-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PWV8q1BX/fm+Qzzt5MCSGUmUJNTso4UzY3IaDBx969glZlmXdJYU/JhaJ8p499Nh hPvtbUAIVOro3bnekMwB8w== 0000912057-97-028264.txt : 19970818 0000912057-97-028264.hdr.sgml : 19970818 ACCESSION NUMBER: 0000912057-97-028264 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970131 FILED AS OF DATE: 19970815 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: POWER PLUS CORP CENTRAL INDEX KEY: 0000853444 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-RETAIL STORES, NEC [5990] IRS NUMBER: 341723067 FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-18163 FILM NUMBER: 97665296 BUSINESS ADDRESS: STREET 1: 7850 WOODBINE AVENUE STREET 2: SUITE 201 CITY: MARKHAM ONTARIO CAN STATE: A0 ZIP: 14467 BUSINESS PHONE: 9054795683 MAIL ADDRESS: STREET 1: 7850 WOODBINE AVENUE STREET 2: SUITE 201 CITY: MARKHAM ONTARIO STATE: A0 FORMER COMPANY: FORMER CONFORMED NAME: BATTERY ONE INC DATE OF NAME CHANGE: 19950126 10-K 1 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended 31 JANUARY 1997 ("FISCAL 1997") Commission file number 0-18163 EDGAR Filing Number 000-18163 CUSIP number 738908102 SEDAR Project Number 00004997 POWER PLUS CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) (the "REGISTRANT", or the "COMPANY", or "POWER PLUS") --------------------------------------------------------------------------- | PROVINCE OF ALBERTA, CANADA 52-1976897 | | (JURISDICTION OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NUMBER) | | | | 7850 WOODBINE AVENUE, SUITE 201, | | MARKHAM, ONTARIO, CANADA L3R 0B9 | | (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP/POSTAL CODE) | | | | 905-479-5683 | | 800-769-3733 (800-POWERED) 905-479-8911 | | (TELEPHONE NUMBERS) (FAX NUMBER) | --------------------------------------------------------------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes / / No /X/ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes / / No /X/ As of 18 July 1997, the aggregate market value of the voting stock of the registrant held by non-affiliates was approximately $11,341,095 based upon the closing price of the shares on The Alberta Stock Exchange of $1.50 per share. As of such date, 7,620,730 common shares (the "Common Shares") of the Registrant's Common Stock were outstanding. (Please refer to ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS concerning the reorganization and consolidation of the Company's stock on the basis of 20 to 1.) DOCUMENTS INCORPORATED BY REFERENCE None. FORM 10-K Fiscal Year End 1997 Page 2 BASIS OF PRESENTATION The Company prepares its consolidated financial statements in Canadian dollars. In this report all references to "$" are to Canadian dollars, unless otherwise noted. EXCHANGE RATES Based on the noon buying rates for cable transfers in New York City, certified for customs purposes by the Federal Reserve Bank of New York, the exchange rate on 18 July 1997 was C$1 = US$1.37. For additional information on exchange rates see ITEM 6 -- SELECTED FINANCIAL DATA - EXCHANGE RATES. PART I ITEM 1 -- BUSINESS A. GENERAL DEVELOPMENT OF BUSINESS 1. TODAY On 31 July 1996, the Company changed its name to Power Plus Corporation, signifying a new beginning and the launch of POWERFUL STUFF, a unique specialty niche retailing concept focused on wireless communication products and services (beepers/pagers, cellular phones, Personal Communications Systems (PCS) and related service contracts) together with portable electronics (the latest in hand-held electronic communications, entertainment, business and lifestyle products). This bold move represents a broad departure from the Company's past. As of 18 July 1997, the active companies in the Power Plus Group include: Power Plus Corporation, Power Plus USA, Inc., Power Plus Canada, Inc. and First Olympia Holdings, Inc. (collectively "Power Plus" or the "Company"). [Corporate Organization Chart] Page 3 2. REORGANIZING, RESTRUCTURING, REFINANCING AND REBUILDING On 1 February 1996, the Company announced its Reorganization Plan which was disclosed in detail in the former FORM 10-K registration statement for Fiscal 1996 dated 19 June 1996. In overview, the Reorganization Plan is subdivided into two parts: PLAN 2000, the Company's 5-year business plan prescribing how the Company proposes to build its business to in excess of 1000 stores by the end of the Year 2000; and, the Financing Plan which sets out the manner in which the Company proposes to provide a total of $49.1 million over the initial 3 years of PLAN 2000 to finance its requirements -- $33.7 million of which remains over the next 2 years. The Reorganization Plan and the related Plan of Arrangement proposed by new management received shareholder, regulatory and court approval in July 1996. Among other matters, the Company's proposal included: - Changing the Company's name to POWER PLUS CORPORATION. - Reorganizing and consolidating the outstanding share capital, requiring a reverse-split on the basis of every twenty shares before consolidation being reorganized and consolidated into one consolidated share plus an exchange right. - Funding the Company's Reorganization Plan and PLAN 2000 by implementing its Financing Plan. - Consolidating corporate headquarters into offices in Toronto, Canada. - Establishing new retail operations in the US and Canada. - Putting new management in place. PLAN 2000 is the blueprint providing the foundation for the Company's launch of POWERFUL STUFF in late Fiscal 1997. The POWERFUL STUFF specialty retail chain is conceived to be a branded North American distribution channel focused on PORTABLE LIFESTYLE COMMUNICATIONS, WEARABLE FASHION ELECTRONICS and PALM-TOP BUSINESS TECHNOLOGY -- to meet the expanding demand for wireless communication products and services plus portable electronics. Power Plus has combined these distinct merchandising segments into a single retail store -- POWERFUL STUFF! The pagers/beepers and cell phones featured at POWERFUL STUFF stores are a source of significant per transaction revenue, contributing additional strong secondary margins through accessory and airtime sales plus activation fees, and generating recurring revenues from customer airtime and renewals. The fashion electronics and palm-top business technology segments of the business, plus accessories and batteries, also contribute complementary revenues. PLAN 2000 envisions a 5-year expansion program to over 1000 stores by rolling out new stores in a district cluster marketing approach throughout seven geographic North American regions -- the Southeast, Mid-Atlantic, Northeast, North Central, Northwest, Southwest and South Central regions. The Company is currently in the second year of implementing PLAN 2000. At the end of Fiscal 1997, the Company operated 51 retail stores under the trade name POWERFUL STUFF, this marking the conclusion of the first year of PLAN 2000. With its Corporate Office now established in Toronto and its North American Operations Office in Sarasota, the Company expects approximately 85% of its POWERFUL STUFF stores to be in the US. As of 18 July 1997, the Company has 36 Page 4 locations open in the US and 19 in Canada, totaling 55. The stores, operating from leased premises ranging from 150 to 700 square feet and averaging 300 square feet, are located in major enclosed shopping malls in the US and Canada. The Company's Reorganization Plan incorporates a related $49.1 million Financing Plan over the first 3 years of PLAN 2000, providing the framework for the capital projected to be required to rapidly increase the number of POWERFUL STUFF stores to the level of critical mass necessary to expeditiously achieve economies of scale and operating efficiencies. During the first year of PLAN 2000, the Company received $15.4 million in proceeds from the Financing Plan. (See ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS for a discussion of the Financing Plan and ITEM 7 - Section C (4) SUMMARY OF CHANGES TO SHARES AND SHARE CAPITAL.) Long-term debt and new equity capital are the sources of funding for both future growth and the operating losses incurred during this expansion stage. While the Company has made and will make every effort to raise the capital provided for under the Financing Plan, differences in timing and the amounts of proceeds actually received will impact the pace of the future rollout, and no assurances can be given the financing will be completed as planned. Management, projecting that the Company must expand to the 125 store level before it will attain profitable operations, anticipates reaching critical mass by the end of calendar 1997 based upon the funding being received as planned. POWERFUL STUFF'S Canadian division launched in July 1996 in the Northeast Region with its first store in Toronto. Since then, 18 new locations have been opened in Ontario and a number of additional locations are currently under negotiation. This division's immediate expansion thrust is expected to be concentrated primarily in Ontario. Several store locations in British Columbia and Alberta, in the Northwest Region, are under consideration for 1997's expansion. Business options for further expansion into other provinces will be considered once the business has been firmly established in the initial targeted markets. (See ITEM 1 - Section C LOCATION, DESIGN AND CONSTRUCTION OF STORES, below, for more information of the approach to store rollout and definition of the Regions.) POWER PLUS USA, INC. also launched in July 1996 commencing in the Northeast Region (Pittsburgh - a total of four locations by year end), and following in the Southeast Region (Florida, Georgia, Mississippi, North Carolina and Tennessee). The Southeast expansion is a blend of new POWERFUL STUFF stores being opened, combined with 13 retail locations acquired in Florida in September. Effective 1 September 1996, Power Plus launched its wireless airtime rebilling business -- its POWERFUL CONNECTIONS division -- with the purchase of over 20,000 existing pager customers under contract and the entitlement to the related future wireless (pager/beeper airtime) rebilling revenue, plus the 13 above-referenced Florida retail locations. These were purchased from CONSUMER ELECTRONICS SPECIALTY STORES, INC. ("CESS"), located in Sarasota, Florida (see ITEM 7(B) - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, The Southeast Region). POWERFUL STUFF, in implementing PLAN 2000, expects to become significant in the retail sales of pager and other wireless hardware, accessories and related services, by firmly establishing POWERFUL CONNECTIONS as a reseller business in both the US and Canada. Page 5 3. BACKGROUND AND HISTORY Power Plus Corporation was incorporated under the BUSINESS CORPORATIONS ACT, ALBERTA, Canada, on 15 December 1986 under the name "Caio Capital Company." However, prior to the 1 May 1988 acquisition of all of the issued and outstanding shares of Battery One-Stop International Inc., a company incorporated under the BUSINESS CORPORATIONS ACT, CANADA on 6 March 1985 ("BOSI"), the Company had not conducted any significant operations. In connection with its acquisition of BOSI, the Company changed its name to "Battery One-Stop Inc." and continued to develop the specialty retail business, begun by BOSI, of marketing and selling batteries and certain battery-powered products in Canada and the United States. On 8 November 1994 the Company changed its name to Battery One, Inc. In November 1992, the Company formed two new US wholly-owned subsidiaries, First Olympia Holdings Inc., a US limited liability company which has been inactive in the business since incorporation and Batteries Etc., Inc. ("Etc."). Effective 25 November 1992, Etc. purchased from One-Stop Battery, Inc., an unrelated privately-held company, certain of its assets including inventory, kiosks, fixtures and related equipment and office furnishings through these subsidiaries. The acquisition included 40 operating locations in the United States and the leases therefor. The Company's former business was primarily the retail sales of over 400 types of dry cell batteries, including common and specialized cells, plus battery-powered and battery-related products through Company-owned stores. The Company's products were sold principally from kiosks or inline stores situated in high traffic areas of major shopping centers and transportation hubs. During most of Fiscal 1996, the Company operated 18 retail locations in Canada and 33 locations in the United States. By the last quarter of Fiscal 1996 (the year ended 31 January 1996), it had become apparent to then management that on the basis of the Company's share capitalization, and considering the continued non-profitability of Etc. which formerly operated the business in the US, notwithstanding its best efforts, the Company was not able to complete the financing of its turnaround program on the basis contemplated. The poor performance of Etc. resulted from a number of unproductive stores situated in secondary locations committed to by prior management. In fact, during this period Etc.'s cash flow was subsidized by BOSI which formerly operated the business in Canada, to BOSI's serious detriment. (Etc. and BOSI are referred to collectively as the "Former Subsidiaries".) In December 1995, BOSI made a voluntary assignment into bankruptcy pursuant to the CANADIAN BANKRUPTCY AND INSOLVENCY ACT. In December 1995, Etc. made a voluntary petition seeking protection under Chapter 11 of the US BANKRUPTCY CODE, which in January 1996 was then converted to a Chapter 7 filing. The Company is the largest creditor of the Former Subsidiaries but does not expect to receive any recovery of substance upon the winding up of these bankruptcies expected during Fiscal 1998. (See ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.) All of the Company's then operations were conducted through the Former Subsidiaries and all of its capital assets were owned by the Former Subsidiaries. Accordingly, at 31 January 1996 the Company had no ongoing retail operations. Page 6 Power Plus Corporation, however, as the parent company, maintained continuous operations and remained in good standing. The Company continued its ongoing statutory reporting requirements, making all the required disclosures to shareholders, raising new capital for the purpose of restructuring and reorganizing its operations, and trimming its overhead, leaving a committed executive management team dedicated to turning the business around. B. PRINCIPAL PRODUCTS AND SERVICES 1. THE WIRELESS COMMUNICATIONS -- PAGERS, CELLULAR TELEPHONES AND AIRTIME REBILLING While the reseller distribution channel is an established concept in the US, it is a new concept for Canada. The distribution chain for paging and cellular services starts with the carriers or airtime providers that own regional and national networks. Telephone companies control some airtime providers and often partner with the leading independents to offer expanded coverage and service. Most paging carriers have large direct sales forces selling primarily to businesses, but they rely on indirect retail channels and resellers for small business and consumer sales. A reseller buys wireless services from carriers at discounts and then packages these services, sells and bills them to its own customers, collects the payments and provides customer service. To the customers, the RESELLER IS the paging or cellular company. Resellers aim to create long-term customer relationships. For paging services, the monthly service bill is usually fixed, and priced competitively to the local market (which is usually defined by technology, by the radio frequency of the pager). With up-front and properly timed payment schedules for pagers customers, there is limited risk for carrying receivables for the reseller. Cellular airtime reselling is similar to that of paging reselling although there is a major difference because it is both rate and usage (including particular time of usage) sensitive. As each person uses a phone differently, the monthly per customer revenue is variable, ranging from 4 to 10 TIMES more than that of a pager customer. So, in addition to the cost of funding marketing and sales efforts, the cellular airtime reseller must be able to finance, manage and collect receivables. Satisfied cellular customers typically remain active with a carrier for 5 years or more. A reseller that is also a retailer has the advantage of being able to combine equipment sales with service sales to maximize company margins where the retail margin on the equipment alone is limited. Providing easy access to high quality service at low rates is critical to switching customers from other carriers and then keeping them. i. BEEPERS / PAGERS a.) Equipment The beeper department is a new merchandise category in POWERFUL STUFF stores. Depending on the store location, the sale of pagers, accessories and the attendant service packages, is expected to account for between 30% to 80% of stores sales. Merchandise margin on equipment is highly competitive and something of a loss-leader, whereas the margins made on activation fees and recurring paging service and renewals are higher. High margin fashion Page 7 sensitive paging accessories are included with most purchases, then continually purchased, to modify and personalize a pager. Pagers are typically sold near cost. (Selling, giving away or leasing pagers at cost, in extreme situations, can be a requirement for selling the service. This marketing ploy is analogous to giving away razors in order to sell blades.) While numeric pagers are the most affordable for the younger market, it is planned that stores will carry a broad range of pagers, including some with advanced features such as alpha-numeric message, 2-way message and voice mail. POWERFUL STUFF stores will maintain a breadth and depth of pager and accessories inventories in each store. It is planned that all the brightly colored beepers, airbrushed cases and accessories catch the shopper's eye and draw customers to the store. Sales representatives are trained to make minor service repairs and accessory customization at the store. b.) Market Overview From various sources researched by management, it appears that the paging industry in the US has grown from less than 2 million subscribers in 1981 to more than 34 million by the end of 1995. At the end of 1995, the top 22 paging providers in the US were servicing roughly 25 million subscribers. Penetration in the US is currently approaching 15% and, for comparison, in Hong Kong about 20%. The less developed paging market in Canada is believed to proffer even more room for growth. The 1.2 million paging customers in Canada (3.5% market penetration) is expected to double in the next 5 years according to industry analysis. US companies building networks with Canadian partners will accelerate this growth and introduce aggressive marketing. Lower prices for equipment and paging service has shifted the growth in paging from the business sector to the consumer marketplace. The average monthly service fees for the leading paging providers has dropped from a range of US$10 to US$15 in 1994 to the US$7 to US$10 range in 1996, and according to Motorola, consumer demand increased dramatically. Power Plus' target customer market for pagers is the under 30 year olds -- particularly the 15 to 25 year old group -- for the following reasons: - The segment is under-served, retailers having concentrated efforts on business customers. - Young people are in the malls. - This segment represents an exploding market in paging. - It is the targeted media group for fashion electronics. - Enhances the value of the Company's retail distribution chain. This market buys pagers in every conceivable color or custom design as a fashion statement and status symbol, as well as to be in touch with peers and sometimes even their parents. For the 15 to 25 year olds, pagers are a status symbol and, for many, provides them with the independence of their own private phone number. As the consumer demand increased, there has been a shift in distribution channels from direct (business to business) sales by carriers to sales by retail Page 8 stores. This marketing shift is responsive to the retail customer becoming a target market, versus commercial accounts. Today, about 71% of pager customers prefer a retail store to make their purchase as opposed to directly from the carrier. The Company's research also indicates that paging customers are among the best prospects to buy cell phones. ii. CELLULAR a.) Equipment Cellular telephones provide a product migration for pager customers. While cellular equipment margins are expected to be small, as with pager equipment, it is the activation and service contracts, renewals, repairs and accessories that yield substantial dollar volume and margin. Power Plus will focus evolving this category as an agent and reseller for cellular carriers. An agent earns a fee paid by the carrier for its marketing and sales efforts that culminate in a cellular contract with a customer. However, the agent is often required to provide the customer with a FREE or highly subsidized cellular phone. POWERFUL STUFF, in the future, intends to offer the consumer a choice of the carrier's plan with phone included, or a resellers plan with lower per minute charges. The latter will be priced to attract more customers and create a reasonable return while eliminating subscriber churn. Conversely, selling cellular telephones to new customers requires carrying high cost merchandise inventory and this can be costly in both real dollar terms and in opportunity cost when valuing the limited retail shelf space in a kiosk which is normally dedicated to faster-turning merchandise. Power Plus will attempt to make special merchandise distribution arrangements with selected phone manufacturers. Possibilities should increase for these relationships as manufacturers see the scope of the distribution channel being created. POWERFUL STUFF intends to test new ways of selling cellular services, acquiring customers and building a significant profit center. b.) Market Overview Research indicates that the wireless telecommunications market in North America has reached mass-market proportions. In 1995, 9.6 million customers signed up for cellular service, a record in the US. According to CTIA's industry survey in the US, wireless phone customers number 33.8 million at the end of 1995 -- a 40% increase. Total sales in the US topped $19 billion, a 34% annual increase that is projected to continue. The number of new cell sites in the US, the building blocks of a wireless system, increased 26% to a total of 22,663 in 1995. This excludes the build-out of the new PCS network. New cells increase capacity, improve voice quality and reduce power (broadcasting) needs. With the industry's growth and expansion into the consumer marketplace, the average monthly customer bill dropped to $51 in 1995 from an average of almost $100 in 1987. Research indicates that a typical cellular telecommunications customer is a male over age 30. The industry has significantly penetrated the business market, particularly professionals, executives, and outside sales and Page 9 management people. Penetration of the consumer marketplace is accelerating as networks expand, as competitors enter the market and as new products are developed. The transformation from an analog to a digital service will also open new product opportunities. Many current subscribers own their cell phones and have passed the initial contract expiry dates locking them into specific carriers. Currently the industry entices these customers to switch to alternative carriers with new promotion offers. Another reason that customers will shop around results from technological innovation that, in fact, has reduced the carrier's capital investment. Over the next few years many consumers who are paying 50CENTS to 60CENTS per prime time minute will be converting to lower group rates -- the CONVERSION MARKET. Switching a customer's cellular phone from one cellular service to another is a relatively simple task which can be done at the sales counter of any store by knowledgeable sales representatives. Selling an alternative carrier's airtime package to an existing cellular customer whose contract recently expired with a different carrier -- SWITCHING SERVICES -- is a new opportunity that requires little investment in inventory by the agent since customers will already own their phone. The Company believes there is a large number of cellular customers who now own their own phones with service commitments expiring shortly. New limited calling products are beginning to appear in the marketplace which will make cell phones more accessible to young people, the Company's target market for pagers. The fact that pager customers often become cellular customers means that Power Plus is well positioned to capture some portion of this burgeoning new market. To service both this and the CONVERSION MARKET, POWERFUL STUFF intends to build a distribution channel to service these customers in a convenient mall location. 2. PORTABLE ELECTRONICS Consumers love to see and try leading-edge products and live the fashion statement they make -- the latest in hand-held electronics, communications, entertainment, business and lifestyle products to be featured at POWERFUL STUFF stores. These products range from low-priced impulse items to more expensive products that must be explained or demonstrated and include: calculators, translators, data and voice recorders and organizers, PDAs (personal digital assistants), pointers and palm-top computers; as well as audio/video products, radios, Walkmans, CD players, miniature TVs, remote controllers, flashlights and hand-held games for young people and adults. 3. BATTERY ACCESSORIES All pagers, cellular phones and portable electronic products require the batteries needed to power them (sometimes common cells and oftentimes specialty batteries), which will be made available at POWERFUL STUFF stores. Annual battery sales in the US exceed $9 billion representing an annual consumption of over 7 billion batteries. Growth has been about 12% per year and is expected to continue. At least 90% of all households maintain and use one or more battery- powered product. Page 10 4. MERCHANDISE AND SERVICE It is important to note that the merchandise and service mix for a store -- or cluster of stores -- can be sensitive to unique regional market conditions. Within the key merchandise categories, it is planned that each store will offer innovative products (new items), opportunity items (special prices) and continuity products and services (repeat purchases and recurring sales). To keep merchandise fresh and exciting, it is planned that all stores will have new, just-in items and this week's specials. While wireless communications and related services are a key factor in the new business thrust envisioned by the Company, merchandising flexibility enables POWERFUL STUFF to adapt to a specific location and regional market. In locations where paging and cellular cannot play the dominant merchandise role, batteries and battery-related products will be emphasized to a greater degree in order to maintain acceptable sales levels. For instance, at the AirMall in the Pittsburgh International Airport where shoppers include many business travelers and at Florida Mall in Orlando where many shoppers are tourists, portable electronic products plus batteries will be the emphasis. 5. SOURCES AND AVAILABILITY OF PRODUCTS To meet its anticipated merchandise and inventory requirements, the Company will attempt to forge strategic vendor-partner relationships with key suppliers. Such partnerships should recognize the importance of both parties to each other's plans and success. These vendor-partnerships do not normally occur at start up unless the supplier is actually an equity or contracted partner in the business. As a new entrant, it is expected that POWERFUL STUFF must demonstrate its potential and its ability to achieve its vision in order to include suppliers in the vision. In the short-term, most brand name products are available from distributors, if not on a direct basis. In some cases, vendors prefer to support their distributors and will sell exclusively through distributors until the retailer reaches substantial volume commitments. POWERFUL STUFF plans to sell brand name merchandise to the extent possible. However, this does not always mean the NUMBER ONE brand. Vendors of the NUMBER TWO brand might be more receptive and flexible than brand leaders. It is also common practice in the industry that as a retail chains grows merchandise suppliers (whether agents or direct) become eager to ensure that the important chains have access to new product and ample supply of normal merchandise. Consequently, the Company is not dependent upon a single or limited source of supply for the vast majority of its merchandise or services. Moreover, many manufacturers make the same products in different countries. Hence, if one supplier is short of product, another supplier can be called upon to fill the Company's needs. The Company believes that an adequate supply of all types of merchandise, batteries and battery-powered products is available. 6. MARKETING OF PRODUCTS While most retailers in the mall draw from traffic in the mall, POWERFUL STUFF has developed a business model which the Company believes, in certain circumstances, actually draws customers to the mall. The POWERFUL STUFF business system plans to Page 11 utilize targeted media advertising, primarily radio to paging and cellular subscribers, at the stores as well as to position and create an image for the business. Acquiring new customers, rather than just selling merchandise, is a key part of the POWERFUL STUFF business model and operating plan. By design, a significant portion of POWERFUl STUFF'S advertising will be measurable, direct- response advertising rather than general retail support advertising. POWERFUL STUFF plans to advertise to capture new paging customers. Advertising, will be measured to determine incremental benefit and cost per new customer. Advertising, in combination with the LOOK AND FEEL of the stores and an effective sales staff, will attempt to establish POWERFUL STUFF'S image to its core market. The media-market approach to clustering the stores enhances the effectiveness, efficiency and economy of advertising. The Company believes that radio advertising, itself both highly MARKET- and AUDIENCE-SPECIFIC by nature, will raise the target customers' awareness and image of POWERFUL STUFF'S stores. Accordingly, the potential to use radio advertising is a criteria in selecting new store locations. In addition to broadcast media advertising to acquire new customers at the store, direct customer promotions may be employed by including promotional offers in the invoices mailed for paging and cellular rebilling airtime and related services. As each store can capture customer and transaction data, it can also create a database for targeted promotions and follow-on direct marketing. In retail, customer lists are an important asset. Finally, because of the particular locations of the kiosks, the Company believes that marketing its merchandise and services enjoy a competitive advantage compared to other retail and chain stores. The merchandise is displayed prominently in its stores, which are located primarily in shopping malls. C. LOCATION, DESIGN AND CONSTRUCTION OF STORES The selection of the best locations and the appearance is vital for long-term profitability. High volume shopping malls are key to POWERFUL STUFF'S growth strategy. Over 1000 specific mall locations have been identified in the US and Canada that meet Power Plus' criteria. The rollout plan focuses on the top 20 developers who, between them, manage an aggregate of over 900 shopping malls. The Company's PLAN 2000 targets opening 1000 stores over a 5 year period. POWERFUL STUFF stores are either 150 square foot kiosks or small inline stores of 300 to 700 square feet. The kiosk and small store model has proven successful for a number of companies, for example Sunglass Hut. One of Power Plus' primary real estate strategies is to pattern itself after the Sunglass Hut model, including acquiring locations near proven Sunglass Hut stores. The Company's rollout plan foresees clustering POWERFUL STUFF stores in regional markets, opening a minimum of 5 stores in a district but each district must have the capacity to add at least 10 more stores over the next 3 years to be viable economically. A District Manager can then be responsible for the operations and performance of between 15 and 20 stores. Page 12 Clustering stores within media areas creates an economically viable opportunity to advertise effectively and efficiently. In order to meet the demands anticipated by the rapid pace of the rollout program, the Company has developed a modularized attack to the build out program that is particularly adapted when employed in a clustering approach. 1. CLUSTERING FOR RAPID, MANAGED GROWTH A Region at maturity may contain up to 8 districts of 15 to 20 stores extending from a metropolitan area, which has as its nucleus 6 to 8 stores within the radius of the city. The rest of the stores are selected in suburban or smaller cities within close proximity to the metro area. This allows POWERFUL STUFF to reach an economic critical mass in a cluster rapidly, as opposed to spreading resources to isolated locations across the continent. At the maturity of Plan 2000, POWERFUL STUFF expects to be positioned throughout the 7 geographic Regions listed below, each typically comprised of approximately 8 Districts which themselves each comprise between 15 and 20 stores on average, making the typical Region in the 160 store range. - Northeast Region - Mid-Atlantic Region - Southeast Region - North Central Region - South Central Region - Northwest Region - Southeast Region Clustering also enables POWERFUL STUFF to maximize marketing dollars, control turnover, minimize training and recruiting costs, and reduce financial risks because of more frequent supervision by District Managers. 2. TARGET LOCATIONS The dominant form of retail space in North America is the suburban shopping center which is identified by the following characteristics. i. Shopping centers are typically defined by their dominant anchor tenants and their gross leasible area ("GLA"), and to some extent by population or trade area that they serve. ii. Shopping malls are rated according to customer traffic and annual sales per square foot standard measurements. Shopping malls under consideration should have annual sales in the range of $300 to $500 per square foot. Other measures are the upscale versus mass market characteristics, the ethnic demographics of the customers and the experience of other retailers in the mall. A key consideration for targeting cities will be to identify areas where the wireless communications market is under-served, presenting an opportunity for POWERFUL CONNECTIONS to be a dominant provider. Page 13 Seven types of shopping centers exist: super regional mall, regional mall, airport, downtown retail, off-price, transportation and festival locations. The majority of POWERFUL STUFF stores will be in the first two categories with a few opportunistic stores in other types of locations. 3. SITE CHARACTERISTICS i. Population 200,000 people in a primary trading area of a town ranging from a three to five mile radius ii. Mall Site 500,000 square feet GLA with two fashion anchors iii. Location in Mall Main mall with adjacencies to record stores and teen fashion apparel tenants. 4. NEAR-TERM LOCATIONS Power Plus opened 51 retail stores by the end of 1996, against a target of 40, and plans to open about 75 during 1997 and about 300 for each of the next three years, subject to the timing and amounts of capital injections. The focus is on opening clusters, not just opening stores. The Company will aggressively pursue opportunities to expand in cities where POWERFUL STUFF can offer pager and cellular telephone service as a reseller in addition to portable electronics. Currently being targeted for the rollout thrust are the Northeast, Mid-Atlantic, Southeast and Northwest Regions. 5. TOP 20 DEVELOPERS As noted earlier, PLAN 2000 envisions a 1000 store rollout plan. Power Plus has identified that the Company's criteria will play into the top 20 developers, such as Rousse, Simon/DeBartolo and Urban Retail Group, portfolios of mall properties in a complimentary fashion. Most of the developers have properties that are regionalized in certain geographic areas throughout North America, a factor which may also make it easier for Power Plus to cluster locations. The Company anticipates that over time, developer relationships established in one market will benefit others. This advantage can create a snowball effect, and may assist the Company in attaining a significant number of locations in a short duration. Power Plus plans to focus on the top 20 developers list since they have many of the best centers. Between them, these developers could account for 90% of Power Plus's location requirements. Page 14 6. DESIGN In partnership with award-winning architectural retail designer Michel Dubuc Concept, Power Plus has created a store which has put a bold new twist on the traditional electronics niche, and in so doing has set its sights on changing the face of this specialty niche retail marketplace. Michel Dubuc, the founder of Michel Dubuc Concept, has agreed to stand for election to Power Plus' Board of Directors (see ITEM 10 - A(2) for further background on Michel Dubuc Concept and detail of Mr. Dubuc's pending appointment.) POWERFUL STUFF stores combine design elements which have mass appeal across age, gender and ethnic boundaries, addressing today's retailers needs to ensure market longevity and flexibility. From the elliptical lines encircling the brand name and the bold lifestyle posters, to the graphic computer circuit boards on the walls, this futuristic. hi-tech design, with it's rich colors and textures has redefined what it means to sell electronic products. By bringing a fashion dimension to the store design, POWERFUL STUFF has created a few portable electronic lifestyle niche in the marketplace. This is a store that doesn't just grab the attention of today's consumers, but one that genuinely appeals to their emotions, senses and mind. POWERFUL STUFF stores are not only dramatic, but are fun places to go. Unlike some novelty stores, the design doesn't engulf the product, but brings it to life. All of the palm-top products are presented in 3 easy to shop lifestyle concepts within the store: FUN TECH - presented on the whimsical hi-tech computer graphic wall; COMMUNICATIONS TECH - presented against a colorful street map illustrating the prominence of communications in our lives; and BUSINESS TECH - presented in sleek, energetic and futuristic cases for the discerning and hurried business customer. POWERFUL STUFF stores grasp the basic premise of retail mass appeal by creating a compelling design that humanizes technology, thereby connecting with consumers again and again because we understand their purchase will have more memorable appeal, and will take on more significance when it is purchased at a POWERFUL STUFF store. The standard kiosk is 150 square feet, rectangular in shape with mitered corners. Every inch of space is maximized to emphasize merchandise under the Company's banner and colors. With the exception of hands-on merchandise, the 360 degrees of product display is either under glass or out of normal reach of customers, thus limiting the potential of shrinkage while still keeping product close to the customer. Merchandise displayed on the center island may be hung on slot-boards or similar displays. The hands-on merchandise is secured to the counter but easily removable and stored in one of the lockable drawers for night security. Inline stores, typically in the 300 to 700 square feet range, are designed specifically to match the space, provide comfortable selling area and attract customer traffic in the mall. The capital investment, excluding inventory, per location ranges from $28,000 to $115,000. Page 15 7. CONSTRUCTION With all materials on site it takes 2 days to manufacture a kiosk. The modular design facilitates shipping to its destination. The mechano-approach installation enables the Company to retain local contractors to install the kiosk in the malls, which usually takes less than 8 hours -- a cost saving compared to shipping the installation team with the kiosk. In this way, it will be possible for one local contractor to install all the kiosks in a large but local geographic area, as required. By using the same contractor, in addition to the efficiency gains, the Company is building a base of resources that can also be called upon to perform usual maintenance or repairs in the future. Display cases are constructed of predominantly plastic laminate and either tempered or laminate safety glass. The glass shelving inside each case (glass so that the maximum amount of merchandise may be viewed by customers) can be adjusted for height or removed to enable special merchandise display units. Indeed, with the modular approach incorporated in the new store design, any display case can be removed and replaced with a special-purpose case. The size of the case goods means that the Company can place orders for multiple units at one time -- even build a small inventory of them -- thus obtaining volume price concessions. By limiting variations, adopting a modular approach and specifying building and material standards, it is possible for the Company to tender for the supply of its casegoods. There are more than 500 casegoods manufacturers in North America and it will be possible for the Company to select suitable ones proximate to the specific areas the Company plans to roll into next, thereby saving shipping costs. Power Plus has developed a modular approach to remodeling inline locations for POWERFUL STUFF stores. The same size and style for casegoods as used in kiosks are also employed to fixture the store. Since installation crews are handling the same casegoods, the cost of installation benefit from the mechano-approach and the Company is able to employ consistently its standard colors and appearance. The importance of a well-run construction department is easily understood in the context of the demands of meeting the rigorous pace of the rollout. The Company prefers to use local contractors to install kiosks or build inlines, in order to control construction costs (cost of roving installation team versus local contractors) and have them nearby for future routine repair and maintenance. As well, often local contractors can obtain permits and approvals, if only because they know the local rules and processes better. General contractors are selected via a bidding process (against architectural drawings supplied by the Company) and once selected will report to one of the Company's Store Construction Project Managers. The bidding process requires, among other matters, that the general contractor demonstrate it has suitable insurance coverage. Page 16 D. EMPLOYEES As of 18 July 1997 the Company employs: 1 Regional Manager, 7 District Managers, 54 Store Managers, 82 Full time associates, 64 Part time associates and 71 Administrative, Customer Service, Distribution and Warehouse personnel - -- a total in all of 288 employees including senior officers and executive management. POWERFUL STUFF stores are opened and managed regionally. POWERFUL STUFF will attract talent from all areas of the wireless communications and retail industries. By implementing a planned growth through a geographic clustering approach, and the creation of a responsive supervisory and training plan, the Company is fast approaching self-sufficiency. However, the Company's PROMOTE FROM WITHIN PHILOSOPHY will be periodically supplemented by outside hires for the purpose of keeping its perspective fresh and ideas innovative. 1. ECONOMIC GROWTH MODEL - GEOGRAPHIC CLUSTERING POWERFUL STUFF is deploying the rapid growth model used similarly by some of the industry's most successful retail companies - GEOGRAPHIC CLUSTERING. Geographic clustering is managed growth by establishing and penetrating specific geographic markets with multiple stores, usually a minimum of 5 in the first year of opening any new district. This approach assures operational overhead efficiencies, brand identity and rapid market dominance. Clustering also creates a productive stable and well-trained sales and management team, from which Power Plus can pull resources to transplant and seed the next cluster. 