and
Director
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Rockne J. Timm Chief Executive Officer (Principal May 3, 2006
- ------------------------------------ Executive Officer) and Director
Rockne J. Timm
* Vice President Finance and Chief Financial May 3, 2006
- ------------------------------------ Officer (Principal Financial and Accounting
Robert A. McGuinness Officer)
* President and Director May 3, 2006
- ------------------------------------
A. Douglas Belanger
* Senior Vice President and Director May 3, 2006
- ------------------------------------
James P. Geyer
* Chairman of the Board May 3, 2006
- ------------------------------------
James H. Coleman
* Director May 3, 2006
- ------------------------------------
Patrick D. McChesney
* Director May 3, 2006
- ------------------------------------
Chris D. Mikkelsen
* Director May 3, 2006
- ------------------------------------
Jean Charles Potvin
*By: /s/ Rockne J. Timm May 3, 2006
- ------------------------------------
Name: Rockne J. Timm
Attorney-in-Fact
III-2
AUTHORIZED REPRESENTATIVE
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Authorized Representative has duly caused this Amendment No. 1 to the
Registration Statement to be signed on its behalf by the undersigned, solely in
his capacity as the duly authorized representative of the Registrant in the
United States, in the City of Spokane, in the State of Washington, on this 3rd
day of May, 2006.
GOLD RESERVE CORPORATION
By: /s/ Rockne J. Timm
------------------------------------
Rockne J. Timm
President
III-3
EXHIBIT INDEX
Exhibit Description
------- -----------
3.1 Form of Underwriting Agreement
4.1 Annual information form of the Registrant in the form of Form
20-F for the year ended December 31, 2005 (incorporated by
reference to the Registrant's annual report on Form 20-F filed
with the Commission on April 3, 2006)
4.2 Audited annual consolidated comparative financial statements of
the Registrant for the year ended December 31, 2005 and the
auditors' report thereon, together with management's discussion
and analysis for the year ended December 31, 2005 (incorporated
by reference to the Registrant's annual report on Form 20-F
filed with the Commission on April 3, 2006)
4.3 Management information circular dated April 14, 2005 prepared in
connection with the Registrant's annual and special meeting of
shareholders held on June 2, 2005 (incorporated by reference to
the Registrant's Form 6-K furnished to the Commission May 2,
2006)
4.4 Management information circular dated January 31, 2006 prepared
in connection with the Registrant's special meeting of
shareholders held on March 22, 2006 (incorporated by reference
to the Registrant's Form 6-K furnished to the Commission May 2,
2006)
4.5 Summary, being pages 1.1 to 1.13 inclusive of NT 43-101 Technical
Report on the Brisas Project dated February 24, 2005 as prepared by
Pincock Allen of Holt (incorporated by reference to the Registrant's
Form 6-K furnished to the Commission May 2, 2006)
5.1 Consent of PricewaterhouseCoopers LLP
5.2* Consent of Fasken Martineau DuMoulin LLP
5.3* Consent of Heenan Blaikie LLP
5.4* Consent of Pincock Allen & Holt
5.5* Consent of Raul Borrastero, C.P.G.
5.6* Consent of Susan Poos, P.E.
5.7* Consent of Richard Addison, P.E., C Eng, Eur.Ing
5.8* Consent of Richard J. Lambert, P.E.
5.9# Consent of Brad Yonaka
6.1* Power of Attorney
- --------
* Previously filed.
# To be filed by amendment.
EXHIBIT 3.1
UNDERWRITING AGREEMENT
May 3, 2006
Gold Reserve Inc.
926 West Sprague Avenue
Suite 200
Spokane, Washington 99201
U.S.A.
Attention: Mr. Douglas Belanger, President
Dear Sirs:
Sprott Securities Inc. ("Sprott") and RBC Dominion Securities Inc. ("RBC" and,
together with Sprott, the "Underwriters" and each individually an "Underwriter")
understands that Gold Reserve Inc. (the "Corporation") proposes to issue and
sell 3,335,000 Class A common shares of the Corporation (the "Underwritten
Shares"). The Underwriters further understand that the Corporation has prepared
and filed a preliminary short form prospectus, a registration statement and all
necessary documents relating thereto and will take all additional necessary
steps to qualify the Offered Shares (as defined below) for distribution in each
of the Qualifying Provinces (as defined below) and in the United States.
Upon and subject to the terms and conditions contained herein, the Underwriters
hereby severally offer to purchase from the Corporation in the respective
percentages set forth in Section 18 hereof and the Corporation hereby agrees to
issue and sell to the Underwriters all but not less than all of the Underwritten
Shares at the purchaser price of $9.00 per Underwritten Share, which will
constitute an aggregate purchase price of $30,015,000 payable to the Corporation
in respect of the Underwritten Shares.
The Corporation hereby grants to the Underwriters (in accordance with the
percentages set forth in Section 18 hereof) an option (the "Over Allotment
Option") to purchase severally and not jointly and offer for sale to the public
pursuant hereto up to 500,250 additional Common Shares in the capital of the
Corporation at the same price per share as the Underwritten Shares (the
"Additional Shares" and together with the Underwritten Shares, the "Offered
Shares") upon the terms and conditions set forth herein. The Over Allotment
Option shall be exercisable, in whole or in part, not less than 48 hours prior
to the Over-Allotment Option Closing Date by notice in writing to the
Corporation delivered by Sprott (on behalf of the Underwriters), at any time up
until 5:00 p.m. (Toronto time) on the day which is 30 days following the Closing
Date. The Additional Shares shall have attributes identical to the Underwritten
Shares.
In consideration of the agreement of the Underwriters to purchase the
Underwritten Shares and to offer them to the public pursuant to the Prospectuses
and the Registration Statement (as hereinafter defined), the Corporation agrees
to pay to the Underwriters, at the Time of Closing (as hereinafter defined), a
fee equal to 5.0% of the aggregate purchase price for the Offered Shares or
$0.45 per Offered Share.
All actions to be undertaken by the Underwriters in connection with the offering
or sale of the Offered Shares in the United States, shall be undertaken through
their respective U.S. Dealers.
- 2 -
Terms and Conditions
The following are additional terms and conditions of this Agreement between the
Corporation and the Underwriters:
1. (a) Definitions. Where used in this Agreement or in any amendment hereto, the
following terms shall have the following meanings, respectively:
"1933 Act" and "Rules" mean the United States Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder;
"1934 Act" means the United States Securities Exchange Act of 1934, as amended;
"affiliate", "distribution", "material change", "material fact",
"misrepresentation", and "subsidiary" when used in connection with the Canadian
Preliminary Prospectus, Canadian Final Prospectus or any Prospectus Amendment
thereto shall have the respective meanings given to them under the Canadian
Securities Laws, when used in connection with the Registration Statement, the
U.S. Preliminary Prospectus, the U.S. Final Prospectus, the Amended Preliminary
Prospectus, any Prospectus Amendment thereto, the Disclosure Package or any
Issuer Free Writing Prospectus shall have the respective meanings (to the extent
applicable) under the U.S. Securities Laws including judicial and administrative
interpretations thereof, and in all other contexts shall have the respective
meanings given to them under Canadian Securities Laws;
"Agreement" means the agreement resulting from the acceptance by the Corporation
of the offer made by the Underwriters pursuant to this letter;
"AMEX" means the American Stock Exchange;
"Amended Preliminary Prospectuses" means together (i) the amended Canadian
Preliminary Prospectus to be dated May 3, 2006, signed and certified in
accordance with the Securities Laws, relating to the qualification for
distribution of the Offered Shares under the Securities Laws in all the
Qualifying Provinces through the Underwriters, including all of the Documents
Incorporated By Reference reflecting the terms of this Agreement (also referred
to as the "Canadian Amended Preliminary Prospectus") and (ii) the amended U.S.
Preliminary Prospectus, to be dated May 3, 2006, included in the Registration
Statement and relating to the offering of Offered Shares in the United States
reflecting the terms of this Agreement (also referred to as the "U.S. Amended
Preliminary Prospectus");
"Applicable Securities Laws" means the Canadian Securities Laws and the U.S.
Securities Laws;
"Applicable Time" shall mean the date and time immediately prior to the
Effective Date;
"Brisas Project" means the Brisas gold-copper project of the Corporation located
in the Kilometer 88 mining district of Bolivar State in southeast Venezuela;
"business day" means a day which is not a Saturday, a Sunday or a day on which
chartered banks are not open for business in Toronto, Ontario or New York City
and a day on which the office of the SEC in Washington D.C. is open for
business;
- 3 -
"Canadian Preliminary Prospectus" means the preliminary short form prospectus of
the Corporation in the English language dated May 2, 2006, signed and certified
in accordance with the Securities Laws, relating to the qualification for
distribution of the Offered Shares under the Securities Laws in all the
Qualifying Provinces through the Underwriters, including all of the Documents
Incorporated by Reference;
"Canadian Prospectus" or "Canadian Final Prospectus" means the (final) short
form prospectus of the Corporation in the English language to be approved,
signed and certified in accordance with the Securities Laws, and relating to the
qualification for distribution of the Offered Shares under the Securities Laws
in all the Qualifying Provinces through the Underwriters, including all of the
Documents Incorporated By Reference;
"Canadian Securities Laws" means all applicable securities laws in each of the
Qualifying Provinces and the respective regulations and rules under such laws
together with applicable published policy statements of the Canadian Securities
Regulators in the Qualifying Provinces;
"Canadian Securities Regulators" means the applicable securities commission or
regulatory authority in each of the Qualifying Provinces;
"Closing Date" means May 15, 2006 or such earlier or later date as may be agreed
to in writing by the Corporation and the Underwriters each acting reasonably but
in any event no later than May 30, 2006;
"Common Shares" means the Class A common shares in the capital of the
Corporation;
"Disclosure Package" shall mean (i) the U.S. Amended Preliminary Prospectus or
such subsequent U.S. Prospectus Amendments filed prior to the Effective Date,
(ii) the Issuer Free Writing Prospectuses, if any, identified in Schedule D
hereto, and (iii) any other Free Writing Prospectus that the parties hereto
shall hereafter expressly agree in writing to treat as part of the Disclosure
Package.
"Documents Incorporated by Reference" means the documents specified in Schedule
"A", together with such additional documents expressly incorporated by reference
into the applicable prospectus and the Registration Statement subsequent to the
date hereof, determined at any time as of the date of the statement or
representation made up to and including the Effective Date;
"Effective Date" shall mean each date and time that the Registration Statement
and any post-effective amendment or amendments became or become effective;
"Feasibility Study" means the feasibility study relating to the Brisas Project
dated January 2005 prepared by Aker Kvaerner ASA, and any updates thereto;
"Final Prospectuses" or "Prospectuses" means, collectively, the Canadian
Final Prospectus and the U.S. Final Prospectus;
"Financial Information" means the Corporation's financial statements included in
the Documents Incorporated by Reference or included in the Registration
Statement under the heading "Auditors' Report with Respect to Supplementary
Information", together with any auditors' report thereon and the notes thereto;
- 4 -
"Free Writing Prospectus" shall mean a free writing prospectus, as defined in
Rule 405 under the U.S. Securities Act;
"Historical Financial Statements" means audited consolidated comparative
financial statements of the Corporation as at December 31, 2005 and December 31,
2004, and for each of the fiscal years ended December 31, 2005 and December 31,
2004 and the related notes thereto, each prepared in accordance with Canadian
generally accepted accounting principles, and reconciliations thereof to United
States generally accepted accounting principles, together with the auditors'
reports thereon, in each case as included or incorporated by reference in the
Prospectuses or the Registration Statement; including under the heading
"Auditors' Report with Respect to Supplementary Information";
"Issuer Free Writing Prospectus" shall mean an issuer free writing prospectus,
as defined in Rule 433 under the 1933 Act; provided, however, if such Issuer
Free Writing Prospectus is made by any Underwriter or other third party, such
Underwriter or other third party has obtained the prior written consent of the
Corporation with regard to such issuer free writing prospectus;
"Material Adverse Effect" means a material adverse effect on the assets or
properties, business, results of operations, or condition (financial or
otherwise) of the Corporation and its Subsidiaries (on a consolidated basis) or
on the power or authority of the Corporation to perform its obligations under
this Agreement;
"Mutual Reliance Procedures" means the mutual reliance review system procedures
provided for under National Policy 43-201 - Mutual Reliance Review System for
Prospectuses and Annual Information Forms of the Canadian Securities
Administrators;
"NASD" means the National Association of Securities Dealers, Inc.;
"National Instrument 44-101" means National Instrument 44-101 adopted by the
Canadian Securities Administrators;
"National Policy 43-201" means National Policy 43-201 adopted by the Canadian
Securities Regulators;
"Offering Documents" has the meaning ascribed thereto in Subsection 6(a)(ii);
"OSC" means the Ontario Securities Commission;
"PAH Report" means the technical report entitled "NI 43-101 Technical Report,
Gold and Copper Project, Brisas Project" dated February 24, 2005 prepared by
Pincock Allen & Holt for the Corporation, as amended or updated;
"POP System" means the short form prospectus distribution rules established by
National Instrument 44-101 of the Canadian Securities Administrators;
"Preliminary Prospectuses" means, collectively, the Canadian Preliminary
Prospectus and the U.S. Preliminary Prospectus;
"Prospectus Amendments" means any amendment to any of the Preliminary
Prospectuses, including the Amended Preliminary Prospectuses, or the Final
Prospectuses (also referred to as the "Canadian Prospectus Amendment" or "U.S.
Prospectus Amendment" as applicable);
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"Qualifying Provinces" means, collectively, each of the provinces of Canada
other than the Province of Quebec;
"Registration Statement" means the registration statement on Form F-10,
including the U.S. Preliminary Prospectus and the U.S. Final Prospectus, as the
case may be, as amended at the Effective Date;
"SEC" means the United States Securities and Exchange Commission;
"Securities Laws" means, collectively, the applicable securities laws of each of
the Qualifying Provinces and the respective regulations and rules made
thereunder together with all applicable published policy statements, blanket
orders and rulings of the Canadian Securities Regulators and all discretionary
orders or rulings, if any, of the Canadian Securities Regulators made in
connection with the transactions contemplated hereunder;
"Standard Listing Conditions" has the meaning ascribed thereto in Subsection
5(a)(v);
"Subsequent Disclosure Documents" means any financial statements, management
information circulars, annual information forms, material change reports or
other documents issued by the Corporation after the date of this Agreement that
are required to be incorporated by reference in the Prospectuses and
Registration Statement;
"Subsidiaries" means, collectively, the subsidiaries of the Corporation set out
in Schedule "B" to this Agreement;
"Supplementary Material" means, collectively, any amendment to the Canadian
Preliminary Prospectus or Canadian Prospectus, any amendment or supplemental
prospectus or ancillary materials that may be filed by or on behalf of the
Corporation under the Securities Laws relating to the distribution of the
Offered Shares thereunder;
"Time of Closing" means 8:00 a.m. (Toronto time) on the Closing Date, or such
other time on the Closing Date as may be agreed to by the Corporation and the
Underwriters;
"to the best of the Corporation's knowledge" means the actual knowledge of the
senior officers of the Corporation;
"Transfer Agent" means Computershare Trust Company of Canada, the registrar and
transfer agent in respect of the Common Shares;
"TSX" means the Toronto Stock Exchange;
"United States" means the United States of America, its territories and
possessions, any state of the United States and the District of Columbia; and
"U.S. Dealers" means the U.S. broker-dealer affiliates of the Underwriters,
registered as such with the SEC under Section 15 of the 1934 Act, who are
members of the NASD;
"U.S. Final Prospectus" means the Canadian Final Prospectus (with such deletions
therefrom and additions thereto as are permitted or required by Form F-10 and
the applicable rules and regulations of the SEC) included in the Registration
Statement at the Effective Date (including the Documents Incorporated
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by Reference therein not otherwise superceded or modified thereby) relating to
the offering of Offered Shares in the United States, except that if the U.S.