2. FIELD SUPERVISORY STRUCTURE The clustering approach is being implemented to create a streamlined and efficient field supervisory infrastructure, assuring each store is operating to its maximum potential. i. REGIONAL MANAGER A Regional Manager will supervise approximately 8 District Managers who will oversee 15 to 20 Store Managers within their districts, or up to 160 stores in total. Each region functions as its own OPERATING UNIT to promote bottom-line accountability and to focus on the specific product assortment needed to capture its unique market niche. At the maturity of PLAN 2000, POWERFUL STUFF expects to have 7 Regional Managers overseeing the 7 Regions, each typically comprising approximately 8 districts of 15 to 20 stores. ii. DISTRICT MANAGER A District Manager is the PROFIT CENTER MANAGER overseeing the profitability of each district by assuring: sales growth, recruiting personnel, opening new stores, training, customer service, fine-tuning merchandise assortment tailored to the local market, and operating profit. District Managers will supervise 15 to 20 stores. iii. MANAGER TRAINER Each district will have one to two senior store managers called Manager Trainers. Manager Trainers are the most senior and experienced store managers who are placed in higher volume stores, generally centralized within the district. Store Page 17 Managers must become Manager Trainers before becoming eligible for promotion to a District Manager. A Manager Trainer serves multiple purposes -- preparing and overseeing the training of new store managers, communicating with and motivating the store teams within their market area, and recruiting new sales associates. The Manager Trainer is the key mentor to the seeding of new clusters with quality, well-trained personnel. iv. STORE MANAGER POWERFUL STUFF Store Managers are incentivised for and have as their primary focus 3 main responsibilities: a.) Producing sales Because stores, at an average of 300 sq. ft., are operationally easy to manage, and because a high percentage of store sales are produced by the Manager, POWERFUL STUFF Store Managers are incentivised for their personal sales as well as their store sales productivity -- training and motivating -- of their sales team. b.) Controlling non-fixed expenses Store Managers will be held accountable for controlling non-fixed expenses including labor costs, shrinkage due to cash and merchandise losses, and supplies and material costs. c.) Maintaining a visually appealing and properly merchandised store Store Managers will be held accountable for the professionalism of their staff and for ensuring each store is clean and maintained to corporate visual merchandising standards, and that the product mix is appropriate for the need of the local market for that store. 3. STORE STAFFING AND COMPENSATION The total projected selling and non-selling hours for store labor at a retail mall location is 110 hours per week, a standard 120 hours annualized over a year, taking into account 4th quarter seasonality. This is the equivalent of 2 full-time and 1 to 2 part-time people per store except in peak seasons. POWERFUL STUFF, through its years of rapid growth, will emphasize full-time employees to the extent possible, in order to maximize staff coverage in metro areas and to feed new-location growth with well-trained associates. POWERFUL STUFF employs a PAY FOR PERFORMANCE compensation plan which maximizes sales productivity through personal and team incentives. Store associates will receive an hourly rate and percentage of sales based on specific categories of merchandise which will promote sales without eroding margins. Contributions from merchandise and service vendor partners will allow POWERFUL STUFF to maximize sales productivity in promotional periods through special contests and spiffs. Store Managers will also participate in a monthly incentive program on overall store sales based on hitting a budgeted sales target, and will be able to earn an annual bonus by maximizing store sales performance and controlling expenses. Opportunities to increase compensation will be earned by increasing store sales and through promotions to higher-volume stores. Page 18 4. TRAINING AND DEVELOPMENT POWERFUL STUFF will be relying heavily on POWERFUL UNIVERSITY which will be deployed as its 6 month, 3 segment training and development program. Consisting of a self-study workbook for each segment, there will be a written training curriculum that must be completed by all full-time associates before the individual earns the right to run their own POWERFUL STUFF store. Each segment must be reviewed and signed off by the District and Regional Manager for that store. Each segment is divided into 4 main areas with a lesson each week. - Sales and Customer Service - Store Operations - Product Knowledge - Leadership and Management Associates will be tested both orally and in written format before receiving their Graduation Certificate. POWER U is supplemented by a NEW HIRE ORIENTATION program and PART-TIME PARTNER training program. The Company believes training is most effective when driven down to front-line levels of accountability, therefore most training will be executed by District Managers and Manager Trainers who will be assisted by Vendor Partners for product-specific training. POWERFUL STUFF will also schedule periodic classroom and market training conducted by regional training coordinators, for those areas that are more complex, required by law, or critical to the well-being of the organization, such as performance appraisals, sexual harassment and diversity training. POWERFUL STUFF currently communicates to Store Associates through a Weekly Sales Bulletin featuring the top sales performances by the district team, store team, and individual performances. This bulletin also communicates new product information and other news from the Home Office Team. POWERFUL STUFF will also utilize multi-media devices such as video for training and communications to ensure consistency from store to store and as a mechanism to drive the values and mission of the company to the field associates. E. COMPETITION The Company has not identified a major US competitor that, on a national scale, is positioning itself to be the dominant provider of paging products and services to the youth market. The Company's strategy is to take a pre-emptive position to the extent possible. In part, this will depend on its ability to target and open large numbers of stores quickly. Competition must be evaluated on a market by market basis. There maybe a number of markets where paging penetration and the number of resellers may be sufficiently high (New York City, Miami) such that POWERFUL STUFF will carefully consider whether or not to enter that market. A potential competitor, Simply Wireless, being rolled out by Century Cellular Network, Inc. is a kiosk STORE-WITHIN-A-STORE concept for supermarkets, as opposed to shopping malls. Page 19 Simply Wireless has targeted expansion into 9 states and anticipates growing to 250 locations. While not a kiosk-type store chain, Radio Shack is by far the largest competitor in key merchandise categories as the largest volume retailer of batteries and the largest seller of cellular phones in the US. It is also a competitor in Canada where, in addition to their own stores, Radio Shack has a co-venture with Cantel, a leading Canadian cellular and cable company, to open over 100 small stores. Fortunately, for a large portion of POWERFUL STUFF'S target market, Radio Shack is not the image or store of choice. In the overall market arena, the primary competition will be from large discount chains, price clubs, and electronic stores, including WalMart, Sam's, Circuit City and Future Shop, among others. These companies drive down the prices and margins on many items. In addition, there will be many local companies selling paging to businesses, installation of phones, radar detectors and alarms in cars, etc. There may be significant competition for a limited amount of prime space in shopping malls. Some malls limit the number of kiosks, often at the request of lead tenants. When kiosk locations are not available, POWERFUL STUFF may utilize small inline stores. Malls and retailers exploit the USE CLAUSE in leases to control competition in the mall. In some locations POWERFUL STUFF may be restricted from offering some merchandise lines such as telephones, cellular, watches or cameras due to the existing USE CLAUSE of another tenant retailer. In extreme situations, this might eliminate a location from consideration. F. TRADEMARKS The Company presently holds two service marks registered on the Principal Register of the United States Patent and Trademark Office. Registrations are for the mark BATTERY ONE-STOP and design BATTERY 1-STOP in connection with battery and battery-powered store services. Both service marks cover the use of the name BATTERY ONE-STOP in connection with the sale or advertising of its services in the United States. The Company also holds a Certificate of Registration from the Registrar of Trade Marks, Consumer and Corporate Affairs, Canada, covering the stylized use of the name BATTERY ONE-STOP in the operation of its business in Canada. In addition, the Company has registered the name BATTERY ONE-STOP in the United Kingdom. The Company has applied for registration of other trade marks in Canada and the United States. The trade marks for which applications have been made are POWERFUL STUFF, POWERFUL STUFF! design, POWERFUL CONNECTIONS and 1-800-POWERED. These applications are still pending. The Company had previously filed applications, which are still pending, to register the service marks using the name BATTERY ONE in the United States and Canada. Page 20 G. GOVERNMENTAL REGULATION Various national, state and local governments have adopted, and may in the future adopt, laws and regulations regulating contamination of the environment. These laws and regulations may impact the Company's disposal of spent batteries which contain toxic compounds and impose liabilities for pollution resulting from improper disposal. The Company monitors the adoption of orders, rules, regulations and laws related to the Company's operations and advises all store managers and regional managers of any new requirement or change in the law by way of weekly mailings. The Company believes that all of its store managers are currently complying, and will continue to comply with, in all material respects with all orders, the rules, regulations and laws applicable to the Company's operations. To the Company's best knowledge, there have been no material violations of any such requirements. The Company has not incurred significant costs in the past to comply with environmental regulations and does not anticipate incurring significant costs in the future. However, the Company cannot predict the effect of any future changes in applicable regulations on its operations or capital expenditure requirements. H. CERTAIN GEOGRAPHIC INFORMATION The Company's sales, operating losses and total assets in Canada and the US for Fiscal 1997, Fiscal 1996, the transition year ended 31 January 1995 are set forth below: CANADA UNITED STATES TOTAL --------- ------------ ----------- 1997 ----------------------------------------- Sales $503,429 $3,577,169 $4,080,598 Net loss $3,595,000 $2,092,427 $5,687,427 Total assets $7,422,843 $3,621,011 $11,043,854 ----------------------------------------- 1996 ----------------------------------------- Sales $1,749,393 $3,625,836 $5,375,229 Net loss $1,076,324 $3,465,227 $4,541,551 Total assets $330,035 -- $330,035 ----------------------------------------- 1995 ----------------------------------------- Sales $2,414,991 $6,132,982 $8,547,973 Net loss $498,134 $991,282 $1,489,416 Total assets $1,505,984 $3,676,695 $5,182,679 ----------------------------------------- ----------------------------------------- Page 21 ITEM 2 -- PROPERTIES The Company's Corporate Office is at 7850 Woodbine Avenue, Suite 201, Markham, Ontario, L3R 0B9. Leased on a month-to-month basis, these offices are approximately 3,250 square feet, at a monthly occupancy cost of approximately $3,200. For the operations of Power Plus Canada, Inc., the Company has arranged leasing of office and warehousing space of approximately 2,500 square feet strategically located proximate at 7780 Woodbine Avenue, Markham, Ontario, including store front and administration offices. Leased on an annual basis, the monthly occupancy costs for these warehousing premises are approximately $2,300. Power Plus USA, Inc. has leased office space totaling 6,800 square feet at 1575 Main Street, in Sarasota at a monthly occupancy cost of approximately US$5,500, plus 2,600 additional square feet at 1614 - 1618 Ringling Road, in Sarasota at a monthly occupancy cost of approximately US$2,500. Together, these two locations comprise the Company's North American Operations Office and the offices of Power Plus USA, Inc. In addition, Power Plus USA, Inc. also leases a pager repair facility comprised of 2,650 square feet at 4005 North Tamiami Trail, in Sarasota, on a month-to-month basis, at a monthly occupancy cost of approximately US$1,650, and 5,000 square feet at 1195 Talvest Road, in Sarasota at a monthly occupancy cost of approximately US$2,400 for its warehouse. As at 18 July 1997, the Company operated 19 stores in Ontario, Canada and 36 stores in the US, totaling 55. The Company's locations in the US are located in the following States: REGION STATE NUMBER OF LOCATIONS ------ ----- ------------------- Southeast Florida 20 Southeast Alabama 5 Southeast Georgia 3 Southeast Mississippi 1 Southeast Tennessee 1 Southeast North Carolina 2 Northeast Pennsylvania 4 -- Total 36 -- -- Of the stores in Ontario, 16 stores, which opened primarily in Quarter 4 of Fiscal 1997, were open by the end of Fiscal 1997. Similarly, of the stores in the US, 35 stores, which were opened primarily in Quarter 4 of Fiscal 1997, were open at the end of Fiscal 1997. Subject to availability and timing of financing proposed under the Financing Plan, PLAN 2000 provides for the opening of 950 new stores over the next 3 1/2 years in a MARKET CLUSTER APPROACH and aims to create critical mass in certain target areas that offer particular advantages to the Company, such as under-developed or under-serviced markets, for paging and cellular wireless communications or under an umbrella of radio advertising. PLAN 2000 establishes a target of over 1000 stores by the end of the Year 2000. (See Page 22 ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS for a discussion of the Reorganization and related Financing Plan.) In general, the terms of the Company's lease agreements have provided for: (i) a rentable area for each store of 150 to 700 square feet; (ii) a lease term normally of three, five or eight years; and, (iii) either a fixed annual rent, payable monthly or quarterly (ranging from a low of $12,144 in the first year of the least expensive lease to a high of $72,924 in the last year of the most expensive lease) and either together with (or, in some cases, in lieu of the annual rent) payments equal to a percentage, ranging from 6% to 17%, of a store's adjusted gross sales during the year, or, alternatively in some cases, a variable annual rent equal of up to 10% of adjusted annual gross sales, net of sales taxes, plus rental taxes, if any. The current rental market appears equally as favorable as in the past. Accordingly, the Company expects to enter into future leases on economically viable and commercially reasonable terms. ITEM 3 -- LEGAL PROCEEDINGS None ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. Page 23 PART II ITEM 5 -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS A. COMMON STOCK DATA Commensurate with the approvals and implementation of the Company's Reorganization Plan and the related renaming of the Company, new stock trading symbols were adopted. The Common Stock is listed on The Alberta Stock Exchange, Province of Alberta, Canada, and is traded under the symbol "PPC". The former symbols were "BTB" and "BATT". The Company is a reporting issuer in the Provinces of Alberta and British Columbia, in Canada, and the US. Prior to January 1992, the Common Stock was included in the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), trading NASDAQ small cap under the symbol "BATTF". The Common Stock was delisted from NASDAQ small cap trading in January 1992 due to the Company's failure to satisfy certain minimum capital requirements. Effective 19 December 1994, the Company resumed trading in the US on the NASDAQ OTC Bulletin Board under its old symbol BATTF. No trades were reported for the period 31 December 1994 through 28 February 1995. Beginning 24 April 1995, the trading symbol was changed to "BATT" when the Company's application to qualify as an exempt foreign issuer was accepted by NASDAQ. Effective with the Company's name change to Power Plus Corporation, the new symbol for trading on the NASDAQ OTC Bulletin Board became "PPCO". As part of the Company's Reorganization Plan, approval was obtained to reorganize and consolidate its capitalization on the basis of 20 pre-consolidation shares for 1 post-consolidation share plus 1 exchange right, that is to 2,238,281 POST-CONSOLIDATION shares from the existing 44,765,613 PRE-CONSOLIDATION shares. After receiving shareholder approval in July 1996, final court and regulatory approval as required was obtained and the reorganization and consolidation (20:1 reverse-split) occurred effective 1 November 1996 and the Exchange Rights were issued accordingly. (See also ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS concerning management's Reorganization Plan as it concerns the Common Shares, and recent sales of unregistered securities by the Company.) The following table sets forth the reported high and low bid prices for the Common Shares as quoted by The Alberta Stock Exchange for each full quarterly period within the fiscal years ended 31 January 1997, 1996 and 1995, respectively, restated for the impact of the 20:1 reverse-split and expressed in Canadian dollars: Page 24
FISCAL 1997(1) FISCAL 1996(1) FISCAL 1995(1, 2) ----------- ----------- ----------- High Low High Low High Low ---- --- ---- --- ---- --- 1st Quarter $2.80 $2.30 $8.00 $7.20 $7.60 $3.20 2nd Quarter $3.80 $2.80 $6.60 $6.40 $9.60 $5.20 3rd Quarter $7.20 $4.00 $6.00 $5.60 $8.20 $5.00 4th Quarter $4.20 $2.75 $6.60 $6.00 n/a n/a
(1) The Common Shares were subject to a reverse-split consolidation on the basis of 20 old shares for one (new) Common Share, effective 1 November 1996. All amounts reported in prior periods in the table have been restated for comparative purposes. (See also ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS concerning management's Reorganization Plan as it concerns the Common Shares.) (2) Fiscal 1995 was a transition year of only nine months, and covered the period from 1 May 1994 to 31 January 1995. (3) The Common Shares began trading under the symbol PPC. Previously, the shares traded under the symbol BTB AND BAT. The following table sets forth the reported high and low bid prices for the Common Shares as quoted by NASDAQ - OTC for each full quarterly period within the fiscal years ended 31 January 1997, 1996 and 1995, respectively, restated for the impact of the 20:1 reverse split and EXPRESSED IN US DOLLARS:
FISCAL 1997(1) FISCAL 1996(1) FISCAL 1995(1,2,3) ----------- ----------- ----------- High Low High Low High Low ---- --- ---- --- ---- --- 1st Quarter $1.80 $0.90 $6.00 $5.63 n/a n/a 2nd Quarter $2.60 $1.50 $6.25 $4.38 n/a n/a 3rd Quarter $4.60 $1.88 $5.00 $1.80 n/a n/a 4th Quarter $2.88 $2.13 $3.60 $0.60 n/a n/a
(1) The Common Shares were subject to a reverse-split consolidation on the basis of 20 old shares for one (new) Common Share, effective 1 November 1996. All amounts in prior periods reported in the table have been restated for comparative purposes. (See also ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS concerning management's Reorganization Plan as it concerns the Common Shares.) (2) Fiscal 1995 was a transition year of only nine months, and covered the period from 1 May 1994 to 31 January 1995. (3) The Common Shares did not begin trading on the NASDAQ OTC Bulletin Board until April 1995 which was Quarter 1 of Fiscal 1996. (4) The Common Shares began trading under the symbol PPCO. Previously, the shares traded under the symbol BATT and BATTF. Because a substantial number of Common Shares that are held by agents in "street name", the Company is unaware of exactly how many of the outstanding Common Shares are held by residents of the United States. As of 18 July 1997, there is a total of approximately 2,500 beneficial holders of the 7,620,730 issued and outstanding Common Shares. Under the terms of the Company's current Special Notes convertible debt debentures financing, while this debt remains outs standing the Company is prohibited from making any distribution to its shareholders or declaring and paying any dividends on its Common Shares. To date, the Company has not paid dividends on its Common Shares. (See ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Section C(1)(iv.) SPECIAL NOTES CONVERTIBLE DEBT FINANCING.) Page 25 B. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS Acquisitions of control of businesses or corporations in Canada are regulated by the Investment Canada Act (the "Investment Act"). The Investment Act created an agency known as Investment Canada. In certain circumstances, an investment to acquire control of a Canadian business is reviewable by said agency. In other cases, only notice need be given to said agency and, in many cases, no action need be taken at all. The Investment Act does not apply to the acquisition of securities such as shares of the Company where the acquisition does not constitute an acquisition of "control" within the meaning of said term in the Investment Act. Generally, the term "control" means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract or otherwise. Under the Investment Act, the acquisition of more than 50% of the voting shares of a corporation is deemed to be an acquisition of control of such corporation, and the acquisition of one-third or more of the voting shares of a corporation is presumed to be an acquisition of control of such corporation unless it can be established that the acquirer does not control the corporation through the ownership of one-third or more of the voting shares. The acquisition of less than one-third of the voting shares of a corporation is deemed not to be an acquisition of control of such entity. The Company is aware of no Canadian governmental laws, decrees or regulations nor any foreign exchange controls which restrict the import or export of capital or which affect the remittance of dividends, interest or other payments of non-resident holders of the Company's securities, except as discussed in ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The Company knows of no limitation on the rights of nonresident or foreign owners to hold or vote the Common Shares imposed by foreign laws and there are no provisions in the Company's charter or by-laws which restrict ownership of securities or prescribe restrictions on the payment of dividends, interest or other payments to shareholders. C. TAXATION Dividends and other distributions deemed to be dividends paid or deemed to be paid by a Canadian resident corporation to a non-resident of Canada generally are subject to non-resident withholding tax equal to 25% of the gross amount of the dividend or deemed dividend. Also, a non-resident of Canada is subject to tax in Canada at the rates generally applicable to residents of Canada on any "taxable capital gain" arising on the disposition of the shares of a Canadian public corporation if such non-resident, together with persons with whom he does not deal at arm's length, owned 25% or more of the issued shares of any class of the capital stock of the Canadian public corporation at any time in the five years immediately preceding the date of disposition of the shares. The taxable portion of the capital gain is three-quarters of the actual gain from the disposition of the shares. Canadian taxation of dividend and deemed dividend payments to and gains realized by non-residents of Canada who are residents of the United States are subject to the 1980 Canada-United States Income Tax Convention (the "1980 Convention"). Under the 1980 Convention, the rate of Canadian non-resident withholding tax on dividends or deemed dividends paid to a United States resident may not exceed 15%, and in the case of a United States corporation that beneficially owns at least 10% of the voting stock of the corporation paying the dividend may not exceed 10% of the dividend or deemed dividend. Page 26 On March 17, 1995, the United States and Canada signed a protocol to the 1980 Convention (the "1995 Protocol"). Ratified on 9 November 1995, the 1995 Protocol reduces the withholding rate on dividends from 15% to 10%, and, in the case of a dividend paid to a United States corporation that owns at least 10% of the voting stock of the payor corporation, to 7% for dividends paid in 1995, 6% for dividends paid in 1996, and 5% for dividends paid after 1996. Where the dividends are received by a United States person carrying on business in Canada through a Canadian permanent establishment and the shares in respect of which the dividends or deemed dividends are paid are effectively connected with that permanent establishment, the dividends or deemed dividends are generally subject to Canadian tax as business profits, generally without limitation under the 1980 Convention. The 1980 Convention also provides that gains realized by a United States resident on the disposition of shares of a Canadian corporation may not generally be taxed in Canada unless the value of the Canadian corporation is derived principally from real property situated in Canada or the shares form part of the business property of a permanent establishment which the United States shareholder has or had in Canada within the twelve month period preceding the date of disposition. Subject to certain limitations, generally Canadian income taxes paid or accrued by a United States resident to Canada on account of dividends or deemed dividends paid by the Canadian corporation and gains from the disposition of the Canadian corporation's shares are eligible for foreign tax credit treatment in the United States. D. RECENT SALES OF UNREGISTERED SECURITIES See ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Section C(1) FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES. ITEM 6 SELECTED FINANCIAL DATA A. SUMMARY DATA The following selected financial data of the Company is presented for, and as of the end of Fiscal 1997, Fiscal 1996, Transition Fiscal 1995, and each of the former 12 month fiscal years ended 30 April 1994 and 1993. (During Fiscal 1995, the Company changed its fiscal year end to 31 January from 30 April.) This information should be read in conjunction with ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and the Consolidated Financial Statements and the Notes thereto, included elsewhere herein. The Company's Consolidated Financial Statements and related information have been prepared according to Canadian Generally Accepted Accounting Principles (CGAAP), however, these financial statements comply, in all material respects, with United States Generally Accepted Accounting Principles, except as described in Note 12 to the Company's Consolidated Financial Statements. Page 27
FYE 31 JANUARY TRANSITION FYE 30 APRIL ----------------------- FYE ENDED ---------------------- 31 JANUARY 1997 1996(2) 1995(2) 1994(2) 1993(1) ------ ------- ---------- ------- ------- - STATEMENT OF OPERATIONS DATA: Total revenue $4,080,598 $5,375,229 $8,547,973 $10,223,192 $4,311,591 Net (loss) $(5,687,427) $(4,541,551) $(1,489,416) $(2,063,707) $(727,154) Net (loss) per share (3) (4) POST REVERSE-SPLIT $(2.54) $(2.50) $(0.94) $(1.40) $(0.60) AS ORIGINALLY REPORTED $(0.13) $(0.05) $(0.07) $(0.03) BALANCE SHEET DATA: Total assets $11,043,854 $330,035 $5,182,679 $4,739,604 $4,326,026 Working capital $4,033,127 $(422,159) $611,868 $161,473 $873,069 Long-term liabilities $4,740,000 NIL NIL NIL NIL Total liabilities $7,455,813 $507,208 $2,152,401 $2,015,312 $743,587 Common shareholders' equity/deficiency (5) $3,588,041 $(177,173) $3,030,278 $2,724,292 $3,582,439
(1) Consolidated results of the Company and its Former Subsidiaries, including the acquisition of the US business in November 1992. (2) Consolidated results of the Company and its Former Subsidiaries. (3) The Common Shares were subject to a reverse-split consolidation on the basis of 20 old shares for 1 (new) Common Shares, effective 1 November 1996, during Quarter 4 of Fiscal 1997. The comparative amounts for reported periods prior to Fiscal 1997 have been restated on the same basis. The Common Share characteristics and entitlements are the same as the old shares. (See also ITEM 7 --MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS for more discussion concerning management's Reorganization Plan as it concerns the Common Shares.) (4) To date, the Company has not paid dividends on its Common Shares. (See ITEM 5(A), above.) (5) In accordance with the Reorganization Plan and the Plan of Arrangement, the stated capital amount and accumulated deficiency in earnings were both reduced by $26,670,825, to better reflect the financial repositioning of the Company. (See also ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS for more discussion concerning Stated Capital Reduction.) B. EXCHANGE RATES The following table sets forth, for the periods and dates indicated, certain information concerning exchange rates of United States and Canadian Dollars. All figures shown represent noon buying rates for cable transfers in New York City, certified for customs purposes by the Federal Reserve Bank of New York. The sources of this data are the Federal Reserve Bulletin and the International Financial Statistics prepared by the Bureau of Statistics of the International Monetary Fund.
C$ HIGH C$ LOW AVERAGE FISCAL YEAR END -------- ------- ------- --------------- C/US US/C C/US US/C C/US US/C C/US US/C ---- ---- ---- ---- ---- ---- ---- ---- 1997 $1.38 $0.73 $1.33 $0.75 $1.36 $0.74 $1.37 $0.73 1996 $1.36 $0.74 $1.28 $0.78 $1.32 $0.77 $1.32 $0.77 1995 $1.42 $0.70 $1.34 $0.74 $1.37 $0.72 $1.40 $0.71 1994 $1.26 $0.79 $1.40 $0.72 $1.32 $0.76 $1.38 $0.72 1993 $1.18 $0.85 $1.29 $0.78 $1.23 $0.81 $1.27 $0.79 1992 $1.29 $0.78 $1.14 $0.88 $1.21 $0.83 $1.27 $0.79
Page 28 ITEM 7 -- MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the Notes thereto, which follow elsewhere herein. The audited Consolidated Financial Statements for Fiscal 1997 reflect a period of fundamental change for Power Plus. The Company, renamed Power Plus Corporation, has literally shed its past by reorganizing and redirecting its business operations. A. THE BUSINESS IN EVOLUTION Power Plus has combined two merchandising segments -- wireless communication products and services (beepers/pagers, cellular phones, Personal Communications Systems (PCS) and related airtime service contracts), PLUS portable electronics (the latest in hand-held electronics, communications, entertainment, business and lifestyle products). Management has researched, planned and is implementing its NEW wireless communications business, called POWERFUL CONNECTIONS tangentially with the launch of its new POWERFUL STUFF retail chain throughout the US and Canada. The distinction between them is that POWERFUL CONNECTIONS is the reseller of pager and cellular airtime and services, while POWERFUL STUFF is a chain of retail stores that sells the merchandise and makes the initial sales of the pager or cellular airtime service contract to the retail consumer. 1. 1 + 1 = 3 -- SYNERGISM AT WORK The synergy and potential mutual benefits for the two merchandising segments are noteworthy. In POWERFUL STUFF stores, the pagers (beepers) and accessories generate higher average per transaction revenues and earn strong secondary margins through related airtime and activation sales. The sale of the portable electronic products is complementary and the related battery business provides particularly high margins from specialty batteries and installation services, plus strong positioning for the sale of innovative portable battery-powered products. The initial sales of contracts for wireless airtime and services generates recurring revenues from customer subscriber fees and renewals for POWERFUL CONNECTIONS. The priority of the POWERFUL STUFF retail chain is increasing the number of stores and the sales productivity per store, while maintaining a strong gross margin. POWERFUL CONNECTIONS, on the other hand, will focus on providing the creative packaging and pricing of airtime, building a loyal customer base for its rebilling business while maintaining a strong gross margin. There are differences, however, in the key business fundamentals. POWERFUL STUFF focuses on its working capital -- turning inventory -- to produce a return on its capital investment in fixed assets and leaseholds, while POWERFUL CONNECTIONS' focus is on building a utility-like cash flow from an increasing and loyal customer base. On one hand, POWERFUL STUFF requires capital to expand -- the timing and amounts of capital injections determines the rate of the chain's growth -- while, on the other hand, Page 29 POWERFUL CONNECTIONS can expand with marginal capital investment. POWERFUL CONNECTIONS' growth will, however, be highly dependent on the expansion of the POWERFUL STUFF chains. In adding the wireless communications business, Power Plus enhances the value of the POWERFUL STUFF retail chain and its opportunity to build its own loyal customer franchise. Sales staff in POWERFUL STUFF stores will be the principal sales force for the wireless communications products and services. As POWERFUL CONNECTIONS' customer list grows from 20,000 to over 1 million, as foreseen in PLAN 2000, all of these customers will initially contract and pay for these services at a POWERFUL STUFF store. In fact, counting customers lost through normal attrition over time, the stores will likely actually sign up more than 2 million new customers -- all of whom may purchase their pagers and accessories, and perhaps other merchandise, at POWERFUL STUFF stores. For that reason, POWERFUL STUFF stores will earn an agent's fee on the sales of POWERFUL CONNECTIONS' airtime rebilling contracts, as well as the normal margins on the sale of pagers and accessories. But the connection between the customer and the Company doesn't end there. Considering that the average airtime billing cycle is every three months, coupled with the fact that about 60% of the pager customers pay their bills at a POWERFUL STUFF store, the pager business will improve customer loyalty and their shopping frequency for the retail chain. POWERFUL STUFF will be able to include "stuffers" that advertise special promotions with the POWERFUL CONNECTIONS bills which are mailed on average 4 times a year to all of its customers. This inexpensive targeted advertising may also help increase future sales at each POWERFUL STUFF store. 2. WIRELESS BUSINESS While the business of a reseller distribution channel is reasonably established in the US, it is relatively new to Canada. Cantel and Bell Mobility do not currently have resellers; they sell direct and use agents and retailers. PageMart and PageNet are major new entrants to the paging business in Canada and both are in the process of setting up reseller programs in Canada based on the models employed by their parent companies in the US. The carrier, whether a pager or cellular network, provides service to POWERFUL CONNECTIONS at highly attractive rates for the airtime. In turn, POWERFUL CONNECTIONS will repackage, sell, bill and service customers IT attracts through the POWERFUL STUFF retail chains. For the carrier, therefore, POWERFUL CONNECTIONS is a source of revenue. The carrier is incentivized to maximize the growth of POWERFUL CONNECTIONS -- if only to improve its own return on capital investment. In addition to the variable cost of providing the airtime -- whether costed on a per minute or per month basis, both are only incurred ONCE SOLD -- POWERFUL CONNECTIONS also incurs the costs of acquiring customers commissions paid to POWERFUL STUFF, advertising, billing, collecting, servicing and accounting. Some of these costs are variable and others are fixed. A paging carrier can provide service for approximately $2 per month per customer to a reseller. The reseller might sell this service for anywhere from $4 to $15 per number per month. A cellular company might make its network available to a reseller for a price ranging between 10CENTS and 20CENTS per minute (depending on the time of day), plus charges for the telephone number, activation, etc. The reseller obtains a markup on this time. Page 30 The potential for profit increases as more customers are added -- because the volume discount increases as more customers are added and much of the cost of the computerized backoffice overhead is fixed -- better overhead leverage. Typically, the reseller must perform certain functions, most of which are computerized: - Marketing to the customer, contracting and activating the service, providing ongoing technical support and retaining the customer. - Credit screening and acceptance of credit risk, if any, and the assumption of the risk for bad debts. - Billing and collecting accounts receivables. - Financing the customer receivables and paying the carrier according to contracted schedules and terms. - Blocking customers who do not pay their bills or terminating their service. Some of these are reactivated. The business experiences a normal customer attrition rate, on average, of between 5% and 10% per month. Therefore, to avoid incurring ongoing service costs, POWERFUL CONNECTIONS must be vigilant about the timing of billing and collecting amounts due, and blocking and terminating non-paying customers. POWERFUL CONNECTIONS pays the carrier on a monthly basis in arrears and must either collect from its customer (in the same month) or terminate the service from the supply side in order to cut future costs for which the Company will get paid. An important aspect of the reseller/retailer business is that POWERFUL CONNECTIONS' customers receive periodic service invoices by mail which can also include sales incentives for merchandise available at POWERFUL STUFF stores. A portion of the pager customers return to the store to pay their bills in cash. Their action enables the reseller/retailer to keep in touch, reduces subscriber churn and provides an opportunity to sell other merchandise --accessories are particularly high margin items. Most cellular customers pay their bills directly by mail. By combining pager reseller and cellular services with retailing, POWERFUL STUFF will work to obtain competitive advantages in the marketplace. - A reseller determines its own packaging of airtime and pricing, and other enticements to attract new customers. - The reseller is able to establish a direct service relationship with customers who identify with the retail store -- not some face-less carrier. - Highly targeted advertising about accessories and new merchandise at POWERFUL STUFF stores can be included with bills mailed to customers. - Over time, a reseller can build a highly refined customer list into a tangible valued asset. With the many advances in communication products and services, new product opportunities to combine reselling with retailing should emerge. Management believes that POWERFUL STUFF is advantageously positioned to attract new wireless customers for POWERFUL CONNECTIONS. The limited amount of capital investment required to build the pager airtime rebilling business, compared to the cellular airtime rebilling business, has caused management Page 31 to prioritize accordingly. In addition, the billing cycle management proposes to utilize will actually produce increasing amounts of positive cash flow over time, which amounts can be deployed to help fund the POWERFUL STUFF store chain rollout program. B. RESULTS OF OPERATIONS 1. FISCAL 1997 i. BUILDING THE BUSINESS Power Plus Corporation, with its Corporate Office now in Toronto, Canada, and its North American Operations Office in Sarasota, Florida, is building a branded chain of specialty niche retail stores which sells wireless telecommunications products and portable fashion electronics. The Company expects approximately 85% of its stores to be in the US. Through its wholly-owned subsidiaries, Power Plus USA, Inc. and Power Plus Canada, Inc., Power Plus operated 51 retail stores by the end of Fiscal 1997 under the trade name POWERFUL STUFF. The majority of these stores were opened in the last four months of Fiscal 1997. The stores, operating from leased premises ranging from 150 to 700 square feet in major enclosed shopping malls in the US and Canada, sell wireless communication products and services (beepers, cellular phones, personal communication systems and related service contracts), and portable electronics (hand-held electronic communications, entertainment, business and lifestyle products). Through POWERFUL CONNECTIONS, the Company is building it wireless airtime and service reselling business and a customer list that will include all parties that were or are airtime customers of the Company. At the beginning of Fiscal 1997, the Company was being restructured and reorganized from its former self, then known as Battery One, Inc. Prior to the end of Fiscal 1996 the Company's Former Subsidiaries were assigned into bankruptcy. All of the Company's operations through the end of Fiscal 1996, which had consisted primarily of the sale of batteries and battery-related products to consumers via Company-owned retail stores in Canada and the United States, were conducted through the Former Subsidiaries and all of its capital assets were owned by the Former Subsidiaries. Accordingly, at the end of Fiscal 1996, the Company had no ongoing retail operations and the comparative Consolidated Statements of Operations for Fiscal 1996 and Fiscal 1995 present the results of its former business. The Consolidated Financial Statements included with these materials reflect that during the first two quarters of Fiscal 1997 the Company acquired assets, operated only one store in Canada and opened its first US store in July 1996. During Quarters 3 and 4 of Fiscal 1997, Power Plus opened 36 new locations and acquired a chain of 13 retail locations in Florida, bringing the number of locations opened in total to 51, against PLAN 2000's target of 40, by the end of Fiscal 1997. In fact, most stores were opened in mid- December. The timing of the store openings meant that revenues were skewed to Quarter 4 which was, to the extent the stores were fully operational, also favorably impacted by the peak Christmas selling season. As of 18 July 1997, the Company has 36 locations open in the US and 19 Page 32 in Canada, totaling 55. At the end of Fiscal 1997, the Company had 51 locations open. On 1 February 1996, the Company announced its Reorganization Plan subdivided into two parts: PLAN 2000, the Company's 5-year business plan prescribing the manner in which the Company would relaunch and build its business to in excess of 1000 stores by the end of the Year 2000; and, the Financing Plan which prescribed how the Company would finance PLAN 2000's funding requirements. The Reorganization Plan, which incorporated a related Plan of Arrangement, was approved by the Company's shareholders at Fiscal 1996's Annual and Special Meeting of Common Shareholders held on 24 July 1996. The Plan of Arrangement was approved by the regulators and court immediately thereafter. Among other matters, shareholders approved as part of the Reorganization Plan the Company's proposal to: change its name; reduce its stated capital by all or virtually all of the accumulated deficit; reorganize and consolidate its capitalization on the basis of 20 pre-consolidation shares for 1 post-consolidation share plus 1 exchange right -- that is to 2,238,281 post-consolidation shares from then record date number of 44,765,613 pre-consolidation shares; and, refinance in accordance with the Financing Plan. The Company's Reorganization Plan incorporated a related 3-year Financing Plan, formerly approximately $42 million and recently increased to $49.1 million. The Company had received $15.4 million as of the end of Fiscal 1997, providing the capital needed to fund the first year implementation of PLAN 2000 and the related store rollout program designed to achieve critical mass expeditiously and economies of scale and operating efficiencies. (Please refer to the table in Section C(4) - FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES, below.) During Fiscal 1997, the Company invested $3,486,592 in capital operating assets, compared to $-nil last year. Of this amount, $1,200,500 was invested in capital operating assets acquired and $2,286,092 was added by purchasing or constructing capital operating assets over the course of the year. At the end of Fiscal 1997, the Company had non-merchandise inventory valued at $247,439 comprised of store furniture and fixtures and POS computer hardware not yet put into service which was included in working capital and that was not amortized. These fixed assets will be deployed as new stores are opened during Fiscal 1998. Since the majority of stores were opened in the last four months of Fiscal 1997 and because of the limited time these fixed assets were deployed in the year, the Company did not amortize its capital investment in those fixed assets this year. During Fiscal 1997, the business grew by entering into store leases, buying furniture and fixtures, purchasing equipment and constructing/renovating store locations, and by acquiring businesses. Page 33 a.) POWER PLUS CANADA On 8 March 1996, the Company closed a purchase transaction with the Trustee responsible for the realization of the assets BOSI whereby it acquired the inventory, furniture and equipment, kiosks, and certain lease entitlements and proprietary interests of its former Canadian subsidiary, including an operating store location at Toronto's Square One, for cash consideration of $200,000. During an interim period, the Company employed the inventory, certain lease entitlements and trademarks in its skeletal operations. However, because the longer term redirection of the business operations called for a new appearance and substantial change to merchandise mix, the other assets acquired were sold in the ordinary course of business. The Canadian POWERFUL STUFF chain was launched in July 1996. Since then 18 new locations have been opened in Ontario, in the Northeast Region, representing a capital investment of $1,109,932. Total capital investment in operating assets deployed in the business in Canada amounted to $1,309,932 compared to $-nil last year. (The $330,035 amount in assets reported last year pertained to the parent company and were not deployed as operating assets.) b.) POWER PLUS USA On 17 May 1996, Power Plus USA, Inc., acquired the strategic Pittsburgh Airport AirMall location lease, formerly held by Etc., from the Trustee upon approval of the Western District of New York Bankruptcy Court for cash consideration of $110,000 (US$70,000). The US POWERFUL STUFF chain also launched in July 1996, starting in the Northeast Region (Pittsburgh), and then in the Southeast Region (Florida, Georgia, Mississippi, North Carolina and Tennessee). - The Northeast Region The US operations commenced with the opening of the Pittsburgh Airport AirMall store at the end of July 1996, ideally situated in the largest airport shopping center in North America, providing POWERFUL STUFF with a flagship store in one of the premier US transportation centers and the foundation for expansion in this Region. Three additional locations were opened during Quarters 3 and 4 of Fiscal 1997, to flesh-out the Pittsburgh District cluster. More locations are planned for the Pittsburgh District and a new District is planned for Detroit in Fiscal 1998. - The Southeast Region The Southeast Region's expansion is a blend of new POWERFUL STUFF stores combined with the 13 retail locations acquired in Florida. On 17 June 1996, Power Plus USA agreed to purchase certain assets, lease entitlements and the business of PORTRONICS, a specially US retailer, from Consumer Electronics Specialty Stores, Inc. ("CESS"), located in Sarasota, Florida. The acquisition, which closed effective 1 September 1996, included 10 leased stores in Florida, inventories, two rented warehouse/retail facilities and pager repair facilities, one office/retail location (for a total of 13 retail locations) and CESS's proprietary interests. An integral component of the assets purchased also included over 20,000 existing pager customers under Page 34 contract and the sole right of the Company to the related future rebilling revenue. Total consideration of $1,232,066, of which the final installment was paid during the first half of Fiscal 1998, was paid in a combination of cash and the assumption of certain trade liabilities as follows:
Assets acquired were: Consideration therefor was: Merchandise inventory $341,566 Cash, on closing $599,189 Furniture, fixtures & equipment 205,500 Current liabilities assumed 119,178 Customer list 685,000 Amount paid subsequent to Fiscal 1997 513,699 ------- ------- $1,232,066 $1,232,066 ---------- ---------- ---------- ----------
In addition, Power Plus opened a total of 22 new locations in Georgia, North Carolina, Alabama, Tennessee and Mississippi by year end, representing an incremental capital investment in operating assets of $1,286,160. On 12 August 1996, the Company announced an agreement in principle to enter into a joint venture with C-Con Acquisition Company Inc. of Florida to resell cellular telephone services through POWERFUL STUFF retail stores. In light of priorities otherwise, it was determined to abort this transaction at no cost or expense to the Company ii. MANAGEMENT PRIORITY FOR FISCAL 1997 WAS PLANNING FOR THE FUTURE During the first half of Fiscal 1997 in the early start up phase, the Company had only 1 store open, 20 by the end of Quarter 3 and 51 by the end of the year. The weighted average number of months that stores were open during the year was only 3 -- substantially less than break-even, which is estimated to be 125 stores. In this context, and as was expected, the administrative and overhead costs, including specialty legal and accounting fees for restructuring and reorganizing the Company following the bankruptcies of the Former Subsidiaries, were substantial. Also, new management invested significant time researching and planning for the Company's future, for which the administrative and overhead costs have also been substantial in context of the start up operations. For most of the year, the Company's management was occupied in laying the foundations for the building process which began only late in Fiscal 1997. In addition, the Company, in anticipation of the planned future growth of the business, made the strategic decision to hire an experienced and proven senior management team which may appear to some to be more than is required for current business needs -- but, is in fact considered necessary to prepare for delivering the growth contemplated in PLAN 2000. Hiring in anticipation of need represents a form of insurance -- to both accomplish the goals set out in PLAN 2000, and to prudently drive and manage the planned rapid growth process. This, therefore, is another reason administrative and overhead expenses for Fiscal 1997 appear higher than they would be otherwise for a mature operation. The Company intends to continue its pre-hiring policy for the next two years as planned to provide and train the management required to accomplish its goals and objectives. Page 35 While management did have the option of capitalizing certain of these expenditures, which represented a substantial amount in the aggregate, the decision was made to expense them in the period incurred so that the future results of the new business would not be tarnished by any amount of amortization from these non-recurring expenses in future periods. The long-term business of the Company is building and operating the POWERFUL STUFF retail store chains and POWERFUL CONNECTIONS wireless reseller business. The transition from the planning to the operating phase is being marked by the building of an experienced operating team and, accordingly, management foresees that administrative and overhead expenses will come into line with industry standards, and ultimately become suitably leveraged as the future numbers of stores and wireless customers increase. iii.CONSIDERATION OF FISCAL 1997 BUSINESS RESULTS The following table sets forth certain items reflected in the Company's consolidated statement of operations expressed as percentages of sales: PERCENTAGE OF SALES ---------------------------------- TRANSITION FYE FYE 31 JANUARY 31 JANUARY ------------------ ---------- 1997 1996 1995 ------ ------ ------ Cost of sales 58.5% 42.4% 49.1% Operating, occupancy & administrative expenses n/a 133.3% 66.2% Net loss n/a 84.9% 17.4%
(1) Operating and administrative expenses included write-off of assets abandoned in 1996. Cost of sales as a percentage of total sales for the period reported on herein was 58.5%, reflecting certain inefficiencies which management believes are short-term. These include the cost of writing off inventory, restructuring the merchandise mix and the negative impact of less than optimal purchasing power facing a small chain lacking sufficient credit support from vendors. Management expects the Cost of Sales to decrease over time as a percentage of sales once the Company reaches critical mass and settles on its merchandise mix. In addition, the Company has recently began developing and nurturing new relationships with vendors and expects this will lead to a better gross profit, benefiting from lower merchandise costs in the future and other cost abatement inducements from vendors. Fiscal 1997's operating and administration expenses, are not comparable to Fiscal 1996, principally because pursuant and subsequent to the bankruptcies of the Former Subsidiaries, the Company was initially focused on reorganizing, restructuring and planning for the future. Fiscal 1996 expenses also included the loss on the abandonment of assets in Fiscal 1996. In the long-term, the Company's administration is expected to be structured so that a number of new stores can be Page 36 added without a corresponding increase in administrative overhead, thus leveraging on the fixed overhead expenses. The amount of amortization for the period increased in comparison to Fiscal 1996 because the Company had acquired assets during the year and had capitalized certain intangible assets (deferred costs of issuing Special Notes and deferred issuing costs of warrant financings), and was amortizing the discount on the Special Notes at the rate of $70,000 per quarter. No corporate income taxes were payable in Fiscal 1997. Management expects the amount of accrued income tax losses being carried forward and available for sheltering future business income is approximately $20 million. This amount is not reported in the Consolidated Balance Sheet. 2. FISCAL 1996 By the final quarter of Fiscal 1996, it had become apparent to then management that on the basis of the Company's share capitalization, and in consideration of the continued non-profitability of Etc., the Company, notwithstanding its best efforts, was not able to complete the financing of former management's turnaround program on the basis contemplated. The poor performance of Etc. resulted from a number of unproductive stores situated in secondary locations committed to by prior management, which were subsidized by BOSI to its serious detriment. In December 1995, BOSI made a voluntary assignment into bankruptcy pursuant to the CANADIAN BANKRUPTCY AND INSOLVENCY ACT. In December 1995, Etc. made a voluntary petition seeking protection under Chapter 11 of the US BANKRUPTCY CODE, which in January 1996 was converted to a Chapter 7 filing. The Company is the largest creditor of the Former Subsidiaries but does not expect to receive any recovery of substance upon the winding up of these bankruptcies expected during Fiscal 1998. The Company is not directly nor indirectly liable for any debt or liability of the Former Subsidiaries and has no outstanding guarantees or undertakings with respect to any third party claim against the Former Subsidiaries. All of the Company's operations, which consisted primarily of the sale of batteries and battery-powered products to consumers via Company-owned retail stores in Canada and the United States, were conducted through the Former Subsidiaries and all of its capital assets were owned by the Former Subsidiaries. As at 31 January 1996, the Company, therefore, had no ongoing retail operations. The Consolidated Statements of Operations for Fiscal 1996 reflect the decline in operations experienced by the Former Subsidiaries, as compared to Fiscal 1995. The loss from operations reported in the Company's Consolidated Financial Statements is $4.4 million. In addition, the loss on abandonment of Former Subsidiaries in the amount of $118,767, increased the net loss to $4.5 million. The Consolidated Financial Statements for Fiscal 1996 and 1995 include the accounts of the Battery One, Inc., BOSI and Etc. All significant intercompany accounts and transactions between the parent company and the Former Subsidiaries were eliminated. No corporate income taxes were payable in Fiscal 1996. Management expects the amount of accrued income tax losses, being carried forward and available for sheltering Page 37 future business income, is approximately $15 million. This amount is not reported in the Consolidated Balance Sheet. 3. TRANSITION FISCAL 1995 The Company sustained substantial operating losses while attempting to turn around the US operation during the latter part of Fiscal 1995 and which continued into Fiscal 1996. The plan, designed to improve operating efficiencies, strengthen management depth and upgrade the corporate image with customers, over time proved to be too little too late. During Fiscal 1995, the Company changed its fiscal year end to be more consistent with other retailers, redesigned its standard kiosks and added new directors and executive officers. As a result of the fiscal year end change, sales volume for Fiscal 1995 declined to $8.6 million from $10.2 million for Fiscal 1994. Sales volume increased $600,000, or 8% over the same nine-month period last year. Fiscal 1995's net loss was $1.5 million, compared to $2.1 million loss reported at the end of prior year. The US operations contributed $6.1 million sales to Transition Fiscal Year 1995's consolidated sales (71.7% of the total), compared with $7.2 million in sales to the Fiscal 1994 consolidated results (70.1% of the total). The fractionation in sales approximates the proportion of locations in the US and Canada. Throughout Fiscal 1995, the Company operated 68 stores -- 49 in the US (72% of the total) and 19 in Canada. Operating expenses as a percentage of sales decreased in Fiscal 1995 compared to Fiscal 1994. Operating expenses as a percentage of sales were 66.2% in Transition Fiscal 1995 compared to 75.3% in Fiscal 1994. The decrease in 1995 reflects the ongoing benefits flowing from consolidating the administrative functions into one location and streamlining. The Company's consolidated net loss for 1995 (no taxes were payable in Fiscal 1995) was $1.5 million compared to $2.1 million in Fiscal 1994. The US operations accounted for about 66.6% of the 1995 net loss, compared to 66% of the 1994 net loss. The 1995 and 1994 losses equated to losses per share of $0.05 and $0.07 on an increased weighted average number of common shares outstanding of 34,694,521 compared to 31,806,154. The comparable losses per share, restated for the effect of the 20:1 reverse-split, equate to $1.00 and $1.40, respectively. C. Financial Condition, Liquidity and Capital Resources The Company's Reorganization Plan approved last year incorporated a 3-year $42 million Financing Plan which was recently increased to $49.1 million. The Financing Plan provides the framework to fund the initial growth and related interim working capital shortfall. This is the period according to PLAN 2000 before the Company becomes self-sustaining, that is when future growth can be self-financed from internally generated cash flows. Management projects that the Company must expand to the 125 store level before it will attain profitable operations. Management anticipates reaching critical mass by the end of calendar 1997. It is expected that long-term debt and new equity capital will provide the necessary funding for future growth and the operating losses incurred during this growth stage, although no assurances can be given that this funding will be completed as planned. As at Fiscal 1997 year end, the Company had raised the equity capital and long-term debt it had forecasted. Page 38 For an overview of both completed financings and planned financings, please refer to the table in Section C(4) - SUMMARY OF CHANGES TO SHARES AND SHARE CAPITAL, below. Management estimates that the Company will attain the ability to fund its future rate of growth from internally generated cash flows at approximately the 600 store-level. Subject to the timing and amounts received, management estimates that the Company can become self-sustaining by the end of Fiscal 1999. The current Financing Plan calls for $49.1 million, needed to meet the rapid pace set by management of the rollout program. The change in the amount relates to the additional costs of reorganizing and planning phases, the impact of the deviation in the timing of the receipt of capital proceeds from the Exchange Rights which was originally forecasted for early December 1996 (theoretically in time for merchandise purchases for the Christmas season but since this amount was received at the end of January 1997, it was too late to be deployed to boost Christmas sales), and the acquisition of the 13 retail locations in Florida in September 1996. 1. FINANCIAL INSTRUMENTS DEPLOYED BY THE FINANCING PLAN The financing-related securities, including the Special Warrants and the Special Notes which are convertible into Common Shares, were sold by private placement to ACCREDITED INVESTORS. These securities were issued pursuant to the applicable securities laws in the governing jurisdictions and were not registered or sold principally in the US. Sales of the securities in the US were made in reliance upon the exemption form registration contained in Section 4(2) of the SECURITIES ACT OF 1933, as amended. (Please also refer to the table in Section C(4) - SUMMARY OF CHANGES TO SHARES AND SHARE CAPITAL, below.) i. FISCAL ADVISOR ENGAGED FOR FISCAL 1997 The Company engaged C.M. Oliver & Company Limited of Toronto (the "Agent") effective 1 March 1996 as its fiscal advisor and agent for a one-year term. The term was not extended. The Agent assisted the Company on a best efforts basis in raising the capital required for its Reorganization Plan, in accordance with the Financing Plan. The Agent's compensation includes a warrant to purchase up to 4.5 million pre-consolidation shares of the Company at 10 CENTS per share (225,000 post-consolidation Common Shares at $2.00 per share). This share purchase option considered on a post-consolidation basis represents potential dilution of up to 675,000 Common Shares, and the possibility of up to $1.2 million in the aggregate in additional capital. During Fiscal 1997, 205,219 Common Shares were issued to the Agent for $410,438. The balance of up to 19,781 Common Shares, representing potential additional capital proceeds of up to $39,562 are expected to be exercised in September 1997. As well, the Agent's compensation included a 8% commission for certain capital amounts raised. During Fiscal 1997, the Company paid a total of $752,000 in cash and 45,000 Common Shares as a payment in kind on account of commission and finder's fees. Page 39 ii. 1996 SPECIAL WARRANT PRIVATE PLACEMENT FINANCING During Fiscal 1997, the Company completed the 1996 Special Warrant Private Placement Financing (the "1996 Special Warrants") of $4.5 million representing an aggregate of 45 million 1996 Special Warrants. The closings of the first and second tranches took place on 1 March and 2 April 1996, representing 38.5 million 1996 Special Warrants, which were issued at a purchase price of 10 CENTS per Special Warrant (or 2.25 million 1996 Special Warrants at $2.00 on a post-consolidation basis), for gross proceeds of $3.85 million, of which $1.1 million had been received prior to 31 January 1996. An additional 6.5 million 1996 Special Warrants representing gross proceeds of $650,000 were issued prior to the end of September 1996, completing the 1996 Special Warrant Financing in its entirety. Each 1996 Special Warrant was converted effective 31 January 1997 at no additional consideration into 1 Common Share plus 1 Class B Warrant which consists of two entitlements: firstly, entitling holders to acquire up to an aggregate of 2.25 million Common Shares at an exercise of $2.00 per share (equivalent to 45,000,000 shares at 10 CENTS per share on a pre-consolidated basis), on or before 30 September 1997, representing additional potential future capital to the Company in the aggregate of up to $4.5 million; and, secondly, and subject to the exercise of the Class B Warrant, a collateral Class BB Warrant, entitling holders to acquire up to an aggregate of a further 2.25 million Common Shares at an exercise purchase price of $2.50 per share (equivalent to 45,000,000 old shares at 12.5 CENTS per share on a pre-consolidated basis), on or before 1 March 1998, representing additional potential future capital in the aggregate of up to $5.6 million. The aggregate future capital injection potentially to be derived from the Class B and BB Warrants on a fully exercised basis is $10.1 million. The 1996 Special Warrant financing terms provided that the Company would incur a 10% penalty payable by the issuance of additional 1996 Special Warrants to the holders of the 1996 Special Warrants, that is a further 4.5 million 1996 Special Warrants on a pre-consolidation basis in prescribed circumstances, representing additional dilution of 225,000 Common Shares. Those prescribed circumstances required the Company to file a prospectus in Ontario and Alberta by 14 June 1996 to qualify the 1996 Special Warrants as free-trading to be lawfully offered to the public, and to obtain a final prospectus receipt by 26 July 1996, failing which the penalty would be invoked. The Company was unable to meet such obligations and the penalty has therefore been incurred. The entitlements attached to these penalty 1996 Special Warrants are the same as the 1996 Special Warrants. Holders of the penalty 1996 Special Warrants will not be required to pay to receive the Common Shares included therein, but the Class B and BB Warrants attached thereto will include the same exercise price required to be paid for them to be acquired, that is $2.00 per Common Share for the Class B Warrant and $2.50 per Common Share for the Class BB Warrant. The penalty 1996 Special Warrants represent up to an aggregate of 450,000 additional Common Shares in dilution, and the potential of up to an aggregate of $1 million in additional capital on a fully diluted basis. Page 40 None of the Class B Warrants, Class BB Warrants, Penalty Class B Warrants or Penalty Class BB Warrants were exercised prior to year end. As of 18 July 1997, 550,000 Class B Warrants have been exercised providing $1.1 million gross proceeds. On 30 June 1997, the Company announced by news release that it has received approval for a three-month extension of the expiry date of the outstanding Class B Warrants and Class B Penalty Warrants from 30 June 1997 to 30 September 1997. All other terms and conditions remained the same. iii. SHARE CAPITAL REORGANIZATION AND CONSOLIDATION AND EXCHANGE RIGHTS ENTITLEMENTS The reorganization and consolidation of the Company's outstanding share capital occurred pursuant to a Plan of Arrangement under Section 86 of the BUSINESS CORPORATIONS ACT, ALBERTA, which had received shareholder, court and regulatory approval. In general terms, the Company reorganized and consolidated all of its issued old shares (of which 44,765,613 pre-consolidation shares had been issued and outstanding as of 1 November 1996) on the basis of every 20 old shares before consolidation being reorganized and consolidated into 1 Common Share (that is, after consolidation there would be 2,238,281 issued post-consolidated Common Shares) plus 1 Exchange Right. Under the terms of this consolidation, respecting the loyalty of the Company's long-term shareholders and seeking their continuing support on an equal footing with the Special Warrant holders, and considering the Company's capital requirements, each consolidated Common Share had attached to it 1 exchange entitlement (the "Exchange Rights") to purchase 1 unit of the Company's equity (the "Exchange Rights Units") on or by 31 January 1997. The Exchange Rights entitled holders to purchase up to an aggregate of 2,238,281 Exchange Rights Units of the Company at an exercise price of $2.00 per unit (equal to 10 CENTS per unit on a pre-consolidation basis), on or before 31 January 1997. Each Exchange Rights Unit consisted of one Common Share plus one purchase warrant, hereinafter referred to as the Class A Warrants. The Class A Warrants shall consist of two entitlements: firstly, entitling holders to purchase 2,238,281 Common Shares of the Company at an exercise price of $2.00 per Common Share (equivalent of 10 CENTS per share on a pre-consolidation basis), on or before 30 September 1997, representing additional potential future capital to the Company up to an aggregate of $4.5 million (less the amount exercised during Fiscal 1997); and, secondly, conditional upon the exercise of the Class A Warrant, a collateral warrant, hereinafter referred to as the Class AA Warrant, entitling holders to purchase up to an aggregate of a further 2,238,281 Common Shares of the Company at an exercise price of $2.50 per Common Share (equivalent of 12.5 CENTS per share on a PRE-CONSOLIDATION basis), on or before 1 March 1998, representing additional potential future capital to the Company in the amount of up to an aggregate of $5.6 million (less the amount already exercised). The potential capital injection that may be derived from the Exchange Rights on a fully diluted basis is $10.1 million in the aggregate. Effective 31 January 1997, all the Exchange Rights, which entitled the holder to purchase 1 (post-consolidation) Common Share for $2.00 and receive 1 Class A Page 41 share purchase warrant, were converted into 2,238,281 Common Shares and the Company received $4,476,562 in new capital. Prior to the end of Fiscal 1997, 30,525 Class A Warrants and 1,475 Class AA Warrants were exercised, representing dilution of 31,000 Common Shares and providing $64,737 additional capital. As of 18 July 1997, 422,443 Class A and 4,225 Class AA Warrants have been exercised providing approximately $855,000 proceeds. On 30 June 1997, the Company announced by news release that it has received approval for a three-month extension of the expiry date of the outstanding Class A Warrants from 30 June 1997 to 30 September 1997. All other terms and conditions remained the same. iv. SPECIAL NOTES CONVERTIBLE DEBT FINANCING The Company initially received approval for a $6 million, 5-year 10% Special Note private placement financing offering. The Company has recently obtained conditional regulatory approval to increase this Offering by $5 million, making it now up to $11 million, in the aggregate, with the same terms and conditions. During Fiscal 1997, the Company completed the $6 million placement in two closings. Each $1,000 principal amount of Special Notes may be converted into an equivalent principal amount of 5-year, 10% convertible fixed and floating secured debentures, currently representing potential future dilution of up to 2.4 million Common Shares. This convertible debt is fully secured by all the assets of Power Plus Corporation. At any time on or after the third anniversary date of the issuance of the Special Notes, the Company has the right, upon reasonable notice, to compel holders to convert all or any part of the indebtedness into Common Shares at $2.50 per Common Share, on the condition that the Common Shares have traded at a weighted average price of $4.00 per Common Share or greater during the preceding 10 trading days. Failing conversion by holders in the circumstances of such notice, the Company has the right to repay the whole or any part of the indebtedness, on a PRO RATA basis. Interest is payable on the Special Notes semi-annually, on the 31st days of January and July, respectively. Interest paid on the Special Notes during Fiscal 1997 was $251,100. The $5 million increase to the Special Notes financing represents the potential of additional dilution of up to 2 million Common Shares, thereby making it 4.4 million Common Shares in the aggregate. Management anticipates completing the private placement of this additional $5 million Special Notes during August 1997 but since this is a best efforts financing, again, no assurances can be given as to its completion. Page 42 v. 1997 SPECIAL WARRANT PRIVATE PLACEMENT FINANCING The Company has recently obtained conditional regulatory approval to a Special Warrant Private Placement Financing (the "1997 Special Warrants Offering") of $3 million comprised of 1,714,286 Special Warrants, each having a purchase price of $1.75. Each Special Warrant is convertible into 1 Common Share plus 1 share purchase warrant entitling the holder to purchase, for up to one year period thereafter, 1 additional Common Share for $2.00, representing up to $3.4 million in potential additional capital. The Company, therefore, could issue up to 3,428,572 Common Shares over the next year for aggregate proceeds of up to $6.4 million pursuant to this 1997 Special Warrants Offering. Management anticipates completing this 1997 Special Warrants Offering during August 1997, although since it is a best efforts financing no assurances can be given either as to the timing or the amount to be completed. 2. FUTURE POTENTIAL FUNDING FROM THE FINANCING PLAN In addition to the foregoing amounts aggregating $15.4 already received by the Company at the end of Fiscal 1997, the 3-year Financing Plan supporting PLAN 2000 as modified now provides future potential funding of up to $33.7 million, summarized by year as follows: i. FISCAL 1998 To satisfy the projected requirements for calendar 1997 or Year 2 of PLAN 2000, the Financing Plan provides for the projected completion of the 1997 Special Warrants and the completion of the $5 million Special Notes, both during August 1997, plus the Class A Warrants attached to the post-consolidated Common Shares and the Class B Warrants attached to the 1996 Special Warrants which are projected to be exercised on or before 30 September 1997. While no assurances can be given that such financings will be completed in full or on time as planned to meet the financial requirements for calendar 1997, if completed then additional aggregate capital will be available to the Company as follows: Class A Warrants (1,2) $5 million Class B Warrants (3) $5 million 1997 Special Warrants, first tranche $3 million Special Notes, convertible debt $5 million ---------- Total $18 million ----------- ----------- (1) Includes maximum proceeds from Agent's Option Class A Warrants. (2) The amount has been adjusted for proceeds received in Fiscal 1997. (3) Includes maximum proceeds derived from the Penalty Class B Warrants. ii. FISCAL 1999 To satisfy the Company's financial requirements for calendar 1998 or Year 3 of PLAN 2000, the Financing Plan provides for: the two-year Class AA Warrants attached to the Common Shares and the two-year Class BB Warrants attached to the 1996 Special Warrants, which are both projected to be exercised on or before 1 Page 43 March 1998; as well as the share purchase warrants attached to the 1997 Special Warrants projected to be exercised during August 1998. While no assurances can be given that these warrants will be exercised, the Class AA and BB Warrants and 1997 Special Warrants share purchase warrants will provide additional aggregate capital as follows: Class AA Warrants $6.1 million Class BB Warrants $6.2 million 1997 Special Warrants, second tranche $3.4 million ------------ Total $15.7 million ------------- ------------- iii. FISCAL 2000 AND BEYOND PLAN 2000's Financing Plan provides the framework for potential sources of new capital in the aggregate of up to $49.1 million during Calendar Years 1996, 1997 and 1998 to fund the implementation of PLAN 2000. Long-term debt and new equity capital are the sources of funding for both future growth and the operating losses incurred during this growth stage. As at Fiscal 1997 year end, the Company had raised both the equity capital and long-term debt envisioned in the Financing Plan. Subject to the availability of the funding, the Company's management anticipates reaching critical mass by the end of calendar 1997 and financial self-sufficiency, in accordance with PLAN 2000 assumptions, including the rollout of new stores, after the total number of stores opened exceeds 600. On the basis of the successful completion of the Financing Plan through Year 3 of PLAN 2000, and subject to PLAN 2000 performing on target, the Company would, in the opinion of management, have sufficient resources to repay the Special Notes during Year 4 of PLAN 2000 (if not by then converted), if desirable and required to do so, as well as to complete the rollout of PLAN 2000 as proposed for Years 4 and 5, without the Company being required to raise additional capital and incur further equity dilution. The Company, however, can give no assurances that this will in fact be the case. 3. SUMMARY OF CHANGES TO SHARES AND SHARE CAPITAL The following table presents the potential impact on share capitalization from the realization of the Financing Plan, as currently revised, as of 18 July 1997, reflecting transactions completed in Fiscal 1997. The table sets out those components of the Financing Plan already fully completed and the estimated timing applicable to other components. The information is presented on a fully diluted basis and does not account for the portions of the Class A, AA and B Warrants exercised to date. While no assurances can be given that any or all of the future events will be completed in full in accordance with the estimated timing, as set out in the Financing Plan, if all elements were completed and exercised in full prior to their respective expiry dates, as the case may be, then the number of Common Shares and the fully diluted share capital, exclusive of allowable management incentive options reserves, would be as follows: Page 44
SHARES CAPITAL TIMING ---------- ------- ------ $ amounts are expressed in Canadian Dollars in millions; assumes maximum dilution) COMPLETED ESTIMATED --------- --------- i CONSOLIDATED, BEGINNING SHARE CAPITALIZATION (from 44,765,613 shares on 20:1 basis): a.) Post-consolidation number of Common Shares and equivalent number of 2,238,281 $0.0 Nov. 1996 Exchange Rights Units b.) Potential dilution and capital raised from Exchange Right Units and included Class A & AA Warrants: i) One Exchange Rights Unit to receive one Common Share at $2.00 and one 2,238,281 $4.5 Jan. 1997 Class A Warrant ii) One Class A Warrant to purchase one Common Share at $2.00 and receive 2,238,281 $4.5 Sep. 1997 one Class AA Warrant (note: 30,525 Class A Warrants were exercised prior to Fiscal 1997 year end.) iii) One Class AA Warrant to purchase one Common Share at $2.50 2,238,281 $5.6 Mar. 1998 (note: 1,475 Class AA Warrants exercised prior to Fiscal 1997 year end.) iv) Agent's Option to purchase 225,000 Common Shares at $2.00 and receive 225,000 $0.5 Dec. 1996 equal number of Agent's Option Class A Warrants v) Agent's Option Class A Warrants to purchase up to 225,000 Common Shares 225,000 $0.5 Mar. 1997 at $2.00 and receive equal number of Agent's Option Class AA Warrants vi) Agent's Option Class AA Warrants to purchase up to 225,000 Common 225,000 $0.6 Mar. 1998 Shares at $2.50 ii 1996 SPECIAL WARRANT PRIVATE PLACEMENT FINANCING a.) Special Warrants for $2.00 that were exchanged during first quarter of Fiscal 2,250,000 $4.5 Mar. 1996 1998 for Common Shares and an equivalent number off Class B Warrants b.) One Class B Warrant to purchase one Common Share at $2.00 and receive 2,250,000 $4.5 Sep. 1997 one Class BB Warrant c.) One Class BB Warrant to purchase one Common Share at $2.50 2,250,000 $5.6 Mar. 1998 d.) Penalty Special Warrants to receive 225,000 Common Shares at no cost and 225,000 $0.0 Jan. 1997 255,000 Class B Penalty Warrants e.) Class B Penalty Warrants to purchase up to 225,000 Common Shares at $2.00 225,000 $0.5 Sep. 1997 and receive equal number of Class BB Penalty Warrants f.) Class BB Penalty Warrants to purchase up to 225,000 Common Shares at $2.50 225,000 $0.6 Mar. 1998 iii SPECIAL NOTES: CONVERTIBLE INTO COMMON SHARES AT $2.50 PER SHARE a.) $6 million - first and second tranche 2,400,000 $6.0 Sep. 1996 b.) $5 million - third tranche 2,000,000 $5.0 Aug. 1997 iv 1997 SPECIAL WARRANT PRIVATE PLACEMENT FINANCING a.) Special Warrants purchase warrants for $1.75 to purchase Common Shares 1,714,285 $3.0 Aug. 1997 b.) Special Warrants share purchase warrants to purchase Common Shares for $2.00 1,714,285 $3.4 Aug. 1998 --------- ---- v NUMBER OF SHARES, FULLY DILUTED (1) 24,881,694 ---------- ---------- vi CAPITAL AVAILABLE, ASSUMING FULL DILUTION $49.1 ----- Less amounts already received: during Fiscal 1997 $14.3 during Fiscal 1996 $1.1 ----- vii POTENTIAL CAPITAL DERIVED FROM EXISTING FINANCING INSTRUMENTS $33.7 ----- ----- (1) Excludes amount of allowable management incentive options. There are no such options issued.
Page 45 4. STATED CAPITAL REDUCTION In accordance with the Plan of Arrangement incorporated in the Reorganization Plan, the Company reduced both the stated capital amount for the Common Shares and the accumulated deficit by $26,670,825, effective 31 July 1996. It is management's opinion, after making the adjustment, that the balance sheet better represents the financial repositioning of the Company resulting from the reorganization and restructuring, and the appropriate current financial condition of the Company as it proceeds to implement its 5-year business plan. 5. PRIOR TO FISCAL 1997 Over the several years prior to Fiscal 1997, the Company experienced significant operating losses and was required to meet ongoing cash flow requirements by selling shares on a private placement basis. The Company raised approximately $1.8 million during the 9-month period ended 31 January 1995. On 29 July 1994, 3 million share purchase warrants were exercised and the Company issued 3 million shares for cash proceeds of $660,000. In addition, on 29 July 1994 the Company completed a private placement financing of special warrants. The Company issued 6,363,636 special warrants at 22CENTS each, for cash proceeds of $1.4 million. Each special warrant entitled the holder to convert the special warrant at no further consideration into one common share and one-half of one regular warrant. One regular warrant entitled the holder to purchase one share of common stock at $1.00 per share on a pre-consolidation basis or $20.00 per share post-consolidation. During Fiscal 1996, 4,498,454 special warrants were exchanged, 1,279,000 special warrants were exchanged during Fiscal 1995 and the remainder in February 1996 were exchanged for common shares. No regular warrant, which has now expired, was exercised. D. OUTLOOK Last year, the Company estimated that it could open 40 stores by year end -- it accomplished 51 -- and today has 55 stores opened compared to only 1 a year ago. Last year, the Company estimated that it would raise $13 million for funding for the reorganization and restructuring, and for planning and commencing operations in accordance with PLAN 2000. In fact, the Company received $15.4 million. Last year, the Company was planning for opening a chain of retail stores, whereas now the chain is a North American reality. POWERFUL STUFF stores incorporate a distinctive and appealing look that landlords, vendors and staff are enthusiastic about -- and POWERFUL CONNECTIONS is a new, complementary wireless airtime rebilling business that has the ability to produce increasing and substantial cash flow with minimal capital investment. Last year, the Company was preoccupied with restructuring and reorganizing, but this year management is busy building the future business. This represents a dramatic change. Management estimates, subject to the availability and timing of planned financing, that by the end of Fiscal 1998 the Company can achieve critical mass by opening 125 stores -- the break even point. Until the Company reaches critical mass, however, it will be dependent on the timing and availability of external financings to sustain its operations in the start up mode and for expansion capital. As the pace of the rollout is responsive to management control, it can, Page 46 within the short-term, be adjusted to conform to the financing risk. But, until the Company exceeds critical mass and can rely on the cash flow from normal operations to sustain those operations, it is, in the meantime, required to rely on the timing and availability of financings. At its current size, the Company can be responsive and flexible, but until it exceeds the estimated 125 store break-even point, the business will not generate surplus cash. Accordingly, when the timing and availability of financings deviates from the assumptions in PLAN 2000, the business may be also adversely impacted. In the short-term, the Company can responsibly conserve cash by controlling merchandise purchases resulting, however, in a temporary sales decline. ITEM 7a-- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and schedules listed in Item 14(a) hereof are incorporated herein by reference and are filed as a part of this report. ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE During Fiscal 1997, there were no changes in nor disagreements with the Company's auditors concerning accounting and financial disclosure. During Fiscal 1996, the Company's Board of Directors changed the Company's auditors to BDO Dunwoody, Chartered Accountants, of Toronto, Canada, effective 16 April 1996, on the recommendation of the Company's Audit Committee and in accordance with the National Policy No. 31 of the CANADIAN SECURITIES ADMINISTRATION, replacing Price Waterhouse LLP, Certified Public Accountants, of Pittsburgh, Pennsylvania, which appointment was approved at the Company's last annual general meeting of shareholders. By written acknowledgment dated 15 April 1996, Price Waterhouse LLP advised the Company of its determination that it was no longer in a position to continue its audit engagement. The resignation arose out of circumstances surrounding the relocation of the Company's executive offices from the United States to Toronto, Canada, and the related application of that accounting firm's governing corporate policies in such circumstances. During the Company's two most recent fiscal years and the subsequent interim period preceding the resignation, there were no disagreements with Price Waterhouse LLP on any matter of accounting principles or practices, financial statement disclosure, nor auditing scope or procedures. Page 47 PART III ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth the names of all directors and executive officers of the Company as of 18 July 1997, all positions and offices held by each such person with the Company or each such person's principal occupation or employment, the name and principal business of any organization by which such person has been employed for the past five fiscal years, and the period during which such person has served as such. A. DIRECTORS AND EXECUTIVE OFFICERS At Fiscal 1996's Annual and Special Meeting of Common Shareholders held on 24 July 1996, the shareholders adopted a special resolution to amend the Articles and By-Laws of the Company to provide for the election and retirement of the directors in rotation, and for the terms governing the removal of directors. The amendments divided the Board of Directors into three classes, as nearly equal in number as the then total number of directors may permit. At Fiscal 1996's meeting, J. Douglas Elliott and R. Bruce Freeman were elected as directors and agreed to stand, each for a term of office expiring at the third succeeding annual meeting of shareholders. Eric D. Sigurdson was elected a director and agreed to stand for a term of office expiring at the second succeeding annual meeting of shareholders. The Company's Board of Directors is currently comprised as follows:
COMMENCEMENT CONCLUSION OF NAME AGE POSITION OF SERVICE CURRENT TERM ---- --- -------- ---------- ------------ J. Douglas Elliott 45 Director of the Company since 1994 and Chairman, 19 August July 1999 CEO and President of the Company since December 1994 1995; Lawyer by background; President of Elliott & Associates, Inc. 1987 to present; Elliott & Associates provides consulting services to the investment and financial services industries specializing in the structuring, financing and management of investment opportunities, and financial public relations. R. Bruce Freeman 44 Director of the Company since 1989, Vice Chairman 13 January July 1999 of the Company since 1993 and CFO and Treasurer 1989 since September 1995; Chartered Accountant by background, with joint degree in accounting and law; Managing Partner of Freeman & Associates which provides consulting services to corporations and individuals in the investment and financial services industries specializing in the structuring, financing and management of special projects; Prior to May 1991, Vice-President and Chief Financial Officer of Magnasonic Canada, Inc., a corporation which held major interests in Sanyo Canada, Inc., Major Video Super Stores and holds an interest in Magnasonic Lloyds Company, Inc.
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COMMENCEMENT CONCLUSION OF NAME AGE POSITION OF SERVICE CURRENT TERM ---- --- -------- ---------- ------------ Eric D. Sigurdson 45 Director of the Company since 1995, a Chartered 1 March July 1998 Accountant by background, and the principal of 1995 Keystone International, involved in management consulting and business development, emphasizing mergers & acquisitions and strategic direction. Mr. Sigurdson is currently rolling out the aggressively expanding Krispy Kreme specialty doughnut store chain in the St. Louis and Chicago markets for which he acquired the regional development rights. Mr. Sigurdson was formerly employed by The Horsham Corporation and its US subsidiary, Clark Refining & Marketing Inc., as its Executive Vice President and Chief Financial Officer. Prior to his employment with Horsham, Mr. Sigurdson was President and a Director of Toronto Dominion Real Estate Inc., a real estate investment banking venture of Toronto Dominion Bank, and Director of Mergers & Acquisitions of Toronto Dominion Securities Inc. Mr. Sigurdson also serves as a member of the Company's Audit and Advisory Compensation Committees.