Final Prospectus first furnished to the U.S. Dealers after the Effective Date
for use in connection with the offering of the Underwritten Shares in the United
States differs from the prospectus included in the Registration Statement at the
Effective Date, the term "U.S. Final Prospectus" shall refer to the final
prospectus first furnished to the U.S. Dealers for such use (including the
Documents Incorporated by Reference therein not otherwise superceded or modified
thereby);
"U.S. Preliminary Prospectus" means the Canadian Preliminary Prospectus (with
such deletions therefrom and additions thereto as are permitted or required by
Form F-10 and the applicable rules and regulations of the SEC), included in the
Registration Statement before the Effective Date (including the Documents
Incorporated by Reference therein not otherwise superceded or modified thereby)
relating to the offering of Offered Shares in the United States; and
"U.S. Securities Laws" means all applicable securities legislation in the United
States, including without limitation the 1933 Act and 1934 Act, and the rules
and regulations promulgated thereunder, including judicial and administrative
interpretations thereof.
(b) Capitalized terms used but not defined herein have the meanings ascribed
to them in the Prospectuses and Registration Statement.
(c) Any reference in this Agreement to a paragraph or subparagraph shall
refer to a paragraph or subparagraph of this Agreement.
(d) All words and personal pronouns relating thereto shall be read and
construed as the number and gender of the party or parties referred to
in each case require and the verb shall be construed as agreeing with
the required word and/or pronoun.
(e) Any reference in this Agreement to $ or to dollars shall refer to the
lawful currency of Canada, unless otherwise specified.
2. Attributes of the Offered Shares. The Offered Shares to be issued and sold
by the Corporation hereunder shall be duly and validly created and issued by the
Corporation and, when issued and sold by the Corporation, such Offered Shares
shall have the rights, privileges, restrictions and conditions that conform in
all material respects to the rights, privileges, restrictions and conditions set
forth in the Preliminary Prospectuses, the Amended Preliminary Prospectuses, any
subsequent Prospectus Amendment, the Prospectuses and the Registration
Statement, subject to such modifications or changes (if any) prior to the
Closing Date as may be agreed to in writing by the Corporation and the
Underwriters.
3. Filing of Prospectus.
(a) The Corporation represents and warrants to, and covenants and agrees
with, the Underwriters that:
(i) the Corporation has filed the Canadian Preliminary Prospectus in
each of the Qualifying Provinces pursuant to National Policy
43-201 and has obtained an MRRS decision document evidencing
receipts by each of the Canadian Securities Regulators for the
Canadian Preliminary Prospectus;
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(ii) the Corporation shall fulfill or cause to be fulfilled to the
reasonable satisfaction of the Underwriters' counsel all relevant
provisions of Canadian Securities Laws that are required to be
fulfilled by the Corporation to permit the distribution of the
Offered Shares in each of the Qualifying Provinces, by or through
the Underwriters who shall comply with the relevant provisions of
Canadian Securities Laws;
(iii) following execution of this Agreement, the Corporation shall file
the Canadian Amended Preliminary Prospectus in each of the
Qualifying Provinces pursuant to National Policy 43-201;
(iv) forthwith after any comments with respect to the Canadian
Preliminary Prospectus or the Canadian Amended Preliminary
Prospectus have been received from the Canadian Securities
Regulators but not later than May 8, 2006 (or such later date as
may be agreed to in writing by the Corporation and the
Underwriters but in any event not later than May 12, 2006), the
Corporation shall have used its best efforts to have prepared,
filed and obtained a decision document from the OSC under the
Mutual Reliance Procedures evidencing that a receipt has been
issued for the Canadian Prospectus by each of the Canadian
Securities Regulators or otherwise fulfilled all legal
requirements to enable the Offered Shares to be offered and sold
to the public in Canada through the Underwriters or any other
investment dealer or broker registered to transact such business
in the applicable Qualifying Province;
(v) prior to the filing of the Amended Preliminary Prospectuses and
thereafter, and prior to the completion of the distribution of the
Offered Shares, the Corporation shall have allowed the
Underwriters to participate fully in the preparation of such
document and shall have allowed the Underwriters to conduct all
due diligence investigations which they may reasonably require in
order to fulfil their obligations as underwriters and in order to
enable them to execute the certificate required to be executed by
them in such document; and
(vi) the Corporation: (i) has prepared and filed with the SEC the
Registration Statement, which does and will comply in all material
respects with the applicable requirements of the 1933 Act and the
rules thereunder, including the U.S. Preliminary Prospectus and a
written appointment of agent for services of process upon the
Corporation on Form F-X (the "Form F-X"); (ii) as soon as
practicable after the filing of the Canadian Amended Preliminary
Prospectus with the OSC and, in any event, on the date on which
the Canadian Amended Preliminary Prospectus is filed with the OSC,
will file an amendment to such Registration Statement including
the U.S. Amended Preliminary Prospectus, which will comply in all
material respects with the applicable requirements of the 1933 Act
and the rules thereunder; (iii) as soon as practicable after the
filing of any further Prospectus Amendment with the OSC and, in
any event, on the date on which the Prospectus Amendment is filed
with the OSC, will file an amendment to such Registration
Statement including the U.S. Prospectus Amendment, which will
comply in all material respects with the applicable requirements
of the 1933 Act and the rules thereunder; and (iv) as soon as
practicable after the filing of the Canadian Final Prospectus with
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the OSC and, in any event, on the date on which the Canadian Final
Prospectus is filed with the OSC, will file an amendment to such
Registration Statement including the U.S. Final Prospectus and
take all actions as may be necessary or desirable to cause the
Registration Statement to become effective under the 1933 Act and
shall have fulfilled and complied with, to the reasonable
satisfaction of the Underwriters, the U.S. Securities Laws
required to be fulfilled or complied with by the Corporation to
enable the Offered Shares to be lawfully distributed to the public
in the United States.
4. Distribution and Certain Obligations of Underwriters.
(a) The Underwriters shall, and shall require any investment dealer or
broker (other than the Underwriters) with which the Underwriters have a
contractual relationship in respect of the distribution of the Offered
Shares (each, a "Selling Firm") to agree to, comply with the Securities
Laws in connection with the distribution hereof and shall offer the
Offered Shares for sale to the public directly and through Selling Firms
upon the terms and conditions set out in the Prospectuses, Registration
Statement and this Agreement. The Underwriters shall, and shall require
any Selling Firm to offer for sale to the public and sell the Offered
Shares only in those jurisdictions where they may be lawfully offered
for sale or sold. The Underwriters shall: (i) use all reasonable efforts
to complete and cause each Selling Firm to complete the distribution of
the Offered Shares as soon as reasonably practicable; and (ii) promptly
notify the Corporation when, in their opinion, the Underwriters and the
Selling Firms have ceased distribution of the Offered Shares and provide
a breakdown of the number of Offered Shares distributed in each of the
Qualifying Provinces where such breakdown is required for the purpose of
calculating fees payable to the Canadian Securities Regulators.
(b) The Underwriters shall, and shall require any Selling Firm to agree to,
distribute the Offered Shares in a manner which complies with and
observes all applicable laws and regulations in each jurisdiction into
and from which they may offer to sell the Offered Shares or distribute
the applicable Prospectus and will not, directly or indirectly, offer,
sell or deliver any Offered Shares or deliver the applicable Prospectus
or any Supplementary Material to any person in any jurisdiction other
than in the Qualifying Provinces except in a manner which will not
require the Corporation to comply with the registration, prospectus,
filing, continuous disclosure or other similar requirements under the
applicable securities laws of such other jurisdictions or pay any
additional governmental filing fees which relate to such other
jurisdictions. Subject to the foregoing, the Underwriters and any
Selling Firm shall be entitled to offer and sell the Offered Shares in
Europe in accordance with any applicable securities and other laws in
the jurisdictions in which the Underwriters and/or Selling Firms offer
the Offered Shares. Any offer or sale of the Offered Shares in the
United States will be made only by U.S. Dealers.
(c) For the purposes of this Section 4, the Underwriters shall be entitled
to assume that the Offered Shares are qualified for distribution in any
Qualifying Province where a receipt or similar document for the Canadian
Final Prospectus shall have been obtained from the applicable Securities
Commission (including a decision document for the Canadian Final
Prospectus issued under the Mutual Reliance Procedures) unless otherwise
notified in writing.
- 9 -
(d) For purposes of this Section 4, the Underwriters shall be entitled to
assume that the Offered Shares are available for sale in the United
States when the Registration Statement has gone effective unless
otherwise notified in writing.
5. Deliveries on Filing and Related Matters.
(a) The Corporation shall deliver to each of the Underwriters:
(i) at the Time of Closing, copies of the Registration Statement, the
Prospectuses, the Amended Preliminary Prospectuses, any other
Prospectus Amendments and the Prospectuses, signed and certified
by the Corporation as required by the Applicable Securities Laws,
if applicable;
(ii) at the Time of Closing, a copy of any Issuer Free Writing
Prospectuses or Supplementary Material required to be filed by the
Corporation in compliance with Applicable Securities Laws;
(iii) concurrently with the filing of the Canadian Final Prospectus with
the Canadian Securities Regulators, a long-form comfort letter
dated the date of the Canadian Final Prospectus, in form and
substance satisfactory to the Underwriters, acting reasonably,
addressed to the Underwriters and the directors of the Corporation
from the auditors of the Corporation, PricewaterhouseCoopers LLP,
which has been prepared in accordance with SAS 72 and SAS 100, and
contains statements and information of the type ordinarily
included in accountants' "comfort letters" to U.S. underwriters
with respect to the financial statements and certain financial
information contained in the U.S. Prospectus and the Canadian
Prospectus with respect to financial and accounting information
relating to the Corporation contained in the Prospectuses and
Registration Statement, which letter shall be based on a review by
PricewaterhouseCoopers LLP within a cut-off date of not more than
two business days prior to the date of the letter, and which
letter shall be in addition to the auditors' consent letter and/or
comfort letter addressed to the Canadian Securities Regulators in
the Qualifying Provinces; and
(iv) prior to the filing of the Canadian Final Prospectus with the
Canadian Securities Regulators or the final Amendment to the
Registration Statement with the SEC, copies of correspondence from
the TSX and AMEX indicating that the Offered Shares have been
approved for listing on the TSX and AMEX or otherwise subject only
to satisfaction by the Corporation of such post-closing conditions
imposed by the TSX and AMEX (the "Standard Listing Conditions").
(b) Supplementary Material
The Corporation shall also prepare and deliver promptly to the
Underwriters signed copies of all Supplementary Material. Concurrently with the
delivery of any Supplementary Material or the incorporation by reference in the
Prospectus of any Subsequent Disclosure Document, the Corporation shall deliver
to the Underwriters, with respect to such Supplementary Material or Subsequent
Disclosure Document, and comfort letters substantially similar to those referred
to in Section 5(a)(iii) to the extent that such Supplementary Material contains
any Financial Information.
- 10 -
(c) Representations as to Prospectus and Supplementary Material
Delivery of the Preliminary Prospectuses, the Amended Preliminary Prospectuses,
any other Prospectus Amendments, the Prospectuses, and Issuer Free Writing
Prospectuses and any Supplementary Material by the Corporation shall constitute
the representation and warranty of the Corporation to the Underwriters that:
(i) all information and statements (except information and statements
furnished to the Corporation by the Underwriters relating solely
to the Underwriters) contained and incorporated by reference in
the Canadian Preliminary Prospectus, the Canadian Amended
Preliminary Prospectus or the Canadian Prospectus or any
Supplementary Material, as the case may be, at the respective
dates of filing thereof (A) true and correct, in all material
respects, and contain no misrepresentation and, on the respective
dates of delivery thereof, the Canadian Preliminary Prospectus,
the Canadian Amended Preliminary Prospectus, the Canadian
Prospectus or any Supplementary Material constitute full, true and
plain disclosure of all material facts relating to the Corporation
and the Offered Shares and (B) did not contain any untrue
statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances under which
they were made;
(ii) no known material fact or information has been omitted therefrom
(except facts or information furnished to the Corporation by the
Underwriters relating solely to the Underwriters) which is
required to be stated in such disclosure or is necessary to make
the statements or information contained in such disclosure not
misleading in light of the circumstances under which they were
made;
(iii) except information furnished to the Corporation by the
Underwriters relating solely to the Underwriters, such documents
comply in all material respects with the requirements of the
Securities Laws;
(iv) as at their respective dates, the Canadian Preliminary Prospectus
does, and the Canadian Amended Preliminary Prospectus, any other
Canadian Prospectus Amendment, and the Canadian Final Prospectus
will, comply in all material respects with the Canadian Securities
Laws and, at the time of delivery of the Offered Shares to the
Underwriters, the Canadian Final Prospectus, as amended by a
Prospectus Amendment, if any, will comply in all material respects
with the Canadian Securities Laws;
(v) (i) the U.S. Preliminary Prospectus conforms and the U.S. Final
Prospectus will conform to the Canadian Preliminary Prospectus and
Canadian Final Prospectus, respectively, except for such deletions
therefrom and additions thereto as are permitted or required by
Form F-10 and the Rules; (ii) the Registration Statement as
amended, does not and, on the Effective Date, will not contain any
untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the
statements therein not misleading; (iii) the U.S. Preliminary
Prospectus and the Corporation's Form F-X comply, and the U.S.
Amended Preliminary Prospectus, any other U.S. Prospectus
Amendment, U.S. Final Prospectus, any Issuer Free Writing
- 11 -
Prospectuses and the Registration Statement, as amended, will
comply, in all material respects with the 1933 Act and the Rules
on the date of filing; (iv) the U.S. Preliminary Prospectus as of
the date of filing does not, and the Disclosure Package as of the
Applicable Time and U.S. Final Prospectus as of the date of filing
and as of the Closing Date will not, contain any untrue statement
of a material fact or omit to state a material fact necessary to
make the statements therein, in the light of the circumstances
under which they were made, not misleading on the date of filing;
and (v) the Canadian Preliminary Prospectus contains, and the
Canadian Amended Preliminary Prospectus, any subsequent Canadian
Prospectus Amendment and the Canadian Final Prospectus and any
Supplementary Material will contain, full, true and plain
disclosure of all material facts required to be stated therein
relating to the Corporation, the operations of the Corporation,
and the Offered Shares, and the Canadian Preliminary Prospectus as
of the date of its filing will, and the Canadian Amended
Preliminary Prospectus as of the Applicable Time and the Canadian
Final Prospectus as of the date of filing and as of the Closing
Date contain no untrue statement of a material fact and will not
omit to state a material fact that is necessary to make any
statement therein not misleading in light of the circumstances in
which it was made; provided, however, that this representation and
warranty shall not apply to statements or omissions made in
reliance upon and in conformity with information relating to the
Underwriters furnished in writing to the Corporation by the
Underwriters expressly for use in the Preliminary Prospectuses,
the Disclosure Package, the Final Prospectuses or the Registration
Statement; and
(vi) each Issuer Free Writing Prospectus does not include any
information that conflicts with the information contained in the
Registration Statement or the Canadian Preliminary Prospectus or
Canadian Prospectus, including any Document Incorporated by
Reference therein deemed to be a part thereof that has not been
superseded or modified. The foregoing sentence does not apply to
statements in or omissions from any Issuer Free Writing Prospectus
based upon and in conformity with written information furnished to
the Corporation by any Underwriter specifically for use therein.
Such deliveries shall also constitute the Corporation's consent to the
Underwriters' use of the Preliminary Prospectuses, the Amended Preliminary
Prospectuses, any other Prospectus Amendments, the Disclosure Package, the
Prospectuses and any Supplementary Material in connection with the distribution
of the Offered Shares in compliance with this Agreement unless otherwise advised
in writing.
(d) Commercial Copies
(i) The Corporation has caused an electronic copy of the Preliminary
Prospectuses, and will cause an electronic copy of the Amended
Preliminary Prospectuses, any other Prospectus Amendments, the
Disclosure Package, the Prospectuses, the Issuer Free Writing
Prospectuses and any Supplementary Material to be delivered to the
Underwriters without charge after the Underwriters have been
advised that the Corporation has complied with the Applicable
Securities Laws in the Qualifying Provinces and the United States
in accordance with Section 3. The Corporation shall cause
commercial copies of the Amended Preliminary Prospectuses and the
- 12 -
Prospectuses to be delivered to the Underwriters without charge
(including in circumstances where any delivery requirement may be
satisfied pursuant to Rule 172 under the 1933 Act), in such
numbers and in such cities in the Qualifying Provinces and in the
United States as the Underwriters may reasonably request by oral
instructions to the Corporation of the Preliminary Prospectuses,
the amended Preliminary Prospectuses and the Prospectuses and each
Issuer Free Writing Prospectus given forthwith after the
Underwriters have been advised that the Corporation has complied
with the Securities Laws in the Qualifying Provinces and in the
United States pursuant to Section 3. Such delivery shall be
effected as soon as possible and, in any event, on or before a
date which is one business day after compliance with applicable
Securities Laws in the Qualifying Provinces and in the United
States pursuant to Section 3 with respect to the Preliminary
Prospectuses, the amended Preliminary Prospectuses and the
Prospectuses, and on or before a date which is one business day
after the issuance of the MRRS decision document or accept for
filing, as the case may be, of any Supplementary Material.
(ii) The Corporation shall cause to be provided to the Underwriters,
without charge, such number of copies of any Documents
Incorporated By Reference in the Preliminary Prospectuses, the
Amended Preliminary Prospectuses, the Prospectuses, any other
Prospectus Supplements or any Supplementary Material the
Underwriters may reasonably request for use in connection with the
distribution of the Offered Shares.
(e) Press Releases
During the period commencing on the date hereof and until completion of
distribution of the Offered Shares, (i) the Corporation will promptly provide to
Underwriters drafts of any press releases of the Corporation for review by
Underwriters and the Underwriters' counsel prior to issuance, and (ii) the
Underwriters will promptly provide to the Corporation drafts of any press
releases of the Underwriters regarding the Corporation for review by the
Corporation and the Corporation's counsel prior to issuance. All press releases
shall comply with Applicable Securities Laws.
6. Material Change.
(a) The Corporation shall promptly inform the Underwriters (and if requested
by the Underwriters, confirm such notification in writing) during the
period prior to the Underwriters notifying the Corporation of the
completion of the distribution of the Offered Shares in accordance with
Section 4(a) hereof of the full particulars of:
(i) any material change in the assets, liabilities (contingent or
otherwise), business, affairs, operations or capital of the
Corporation and the Subsidiaries taken together as a whole; or
(ii) any change in any material fact contained in the Preliminary
Prospectuses, the Amended Preliminary Prospectuses, the
Prospectuses, the Registration Statement or any Supplementary
Material (collectively, the "Offering Documents") or whether any
event or state of facts has occurred after the date hereof, which,
in any case, is, or may be, of such a nature as to render any of
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the Offering Documents untrue or misleading in any material
respect or to result in any misrepresentation in any of the
Offering Documents, or which would result in the Prospectuses, the
Registration Statement or any Supplementary Material not complying
(to the extent that such compliance is required) with Applicable
the Securities Laws of any Qualifying Province or the United
States.
(b) The Corporation will comply with Section 57 of the Securities Act
(Ontario) and with the comparable provisions of the other Securities
Laws, and the Corporation will prepare and file promptly any
Supplementary Material which may be necessary and will otherwise comply
with all legal requirements necessary to continue to qualify the Offered
Shares for distribution in each of the Qualifying Provinces.
(c) In addition to the provisions of Subsections 6(a) and 6(b) hereof, the
Corporation shall in good faith discuss with the Underwriters any
change, event or fact contemplated in Subsections 6(a) and 6(b) which is
of such a nature that there is or could be reasonable doubt as to
whether notice should be given to the Underwriters under Subsection 6(a)
hereof and shall consult with the Underwriters with respect to the form
and content of any amendment proposed to be filed by the Corporation, it
being understood and agreed that no such amendment shall be filed with
any Securities Commission prior to the review thereof by the
Underwriters and their counsel, acting reasonably.
7. Regulatory Approvals. Prior to the filing of the Canadian Final Prospectus
with the Canadian Securities Regulators, the Corporation shall file or cause to
be filed with the TSX and AMEX all necessary documents and shall take or cause
to be taken all necessary steps to ensure that the Corporation has obtained all
necessary approvals for the Offered Shares to be conditionally listed on the TSX
and AMEX subject only to the Standard Listing Conditions.
8. Representations and Warranties of the Corporation. For purposes of Section
8, "Preliminary Prospectuses" shall mean "Amended Preliminary Prospectuses." The
Corporation represents and warrants to the Underwriters and acknowledges that
each of them is relying upon such representations and warranties in purchasing
the Offered Shares that:
(a) the Corporation and each of the Subsidiaries is an entity constituted
and validly existing under the laws of the jurisdiction in which it was
incorporated, amalgamated or continued, as the case may be. No
proceedings have been instituted or, to the knowledge of the
Corporation, are pending for the dissolution or liquidation of the
Corporation or any of the Subsidiaries;
(b) each of the Corporation and the Subsidiaries has the requisite corporate
power, authority and capacity to own, lease, or own and lease and to
operate its property and assets including all material licenses or other
similar rights necessary to carry on the business customarily carried on
by it, except as described in the Preliminary Prospectuses and the
Registration Statement, and the Corporation has all requisite power and
authority to enter into this Agreement and to carry out its obligations
thereunder;
(c) attached hereto as Schedule "B" is a list of the Subsidiaries, the
particulars of the jurisdiction of subsistence and percentage of the
voting and equity interest in such Subsidiaries held by the Corporation.
Each of the Subsidiaries has been duly incorporated or organized in its
- 14 -
respective jurisdiction and is and will be at the Time of Closing
up-to-date in all of such Subsidiary's filings and in good standing
under the laws of such jurisdiction as the case may be. Such
Subsidiaries' issued and outstanding securities have been duly
authorized and validly issued and are outstanding as fully paid shares
and no person has any right, agreement or option, present or future,
contingent or absolute, or any right or privilege capable of becoming a
right, agreement or option, for the purchase from the Corporation of any
interest in any of such securities or for the issue or allotment of any
unissued shares in the capital of any such Subsidiary or any other
security convertible into or exchangeable for any such securities. The
Subsidiaries are the only subsidiaries which are material to the
Corporation and its operations and no Subsidiary is currently
prohibited, directly or indirectly, from paying any dividends to the
Corporation, from making any other distribution on such Subsidiary's
capital stock, from repaying to the Corporation any loans or advances to
such Subsidiary from the Corporation or from transferring any of such
Subsidiary's property or assets to the Corporation or any other
subsidiary of the Corporation;
(d) each of the Corporation and the Subsidiaries has conducted and is
conducting its business in material compliance with all applicable laws,
rules and regulations of each jurisdiction in which its business is
carried on and, to its knowledge, is licensed, registered or qualified
in all jurisdictions in which it owns, leases or operates its property
or carries on business to enable its business to be carried on as now
conducted and its property and assets to be owned, leased and operated
and all such licenses, registrations and qualifications are and will be
at the Time of Closing valid, subsisting and in good standing, except in
each case in respect of matters which do not and will not result in any
material adverse change to the business or condition (financial or
otherwise) of the Corporation and its Subsidiaries (on a consolidated
basis), and except for the absence of any such license, registration or
qualification which does not and will not have a Material Adverse
Effect;
(e) neither the Corporation nor any of the Subsidiaries has received any
notice of proceedings relating to the revocation or modifications of any
material mining or exploration authorities, permits or licenses
previously granted to the Corporation, nor have any of them received
notice of the revocation or cancellation of, or any intention to revoke
or cancel, any mining claims, groups of claims, exploration rights,
concessions or leases with respect to any of the resource properties
described in the Preliminary Prospectuses and the Registration Statement
where such proceedings, revocations, modifications, or cancellations,
would have a material adverse effect on the Corporation and the
Subsidiaries, taken as a whole;
(f) except as otherwise disclosed in the Preliminary Prospectuses and
Registration Statement, the Corporation and the Subsidiaries are the
absolute legal and beneficial owner of, and have good and marketable
title to, all of the material property or assets thereof as described in
the Preliminary Prospectuses and the Registration Statement, and no
other property rights are necessary for the conduct of the business of
the Corporation or any Subsidiary as currently conducted except with
does not and will not have a Material Adverse Effect. None of the
Corporation or the Subsidiaries knows of any claim or the basis for any
claim that might or could adversely affect the right thereof to use,
transfer or otherwise exploit such property rights and, except as
disclosed in the Preliminary Prospectuses and the Registration
Statement, none of the Corporation or the Subsidiaries has any
responsibility or obligation to pay any material commission, royalty,
- 15 -
licence fee or similar payment to any person with respect to the
property rights thereof
(g) the Corporation and the Subsidiaries hold either freehold title, mining
leases, mining concessions, mining claims or participating interests or
other conventional property or proprietary interests or rights,
recognized in the jurisdiction in which a particular property is
located, in respect of the ore bodies and minerals located in properties
in which the Corporation and the Subsidiaries have an interest as
described in the Preliminary Prospectuses and the Registration Statement
under valid, subsisting and enforceable title documents or other
recognized and enforceable agreements or instruments, sufficient to
permit the Corporation or applicable Subsidiary to explore the minerals
relating thereto. All property, leases or claims in which the
Corporation or any Subsidiary has an interest or right have been validly
located and recorded in accordance with all applicable laws and are
valid and subsisting where the failure to be so would have a material
adverse effect on the Corporation and Subsidiaries, taken as a whole.