To strengthen the Company's new operations, the Board of Directors has resolved to increase its membership from three (3) to seven (7) members and to seek the election of the following new members for the following terms at the upcoming 12 September 1997 Annual General Meeting of Common Shareholders. 1. JOHN S. BRONSON - Mr. Bronson has agreed to stand for election to the Company's Board of Directors for a term of office expiring at the third succeeding annual meeting of shareholders. Mr. Bronson, the Chairman of the Company's Advisory Council and Compensation Committee, is the Executive Vice President of Human Resources of Pepsi-Cola Worldwide Beverage Co. of Somers, New York. Mr. Bronson brings a depth of multiple unit retail organizational experience and marketing background with his commitment to the Company. Amongst other responsibilities with PepsiCo, Mr. Bronson headed up the Human Resources strategy and implementation for 6,000+ Kentucky Fried Chicken, Pizza Hut and Taco Bell units in over 80 countries. 2. MICHEL DUBUC - Mr. Dubuc has agreed to stand for election to the Company's Board of Directors for a term of office expiring at the first succeeding annual meeting of shareholders. Mr. Dubuc is a member of the Company's Advisory Council. An Architect Associate AIA for over 25 years, Mr. Dubuc is the principal of the renowned, award-winning Michel Dubuc Concept, a specialty firm he founded bringing together a full-time staff of 45 Architects, Interior Designers and Graphic Artists to offer innovative and market-sensitive design solutions for individual and chain retailers. Mr. Dubuc's firm has been responsible for the conceptualization of numerous retail store prototypes and the design of over 1,200 projects with the emphasis on the US retail marketplace. Mr. Dubuc and his firm were commissioned by Power Plus to assist in the development of the company's new generation of POWERFUL STUFF stores. 3. HARLEY MINTZ - Mr. Mintz has agreed to stand for election to the Company's Board of Directors for a term of office expiring at the third succeeding annual meeting of shareholders. Mr. Mintz, a Chartered Accountant, has been Managing Partner of Mintz Page 49 & Partners, Chartered Accountants, of Toronto, Canada, since 1982. Mintz & Partners is the 15th largest accounting firm in Canada. As a member of NEXIA International, Mintz & Partners is also part of the 15th largest accounting organization in the world, with affiliates in 7 Canadian cities and more than 80 countries. Mr. Mintz serves as a member of the Advisory Council and Compensation Committee of Power Plus. 4. DAVID A. WILLIAMS - Mr. Williams has agreed to stand for election to the Company's Board of Directors for a term of office expiring at the second succeeding annual meeting of shareholders. Mr. Williams is a member of the Company's Advisory Council. Mr. Williams, the principal of Roxborough Holdings Limited, is now an active private investor who, amongst his diverse financial interests, seeks out special situation small cap opportunities such as Power Plus, committing capital, time and experience to companies he invests in to assist such companies during their high-growth phase of development. Mr. Williams was formerly the President and Chairman of Beutel, Goodman, a highly regarded Canadian investment counseling firm, during a period of extraordinary growth when that firm expanded to over $11.6 billion under management. There is no arrangement nor understanding known to the Company between any person named above, other than as disclosed herein. (See ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.) There are no family relationships between any director or executive officer and any other director or executive officer of the Company. During Fiscal 1997, the Board of Directors held sixteen (16) meetings, of which all meetings were attended by all members of the Board of Directors. The minutes of such meetings together with all other consent resolutions of the Board of Directors were distributed to all directors for signature and approval. The Company's Corporate Secretary appointed by the Board of Directors is Michael J. Perkins. Mr. Perkins, the Managing Partner of Ogilvie & Co., Barristers & Solicitors, of Calgary, Alberta, is also the Company's specialty Canadian securities counsel. With a multi-dimensional law practice, Mr. Perkins has an accomplished reputation advising public companies, specializing in organizational matters, statutory compliance and venture capital/corporate finance. The Company is required to have an AUDIT COMMITTEE which currently consists of R. Bruce Freeman (Chairman), J. Douglas Elliott and Eric D. Sigurdson. The general function of the Audit Committee is to review the overall audit plan and system of internal controls of the Company, to review the results of the external audit and to resolve any problems with the Company's auditors. During Fiscal 1997, the Audit Committee held six (6) meetings at which all members attended. Upon Messrs. Bronson and Mintz being elected and standing to the Board of Directors, it has been resolved by the Board of Directors that they will be appointed members of the Audit Committee. The Company's Board of Directors has also established a MANAGEMENT COMMITTEE which consists of J. Douglas Elliott and R. Bruce Freeman, the constitution and membership of which has been approved by the shareholders. The Management Committee, during the intervals between meetings of the Board of Directors, is entitled to exercise all powers of the Board of Directors in respect of the management and direction of the business and affairs of the Company (save and except only those specified in Section111 of the BUSINESS CORPORATIONS ACT ALBERTA, in all cases in which specific direction shall not have been given by the Board of Directors). The Management Committee meets as required to fulfill its mandate. Page 50 The Company has no other standing Committees of the Board of Directors. The Company has formed an ADVISORY COMPENSATION COMMITTEE which currently consists of John S. Bronson (Chairman), Harley Mintz and Eric Sigurdson. The general function of the Advisory Compensation Committee is to review the Company's overall compensation policy and to ensure an independent review of compensation. None of the Company's officers participated in any decisions concerning the compensation of officers. Upon Messrs. Bronson and Mintz standing as directors, it has been resolved by the Company's Board of Directors that the Advisory Compensation Committee will then be duly constituted as a standing committee of the Board going forward. The Company has also formed an ADVISORY COUNCIL composed of a number of diversified and accomplished business executives, experienced and acclaimed in their respective fields of endeavor. Mr. John S. Bronson is currently Chairman of the Advisory Council and Managing Advisor, International Relations. The general function of the Advisory Council is to act as an action-oriented, think-tank resource group to assist and support the Corporation's Board of Directors and its management team to execute and expand upon the strategic corporate business plan. In some circumstances, the Advisory Council will serve as a forum for certain members to be considered for future directorships, as in the case of Messrs. Bronson, Mintz, Williams and Dubuc, all of whom are now standing for election to the Board of Directors of the Corporation (see ITEM 10 B. (i), (ii), (iii) & (iv), above). Areas of targeted expertise include marketing, merchandising, real estate, franchising, human resources, public relations, finance and international affairs. The Directors will augment the membership of the Advisory Council from time-to-time, but currently its members include John S. Bronson, Frederick Ley (human resources), Harley Mintz (corporate structuring and taxation), Stephen Mamarchev (market research), David A. Williams (strategic planning) and Michel Dubuc (store design). Upon Messrs. Bronson, Mintz, Williams and Dubuc being elected and standing as directors, they will no longer serve as members of the Advisory Council. On 29 September 1994, in the US District Court for the Northern District of California, the US Securities and Exchange Commission ("SEC") issued a complaint for injunctive and other relief against J. Douglas Elliott, Chairman, CEO and President of the Company, in a matter unrelated to the Company. The complaint alleges that in various periods during 1990 and 1991, Mr. Elliott, while an officer and director of Dimples Group Inc. ("Dimples"), a Canadian corporation engaged in the manufacture and distribution of diapers, violated Section 10(b) of the SECURITIES EXCHANGE ACT OF 1934 and Rule 10b-5 thereunder in connection with a general solicitation of US investors in the United States to purchase Dimples securities. The SEC complaint alleged that Mr. Elliott, among other things, wrote press releases that were materially misleading in that they included revenue projections and statements regarding the test-marketing of Dimples' diaper product, Dimples' financing efforts and information on production and sales figures that did not have a reasonable basis in fact. Mr. Elliott has informed the Registrant as follows in regard to the SEC complaint: He denies the SEC's allegations and considers that they are themselves without any reasonable basis in fact. He disputes that the SEC has any jurisdiction in respect of Dimples and its management. He will vigorously Page 51 pursue legal remedies available to him in the circumstances as required and advised. Mr. Elliott has also advised the Company that he believes the SEC complaint resulted from an investigation undertaken by the SEC arising out of unfounded allegations made by former management of Dimples to the SEC in 1991. Mr. Elliott has advised that these complaints of former management were the subject of legal and administrative proceedings in Canada, in which, according to Mr. Elliott, these allegations were found to be without merit and to be an abuse of process, the proceedings having been determined in favor of Dimples and Mr. Elliott. Mr. Elliott has indicated that he, Dimples and its management rely upon these findings in their defense. This complaint is not expected to have any material impact on future operating results or the financial conditions of the Company. B. EXECUTIVE OFFICERS The Company's officers are chosen by and serve at the pleasure of the Board of Directors. In addition to certain Directors who are also executive officers of the Company, set forth below is certain background information regarding other executive officers of the Company appointed by the Directors to strengthen the Company's new operations. Hiring and developing the human resources to propel POWERFUL STUFF to 1000+ stores and a $500+ million business is a major challenge facing Power Plus. To meet PLAN 2000's objectives, all senior management of the Company must be experienced and proven executives WHO HAVE DONE IT BEFORE. The strategy is to hire professionals who bring with them the experience and discipline of successfully implementing the policies, procedures and programs required to manage multi-unit retail operations, with numerous employees, in decentralized locations, and to make them profitable. 1. PAUL BRUNETTE, SENIOR VICE PRESIDENT, MERCHANDISING AND RETAIL SERVICES - Mr. Brunette was formerly with the Incredible Universe division of Tandy Corporation as Merchandise Manager for consumer electronics. Previously, Mr. Brunette was responsible for the development and implementation of national merchandising and marketing programs as National Category Manager for Circuit City Stores. Prior to his National Category assignment, he held a number of progressive merchandise positions within Circuit City. Mr. Brunette will be responsible for the strategic direction of POWERFUL STUFF merchandising, including buying, merchandising promotions and vendor relations, as well as customer services and warehousing and distribution. 2. REBECCA L. HARVEY, SENIOR VICE PRESIDENT, RETAIL OPERATIONS - Ms. Harvey was formerly Vice President, Sales/Human Resources Administrator of Champs Sports, where she had responsibility for human resource functions, store operations, and training programs during the period when Champs grew from 40 to over 500 stores. Ms. Harvey previously worked in training and development for Joske's of Texas Department Stores (Allied Stores) and Maas Brothers Department Stores. Ms. Harvey was also Director, National Accounts, for AEI Music Network where she was responsible for creating enhanced audio and media environments for major retail chains. Ms. Harvey will be responsible for POWERFUL STUFF's operations and the Page 52 Company's marketing strategy, as well as for recruiting and training of the 4000 POWERFUL STUFF people needed to achieve PLAN 2000's objectives. 3. KENNETH C. MARINO, SENIOR VICE PRESIDENT, REAL ESTATE - Mr. Marino was formerly Director of Real Estate for Sunglass Hut International, Inc. During a period of exceptional growth and multiple unit rollout, Mr. Marino played a key role in Sunglass Hut's expansion to over 2000 stores in shopping centers across North America. Mr. Marino will be responsible for POWERFUL STUFF's real estate rollout program. 4. RONALD K. SCHMIDT, VICE PRESIDENT, CONSTRUCTION - Mr. Schmidt has extensive retail construction background, working with national tenants and contractors in a project management capacity with various developers, including Rouse, Federated Stores Realty and Prime Group. In addition to construction his responsibilities, Mr. Schmidt has been responsible for overseeing tenant coordination programs while working on mall developments, including Town Center in Boca Raton, Tampa Bay Center, Foot Hills Mall in Tucson and Sherway Gardens Mall in Toronto. Mr. Schmidt will employ his 20 years of retail construction experience to build Power Plus' construction division to support the development of 250+ POWERFUL STUFF stores a year. C. MANAGEMENT ORGANIZATION CHART [MANAGEMENT ORGANIZATION CHART] Page 53 D. FORMER SIGNIFICANT EMPLOYEES The Company no longer maintains employment associations with: i. Mr. G. Thomas Alison, formerly acting Chief Operating Officer; ii. Mr. Chuck Rogers, formerly Vice President, Retail Operations; iii. Ms Sandra Porter, formerly Vice President, Finance and Administration; iv. Mr. Kenneth Levin, formerly Senior Vice-President, Wireless Division; and, v. Mr. Joseph Adler, formerly Vice President, Construction. E. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE None of the Company's officers or directors have filed reports on Forms 3, 4 & 5 with the Securities and Exchange Commission. Officers and directors file similar insider reports with The Alberta Stock Exchange as required. ITEM 11 -- EXECUTIVE COMPENSATION 1. During Fiscal 1997, the Company employed a total of ten (10) executive officers. The aggregate cash compensation (including salaries, fees, commissions, bonuses paid for services rendered during the most recently completed fiscal year, bonuses paid during the most recently completed fiscal year for services rendered in a previous fiscal year, and any compensation other than bonuses earned during the most recently completed fiscal year the payment of which was deferred) paid to such executive officers by the Company and its subsidiaries for services rendered during Fiscal 1997 was approximately $766,438. 2. There were no amounts set aside nor accrued by the Company during Fiscal 1997 to provide pension, retirement or similar benefits for the officers and directors of the Company, pursuant to any existing plan, contract, authorization or arrangement provided or contributed to by the Company. 3. The directors of the Company are entitled to but have not received a fee for attending meetings and are reimbursed for travel and other expenses properly incurred while attending meetings of the Board of Directors or any committee thereof or in the performance of their duties as directors of the Company. The directors are eligible to receive stock options pursuant to the Company's Incentive Stock Option Plan, as described below. 4. INCENTIVE STOCK OPTION PLAN i. Pursuant to a resolution of the Board of Directors of the Company dated 20 June 1996, the Company established a stock option plan for the Board of Directors, management, employees, consultants and associates of the Company (the "Stock Option Plan"). The shareholders approved and ratified the adoption of the Stock Option Plan at Fiscal 1996's Annual General and Special Meeting of Common Shareholders. The purpose of the Stock Option Plan is to afford persons who provide services to the Company, whether as directors, management, employees or otherwise, an opportunity to obtain a proprietary interest in the Company by Page 54 permitting them to purchase Common Shares and to aid in attracting, as well as retaining and encouraging, the continuing involvement of such persons with the Company. Subject to the terms of the Stock Option Plan, the Board of Directors have full authority to administer the Stock Option Plan upon such terms as the Board of Directors, in their sole discretion, shall determine, provided no option shall be granted under the Stock Option Plan after 10 July 2001. Up to ten percent (10%) of the issued and outstanding Common Shares of the Company, from time-to-time on a non-diluted basis, have been reserved and set aside for issuance upon exercise of options which may be granted pursuant to the Stock Option Plan. ii. A copy of the Stock Option Plan may be obtained at no charge by each shareholder of the Company upon written request being made to the Chief Financial Officer of the Company, at the executive offices of the Company. iii. No stock options were granted to executive officers or directors during Fiscal 1997. iv. There are no stock options issued and outstanding as at the date hereof. However, the Board of Directors of the Company has resolved, subject to regulatory approval, to reserve for issuance up to and until 30 September 1997, stock options to purchase up to and including 950,000 Common Shares for granting to the Company's directors, officers, employees, advisors and consultants, at an exercise price of $1.25. This resolve is a matter of business for the resolve of the Company's shareholders at Fiscal 1997's upcoming Annual General Meeting of Common Shareholders on 12 September 1997. 5. OTHER PLANS i. The Company does not have any pension or retirement plans. ii. There is no plan or arrangement in respect of compensation received or that may be received by executive officers or directors in the most recently completed fiscal year with a view of compensating those officers in the event of their termination of employment or a change of responsibilities following a change of control. iii. Other than as herein set forth, the Company did not pay any additional compensation to the executive officers or directors (including personal benefits and securities or properties paid or distributed which compensation was not offered on the same terms to all full-time employees), during Fiscal 1997. 6. Other than as herein set forth, no director, executive officer nor any of their respective associates or affiliates is or has been at any time since the beginning of the last completed fiscal year indebted to the Company or any of its subsidiaries. 7. There are no material interests, direct or indirect, of the current directors, executive officers, and shareholders who beneficially own, directly or indirectly, more than five percent (5%) of the outstanding Common Shares or any known associate or affiliates of such persons, in any transaction which has materially affected the Company other than as hereinafter set forth. None of the Company's executive officers participated in any decisions concerning the compensation of executive officers, this being expressly the responsibility of the Company's Advisory Compensation Committee. Page 55 ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth the amount of Common Shares beneficially owned by directors and executive officers of the Company and each person known by the Company to be beneficial owner of more than five percent of the Common Shares as of 18 July 1997. A. DIRECTORS AND OFFICERS SHAREHOLDINGS
AMOUNT AND NATURE OF PERCENT NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) OF CLASS (2) ------------------------ ------------------------ ------------ J. Douglas Elliott NIL NIL R. Bruce Freeman 15,000 Less than 1% John Bronson 75,000 Less than 1% Paul Brunette NIL NIL Rebecca Harvey NIL NIL Kenneth C. Marino NIL NIL Harley Mintz 70,000 Less than 1% Eric D. Sigurdson 10,000 Less than 1% David A. Williams 710,000 9.3% ------- ----- All executive officers and directors as a group 880,000 11.5% ------- ----- ------- -----
B. OTHER SHAREHOLDINGS EXCEEDING FIVE PERCENT (5%)
AMOUNT AND NATURE OF PERCENT NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) OF CLASS (2) ------------------------ ------------------------ ------------ AGF Management Limited 526,890 7% BPI Canadian Opportunities Fund 926,890 12% ------- --- Total 1,453,780 19% --------- --- --------- --- 1 Securities beneficially owned include: securities which the named person has the right to acquire within 60 days as of the date hereof, such as through the exercise of any option, warrant or right; securities directly or indirectly held by the named person or by certain members of his family for which the named person has sole or shared voting or investment power. 2 Percent of class based on 7,620,730 Common Shares outstanding as of the date hereof. Common Shares which an individual or group has the right to acquire within 60 days pursuant to the exercise of options are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other individual or group shown in the table. 3 Elliott & Associates, Inc. (which provides the services of J. Douglas Elliott as the Chairman, CEO and President of the Company) and R. Bruce Freeman are expected to have the opportunity to derive material benefit from the potential of participation in the Company's Stock Option Plan (see ITEM 11 (4) - EXECUTIVE COMPENSATION) and from the Management Services Agreement (see ITEM 13 (1) - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS).
Page 56 ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 1. The Company's Advisory Compensation Committee and Board of Directors agreed to enter into a 5-year Management Services Agreement made between the Company and a private Management Company beneficially owned and controlled by Elliott & Associates, Inc. (which provides the services of J. Douglas Elliott as the Chairman, CEO and President of the Company) and R. Bruce Freeman, the Vice Chairman, CFO and Treasurer of the Company. The Board of Directors and the Advisory Compensation Committee consider that the general terms of the Management Services Agreement, as proposed, provide for an appropriate and complete incentive-based compensation package in terms comparable to normal industry standards, designed to ensure the ongoing care and management of the Company while providing reasonable compensation for the executive officers critical to the turnaround and reorganization of the Company's business and to its future success. The entering into of the Management Services Agreement has been approved by the Company's shareholders. Subject to the final approval of the Advisory Compensation Committee and Board of Directors as to the details of the Management Services Agreement and final regulatory approval, this Agreement includes the following general terms and conditions: i. a term expiring on 31 January 2000; ii. the reimbursement of the Management Company's unpaid historical services provided to the Company together with expenses incurred from 1 September 1994, up to and including 29 February 1996, by the issuance of 200,000 Common Shares of the Company; iii. the payment of an annual management fee to be determined by the Advisory Compensation Committee and approved by the Board of Directors; plus industry standard benefits and the reimbursement of all reasonable out-of-pocket expenses incurred by the Management Company on behalf of the Company; and, iv. the issuance of up to and including 400,000 post-consolidated Common Shares of the Company at a zero cost base, issuable over the term of the Management Services Agreement upon achieving certain performance thresholds during each of the periods ended 31 January 1997, 31 January 1998, 31 January 1999, and 31 January 2000, the particulars of which performance thresholds are to be determined by the Advisory Compensation Committee and the Board of Directors. 2. The Company retains Ogilvie & Company, Barristers & Solicitors, of which Michael J. Perkins is a partner, to perform specialty securities work and for corporate organizational matters for which the Company incurred fees of $152,955 in Fiscal 1997. Mr. Perkins is Corporate Secretary of the Company. Page 57 PART IV ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF POWER PLUS CORPORATION F-1 Auditors' Report dated 19 June 1997 F-2 Consolidated Balance Sheets for the fiscal years ended 31 January 1997 and 1996 F-3 Consolidated Statements of Operations for the fiscal years ended 31 January 1997, 1996 and 1995 F-4 Consolidated Statements of Deficit for the fiscal years ended 31 January 1997, 1996 and 1995 F-5 Consolidated Statements of Changes in Financial Position for the fiscal years ended 31 January 1997, 1996 and 1995 F-6 Notes to Consolidated Financial Statements F-7 2. INDEX OF FINANCIAL STATEMENT SCHEDULES None 3. EXHIBITS The exhibits listed on the accompanying index of exhibits are filed as part of this Annual Report on Form 10-K. (b) Reports on Form 8-K 1. Form 8K dated 31 October 1996, filed with the Securities and Exchange Commission on 1 November 1996 reporting the Company's 1-for-20 reverse stock split and the Company's new trading symbols. Page 58 (c) Index of Exhibits EXHIBIT DESCRIPTION ----------- NUMBER ------ *3.1 Certificate of Incorporation, as amended, of the Company. **3.2 By-laws of the Company. **4.1 Specimen Common Share Certificate. **4.2 Incentive Stock Option Plan. 4.3 Form of Special Note ***16 Letter regarding change in the Company's Auditors from Price Waterhouse, LLP, of Pittsburgh, Pennsylvania, to BDO Dunwoody, Chartered Accountants, of Toronto, Canada. 27 Financial Data Schedule (EDGAR purposes only) ______________________________ * A complete copy of the Company's Articles of Incorporation, as they existed before the amendment filed as an exhibit to this document, were previously filed as an exhibit to the Company's Annual Report on Form 20-F with the Securities and Exchange Commission for the fiscal year ended 12 April 1990 and incorporated herein by reference thereto. ** Previously filed as an exhibit to the Company's Annual Report on Form 20-F with the Securities and Exchange Commission for the fiscal year ended 12 April 1990 and incorporated herein by reference thereto. *** Previously filed as an exhibit to the Company's Form 8-K filed dated 15 April 1996 and incorporated herein by reference thereto. Page 59 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the SECURITIES EXCHANGE ACT OF 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. POWER PLUS CORPORATION Date: 7 August 1997 By: /s/ J. Douglas Elliott ----------------------- J Douglas Elliott Chief Executive Officer Pursuant to the requirements of the SECURITIES EXCHANGE ACT OF 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of the 7th day of August 1997. /s/ J. Douglas Elliott --------------------------------- J Douglas Elliott Chairman, CEO and President (Principal Executive Officer) /s/ R. Bruce Freeman --------------------------------- R Bruce Freeman Vice Chairman, CFO (Principal Financial and Accounting Officer) /s/ Eric D. Sigurdson --------------------------------- Eric D.Sigurdson Page F - 1 INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS Auditors' Report dated 19 June 1997 F-2 Consolidated Balance Sheets for the fiscal years ended 31 January 1997 and 1996 F-3 Consolidated Statements of Operations for the fiscal years ended 31 January 1997, 1996 and 1995 F-4 Consolidated Statements of Deficit for the fiscal years ended 31 January 1997, 1996 and 1995 F-5 Consolidated Statements of Changes in Financial Position for the fiscal years ended 31 January 1997, 1996 and 1995 F-6 Notes to Consolidated Financial Statements F-7 Page F - 2 MANAGEMENT'S STATEMENT OF RESPONSIBILITY The management of Power Plus Corporation is responsible for the preparation of the accompanying financial statements and the preparation and presentation of all information in the Annual Report. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada and are considered by management to present fairly the financial position and operating results of the Company. The Company maintains various systems of internal control to provide reasonable assurance that transactions are appropriately authorized and recorded, that assets are safeguarded, and that financial records are properly maintained to provide accurate and reliable financial statements. The Company's audit committee meets periodically with the Company's management and independent auditors to review financial reporting matters and internal controls and to review the consolidated financial statements and the independent auditors' report. The audit committee reported its findings to the Board of Directors who have approved the consolidated financial statements. The Company's independent auditors, BDO Dunwoody, Chartered Accountants, have examined the financial statements and their report follows. J. Douglas Elliott R. Bruce Freeman Chairman, CEO & President Vice Chairman, CFO & Treasurer ------------------------------------------------------------------- AUDITORS' REPORT TO THE BOARD OF DIRECTORS OF POWER PLUS CORPORATION: We have audited the consolidated balance sheet of Power Plus Corporation as at 31 January 1997 and 1996 and the consolidated statements of operations, deficit and changes in the financial position for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at 31 January 1997 and 1996 and the results of its operations and the changes in its financial position for the years then ended in accordance with generally accepted accounting principles. The consolidated financial statements as at 31 January 1995 and for the period then ended were audited by other auditors who expressed an opinion without reservation thereon in their report dated 16 June 1996. ___________________________ BDO Dunwoody Chartered Accountants Toronto, Canada 19 June 1997 Page F - 3 POWER PLUS CORPORATION CONSOLIDATED BALANCE SHEETs as at 31 January ($-AMOUNTS ARE EXPRESSED IN CANADIAN DOLLARS) 1997 1996 ---- ---- ASSETS Current assets: Cash and cash equivalents $4,341,243 $1,288 Accounts receivable 202,319 64,001 Inventory 1,809,529 0 Prepaid expenses 395,849 19,760 ------- ------ 6,748,940 85,049 Capital assets, net - SEE NOTE 5 2,652,157 0 Deferred charges, net - SEE NOTE 6 705,120 244,986 Other assets, net - SEE NOTE 6 937,637 0 ------- - $11,043,854 $330,035 ----------- -------- ----------- -------- LIABILITIES Current liabilities: Accounts payable and accrued liabilities $2,715,813 $507,208 Special Notes - SEE NOTE 7 4,740,000 0 --------- - 7,455,813 507,208 --------- ------- SHAREHOLDERS' EQUITY / (DEFICIENCY) Share capital - SEE NOTE 8 Authorized at no par value: An unlimited number of common shares An unlimited number of preferred shares Issued: 4,508,562 common shares (1996 - 39,192,975 PRE-CONSOLIDATION COMMON SHARES) 7,398,300 26,016,484 Convertible component of Special Notes - SEE NOTE 7 1,400,000 Deficit - SEE NOTE 8 (5,210,259) (26,193,657) ----------- ------------ 3,588,041 (177,173) --------- --------- $11,043,854 $330,035 ----------- -------- ----------- -------- Page F - 4 POWER PLUS CORPORATION Consolidated Statements of Operations 31 January 1997, 1996 and 1995 ($-AMOUNTS ARE EXPRESSED IN CANADIAN DOLLARS)
1997 1996 1995 ---- ---- ---- - SEE NOTES 2 & 4 - SEE NOTES 2 & 4 SALES $4,080,598 $5,375,229 $8,547,973 Cost of sales 2,389,115 2,268,678 4,199,471 --------- --------- --------- Gross profit 1,691,483 3,106,551 4,348,502 --------- --------- --------- EXPENSES Operating and administration 7,105,723 7,229,637 5,637,840 Amortization 273,187 299,698 200,078 ------- ------- ------- LOSS FROM OPERATIONS 5,687,427 4,422,784 1,489,416 Loss from abandonment of Former Subsidiaries 0 118,767 0 - ------- - NET LOSS FOR PERIOD $5,687,427 $4,541,551 $1,489,416 ---------- ---------- ---------- ---------- ---------- ---------- LOSS PER SHARE - SEE NOTE 8 NET LOSS PER SHARE $2.54 $2.50 $0.94 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 2,238,281 1,814,534 1,590,307 (RESTATED ON A POST-CONSOLIDATION BASIS FOR 1996 AND 1995)
Page F - 5 POWER PLUS CORPORATION Consolidated Statements of Deficit 31 January 1997, 1996 and 1995 ($-AMOUNTS ARE EXPRESSED IN CANADIAN DOLLARS)
1997 1996 1995 ---- ---- ---- - SEE NOTES 2 & 4 - SEE NOTES 2 & 4 Deficit, beginning of period $26,193,657 $21,652,106 $20,162,690 Net loss for period 5,687,427 4,541,551 1,489,416 Less: Stated capital reduction - SEE NOTE 8 26,670,825 0 0 ---------- - - Deficit, end of period $5,210,259 $26,193,657 $21,652,106 ---------- ---------- ---------- ---------- ---------- ----------
Page F - 6 POWER PLUS CORPORATION Consolidated Statements of Changes in Financial Position 31 January 1997, 1996 and 1995 ($-AMOUNTS ARE EXPRESSED IN CANADIAN DOLLARS)
1997 1996 1995 ---- ---- ---- - SEE NOTES 2 & 4 - SEE NOTES 2 & 4 CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Loss for period $(5,687,427) $(4,541,551) $(1,489,416) Items not affecting cash Loss on abandonment of Former Subsidiaries 0 118,767 Amortization 273,187 299,698 200,078 ------- ------- ------- (5,414,240) (4,123,086) (1,289,338) Changes in non cash operating items Accounts receivable (138,318) 92,089 (126,329) Inventory (1,809,529) 2,086,443 (237,347) Prepaid expenses (376,089) 171,721 (75,396) Accounts payable and accrued liabilities 2,208,605 (1,600,936) 142,832 On abandonment of Former Subsidiaries 0 1,964,066 0 - --------- - (5,529,571) (1,409,703) (1,585,578) ----------- ----------- ----------- CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES Issue of common shares and warrants 8,052,641 1,334,100 1,795,402 Notes payable 0 (44,257) (5,743) Special Notes - SEE NOTE 7 6,000,000 0 0 --------- - - 14,052,641 1,289,843 1,789,659 ---------- --------- --------- CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES Purchase of capital assets - SEE NOTE 3 (2,671,310) 0 (19,889) Deferred charges (550,573) (209,106) (35,780) Purchase of other assets - SEE NOTE 3 (961,232) 0 0 --------- - - (4,183,115) (209,106) (55,669) ----------- --------- -------- Increase (decrease) in cash during period 4,339,955 (328,966) 148,412 Cash, beginning of period 1,288 330,254 181,842 ----- ------- ------- CASH, END OF PERIOD $4,341,243 $1,288 $330,254 ---------- ------ -------- ---------- ------ --------
Page F - 7 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS Power Plus Corporation is building a specialty chain of niche retail stores throughout North America. Power Plus Corporation, through its wholly-owned subsidiaries Power Plus USA, Inc. and Power Plus Canada, Inc., (collectively, "Power Plus" or the "Company"), operated 51 retail stores at the conclusion of the fiscal year ended 31 January 1997 ("Fiscal 1997") under the trade name POWERFUL STUFF! The majority of these stores were opened in the last four months of Fiscal 1997. The stores, operating from leased premises in major enclosed shopping malls in the US and Canada and ranging from 150 to 700 square feet (averaging approximately 300 square feet), sell wireless communication products and services (beepers, cellular phones, personal communication systems and related service contracts), and hand-held electronic communications, entertainment, business and lifestyle products. The Company has not yet reached the 125 store level at which point management estimates it will attain profitable operations. Both long-term debt and new equity capital will be necessary to fund future expansion and the operating losses incurred during its growth phase. The Company's Reorganization Plan, and related Financing Plan, approved by both shareholders and regulators in July 1996, and the Plan of Arrangement approved by the Court, contemplates this reality and provides the structure to accommodate these requirements. As at the end of Fiscal 1997, the Company had received both the equity capital and long-term debt amounts called for in the plan, although the timing of the receipts was in arrears of that projected. Management anticipates reaching critical mass by the end of calendar 1997. 2. SIGNIFICANT ACCOUNTING POLICIES a.) BASIS OF PRESENTATION Power Plus Corporation was incorporated on 15 December 1986 under the BUSINESS CORPORATIONS ACT, ALBERTA. Power Plus Canada, Inc. was incorporated on 21 July 1988 and was acquired on 13 January 1989, although it remained inactive until July 1996 when it became the entity operating the Canadian chain of retail stores. Power Plus USA, Inc. was incorporated on 27 February 1996 and is the entity operating the US chain of retail stores. Effective 1 September 1996, Power Plus USA, Inc. acquired certain business assets, including lease entitlements, from Consumer Electronics Specialty Stores, Inc. ("CESS"), a privately-owned Florida-based retail chain and wireless reseller. SEE ALSO NOTE 3. In addition, Power Plus Corporation also owns two other subsidiaries: First Olympia Holdings, Inc. and 554618 Alberta, Inc., the latter being inactive. These consolidated financial statements are prepared in accordance with generally accepted accounting principles in Canada and are expressed in Canadian dollars. Page F - 8 b.) PRINCIPLES OF CONSOLIDATION The consolidated financial statements for Fiscal 1997 include the accounts of Power Plus Corporation, Power Plus Canada, Inc., Power Plus USA, Inc. and First Olympia Holdings, Inc. During the year ended 31 January 1996 ("Fiscal 1996") and the 9-month period ended 31 January 1995, Power Plus Corporation (then named Battery One, Inc.) conducted all of its business through its then wholly-owned subsidiaries, Battery One-Stop International Inc. ("BOSI") and Batteries Etc., Inc. ("Etc."), (collectively, the "Former Subsidiaries"). During Fiscal 1996 the Former Subsidiaries were assigned into bankruptcy, management ceased to control their affairs and they were abandoned. Accordingly, the Company's net investment in BOSI and Etc. was written off and it ceased to consolidate their accounts and operating results on 14 December 1995 and on 8 December 1995, respectively. The comparative consolidated financial statements include the accounts of the Battery One, Inc., BOSI and Etc. SEE ALSO NOTE 4. All significant intercompany accounts and transactions between the Company and its subsidiaries have been eliminated. c.) INVENTORY Inventory consists entirely of finished goods held for resale and is carried at the lower of cost or estimated net realizable value. Cost was determined using the first-in, first-out inventory valuation method. d.) PREPAID EXPENSES Prepaid expenses consist of amounts paid before the accounting period when such amounts will become expenses and matched to the results of the expenditure. Such amounts include utility, rent and construction deposits. e.) FOREIGN CURRENCY TRANSLATION Operations of the Company's US subsidiary are considered to be integrated with the Company and accordingly it accounts for the translation of foreign currency transactions and related financial statement items using the temporal method. Under this method, monetary items are translated at the rate of exchange in effect at the balance sheet date, non-monetary items are translated at historical exchange rates, and revenue and expense items are translated at average rates of exchange for the period in which they occur. Exchange gains and losses are included in the determination of net income. f.) CAPITAL ASSETS Capital assets are recorded at cost. The provision for amortization is calculated on a straight-line basis on the original cost over the following estimated useful lives: Leasehold improvements 10 years Store furniture and fixtures and kiosks 5 years Office and warehouse equipment 5 years Computer software and hardware 5 years Store design and set-up costs 3 years Costs capitalized for new stores and kiosks include all design, delivery, installation and construction costs. Page F - 9 g.) DEFERRED CHARGES Deferred charges are recorded at cost. These costs include patent and trademark filing costs, intellectual properties, cost of raising capital and such other costs that are properly deferred to be matched against the result of the expenditure. The long-term amounts are subject to amortization where the short-term amounts are expensed in the period when the event is completed. The provision for amortization is calculated on a straight-line basis on the original cost over the following four years. Costs of raising capital are deferred until such time as the related transactions are completed and the cost of issuing the Special Notes is amortized over the life of the Special Notes. The provision for amortization is calculated on a straight-line basis on the original cost over the following estimated useful lives: Trade marks, trade names, intellectual properties 10 years Customer list 10 years Deferred cost of raising equity capital until transaction completed Costs for issuing Special Notes over five-year life of Special Notes h.) FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities and special notes. Approximately $35,000 of financial assets and $1,672,000 of financial liabilities are denominated in United States Dollars and the Company is exposed to currency risk accordingly. It is management's opinion that the Company is not exposed to interest rate or credit risks arising from these financial instruments. The fair values of these financial instruments approximate their carrying values, unless otherwise noted. i.) ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimated. 3. PURCHASE OF CERTAIN BUSINESS ASSETS On 1 October 1996, Power Plus USA, Inc. completed the purchase of certain assets, lease entitlements and the business called PORTRONICS, from CESS. The acquisition, which was effective 1 September 1996, included 13 leased retail locations in Florida, inventories, two rented warehouse/retail facilities and pager repair facilities, one office location and CESS's proprietary interests.
Assets acquired were: Consideration therefor was: Merchandise inventory $341,566 Cash, on closing $599,189 Furniture, fixtures & equipment 205,500 Current liabilities assumed 119,178 Customer list 685,000 Amount paid subsequent to Fiscal 1997 513,699 ------- ------- $1,232,066 $1,232,066 ---------- ---------- ---------- ----------
Page F - 10 4. CESSATION OF CONTROL OF THE FORMER SUBSIDIARIES In December 1995, BOSI made a voluntary assignment into bankruptcy pursuant to the CANADIAN BANKRUPTCY AND INSOLVENCY ACT. Also in December 1995, Etc. made a voluntary petition seeking protection under Chapter 11 of the US BANKRUPTCY CODE, which in January 1996, was converted to a Chapter 7 filing. The Company was the largest creditor of the Former Subsidiaries. The Company is not directly nor indirectly liable for any debt or liability of the Former Subsidiaries and has no outstanding guarantees or undertakings with respect to any claim against the Former Subsidiaries. 5. CAPITAL ASSETS 31 JANUARY 1997 --------------------------------- ACCUMULATED COST AMORTIZATION NET ---- ------------ --- Store furniture and fixtures and kiosks $381,112 $0 $381,112 Leasehold improvements 771,794 0 771,794 Office and warehouse equipment 350,104 19,153 330,951 Computer software and hardware 1,029,633 0 1,029,633 Store design and set-up costs 138,667 0 138,667 ------- - ------- $2,671,310 $19,153 $2,652,157 ---------- ------- ---------- ---------- ------- ---------- The majority of stores were opened in the last four months of Fiscal 1997 and because of the limited time these assets were deployed in the year, the Company did not amortize its capital investment. The Company did not own any Capital Assets as at the end of Fiscal 1996. Page F - 11 6. DEFERRED CHARGES AND OTHER ASSETS Deferred charges consist of the deferred cost of raising capital for the Company, where the transaction is still pending, costs including fees paid to the Company's fiscal agent for raising the funding for the Special Notes, and certain restructuring and reorganizing costs. 31 JANUARY 1996 ------------------------------------ ACCUMULATED COST AMORTIZATION NET ---- ------------ --- Deferred issuing cost of capital and long-term debt $256,946 $11,960 $244,986 -------- ------- -------- -------- ------- -------- 31 JANUARY 1997 ----------------------------------- ACCUMULATED COST AMORTIZATION NET ---------- ------------ --------- Trade marks, trade names and intellectual properties $276,232 $23,595 $252,637 Customer list 685,000 0 685,000 ------- - ------- Other assets 961,232 23,595 937,637 Deferred issuing cost of capital and long-term debt 795,560 90,440 705,120 ------- ------ ------- $1,756,792 $114,035 $1,642,757 ---------- -------- ---------- ---------- -------- ---------- Included in deferred charges in Fiscal 1996 are amounts pertaining to the cost of raising capital for the Company, which transactions closed in March 1996. The deferred issuing cost of capital is charged to the cost of issuing shares when issued. The deferred issuing costs of long-term debt are amortized as financing charges over the term of the debt. The Company did not amortize the customer list during Fiscal 1997 because of the limited time between its acquisition and the year end. 7. SPECIAL NOTES The Company completed a $6 million Special Notes 5-year 10% convertible fixed and floating charge debentures private placement debt financing during Fiscal 1997, in accordance with the Financing Plan. The Special Notes are convertible, in whole or in part, into Common Shares of the Company at any time, at $2.50 per share, representing potential future dilution of up to 2.4 million Common Shares, and are secured by all the assets of Power Plus Corporation. At any time on or after the third anniversary date from their date of issue, the Company has the right, upon reasonable notice, to compel holders of the Special Notes to convert all or any part of the indebtedness into Common Shares for $2.50 per share, on the condition that the shares have traded at a weighted average price of $4.00 per share or greater during the preceding 10 trading days. Failing conversion by holders of the Special Notes in the circumstances of such notice, the Company has the right to repay the whole or any part of the Special Notes, on a PRO RATA basis. Page F - 12 Interest is payable on the Special Notes semi annually, on the 31st day of January and July. Interest paid on the Special Notes during Fiscal 1997 was $251,100. In the opinion of management, the convertible feature of the Special Notes had an assignable fair value of $1,400,000 at the date of issuance, which amount has been classified as a component of shareholders' equity. Correspondingly, the liability component of the Special Notes had an assignable fair value of $4,600,000 at the date of issuance and the difference between this amount and their face value is being amortized on a straight-line basis over their term. For Fiscal 1997, this amortization amounted to $140,000. 8. SHARE CAPITAL The Company arranges the private placement of warrant financings from time to time and records the proceeds as equity upon the receipt thereof. As and when the warrants are exchanged for Common Shares, the Company records the issuance of shares. During Fiscal 1997, the Company reorganized its share capital and raised new equity, in accordance with the Financing Plan and Plan of Arrangement, as follows: a.) Effective 1 November 1996, the Company's 44,765,613 issued and outstanding common shares were reorganized on the basis of a 20 for 1 consolidation. Each 20 pre-consolidation shares were exchanged for 1 post-consolidation share and 1 exchange right ("Exchange Right"). Each Exchange Right entitled the holder to purchase for $2.00 one exchange right unit consisting of 1 Common Share and 1 Class A Warrant. Each Class A Warrant entitles the holder to purchase prior to 30 September 1997, 1 Common Share for $2.00 and receive 1 Class AA Warrant. Each Class AA Warrant, in turn, entitles the holder to purchase prior to 1 March 1998, 1 Common Share for $2.50. By the end of Fiscal 1997, 2,238,281 Exchange Rights had been exchanged for an equal number of Common Shares and Class A Warrants. In addition, 30,525 Class A and 1,475 Class AA Warrants were exercised. b.) The Company reduced both the stated capital amount for Common Shares and the accumulated deficit by $26,670,825 in order to better present its financial repositioning. c.) During Fiscal 1997, the Company completed a Special Warrant private placement equity financing comprised of 2.25 million Special Warrants (originally 45 million Special Warrants pre-consolidation) for $4.5 million. Of this amount, $1.1 million was received in the Quarter 3 of Fiscal 1996. Each Special Warrant entitled the holder to receive 1 Common Share and 1 Class B Warrant. Each Class B Warrant entitles the holder to purchase, prior to 30 September 1997, 1 Common Share for $2.00 and receive 1 Class BB Warrant which, in turn, entitles the holder to purchase, prior to 1 March 1998, 1 Common Share for $2.50. None of the Class B Warrants and Class BB Warrants were exercised by Fiscal 1997 year end. As the Special Warrants were not qualified for trading prior to 26 July 1996, the Company was obliged to issue for no consideration 1 Penalty Special Warrant, having the same rights and entitlements, for every 10 Special Warrants. This resulted in the issuance of 225,000 Penalty Special Warrants. All Special Warrants are convertible into common shares, for no additional consideration, one year after their date of their issue. Page F - 13 d.) The following table sets out the changes to the stated capital and Common Shares. SHARES DOLLARS ---------- ----------- 31 JANUARY 1995 BALANCE 33,914,521 $24,682,384 ---------- ----------- Shares issued for cash 780,000 $244,100 Warrants exchanged for shares 4,498,454 Advances in consideration of Special Warrant issue 1,100,000 Cost of issuing (10,000) ---------- ----------- 31 JANUARY 1996 BALANCE 39,192,975 $26,016,484 ---------- ----------- PRE-CONSOLIDATION Shares issued for payment in kind 900,000 Warrants issued for cash 3,773,125 Warrants exchanged for shares 4,672,638 --------- Total pre-consolidation old shares outstanding 44,765,613 ---------- ---------- STOCK CONSOLIDATION AT 20:1 RATIO 2,238,281 POST-CONSOLIDATION Exchange rights exercised for shares 2,238,281 4,476,561 Warrants issued for cash and exchanged for shares 32,000 80,738 Cost of issuing (277,783) STATED CAPITAL REDUCTION (26,670,825) ---------- ------------ 31 JANUARY 1997 BALANCE 4,508,562 $7,398,300 --------- ---------- --------- ---------- Page F - 14 e.) The following table summarizes the steps both completed and contemplated by the Financing Plan.
$-AMOUNTS ARE EXPRESSED INMILLIONS; ASSUMING MAXIMUM DILUTION) SHARES CAPITAL TIMING ------ ------- ------ i. CURRENT SHARE CAPITALIZATION (from 44,765,613 shares on 20:1 basis): a.) POST-CONSOLIDATION common shares and equal number of Exchange Rights Units 2,238,281 $0.0 completed Nov. 1996 b.) POTENTIAL DILUTION AND CAPITAL DERIVED FROM EXCHANGE RIGHT UNITS: i) One Exchange Rights Unit to receive one common share at $2.00 and one 2,238,281 $4.5 completed Class A Warrant Jan. 1997 ii) One Class A Warrant to purchase one common share at $2.00 and receive one 2,238,281 $4.5 estimated Class AA Warrant Sep. 1997 (note: 30,525 Class A Warrants were exercised prior to Fiscal 1997 year end.) iii) One Class AA Warrant to purchase one common share at $2.50 2,238,281 $5.6 estimated (note: 1,475 Class AA Warrants were exercised prior to Fiscal 1997 year Mar. 1998 end.) iv) Agent's Option to purchase up to 225,000 common shares at $2.00 and 225,000 $0.4 completed receive the equivalent number of Agent's Option Class A Warrants Dec. 1996 v) Agent's Option Class A Warrants to purchase up to 225,000 common shares at 225,000 $0.4 estimated $2.00 and receive the equivalent number of Agent's Option Class AA Warrants Sep. 1997 vi) Agent's Option Class AA Warrants to purchase up to 225,000 common shares 225,000 $0.6 estimated at $2.50 Mar. 1998 ii. SPECIAL WARRANT PRIVATE PLACEMENT FINANCING: a.) Special Warrants at $2.00, exchanged during first quarter of Fiscal 1998, for 2,225,000 $4.5 completed common shares and an equal number of Class B Warrants Mar. 1996 b.) One Class B Warrant to purchase one common share at $2.00 and receive one 2,225,000 $4.5 estimated Class BB Warrant Sep. 1997 c.) One Class BB Warrant to purchase one common share at $2.50 2,225,000 $4.6 estimated Mar. 1998 d.) Penalty Special Warrants to receive 225,000 common shares at no cost and 225,000 $0.0 completed 255,000 Class B Penalty Warrants Jan. 1997 e.) Class B Penalty Warrants to purchase up to 225,000 common shares at $2.00 and 225,000 $0.5 estimated receive the equal number of Class BB Penalty Warrants Sep. 1997 f.) Class BB Penalty Warrants to purchase up to 225,000 common shares at $2.50 225,000 $0.6 estimated Mar. 1998 iii SPECIAL NOTES: CONVERTIBLE INTO COMMON SHARES AT $2.50 PER SHARE a.) $6 million - first tranche 2,400,000 $6.0 completed Sep. 1996 b.) $5 million - second tranche 2,000,000 $5.0 estimated Aug. 1997 iv 1997 SPECIAL WARRANT PRIVATE PLACEMENT FINANCING a.) Special Warrants purchase warrants for $1.75 to purchase common shares 1,714,285 $3.0 estimated Aug. 1997 b.) Special Warrants purchase warrants to purchase common shares for $2.00 1,714,285 $3.4 estimated --------- ---- Aug. 1998 v NUMBER OF SHARES, FULLY DILUTED (1) 24,881,694 ---------- vi CAPITAL AVAILABLE ---------- $49.1 LESS amounts already received: during Fiscal 1997 $14.3 during Fiscal 1996 $1.1 ---- vii POTENTIAL CAPITAL remaining available from maximum dilution of existing $33.7 financing instruments outstanding. ----- ----- (1) Excludes amount of allowable management incentive options. There are no such options issued.