The Corporation and the Subsidiaries have all necessary surface rights,
access rights and other necessary rights and interests relating to the
properties in which the Corporation and the Subsidiaries have an
interest as described in the Preliminary Prospectuses and the
Registration Statement granting the Corporation or applicable Subsidiary
the right and ability to explore for minerals, ore and metals for
development purposes as are appropriate in view of the rights and
interest therein of the Corporation or applicable Subsidiary, with only
such exceptions as do not interfere with the use made by the Corporation
or applicable Subsidiary of the rights or interest so held, and each of
the proprietary interests or rights and each of the documents,
agreements and instruments and obligations relating thereto referred to
above is currently in good standing in the name of the Corporation or a
Subsidiary where the failure to be so would have a material adverse
effect on the Corporation and its Subsidiaries, taken as a whole;
(h) the Corporation has made available to the respective authors thereof
prior to the issuance of the PAH Report and the Feasibility Study, for
the purpose of preparing the PAH Report and the Feasibility Study, as
applicable, all information requested, and to the knowledge and belief
of the Corporation, no such information contains any material
misrepresentation. The Corporation does not have any knowledge of a
material adverse change in any production, cost, price, reserves or
other relevant information provided since the dates that such
information was so provided;
(i) to the best of Corporation's knowledge, each of the PAH Report and the
Feasibility Study accurately and completely sets forth all material
facts relating to the properties that are subject thereto. Since the
date of preparation of the PAH Report and the Feasibility Study there
has been no change, to the best of the Corporation's knowledge, that
would disaffirm or change any aspect of the PAH Report or the
Feasibility Study in any material respect;
(j) the Corporation maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (1) transactions are
executed in accordance with management's general or specific
authorization, and (2) transactions are recorded as necessary to permit
preparation of financial statements in conformity with Canadian
- 16 -
generally accepted accounting principles and to maintain accountability
for assets and the Corporation is not aware of any material weakness in
its internal controls over financial reporting;
(k) except as otherwise described in the Preliminary Prospectuses and
Registration Statement, there is no action, proceeding or investigation
(whether or not purportedly on behalf of the Corporation or any of the
Subsidiaries) pending or, to the best of the Corporation's knowledge,
threatened against the Corporation or any of the Subsidiaries at law or
in equity, or before or by any federal, provincial, municipal or other
governmental department, commission, board or agency, regulatory
authority, domestic or foreign, which is, or could reasonably be
expected to, result in any material change in the business or in the
condition (financial or otherwise) of the Corporation and the
Subsidiaries, or their properties or assets (taken as a whole), or which
questions the validity of any action taken or to be taken by the
Corporation pursuant to or in connection with this Agreement;
(l) the Historical Financial Statements:
(i) have been prepared in accordance with Canadian generally accepted
accounting principles applied on a basis consistent with those of
preceding fiscal periods;
(ii) present fairly and correctly, in all material respects, the
assets, liabilities and financial condition of the Corporation as
at the dates thereof and the results of its operations and the
changes in its cash flows for the periods then ended;
(iii) have been reconciled to generally accepted accounting principles
in the United States of America ("U.S. GAAP") in accordance with
Item 18 of Form 20-F under the 1934 Act to the extent required by
the 1933 Act and the Rules for use of Form F-10; and
(iv) comply with the requirements of Canadian Securities Laws and the
1933 Act and Rules and the 1934 Act and the rules and regulations
promulgated thereunder;
(m) the auditors of the Corporation who audited the financial statements of
the Corporation most recently delivered to the security holders of the
Corporation are independent public accountants as required by the 1933
Act and the Rules and the Sarbanes-Oxley Act of 2002 and are independent
public accountants as required by the Canadian Securities Laws and there
has never been any reportable disagreement or event (within the meaning
of National Instrument 51-102) with the present or any former auditors
of the Corporation;
(n) to the best of the Corporation's knowledge, none of the directors or
senior officers of the Corporation, any known holder of more than 10% of
any class of securities of the Corporation or any known associate or
affiliate of any of the foregoing has any interest, directly or
indirectly, in any transaction contemplated by this Agreement except as
otherwise described in the Preliminary Prospectuses and the Registration
Statement;
(o) the Corporation and the Subsidiaries have filed all federal, provincial,
state, local and foreign tax returns that are required to be filed or
have requested extensions thereof (except in the case in which the
failure to do so would not have a material adverse affect on the
- 17 -
Corporation and the Subsidiaries, taken as a whole) and have paid all
taxes required to be paid and any other assessment, fine or penalty
levied against the Corporation or any of the Subsidiaries, to the extent
that any of the foregoing is due and payable, except for any such
assessment, fine or penalty that is currently being contested in good
faith;
(p) no domestic or foreign taxation authority has asserted or to, to the
best of the Corporation's knowledge, threatened to assert any
assessment, claim or liability for taxes due or to become due in
connection with any review or examination of the tax returns of the
Corporation or any of the Subsidiaries (including, without limitation,
any predecessor companies) filed for any year which would have a
material adverse effect on the Corporation and the Subsidiaries, taken
as a whole;
(q) the Corporation and the Subsidiaries own or possess the right to use all
material patents, trademarks, trademark registrations, service marks,
service mark registrations, trade names, copyrights, licenses,
inventions, trade secrets and rights described in the Preliminary
Prospectuses and Registration Statement as being owned by them or any of
them or necessary for the conduct of their respective businesses, and
the Corporation is not aware of any claim to the contrary or any
challenge by any other person to the rights of the Corporation and the
Subsidiaries with respect to the foregoing. To the best of the
Corporation's knowledge, the Corporation's business, including that of
its Subsidiaries, as now conducted does not, and as currently proposed
to be conducted will not, infringe or conflict with in any material
respect patents, trademarks, service marks, trade names, copyrights,
trade secrets, licenses or other intellectual property or franchise
right of any person. No claim has been made against the Corporation
alleging the infringement by the Corporation of any patent, trademark,
service mark, trade name, copyright, trade secret, license in or other
intellectual property right or franchise right of any person;
(r) the Corporation is a reporting issuer not in default under the
Securities Laws of each Qualifying Province and is subject to the
reporting requirements of the 1934 Act and is current in its filings;
where applicable, the Corporation is in compliance with its timely
disclosure obligations under the Applicable Securities Laws in all of
the Qualifying Provinces and the United States and under the rules of
the TSX and AMEX and, without limiting the generality of the following,
there has not occurred any material adverse change in the business,
affairs, operations, assets, liabilities (contingent or otherwise) or
capital of the Corporation and the Subsidiaries (taken as a whole) which
has not been publicly disclosed; the Corporation has not filed any
confidential material change reports since the date of such statements
which remain confidential at the date hereof;
(s) the documents to be incorporated or deemed to be incorporated by
reference in the Registration Statement and the U.S. Prospectus, at the
time they were or hereafter are filed with the SEC, complied or will
comply, as applicable, in all material respects with the requirements of
the 1934 Act, and the rules and regulations of the SEC thereunder (the
"1934 Act Regulations");
(t) to the best of the Corporation's knowledge, no agreement is in force or
effect which in any manner affects the voting or control of any of the
securities of the Corporation or any of the Subsidiaries (other than as
reflected in the Schedule 13D filed with the SEC on May 12, 2005 by
Strongbow Capital, Ltd., et al, and any and all amendments thereto);
- 18 -
(u) the authorized capital of the Corporation consists of an unlimited
number of Common Shares, Class B common shares and preferred shares
issuable in series, of which, as at April 28, 2006, 35,324,977 Common
Shares and 1,085,099 Class B common shares and no preferred shares were
issued and outstanding as fully paid and non-assessable shares; except
as disclosed in Schedule "C" hereto, no person, firm or corporation, as
of the date hereof has any agreement or option, or right or privilege
(whether pre-emptive or contractual) capable of becoming an agreement or
option, for the purchase from the Corporation of any unissued shares of
the Corporation or any other security convertible or exchangeable for
shares of the Corporation, except as otherwise described in the
Preliminary Prospectuses and Registration Statement;
(v) the execution and delivery of this Agreement and the performance of the
transactions contemplated hereby have been duly authorized by all
necessary corporate action of the Corporation and this Agreement has
been duly executed and delivered by the Corporation and constitutes a
valid and binding obligation of the Corporation enforceable against the
Corporation in accordance with its terms, provided that enforcement
thereof may be limited by laws affecting creditors' rights generally,
that specific performance and other equitable remedies may only be
granted in the discretion of a court of competent jurisdiction and that
the proviso relating to indemnity, contribution and waiver of
contribution may be unenforceable;
(w) the execution and delivery of this Agreement, the fulfilment of the
terms hereof by the Corporation and the issuance, sale and delivery of
the Offered Shares to be issued and sold by the Corporation at the Time
of Closing do not and will not:
(i) require the consent, approval, authorization, filing, registration
or qualification of or with any governmental authority, stock
exchange, Securities Commission or other third party, except such
as have been obtained or such as may be required (and shall be
obtained prior to the Time of Closing) under applicable Securities
Laws or stock exchange regulations; or
(ii) result in a breach of or default under, and do not and will not
create a state of facts which, after notice or lapse of time or
both, will result in a breach of or default under, and do not and
will not conflict with:
(A) any of the terms, conditions or provisions of the articles,
by-laws or resolutions of the shareholders, directors or any
committee of directors of the Corporation or any of its
Subsidiaries or any material indenture, agreement or
instrument to which the Corporation or any of its
Subsidiaries is a party or by which it or they are
contractually bound;
(B) any statute, rule, regulation or law applicable to the
Corporation or any of its Subsidiaries, including, without
limitation, the Securities Laws, or any judgment, order or
decree of any governmental body, agency or court having
jurisdiction over the Corporation or its Subsidiaries; or
(C) any mortgage, note, indenture, contract, agreement, lease or
other document to which the Corporation is a party or by
which it is bound;
- 19 -
(x) the Offered Shares to be issued and sold as hereinbefore described have
been, or prior to the Time of Closing will be, duly authorized for
issuance, and, upon payment of the issue price for the Offered Shares
and when certificates for such Offered Shares to be sold at Time of
Closing are countersigned by the Transfer Agent, such Offered Shares
will be validly issued and fully paid and non-assessable and all
statements made in the Preliminary Prospectuses and Registration
Statement describing the Offered Shares will be accurate in all material
respects;
(y) except as otherwise described in the Preliminary Prospectuses and
Registration Statement, none of the Corporation nor the Subsidiaries is
in violation of its constating documents, no default exists under and no
event has occurred which, after notice or lapse of time or both, or
otherwise, would constitute a default under or breach of by the
Corporation, its Subsidiaries or any other person, any material
obligation, agreement, covenant or condition contained in any contract,
indenture, trust, deed, mortgage, loan agreement, note, lease or other
agreement or instrument to which the Corporation or any of the
Subsidiaries is a party or by which any of them or any of their
respective properties may be bound where such default or event would
have a material adverse effect on the Corporation and the Subsidiaries,
taken as a whole;
(z) no order, ruling or determination having the effect of suspending the
sale or ceasing the trading of the Offered Shares, the Common Shares or
any other security of the Corporation has been issued or made by any
Securities Commission or stock exchange or any other regulatory
authority and is continuing in effect and no proceedings for that
purpose have been instituted or are pending or, to the best of the
Corporation's knowledge, contemplated or threatened by any such
authority or under any Applicable Securities Laws;
(aa) except as provided herein, there is no person, firm or corporation
acting for the Corporation entitled to any brokerage or finders fee in
connection with this Agreement or any of the transactions contemplated
hereunder;
(bb) the Corporation is eligible to file a short form prospectus in each of
the Qualifying Provinces pursuant to the POP System and on the date of
and upon filing of the Prospectus there will be no documents required to
be filed under the Securities Laws in connection with the offering of
the Offered Shares that will not have been filed as required;
(cc) the Corporation meets the general eligibility requirements for use of
Form F-10 under the 1933 Act;
(dd) the minute books and records of the Corporation and the Subsidiaries
made available to counsel for the Underwriters in connection with their
due diligence investigations of each of the Corporation and the
Subsidiaries for the periods from their respective dates of
incorporation to the date of examination thereof are all of the minute
books and records of the Corporation and the Subsidiaries respectively
and contain copies of all material proceedings (or certified copies
thereof) of the shareholders, the boards of directors and all committees
of the boards of directors of the Corporation and the Subsidiaries to
the date of review of such corporate records and minute books and there
- 20 -
have been no other meetings, resolutions or proceedings of the
shareholders, board of directors or any committees of the boards of
directors of the Corporation and any of the Subsidiaries to the date of
review of such corporate records and minute books not reflected in such
minute books and other records, other than those which have been
disclosed to the Underwriters or which are not material in the context
of the Corporation and the Subsidiaries, on a consolidated basis;
(ee) with respect to each of the premises which is material to the
Corporation on a consolidated basis and which the Corporation or any of
the Subsidiaries occupies as tenant (the "Leased Premises"), the
Corporation or such Subsidiary occupies the Leased Premises and has the
exclusive right to occupy and use the Leased Premises and each of the
leases pursuant to which the Corporation and/or the Subsidiaries
occupies the Leased Premises is in good standing and in full force and
effect;
(ff) there has not been in the last two years and there is not currently any
labour disruption or conflict which could reasonably be expected to
materially adversely affect the carrying on of the Corporation's or the
Subsidiaries' business, considered as a whole;
(gg) the Corporation and the Subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in
such amounts as are customary in the businesses in which they engage,
and the Corporation and the Subsidiaries have no reason to believe that
they will not be able to renew their existing insurance coverage as and
when such coverage expires or obtain similar coverage from similar
insurers as may be necessary to continue their business at a similar
cost to that of their existing coverage;
(hh) except as disclosed in the Preliminary Prospectuses and the Registration
Statement, the Corporation and the Subsidiaries:
(i) and the property, assets and operations thereof comply in all
material respects with all applicable "Environmental Laws" (which
term means and includes, without limitation, any and all
applicable international, federal, provincial, state, municipal or
local laws, statutes, regulations, treaties, orders, judgments,
decrees, ordinances, official directives and all authorizations
relating to the environment, occupational health and safety) or
any "Environmental Activity" (which term means and includes,
without limitation, any past, present or future activity, event or
circumstance) in respect of a "Contaminant" (which term means and
includes, without limitation, any pollutants, dangerous
substances, liquid wastes. hazardous wastes, hazardous materials,
hazardous substances or contaminants or any other matter including
any of the foregoing, as defined or described as such pursuant to
any Environmental Law), including, without limitation, the
storage, use, holding, collection, purchase, accumulation,
assessment, generation, manufacture, construction, processing,
treatment, stabilization, disposition, handling or transportation
thereof or the release, escape, leaching, dispersal or migration
thereof into the natural environment, including the movement
through or in the air, soil, surface water or groundwater;
(ii) do not have any knowledge of and have not received any notice of
any material claim, judicial or administrative proceeding, pending
or threatened against, or which may affect, either the Corporation
or any Subsidiary or any of the property, assets or operations
thereof relating to, or alleging any violation of any
- 21 -
Environmental Laws, the Corporation is not aware of any facts
which could give rise to any such claim or judicial or
administrative proceeding and neither the Corporation nor any
Subsidiary nor any of the property, assets or operations thereof
is the subject of any investigation, evaluation, audit or review
by any "Governmental Authority" (which term means and includes,
without limitation, any national, federal government, province,
state, municipality or other political subdivision of any of the
foregoing, any entity exercising executive, legislative, judicial,
regulatory or administrative functions of or pertaining to
government and any corporation or other entity owned or controlled
(through stock or capital ownership or otherwise) by any of the
foregoing) to determine whether any violation of any Environmental
Laws has occurred or is occurring or whether any remedial action
is needed in connection with a release of any Contaminant into the
environment, except for compliance investigations conducted in the
normal course by any Governmental Authority;
(iii) have not given or filed any notice under any federal, state,
provincial or local law with respect to any Environmental
Activity, the Corporation and the Subsidiaries do not have any
liability (whether contingent or otherwise) in connection with any
Environmental Activity and the Corporation is not aware of any
notice being given under any federal, state, provincial or local
law or of any liability (whether contingent or otherwise) with
respect to any Environmental Activity relating to or affecting the
Corporation or any Subsidiary or the property, assets, business or
operations thereof
(iv) do not store any hazardous or toxic waste or substance on the
property thereof and have not disposed of any hazardous or toxic
waste, in each case in a manner contrary to any Environmental
Laws, and there are no Contaminants on any of the premises at
which the Corporation or any Subsidiary carries on business, in
each case other than in compliance with Environmental Laws; and
(v) to the best of the Corporation's knowledge, are not subject to any
contingent or other liability relating to the restoration or
rehabilitation of land, water or any other part of the environment
(except for those derived from normal exploration activities) or
non-compliance with Environmental Law;
(ii) other than as disclosed in the Preliminary Prospectuses and the
Registration Statement, the Corporation has not made any loans to or
guaranteed the obligations of any person other than the Subsidiaries;
(jj) other than as set out in the Preliminary Prospectuses and the
Registration Statement, to the knowledge of the Corporation, none of the
directors, officers or employees of the Corporation or any associate or
affiliate of any of the foregoing had or has any material interest,
direct or indirect, in any material transaction or any proposed material
transaction with the Corporation or its Subsidiaries which, as the case
may be, materially affects, is material to or will materially affect the
Corporation or its Subsidiaries, on a consolidated basis;
- 22 -
(kk) the Corporation intends to use the net proceeds of the Offering in the
manner specified in the Preliminary Prospectuses and Registration
Statement under the caption "Use of Proceeds";
(ll) the Corporation is not, and after giving effect to the offering and sale
of the Offered Shares and the application of the proceeds thereof as
described in the Preliminary Prospectuses, will not be an "investment
company" as such term is defined in the U.S. Investment Company Act of
1940, as amended;
(mm) each of the Corporation and its Subsidiaries that is incorporated under
the laws of any state in the United States, whose principal place of
business is within the United States or that employs employees resident
in the United States is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income
Security Act of 1974, as amended, including the regulations and
published interpretations thereunder ("ERISA");
(nn) (i) at the time of filing the Registration Statement with the SEC and
(ii) as of the Applicable Time (with such date being used as the
determination date for purposes of this clause (ii)), the Corporation
was not and is not an Ineligible Issuer (as defined in Rule 405 under
the 1933 Act), without taking account of any determination by the
Commission pursuant to Rule 405 that it is not necessary that the
Corporation be considered an Ineligible Issuer;
(oo) the Corporation is, and following the completion of the transactions
contemplated by this Agreement and assuming the use of proceeds as
described in the Disclosure Package and the Prospectuses, will be a
"foreign private issuer" as defined in Rule 3b-4 under the 1934 Act;
(pp) no holders of securities of the Corporation have rights to the
registration or qualification of such securities under the Registration
Statement or Canadian Prospectus;
(qq) the Corporation has not taken, directly or indirectly, any action
designed to or that would constitute or that might reasonably be
expected to cause or result in, under the 1934 Act, the Canadian
Securities Laws or otherwise, stabilization or manipulation of the price
of any security of the Corporation to facilitate the sale or resale of
the Offered Shares;
(rr) neither the Corporation nor any of its Subsidiaries nor, to the
knowledge of the Corporation, any director, officer, agent, employee or
affiliate of the Corporation or any of its Subsidiaries is aware of or
has taken any action, directly or indirectly, that would result in a
violation by such Persons of the FCPA, including, without limitation,
making use of the mails or any means or instrumentality of interstate
commerce corruptly in furtherance of an offer, payment, promise to pay
or authorization of the payment of any money, or other property, gift,
promise to give, or authorization of the giving of anything of value to
any "foreign official" (as such term is defined in the FCPA) or any
foreign political party or official thereof or any candidate for foreign
political office, in contravention of the FCPA and the Corporation, its
Subsidiaries and, to the knowledge of the Corporation, its affiliates
have conducted their businesses in compliance with the FCPA and have
instituted and maintain policies and procedures designed to ensure, and
which are reasonably expected to continue to ensure continued compliance
- 23 -
therewith. "FCPA" means Foreign Corrupt Practices Act of 1977, as
amended, and the rules and regulations thereunder;
(ss) the Corporation and its Subsidiaries maintain "disclosure controls and
procedures" (as such term is defined in Rule 13a-15(e) under the 1934
Act), such disclosure controls and procedures are effective, and there
is and has been no failure on the part of the Corporation and any of the
Corporation's directors or officers, in their capacity as such, to
comply in any material respect with any material provision of the
Sarbanes-Oxley Act of 2002 to the extent applicable to the Corporation
as a "foreign private issuer" as defined in Rule 3b-4 under the 1934
Act; and
(tt) the Transfer Agent, at its principal office in Toronto, Ontario, has
been duly appointed as the registrar and transfer agent in respect of
the Common Shares.
9. Covenants.
(a) The Corporation covenants and agrees with the Underwriters that the
Corporation will advise the Underwriters, promptly after receiving
notice thereof of (i) the time when the amended Preliminary
Prospectuses, the Prospectuses, the Issuer Free Writing Prospectuses,
the Registration Statement and any Supplementary Material has been
filed, (ii) the effectiveness of the Registration Statement, (iii) when
any post effective amendment to the Registration Statement shall have
been filed with the SEC or shall have become effective and (iv) receipts
for the Canadian Preliminary Prospectus or the Canadian Prospectus
therefor have been obtained (v) of the receipt of any comments from the
Canadian Securities Regulators or the SEC, (vi) of any request by the
Canadian Securities Regulators to amend or supplement the Canadian
Preliminary Prospectus or the Canadian Prospectus or for additional
information or of any request by the SEC to amend the Registration
Statement or to amend or supplement the U.S. Prospectus or for
additional information, (vii) of the issuance by the SEC of any stop
order suspending the effectiveness of the Registration Statement or of
any order preventing or suspending the use of any preliminary
prospectus, or of the suspension of the qualification of the Offered
Shares for offering or sale in any jurisdiction, or of the institution
or, to the knowledge of the Corporation, threatening of any proceedings
for any such purpose, and (viii) of the issuance by the Canadian
Securities Regulators or any stock exchange of any order having the
effect of ceasing or suspending the distribution of the Securities or
the trading in the securities of the Corporation, or of the institution
or, to the knowledge of the Corporation, threatening of any proceedings
for any such purpose. The Corporation will use every reasonable effort
to prevent the issuance of any such stop order or of any order
preventing or suspending such use or such order ceasing or suspending
the distribution of the Offered Shares or the trading in the securities
of the Corporation and, if any such order is issued, to obtain the
lifting thereof at the earliest possible time. and will provide evidence
reasonably satisfactory to the Underwriters of each such filing and
copies of such receipts;
(b) Subject to the Corporation's board of directors' exercise of its
fiduciary duty to consider a transaction that might result in the
Corporation ceasing to be a public company, the Corporation covenants
and agrees with the Underwriters that the Corporation will use its
reasonable best efforts (i) to maintain its status as a "reporting
issuer" (or the equivalent thereof) not in default of the requirements
of the Securities Laws of each of the Qualifying Provinces for a period
- 24 -
of one year following the Closing Date and (ii) for a period of one year
following the Closing Date file all documents required to be filed by
the Corporation with the SEC pursuant to the 1934 Act within the time
periods required by the 1934 Act and the rules and regulations of the
SEC thereunder;
(c) Subject to the Corporation's board of directors' exercise of its
fiduciary duty to consider a transaction that might result in the
Corporation ceasing to be a public company, the Corporation covenants
and agrees with the Underwriters that the Corporation will use its
reasonable best efforts to maintain the listing of the Common Shares on
the TSX and AMEX or such other recognized stock exchange or quotation
system as the Underwriters may approve, acting reasonably, to the date
that is two years following the Closing Date so long as the Corporation
meets the minimum listing requirements of the TSX, AMEX or such other
exchange or quotation system;
(d) The Corporation will timely file such reports pursuant to the 1934 Act
as are necessary in order to make generally available to its
securityholders as soon as practicable an earnings statement (which need
not be audited but shall be in reasonable detail) for the purposes of,
and to provide the benefits contemplated by, the last paragraph of
Section 11(a) of the 1933 Act and the regulations thereunder;
(e) The Corporation will use its reasonable best efforts, in cooperation
with the Underwriters, to qualify the Offered Shares for offering and
sale under the applicable securities laws of such states and other
jurisdictions as the Underwriters may designate and to maintain such
qualifications in effect for a period of not less than one year from the
effective date of the Registration Statement; provided, however, that
the Corporation shall not be obligated to file any general consent to
service of process or to qualify as a foreign corporation or as a dealer
in securities in any jurisdiction in which it is not so qualified or to
subject itself to taxation in respect of doing business in any
jurisdiction in which it is not otherwise so subject;
(f) The Corporation covenants and agrees with the Underwriters that the
Corporation will not take, directly or indirectly, any action designed
to or that would constitute or that might reasonably be expected to
cause or result in, under the 1934 Act, the Canadian Securities Laws or
otherwise, stabilization or manipulation of the price of any security of
the Corporation to facilitate the sale or resale of the Offered Shares;
(g) The Corporation covenants and agrees with the Underwriters that the
Corporation that, unless it obtains the prior written consent of each
Underwriter, and each Underwriter, severally and not jointly, covenants
and agrees with the Corporation that, unless it has obtained or will
obtain, as the case may be, the prior written consent of the
Corporation, it has not made and will not make any offer relating to the
Offered Shares that would constitute an "issuer free writing prospectus"
as defined under Rule 433 under the 1933 Act, or that would otherwise
constitute a Free Writing Prospectus required to be filed by the
Corporation with the SEC or retained by the Corporation under Rule 433
under the 1933 Act; provided that the prior written consent of the
parties hereto shall be deemed to have been given in respect of the Free
Writing Prospectuses included in Schedule D hereto. Any such Free
Writing Prospectus consented to by the Underwriters or the Corporation
is hereinafter referred to as a "Permitted Free Writing Prospectus." The
Corporation agrees that (x) it has treated and will treat, as the case
may be, each Permitted Free Writing Prospectus as an Issuer Free Writing
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Prospectus and (y) it has complied and will comply, as the case may be,
with the requirements of Rules 164 and 433 under the 1933 Act applicable
to any Permitted Free Writing Prospectus, including in respect of timely
filing with the SEC, legending and record keeping;
(h) Each Underwriter, severally and not jointly, covenants and agrees with
the Corporation that:
(i) without the prior written consent of the Corporation, it has not
distributed and will not distribute any Free Writing Prospectus in
a manner reasonably designed to lead to its broad unrestricted
dissemination;
(ii) without the prior written consent of the Corporation, it has not
used and will not use any Free Writing Prospectus that contains
the final terms of the Offered Shares unless such terms have
previously been or will be included in a Free Writing Prospectus
filed with the SEC;
(iii) it will, pursuant to reasonable procedures developed in good
faith, retain copies of, and comply with any legending
requirements applicable to, each Free Writing Prospectus used or
referred to by it, in accordance with the 1933 Act;
(iv) it is not subject to any pending proceeding under Section 8A of
the 1933 Act with respect to the offering of the Offered Shares
(and will promptly notify the Corporation if any such proceeding
against it is initiated during the delivery period for any
offering documents); and
(v) without the prior written consent of the Corporation, it has not
prepared or conducted, or participated in, or will prepare or
conduct, or participate in, the preparation or conduct of any
"road show" relating to the Offered Shares that did not originate
live, in real-time to a live audience or the preparation or
provision of any communication used in connection with such road
show that is a graphic or other written communication that is
provided separately, for example by graphic means in a file
designed to be copied or downloaded separately.
10. Conditions of Closing. The obligation of the Underwriters to purchase the
Offered Shares shall be subject to the following:
(a) The Canadian Final Prospectus shall have been timely filed with the
Canadian Securities Regulators and a Mutual Reliance Review System
Decision Document shall have been obtained in respect thereof and the
Registration Statement shall have become effective; and at the Time of
Closing no stop order suspending the effectiveness of the Registration
Statement shall have been issued under the 1933 Act or proceedings
therefor initiated or threatened by the SEC, no order having the effect
of ceasing or suspending the distribution of the Offered Shares or the
trading in the securities of the Corporation or any other securities of
the Corporation shall have been issued or proceedings therefor initiated
or threatened by any securities commission, securities regulatory
authority or stock exchange in Canada or the United States, and any
request on the part of the Canadian Securities Regulators or the SEC for
additional information shall have been complied with to the reasonable
satisfaction of counsel to the Underwriters;
- 26 -
(b) the Corporation shall cause its Yukon counsel, in respect of the laws of
the Yukon, and Fasken Martineau DuMoulin LLP in respect of the laws of
the Provinces of British Columbia, Alberta and Ontario, to deliver to
the Underwriters and their counsel a legal opinion dated and delivered
the Closing Date, in form and substance satisfactory to the Underwriters
and their counsel, acting reasonably, with respect to the following
matters:
(i) the Corporation is a "reporting issuer", or its equivalent, in
each of the Qualifying Provinces and it is not listed as in
default of any requirement of the Securities Laws in any of the
Qualifying Provinces;
(ii) the Corporation is a corporation existing under the laws of the
Yukon Territory and has all requisite corporate power to carry on
its business as now conducted and to own, lease and operate its
property and assets;
(iii) the authorized capital of the Corporation;
(iv) the Corporation has all necessary corporate power and capacity:
(i) to execute and deliver this Agreement and perform its
obligations under this Agreement; and (ii) to create, issue and
sell the Offered Shares;
(v) all necessary corporate action has been taken by the Corporation
to authorize the execution and delivery of each of the Preliminary
Prospectus, the amended Preliminary Prospectus and the Prospectus
and the filing thereof with the Canadian Securities Regulators;
(vi) upon the payment therefor, the Underwritten Shares will have been
validly issued as fully paid and non-assessable, and upon exercise
of the Over-Allotment Option and payment therefor, the Additional
Shares will have been validly issued as fully paid and
nonassessable;
(vii) all necessary corporate action has been taken by the Corporation
to authorize the execution and delivery of this Agreement and the
performance of its obligations hereunder and this Agreement has
been executed and delivered by the Corporation and constitutes a
legal, valid and binding obligation of the Corporation enforceable
against it in accordance with its terms, subject to bankruptcy,
insolvency and other laws affecting the rights of creditors
generally and subject to such other standard assumptions and
qualifications including the qualifications that equitable
remedies may be granted in the discretion of a court of competent
jurisdiction and that enforcement of rights to indemnity,
contribution and waiver of contribution set out in this Agreement
may be limited by applicable law;
(viii) the rights, privileges, restrictions and conditions attaching to
the Common Shares are accurately summarized in all material
respects in the Prospectuses and Registration Statement;
(ix) all necessary documents have been filed, all requisite proceedings
have been taken and all approvals, permits and consents of the
appropriate regulatory authority in each of the Qualifying
-27 -
Provinces to qualify the distribution or distribution to the
public of the Offered Shares in each of the Qualifying Provinces
through persons who are registered under applicable legislation
and who have complied with the relevant provisions of such
applicable legislation;
(x) subject only to the Standard Listing Conditions, the Offered
Shares have been conditionally listed on the TSX;
(xi) the execution and delivery of this Agreement, the fulfilment of
the terms hereof by the Corporation and the issuance, sale and
delivery of the Offered Shares to be issued and sold by the
Corporation at the Time of Closing do not and will not result in a
breach of or default under and do not and will not conflict with
any of the terms, conditions or provisions of the articles or
by-laws of the Corporation;
(xii) Computershare Trust Company of Canada has been duly appointed the
transfer agent and registrar for the Common Shares;
(xiii) the Offered Shares will, on the Closing Date, be qualified
investments under the Income Tax Act (Canada) for trusts governed
by registered retirement savings plans, registered retirement
income funds, deferred profit sharing plans and registered
education savings plans;
(xiv) the statements set forth in the Canadian Final Prospectus under
the caption "Canadian Federal Income Tax Considerations", insofar
as they purport to describe the provisions of the laws referred to
therein, are fair summaries of the matters discussed therein;
(xv) To the knowledge of such counsel, there are no persons with
registration rights or other similar rights to have any securities
qualified for distribution under Canadian Securities Laws;
(xvi) No filing with, or authorization, approval, consent, license,
order, registration, qualification or decree of, any court or
governmental authority or agency in Canada is necessary or
required to be made or obtained by the Corporation in connection
with the due authorization, execution and delivery of this
Agreement or for the offering, sale or delivery of the Offered
Shares;
(xvii) To the knowledge of such counsel, there is not pending or
threatened any action, suit, proceeding, inquiry, or
investigation, to which the Corporation is a party, or to which
the property of the Corporation is subject, before or brought by
any court or governmental agency or body, domestic or foreign,
which might reasonably be expected to result in a Material Adverse
Effect, or which might reasonably be expected to materially and
adversely affect the properties or assets of the Corporation or
the consummation of the transactions contemplated in this
Agreement or the performance by the Corporation of its obligations
thereunder;
(xviii) The Canadian Prospectus (excluding the financial statements and
other financial data included or incorporated therein or omitted
therefrom, as to which such counsel need not express any opinion)
complies as to form in all material respects to the requirements
of Canadian Securities Laws; and
- 28 -
(xix) The documents incorporated by reference in the Canadian Prospectus
as amended or supplemented (other than the financial statements
and other financial data included or incorporated or deemed to be
incorporated therein, as to which such counsel need not express
any opinion), when they were filed with the Canadian Securities
Regulators, complied as to form in all material respects to the
formal requirements of the securities laws, rules and regulations
of the Province of Ontario as interpreted and applied by the
Canadian Securities Regulators and of the Qualifying Provinces as
interpreted and applied by the relevant Canadian Securities
Regulators under published policy statements,
In connection with such opinion, counsel to the Corporation may
rely on the opinions of local counsel in the Qualifying Provinces
acceptable to counsel to the Underwriters, acting reasonably, as
to the qualification for distribution of the Offered Shares or
opinions may be given directly by local counsel of the Corporation
with respect to those items and as to other matters governed by
the laws of jurisdictions other than the province in which they
are qualified to practise and may rely, to the extent appropriate
in the circumstances, as to matters of fact on certificates of
officers of the Corporation and others. In addition to rendering
the opinions set forth above, such counsel shall also include a
statement to the effect that such counsel has participated in the
preparation of the Disclosure Package (except that the reference
to "U.S. Amended Preliminary Prospectus" and "U.S. Prospectus
Amendment" in the definition of "Disclosure Package" herein shall
be replaced with "Canadian Amended Preliminary Prospectus" and
"Canadian Prospectus Amendment," as amended or supplemented at the
Applicable Time, for the purpose of such counsel's opinion), and
the Canadian Prospectus and in conferences with officers and other
representatives of the Corporation, U.S. counsel for the
Corporation, representatives of the independent accountants for
the Corporation, counsel for the Underwriters and representatives
of the Underwriters at which the contents of the Disclosure
Package and the Canadian Final Prospectus and related matters were
discussed and although such counsel has not independently
verified, and (except as to those matters and to the extent set
forth in the opinions referred to in subsections (xiv) of this
Section 10(b)) is not passing upon and does not assume any
responsibility for, the factual accuracy, completeness or fairness
of the statements contained in the Disclosure Package and Canadian
Prospectus, on the basis of such participation, no facts have come
to such counsel's attention which have caused such counsel to
believe that (i) the Disclosure Package, when taken as a whole, as
of the Applicable Time, contained any untrue statement of a
material fact or omitted to state a material fact necessary in
order to make the statements therein, in the light of the
circumstances in which they were made, not misleading, or (ii) as
of the date of the Canadian Prospectus and as of the Closing Date,
the Canadian Prospectus contains any untrue statement of a
material fact or omitted to state a material fact necessary in
order to make the statements therein, in light of the
circumstances in which they are made, not misleading (in each
case, other than the financial statements and other financial and
statistical information, and the information derived from the
reports of or attributed to persons named in the Canadian
Prospectus under the heading "Interest of Experts", included or
incorporated by reference therein, as to which such counsel need
express no belief).