Page F - 15 On 29 July 1994, 3,000,000 share purchase warrants were exercised and the Company issued 3,000,000 pre-consolidation common shares for cash proceeds of $660,000. In addition, on 29 July 1994, the Company completed a private placement financing of special warrants whereby it issued 6,363,636 special warrants at $0.22 each for cash proceeds of $1,400,000. Each special warrant entitled the holder to convert the special warrant into one pre-consolidation common share and one-half of one regular warrant. One regular warrant entitled the holder to purchase one share of pre-consolidation common share at $1.00 per share. During Fiscal 1996, 4,498,454 special warrants were exchanged and during the 9- month period ended 31 January 1995, 1,297,000 special warrants were exchanged for pre-consolidation common shares. The remaining 568,182 special warrants were exchanged in February 1996. The Company has neither issued nor had any stock options outstanding for the past two years. 9. INCOME TAXES During the year ended 31 January 1997 the Company incurred losses aggregating $3,455,000 for Canadian Income Tax purposes, which expire in 2004, and losses of $2,092,000 for United States Income Tax purposes. In addition, the Company had incurred losses as of 31 January 1996 of $14,982,000 (1995 - $10,900,000) as a result of the bankruptcy of the Former Subsidiaries during Fiscal 1996, the bankruptcy of a subsidiary during Fiscal 1992 and business losses from operations. These losses have not been recognized for accounting purposes. The loss carry-forwards expire from 1998 to 2003 fiscal years although the ultimate extent to which these losses may be applied against Canadian source earnings from operations is yet to be determined. Losses from the operations of Former Subsidiaries have been excluded from the foregoing. SEE ALSO NOTE 4. 10.CONTRACTUAL COMMITMENTS The Company is committed to minimum annual lease payments under operating commercial leases, under terms and conditions typical for retail space, for store locations with initial terms in excess of one year, as follows: Fiscal Year ----------- 1998 $1,960,609 1999 1,815,120 2000 1,668,157 2001 1,389,474 2002 2,074,868 --------- $8,908,228 ---------- ---------- Page F - 16 11.SEGMENTED INFORMATION The extent of the Company's operations in Canada and the United States for the years ended 31 January 1997 and 1996, and the 9 months ended 31 January 1995, was as follows: CANADA UNITED STATES TOTAL ------ ------------- ----- 1997 ---- Sales $503,429 $3,577,169 $4,080,598 Net loss $3,595,000 $2,092,427 $5,687,427 Total assets $7,422,843 $3,621,011 $11,043,854 1996 ---- Sales $1,749,393 $3,625,836 $5,375,229 Net loss $1,076,324 $3,465,227 $4,541,551 Total assets $330,035 -- $330,035 1995 ---- Sales $2,414,991 $6,132,982 $8,547,973 Net loss $498,134 $991,282 $1,489,416 Total assets $1,505,984 $3,676,695 $5,182,679 12.US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada. Except as set out below, these financial statements also comply, in all material respects, with accounting principles generally accepted in the United States and the accounting rules and regulations of the Securities and Exchange Commission. a.) INCOME TAXES In the United States, under the Financial Accounting Standards Board SFAS 109, Accounting for Income Taxes, the Company would have used the asset and liability method of accounting for income taxes, instead of the deferral method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequence attributable to temporary differences between the carrying values of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the Company would have tax assets as a result of losses carried forward but would have chosen to provide an allowance against these of 100 percent. Accordingly, its adoption would not have had a material effect on the financial position or results of operations of the Company. Page F - 17 b.) FOREIGN CURRENCY TRANSLATION The Company accounts for the translation of its US subsidiaries financial statements using the temporal method, as discussed in Note 2. In the United States under SFAS 52, all assets and liabilities would be translated at the rate of exchange in effect at the balance sheet date and the translation adjustments arising would be reflected as a separate component of shareholders equity on the balance sheet. The adoption of SFAS 52 would have had no material effect on the financial position or results of operations of the Company. c.) LONG-LIVED ASSETS In the United States, under SFAS 121, the Company would be required to review its long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable, and, if deemed impaired, measure and record an impairment loss based on the fair value of the assets. The adoption of SFAS 121 would have had no material effect on the financial position or results of operations of the Company. EX-4.3A 2 SPECIAL NOTE INDENTURE SPECIAL NOTE INDENTURE Dated as of August 8, 1996 and made effective as of July 31, 1996 BETWEEN BATTERY ONE, INC. - and - MONTREAL TRUST COMPANY OF CANADA Providing for the Issue of a Series of up to $6,000,000 10% Convertible Fixed and Floating Charge Secured Special Promissory Notes TABLE OF CONTENTS PAGE ARTICLE 1 INTERPRETATION 1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Gender and Number. . . . . . . . . . . . . . . . . . . . . . . . 5 1.3 Interpretation not Affected by Headings, etc.. . . . . . . . . . 5 1.4 Day not a Business Day . . . . . . . . . . . . . . . . . . . . . 5 1.5 Time of the Essence. . . . . . . . . . . . . . . . . . . . . . . 5 1.6 Currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.7 Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.8 Meaning of "Outstanding" . . . . . . . . . . . . . . . . . . . . 5 ARTICLE 2 ISSUE OF SPECIAL NOTES 2.1 Principal Amount . . . . . . . . . . . . . . . . . . . . . . . . 6 2.2 Form and Signature of Special Notes. . . . . . . . . . . . . . . 6 2.3 Issue of Special Notes . . . . . . . . . . . . . . . . . . . . . 6 2.4 Certification. . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.5 Debentures to Rank Pari Passu. . . . . . . . . . . . . . . . . . 7 2.6 Registration and Transfer of Special Notes . . . . . . . . . . . 7 2.7 Persons Entitled to Payment. . . . . . . . . . . . . . . . . . . 7 2.8 Mutilation, Loss, Theft or Destruction . . . . . . . . . . . . . 8 2.9 Exchanges of Special Notes . . . . . . . . . . . . . . . . . . . 8 2.10 Charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.11 Option of Holder as to Place of Payment. . . . . . . . . . . . . 8 2.12 Trustee Not Bound to Make Enquiries. . . . . . . . . . . . . . . 9 2.13 Noteholder Not a Shareholder . . . . . . . . . . . . . . . . . . 9 2.14 Exercise Terms of Special Notes. . . . . . . . . . . . . . . . . 9 ARTICLE 3 REPAYMENT 3.1 Covenant to Pay. . . . . . . . . . . . . . . . . . . . . . . . . 9 3.2 Deemed Exercise. . . . . . . . . . . . . . . . . . . . . . . . . 9 3.3 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3.4 Order of Repayment . . . . . . . . . . . . . . . . . . . . . . . 10 ARTICLE 4 SECURITY FOR PAST, PRESENT AND FUTURE INDEBTEDNESS 4.1 Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4.2 Mortgaged Property . . . . . . . . . . . . . . . . . . . . . . . 10 4.3 Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 4.4 Obligation to Pay. . . . . . . . . . . . . . . . . . . . . . . . 11 4.5 Defeasance . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.6 Partial Release. . . . . . . . . . . . . . . . . . . . . . . . . 12 4.7 Proviso for Possession Until Default . . . . . . . . . . . . . . 12 ii ARTICLE 5 EXERCISE OF SPECIAL NOTES 5.1 Method of Exercise of Special Notes. . . . . . . . . . . . . . . 12 5.2 Effect of Exercise of Special Notes. . . . . . . . . . . . . . . 13 5.3 Partial Exercise of Special Notes; Fractions . . . . . . . . . . 14 5.4 Expiration of Special Notes. . . . . . . . . . . . . . . . . . . 14 5.5 Cancellation of Surrendered Special Notes. . . . . . . . . . . . 14 5.6 Accounting and Recording . . . . . . . . . . . . . . . . . . . . 14 5.7 Exercise by Trustee . . . . . . . . . . . . . . . . . . . . . . 14 5.8 Securities Restrictions. . . . . . . . . . . . . . . . . . . . . 15 ARTICLE 6 INDEBTEDNESS 6.1 Covenant to Pay. . . . . . . . . . . . . . . . . . . . . . . . . 15 6.2 Terms and Conditions of Special Notes. . . . . . . . . . . . . . 15 ARTICLE 7 RIGHTS OF THE CORPORATION AND COVENANTS 7.1 Optional Purchases by the Corporation. . . . . . . . . . . . . . 16 7.2 General Covenants. . . . . . . . . . . . . . . . . . . . . . . . 16 7.3 Trustee's Remuneration and Expenses. . . . . . . . . . . . . . . 17 7.4 Securities Qualification Requirements. . . . . . . . . . . . . . 17 7.5 Performance of Covenants by Trustee. . . . . . . . . . . . . . . 17 ARTICLE 8 ENFORCEMENT 8.1 Suits by Noteholders . . . . . . . . . . . . . . . . . . . . . . 17 8.2 Immunity of Shareholders, etc. . . . . . . . . . . . . . . . . . 18 8.3 Limitation of Liability. . . . . . . . . . . . . . . . . . . . . 18 8.4 Waiver of Default. . . . . . . . . . . . . . . . . . . . . . . . 18 ARTICLE 9 MEETINGS OF NOTEHOLDERS 9.1 Right to Convene Meetings. . . . . . . . . . . . . . . . . . . . 18 9.2 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 9.3 Chairman . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 9.4 Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 9.5 Power to Adjourn . . . . . . . . . . . . . . . . . . . . . . . . 19 9.6 Show of Hands. . . . . . . . . . . . . . . . . . . . . . . . . . 19 9.7 Poll and Voting. . . . . . . . . . . . . . . . . . . . . . . . . 20 9.8 Regulations. . . . . . . . . . . . . . . . . . . . . . . . . . . 20 9.9 Corporation and Trustee May be Represented . . . . . . . . . . . 21 9.10 Powers Exercisable by Extraordinary Resolution . . . . . . . . . 21 9.11 Meaning of Extraordinary Resolution. . . . . . . . . . . . . . . 22 iii 9.12 Powers Cumulative. . . . . . . . . . . . . . . . . . . . . . . . 22 9.13 Minutes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 9.14 Instruments in Writing . . . . . . . . . . . . . . . . . . . . . 23 9.15 Binding Effect of Resolutions. . . . . . . . . . . . . . . . . . 23 9.16 Holdings by Corporation Disregarded. . . . . . . . . . . . . . . 23 ARTICLE 10 SUPPLEMENTAL INDENTURES 10.1 Provision for Supplemental Indentures for Certain Purposes . . . 23 10.2 Successor Corporations . . . . . . . . . . . . . . . . . . . . . 24 ARTICLE 11 CONCERNING THE TRUSTEE 11.1 Trust Indenture Legislation. . . . . . . . . . . . . . . . . . . 24 11.2 Rights and Duties of Trustee . . . . . . . . . . . . . . . . . . 24 11.3 Evidence, Experts and Advisers . . . . . . . . . . . . . . . . . 25 11.4 Documents, Monies, etc. Held by Trustee. . . . . . . . . . . . . 25 11.5 Actions by Trustee to Protect Interest . . . . . . . . . . . . . 26 11.6 Trustee Not Required to Give Security. . . . . . . . . . . . . . 26 11.7 Protection of Trustee. . . . . . . . . . . . . . . . . . . . . . 26 11.8 Replacement of Trustee; Successor by Merger. . . . . . . . . . . 26 11.9 Conflict of Interest . . . . . . . . . . . . . . . . . . . . . . 27 11.10 Indemnity of Trustee . . . . . . . . . . . . . . . . . . . . . . 27 11.11 Acceptance of Trust. . . . . . . . . . . . . . . . . . . . . . . 27 11.12 Trustee Not to be Appointed Receiver . . . . . . . . . . . . . . 27 ARTICLE 12 GENERAL 12.1 Notice to the Corporation and the Trustee. . . . . . . . . . . . 28 12.2 Notice to Noteholders. . . . . . . . . . . . . . . . . . . . . . 28 12.3 Ownership of Special Notes . . . . . . . . . . . . . . . . . . . 29 12.4 Evidence of Ownership. . . . . . . . . . . . . . . . . . . . . . 29 12.5 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . 29 12.6 Satisfaction and Discharge of Indenture. . . . . . . . . . . . . 29 12.7 Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 12.8 Sole Benefit of Parties and Noteholders. . . . . . . . . . . . . 30 12.9 Common Shares or Special Notes Owned by the Corporation or its Subsidiaries - Certificate to be Provided. . . . . . . . . . . . 30 THIS SPECIAL NOTE INDENTURE dated the 8th day of August, 1996 and made effective as of the 31st day of July, 1996 BETWEEN: BATTERY ONE, INC., a corporation incorporated under the laws of the Province of Alberta, having an office in the City of Toronto, in the Province of Ontario (hereinafter referred to as the "Corporation") OF THE FIRST PART AND MONTREAL TRUST COMPANY OF CANADA, a trust company incorporated under the laws of Canada and authorized to carry on business in all provinces of Canada (hereinafter referred to as the "Trustee") OF THE SECOND PART WHEREAS: A. the Corporation is proposing to issue Special Notes in the manner herein set forth; B. the Special Notes shall, subject to adjustment, entitle the holder thereof to acquire Debentures at no additional cost upon the terms and conditions herein set forth; C. all acts and deeds necessary have been done and performed to make the Special Notes, when issued as provided in this Indenture, legal, valid and binding upon the Corporation with the benefits and subject to the terms of this Indenture; D. the foregoing recitals are made as representations and statements of fact by the Corporation and not the Trustee; and E. the Trustee has agreed to act as trustee for the Noteholders on the terms and conditions herein set forth. NOW THEREFORE, the parties hereto agree as follows: ARTICLE 1 INTERPRETATION 1.1 DEFINITIONS In this Indenture, including the recitals and schedules hereto, and in all indentures supplemental hereto: (a) "Agency Agreement" means the agency agreement dated August 8, 1996 and made effective as of the 31st day of July, 1996 between the Corporation and the Agent relating to the offering of Special Notes; (b) "Agent" means C.M. Oliver & Company Limited; 2 (c) "Applicable Legislation" means the provisions of the Statutes of Canada and its provinces, and the regulations under those statutes, relating to trust indentures or to the rights, duties and obligations of trustees and of corporations under trust indentures, to the extent that such provisions are at the time in force and applicable to this Indenture; (d) "Business Day" means a day which is not Saturday or Sunday or a legal holiday in the City of Calgary, Alberta; (e) "Common Shares" means fully paid and non-assessable common shares of the Corporation as presently constituted; (f) "Corporation's Auditors" means a firm of chartered accountants duly appointed as auditors of the Corporation; (g) "Counsel" means a barrister or solicitor or a firm of barristers and solicitors retained by the Trustee or retained by the Corporation and acceptable to the Trustee; (h) "Debentures" means the series of up to $6,000,000 10% convertible fixed and floating charge secured debentures of the Corporation issuable pursuant to the Debenture Trust Indenture; (i) "Debenture Trust Indenture" means the debenture indenture, dated August 8, 1996 and made effective as of July 31, 1996, between the Corporation and the Trustee providing for the creation and issuance of the Debentures, as amended or supplemented from time to time; (j) "director" means a director of the Corporation for the time being and, unless otherwise specified herein, reference to action "by the directors" means action by the directors of the Corporation as a board or, whenever duly empowered, action by any committee of such board; (k) "Effective Date" means the 31st day of July, 1996; (l) "Exercise Date" means, with respect to any Special Note, the date on which the Note Certificate representing such Special Note is surrendered for exercise, or otherwise deemed exercised, in accordance with Article 3; (m) "Expiry Date" means the earlier of: (i) the sixth business day after the day upon which a receipt for a Prospectus or an Order has been obtained by each of the Securities Commissions; and (ii) July 31, 1997; (n) "extraordinary resolution" has the meaning set forth in section 9.11; (o) "Filing Jurisdictions" means each of the provinces of Alberta, British Columbia and Ontario; (p) "Issue Date" means the date hereof; (q) "Mortgaged Property" shall have the meaning ascribed thereto in section 4.2 hereof, including, without limitation, all of the undertaking, property and assets, both present and future, of the Corporation, of whatsoever nature and kind and wheresoever situated, that are from time to time subject to any mortgage, lien, assignment, transfer, hypothec, pledge or charge created under or secured by this Debenture Trust Indenture or by any indenture supplementary hereto; 3 (r) "Negotiable Instruments" means cash and all negotiable instruments including, without limitation, promissory notes, cheques, drafts and bills of exchange; (s) "Net Proceeds" means any Subscription Funds less all amounts paid to the Agent and the Agent's Counsel pursuant to the terms of the Agency Agreement; (t) "Note Agency" means the principal office of the Trustee in the City of Calgary or such other place as may be designated in accordance with subsection 5.1(c); (u) "Note Certificate" means a certificate issued on or after the Effective Date to evidence Special Notes; (v) "Noteholders", or "holders" without reference to Common Shares, means the persons who are registered holders of Special Notes; (w) "Noteholders' Request" means an instrument signed in one or more counterparts by Noteholders entitled to acquire in the aggregate not less than 25% of the aggregate principal amount of Debentures which could be acquired pursuant to all Special Notes then unexercised and outstanding, requesting the Trustee to take some action or proceeding specified therein; (x) "Note Register" means the register maintained by the Trustee for the Special Notes; (y) "Order" means an order of a Securities Commission in a Filing Jurisdiction that permits the Debentures and Common Shares issuable upon the exercise of the Debentures to be tradeable in such Filing Jurisdiction without being subject to the prospectus requirement of or any "hold period" under, the Applicable Legislation in such Filing Jurisdiction; (z) "Permitted Encumbrances" means, as of any date, any of the following: (i) liens for taxes, assessments or governmental charges: (A) not at such date due or delinquent; or (B) the validity of which the Corporation shall be contesting in good faith and in respect of which: (1) an amount in cash sufficient to pay such taxes, assessments or charges shall have been deposited with a court, a taxing or assessing authority or the Noteholder; or (2) a surety bond, satisfactory to the Noteholder, for such amount shall have been deposited with the Noteholder; (ii) the lien of any judgment rendered, or of any claim filed, against the Corporation which the Corporation shall be contesting in good faith and in respect of which: (A) an amount in cash sufficient to pay such judgment or claim shall have been deposited with a court or the Noteholder; or (B) a surety bond, satisfactory to the Noteholder, for such amount, shall have been deposited with the Noteholder; (iii) undetermined or inchoate liens incidental to construction or current operations which have not as such date been filed pursuant to law against the Mortgaged Property or 4 against the Corporation or which relate to obligations not at such date due or delinquent; (iv) easements, rights of way, servitudes or other similar rights in property (including, without limitation, rights of way and servitudes for railways, sewers, drain, pipelines, gas and water mains, electric light, power, telephone, telegraph or cable television conduits, poles, wires and cables) granted to or reserved or taken by other persons which in the aggregate do not materially detract from the value of such property or materially detract from the value of such property or materially impair its use in the operation of the business of the Corporation; (v) security given by the Corporation to a public utility, any municipality, governmental or other public authority when required by such utility, municipality or authority in the ordinary course of the business of the Corporation; and (vi) any other lien, the validity of which is being contested in good faith and where the Corporation has deposited: (A) with the court of the Noteholder, an amount in cash sufficient to pay the same in full; (B) with the Noteholder, a surety bond, satisfactory to the Noteholder, for such amount; (aa) "person" means an individual, body corporate, partnership, trust, trustee, executor, administrator, legal representative or any unincorporated organization; (ab) "Prospectus" means a final prospectus in respect of the distribution of Debentures upon the exercise of Special Notes; (ac) "Shareholder" means a holder of record of one or more Common Shares; (ad) "Securities Commissions" means, collectively, the securities commissions or similar regulatory authorities in the Filing Jurisdictions; (ae) "Security Interest" means any assignment, mortgage, charge, pledge, lien, encumbrance or security interest whatsoever, howsoever, created or arising, whether absolute or contingent, fixed or floating, perfected or not, but does not include set-off or any right of set-off; (af) "Special Notes" means the series of up to $6,000,000 10% convertible first fixed and floating charge secured special promissory notes issued and certified hereunder and for the time being outstanding entitling the holder to acquire Debentures; (ag) "Special Note Indenture", "Indenture", "herein", "hereby", "hereof" and similar expressions mean and refer to this indenture and any other indenture, deed or instrument supplemental hereto, and the expressions "Article", "section", "subsection" and "paragraph" followed by a number, letter or both mean and refer to the specified article, section, subsection or paragraph of this Indenture; (ah) "Subsidiary" or "Subsidiary of the Corporation" means any corporation of which more than 50% of the outstanding Voting Shares are owned, directly or indirectly, by or for the Corporation, provided that the ownership of such shares confers the right to elect at least a majority of the board of directors of such corporation and includes any corporation in like relation to a Subsidiary; 5 (ai) "Time of Expiry" means 5:00 p.m. (Calgary time) on the Expiry Date; (aj) "Trading Day" means, with respect to a stock exchange, a day on which such exchange is open for the transaction of business and, with respect to the over-the-counter market, means a day on which The Alberta Stock Exchange is open for the transaction of business; (ak) "Trustee" means Montreal Trust Company of Canada or its successors from time to time in the trust hereby created; (al) "written order of the Corporation", "written request of the Corporation", "written consent of the Corporation" and "certificate of the Corporation" mean, respectively, a written order, request, consent and certificate signed in the name of the Corporation by its Chairman, President or a Vice-President, and may consist of one or more instruments so executed. 1.2 GENDER AND NUMBER Unless herein otherwise expressly provided or unless the context otherwise requires, words importing the singular include the plural and VICE VERSA and words importing gender include all genders. 1.3 INTERPRETATION NOT AFFECTED BY HEADINGS, ETC. The division of this Indenture into articles and sections, the provision of a table of contents and the insertion of headings are for convenience of reference only and shall not affect the construction or interpretation of this Indenture. 1.4 DAY NOT A BUSINESS DAY In the event that any day on or before which any action is required to be taken hereunder is not a Business Day, then such action shall be required to be taken at or before the requisite time on the next succeeding day that is a Business Day. 1.5 TIME OF THE ESSENCE Time shall be of the essence of this Indenture. 1.6 CURRENCY Except as otherwise stated, all dollar amounts herein are expressed in Canadian currency. 1.7 APPLICABLE LAW This Indenture and the Note Certificates shall be construed in accordance with the laws of the Province of Alberta and the federal laws of Canada applicable therein and shall be treated in all respects as Alberta contracts. 1.8 MEANING OF "OUTSTANDING" Every Special Note represented by a Note Certificate countersigned by the Trustee and delivered to the holder is deemed to be outstanding until it is cancelled, deemed to be cancelled, delivered to the Trustee for cancellation or until it expires at the Time of Expiry. Where a new Note Certificate has been issued pursuant to section 2.8, to replace one which has been mutilated, lost, stolen or destroyed, the Special Notes represented by only one of such Note Certificates are counted for the purpose of determining the aggregate number of Special Notes outstanding. 6 ARTICLE 2 ISSUE OF SPECIAL NOTES 2.1 PRINCIPAL AMOUNT The aggregate principal amount of Special Notes authorized to be issued under this Indenture, shall consist of and be limited to six million ($6,000,000) dollars in lawful money of Canada. The Special Notes shall be designated as "$6,000,000 10% convertible fixed and floating charge secured special promissory notes" and shall be dated as of the Issue Date. 2.2 FORM AND SIGNATURE OF SPECIAL NOTES The Special Notes shall be issued only as fully registered Special Notes in the denomination of $1,000 and integral multiples of $1,000. The Special Notes and the certificate of the Trustee endorsed thereon shall be substantially in the form set forth in Schedule "A" hereto. The Special Notes shall be dated as of the Issue Date and shall bear such distinguishing letters and numbers as the Trustee may approve. The Special Notes may be engraved, printed or lithographed, or be partly in one form and partly in another, as the Corporation may determine. The Special Notes shall be under the seal of the Corporation (or a reproduction thereof which shall be deemed to be the seal of the Corporation) and shall be signed (either manually or by facsimile signature) by any one officer or director of the Corporation. A facsimile signature upon any of the Special Notes shall for all purposes of this Indenture be deemed to be the signature of the person whose signature it purports to be and to have been signed at the time such facsimile signature is reproduced and notwithstanding that any person whose signature, either manual or in facsimile, may appear on the Special Notes is not, at the date of this Indenture or at the date of the Special Notes or at the date of the certifying and delivery thereof, the holder of the office indicated, any such Special Notes shall be valid and binding upon the Corporation and entitled to the benefits of this Indenture. 2.3 ISSUE OF SPECIAL NOTES From time to time, and at any time, upon the written direction of the Corporation signed by any one of its directors or officers, the Trustee shall issue and register the Special Notes in the names and denominations as specified in such direction, and will certify and deliver the same in accordance with such direction. Special Notes in the aggregate principal amount not exceeding six million ($6,000,000) dollars in lawful money of Canada shall be executed by the Corporation and, forthwith after such execution, shall be delivered to the Trustee and shall be certified by the Trustee and delivered to, or to the order of, the Corporation pursuant to a written direction of the Corporation without the Trustee receiving any consideration therefore. 2.4 CERTIFICATION No Special Note shall be issued or, if issued, shall be obligatory or shall entitle the holder to the benefits of this Indenture, until it has been certified by or on behalf of the Trustee substantially in the form set out in Schedule "A" hereto or in some other form approved by the Trustee. Such certification on any Special Note shall be conclusive evidence that such Special Note is duly issued, is a valid obligation of the Corporation and that the holder is entitled to the benefits hereof. The certificate of the Trustee signed on the Special Notes shall not be construed as a representation or warranty by the Trustee as to the validity of this Indenture or of the Special Notes or as to the issuance of the Special Notes, and the Trustee shall in no respect be liable or answerable for the use made 7 of the Special Notes or any of them or the proceeds thereof. The certificate of the Trustee signed on the Special Notes, shall, however, be a representation and warranty by the Trustee that the Special Notes have been duly certified by or on behalf of the Trustee pursuant to the provisions of this Indenture. 2.5 SPECIAL NOTES TO RANK PARI PASSU The Special Notes may be issued in such amounts, to such persons and on such terms not inconsistent with the provisions of this Indenture, as the directors may determine. Each Special Note as soon as issued or negotiated shall, subject to the terms hereof, be equally and proportionately entitled to the benefits hereof as if all of the Special Note had been issued and negotiated simultaneously. 2.6 REGISTRATION AND TRANSFER OF SPECIAL NOTES The Corporation shall, at all times while any Special Notes are outstanding, cause to be kept by and at the principal office of the Trustee in the City of Calgary and in such other place or places as the Corporation with the approval of the Trustee may designate, registers in which shall be entered the names and addresses of the holders of Special Notes and particulars of the Special Notes held by them respectively. The registers referred to in this section shall at all reasonable times be open for inspection by the Corporation, the Trustee and any Noteholder. THE SPECIAL NOTES ARE SUBJECT TO RESALE RESTRICTIONS AND MAY NOTE BE SOLD OR OTHERWISE TRADED OR TRANSFERRED. The Corporation and the Trustee will deem and treat the registered owner of any Special Note as the beneficial owner thereof for all purposes and neither the Corporation nor the Trustee shall be effected by any notice to the contrary. Subject to the provisions of this Indenture, and applicable law, the Noteholder shall be entitled to the rights and privileges attached to the Special Notes and the issuance of Debentures upon exercise of the Special Notes by any Noteholder in accordance with the terms and conditions herein contained shall discharge all responsibilities of the Corporation and the Trustee with respect to such Special Notes (subject to any outstanding obligations owing by the Corporation to any Noteholder under Article 6 hereof) and neither the Corporation nor the Trustee shall be bound to inquire into the title of any such holder. Neither the Trustee, the Corporation nor any registrar shall be charged with notice of or be bound to see to the execution of any trust, whether expressed, implied or constructive, in respect of any Special Note. Except in the case of the register required to be kept at the City of Calgary, the Corporation shall have power at any time to close any register upon which the registration of any Special Note appears and in that event it shall transfer the records thereof to another existing register or to a new register and thereafter such Special Notes shall be deemed to be registered on such existing or new register, as the case may be. 2.7 PERSONS ENTITLED TO PAYMENT The person in whose name any Special Note shall be registered shall be deemed and regarded as the owner thereof for all purposes of this Indenture and payment of or on account of the principal amount of such Special Note and the interest payable thereon shall be made only to or upon the order in writing of such holder thereof. Such payment shall be a good and sufficient discharge to the Trustee and any registrar and to the Corporation and any paying agent for the amounts so paid. The holder for the time being of any Special Note shall be entitled to the principal monies, free from all equities and rights of set-off or counter claim between the Corporation and the original or any intermediate holder thereof, and all persons may act accordingly. 8 Delivery to the Corporation by a Noteholder of a Special Note or the receipt of such holder for the principal monies shall be a good and sufficient discharge to the Corporation, which shall not be bound to enquire into the title of such holder, save as ordered by some court of competent jurisdiction or as required by statute. Neither the Corporation, the Trustee nor any registrar shall be charged with notice of or be bound to see to the execution of any trust, whether express, implied or constructive, in respect of any Special Note nor be affected by notice of any equity that may be subsisting in respect thereof. Where Special Note are registered in more than one name the principal monies may be paid by cheque payable to the order of all such holders, failing written instruction from them to the contrary, and such payment shall be a good and sufficient discharge to the Trustee and any registrar and to the Corporation and any paying agent. In the case of the death of one or more joint holders, the principal monies may be paid to the survivor or survivors of such holders whose receipt therefor shall constitute a good and sufficient discharge to the Trustee and any registrar and to the Corporation and paying agent. 2.8 MUTILATION, LOSS, THEFT OR DESTRUCTION In case any of the Special Notes issued hereunder shall become mutilated or be lost, stolen or destroyed, the Corporation, in its discretion, may issue, and thereupon the Trustee shall certify and deliver, a new Special Note upon surrender and cancellation of the mutilated Special Note, or in the case of a lost, stolen or destroyed Special Note, in lieu of and in substitution for the same, and the substituted Special Note shall be in a form approved by the Trustee and shall be entitled to the benefits of this Indenture equally with all other Special Notes issued or to be issued hereunder without preference or priority one over another. In case of loss, theft or destruction the applicant for a substituted Special Note shall furnish to the Corporation and to the Trustee such evidence of such loss, theft or destruction as shall be satisfactory to them in their discretion and shall also furnish indemnity satisfactory to them in their discretion. The applicant shall pay all reasonable expenses incidental to the issuance of any substituted Special Note. 2.9 EXCHANGES OF SPECIAL NOTES Special Notes of any denomination may be exchanged for Special Notes of any other authorized denomination or denominations for an equivalent aggregate principal amount. Any exchange of Special Notes may be made at the offices of the Trustee or at the offices of any registrar or registrars where registers are maintained for the Special Notes pursuant to the provisions of section 2.6. Any Special Notes tendered for exchange shall be surrendered to the Trustee or appropriate registrar and shall be cancelled. 2.10 CHARGES Except as herein otherwise provided and subject to the terms hereof, upon any exchange of Special Notes of any denomination for other Special Notes, the Corporation or the Trustee may make a sufficient charge to reimburse it for any stamp or security transfer taxes or other governmental charge required to be paid and, in addition, a reasonable charge for its services, and payment of the said charge shall be made by the party requesting such exchange as a condition precedent thereto. 2.11 OPTION OF HOLDER AS TO PLACE OF PAYMENT Except as herein otherwise provided, all sums which may at any time become payable, whether at maturity or otherwise, on account of any Special Notes shall be payable at the option of the holder at any of the places at which the principal of such Special Notes are payable. 9 2.12 TRUSTEE NOT BOUND TO MAKE ENQUIRIES The Trustee, prior to the certification and delivery of any Special Notes under any of the provisions of this Article, shall not be bound to make any enquiry or investigation as to the correctness of the matters set out in any of the resolutions, opinions, certificates or other documents required by the provisions of this Indenture, but shall be entitled to accept and act upon the said resolutions, opinions, certificates and other documents. The Trustee may nevertheless, in its discretion, require further proof in cases where it deems further proof desirable. 2.13 NOTEHOLDER NOT A SHAREHOLDER Nothing in this Indenture or in the holding of a Special Note or otherwise, shall, in itself, confer or be construed as conferring upon a Noteholder any right or interest whatsoever as a shareholder or as any other shareholder of the Corporation, including, but not limited to, the right to vote at, to receive notice of, or to attend, meetings of shareholders or any other proceedings of the Corporation, or the right to receive dividends or other distributions. 2.14 EXERCISE TERMS OF SPECIAL NOTES Each Special Note authorized to be issued hereunder shall entitle the holder thereof, upon exercise, or upon the exercise of the Special Notes by the Trustee on behalf of the Noteholders as provided for in section 5.7, to acquire Debentures on the basis of $1,000 principal amount of Debentures per $1,000 principal amount of Special Notes, at any time after the Effective Date and until the Time of Expiry at no additional cost to the holder. ARTICLE 3 REPAYMENT 3.1 COVENANT TO PAY Except in the event that the Special Notes or any part thereof is exercised into Debentures of the Corporation as hereinafter provided, the Corporation, for value received, acknowledges and confirms itself to be indebted to the Noteholders and promises to pay the Noteholders the principal amount of Special Notes outstanding from time to time, in the manner and the priority as hereinafter set forth, or on such earlier date as the principal amount hereby secured may be payable and in the meantime promises to pay interest on the principal amount at the rate and times as hereinafter set forth, and should the Corporation at any time make default of its obligations or in the payment of any part or all of the principal amount or interest, then to pay interest on the amount in default both before and after judgment at the same rate and like money at the same place on the same date. 3.2 DEEMED EXERCISE Where the Special Notes are exercised into Debentures as hereinafter provided, the Special Notes shall, subject to the terms of the Debenture Trust Indenture, be deemed to have been fully paid and expired on the date of such exercise. 3.3 INTEREST Except in the event that the Special Notes or any part thereof is converted into Debentures of the Corporation as hereinafter provided, interest shall be payable on the outstanding balance of the principal amount of the Special Notes at a rate of ten (10%) percent per annum and payable after as well as before maturity, default and judgment with interest payable on overdue interest at the same rate. 10 Interest shall accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of the execution of this Special Note Indenture. Interest will be computed on the basis of a 365 day year. As interest becomes due hereunder, the Corporation shall pay such interest at the holder's office as contemplated in section 2.6 and section 2.7 hereof. The Corporation will pay interest semi-annually on the last day of each calendar month of such half year during the term of the Special Notes (June 30 and December 31), from the date of execution of this Indenture, with the first payment of interest to commence on December 31, 1996. Where the Special Notes are exercised into Debentures as hereinafter provided, the accrued interest to the date of the exercise of the Special Notes shall carry over to the Debentures with the accrued interest under the Special Note paid in accordance with the terms of the Debenture Trust Indenture. 3.4 ORDER OF REPAYMENT The holders shall, and the Corporation hereby irrevocably authorizes the holders, to apply all payments made by the Corporation against the principal amounts of the Special Notes, interest thereon and other monies which are payable by the Corporation under the Special Notes in the following order: (a) all expenses and other monies from time to time secured hereunder; (b) interest payable hereunder; and (c) the principal amount of the Special Notes. ARTICLE 4 SECURITY FOR PAST, PRESENT AND FUTURE INDEBTEDNESS 4.1 SECURITY The mortgages, pledges and charges created herein shall take effect forthwith upon the execution hereof and shall secure any and all indebtedness now or hereafter owing by the Corporation to the holders hereunder; and provided further, without restricting the generality of the foregoing, the Corporation may reduce the principal amount outstanding from time to time, without notice, bonus or penalty, and the holders, if they are so willing, and in their sole discretion, may provide further advances to the Corporation to the extent that the balance outstanding may be increased, reduced and varied from time to time; and provided further, without restricting the generality of the foregoing, the indebtedness secured by the mortgages, pledges and charges created herein shall include the following: (a) Any sums advanced by the holders on behalf of the Corporation or expenses or costs incurred by the holders, or the Trustee appointed hereunder, which are made or incurred pursuant to, or permitted by, the terms hereof, from the date of the advances or the incurring of such expenses or costs until reimbursed; (b) Any and all other indebtedness of the Corporation to the holders now or hereafter owing, regardless of how evidenced or arising, including but without limitation, any and all Special Notes issued hereunder; and (c) Any extensions or renewals of all such indebtedness described herein. 4.2 MORTGAGED PROPERTY In consideration of the premises herein contained and one ($1.00) dollar paid by the Trustee to the Corporation, the receipt and sufficiency whereof is hereby acknowledged, and to secure the due payment of the principal amount of the Special Notes from time to time issued and certified hereunder and all other monies, if any, for the time being and from time to time owing on the security of this Special Note Indenture and the due performance of the obligations of the Corporation herein contained and in pursuance of the power 11 and authority hereinbefore recited and of every other power and authority it thereunto enables, and subject to the Permitted Encumbrances, the Corporation hereby grants, assigns, transfers, mortgages, pledges, charges and grants a Security Interest to and in favour of the Trustee, as trustee on behalf of the Noteholders, a first fixed and floating charge over and in respect of all of its undertaking and all of the property and assets of the Corporation for the time being, both present and future of whatsoever nature including, without restricting the generality of the foregoing, any real and personal, moveable and immoveable property, of whatsoever nature and kind and wheresoever situate, both present and future (except to the extent that the Personal Property Security Act, Alberta, is not applicable to a security interest in such personal property, and to the exception as to leaseholds, as set forth in section 4.3 hereof) and, without in any way limiting the generality of the foregoing, its uncalled capital and all present and future incomes, monies, sources of money, rights, powers, privileges, franchises, easements, agreements, leases, shares, bonds, debentures, book debts, accounts receivable, negotiable and non-negotiable instruments, judgments, chooses in actions, securities and all other property and things of value, tangible or intangible, legal or equitable of which the Corporation may be possessed or entitled to or which may at any time hereafter be acquired by the Corporation (all of such undertaking, property and assets being mortgaged, pledged and charged being herein collectively called the "Mortgaged Property"). 4.3 EXCEPTIONS The Corporation shall not, without the prior consent of holders of not less than sixty-six and two-thirds (66-2/3%) in principal amount of Debentures then outstanding first had and obtained, be at liberty to and shall not, (i) except in respect of Permitted Encumbrances, create or incur or suffer to be created or incurred any mortgage, pledge, hypothec, lien, charge, encumbrance, assignment or other security of any kind whatsoever upon the Mortgaged Property or any part thereof ranking or purporting to rank in priority or pari passu to this Special Note Indenture or the charges created and secured hereby, or (ii) sell, assign, transfer, lease or otherwise dispose of the Mortgaged Property or any part thereof otherwise than in the ordinary course of business of the Corporation as it is presently conducted; provided always that the last day of the term of any lease, verbal or written, or any agreement therefor, now held or hereafter acquired by the Corporation or any renewal thereof, is hereby and shall be excepted out of the mortgage, pledge and charge created hereby or by any other instrument supplemental hereto and does not and shall not form part of the Mortgaged Property, but the Corporation shall stand possessed of the reversionary interest remaining in the Corporation of any leasehold interest forming part of the Mortgaged Property, upon trust to assign and dispose thereof as the Noteholder shall direct, and upon any sale of a leasehold interest or any part thereof, the Holder, for the purposes of vesting the aforesaid reversionary interest of any such term or any renewal thereof in any purchaser or purchasers thereof shall be entitled by deed or writing to appoint such purchaser or purchasers or any other person or persons a new trustee or trustees of the aforesaid reversion in the place of the Corporation and to vest the same accordingly in the new trustee or trustees so appointed, freed and discharged from any obligation respecting the same. 4.4 OBLIGATION TO PAY Nothing contained in this Special Note Indenture or the Special Notes, is intended to or shall impair, as between the Corporation, its creditors, and the holders, the obligation of the Corporation, which is absolute and unconditional, to pay to the holders the principal amount and other indebtedness of the Corporation to the holders, as and when the same shall become due and payable in accordance with the terms hereof, or affect the relative rights of the holders, nor shall anything herein prevent the Trustee, on behalf of the holders, from exercising all remedies otherwise permitted by applicable law or equity under this Special Note Indenture and the Special Notes. 12 4.5 DEFEASANCE Upon (i) payment by the Corporation to the holders of the total principal amount of the Special Notes and all other money secured by this Special Note Indenture and provided the security herein constituted shall not have become enforceable; or (ii) the exercise of all of the Special Notes to Debentures as provided herein, then the Mortgaged Property shall, subject to the terms of the Debenture Trust Indenture, revert and revest in the Corporation without any release, acquittance, reconveyance, re-entry or other act or formality whatsoever, but the Trustee shall nevertheless, within thirty (30) days of being requested in writing by the Corporation to do so, deliver up this Special Note Indenture to the Corporation and execute, acknowledge or deliver to the Corporation a full release and reconveyance of the Mortgaged Property or such parts thereof as shall not have been disposed under the powers herein contained and such further and other documents reasonably requested by the Corporation. 4.6 PARTIAL RELEASE Except as herein specifically provided, no postponement or partial release or discharge of the Security Interest, created under and secured by this Indenture in respect of all or any part of the Mortgaged Property shall in any way operate or be construed so as to release and discharge the security hereby constituted in respect of the Mortgaged Property, provided, or so as to release or discharge the Corporation from its liability to the holders to fully pay and satisfy the principal amount of the Special Notes and all other monies due or remaining unpaid by the Corporation to the holders from time to time as provided herein. 4.7 PROVISO FOR POSSESSION UNTIL DEFAULT Until the security hereby created shall become enforceable and the Trustee on behalf of the Noteholders hereof shall have determined to enforce the same, the Corporation shall be permitted in the same manner and to the same extent as if this Indenture had not been executed, but subject to the express terms hereof, to possess, operate, manage, use and enjoy its Mortgaged Property in the ordinary course of business of the Corporation and for the purpose of carrying on the same, and for such purpose, to take and use the rents, income, profits and issues thereof, including dividends, profits and interest upon or in respect of any shares, bonds or other securities, claims and demands in judgment or otherwise at any time forming part of the Mortgaged Property. ARTICLE 5 EXERCISE OF SPECIAL NOTES 5.1 METHOD OF EXERCISE OF SPECIAL NOTES (a) The holder of any Special Note may exercise the right conferred on such holder to acquire Debentures by surrendering, after the Effective Date and prior to the Time of Expiry, to the Note Agency the Note Certificate with a duly completed and executed exercise form. A Note Certificate with the duly completed and executed exercise form referred to in this subsection shall be deemed to be surrendered only upon personal delivery thereof or, if sent by mail or other means of transmission, upon actual receipt thereof at, in each case, the Note Agency. (b) Any exercise form referred to in subsection 5.1(a) shall be signed by the Noteholder or by the duly appointed legal representative thereof or a duly authorized attorney, with evidence of 13 authority of any such legal representative or attorney attached thereto, and, if required by the exercise form, with such signature properly guaranteed, and shall specify: (i) the aggregate equal number of principal amount of Debentures which the holder wishes to acquire (being not more than those which the holder is entitled to acquire pursuant to the Note Certificate(s) surrendered); (ii) the person or persons in whose name or names such Debentures are to be issued; (iii) the address or addresses of such person(s); and (iv) the aggregate number of Debentures to be issued to each such person if more than one is so specified. If any of the Debentures subscribed for are to be issued to a person or persons other than the Noteholder, the Noteholder shall pay to the Corporation or the Note Agency on behalf of the Corporation, all applicable transfer or similar taxes and the Corporation shall not be required to issue or deliver certificates evidencing Debentures unless or until such Noteholder shall have paid to the Corporation, or the Note Agency on behalf of the Corporation, the amount of such tax or shall have established to the satisfaction of the Corporation that such tax has been paid or that no tax is due. (c) In connection with the exchange of Note Certificates and exercise of Special Notes and in compliance with such other terms and conditions hereof as may be required, the Corporation has appointed the principal offices of the Trustee in Calgary as the agency at which Note Certificates may be surrendered for exchange or at which Special Notes may be exercised. The Corporation may from time to time designate alternate or additional places as the Note Agency and shall give written notice to the Trustee of any change of the Note Agency. 5.2 EFFECT OF EXERCISE OF SPECIAL NOTES (a) Upon compliance by the holder of any Note Certificate with the provisions of section 5.1 or upon the exercise of the Special Notes by the Trustee on behalf of the Noteholder of Special Notes pursuant to section 5.7, and subject to section 5.3, the Debentures subscribed for shall be deemed to have been issued and the person or persons to whom such Debentures are to be issued shall be deemed to have become the holder or holders of record of such Debentures on the Exercise Date unless the transfer registers of the Corporation shall be closed on such date, in which case the Debentures subscribed for shall be deemed to have been issued, and such person or persons deemed to have become the holder or holders of record of such Debentures, on the date on which such transfer registers are reopened. (b) Within five Business Days after the Exercise Date with respect to a Special Note, the Corporation shall cause to be mailed to the person or persons in whose name or names the Debentures so subscribed for have been issued, as specified in the subscription, at the address specified in such subscription or, if so specified in such subscription, cause to be delivered to such person or persons at the Note Agency where the Note Certificate was surrendered, a certificate or certificates for the appropriate number of Debentures subscribed for. In the absence of instructions to the contrary, such certificates shall be issued in the name of the registered holder of the surrendered Note Certificate and shall be mailed by first class mail to the address of such Noteholder appearing on the Note Register. (c) In the event of the exercise of Special Notes prior to the Corporation obtaining a receipt for the Prospectus from each of the Securities Commissions and delivering a copy of the Prospectus to such Special Noteholder, the Corporation may, on the advice of Counsel and if required by 14 applicable law, legend the certificates representing the Debentures issued on such exercise to the effect the such shares are subject to trading restrictions under applicable securities legislation, and prior to the issuance of any such certificates the Trustee shall consult with the Corporation to determine whether such endorsing or legending is required. 5.3 PARTIAL EXERCISE OF SPECIAL NOTES; FRACTIONS (a) The holder of any Special Notes may acquire a principal amount of Debentures less than the principal amount of Special Notes which the holder is entitled to acquire pursuant to the surrendered Note Certificate(s). In the event of any exercise of a principal amount of Special Notes less than the principal amount which the holder is entitled to exercise, the holder of the Special Notes upon such exercise shall also be entitled to receive, without charge therefor, a new Note Certificate(s) in respect of the balance of the principal amount of Special Notes represented by the surrendered Note Certificate(s) not then exercised. In the absence of instructions to the contrary, such certificate shall be issued in the name of the registered holder of the surrendered Note Certificate and shall be mailed by first class mail to the address of such Noteholder appearing on the Note Register. (b) Notwithstanding anything herein contained, the Corporation shall not be required, upon the exercise of any Special Notes, to issue Debentures or to distribute certificates which evidence Debentures in denominations other than $1,000 of principal amount or integral multiples thereof. 5.4 EXPIRATION OF SPECIAL NOTES Subject to section 5.7, immediately after the Time of Expiry, all rights under any Special Note in respect of which the right of acquisition herein and therein provided for shall not have been exercise shall cease and terminate and such Special Note shall be void and of no further force or effect. 5.5 CANCELLATION OF SURRENDERED SPECIAL NOTES All Note Certificates surrendered or deemed to be surrendered to the Note Agency pursuant to the terms hereof, shall be returned to the Trustee for cancellation and, after the expiry of any period of retention prescribed by law, destroyed by the Trustee. Upon request by the Corporation, the Trustee shall furnish to the Corporation a destruction certificate identifying the Note Certificates so destroyed and the number of Special Notes evidenced thereby. 5.6 ACCOUNTING AND RECORDING (a) The Trustee shall promptly account to the Corporation with respect to the Special Notes exercised. Any securities or other instruments from time to time received by the Trustee shall be received in trust for, and shall be segregated and kept apart by the Trustee in trust for, the Corporation. (b) The Trustee shall record the particulars of Special Notes exercised which shall include the names and addresses of the persons who become holders of Debentures on exercise and the Exercise Date. Within five Business Days of each Exercise Date, the Trustee shall provide such particulars in writing to the Corporation. 5.7 EXERCISE BY TRUSTEE Immediately prior to the Time of Expiry, the rights of all holders of Special Notes not then exercised to acquire Debentures shall be exercised by the Trustee on behalf of the Noteholders and the Debentures issuable thereby shall be deemed to be issued to the Noteholders at such time. 15 The Corporation shall cause to be mailed or, if so specified in the exercise form, cause to be delivered at the Note Agency where the Note Certificate was surrendered, to the person or persons specified in the exercise form a debenture certificate or debenture certificates for the appropriate number of Debentures upon receipt at the Note Agency of the Note Certificate with the duly completed and executed exercise form specifying the matters referred to in paragraphs 5.1(b)(ii), 5.1(b)(iii) and 5.1(b)(iv) together with any payment of the nature referred to in subsection 5.1(b). 5.8 SECURITIES RESTRICTIONS Notwithstanding anything herein contained, Debentures will only be issued pursuant to any Special Note in compliance with the securities laws of any applicable jurisdiction and, without limiting the generality of the foregoing, in the event that Special Notes are exercised pursuant to section 5.1 prior to the issuance of a receipt for the Prospectus by the Securities Commissions in each of the Filing Jurisdictions, the certificates representing the Debentures issued thereby will bear such legend as may, in the opinion of counsel of the Corporation, be necessary in order to avoid a violation of any securities laws of any province in Canada or of the United States or to comply with the requirements of any stock exchange on which the Debentures are listed, provided that, if at any time, in the opinion of counsel to the Corporation, such legends are no longer necessary in order to avoid a violation of any such laws, or the holder of any such legended certificate, at the holder's expense, provides the Corporation with evidence satisfactory in form and substance to the Corporation (which may include an opinion of counsel satisfactory to the Corporation) to the effect that such holder is entitled to sell or otherwise transfer such Debentures in a transaction in which such legends are not required, such legended certificate may thereafter be surrendered to the Corporation in exchange for a certificate which does not bear such legend. ARTICLE 6 INDEBTEDNESS 6.1 COVENANT TO PAY The Corporation, for value received, acknowledges and confirms itself to be indebted to the holders and promises to pay the holders the principal amount of Special Notes and the interest payable thereon outstanding from time to time, in the manner and the priority as hereinafter set forth, or on such earlier date as the principal amount hereby secured may be payable and in the meantime promises to pay interest on the principal amount at the rate and times as hereinafter set forth, should the Corporation at any time make default of its obligations in the payment of any part or all of the principal amount or interest, then to pay interest on the amount in default both before and after judgment at the same rate and like money at the same place on the same date. 6.2 TERMS AND CONDITIONS OF SPECIAL NOTES The terms and conditions of the Special Notes as herein created, relating to the payment of the principal amount, maturity, calculation and payment of interest, order or repayment, security for past, present and future indebtedness, security, mortgaged property, defeasance, covenants, insurance, negative covenants, provisions relating to default, notice of default and enforcement of repayment of indebtedness, satisfaction and discharge shall in all respects be identical to the terms and conditions of the Debentures set forth and prescribed in the Debenture Trust Indenture and the provisions of the Debentures and the Debenture Trust Indenture as same relate to the foregoing, shall apply MUTATIS MUTANDIS with respect to the Special Notes, as if such terms and conditions were more fully set forth herein, and including but without limiting the generality of the foregoing, such provisions shall include Article 3, Article 4, Article 5, Article 6, Article 7 and Article 8, inclusive, of the Debenture Trust Indenture. Where inconsistencies, if any, exist in respect of the foregoing provisions between this Special Note Indenture and the Debenture Trust Indenture, the applicable provisions of the Debenture Trust Indenture shall govern. 16 ARTICLE 7 RIGHTS OF THE CORPORATION AND COVENANTS 7.1 OPTIONAL PURCHASES BY THE CORPORATION The Corporation may from time to time purchase, by private contract or otherwise, any of the Special Notes. Any such purchase shall be made at the lowest price or prices at which, in the opinion of the directors, such Special Notes are then obtainable, plus reasonable costs of purchase, and may be made in such manner, from such persons and on such other terms as the Corporation, in its sole discretion, may determine. Any Note Certificates representing the Special Notes purchased pursuant to this section shall forthwith be delivered to and cancelled by the Trustee. No Special Notes shall be issued in replacement thereof. 7.2 GENERAL COVENANTS The Corporation covenants with the Trustee that so long as any Special Notes remain outstanding: (a) it shall reserve and keep available a sufficient number of Debentures for the purpose of enabling it to satisfy its obligations to issue Debentures upon conversion of the Special Notes; (b) it shall cause the Debentures and the certificates representing the Debentures acquired pursuant to the exercise of the Special Notes to be duly issued and delivered in accordance with the Note Certificates and the terms hereof; (c) all Debentures which shall be issued upon exercise of the right to acquire provided for herein and in the Note Certificates shall be issued as fully paid and non-assessable; (d) it shall maintain its corporate existence; (e) it shall use its best efforts to ensure that all Common Shares outstanding or issuable from time to time (including without limitation the Common Shares issuable on the conversion of the Debentures) are listed and posted for trading on The Alberta Stock Exchange; (f) it shall make all requisite filings under applicable Canadian securities legislation including those necessary to remain a reporting issuer not in default in each of the Filing Jurisdictions and those necessary to report the exercise of the right to acquire Debentures pursuant to Special Notes and the issuance of Common Shares pursuant to the conversion of the Debentures; (g) it shall use its best efforts to obtain a receipt for the Prospectus or obtain an Order, as soon as practicable, from each of the Securities Commissions so that the resale of the Debentures, issuable upon the exercise of the Special Notes and Common Shares issuable upon the conversion of the Debentures will not be subject to the prospectus requirements nor any "hold period" under applicable securities legislation in such Filing Jurisdictions; (h) it shall give written notice to the Trustee and to each registered holder of Special Notes of the issuance of the receipts for a Prospectus or an Order, together with a commercial copy of the Prospectus or a copy of an Order, as soon as practicable but, in any event, not later than three Business Days after the issuance of such receipts; and (i) generally, it will well and truly perform and carry out all of the acts or things to be done by it as provided in this Indenture or as the Trustee may reasonably require for the better accomplishing and effecting of the intentions and provisions of this Indenture. 17 7.3 TRUSTEE'S REMUNERATION AND EXPENSES The Corporation covenants that it will pay to the Trustee from time to time reasonable remuneration for its services hereunder and will pay or reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in the administration or execution of the trusts hereby created (including the reasonable compensation and the disbursements of its Counsel and all other advisers and assistants not regularly in its employ) both before any default hereunder and thereafter until all duties of the Trustee hereunder shall be finally and fully performed, except any such expense, disbursement or advance as may arise out of or result from the Trustee's negligence, wilful misconduct or bad faith. 7.4 SECURITIES QUALIFICATION REQUIREMENTS (a) If, in the opinion of counsel, any instrument (not including a prospectus except the Prospectus required to be filed with the Securities Commissions under subsection 7.2(g) is required to be filed with, or any permission is required to be obtained from, any governmental authority in Canada or any other step is required under any federal or provincial law of Canada before any Debentures or Common Shares which a Noteholder is entitled to acquire pursuant to the exercise of any Special Note may properly and legally be issued upon due exercise thereof and thereafter traded, without further formality or restriction, the Corporation covenants that it will take such required action. (b) The Corporation or, if required by the Corporation, the Trustee will give notice of the issue of Debentures pursuant to the exercise of Special Notes, in such detail as may be required, to the Securities Commission in each of the Filing Jurisdictions in which there is legislation or regulation permitting or requiring the giving of any such notice in order that such issue of Debentures and the subsequent disposition of the Debentures so issued will not be subject to the prospectus qualification requirements of such legislation or regulation. 7.5 PERFORMANCE OF COVENANTS BY TRUSTEE If the Corporation shall fail to perform any of its covenants contained in this Indenture, the Trustee may notify the Noteholders of such failure on the part of the Corporation or may itself perform any of the covenants capable of being performed by it but, subject to section 11.2, shall be under no obligation to perform such covenants or to notify the Noteholders of such performance by it. All sums expended or advanced by the Trustee in so doing shall be repayable as provided in section 7.3. No such performance, expenditure or advance by the Trustee shall relieve the Corporation of any default hereunder or of its continuing obligations under the covenants herein contained. ARTICLE 8 ENFORCEMENT 8.1 SUITS BY NOTEHOLDERS Subject to section 8.4, all or any of the rights conferred upon any Noteholder by any of the terms of the Note Certificates or the Indenture or both may be enforced by the Noteholder by appropriate proceedings but without prejudice to the right which is hereby conferred upon the Trustee to proceed in its own name to enforce each and all of the provisions herein contained for the benefit of the Noteholders. 18 8.2 IMMUNITY OF SHAREHOLDERS, ETC. The Trustee and, by the acceptance of the Note Certificates and as part of the consideration for the issue of the Special Notes, the Noteholders hereby waive and release any right, cause of action or remedy now or hereafter existing in any jurisdiction against any incorporator or any past, present or future shareholder, director, officer, employee or agent of the Corporation or any successor corporation on any covenant, agreement, representation or warranty by the Corporation contained herein or in the Note Certificates. 8.3 LIMITATION OF LIABILITY The obligations hereunder are not personally binding upon, nor shall resort hereunder be had to, the private property of any of the past, present or future directors or shareholders of the Corporation or any successor corporation or any of the past, present or future officers, employees or agents of the Corporation or any successor corporation, but only the property of the Corporation or any successor corporation shall be bound in respect hereof. 8.4 WAIVER OF DEFAULT Upon the happening of any default of any covenant or obligation of the Corporation provided for herein: (a) the holders of not less than 66 2/3% of the aggregate number of Special Notes then outstanding shall have power (in addition to the powers exercisable by extraordinary resolution as provided in section 9.10) by requisition in writing to instruct the Trustee to waive any default hereunder and the Trustee shall thereupon waive the default upon such terms and conditions as shall be prescribed in such requisition; or (b) the Trustee shall have power to waive any default hereunder upon such terms and conditions as the Trustee may deem advisable, if, in the Trustee's opinion, the same shall have been cured or adequate provision made therefor; provided that no delay or omission of the Trustee or of the Noteholders to exercise any right or power accruing upon any default shall impair any such right or power or shall be construed to be a waiver of any such default or acquiescence therein and provided further that no act or omission either of the Trustee or of the Noteholders in the premises shall extend to or be taken in any manner whatsoever to affect any subsequent default hereunder of the rights resulting therefrom. ARTICLE 9 MEETINGS OF NOTEHOLDERS 9.1 RIGHT TO CONVENE MEETINGS The Trustee may at any time and from time to time, and shall on receipt of a written request of the Corporation or of a Noteholders' Request and upon being indemnified to its reasonable satisfaction by the Corporation or by the Noteholders signing such Noteholders' Request against the cost which may be incurred in connection with the calling and holding of such meeting, convene a meeting of the Noteholders. In the event of the Trustee failing to so convene a meeting within seven days after receipt of such written request of the Corporation or such Noteholders' Request and indemnity given as aforesaid, the Corporation or such Noteholders, as the case may be, may convene such meeting. Every such meeting shall be held in the City of Calgary or at such other place as may be approved or determined by the Trustee and approved by the Corporation, acting reasonably. 19 9.2 NOTICE At least ten days prior notice of any meeting of Noteholders shall be given to the Noteholders in the manner provided for in section 12.2 and a copy of such notice shall be sent by mail to the Trustee (unless the meeting has been called by the Trustee) and to the Corporation (unless the meeting has been called by the Corporation). Such notice shall state the time when and the place where the meeting is to be held, shall state briefly the general nature of the business to be transacted thereat and shall contain such information as is reasonably necessary to enable the Noteholders to make a reasoned decision on the matter, but it shall not be necessary for any such notice to set out the terms of any resolution to be proposed or any of the provisions of this Article 9. 9.3 CHAIRMAN An individual (who need not be a Noteholder) designated in writing by the Trustee shall be chairman of the meeting and if no individual is so designated, or if the individual so designated is not present within 15 minutes from the time fixed for the holding of the meeting, the Noteholders present in person or by proxy shall choose an individual present to be chairman. 9.4 QUORUM Subject to the provisions of section 9.11, at any meeting of the Noteholders a quorum shall consist of Noteholders present in person or by proxy and entitled to purchase at least 25% of the aggregate principal amount of Debentures which could be acquired pursuant to all the then outstanding Special Notes, provided that at least two persons entitled to vote thereat are personally present. If a quorum of the Noteholders shall not be present within 30 minutes from the time fixed for holding any meeting, the meeting, if summoned by Noteholders or on a Noteholders' Request, shall be dissolved; but in any other case the meeting shall be adjourned to the same day in the next week (unless such day is not a Business Day, in which case it shall be adjourned to the next following Business Day) at the same time and place and no notice of the adjournment need be given. Any business may be brought before or dealt with at an adjourned meeting which might have been dealt with at the original meeting in accordance with the notice calling the same. No business shall be transacted at any meeting unless a quorum be present at the commencement of business. At the adjourned meeting the Noteholders present in person or by proxy shall form a quorum and may transact the business for which the meeting was originally convened. 9.5 POWER TO ADJOURN The chairman of any meeting at which a quorum of the Noteholders is present may, with the consent of the meeting, adjourn any such meeting, and no notice of such adjournment need be given except such notice, if any, as the meeting may prescribe. 9.6 SHOW OF HANDS Every question submitted to a meeting shall be decided in the first place by a majority of the votes given on a show of hands except that votes on an extraordinary resolution shall be given in the manner hereinafter provided. At any such meeting, unless a poll is duly demanded as herein provided, a declaration by the chairman that a resolution has been carried or carried unanimously or by a particular majority or lost or not carried by a particular majority shall be conclusive evidence of the fact. 20 9.7 POLL AND VOTING On every extraordinary resolution, and on any other question submitted to a meeting and after a vote by show of hands when demanded by the chairman or by one or more of the Noteholders acting in person or by proxy and entitled to acquire in the aggregate at least 5% of the aggregate principal amount of Debentures which could be acquired pursuant to all the Special Notes then outstanding, a poll shall be taken in such manner as the chairman shall direct. Questions other than those required to be determined by extraordinary resolution shall be decided by a majority of the votes cast on the poll. On a show of hands, every person who is present and entitled to vote, whether as a Noteholder or as proxy for one or more absent Noteholders, or both, shall have one vote. On a poll, each Noteholder present in person or represented by a proxy duly appointed by instrument in writing shall be entitled to one vote in respect of each one ($1.00) dollar of Debenture which he is entitled to acquire pursuant to the Special Note or Special Notes then held or represented by it. A proxy need not be a Noteholder. The chairman of any meeting shall be entitled, both on a show of hands and on a poll, to vote in respect of the Special Notes, if any, held or represented by him. 9.8 REGULATIONS The Trustee, or the Corporation with the approval of the Trustee, may make and vary such regulations as it shall think fit for: (a) the setting of the record date for a meeting for the purpose of determining Noteholders entitled to receive notice of and to vote at the meeting; (b) the issue of voting certificates by any bank, trust company or other depositary satisfactory to the Trustee stating that the Note Certificates specified therein have been deposited with it by a named person and will remain on deposit until after the meeting, which voting certificate shall entitle the persons named therein to be present and vote at any such meeting and at any adjournment thereof or to appoint a proxy or proxies to represent them and vote for them at any such meeting and at any adjournment thereof in the same manner and with the same effect as though the persons so named in such voting certificates were the actual bearers of the Note Certificates specified therein; (c) the deposit of voting certificates and instruments appointing proxies at such place and time as the Trustee, the Corporation or the Noteholders convening the meeting, as the case may be, may in the notice convening the meeting direct; (d) the deposit of voting certificates and instruments appointing proxies at some approved place or places other than the place at which the meeting is to be held and enabling particulars of such instruments appointing proxies to be mailed, cabled or telegraphed before the meeting to the Corporation or to the Trustee at the place where the same is to be held and for the voting of proxies so deposited as though the instruments themselves were produced at the meeting; (e) the form of the instrument of proxy; and (f) generally for the calling of meetings of Noteholders and the conduct of business thereat. Any regulations so made shall be binding and effective and the votes given in accordance therewith shall be valid and shall be counted. Save as such regulations may provide, the only persons who shall be recognized at any meeting as a Noteholder, or be entitled to vote or be present at the meeting in respect thereof (subject to section 9.9), shall be Noteholders or their Counsel, or proxies of Noteholders. 21 9.9 CORPORATION AND TRUSTEE MAY BE REPRESENTED The Corporation and the Trustee, by their respective directors and officers, and the Counsel for the Corporation and for the Trustee may attend any meeting of the Noteholders, but shall not be entitled to vote thereat, whether in respect of any Special Notes held by them or otherwise. 9.10 POWERS EXERCISABLE BY EXTRAORDINARY RESOLUTION In addition to all other powers conferred upon them by any other provisions of this Indenture or by law, the Noteholders at a meeting shall, subject to the provisions of section 9.11, have the power, exercisable from time to time by extraordinary resolution: (a) to agree to any modification, abrogation, alteration, compromise or arrangement of the rights of Noteholders or the Trustee in its capacity as trustee hereunder or on behalf of the Noteholders against the Corporation, whether such rights arise under this Indenture or the Note Certificates or otherwise; (b) to amend, alter or repeal any extraordinary resolution previously passed or sanctioned by the Noteholders; (c) to direct or to authorize the Trustee to enforce any of the covenants on the part of the Corporation contained in this Indenture or the Note Certificates or to enforce any of the rights of the Noteholders in any manner specified in such extraordinary resolution or to refrain from enforcing any such covenant or right; (d) to waive, and to direct the Trustee to waive, any default on the part of the Corporation in complying with any provisions of this Indenture or the Note Certificates either unconditionally or upon any conditions specified in such extraordinary resolution; (e) to restrain any Noteholder from taking or instituting any suit, action or proceeding against the Corporation for the enforcement of any of the covenants on the part of the Corporation in this Indenture or the Note Certificates or to enforce any of the rights of the Noteholders; (f) to direct any Noteholder who, as such, has brought any suit, action or proceeding to stay or to discontinue or otherwise to deal with the same upon payment of the costs, charges and expenses reasonably and properly incurred by such Noteholder in connection therewith; (g) to assent to any change in or omission from the provisions contained in the Note Certificates and this Indenture or any ancillary or supplemental instrument which may be agreed to by the Corporation, and to authorize the Trustee to concur in and execute any ancillary or supplemental indenture embodying the change or omission; (h) with the consent of the Corporation, to remove the Trustee or its successor in office and to appoint a new trustee or trustees to take the place of the Trustee so removed; (i) to assent to any compromise or arrangement with any creditor or creditors or any class or classes of creditors, whether secured or otherwise, and with holders of any shares or other securities of the Corporation; and (j) to sanction any scheme for the reconstruction or reorganization of the Corporation or for the consolidation, amalgamation or merger of the Corporation with any other corporation or for the sale, leasing, transfer or other disposition of all or substantially all the property and assets of the Corporation. 22 9.11 MEANING OF EXTRAORDINARY RESOLUTION (a) The expression "extraordinary resolution" when used in this Indenture means, subject as hereinafter provided in this section and in section 9.14, a resolution proposed at a meeting of Noteholders duly convened for that purpose and held in accordance with the provisions of this Article 7 at which there are present in person or by proxy Noteholders entitled to acquire at least 25% of the aggregate principal amount of Debentures which may be acquired pursuant to all the then outstanding Special Notes and passed by the affirmative votes of Noteholders entitled to acquire not less than 66 2/3% of the aggregate principal amount of Debentures which may be acquired pursuant to all the then outstanding Special Notes represented at the meeting and voted on the poll upon such resolution. (b) If, at the meeting at which an extraordinary resolution is to be considered, Noteholders entitled to acquire at least 25% of the aggregate principal amount of Debentures which may be acquired pursuant to all the then outstanding Special Notes are not present in person or by proxy within 30 minutes after the time appointed for the meeting, then the meeting, if convened by Noteholders or on a Noteholders' Request, shall be dissolved; but in any other case it shall stand adjourned to such day, being not less than 15 or more than 60 days later, and to such place and time as may be appointed by the chairman. Not less than ten days' prior notice shall be given of the time and place of such adjourned meeting in the manner provided for in section 12.2. Such notice shall state that at the adjourned meeting the Noteholders present in person or by proxy shall form a quorum but it shall not be necessary to set forth the purposes for which the meeting was originally called or any other particulars. At the adjourned meeting the Noteholders present in person or by proxy shall form a quorum and may transact the business for which the meeting was originally convened and a resolution proposed at such adjourned meeting and passed by the requisite vote as provided in subsection 9.11(a) shall be an extraordinary resolution within the meaning of this Indenture notwithstanding that Noteholders entitled to acquire at least 25% of the aggregate principal amount of Debentures which may be acquired pursuant to all the then outstanding Special Notes are not present in person or by proxy at such adjourned meeting. (c) Votes on an extraordinary resolution shall always be given on a poll and no demand for a poll on an extraordinary resolution shall be necessary. 9.12 POWERS CUMULATIVE Any one or more of the powers or any combination of the powers in this Indenture stated to be exercisable by the Noteholders by extraordinary resolution or otherwise may be exercised from time to time and the exercise of any one or more of such powers or any combination of powers from time to time shall not be deemed to exhaust the right of the Noteholders to exercise such power or powers or combination of powers then or thereafter from time to time. 9.13 MINUTES Minutes of all resolutions and proceedings at every meeting of Noteholders shall be made and duly entered in books to be provided from time to time for that purpose by the Trustee at the expense of the Corporation, and any such minutes as aforesaid, if signed by the chairman or the secretary of the meeting at which such resolutions were passed or proceedings had shall be PRIMA FACIE evidence of the matters therein stated and, until the contrary is proved, every such meeting in respect of the proceedings of which minutes shall have been made shall be deemed to have been duly convened and held, and all resolutions passed thereat or proceedings taken shall be deemed to have been duly passed and taken. 23 9.14 INSTRUMENTS IN WRITING All actions which may be taken and all powers that may be exercised by the Noteholders at a meeting held as provided in this Article 9 may also be taken and exercised by Noteholders entitled to acquire at least 66 2/3% of the aggregate principal amount of Debentures which may be acquired pursuant to all the then outstanding Special Notes by an instrument in writing signed in one or more counterparts by such Noteholders in person or by attorney duly appointed in writing, and the expression "extraordinary resolution" when used in this Indenture shall include an instrument so signed. 9.15 BINDING EFFECT OF RESOLUTIONS Every resolution and every extraordinary resolution passed in accordance with the provisions of this Article 7 at a meeting of Noteholders shall be binding upon all the Noteholders, whether present at or absent from such meeting, and every instrument in writing signed by Noteholders in accordance with section 7.14 shall be binding upon all the Noteholders, whether signatories thereto or not, and each and every Noteholder and the Trustee (subject to the provisions for indemnity herein contained) shall be bound to give effect accordingly to every such resolution and instrument in writing. 9.16 HOLDINGS BY CORPORATION DISREGARDED In determining whether Noteholders holding Note Certificates evidencing the entitlement to acquire the required principal amount of Debentures are present at a meeting of Noteholders for the purpose of determining a quorum or have concurred in any consent, waiver, extraordinary resolution, Noteholders' Request or other action under this Indenture, Special Notes owned legally or beneficially by the Corporation or any Subsidiary of the Corporation shall be disregarded in accordance with the provisions of section 12.9. ARTICLE 10 SUPPLEMENTAL INDENTURES 10.1 PROVISION FOR SUPPLEMENTAL INDENTURES FOR CERTAIN PURPOSES From time to time the Corporation (when authorized by action of the directors) and the Trustee may, subject to the provisions hereof, and they shall, when so directed in accordance with the provisions hereof, execute and deliver by their proper officers, indentures or instruments supplemental hereto, which thereafter shall form part hereof, for any one or more or all of the following purposes: (a) adding to the provisions hereof such additional covenants and enforcement provisions as, in the opinion of Counsel, are necessary or advisable in the circumstances, provided that the same are not in the opinion of the Trustee prejudicial to the interests of the Noteholders; (b) giving effect to any extraordinary resolution passed as provided in Article 9; (c) making such provisions not inconsistent with this Indenture as may be necessary or desirable with respect to matters or questions arising hereunder or for the purpose of obtaining a listing or quotation of the Special Notes on any stock exchange, provided that such provisions are not, in the opinion of the Trustee, prejudicial to the interests of the Noteholders; (d) adding to or altering the provisions hereof in respect of the transfer of Special Notes, making provision for the exchange of Note Certificates, and making any modification in the form of the Note Certificates which does not affect the substance thereof; (e) modifying any of the provisions of this Indenture, including relieving the Corporation from any of the obligations, conditions or restrictions herein contained, provided that such modification or 24 relief shall be or become operative or effective only if, in the opinion of the Trustee, such modification or relief in no way prejudices any of the rights of the Noteholders or of the Trustee, and provided further that the Trustee may in its sole discretion decline to enter into any such supplemental indenture which in its opinion may not afford adequate protection to the Trustee when the same shall become operative; and (f) for any other purpose not inconsistent with the terms of this Indenture, including the correction or rectification of any ambiguities, defective or inconsistent provisions, errors, mistakes or omissions herein, provided that in the opinion of the Trustee the rights of the Trustee and of the Noteholders are in no way prejudiced thereby. 10.2 SUCCESSOR CORPORATIONS In the case of the consolidation, amalgamation, merger or transfer of all or substantially all of the undertaking or assets of the Corporation to another corporation ("Successor Corporation"), the Successor Corporation resulting from such consolidation, amalgamation, merger or transfer (if not the Corporation) shall expressly assume, by supplemental indenture satisfactory in form to the Trustee and executed and delivered to the Trustee, the due and punctual performance and observance of each and every covenant and condition of this Indenture to be performed and observed by the Corporation. ARTICLE 11 CONCERNING THE TRUSTEE 11.1 TRUST INDENTURE LEGISLATION (a) If and to the extent that any provision of this Indenture limits, qualifies or conflicts with a mandatory requirement of Applicable Legislation, such mandatory requirement shall prevail. (b) The Corporation and the Trustee agree that each will, at all times in relation to this Indenture and any action to be taken hereunder, observe and comply with and be entitled to the benefits of Applicable Legislation. 11.2 RIGHTS AND DUTIES OF TRUSTEE (a) In the exercise of the rights and duties prescribed or conferred by the terms of this Indenture, the Trustee shall exercise that degree of care, diligence and skill that a reasonably prudent trustee would exercise in comparable circumstances. No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own wilful misconduct or bad faith. (b) The obligation of the Trustee to commence or continue any act, action or proceeding for the purpose of enforcing any rights of the Trustee or the Noteholders hereunder shall be conditional upon the Noteholders furnishing, when required by notice by the Trustee, sufficient funds to commence or to continue such act, action or proceeding and an indemnity reasonably satisfactory to the Trustee to protect and to hold harmless the Trustee against the costs, charges and expenses and liabilities to be incurred thereby and any loss and damage it may suffer by reason thereof. None of the provisions contained in this Indenture shall require the Trustee to expend or to risk its own funds or otherwise to incur financial liability in the performance of any of its duties or in the exercise of any of its rights or powers unless indemnified as aforesaid. (c) The Trustee may, before commencing or at any time during the continuance of any such act, action or proceeding, require the Noteholders, at whose instance it is acting, to deposit with the 25 Trustee the Note Certificates held by them, for which Note Certificates the Trustee shall issue receipts. (d) Every provision of this Indenture that by its terms relieves the Trustee of liability or entitles it to rely upon any evidence submitted to it, is subject to the provisions of Applicable Legislation, this section 11.2 and of section 11.3. 11.3 EVIDENCE, EXPERTS AND ADVISERS (a) In addition to the reports, certificates, opinions and other evidence required by this Indenture, the Corporation shall furnish to the Trustee such additional evidence of compliance with any provision hereof, and in such form, as may be prescribed by Applicable Legislation or as the Trustee may reasonably require by written notice to the Corporation. (b) In the exercise of its rights and duties hereunder, the Trustee may, if it is acting in good faith, rely as to the truth of the statements and the accuracy of the opinions expressed in statutory declarations, opinions, reports, written requests, consents, or orders of the Corporation, certificates of the Corporation or other evidence furnished to the Trustee pursuant to any provision hereof or of Applicable Legislation or pursuant to a request of the Trustee, provided that such evidence complies with Applicable Legislation and that the Trustee complies with Applicable Legislation and that the Trustee examines such evidence and determines that such evidence complies with the applicable requirements of this Indenture. (c) Whenever it is provided in this Indenture or under Applicable Legislation that the Corporation shall deposit with the Trustee resolutions, certificates, reports, opinions, requests, orders or other documents, it is intended that the trust, accuracy and good faith on the effective date thereof and the facts and opinions stated in all such documents so deposited shall, in each and every such case, be conditions precedent to the right of the Corporation to have the Trustee take the action to be based thereon. (d) Proof of the execution of an instrument in writing, including a Noteholders' Request, by any Noteholder may be made by the certificate of a notary public, or other officer with similar powers, that the person signing such instrument acknowledged to him the execution thereof, or by an affidavit of a witness to such execution or in any other manner which the Trustee may consider adequate. (e) The Trustee may employ or retain such Counsel, accountants, appraisers or other experts or advisers as it may reasonably require for the purpose of discharging its duties hereunder and may pay reasonable remuneration for all services so performed by any of them, and shall not be responsible for any misconduct or negligence on the part of any such experts or advisers who have been appointed with due care by the Trustee. 11.4 DOCUMENTS, MONIES, ETC. HELD BY TRUSTEE Any securities, documents of title or other instruments that may at any time be held by the Trustee subject to the trusts hereof may be placed in the deposit vaults of the Trustee or of any Canadian chartered bank or deposited for safekeeping with any such bank. Unless herein otherwise expressly provided, any monies held pending the application or withdrawal thereof under any provisions of this Indenture may be deposited in the name of the Trustee in the deposit department of the Trustee or in any Canadian chartered bank at the rate of interest (if any) then current on similar deposits or, with the consent or at the written direction of the Corporation, may be: (i) deposited in the deposit department of the Trustee or any other loan or trust company authorized to accept deposits under the laws of Canada or a province thereof; or (ii) invested in securities issued or guaranteed by the Government of Canada or a province thereof or of any Canadian chartered bank or loan or trust company, provided that the securities shall not have a maturity date of more 26 than 60 days from the date of investment. Unless the Corporation shall be in default hereunder or unless otherwise specifically provided herein, all interest or other income received by the Trustee in respect of such deposits and investments shall belong to the Corporation. 11.5 ACTIONS BY TRUSTEE TO PROTECT INTEREST The Trustee shall have power to institute and to maintain such actions and proceedings as it may consider necessary or expedient to preserve, protect or enforce its interests and the interests of the Noteholders. 11.6 TRUSTEE NOT REQUIRED TO GIVE SECURITY The Trustee shall not be required to give any bond or security in respect of the execution of the trusts and powers of this Indenture or otherwise in respect of the premises. 11.7 PROTECTION OF TRUSTEE By way of supplement to the provisions of any law for the time being relating to trustees, it is expressly declared and agreed as follows: (a) the Trustee shall not be liable for or by reason of any statements of fact or recitals in this Indenture or in the Note Certificates (except the representations contained in section 11.9 and in the certificate of the Trustee on the Note Certificates) or be required to verify the same, but all such statements or recitals are and shall be deemed to be made by the Corporation; (b) nothing herein contained shall impose any obligation on the Trustee to see to or to require evidence of the registration or filing (or renewal thereof) of this Indenture or any instrument ancillary or supplemental hereto; (c) the Trustee shall not be bound to give notice to any person or persons of the execution hereof; and (d) the Trustee shall not have any liability or responsibility whatever or be in any way responsible for the consequence of any breach on the part of the Corporation of any of the covenants herein contained or of any acts of any directors, officers, employees, agents or servants of the Corporation. 11.8 REPLACEMENT OF TRUSTEE; SUCCESSOR BY MERGER (a) The Trustee may resign its trust and be discharged from all further duties and liabilities hereunder, subject to this section 11.8, by giving to the Corporation not less than 90 days' prior notice in writing or such shorter prior notice as the Corporation may accept as sufficient. The Noteholders by extraordinary resolution shall have power at any time to remove the existing Trustee and to appoint a new Trustee. In the event of the Trustee resigning or being removed as aforesaid or being dissolved, becoming bankrupt, going into liquidation or otherwise becoming incapable of acting hereunder, the Corporation shall forthwith appoint a new trustee unless a new trustee has already been appointed by the Noteholders; failing such appointment by the Corporation, the retiring Trustee or any Noteholder may apply to a justice of the Court of Queen's Bench of the Province of Alberta on such notice as such justice may direct, for the appointment of a new trustee; but any new trustee so appointed by the Corporation or by the Court shall be subject to removal as aforesaid by the Noteholders. Any new trustee appointed under any provision of this section 11.8 shall be a corporation authorized to carry on the business of a trust company in the Province of Alberta and, if required by the Applicable Legislation for any other provinces, in such other provinces. On any such appointment the new trustee shall be 27 vested with the same powers, rights, duties and responsibilities as if it had been originally named herein as Trustee hereunder. (b) Upon the appointment of a successor trustee, the Corporation shall promptly notify the Noteholders thereof in the manner provided for in section 12.2 hereof. (c) Any corporation into or with which the Trustee may be merged or consolidated or amalgamated, or any corporation resulting therefrom to which the Trustee shall be a party, or any corporation succeeding to the trust business of the Trustee shall be the successor to the Trustee hereunder without any further act on its part or any of the parties hereto, provided that such corporation would be eligible for appointment as a successor trustee under subsection 11.8(a). (d) Any Note Certificates certified but not delivered by a predecessor trustee may be certified by the successor trustee in the name of the predecessor or successor trustee. 