(c) the Corporation shall cause its U.S. counsel, Baker & McKenzie, together
with Baker & McKenzie, Caracas, Venezuela, to deliver to the
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Underwriters and their counsel a legal opinion dated and delivered the
Closing Date, in form and substance satisfactory to the Underwriters and
their counsel, acting reasonably, with respect to the following matters:
(i) the Offered Shares are approved for listing subject to notice of
issuance on the American Stock Exchange;
(ii) to the knowledge of such counsel, there is no franchise, contract
or other document of a character required to be filed as an
exhibit to the Registration Statement which is not filed as
required;
(iii) the statements included or incorporated by reference in the
Amended Preliminary Prospectuses and Final Prospectuses under the
heading "Certain United States Federal Income Tax Considerations"
and "Risk Factors - The Company determined that it is a "passive
foreign investment company"..." insofar as such statements
summarize legal matters discussed therein, are accurate and fair
summaries of such legal matters in all material respects;
(iv) the Registration Statement has become effective under the 1933 Act
and the Form F-X was filed with the Commission prior to the
effectiveness of the Registration Statement; the filing of the
U.S. Final Prospectus and any amendments thereto, has been made in
the manner and within the time periods required by Form F-10 and
the applicable rules and regulations of the SEC; to the knowledge
of such counsel, no stop order suspending the effectiveness of the
Registration Statement and no proceedings for that purpose have
been instituted or threatened by the SEC, and the Registration
Statement and the U.S. Final Prospectus (other than the financial
statements and other financial and statistical information and the
information derived from the reports of or attributed to persons
named in the U.S. Preliminary Prospectus and the U.S. Final
Prospectus under the heading "Interests of Experts" included or
incorporated by reference therein as to which such counsel need
express no opinion) as of the Effective Date and the Form F-X
appeared on its face to comply as to form in all material respects
with the applicable requirements of the Act and the rules
thereunder;
(v) the Corporation is not and, after giving effect to the offering
and sale of the Offered Shares and the application of the proceeds
thereof as described in the U.S. Final Prospectus, will not be an
"investment company" as defined in the Investment Company Act of
1940, as amended;
(vi) no approval or authorization, or filing with any governmental
authority of the U.S. is required for transactions contemplated by
the Agreement in connection with the sale of the Offered Shares
such as have been obtained or made under the 1933 Act, except for
such as may be required under the blue sky laws of any
jurisdiction in connection with the purchase and distribution of
the Offered Shares by the Underwriters in the manner contemplated
in this Agreement and in the U.S. Amended Preliminary Prospectus
and the U.S. Final Prospectus and such other approvals (specified
in such opinion) as have been obtained;
(vii) neither the issue and sale of the Offered Shares, nor the
transactions contemplated by the Agreement in connection with the
- 30 -
sale of the Offered Shares will result in a breach or violation
of, or imposition of any lien, charge or encumbrance upon any
property or assets of the Corporation or its subsidiaries pursuant
to, any U.S. federal, Texas or Venezuelan statute, law, rule,
regulation, judgment, order or decree applicable to the
Corporation or its subsidiaries of any court, regulatory body,
administrative agency, governmental body, arbitrator or other
authority having jurisdiction over the Corporation or its
Subsidiaries or any of its or their properties; and
(viii) to the knowledge of such counsel, no holders of securities of the
Corporation have rights to the registration of such securities
under the Registration Statement.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than
the Federal laws of the United States, to the extent they deem
proper and specified in such opinion, upon the opinion of other
counsel of good standing whom they believe to be reliable and who
are satisfactory to counsel for the Underwriters and (B) as to
matters of fact, to the extent they deem proper, on certificates
of responsible officers of the Corporation and public officials.
In addition to rendering the opinions set forth above, such
counsel shall also include a statement to the effect that such
counsel has participated in the preparation of the Registration
Statement, the Disclosure Package and the U.S. Final Prospectus
and in conferences and telephone conversations with officers and
other representatives of the Corporation, Canadian counsel for the
Corporation, representatives of the independent accountants for
the Corporation, counsel for the Underwriters and representatives
of the Underwriters during which the contents of the Registration
Statement, the Disclosure Package and U.S. Final Prospectus were
discussed and although such counsel has not independently
verified, and (except as to those matters and to the extent set
forth in the opinions referred to in subsection (iii) of this
Section 10(c)) is not passing upon and does not assume any
responsibility for, the factual accuracy, completeness or fairness
of the statements contained in the Registration Statement, the
Disclosure Package and U.S. Final Prospectus, on the basis of such
participation, there is not reason for such counsel to believe
that (i) on the Effective Date, the Registration Statement
contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary
to make the statements therein not misleading, (ii) the Disclosure
Package, when taken as a whole, as of the Applicable Time,
contained any untrue statement of a material fact or omitted to
state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were
made, not misleading, or (iii) as of the date of the U.S. Final
Prospectus and as of the Closing Date, the U.S. Final Prospectus
included an untrue statement of a material fact or omitted to
state a material fact necessary in order to make the statements
therein, in light of the circumstances under which they were made,
not misleading (in each case, other than the financial statements
and other financial and statistical information, and the
information derived from the reports of or attributed to persons
named in the U.S. Preliminary Prospectus and the U.S. Final
Prospectus under the heading "Interest of Experts", included or
incorporated by reference therein, as to which such counsel need
express no opinion).
(d) the Underwriters shall have received favourable legal opinions addressed
to the Underwriters and legal counsel to the Underwriters in form and
- 31 -
substance satisfactory to the Underwriters, acting reasonably, dated as
of the Closing Date from Barbados counsel to the Corporation, with
respect to Gold Reserve de Barbados Ltd.;
(e) the Underwriters shall have received favourable legal opinions addressed
to the Underwriters and legal counsel to the Underwriters in form and
substance satisfactory to the Underwriters, acting reasonably, dated as
of the Closing Date from Montana counsel to the Corporation, with
respect to Gold Reserve Corp.; (f) the Underwriters shall have received
favourable legal opinions addressed to the Underwriters in form and
substance satisfactory to the Underwriters, acting reasonably, dated as
of the Closing Date from Baker & McKenzie, Caracas, Venezuelan counsel
to the Corporation, addressed to the Underwriters, legal counsel to the
Underwriters and the Purchasers with respect to Gold Reserve de
Venezuela, C.A. and Compania Aurifera Brisas del Cuyuni, CA. and with
respect to title to the mineral concessions in Bolivar State, Venezuela,
known as the Brisas Property similar in nature to the opinion dated
November 3, 2004 delivered in connection with the last public offering
by the Corporation;
(g) the Underwriters shall have received at the Time of Closing a legal
opinion dated the Closing Date from the Underwriters' Canadian counsel,
Heenan Blaikie LLP, with respect to matters related to the transactions
contemplated hereby reasonably requested by the Underwriters. In
providing such opinion Heenan Blaikie LLP shall be entitled to rely on
the opinions of local counsel as to matters governed by the laws of
jurisdictions other than the laws of Canada and Province of Ontario
respectively, and as to matters of fact, on certificates of the
Corporation's registrar and transfer agents, auditors, public and stock
exchange officials and officers of the Corporation. Heenan Blaikie LLP
shall also be entitled to rely upon the opinion of counsel to the
Corporation described in subparagraph 10(b);
(h) the Underwriters shall have received at the Time of Closing a legal
opinion dated the Closing Date from the Underwriters' U.S. counsel,
Dorsey & Whitney LLP in form and substance satisfactory to the
Underwriters, acting reasonably, with respect to such matters related to
the transactions contemplated hereby reasonably requested by the
Underwriters, including, without limitation, a negative assurance
letter;
(i) the Underwriters shall have received a certificate dated the Closing
Date, signed by the President and Chief Executive Officer of the
Corporation or any other senior officer of the Corporation as may be
acceptable to the Underwriters, in form and content satisfactory to the
Underwriters' counsel, acting reasonably, with respect to:
(i) the articles and by-laws of the Corporation;
(ii) the resolutions of the Corporation's board of directors relevant
to the issue and sale of the Offered Shares to be issued and sold
by the Corporation and the authorization of the other agreements
and transactions contemplated herein; and
(iii) the incumbency and signatures of signing officers of the
Corporation;
- 32 -
(j) the Corporation shall cause its auditors, PricewaterhouseCoopers LLP, to
deliver to the Underwriters a comfort letter, dated the Closing Date, in
form and substance satisfactory to the Underwriters, acting reasonably,
bringing forward to a date not more than two business days prior to the
Closing Date the information contained in the comfort letter referred to
in Subsection 5(a)(iii) hereof;
(k) the Corporation shall deliver to the Underwriters, at the Time of
Closing, certificates dated the Closing Date addressed to the
Underwriters and signed by the President and Chief Executive Officer of
the Corporation and the Chief Financial Officer of the Corporation, or
such other senior officer(s) of the Corporation as may be acceptable to
the Underwriters, certifying for and on behalf of the Corporation and
without personal liability, after having made due enquiries, to the
effect that:
(i) the Corporation has complied in all respects with all the
covenants and satisfied all the terms and conditions of this
Agreement on its part to be complied with and satisfied at or
prior to the Time of Closing;
(ii) the representations and warranties of the Corporation contained
herein, including without limitation those representations in
Section 5(c), are true and correct in all respects as at the Time
of Closing, with the same force and effect as if made on and as at
the Time of Closing after giving effect to the transactions
contemplated hereby (for purposes of this certificate, references
to Preliminary Prospectuses in the representations and warranties
in Section 8 shall be deemed to be references to the Disclosure
Package and Final Prospectuses);
(iii) no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have
been instituted or are pending or, to the knowledge of the
Corporation, are contemplated by the SEC;
(iv) decision documents have been issued by the Canadian Securities
Regulators in the Qualifying Provinces for the Canadian Final
Prospectus and no order, ruling or determination having the effect
of ceasing the trading or suspending the sale of the Common Shares
or the Offered Shares to be issued and sold by the Corporation has
been issued and no proceedings for such purpose have been
instituted or are pending or, to the knowledge of such officers,
contemplated or threatened; and
(v) since the respective dates as of which information is given in the
Prospectuses (A) there has been no material change (actual,
anticipated, contemplated or threatened, whether financial or
otherwise) in the business, affairs, operations, assets,
liabilities (contingent or otherwise) or capital of the
Corporation and the Subsidiaries on a consolidated basis, and (B)
no transaction has been entered into by any of the Corporation or
the Subsidiaries which is material to the Corporation on a
consolidated basis, other than as disclosed in the Prospectuses;
(l) the Underwriters shall have received copies of correspondence indicating
that the Corporation has obtained all necessary approvals for the
Offered Shares to be conditionally listed on the TSX and AMEX, subject
only to the Standard Listing Conditions;
- 33 -
(m) the NASD shall have confirmed that it has not raised any objection with
respect to the fairness and reasonableness of the underwriting terms and
arrangements; and
(n) the Underwriters shall have received from the directors and senior
officers of the Corporation, written undertakings in favour of the
Underwriters agreeing not to sell, transfer, assign or otherwise dispose
of any securities of the Corporation owned directly or indirectly, by
such directors or officers for a period of 90 days following the Closing
Date without the prior consent of the Underwriters, which shall not be
unreasonably withheld.
11. Closing. The closing of the purchase and sale of the Offered Shares shall
be completed at the Time of Closing at the offices of Fasken Martineau DuMoulin
LLP, Toronto, Ontario, or at such other place as the Corporation and the
Underwriters may agree in writing. At the Time of Closing, the Corporation shall
deliver to the Underwriters:
(a) (i) one definitive certificate representing in the aggregate the total
number of the Offered Shares, registered in the name of "Sprott
Securities Inc.", or in such other name or names as shall be designated
in writing by Sprott on behalf of the Underwriters not less than 48
hours prior to the Time of Closing. The Corporation shall make all
necessary arrangements for the exchange of such definitive certificates,
on the date of delivery, at the principal office of the Transfer Agent
in the City of Toronto for certificates representing the Offered Shares
in such amounts and registered in such names as shall be designated by
Sprott in writing on behalf of the Underwriters not less than 48 hours
prior to the Time of Closing. The Corporation shall pay all fees and
expenses payable to or incurred by the Transfer Agent in connection with
the preparation, delivery, certification and exchange of the definitive
share certificate contemplated by this Subsection 11(a) and the fees and
expenses payable to or incurred by the Transfer Agent in connection with
such additional transfers required in the course of the distribution of
the Offered Shares; and
(b) one or more cheques or wire transfers to "Sprott Securities Inc." (or as
Sprott may otherwise direct), on behalf of the Underwriters,
representing the fees payable by the Corporation to the Underwriters as
provided in the fourth paragraph of this Agreement and the expenses of
the Underwriters payable pursuant to Section 15 hereof,
against payment by the Underwriters to the Corporation of the purchase price for
the Offered Shares being issued and sold by them hereunder by wire transfer
(provided that the Underwriters may make payment by a net cheque or wire
transfer delivered by Sprott payable to the Corporation representing the gross
proceeds of the Offering less the fees payable by the Corporation to the
Underwriters and any expenses (pursuant to section 15) of the Underwriters in
which case the Corporation shall not be required to deliver the Underwriters the
cheque referred to in Subsection 11(b)).
Any notice of the exercise of the Over Allotment Option (the "Over-Allotment
Option Notice") to purchase Additional Shares, in whole or in part, shall be
given by Sprott on behalf of the Underwriters to the Corporation in the manner
set forth in Section 19 hereof and shall specify the number of Additional Shares
to be purchased by the Underwriters under the Over Allotment Option and the
closing date for the issuance of the Additional Shares (the "Over-Allotment
Option Closing Date") and time of closing. The Over-Allotment Option Closing
Date, which may be the same as the Closing Date but shall in no event be earlier
than the Closing Date, shall be not less than two nor more than five business
- 34 -
days after providing the Over-Allotment Option Notice, as shall be specified in
the Over-Allotment Option Notice.
If any Additional Shares are purchased, each Underwriter agrees, severally and
not jointly, to purchase the number of Additional Shares (subject to such
adjustments to eliminate fractional Common Shares as Sprott may determine) that
bears the same proportion to the total number of Additional Shares as the
percentages of the aggregate amount of Offered Shares to be purchased at the
Time of Closing set out in Section 18 opposite the name of such Underwriter.
In the event the Over Allotment Option is exercised in accordance with its
terms, the Corporation shall deliver to the Underwriters at the closing time
specified in the Over-Allotment Option Notice:
(i) the documents, opinions, certificates and other agreements and materials
required under Sections 10(a), (b), (c), (d), (i), (j) and (k), in each
case dated the Over-Allotment Option Closing Date (other than
certificates of status which may be dated within 5 days prior to the
Over-Allotment Option Closing Date), together with such further
documentation as may be contemplated herein or as the Underwriters may
reasonably require; and
(ii) such other items set forth in Section 11 herein.
12. Restrictions on Further Issues or Sales. During the period commencing the
date hereof and ending on the day which is 90 days following the Closing Date,
the Corporation shall not, directly or indirectly, without the prior written
consent of the Underwriters, such consent not to be unreasonably withheld,
issue, or announce any offer, sale or other issuance, of any Common Shares or
any securities convertible into or exchangeable for Common Shares other than
pursuant to:
(a) the grant or exercise of stock options and other similar issuances
pursuant to the share incentive plan of the Corporation and other share
compensation arrangements;
(b) outstanding warrants or other convertible securities and any rights
which have been granted or issued, subject to any necessary regulatory
approval;
(c) obligations in respect of existing mineral property agreements; and
(d) the issuance of securities in connection with a bona fide arm's length
acquisition of a business or asset whether by way of purchase of shares
or assets, merger, plan of arrangement, amalgamation or otherwise which
does not exceed 10% of the basic shares outstanding of the Corporation
immediately following the completion of the Offering.
13. Indemnification by the Corporation.
(a) The Corporation (the "Indemnifying Party" with respect to
indemnification under Section 13(a)) shall fully indemnify and save
harmless each of the Underwriters and their respective affiliates, their
respective directors, officers, employees and agents, which shall
include without limitation, the U.S. Dealers (collectively, the
"Indemnified Parties" and individually an "Indemnified Party" with
respect to indemnification under Section 13(a)) from and against all
losses (other than losses of profit), claims, actions, damages,
liabilities, costs and expenses, (including the reasonable fees and
expenses of the Underwriters' counsel that may be incurred in advising
- 35 -
with respect to or defending such claim), in any way caused by or
arising directly or indirectly from or in consequence of:
(i) any information or statement (except information and statements
furnished to the Corporation by the Underwriters relating solely
to the Underwriters) contained in the Registration Statement,
Preliminary Prospectuses, the amended Preliminary Prospectuses,
the Prospectuses or any Issuer Free Writing Prospectus, including
any Documents Incorporated by Reference, filed in connection with
the sale of the Offered Shares pursuant to the Offering or any
certificate of the Corporation delivered under the Agreement which
at the time and in light of the circumstances in which it was made
contains or is alleged to contain a misrepresentation;
(ii) any omission or alleged omission to state in the Registration
Statement, the Preliminary Prospectuses, the amended Preliminary
Prospectuses, the Prospectuses or any Issuer Free Writing
Prospectus, including any Documents Incorporated by Reference, or
any certificate of the Corporation delivered under the Agreement
any fact (except any omission or alleged omission made in reliance
upon and in conformity with written information furnished to the
Corporation by the Underwriters expressly for use in the
Prospectuses or the Registration Statement relating solely to the
Underwriters) required to be stated in such document or necessary
to make any statement in such document not misleading in light of
the circumstances under which it was made;
(iii) any order made or enquiry, investigation or proceeding commenced
or threatened by any securities commission or other competent
authority based upon any untrue statement or omission or alleged
untrue statement or alleged omission or any misrepresentation or
alleged misrepresentation (except a statement or omission or
alleged statement or omission or a misrepresentation or alleged
misrepresentation made in reliance upon and in conformity with
written information furnished to the Corporation by the
Underwriters expressly for use in the Prospectuses or the
Registration Statement) in the Registration Statement, the
Preliminary Prospectuses, the amended Preliminary Prospectuses,
the Prospectuses or any Issuer Free Writing Prospectus, including
any Documents Incorporated by Reference, or based upon any failure
to comply with Applicable Securities Laws (other than any failure
or alleged failure to comply by the Underwriters) preventing or
materially restricting the trading in or the sale of the Offered
Shares in any Qualifying Province of in the United States;
(iv) the non-compliance or alleged non-compliance by the Corporation
with any requirements of the Applicable Securities Laws or other
applicable securities laws, regulations or rules including the
Corporation's non-compliance with any statutory requirement to
make any document available for inspection; or
(v) any breach of any representation, warranty, or covenant of the
Corporation in this Agreement.
(b) Each Underwriter and U.S. Dealer (collectively, the "Indemnifying
Parties" and individually the "Indemnifying Party" with respect to
- 36 -
indemnification under Section 13(b)), severally and not jointly, agrees
to fully indemnify and save harmless the Corporation, each of its
directors, each of its officers who signs the Registration Statement,
and each person who controls the Corporation within the meaning of
either the 1933 Act or the 1934 Act (collectively, the "Indemnified
Parties" and individually an "Indemnified Party" with respect to
indemnification under Section 13(b)), to the same extent as the
foregoing indemnity in Section 13(a) to each Underwriter, but only with
reference to written information furnished to the Corporation relating
solely to such Underwriter, by or on behalf of such Underwriter
specifically for inclusion in the documents referred to in the foregoing
indemnity. This indemnity agreement will be in addition to any liability
which any Underwriter may otherwise have. With respect to Section 13(b),
references to Underwriters shall be deemed to include references to U.S.
Dealers.
(c) If any claim contemplated by this Section 13 shall be asserted against
any of the Indemnified Parties, or if any potential claim contemplated
by this Section 13 shall come to the knowledge of any of the Indemnified
Parties, the Indemnified Party concerned shall notify in writing the
Indemnifying Party as soon as possible of the nature of such claim
(provided that any failure to so notify in respect of any potential
claim shall affect the liability of the Indemnifying Party under this
Section 13 only to the extent that the Indemnifying Party is materially
prejudiced by such failure). The Indemnifying Party shall, subject as
hereinafter provided, be entitled (but not required) to assume the
defence on behalf of the Indemnified Party of any suit brought to
enforce such claim; provided, however, that the defence shall be through
legal counsel selected by the Indemnifying Party and acceptable to the
Indemnified Party, acting reasonably and no admission of liability shall
be made by the Indemnifying Party or the Indemnified Party without, in
each case, the prior written consent of all the Indemnified Parties
affected and the Indemnifying Party, in each case such consent not to be
unreasonably withheld. An Indemnified Party shall have the right to
employ separate counsel in any such suit and participate in the defence
thereof but the fees and expenses of such counsel shall be at the
expense of the Indemnified Party unless:
(i) the Indemnifying Party fails to assume the defence of such suit on
behalf of the Indemnified Party within twenty days of receiving
notice of such suit;
(ii) the employment of such counsel has been authorized by the
Indemnifying Party; or
(iii) the named parties to any such suit (including any added or third
parties) include the Indemnified Party and the Indemnifying Party
and the Indemnified Party and the Indemnifying Party shall have
been advised in writing by counsel that representation of the
Indemnified Party by counsel for the Indemnifying Party is
inappropriate as a result of the potential or actual conflicting
interests of those represented;
(in each of cases (i), (ii) or (iii), the Indemnifying Party shall not
have the right to assume the defence of such suit on behalf of the
Indemnified Party, but the Indemnifying Party shall only be liable to
pay the reasonable fees and disbursements of one firm of separate
counsel for all Indemnified Parties. In no event shall the Indemnifying
- 37 -
Party be required to pay the fees and disbursements of more than one set
of counsel for all Indemnity Parties in respect of any particular claim
or set of claims). The Indemnifying Party will not, without the prior
written consent of the Indemnity Parties, settle or compromise or
consent to the entry of any judgment with respect to any pending or
threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not
the indemnified parties are actual or potential parties to such claim or
action) unless such settlement, compromise or consent includes an
unconditional release of each Indemnity Party from all liability arising
out of such claim, action, suit or proceeding.
(d) The Corporation hereby acknowledges and agrees that, with respect to
Sections 13 and 14 hereof, the Underwriters are contracting on their own
behalf and as agents for their affiliates, directors, officers,
employees and agents and their respective directors, officers, employees
and agents (collectively, the "Beneficiaries"). In this regard, each of
the Underwriters shall act as trustee for the Beneficiaries of the
covenants of the Corporation under Sections 13 and 14 hereof with
respect to the Beneficiaries and accepts these trusts and shall hold and
enforce such covenants on behalf of the Beneficiaries.
14. Contribution.
(a) In order to provide for just and equitable contribution in circumstances
in which the indemnity provided in Section 13 hereof would otherwise be
available in accordance with its terms but is, for any reason, held to
be unavailable to or unenforceable by the Indemnified Parties or
enforceable otherwise than in accordance with its terms, the
Underwriters and the Corporation shall contribute to the aggregate of
all claims, damages, liabilities, costs and expenses and all losses
(other than losses of profits) of the nature contemplated in Section 13
hereof and suffered or incurred by the Indemnified Parties in such
proportions so that the Underwriters shall be responsible for the
portion represented by the percentage that the total Underwriters' fee
payable to the Underwriters bears to the aggregate purchase price of the
Offered Shares, as determined pursuant to the provisions hereof, and the
Corporation shall, subject to paragraph (b) of this Section, be
responsible for the balance. The Underwriters shall not in any event be
liable to contribute, in the aggregate, any amount in excess of such
total fee or any portion thereof actually received. However, no party
who has engaged in any fraud, fraudulent misrepresentation or gross
negligence shall be entitled to claim contribution from any person who
has not engaged in such fraud, fraudulent misrepresentation or gross
negligence.
(b) For greater certainty, the Indemnifying Party shall not have any
obligation to contribute pursuant to this Section 14 in respect of any
claim except to the extent the indemnity given by it in Section 13
hereof would have been applicable to such claim in accordance with its
terms, had such indemnity been found to be enforceable and available to
the Indemnified Parties.
(c) The rights to contribution provided in this Section 14 shall be in
addition to and not in derogation of any other right to contribution
which the Indemnified Parties may have by statute or otherwise at law
provided that paragraphs (a) and (b) of this Section 14 shall apply,
mutatis mutandis, in respect of such other right.
- 38 -
(d) If an Indemnified Party has reason to believe that a claim for
contribution may arise, the Indemnified Party shall give the
Indemnifying Party notice thereof in writing as soon as reasonably
practicable, but failure to so notify the Indemnifying Party shall not
relieve the Indemnifying Party of any obligation which it may have to
the Indemnified Party under this Section 14 provided that the
Indemnifying Party is not prejudiced by such failure, and the right of
the Indemnifying Party to assume the defence of such Indemnified Party
shall apply as set out in Section 13 hereof, mutatis mutandis.