11.9 CONFLICT OF INTEREST (a) The Trustee represents to the Corporation that at the time of execution and delivery hereof no material conflict of interest exists between its role as a trustee hereunder and its role in any other capacity and agrees that in the event of a material conflict of interest arising hereafter it will, within 90 days after ascertaining that it has such material conflict of interest, either eliminate the same or assign its trust hereunder to a successor trustee approved by the Corporation and meeting the requirements set forth in subsection 11.8(a). Notwithstanding the foregoing provisions of this subsection 11.9(a), if any such material conflict of interest exists or hereafter shall exist, the validity and enforceability of this Indenture and the Note Certificate shall not be affected in any manner whatsoever by reason thereof. (b) Subject to subsection 11.9(a), the Trustee, in its personal or any other capacity, may buy, lend upon and deal in securities of the Corporation and generally may contract and enter into financial transactions with the Corporation or any Subsidiary of the Corporation without being liable to account for any profit made thereby. 11.10 INDEMNITY OF TRUSTEE The Corporation hereby indemnifies the Trustee from any and all costs, charges, expenses, liabilities or damages which may be incurred or suffered by the Trustee in respect of the performance of its duties under this Indenture except for such costs, charges, expenses, liabilities or damages attributable to the negligence or wilful misconduct of the Trustee. 11.11 ACCEPTANCE OF TRUST This Indenture is entered into with the Trustee for the benefit of, and the Trustee declares that it holds this Indenture and all rights, interests and benefits of this Indenture for, such persons, firms and corporations, and each of them, who are from time to time Noteholders. The Trustee hereby accepts the trusts in this Indenture declared and provided for and agrees to perform the same upon the terms and conditions herein set forth. 11.12 TRUSTEE NOT TO BE APPOINTED RECEIVER The Trustee and any person related to the Trustee shall not be appointed a receiver, a receiver and manager or liquidator of all or any part of the assets or undertaking of the Corporation. 28 ARTICLE 12 GENERAL 12.1 NOTICE TO THE CORPORATION AND THE TRUSTEE (a) Unless herein otherwise expressly provided, any notice to be given hereunder to the Corporation or the trustee shall be deemed to be validly given if delivered or if sent by registered letter, postage prepaid: If to the Corporation: Battery One, Inc. 7850 Woodbine Avenue, Suite 201 Markham, Ontario L3R 0B9 ATTENTION: PRESIDENT If to the Trustee: Montreal Trust Company of Canada Suite 600, 530 - 8th Avenue S.W. Calgary, Alberta T2P 3S8 Attention: MANAGER, CORPORATE TRUST DEPARTMENT and any such notice delivered in accordance with the foregoing shall be deemed to have been received on the date of delivery or, if mailed, on the fifth Business Day following the date of the postmark on such notice. (b) The Corporation or the Trustee, as the case may be, may notify the other in the manner provided in subsection 12.1(a) of a change of address which, from the effective date of such notice and until changed by like notice, shall be the address of the Corporation or the Trustee, as the case may be, for all purposes of this Indenture. (c) If, by reason of a strike, lockout or other work stoppage, actual or threatened, involving postal employees, any notice to be given to the Trustee or to the Corporation hereunder could reasonably be considered unlikely to reach its destination, such notice shall be valid and effective only if it is delivered to the named officer of the party to which it is addressed or, if it is delivered to such party at the appropriate address provided in subsection 12.1(a), by cable, telegram, telecopy or other means of prepaid, transmitted and recorded communication. 12.2 NOTICE TO NOTEHOLDERS (a) Any notice to the Noteholders under the provisions of this Indenture shall be valid and effective if sent by telegram, telex or telecopier or letter or circular through the ordinary post addressed to such holders at their post office addresses appearing on the register hereinbefore mentioned and shall be deemed to have been effectively given on the date of delivery or, if mailed, five Business Days following actual posting of the notice. (b) If, by reason of a strike, lockout or other work stoppage, actual or threatened, involving postal employees, any notice to be given to the Noteholders hereunder could reasonably be considered unlikely to reach its destination, such notice shall be valid and effective only if it is delivered 29 personally to such Noteholders or if delivered to the address for such Noteholders contained in the register of Special Notes maintained by the Trustee, by cable, telegram, telex or other means of prepaid transmitted and recorded communication. 12.3 OWNERSHIP OF SPECIAL NOTES The Corporation and the Trustee may deem and treat the registered owner of any Special Notes as the absolute owner thereof for all purposes and the Corporation and the Trustee shall not be affected by any notice or knowledge to the contrary except where the Corporation or the Trustee is required to take notice by statute or by order of a court of competent jurisdiction. A Noteholder shall be entitled to the rights evidenced by its Note Certificate free from all equities or rights of set off or counterclaim between the Corporation and the original or any intermediate holder of the Special Notes and all persons may act accordingly and the receipt of any such Noteholder for the Debentures which may be acquired pursuant thereto shall be a good discharge to the Corporation and the Trustee for the same and neither the Corporation nor the Trustee shall be bound to inquire into the title of any such holder except where the Corporation or the Trustee is required to take notice by statute or by order of a court of competent jurisdiction. 12.4 EVIDENCE OF OWNERSHIP (a) Upon receipt of a certificate of any bank, trust company or other depositary satisfactory to the Trustee stating that the Special Notes specified therein have been deposited by a named person with such bank, trust company or other depositary and will remain so deposited until the expiry of the period specified therein, the Corporation and the Trustee may treat the person so named as the owner, and such certificate as sufficient evidence of the ownership by such person of such Special Note during such period, for the purpose of any requisition, direction, consent, instrument or other document to be made, signed or given by the holder of the Special Note so deposited. (b) The Corporation and the Trustee may accept as sufficient evidence of the fact and date of the signing of any requisition, direction, consent, instrument or other document by any person: (i) the signature of any officer of any bank, trust company, or other depositary satisfactory to the Trustee as witness of such execution, (ii) the certificate of any notary public or other officer authorized to take acknowledgments of deeds to be recorded at the place where such certificate is made that the person signing acknowledged to him the execution thereof, or (iii) a satisfactory declaration of a witness of such execution. 12.5 COUNTERPARTS This Indenture may be executed in several counterparts, each of which when so executed shall be deemed to be an original and such counterparts together shall constitute one and the same instrument and notwithstanding their date of execution they shall be deemed to be dated as of the date hereof. 12.6 SATISFACTION AND DISCHARGE OF INDENTURE Upon the earlier of: (a) the date by which there shall have been delivered to the Trustee for exercise or destruction all Note Certificates theretofore certified hereunder; or (b) the Time of Expiry; and if all certificates representing Debentures required to be issued in compliance with the provisions hereof have been issued and delivered hereunder and if all payments required to be made pursuant to Article 4 have been made in accordance therewith, this Indenture shall cease to be of further effect and the Trustee, on demand of and at the cost and expense of the Corporation and upon delivery to the Trustee of a certificate 30 of the Corporation stating that all conditions precedent to the satisfaction and discharge of this Indenture have been complied with, shall execute proper instruments acknowledging satisfaction of and discharging this Indenture. Notwithstanding the foregoing, the indemnities provided to the Trustee by the Corporation hereunder shall remain in full force and effect and survive the termination of this Indenture. 12.7 SUCCESSORS All the covenants and provisions of this Indenture by or for the benefit of the Corporation or the Trustee shall bind and enure to the benefit of their respective successors and assigns hereunder. 12.8 SOLE BENEFIT OF PARTIES AND NOTEHOLDERS Nothing in this Indenture or in the Note Certificates, expressed or implied, shall give or be construed to give to any person other than the parties hereto and the Noteholders, as the case may be, any legal or equitable right, remedy or claim under this Indenture, or under any covenant or provision herein or therein contained, all such covenants and provisions being for the sole benefit of the parties hereto and the Noteholders. 12.9 COMMON SHARES OR SPECIAL NOTES OWNED BY THE CORPORATION OR ITS SUBSIDIARIES - CERTIFICATE TO BE PROVIDED For the purpose of disregarding any Special Notes owned legally or beneficially by the Corporation or any Subsidiary of the Corporation in section 9.16, the Corporation shall provide to the Trustee, from time to time, a certificate of the Corporation setting forth as at the date of such certificate: (a) the names (other than the name of the Corporation) of the registered holders of Special Notes which, to the knowledge of the Corporation, are owned by or held for the account of the Corporation or any Subsidiary of the Corporation; and (b) the number of Special Notes owned legally or beneficially by the Corporation or any Subsidiary of the Corporation; and the Trustee, in making the computations in section 9.16, shall be entitled to rely on such certificate without any additional evidence. IN WITNESS WHEREOF the parties hereto have executed this Indenture under their respective corporate seals and the hands of their proper officers in that behalf. BATTERY ONE, INC. Per: --------------------------------- J. Douglas Elliott Chief Executive Officer MONTREAL TRUST COMPANY OF CANADA Per: /s/ [illegible] -------------------------------- Per: [illegible] -------------------------------- SCHEDULE "A" To the annexed Special Note Indenture dated as of August 8, 1996 between Battery One, Inc. and Montreal Trust Company of Canada, as Trustee. (Form of Special Note) BATTERY ONE, INC. (Incorporated under the laws of Alberta) No. $ --------------------------------- -------------------------- $6,000,000 10% CONVERTIBLE FIXED AND FLOATING CHARGE SECURED SPECIAL PROMISSORY NOTE Battery One, Inc. (hereinafter referred to as the "Corporation") for value received hereby promises to pay to______________________________________ _______________________________________________, the registered holder hereof on or before the Time of Expiry (as hereinafter defined), on presentation and surrender of this Special Note (as hereinafter defined), the sum of __________ ______________________ ($____________________) Dollars as represented by the Debentures (as hereinafter defined), together with such further amount, if any, as may be payable in accordance with the provisions of the Indenture. Interest shall be payable on the outstanding balance of the principal amount of this Special Note at a rate of ten (10%) percent per annum and payable after as well as before maturity, default and judgment with interest payable on overdue interest at the same rate. The Corporation will pay interest semi-annually on the last day of each calendar month of such half year during the term of the promissory note (June 30 and December 31), from the date of execution of the Indenture, with the first payment of interest to commence on December 31, 1996. This Special Note is one of a series of up to $6,000,000 10% convertible fixed and floating charge secured special notes (herein referred to as the "Special Notes") in the maximum aggregate principal amount of six million ($6,000,000) dollars in lawful money of Canada issued under a special note indenture (herein referred to as the "Indenture") dated as of August 8, 1996 and made effective as of July 31, 1996 made between the Corporation and Montreal Trust Company of Canada (the "Trustee"), as trustee, to which the Indenture and all instruments supplemental thereto or in implementation thereof reference is hereby made for a description of the rights of the holders of the said Special Notes, of the Corporation and of the Trustee and of the terms and conditions upon which the Special Notes are issued and held, all to the same effect as if the provisions of the Indenture and such instruments supplemental thereto or in implementation thereof were herein set forth, to all of which provisions the holder of this Special Note, by acceptance hereof, assents. 2 The Special Notes are issuable as fully registered promissory notes in denominations of one thousand ($1,000) dollars and any integral multiples of one thousand ($1,000) dollars. The Special Notes of any authorized denomination may be exchanged, as provided in the Indenture, for Debentures of an equal aggregate principal amount in any other authorized denomination or denominations. Each principal amount of $1,000 represented hereby entitles the holder thereof to acquire, for no additional payment to the Corporation, in the manner and subject to the restrictions and adjustments set forth in the Indenture, at any time and from time to time until 5:00 p.m. (Calgary time) (the "Time of Expiry") which is the earlier of (i) six (6) business days after the date of a receipt (or an Order of the nature described in the Indenture) has been obtained from the securities commission or similar regulatory authority in each of the Province of Alberta, British Columbia and Ontario (the "Filing Jurisdictions") relating to the distribution of Debentures upon the exercise of Special Notes; and (ii) July 31, 1997, Debentures on the basis of $1,000 of principal amount of Debentures per $1,000 of principal amount of Special Notes. Each Debenture shall be created and issuable under a Debenture Trust Indenture, dated as of August 8, 1996 and made effective as of July 31, 1996, between the Corporation and the Trustee. The right to acquire Debentures hereunder may only be exercised by the holder within the time set forth above by: (a) duly completing and executing the Exercise Form attached hereto; and (b) surrendering the Special Note to the Trustee at the principal office of the Trustee in the City of Calgary, in the Province of Alberta. This Special Note shall be deemed to be surrendered only upon personal delivery hereof or, if sent by mail or other means of transmission, upon actual receipt thereof by the Trustee at the office referred to above. Upon surrender of this Special Note, the person or persons in whose name or names the Debentures issuable upon exercise of this Special Notes are to be issued shall be deemed for all purposes (except as provided in the Indenture) to be the holder or holders of record of such Debentures and the Corporation has covenanted that it will (subject to the provisions of the Indenture) cause a certificate or certificates representing such Debentures to be delivered or mailed to the person or persons at the address or addresses specified in the Exercise Form within five (5) business days. Immediately prior to the Time of Expiry, the Trustee shall exercise the Special Note on behalf of the holder, if not already actually exercised, and the certificates representing the Debentures issued thereby may be obtained upon duly completing and executing the Exercise Form attached hereto and surrendering this Special Note to the Trustee at the principal office of the Trustee in the City of Calgary. The Indenture contains provisions for the holding of meetings of holders of Special Notes (the "Noteholders") and rendering resolutions passed at such meetings and instruments in writing signed by the holders of a specified majority of the Special Notes outstanding binding upon all Noteholders, subject to the provisions of the Indenture. This Special Note shall not become obligatory for any purpose until it shall have been certified by the Trustee under the Indenture. Nothing in the holding of this Special Note or the Indenture or otherwise, shall in itself, confer or be construed as conferring upon a Noteholder any right or interest whatsoever as a shareholder of the Corporation, including, but not limited to, the right to vote or receive notice of, or to attend meetings of shareholders or any other proceedings of the Corporation, or the right to receive dividends or other distributions. 3 THIS SPECIAL NOTE IS SUBJECT TO RESALE RESTRICTIONS AND MAY NOT BE SOLD OR OTHERWISE TRADED OR TRANSFERRED. IN WITNESS WHEREOF the Corporation has caused its corporate seal to be hereunto affixed and this Special Note to be signed by its proper officers in that behalf as of August 8, 1996 and made effective as of July 31, 1996. BATTERY ONE, INC. Per: --------------------------- Per: --------------------------- 4 (FORM OF TRUSTEE'S CERTIFICATE) This Special Note is one of the $6,000,000 10% Convertible Fixed and Floating Charge Secured Special Notes referred to in the Indenture within mentioned. MONTREAL TRUST COMPANY OF CANADA Per: -------------------------------- 5 EXERCISE FORM $_______________ IN PRINCIPAL AMOUNT OF SPECIAL NOTES TO: BATTERY ONE, INC. AND MONTREAL TRUST COMPANY OF CANADA The undersigned hereby exercises the above noted principal amount of Special Notes to receive Debentures of Battery One, Inc. as constituted on July 31, 1996 (or such number of other securities or property to which such Special Notes entitle the undersigned in lieu thereof or in addition thereto under the provisions of the Indenture referred to in the accompanying Special Note Certificate) in accordance with and subject to the provisions of such Indenture. The Debentures (or other securities or property) issuable upon the exercise the Special Notes are to be issued as follows: Name: ------------------------------------------------------------------ (print clearly) Address in full: ------------------------------------------------------- ----------------------------------------------------------------------- Social Insurance Number: ---------------------------------------------- Principal Amount: ----------------------------------------------------- Note: If further nominees intended, please attach (and initial) schedule giving these particulars. Such securities (please check one): (a) __________ should be sent by first class mail to the following address: --------------------------------------------------------- --------------------------------------------------------- OR (b) __________ should be held for pick up at the office of the Trustee at which this Special Note Certificate is deposited. If the principal amount of Special Notes exercised are less than the principal amount of Special Notes represented hereby, the undersigned requests that the new Special Note Certificate representing the balance of the Special Notes be registered in the name of - ------------------------------------------------------------------------------ 6 whose address is ------------------------------------------------------------- Such securities (please check one): (a) __________ should be sent by first class mail to the following address: --------------------------------------------------------- --------------------------------------------------------- OR (b) __________ should be held for pick up at the office of the Trustee at which this Special Note Certificate is deposited. In the absence of instructions to the contrary, the securities or other property will be issued in the name of or to the holder hereof and will be sent by first class mail to the last address of the holder appearing on the register maintained for the Special notes. DATED this ____ day of __________, 199__. - ----------------------------------- --------------------------------- Signature Guaranteed (Signature of Special Noteholder) -------------------------------- Print full name -------------------------------- -------------------------------- Print full address INSTRUCTIONS: 1. The registered holder may exercise its right to receive Debentures by completing this form and surrendering this form and the Special Note Certificate representing the Special Notes being exercised to Montreal Trust Company of Canada at its principal office at Suite 600, 530 - 8th Avenue S.W., Calgary, Alberta. Certificates for Debentures will be delivered or mailed within five business days after the exercise of the Special Notes. 7 2. If the Exercise Form indicates that Debentures are to be issued to a person or persons other than the registered holder of the Certificate, the signature of such holder of the Exercise Form MUST be guaranteed by an authorized officer of a chartered bank, trust company or an investment dealer who is a member of a recognized stock exchange. 3. If the Exercise Form is signed by a trustee, executor, administrator, curator, guardian, attorney, officer of a corporation or any person acting in a judiciary or representative capacity, the certificate must be accompanied by evidence of authority to sign satisfactory to the Trustee and the Corporation. 4. IF THE REGISTERED HOLDER EXERCISES ITS RIGHT TO RECEIVE DEBENTURES PRIOR TO A RECEIPT FOR A PROSPECTUS BEING ISSUED BY THE APPLICABLE SECURITIES COMMISSION THE DEBENTURES WILL BE SUBJECT TO A HOLD PERIOD AND MAY BE ISSUED WITH A LEGEND REFLECTING SUCH HOLD PERIOD. OFFICE OF THE TRUSTEE Montreal Trust Company of Canada Suite 600, 530 - 8th Avenue S.W. Calgary, Alberta T2P 3S8 Telephone: (403) 267-6510 EX-4.3B 3 DEBT INDENTURE DEBENTURE TRUST INDENTURE Dated as of the 8th day of August, 1996 and made effective as of July 31, 1996 Between BATTERY ONE, INC. and MONTREAL TRUST COMPANY OF CANADA Providing for the Issue of a Series of up to $6,000,000 10% Convertible Fixed and Floating Charge Secured Debentures Due July 31, 2001 -i- TABLE OF CONTENTS Page ---- ARTICLE 1 INTERPRETATION. . . . . . . . . . . . . . . 2 1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.2 Gender. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.3 Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.4 Applicable Law. . . . . . . . . . . . . . . . . . . . . . . . 6 1.5 Enurement . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.6 Meaning of "Outstanding". . . . . . . . . . . . . . . . . . . 7 ARTICLE 2 THE DEBENTURES. . . . . . . . . . . . . . . 7 2.1 Principal Amount. . . . . . . . . . . . . . . . . . . . . . . 7 2.2 Form and Signature of Debentures. . . . . . . . . . . . . . . 8 2.3 Issue of Debentures . . . . . . . . . . . . . . . . . . . . . 8 2.4 Certification . . . . . . . . . . . . . . . . . . . . . . . . 8 2.5 Debentures to Rank Pari Passu . . . . . . . . . . . . . . . . 9 2.6 Registration and Transfer of Debentures . . . . . . . . . . . 9 2.7 Persons Entitled to Payment . . . . . . . . . . . . . . . . . 10 2.8 Mutilation, Loss, Theft or Destruction. . . . . . . . . . . . 11 2.9 Exchanges of Debentures . . . . . . . . . . . . . . . . . . . 11 2.10 Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2.11 Option of Holder as to Place of Payment . . . . . . . . . . . 12 2.12 Trustee Not Bound to Make Enquiries . . . . . . . . . . . . . 12 2.13 Debentureholder Not a Shareholder . . . . . . . . . . . . . . 12 ARTICLE 3 REPAYMENT. . . . . . . . . . . . . . . . 12 3.1 Covenant to Pay . . . . . . . . . . . . . . . . . . . . . . . 12 3.2 Maturity. . . . . . . . . . . . . . . . . . . . . . . . . . . 13 3.3 Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . 13 3.4 Order of Repayment. . . . . . . . . . . . . . . . . . . . . . 13 ARTICLE 4 SECURITY FOR PAST, PRESENT AND FUTURE INDEBTEDNESS. . . . . . 13 4.1 Security. . . . . . . . . . . . . . . . . . . . . . . . . . . 13 4.2 Mortgaged Property. . . . . . . . . . . . . . . . . . . . . . 14 4.3 Exceptions. . . . . . . . . . . . . . . . . . . . . . . . . . 14 4.4 Obligation to Pay . . . . . . . . . . . . . . . . . . . . . . 15 4.5 Defeasance. . . . . . . . . . . . . . . . . . . . . . . . . . 15 4.6 Partial Release . . . . . . . . . . . . . . . . . . . . . . . 15 4.7 Proviso for Possession Until Default. . . . . . . . . . . . . 16 -ii- ARTICLE 5 COVENANTS, REPRESENTATIONS AND WARRANTIES OF THE CORPORATION . . . 16 5.1 Representations and Warranties. . . . . . . . . . . . . . . . 16 5.2 Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . 16 5.3 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 19 5.4 Negative Covenants. . . . . . . . . . . . . . . . . . . . . . 20 5.5 Defend Mortgaged Property . . . . . . . . . . . . . . . . . . 20 5.6 Supplemental Instruments. . . . . . . . . . . . . . . . . . . 21 5.7 To Pay Trustee's Remuneration . . . . . . . . . . . . . . . . 21 5.8 Trustee May Perform Covenants . . . . . . . . . . . . . . . . 22 ARTICLE 6 DEFAULT . . . . . . . . . . . . . . . . 22 6.1 Acceleration of Maturity. . . . . . . . . . . . . . . . . . . 22 6.2 Notice of Events of Default . . . . . . . . . . . . . . . . . 23 6.3 Waiver of Default . . . . . . . . . . . . . . . . . . . . . . 23 6.4 Enforcement by the Trustee. . . . . . . . . . . . . . . . . . 24 6.5 No Suits by Debentureholders. . . . . . . . . . . . . . . . . 28 6.6 Application of Monies by Trustee. . . . . . . . . . . . . . . 28 6.7 Distribution of Proceeds. . . . . . . . . . . . . . . . . . . 29 6.8 Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . 29 6.9 Judgment Against the Corporation. . . . . . . . . . . . . . . 29 6.10 Immunity of Shareholders and Others . . . . . . . . . . . . . 29 6.11 Trustee Appointed Attorney. . . . . . . . . . . . . . . . . . 30 ARTICLE 7 SATISFACTION AND DISCHARGE. . . . . . . . . . . . 30 7.1 Cancellation and Destruction. . . . . . . . . . . . . . . . . 30 7.2 Non-Presentation of Debentures. . . . . . . . . . . . . . . . 30 7.3 Repayment of Unclaimed Monies or Common Shares. . . . . . . . 30 ARTICLE 8 SUCCESSOR CORPORATIONS. . . . . . . . . . . . . 31 8.1 Certain Requirements. . . . . . . . . . . . . . . . . . . . . 31 8.2 Vesting of Powers in Successor. . . . . . . . . . . . . . . . 31 ARTICLE 9 MEETINGS OF DEBENTUREHOLDERS . . . . . . . . . . . 32 9.1 Right to Convene Meeting. . . . . . . . . . . . . . . . . . . 32 9.2 Notice of Meetings. . . . . . . . . . . . . . . . . . . . . . 32 9.3 Chairman. . . . . . . . . . . . . . . . . . . . . . . . . . . 32 9.4 Quorum. . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 9.5 Power to Adjourn. . . . . . . . . . . . . . . . . . . . . . . 33 9.6 Show of Hands . . . . . . . . . . . . . . . . . . . . . . . . 33 9.7 Poll. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 9.8 Voting. . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 9.9 Regulations . . . . . . . . . . . . . . . . . . . . . . . . . 34 9.10 Persons Entitled to Attend Meetings . . . . . . . . . . . . . 34 9.11 Powers Exercisable by Extraordinary Resolution. . . . . . . . 34 -iii- 9.12 Meaning of "Extraordinary Resolution" . . . . . . . . . . . . 36 9.13 Powers Cumulative . . . . . . . . . . . . . . . . . . . . . . 36 9.14 Minutes . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 9.15 Instruments in Writing. . . . . . . . . . . . . . . . . . . . 37 9.16 Binding Effect of Resolutions . . . . . . . . . . . . . . . . 37 9.17 Evidence of Rights of Debentureholders. . . . . . . . . . . . 37 ARTICLE 10 NOTICES . . . . . . . . . . . . . . . . 38 10.1 Notice to Corporation . . . . . . . . . . . . . . . . . . . . 38 10.2 Notice to Debentureholders. . . . . . . . . . . . . . . . . . 38 10.3 Notice to Trustee . . . . . . . . . . . . . . . . . . . . . . 39 ARTICLE 11 CONCERNING THE TRUSTEE. . . . . . . . . . . . . 39 11.1 No Conflict of Interest . . . . . . . . . . . . . . . . . . . 39 11.2 Replacement of Trustee. . . . . . . . . . . . . . . . . . . . 39 11.3 Duties of Trustee . . . . . . . . . . . . . . . . . . . . . . 40 11.4 Reliance Upon Declarations. . . . . . . . . . . . . . . . . . 40 11.5 Evidence of Compliance to Trustee . . . . . . . . . . . . . . 40 11.6 Officers' Certificate as Evidence . . . . . . . . . . . . . . 42 11.7 Experts, Advisors and Agents. . . . . . . . . . . . . . . . . 42 11.8 Trustee May Deal in Debentures. . . . . . . . . . . . . . . . 42 11.9 Investment of Monies Held by Trustee. . . . . . . . . . . . . 43 11.10 Trustee Not Ordinarily Bound. . . . . . . . . . . . . . . . . 43 11.11 Trustee Not Required to Give Security . . . . . . . . . . . . 43 11.12 Trustee Not to be Appointed Receiver. . . . . . . . . . . . . 44 11.13 Trustee Not Bound to Act on Corporation's Request . . . . . . 44 11.14 Protection of Trustee . . . . . . . . . . . . . . . . . . . . 44 11.15 Conditions Precedent to Trustee's Obligations to Act Hereunder . . . . . . . . . . . . . . . . . . . . . . . . . . 44 11.16 Authority to Carry on Business. . . . . . . . . . . . . . . . 45 11.17 Acceptance of Trust . . . . . . . . . . . . . . . . . . . . . 45 11.18 Direction of Trustee's Actions by Holders . . . . . . . . . . 45 11.19 Environmental Indemnity . . . . . . . . . . . . . . . . . . . 45 ARTICLE 12 CONVERSION OF DEBENTURES . . . . . . . . . . . . 46 12.1 Conversion. . . . . . . . . . . . . . . . . . . . . . . . . . 46 12.2 Manner of Exercise of Right to Convert. . . . . . . . . . . . 47 12.3 Adjustment. . . . . . . . . . . . . . . . . . . . . . . . . . 49 12.4 No Requirement to Issue Fractional Shares . . . . . . . . . . 50 12.5 Corporation to Reserve Shares . . . . . . . . . . . . . . . . 50 12.6 Taxes and Charges on Conversion . . . . . . . . . . . . . . . 51 12.7 Cancellation of Converted Debentures. . . . . . . . . . . . . 51 12.8 Certificate as to Adjustment. . . . . . . . . . . . . . . . . 51 12.9 Notice of Special Matters . . . . . . . . . . . . . . . . . . 51 -iv- ARTICLE 13 SUPPLEMENTAL INDENTURES . . . . . . . . . . . . 52 13.1 Supplemental Indentures . . . . . . . . . . . . . . . . . . . 52 ARTICLE 14 EXECUTION AND FORMAL DATE. . . . . . . . . . . . 52 14.1 Execution . . . . . . . . . . . . . . . . . . . . . . . . . . 52 14.2 Formal Date . . . . . . . . . . . . . . . . . . . . . . . . . 53 THIS INDENTURE dated the 8th day of August, 1996 and made effective as of the 31st day of July, 1996. BETWEEN: BATTERY ONE, INC., a corporation incorporated under the laws of the Province of Alberta and having its head office in the City of Calgary, in the Province of Alberta (hereinafter called the "Corporation") OF THE FIRST PART - and - MONTREAL TRUST COMPANY OF CANADA, a trust company incorporated under the laws of Canada and authorized to carry on business in all provinces of Canada (hereinafter called the "Trustee") OF THE SECOND PART WHEREAS: 1. The Corporation has agreed to issue a minimum of $2,500,000 and a maximum of $6,000,000 in principal amount of Special Notes pursuant to the Special Note Indenture; 2. The Special Notes entitle the holders thereof to acquire Debentures of the Corporation, each Special Note exercisable to acquire Debentures on the basis of $1,000 principal amount of Special Notes per $1,000 principal amount of Debentures; 3. The Corporation has deemed it necessary for its corporate purposes to create and issue the Debentures upon exercise of the Special Notes as herein provided; 4. The Corporation, under the laws relating thereto, is duly authorized to create and issue the Debentures to be issued as herein provided; 5. All necessary by-laws and resolutions of the Corporation have been duly enacted, passed, and/or confirmed and other proceedings taken and conditions complied with to make the creation and issue of the Debentures proposed to be issued hereunder and this Indenture and the execution thereof legal, valid and binding on the Corporation in accordance with the laws relating to the Corporation; 6. The Trustee has agreed to act as trustee on behalf of the Debentureholders (and not as agent for the Corporation) in the manner and upon the terms hereinafter set forth; and 7. The foregoing recitals are made as representations and statements of fact by the Corporation and not by the Trustee. NOW THEREFORE it is hereby witnessed, covenanted, agreed and declared as follows: -2- ARTICLE 1 INTERPRETATION 1.1 DEFINITIONS In this Indenture and in the Debentures, unless there is something in the subject matter or context inconsistent therewith, the following expressions shall mean as follows: (a) "Agency Agreement" means the agency agreement, dated August 8, 1996 and made effective as of the 31st day of July, 1996 between the Corporation and the Agent relating to the offering of the Debentures; (b) "Agent" means C.M. Oliver & Company Limited; (c) "this Indenture", "this Debenture Trust Indenture", "hereto", "herein", "hereby", "hereunder", "hereof" and similar expressions refer to this indenture and not to any particular article, clause, subclause, subdivision or other portion hereof and, include any and every instrument supplemental or ancillary hereto; (d) "Applicable Law" means, in relation to any person, transaction or event, all applicable provisions (or mandatory applicable provisions, if so specified) of laws, statutes, rules, regulations, official directives and orders of all governmental bodies (whether administrative, legislative, executive or otherwise) and judgments, orders and decrees of all courts, arbitrators, commissions or bodies exercising similar functions having jurisdiction over the person, transaction or event in question; (e) "Business Day" means a day which is not Saturday or Sunday or a legal holiday in the City of Calgary, Alberta; (f) "Common Shares" means fully paid and non-assessable common shares of the Corporation as presently constituted, provided that in the event of an adjustment pursuant to clause 12.3, then "Common Share" shall thereafter mean a share or other security or property purchasable upon exercise of a Debenture as a result of any such adjustment; (g) "Conversion Date" means, with respect to any Debenture, the date on which the Debenture Certificate representing such Debenture is surrendered for conversion into Common Shares as contemplated in clause 12.2 hereof; (h) "Conversion Price" means the price at which the principal amount of the Debentures are convertible into Common Shares of the Corporation as described in clause 12.1(a) or 12.1(b), as the case may be; (i) "Corporation" means the party of the first part hereunder and includes any successor corporation to or of the Corporation which shall have complied with the provisions of Article 8; -3- (j) "Corporation's Auditors" or "Auditors of the Corporation" means an independent firm of chartered or certified public accountants duly appointed as auditors of the Corporation; (k) "Counsel" means a barrister or solicitor or firm of barristers or solicitors retained or employed by the Trustee or retained or employed by the Corporation; (l) "Debenture Certificate" means a certificate issued on or after the Issue Date to evidence Debentures; (m) "Debentures" means the series of $6,000,000 10% convertible fixed and floating charge secured debentures of the Corporation issued or to be issued hereunder and for the time being outstanding; (n) "Debentureholders" or "holders" means the several persons for the time being entered in the registers hereinafter mentioned as holders of Debentures; (o) "director" means a director of the Corporation for the time being and "directors" or "board of directors" means the board of directors of the Corporation or, if duly constituted and whenever duly empowered, the executive committee of the board of directors of the Corporation for the time being, and reference to action by the directors means action by the directors of the Corporation as a board or action by the said executive committee as such committee; (p) "dollars" or "$" means, unless otherwise stated, Canadian dollars and all reference to cash or money shall mean dollars as so defined; (q) "Effective Date" means the 31st day of July, 1996; (r) "Event of Default" means any event specified in clause 6.1, continued for the period of time, if any, therein designated; (s) "Filing Jurisdiction" means each of the Provinces of Alberta, British Columbia and Ontario; (t) "Issue Date" means the date upon which the Debentures are issued; (u) "Mortgaged Property" shall have the meaning ascribed thereto in clause 4.2 hereof, including, without limitation, all of the undertaking, property and assets, both present and future, of the Corporation, of whatsoever nature and kind and wheresoever situated, that are from time to time subject to any mortgage, lien, assignment, transfer, hypothec, pledge or charge created under or secured by this Indenture or by any indenture supplementary hereto; (v) "Negotiable Instruments" means cash and all negotiable instruments including, without limitation, promissory notes, cheques, drafts and bills of exchange; (w) "Note Agency" means the principal office of the Trustee in the City of Calgary, or such place as may be designated in accordance with clause 2.6 hereof; -4- (x) "Officer's Certificate" means a certificate signed by the Chairman, President, Vice-President or by the Secretary of the Corporation; (y) "Order" means an order of a Securities Commission in a Filing Jurisdiction that permits the Debentures and Common Shares issuable upon the exercise of Debentures to be tradeable in such Filing Jurisdiction without being subject to the prospectus requirement nor any "hold period" under the Applicable Legislation in such Filing Jurisdiction; (z) "Permitted Encumbrances" means, as of any date, any of the following: (i) liens for taxes, assessments or governmental charges: (1) not at such date due or delinquent; or (2) the validity of which the Corporation shall be contesting in good faith and in respect of which: (A) an amount in cash sufficient to pay such taxes, assessments or charges shall have been deposited with a court, a taxing or assessing authority or the Debentureholder; or (B) a surety bond, satisfactory to the Debentureholder, for such amount shall have been deposited with the Debentureholder; (ii) the lien of any judgment rendered, or of any claim filed, against the Corporation which the Corporation shall be contesting in good faith and in respect of which: (1) an amount in cash sufficient to pay such judgment or claim shall have been deposited with a court or the Debentureholder; or (2) a surety bond, satisfactory to the Debentureholder, for such amount, shall have been deposited with the Debentureholder; (iii) undetermined or inchoate liens incidental to construction or current operations which have not at such date been filed pursuant to law against the Mortgaged Property or against the Corporation or which relate to obligations not at such date due or delinquent; (iv) easements, rights of way, servitudes or other similar rights in property (including, without limitation, rights of way and servitudes for railways, sewers, drains, pipelines, gas and water mains, electric light, power, telephone, telegraph or cable television conduits, poles, wires and cables) granted to or reserved or taken by other persons which in the aggregate do not materially detract from the value of such property or -5- materially impair its use in the operation of the business of the Corporation; (v) security given by the Corporation to a public utility, any municipality, governmental or other public authority when required by such utility, municipality or authority in the ordinary course of the business of the Corporation; and (vi) any other lien, the validity of which is being contested in good faith and where the Corporation has deposited: (1) with the court of the Debentureholder, an amount in cash sufficient to pay the same in full; (2) with the Debentureholder, a surety bond, satisfactory to the Holder, for such amount; (aa) "person" means an individual, corporation, company, partnership, association or trust; (ab) "principal" or "principal amount" means the principal sum of up to and including $6,000,000 or part thereof which remains outstanding and unpaid from time to time; (ac) "Prospectus" means a final prospectus in respect of the distribution of Debentures and Common Shares upon the exercise of the Debentures; (ad) "receiver" means the receiver appointed pursuant to clause 6.4(g) hereof and includes a receiver manager; (ae) "Securities Commissions" means, collectively, the securities commissions or similar regulatory authorities in the Filing Jurisdictions; (af) "Security Interest" means any assignment, mortgage, charge, pledge, lien, encumbrance or security interest whatsoever, howsoever, created or arising, whether absolute or contingent, fixed or floating, perfected or not, but does not include set-off or any right of set- off; (ag) "Special Note Indenture" means the special note trust indenture, dated August 8, 1996 and made effective as of July 31, 1996, between the Corporation and the Trustee providing for the issuance of the Special Notes, as amended or supplemented from time to time; (ah) "Special Notes" means the special notes issued and certified under the Special Note Indenture; (ai) "Subsidiary" or "Subsidiary Company" means any corporation of which more than fifty (50%) percent of the outstanding voting shares are owned, directly or indirectly, by or for the Corporation, provided that the ownership of such -6- voting shares confers the right to elect at least a majority of the board of directors of such corporation and includes any corporation in like relation to a subsidiary; (aj) "Trustee" means the party of the second part hereunder or its successor or successors for the time being as trustee hereunder; (ak) "Voting Shares" means shares of capital stock of any class of any corporation carrying voting rights under all circumstances, provided that, for the purposes of such definition, shares which only carry the right to vote conditionally on the happening of an event shall not be considered voting shares, whether or not such event shall have occurred, nor shall any shares be deemed to cease to be voting shares solely by reason of a right to vote accruing to shares of another class or classes by reason of the happening of such event; and (al) "written direction of the Corporation" means an instrument in writing signed by the Chairman, President, Vice-President or by the Secretary of the Corporation. 1.2 GENDER Words importing the singular number shall also include the plural and vice versa, and words importing any of the masculine, feminine or neuter genders shall include the others. 1.3 HEADINGS The division of this Indenture into Articles and Clauses, the provision of a table of contents and the insertion of headings are for convenience of reference only and shall not affect the construction or interpretation of this Indenture or the Debentures. 1.4 APPLICABLE LAW This Indenture and the Debentures shall be construed in accordance with the laws of the Province of Alberta and shall be treated in all respects as Alberta contracts. 1.5 ENUREMENT This Indenture and the Debentures shall enure to the benefit of and be binding upon in respect of successors, heirs, executors, administrators and permitted assigns of the Corporation, the Trustee and the holders. 1.6 MEANING OF "OUTSTANDING" Every Debenture certified and delivered by the Corporation and Trustee hereunder shall be deemed to be outstanding until it shall be cancelled or delivered to the Trustee for cancellation or monies for the payment or conversion thereof shall have been set aside under clause 7.2, as the case may be, provided that: -7- (a) Debentures which have been partially converted shall be deemed to be outstanding only to the extent of the unconverted part of the principal amount thereof; (b) when a new Debenture has been issued in substitution for a Debenture which has been lost, stolen or destroyed, only one of such Debentures shall be counted for the purpose of determining the aggregate principal amount of Debentures outstanding; and (c) for the purposes of any provision of this Indenture entitling holders of outstanding Debentures to vote, sign consents, requisitions or other instruments or take any other action under this Indenture, Debentures owned directly or indirectly, legally or equitably by the Corporation or any Subsidiary shall be disregarded except that: (i) for the purpose of determining whether the Trustee shall be protected in relying on any such vote, consent, requisition or other instrument or action, only the Debentures which the Trustee knows are so owned shall be so disregarded; and (ii) Debentures so owned which have been pledged in good faith other than to the Corporation or a Subsidiary shall not be so disregarded if the pledgee shall establish to the satisfaction of the Trustee the pledgee's right to vote such Debentures in his discretion free from the control of the Corporation or any Subsidiary. ARTICLE 2 THE DEBENTURES 2.1 PRINCIPAL AMOUNT The aggregate principal amount of Debentures authorized to be issued under this Indenture shall consist of and be limited to six million ($6,000,000) dollars in lawful money of Canada. The Debentures shall be designated as "$6,000,000 10% Convertible Fixed and Floating Charge Secured Debentures" and shall be dated as of the Issue Date. 2.2 FORM AND SIGNATURE OF DEBENTURES The Debentures shall be issued only as fully registered Debentures in the denomination of $1,000 and integral multiples of $1,000. The Debentures and the certificate of the Trustee endorsed thereon shall be substantially in the form set forth in Schedule "A" hereto. The Debentures shall be dated as of the Issue date and shall bear such distinguishing letters and numbers as the Trustee may approve. The Debentures may be engraved, printed or lithographed, or be partly in one form and partly in another, as the Corporation may determine. -8- The Debentures shall be under the seal of the Corporation (or a reproduction thereof which shall be deemed to be the seal of the Corporation) and shall be signed (either manually or by facsimile signature) by any one officer or director of the Corporation. A facsimile signature upon any of the Debentures shall for all purposes of this Indenture be deemed to be the signature of the person whose signature it purports to be and to have been signed at the time such facsimile signature is reproduced and notwithstanding that any person whose signature, either manual or in facsimile, may appear on the Debentures is not, at the date of this Indenture or at the date of the Debentures or at the date of the certifying and delivery thereof, the holder of the office indicated, any such Debentures shall be valid and binding upon the Corporation and entitled to the benefits of this Indenture. 2.3 ISSUE OF DEBENTURES The Debentures shall be issued from time to time upon the holders of Special Notes duly exercising the Special Notes pursuant to the Special Note Indenture. Debentures in the aggregate principal amount not exceeding six million ($6,000,000) dollars in lawful money of Canada shall be executed by the Corporation and, forthwith after such execution, shall be delivered to the Trustee and shall be certified by the Trustee and delivered to or to the order of the Corporation pursuant to a written direction of the Corporation without the Trustee receiving any consideration therefor. 2.4 CERTIFICATION No Debenture shall be issued or, if issued, shall be obligatory or shall entitle the holder to the benefits of this Indenture, until it has been certified by or on behalf of the Trustee substantially in the form set out in Schedule "A" hereto or in some other form approved by the Trustee. Such certification on any Debenture shall be conclusive evidence that such Debenture is duly issued, is a valid obligation of the Corporation and is entitled to the benefits hereof. The certificate of the Trustee signed on the Debentures shall not be construed as a representation or warranty by the Trustee as to the validity of this Indenture or of the Debentures or as to the issuance of the Debentures, and the Trustee shall in no respect be liable or answerable for the use made of the Debentures or any of them or the proceeds thereof. The certificate of the Trustee signed on the Debentures, shall, however, be a representation and warranty by the Trustee that the Debentures have been duly certified by or on behalf of the Trustee pursuant to the provisions of this Indenture. 