15. Expenses. Whether or not the purchase and sale of the Offered Shares shall
be completed, all expenses of or incidental to the creation, issuance and
delivery of the Offered Shares and of or incidental to all matters in connection
with the transactions herein set out shall be borne by the Corporation
including, without limitation:
(a) all expenses of or incidental to the creation, issue, sale or
distribution of the Offered Shares and the filing of the Registration
Statement, the Preliminary Prospectuses, the Amended Preliminary
Prospectuses, any other Prospectus Amendments, the Prospectuses, any
Supplementary Material and any Issuer Free Writing Prospectuses and the
reasonable out-of-pocket expenses of the Underwriters and the reasonable
fees of the Underwriters' counsel; provided that in connection with the
Underwriters' legal fees, the Corporation shall be solely responsible
for paying the first $100,000 in fees (including disbursements and
applicable taxes) and any fees, disbursements and applicable taxes in
excess of $100,000 shall be shared equally between the Corporation, on
the one hand, and the Underwriters, on the other hand subject to a
maximum total reimbursement by the Corporation of $150,000;
(b) all expenses of or incidental to any filings required to be made with
the NASD (including filing fees and the reasonable fees and expenses of
counsel for the Underwriters relating to such filings);
(c) the reasonable fees and expenses of the auditors, counsel to the
Corporation and all local counsel (including GST and other applicable
taxes on all of the foregoing) and the transfer agent for the Common
Shares; and
(d) all costs incurred in connection with the preparation, filing and
printing of the Registration Statement, the Preliminary Prospectuses,
the Amended Preliminary Prospectuses, any other Prospectus Amendments,
the Prospectuses, any Issuer Free Writing Prospectuses and any
Supplementary Material and the share certificates contemplated
hereunder.
16. All Terms to be Conditions. The Corporation agrees that the conditions
contained in this Agreement will be complied with insofar as the same relate to
acts to be performed or caused to be performed by the Corporation and that it
will use its commercially reasonable efforts to cause all such conditions to be
complied with. Any breach or failure to comply with any of the conditions set
out in this Agreement shall entitle the Underwriters to terminate their
obligation to purchase the Offered Shares, by written notice to that effect
given to the Corporation at or prior to the Time of Closing. It is understood
that the Underwriters may waive, in whole or in part, or extend the time for
compliance with, any terms and conditions in this Agreement without prejudice to
the rights of the Underwriters in respect of any such terms and conditions or
any other or subsequent breach or non-compliance, provided that to be binding on
the Underwriters any such waiver or extension must be in writing.
- 39 -
17. Termination by Underwriters in Certain Events.
(a) Each Underwriter shall also be entitled to terminate its obligation to
purchase the Offered Shares by written notice to that effect given to
the Corporation at or prior to the Time of Closing if:
(i) material change - there shall be any material change in the
affairs of the Corporation, or change in any material fact or
there should be discovered any previously undisclosed material
fact or material change required to be disclosed in the
Registration Statement, the Amended Preliminary Prospectuses, any
other Prospectus Amendments, the Prospectuses, any Issuer Free
Writing Prospectus or Supplementary Material or there should occur
a change (other than a change related solely to the Underwriters)
in a material fact contained in the Registration Statement, the
Amended Preliminary Prospectuses, any other Prospectus Amendments,
the Prospectuses, any Issuer Free Writing Prospectus or
Supplementary Material, in each case which, in the reasonable
opinion of the Underwriters (or any of them), has or would be
expected to have a significant adverse effect on the market price
or value of the Common Shares; or
(ii) disaster out - (A) any inquiry, action, suit, investigation or
other proceeding (whether formal or informal) is commenced,
announced or threatened or any order made by any federal,
provincial, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality including,
without limitation, the TSX, the AMEX or any securities regulatory
authority or any law or regulation is enacted or changed which in
the opinion of the Underwriters (or any of them), acting
reasonably, operates to prevent or restrict the trading of the
Common Shares or materially and adversely affects or will
materially and adversely affect the market price or value of the
Common Shares; or (B) if there should develop, occur or come into
effect or existence any event, action, state, condition or major
financial occurrence of national or international consequence or
any law or regulation which in the reasonable opinion of the
Underwriters (or any one of them) seriously adversely affects, or
involves, or will, or could reasonably be expected to, seriously
adversely affect, or involve, the financial markets or the
business, operations or affairs of the Corporation and its
Subsidiaries taken as a whole.
(b) If this Agreement is terminated by any of the Underwriters pursuant to
Subsection 17(a), there shall be no further liability on the part of
such Underwriter or of the Corporation to such Underwriter, except in
respect of any liability which may have arisen or may thereafter arise
under Sections 13, 14 and 15.
(c) The right of the Underwriters or either of them to terminate their
respective obligations under this Agreement is in addition to such other
remedies as they may have in respect of any default, act or failure to
act of the Corporation in respect of any of the matters contemplated by
this Agreement. A notice of termination given by one Underwriter under
this Section 17 shall not be binding upon the other Underwriter.
18. Obligations of the Underwriters to be Several. Subject to the terms and
conditions hereof, the obligation of the Underwriters to purchase the Offered
- 40 -
Shares shall be several and not joint. The percentage of the Offered Shares to
be severally purchased and paid for by each of the Underwriters shall be as
follows:
Sprott Securities Inc. - 50%
RBC Dominion Securities Inc. - 50%
If an Underwriter (a "Refusing Underwriter") shall not complete the purchase and
sale of the Offered Shares which such Underwriter has agreed to purchase
hereunder for any reason whatsoever, the other Underwriter (the "Continuing
Underwriter") shall be obligated severally to take up and pay for any and all
Offered Shares (whether Underwritten Shares or Additional Shares) which the
Refusing Underwriter agreed but failed to purchase; provided, however, that in
the event that the aggregate amount of Offered Shares which the Refusing
Underwriter agreed but failed to purchase shall exceed 10% of the aggregate
amount of Offered Shares, the Continuing Underwriter shall be entitled, at its
option, to purchase all but not less than all of the Offered Shares which would
otherwise have been purchased by such Refusing Underwriter. If the Continuing
Underwriter does not elect to purchase the balance of the Offered Shares
pursuant to the foregoing:
(a) the Continuing Underwriter shall not be obliged to purchase any of the
Offered Shares that any Refusing Underwriter is obligated to purchase;
and
(b) the Corporation shall not be obliged to sell less than all of the
Offered Shares,
and the Corporation shall be entitled to terminate its obligations under this
Agreement arising from their acceptance of this offer, in which event there
shall be no further liability on the part of the Corporation or the Continuing
Underwriter, except pursuant to the provisions of Sections 13, 14 and 15.
Nothing in this Section 18 shall relieve from liability to the Corporation any
Refusing Underwriter.
19. Notices. Any notice or other communication required or permitted to be
given hereunder shall be in writing and shall be delivered to,
in the case of the Corporation, to:
Gold Reserve Inc.
926 West Sprague Avenue
Suite 200
Spokane, Washington 99201
U.S.A.
Attention: Douglas Belanger, President
Facsimile No.: (509) 623-1634
with copies of any such notice to:
Fasken Martineau DuMoulin LLP
4200 TD Bank Tower
Toronto Dominion Centre
Toronto, Ontario
M5K 1N6
- 41 -
Attention: Charles Higgins and Georges Dube
Facsimile No.: (416) 364-7813
and:
Baker & McKenzie LLP
Pennzoil Place, South Tower
711 Louisiana, Suite 3400
Houston, Texas 77002
Attention: Jonathan B. Newton
Facsimile No.: (713) 427-5099
in the case of Sprott Securities Inc. to:
Sprott Securities Inc.
Royal Bank Plaza
P.O. Box 63 South Tower, Suite 2750 Toronto, ON M5J 2J2
Attention: Darren Wallace
Facsimile No.: (416) 943-6496
in the case of RBC Dominion Securities Inc.
RBC Dominion Securities Inc.
Royal Bank Plaza, South Tower
200 Bay Street
Toronto, ON M5J 2W7
Attention: Gary A. Sugar
Facsimile No.: (416) 842-7527
with a copy of any such notice to:
Heenan Blaikie LLP
Royal Bank Plaza, South Tower
200 Bay Street
Toronto, ON M5J 2J4
Attention: Kevin Rooney
Facsimile No.: (416) 360-8425
and
- 42 -
Dorsey & Whitney LLP
1420 Fifth Avenue, Suite 3400
Seattle, WA 98101
Attention: Kimberley Anderson
Facsimile No.: (206) 903-8820
The Corporation and the Underwriters may change their respective addresses for
notices by notice given in the manner aforesaid. Any such notice or other
communication shall be in writing, and unless delivered personally to the
addressee or to a responsible officer of the addressee, as applicable, shall be
given by telecopy and shall be deemed to have been given when: (i) in the case
of a notice delivered personally to a responsible officer of the addressee, when
so delivered; and (ii) in the case of a notice delivered or given by telecopy on
the first business day following the day on which it is sent.
20. Miscellaneous.
(a) Except with respect to Sections 13, 14, 17 and 18, all transactions and
notices on behalf of the Underwriters hereunder or contemplated hereby
may be carried out or given on behalf of the Underwriters by Sprott and
Sprott shall in good faith discuss with RBC the nature of any such
transactions and notices prior to giving effect thereto or the delivery
thereof, as the case may be.
(b) This Agreement shall enure to the benefit of, and shall be binding upon,
the Underwriters and the Corporation and their respective successors and
legal representatives. The invalidity or unenforceability of any
particular provision of this Agreement shall not affect or limit the
validity or unenforceability of the remaining provisions of this
Agreement.
(c) This Agreement shall be governed by and interpreted in accordance with
the laws of the Province of Ontario and the federal laws of Canada
applicable therein.
(d) Time shall he of the essence hereof and, following any waiver or
indulgence by any party, time shall again be of the essence hereof.
(e) The words, "hereunder", "hereof' and similar phrases mean and refer to
the Agreement formed as a result of the acceptance by the Corporation of
this offer by the Underwriters to purchase the Offered Shares.
(f) All representations, warranties, covenants and agreements of the
Corporation and the Underwriters herein contained or contained in
documents submitted pursuant to this Agreement and in connection with
the transaction of purchase and sale herein contemplated shall survive
the purchase and sale of the Offered Shares and the termination of this
Agreement for a period of three years and shall continue in full force
and effect for the benefit of the Underwriters or the Corporation, as
the case may be, for a period of three years regardless of any
subsequent disposition of the Offered Shares or any investigation by or
on behalf of the Underwriters with respect thereto. The Underwriters and
the Corporation shall be entitled to rely on the representations and
warranties of the Corporation or the Underwriters, as the case may be,
contained herein or delivered pursuant hereto notwithstanding any
- 43 -
investigation which the Underwriters or the Corporation may undertake or
which may be undertaken on the Underwriters' behalf.
(g) Each of the parties hereto shall be entitled to rely on delivery of a
facsimile copy of this Agreement and acceptance by each such party of
any such facsimile copy shall be legally effective to create a valid and
binding agreement between the parties hereto in accordance with the
terms hereof.
(h) This Agreement may be executed in any number of counterparts, each of
which when so executed shall be deemed to be an original and all of
which when taken together shall constitute one and the same agreement.
(i) It is understood that the terms and conditions of this Agreement
supersede any previous verbal or written agreement between the
Underwriters and the Corporation with respect to this offering.
[INTENTIONALLY LEFT BLANK]
- 44 -
If the foregoing accurately reflects the terms of the transactions which we are
to enter into and are agreed to by you, please communicate your acceptance by
executing the enclosed copies of this agreement where indicated and returning
them to us.
Yours very truly
SPROTT SECURITIES INC.
By: /s/ Peter Grosskopf
-----------------------------------------------
Authorized Signing Officer
RBC DOMINION SECURITIES INC.
By: /s/ Gary A. Sugar
-------------------------------------------------
Authorized Signing Officer
Accepted and agreed to by the undersigned as of the date of this letter first
written above.
GOLD RESERVE INC.
By: /s/ A. Douglas Belanger
A. Douglas Belanger
President
- 45 -
SCHEDULE "A"
(a) annual information form of the Corporation in the form of Form 20-F for
the year ended December 31, 2005;
(b) audited annual consolidated comparative financial statements of the
Corporation for the year ended December 31, 2005 and the auditors'
report thereon, together with management's discussion and analysis for
the year ended December 31, 2005;
(c) management information circular dated April 14, 2005 prepared in
connection with the Corporation's annual and special meeting of
shareholders held on June 2, 2005;
(d) management information circular dated January 31, 2006 prepared in
connection with the Corporation's special meeting of shareholders held
on March 22, 2006; and
(e) the summary, being pages 1.1 to 1.13 inclusive, of NI 43-101 Technical
Report Gold and Copper Project Brisas Project dated February 24, 2005
as prepared by Pincock, Allen & Holt.
- 46 -
SCHEDULE "B"
SUBSIDIARIES OF THE CORPORATION
- ----------------------------------------------- ------------------------------------ ---------------------------------
Subsidiary Jurisdiction Ownership Interest
- ----------------------------------------------- ------------------------------------ ---------------------------------
Gold Reserve Corporation Montana 100%
- ----------------------------------------------- ------------------------------------ ---------------------------------
Gold Reserve de Venezuela, C.A. Venezuela 100%
- ----------------------------------------------- ------------------------------------ ---------------------------------
Gold Reserve de Barbados Ltd. Barbados 100%
- ----------------------------------------------- ------------------------------------ ---------------------------------
Companion Aurifera Brisas del Cuyoni, C.A. Venezuela 100%
- ----------------------------------------------- ------------------------------------ ---------------------------------
SCHEDULE "C"
OUTSTANDING CONVERTIBLE SECURITIES
Equity Units (Class B Shares) 1,085,099
Warrants to purchase Common Shares 2,680,500
Options to purchase Common Shares 562,058
As of April 28, 2006
- 48 -
SCHEDULE "D"
SCHEDULE OF FREE WRITING PROSPECTUSES INCLUDED IN THE
DISCLOSURE PACKAGE
Preliminary term sheet dated May 2, 2006
EXHIBIT 5.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Amendment No. 1 to
the Registration Statement on Form F-10 (the "Registration Statement") of Gold
Reserve Inc. of our report dated February 17, 2006 relating to the consolidated
financial statements of Gold Reserve Inc., which appears in Gold Reserve Inc.'s
Annual Report on Form 20F for the year ended December 31, 2005.
We also consent to the inclusion in this Amendment No. 1 to the Registration
Statement of Gold Reserve Inc. of our report dated February 17, 2006 relating to
the Supplementary Information on Differences Between Canadian and U.S. GAAP.
We further consent to the use of our name in the prospectus that is filed as a
part of this Amendment No. 1 to the Registration Statement under the headings
"Auditors, Transfer Agent and Registrar" and "Documents Filed as a Part of the
Registration Statement".
/s/ PricewaterhouseCoopers LLP
Chartered Accountants
Vancouver, B.C., Canada
May 3, 2006