2.5 DEBENTURES TO RANK PARI PASSU The Debentures may be issued in such amounts, to such persons and on such terms not inconsistent with the provisions of this Indenture, as the directors may determine. Each Debenture as soon as issued or negotiated shall, subject to the terms hereof, be equally and proportionately entitled to the benefits hereof as if all of the Debentures had been issued and negotiated simultaneously. - 9 - 2.6 REGISTRATION AND TRANSFER OF DEBENTURES The Corporation shall, at all times while any Debentures are outstanding, cause to be kept by and at the principal office of the Trustee in the City of Calgary and in such other place or places as the Corporation with the approval of the Trustee may designate, registers in which shall be entered the names and addresses of the holders of Debentures and particulars of the Debentures held by them respectively and of all transfers of Debentures. The registers referred to in this clause shall at all reasonable times be open for inspection by the Corporation, the Trustee and any Debentureholder. The Debentures are subject to resale restrictions and may not be sold or otherwise traded or transferred except in accordance with the provisions of applicable securities legislation. Compliance with the securities laws of any jurisdiction to which the Debentureholder or transferee is subject is the responsibility of the Debentureholder or its transferee. Except in the case of the register required to be kept at the City of Calgary, the Corporation shall have power at any time to close any register upon which the registration of any Debenture appears and in that event it shall transfer the records thereof to another existing register or to a new register and thereafter such Debentures shall be deemed to be registered on such existing or new register, as the case may be. The Debentures may only be transferred on the registers as herein contemplated by the holder or its legal representatives or its attorney duly appointed by an instrument in writing in form and execution satisfactory to the Trustee only upon surrendering to the Trustee of the Debenture Certificate or Debenture Certificates representing the Debentures to be transferred, with the transfer form thereon duly completed and executed, signed by the Debentureholder or by the duly appointed legal representative thereof or a duly authorized attorney, together with evidence of authority of any such legal representative or attorney and, if required by the transfer form, with such signature properly guaranteed, and upon compliance with (i) the conditions herein; (ii) any reasonable requirements as the Trustee may prescribe; and (iii) all applicable securities legislation and requirements of regulatory authorities relating to the transferability of the Debentures or restrictions thereon; and such transfer shall be duly noted in the registers of the Debentures as herein contemplated by the Trustee. Upon compliance with such requirements, the Trustee shall issue to the transferee a Debenture Certificate representing the Debentures transferred. Such new Debenture Certificate shall be sent by first class mail or held for pick-up by the transferee in accordance with the instructions given on the transfer form and, if no such instructions are given, shall be sent by first class mail to the address of the transferee appearing on the form of transfer. If less than all of the Debenture represented by a Debenture Certificate are transferred, the Trustee shall issue a new Debenture Certificate representing the Debentures not transferred in the same name as the name appearing on the Debenture Certificate surrendered for transfer. Such new Debenture Certificate shall be sent by first class mail or held for pick-up in accordance with instructions given on the transfer form, and, if no instructions are given, shall be sent by first class mail to the address of the holder of the Debenture surrendered for transfer appearing on the register of the Debentures as herein contemplated. - 10 - The Corporation and the Trustee will deem and treat the registered owner of any Debenture as the beneficial owner thereof for all purposes and neither the Corporation nor the trustee shall be effected by any notice to the contrary. Subject to the provisions of this Indenture, and applicable law, the Debentureholder shall be entitled to the rights and privileges attached to the Debentures and the issuance of Common Shares upon conversion of the Debentures by any Debentureholder in accordance with the terms and conditions herein contained shall discharge all responsibilities of the Corporation and the Trustee with respect to such Debentures and neither the Corporation nor the Trustee shall be bound to inquire into the title of any such holder. Notwithstanding the foregoing, neither the Corporation nor the Trustee shall be required to transfer or exchange any Debentures on any payment date or during a period of seven (7) Business Days immediately preceding any such date. Neither the Trustee, the Corporation nor any registrar shall be charged with notice of or be bound to see to the execution of any trust, whether expressed, implied or constructive, in respect of any Debenture, and the Trustee or the Corporation may transfer any Debenture on the direction of the holder thereof, whether named as trustee or otherwise, as though that person were the beneficial owner thereof. 2.7 PERSONS ENTITLED TO PAYMENT The person in whose name any Debenture shall be registered shall be deemed and regarded as the owner thereof for all purposes of this Indenture and payment of or on account of the principal amount of such Debenture shall be made only to or upon the order in writing of such holder thereof. Such payment shall be a good and sufficient discharge to the Trustee and any registrar and to the Corporation and any paying agent for the amounts so paid. The holder for the time being of any Debenture shall be entitled to the principal monies, free from all equities and rights of set-off or counter claim between the Corporation and the original or any intermediate holder thereof, and all persons may act accordingly. A transferee of a Debenture shall, after an appropriate form of transfer is lodged with the Trustee or other registrar and upon compliance with all other conditions in that behalf required by this Indenture or by any conditions contained in such Debenture or by law, be entitled to be entered on any of the appropriate registers as the owner of such Debenture free from all equities and rights of set-off or counterclaim between the Corporation and his transferor or any previous holder thereof, save in respect of equities of which the Corporation is required to take notice by statute or by order of a court of competent jurisdiction. Delivery to the Trustee by a Debentureholder of a Debenture or the receipt of such holder for the principal monies shall be a good and sufficient discharge to the Corporation (subject to any outstanding obligations owing by the Corporation to any Debentureholder pursuant to Articles 3, 4, 5, 6, 7 and 8 herein), which shall not be bound to enquire into the title of such holder, save as ordered by some court of competent jurisdiction or as required by statute. Neither the Corporation, the Trustee nor any registrar shall be charged with notice of or be bound to see to the execution of any trust, whether express, implied or constructive, - 11 - in respect of any Debenture nor be affected by notice of any equity that may be subsisting in respect thereof. Where Debentures are registered in more than one name the principal monies may be paid by cheque payable to the order of all such holders, failing written instruction from them to the contrary, and such payment shall be a good and sufficient discharge to the Trustee and any registrar and to the Corporation (subject to any outstanding obligations owing by the Corporation to any Debentureholder pursuant to Articles 3, 4, 5, 6, 7 and 8 herein) and any paying agent. In the case of the death of one or more joint holders, the principal monies may be paid to the survivor or survivors of such holders whose receipt therefor shall constitute a good and sufficient discharge to the Trustee and any registrar and to the Corporation and paying agent. 2.8 MUTILATION, LOSS, THEFT OR DESTRUCTION In case any of the Debentures issued hereunder shall become mutilated or be lost, stolen or destroyed, the Corporation, in its discretion, may issue, and thereupon the Trustee shall certify and deliver, a new Debenture upon surrender and cancellation of the mutilated Debenture, or in the case of a lost, stolen or destroyed Debenture, in lieu of and in substitution for the same, and the substituted Debenture shall be in a form approved by the Trustee and shall be entitled to the benefits of this Indenture equally with all other Debentures issued or to be issued hereunder without preference or priority one over another. In case of loss, theft or destruction the applicant for a substituted Debenture shall furnish to the Corporation and to the Trustee such evidence of such loss, theft or destruction as shall be satisfactory to them in their discretion and shall also furnish indemnity satisfactory to them in their discretion. The applicant shall pay all reasonable expenses incidental to the issuance of any substituted Debenture. 2.9 EXCHANGES OF DEBENTURES Debentures of any denomination may be exchanged for Debentures of any other authorized denomination or denominations for an equivalent aggregate principal amount. Any exchange of Debentures may be made at the offices of the Trustee or at the offices of any registrar or registrars where registers are maintained for the Debentures pursuant to the provisions of clause 2.6. Any Debentures tendered for exchange shall be surrendered to the Trustee or appropriate registrar and shall be cancelled. 2.10 CHARGES Except as herein otherwise provided and subject to the terms hereof, upon any exchange of Debentures of any denomination for other Debentures and upon any transfer of Debentures, the Corporation or the Trustee may make a sufficient charge to reimburse it for any stamp or security transfer taxes or other governmental charge required to be paid and, in addition, a reasonable charge for its services, and payment of the said charge shall be made by the party requesting such exchange or transfer as a condition precedent thereto. - 12 - 2.11 OPTION OF HOLDER AS TO PLACE OF PAYMENT Except as herein otherwise provided, all sums which may at any time become payable, whether at maturity or otherwise, on account of any Debenture shall be payable at the option of the holder at any of the places at which the principal of such Debentures are payable. 2.12 TRUSTEE NOT BOUND TO MAKE ENQUIRIES The Trustee, prior to the certification and delivery of any Debentures under any of the provisions of this Article, shall not be bound to make any enquiry or investigation as to the correctness of the matters set out in any of the resolutions, opinions, certificates or other documents required by the provisions of this Indenture, but shall be entitled to accept and act upon the said resolutions, opinions, certificates and other documents. The Trustee may nevertheless, in its discretion, require further proof in cases where it deems further proof desirable. 2.13 DEBENTUREHOLDER NOT A SHAREHOLDER Nothing in this Indenture or in the holding of a Debenture or otherwise, shall, in itself, confer or be construed as conferring upon a Debentureholder any right or interest whatsoever as a shareholder or as any other shareholder of the Corporation, including, but not limited to, the right to vote at, to receive notice of, or to attend, meetings of shareholders or any other proceedings of the Corporation, or the right to receive dividends or other distributions. ARTICLE 3 REPAYMENT --------- 3.1 COVENANT TO PAY The Corporation, for value received, acknowledges and confirms itself to be indebted to the holders and promises to pay the holders the principal amount of Debentures outstanding from time to time, in the manner and the priority as hereinafter set forth, or on such earlier date as the principal amount hereby secured may be payable and in the meantime promises to pay interest on the principal amount at the rate and times as hereinafter set forth, and should the Corporation at any time make default of its obligations or in the payment of any part or all of the principal amount or interest, then to pay interest on the amount in default both before and after judgment at the same rate and like money at the same place on the same date. 3.2 MATURITY The Debentures shall mature and become payable on July 31, 2001. - 13 - 3.3 INTEREST Except in the event that the Debentures or any part thereof is converted into Common Shares of the Corporation as hereinafter provided, interest shall be payable on the outstanding balance of the principal amount of the Debentures at a rate of ten (10%) percent per annum and payable after as well as before maturity, default and judgment with interest payable on overdue interest at the same rate. Interest shall accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of the execution of this Indenture. Interest will be computed on the basis of a 365 day year. As interest becomes due hereunder, the Corporation shall pay such interest at the holder's office as contemplated in clause 2.6 and clause 2.7 hereof. The Corporation will pay interest semi-annually on the last day of each calendar month of such half year during the term of the Debentures (June 30 and December 31), from the date of execution of this Indenture, with the first payment of interest to commence on December 31, 1996. 3.4 ORDER OF REPAYMENT The holders shall, and the Corporation hereby irrevocably authorizes the holders, to apply all payments made by the Corporation against the principal amounts of the Debentures, interest thereon and other monies which are payable by the Corporation under the Debentures in the following order: (a) all expenses and other monies from time to time secured hereunder; (b) interest payable hereunder; and (c) the principal amount of the Debentures. ARTICLE 4 SECURITY FOR PAST, PRESENT AND FUTURE INDEBTEDNESS -------------------------------------------------- 4.1 SECURITY The mortgages, pledges and charges created herein shall take effect forthwith upon the execution hereof and shall secure any and all indebtedness now or hereafter owing by the Corporation to the holders hereunder; and provided further, without restricting the generality of the foregoing, the Corporation may reduce the principal amount outstanding from time to time, without notice, bonus or penalty, and the holders, if they are so willing, and in their sole discretion, may provide further advances to the Corporation to the extent that the balance outstanding may be increased, reduced and varied from time to time; and provided further, without restricting the generality of the foregoing, the indebtedness secured by the mortgages, pledges and charges created herein shall include the following: (a) Any sums advanced by the holders on behalf of the Corporation or expenses or costs incurred by the holders, or the Trustee appointed hereunder, which are made or incurred pursuant to, or permitted by, the terms hereof, from the date of the advances or the incurring of such expenses or costs until reimbursed; - 14 - (b) Any and all other indebtedness of the Corporation to the holders now or hereafter owing, regardless of how evidenced or arising, including but without limitation, any and all Debentures issued hereunder; and (c) Any extensions or renewals of all such indebtedness described herein. 4.2 MORTGAGED PROPERTY In consideration of the premises herein contained and one ($1.00) dollar paid by the Trustee to the Corporation, the receipt and sufficiency whereof is hereby acknowledged, and to secure the due payment of the principal amount of the Debentures from time to time issued and certified hereunder and all other monies, if any, for the time being and from time to time owing on the security of this Indenture and the due performance of the obligations of the Corporation herein contained and in pursuance of the power and authority hereinbefore recited and of every other power and authority it thereunto enables, and subject to the Permitted Encumbrances, the Corporation hereby grants, assigns, transfers, mortgages, pledges, charges and grants a Security Interest to and in favour of the Trustee, as trustee on behalf of the Debentureholders, a first fixed and floating charge over and in respect of all of its undertaking and all of the property and assets of the Corporation for the time being, both present and future of whatsoever nature including, without restricting the generality of the foregoing, any real and personal, moveable and immoveable property, of whatsoever nature and kind and wheresoever situate, both present and future, except to the extent that the Personal Property Security Act, Alberta, is not applicable to a security interest in such personal property, and to the exception as to leaseholds, as set forth in clause 4.3 hereof and, without in any way limiting the generality of the foregoing, its uncalled capital and all present and future incomes, monies, sources of money, rights, powers, privileges, franchises, easements, agreements, leases, shares, bonds, debentures, book debts, accounts receivable, negotiable and non-negotiable instruments, judgments, chooses in actions, securities and all other property and things of value, tangible or intangible, legal or equitable of which the Corporation may be possessed or entitled to or which may at any time hereafter be acquired by the Corporation (all of such undertaking, property and assets being mortgaged, pledged and charged being herein collectively called the "Mortgaged Property"). 4.3 EXCEPTIONS The Corporation shall not, without the prior consent of holders of not less than sixty-six and two-thirds (66-2/3%) in principal amount of Debentures then outstanding first had and obtained, be at liberty to and shall not, (i) except in respect of Permitted Encumbrances, create or incur or suffer to be created or incurred any mortgage, pledge, hypothec, lien, charge, encumbrance, assignment or other security of any kind whatsoever upon the Mortgaged Property or any part thereof ranking or purporting to rank in priority or pari passu to this Indenture or the charges created and secured hereby, or (ii) sell, assign, transfer, lease or otherwise dispose of the Mortgaged Property or any part thereof otherwise than in the ordinary course of business of the Corporation as it is presently conducted; provided always that the last day of the term of any lease, verbal or written, or any agreement therefor, now held or hereafter acquired by the Corporation or any renewal thereof, is hereby and shall be excepted out of the mortgage, pledge and charge created hereby or by any other instrument supplemental hereto and does not and shall not form part of the Mortgaged Property, but the Corporation shall stand possessed of the reversionary interest remaining in - 15 - the Corporation of any leasehold interest forming part of the Mortgaged Property, upon trust to assign and dispose thereof as the Holder shall direct, and upon any sale of a leasehold interest or any part thereof, the Holder, for the purposes of vesting the aforesaid reversionary interest of any such term or any renewal thereof in any purchaser or purchasers thereof shall be entitled by deed or writing to appoint such purchaser or purchasers or any other person or persons a new trustee or trustees of the aforesaid reversion in the place of the Corporation and to vest the same accordingly in the new trustee or trustees so appointed, freed and discharged from any obligation respecting the same. 4.4 OBLIGATION TO PAY Nothing contained in this Indenture or the Debentures, is intended to or shall impair, as between the Corporation, its creditors and the holders, the obligation of the Corporation, which is absolute and unconditional, to pay to the holders the principal amount and other indebtedness of the Corporation to the holders, as and when the same shall become due and payable in accordance with the terms hereof, or affect the relative rights of the holders, nor shall anything herein prevent the Trustee, on behalf of the holders, from exercising all remedies otherwise permitted by applicable law or equity under this Indenture and the Debentures. 4.5 DEFEASANCE Upon payment by the Corporation to the holders of the total principal amount of the Debentures and all other money secured by this Indenture and provided the security herein constituted shall not have become enforceable, then the Mortgaged Property shall revert and revest in the Corporation without any release, acquittance, reconveyance, re-entry or other act or formality whatsoever, but the Trustee shall nevertheless, within thirty (30) days of being requested in writing by the Corporation to do so, deliver up this Indenture to the Corporation and execute, acknowledge or deliver to the Corporation a full release and reconveyance of the Mortgaged Property or such parts thereof as shall not have been disposed under the powers herein contained and such further and other documents reasonably requested by the Corporation. 4.6 PARTIAL RELEASE No postponement or partial release or discharge of the Security Interest, created under and secured by this Indenture in respect of all or any part of the Mortgaged Property shall in any way operate or be construed so as to release and discharge the security hereby constituted in respect of the Mortgaged Property except as herein specifically provided, or so as to release or discharge the Corporation from its liability to the holders to fully pay and satisfy the principal amount of the Debentures and all other monies due or remaining unpaid by the Corporation to the holders from time to time as provided herein. - 16 - 4.7 PROVISO FOR POSSESSION UNTIL DEFAULT Until the security hereby created shall become enforceable and the Trustee on behalf of the Debentureholders hereof shall have determined to enforce the same, the Corporation shall be permitted in the same manner and to the same extent as if this Indenture had not been executed, but subject to the express terms hereof, to possess, operate, manage, use and enjoy its Mortgaged Property in the ordinary course of business of the Corporation and for the purpose of carrying on the same, and for such purpose, to take and use the rents, income, profits and issues thereof, including dividends, profits and interest upon or in respect of any shares, bonds or other securities, claims and demands in judgment or otherwise at any time forming part of the Mortgaged Property. ARTICLE 5 COVENANTS, REPRESENTATIONS AND WARRANTIES OF THE CORPORATION ------------------------------------------------------------ 5.1 REPRESENTATIONS AND WARRANTIES The Corporation represents and warrants to the Trustee for the benefit of the Trustee and the Debentureholders as follows: (a) the Corporation is a corporation duly organized, legally existing and in good standing under the laws of the Province of Alberta and is duly authorized to do business in each other jurisdiction where a failure so to qualify would have a materially adverse effect on the business or operations of the Corporation; (b) the Corporation is duly authorized and empowered to execute, deliver and perform its obligations under this Indenture and all corporate action on the part of the Corporation for the due execution, delivery and performance by the Corporation of this Indenture has been duly and effectively taken; (c) this Indenture and the Debentures constitute valid and binding obligations of the Corporation, enforceable in accordance with their terms (except that such enforcement may be subject to any applicable bankruptcy, insolvency or similar laws generally affecting the enforcement of creditors' rights and that specific performance and other equitable remedies are subject to the discretion of the courts before which such remedies are sought and the provisions of the Interest Act, (Canada). 5.2 COVENANTS The Corporation covenants and agrees with the Trustee for the benefit of the Trustee and the Debentureholders as follows: (a) so long as any Debentures remain outstanding: (i) it shall reserve and keep available a sufficient number of Common Shares for the purpose of enabling it to satisfy its obligations to issue Common Shares upon the conversion of the Debentures; - 17 - (ii) it shall cause the Common Shares and the certificates representing the Common Shares acquired pursuant to the conversion of the Debentures to be duly issued and delivered in accordance with the Debenture Certificates and the terms hereof; (iii) all Common Shares which shall be issued upon conversion of Debentures as provided for herein and in the Debenture Certificate shall be issued as fully paid and non-assessable; (iv) it shall maintain its corporate existence; (v) it shall use its best efforts to ensure that all Common Shares outstanding or issuable from time to time (including without limitation the Common Shares issuable on the conversion of the Debentures) are listed and posted for trading on The Alberta Stock Exchange; (vi) it shall make all requisite filings under applicable Canadian securities legislation including those necessary to remain a reporting issuer not in default in each of the Filing Jurisdictions and those necessary to report the issuance of Common Shares pursuant to the conversion of the Debentures; (vii) it shall use its best efforts to obtain a receipt for the Prospectus or obtain an Order, as soon as practicable, from each of the Securities Commissions so that the resale of the Debentures and Common Shares issuable upon the conversion of the Debentures will not be subject to the prospectus requirements nor any "hold period" under applicable securities legislation in such Filing Jurisdictions; (viii) it shall give written notice to the Trustee and to each registered Debentureholder of the issuance of the receipts for a Prospectus or an Order, as soon as practicable but, in any event, not later than three Business Days after the issuance of such receipts; and (ix) generally, it will well and truly perform and carry out all of the acts, or things, to be done by it as provided in this Indenture or as the Trustee may reasonably require for the better accomplishing and effecting of the intentions and provisions of this Indenture; (b) to forever defend all and singular the Mortgaged Property unto the Trustee against every person whomsoever lawfully claiming or attempting to claim the same or any part thereof; (c) to punctually and duly pay the principal amount, interest on each of the Debentures and other monies hereby secured, together with other appurtenant charges thereon, in accordance with the terms of this Indenture; (d) to carry on and continuously conduct its business in respect of the Mortgaged Property in a lawful, efficient, diligent and businesslike manner; - 18 - (e) to keep and maintain proper books of account and records accurately covering all aspects of the business affairs of the Corporation and its Subsidiaries relating to the Mortgaged Property and to permit authorized officers, employees or agents of the Trustee to inspect the same during regular business hours; (f) to furnish annually to the Trustee within one hundred forty (140) days after the end of each fiscal year of the Corporation audited financial statements of the Corporation together with the report of its auditors thereon; (g) to furnish to the Trustee within sixty (60) days after the end of each quarter of its fiscal year unaudited financial statements of the Corporation for such quarter containing such information as the Trustee may reasonably require; (h) to furnish to the Trustee any financial or operating statements or reports relating to the business or affairs of the Corporation as the Trustee may reasonably request; (i) to fully pay and discharge as and when the same become due and payable all taxes (including local improvement rates), rates, duties and assessments that may be levied, rated, charged or assessed against the Corporation, or the Mortgaged Property, or any part thereof unless same is being contested in good faith, and if the Corporation fails to pay any of such taxes, rates, duties or assessments and if it is not in good faith contesting the same, the Trustee may pay, but shall not be obligated to pay, the same and any amounts so paid by the Trustee shall become and form part of the principal amount secured hereby and shall bear interest at the rate aforesaid until paid; (j) to at all times promptly observe, perform, execute and comply with all applicable laws, rules, requirements, orders, directions, by-laws, ordinances, work orders and regulations of every governmental authority and agency whether federal, provincial, municipal or otherwise, including, without limiting the generality of the foregoing, those dealing with fire, access, the environment (whether for its protection, preservation, clean-up or otherwise), toxic materials or other environmental hazards, public health and safety, and all private covenants and restrictions affecting the Mortgaged Property or any portion thereof, and from time to time, upon request of the Trustee, to provide to the Trustee evidence of such observance and compliance and at the Corporation's expense make any and all improvements thereon or alterations to the Mortgaged Property and to take all such other action as may be required at any time by any such present or future law, rule, requirement, order, direction, by-law, ordinance, work order or regulation; (k) to give notice to the Trustee promptly of any Event of Default or of any event which with notice or lapse of time, or both, would constitute an Event of Default hereunder; (l) to execute such further assurances of the Mortgaged Property as may be reasonably required by the Trustee; - 19 - (m) where the Corporation's interest in any of the Mortgaged Property, real or personal, is that of a purchaser under an agreement or option to purchase, the mortgage, pledge and charge hereby created shall extend to the entire estate or interest from time to time of the Corporation in such property, including in the case of real property the fee simple when the real property is conveyed in fee simple to the Corporation. 5.3 INSURANCE (a) The Corporation covenants that, at all times during the continuation of this Indenture, it will keep such of the Mortgaged Property that are of an insurable nature and are of a character usually insured by companies owning or operating the same or similar premises insured with responsible insurers, against loss, or damage by fire and other causes customarily insured against by similar premises in Canada and within limits of coverage reasonably acceptable to the Trustee. Unless otherwise agreed to in writing by the Trustee, the losses under all such insurances shall be payable firstly to the Debentureholders hereunder. (b) The Corporation agrees that so long as it remains indebted to the Debentureholders, it will, unless otherwise requested in writing by the Trustee, maintain with reputable insurers third party public liability and property damage insurance covering all operations of the Corporation within limits of coverage usually carried by others owning or operating the same or a similar type and size of business as that being conducted by the Corporation. (c) The Corporation will, upon the request of the Trustee, deliver to the Trustee certified copies of all policies or contracts of insurance being carried by the Corporation pursuant to the terms hereof, together with such certificates of insurance as the Trustee may reasonably require and evidence that the premiums on all such insurance have been paid. (d) If the Corporation should fail to take out or maintain all or any of the insurance required to be carried by the Corporation pursuant to the terms hereof, the Trustee may, but shall not be obligated to, take out some or all of such insurance and all sums expended by the Trustee in effecting such insurance shall forthwith become due and be payable by the Corporation to the Trustee and until paid shall form part of the principal amount secured hereby. (e) In the event of loss under any of the insurance referred to in clause 5.3(a) hereof, the Trustee, at its option, may apply the insurance proceeds on account of the principal amount secured hereby or may apply the same to rebuilding, repairing and restoring the Mortgaged Property, or may at its sole discretion apply the same partly for one purpose and partly for the other purpose. - 20 - 5.4 NEGATIVE COVENANTS The Corporation shall not, and covenants with the Trustee on behalf of the Trustee and the Debentureholders, that it will not, without the consent of holders of not less than sixty-six and two-thirds (66-23%) percent of the principal amount of Debentures outstanding first had and received: (a) sell, exchange, transfer, assign or dispose of any part of the Mortgaged Property, except in the ordinary and normal course of business of the Corporation as such business is currently being carried out; (b) create or suffer to be created any mortgage, hypothec, lien, charge, encumbrance or security interest of whatsoever nature upon the Mortgaged Property ranking in priority to or pari passu with the lien hereof except for Permitted Encumbrances; (c) incur or become liable for any indebtedness when it is in default under this Indenture, except for current indebtedness incurred in the ordinary course of business of the Corporation; (d) guarantee the debts, liabilities or obligations of any Person or become the endorser on any note or other obligation when it is in default under the terms of this Indenture; (e) reduce its capital or make any distribution otherwise than out of surplus of its assets, or redeem, purchase or otherwise retire or pay off any of the issued and outstanding shares for the time being of the Corporation; (f) lend money to any person, when it is in default under this Indenture; (g) make any capital expenditures when it is in default under this Indenture; or (h) make any distribution to its shareholders or any of them or declare or pay any dividends. 5.5 DEFEND MORTGAGED PROPERTY (a) The Corporation at its own cost will protect the Mortgaged Property against all liabilities of any nature, including all claims of workmen or materialmen that might arise from the administration or operation of any part of the Mortgaged Property or from the Corporation's operations; and will pay or cause to be paid all such liabilities and all charges for labour, materials and equipment incurred in such administration and operation unless same is being contested in good faith; will indemnify and hold the Trustee free and clear of any liens, charges and security interest or attempted liens, charges or security interests upon the Mortgaged Property. (b) If a lien hereof, or the title to, or the rights of the Trustee in or to the Mortgaged Property or any part thereof, shall be endangered or shall be attacked directly - 21 - or indirectly, or if any legal proceedings are instituted against the Corporation or the Trustee with respect thereto, the Corporation will promptly give written notice thereof to the Trustee and the Corporation, at its sole cost and expense, and will diligently cure any defect that may be developed or validly claimed, and will take all necessary and proper steps for the defence of the title to the Mortgaged Property and the lien of this Indenture thereon and will take such action as is reasonably appropriate to the defence of any such legal proceedings including, but not limited to, the employment of counsel, for the prosecution or defence of litigation and the release or discharge of claims made against the title to the Mortgaged Property or the lien of this Indenture. If the Trustee shall deem it necessary or expedient, a defence of such title, mortgage lien or charge, the Corporation hereby authorizes the Trustee, at the Corporation's sole expense, to take all additional steps deemed by the Debentureholder reasonably necessary or advisable for the defence of such title, mortgage, lien or charge including, but not limited to, the employment of independent counsel, for the prosecution or defence of litigation and the compromise or discharge of any adverse claims made with respect thereto. 5.6 SUPPLEMENTAL INSTRUMENTS The Corporation, at its cost and expense, will duly execute and deliver all such supplementary and corrective instruments and other instruments and assurances as the Trustee may reasonably require in order to render all of the Mortgaged Property now owned and hereinafter acquired by the Corporation, subject to the specific lien, charge and security interest hereof or as the Trustee deems necessary or advisable for the perfection and protection of the mortgages, liens, charges and assignments created or intended to be created hereby and the rights conferred or intended to be conferred upon the Trustee under this Indenture. The Corporation, at its cost and expense, will cause this Indenture and all such supplementary and corrective instruments and other instruments and assurances to be properly filed and re-filed, registered and re-registered and deposited and re-deposited in such manner, at such offices and places and at such times and as often as may be required by law or as may be necessary or desirable to perfect and preserve the mortgage, liens, charges and assignments created or intended to be created hereby and the rights conferred or intended to be conferred upon the Trustee under this Indenture, and will cause to be furnished promptly to the Trustee evidence satisfactory to the Trustee of such filing, registering and depositing, all at the cost and expense of the Corporation. 5.7 TO PAY TRUSTEE'S REMUNERATION The Corporation will pay the Trustee reasonable remuneration for its services as Trustee hereunder and will repay to the Trustee on demand all monies which shall have been paid by the Trustee in and about the execution of the trusts hereby created, and such monies shall be payable out of any funds coming into the possession of the Trustee in priority to any of the Debentures. The said remuneration shall continue payable until the trusts hereof be finally wound up and whether or not the trusts of this Indenture shall be in course of administration by or under the direction of the court. -22- 5.8 TRUSTEE MAY PERFORM COVENANTS If the Corporation shall fail to perform any covenant on its part herein contained, the Trustee may in its discretion, but (subject to clause 6.2) need not, notify the Debentureholders of such failure or itself may perform any of said covenants capable of being performed by it and, if any such covenant requires the payment or expenditure of money, it may make such payment or expenditure with its own funds, or with money borrowed by or advanced to it for such purposes, but shall be under no obligation so to do. All sums so expended or advanced shall be repayable by the Corporation in the manner provided in clause 5.7, but no such performance or payment shall be deemed to relieve the Corporation from any default hereunder. ARTICLE 6 DEFAULT 6.1 ACCELERATION OF MATURITY Upon the happening of any one or more of the following events, namely: (a) if the Corporation makes default in payment of any principal amount due on any Debentures and any such default continues for a period of seven (7) Business Days; (b) if a decree or order of a court having jurisdiction in the premises is entered adjudging the Corporation a bankrupt or insolvent under the BANKRUPTCY & INSOLVENCY ACT (Canada) or any other bankruptcy, insolvency or analogous laws, or issuing sequestration or process of execution against, or against any substantial part of the property of, the Corporation, or appointing a receiver of, or of any substantial part of the property of, the Corporation or ordering the winding-up or liquidation of its affairs, and any such decree or order continues unstayed and in effect for a period of thirty (30) days; (c) if a resolution is passed for the winding-up or liquidation of the Corporation except in the course of carrying out or pursuant to a transaction in respect of which the conditions of clause 8.1 are duly observed and performed or if the Corporation institutes proceedings to be adjudicated a bankrupt or insolvent, or consents to the institution of bankruptcy or insolvency proceedings against it under the BANKRUPTCY & INSOLVENCY ACT (Canada) or any other bankruptcy, insolvency or analogous laws, or consents to the filing of any such petition or to the appointment of a receiver of, or of any substantial part of the property of, the Corporation or makes a general assignment for the benefit of creditors, or admits in writing its inability to pay its debts generally as they become due or takes corporate action in furtherance of any of the aforesaid purposes; (d) if an encumbrancer shall take possession of the property of the Corporation or any part thereof which is, in the opinion of the Trustee, a substantial part thereof, or if a distress or execution or any similar process be levied or enforced -23- there against and remain unsatisfied for such period as would permit such property or such part thereof to be sold thereunder; or (e) if the Corporation shall neglect to observe or perform any other covenant or condition herein contained on its part to be observed or performed and, after notice in writing has been given by the Trustee to the Corporation specifying such default and requiring the Corporation to put an end to the same (which said notice may be given by the Trustee, in its discretion, and shall be given by the Trustee upon receipt of a request in writing signed by the holder of not less than sixty-six and two-thirds (66-2/3%) percent in the principal amount of the Debentures then outstanding), the Corporation shall fail to make good such default within a period of thirty (30) days, unless the Trustee (having regard to the subject matter of the default) shall have agreed to a longer period, and in such event, within the period agreed to by the Trustee; then in each and every such event the Trustee shall upon consent of holders of not less than sixty-six and two-thirds (66-2/3%) percent in principal amount of the Debentures then outstanding, (subject to the provisions of clause 6.3), by notice in writing to the Corporation declare the principal amount of all Debentures then outstanding and all other monies outstanding hereunder to be due and payable and the same shall forthwith become immediately due and payable to the Trustee, anything therein or herein to the contrary notwithstanding, and the Trustee may proceed to enforce such payment and the Security Interest created hereunder, and subject to the other terms hereof, the Corporation shall forthwith pay to the Trustee for the benefit of the Debentureholders the principal amount of and such other monies from the date of the said declaration until payment is received by the Trustee. Such payment when made shall be deemed to have been made in discharge of the Corporation's obligations hereunder, and any monies so received by the Trustee shall be applied in the manner provided in clause 6.6. 6.2 NOTICE OF EVENTS OF DEFAULT If an Event of Default shall occur and be continuing the Trustee shall, within thirty (30) days after it becomes aware of the occurrence of such Event of Default, give notice of such Event of Default to the Debentureholders in the manner provided in clause 10.2, provided that, notwithstanding the foregoing, unless the Trustee shall have been requested to do so by the holders of at least sixty-six and two-thirds (66-2/3%) percent of the principal amount of the Debentures then outstanding, the Trustee shall not be required to give such notice if the Trustee in good faith shall have determined that the withholding of such notice is in the best interests of the Debentureholders and shall have so advised the Corporation in writing. 6.3 WAIVER OF DEFAULT Upon the happening of any Event of Default hereunder: (a) the holders of sixty-six and two-thirds (66-2/3%) percent of the principal amount of the Debentures then outstanding shall have the power (in addition to the powers exercisable by extraordinary resolution as hereinafter provided) by requisition in writing to instruct the Trustee to waive any Event of Default -24- and to cancel any declaration made by the Trustee pursuant to clause 6.1 and the Trustee shall thereupon waive the Event of Default and cancel such declaration, or either, upon such terms and conditions as shall be prescribed in such requisition; and (b) the Trustee, so long as it has not become bound to declare the principal of the Debentures then outstanding to be due and payable, or to obtain or enforce payment of the same, shall have power to waive any Event of Default if, in the Trustee's opinion, the same shall have been cured or adequate satisfaction made therefor, and in such event to cancel any such declaration theretofore made by the Trustee in the exercise of its discretion, upon such terms and conditions as the Trustee may deem advisable; provided that no act or omission either of the Trustee or of the Debentureholders in the premises shall extend to or be taken in any manner whatsoever to affect any subsequent Event of Default or the rights resulting therefrom. 6.4 ENFORCEMENT BY THE TRUSTEE (a) Subject to the provisions of clause 6.3 and to the provisions of any extraordinary resolution that may be passed by the Debentureholders, the Trustee may in its discretion and shall upon receiving the consent of holders of not less than sixty-six and two-thirds (66-2/3%) percent in principal amount of the Debentures then outstanding and upon being indemnified to its reasonable satisfaction against all costs, expenses and liabilities to be incurred, proceed in its name as Trustee hereunder to enforce the Security Interest created hereunder and to obtain or enforce payment of the principal amount of all the Debentures then outstanding together with any other amounts due hereunder by such proceedings authorized by this Indenture or by law or equity as the Trustee in such request shall have been directed to take, or if such request contains no such direction, or if the Trustee shall act without such request, then by such proceedings authorized by this Indenture or by suit at law or in equity as the Trustee shall deem expedient. (b) The Trustee shall be entitled and empowered, either in its own name or as trustee of an express trust, or as attorney-in-fact for the holders of the Debentures, or in any one or more of such capacities, to file such proof of debt, amendment of proof of debt, claim, petition or other document as may be necessary or advisable in order to have the claims of the Trustee and of the holders of the Debentures allowed in any insolvency, bankruptcy, liquidation or other judicial proceedings relating to the Corporation or its creditors or relating to or affecting its property. The Trustee is hereby irrevocably appointed (and the successive respective holders of the Debentures by taking and holding the same shall be conclusively deemed to have so appointed the Trustee) the true and lawful attorney-in-fact of the respective holders of the Debentures with authority to make and file in the respective names of the holders of the Debentures or on behalf of the holders of the Debentures as a class, subject to deduction from any such claims of the amounts of any claims filed by any of the holders of the Debentures themselves, any proof of debt, amendment of -25- proof of debt, claim, petition or other document in any such proceedings and to receive payment of any sums becoming distributable on account thereof, and to execute any such other papers and documents and to do and perform any and all such acts and things for and on behalf of such holders of the Debentures, as may be necessary or advisable in the opinion of the Trustee, in order to have respective claims of the Trustee and of the holders of the Debentures against the Corporation or its property allowed in any such proceeding, and to receive payment of or on account of such claims; provided, however, that nothing contained in this Indenture shall be deemed to give to the Trustee, unless so authorized by extraordinary resolution, any right to accept or consent to any plan or reorganization or otherwise by action of any character in such proceeding to waive or change in any way any right of any Debentureholder. (c) In the event the Security Interest hereby constituted shall have become enforceable, then the Trustee, to the extent permitted by law, in its discretion and subject to Permitted Encumbrances, may enter upon and/or take possession of the Mortgaged Property or any part thereof and may in the like discretion sell, call in, collect and convert into money the same or any part thereof with full power to sell any of the Mortgaged Property either together or in parcels and either by public auction or private contract and either for a lump sum or for a sum payable by instalments or for a sum on account and a mortgage or charge for the balance and with full power upon every such sale to make any special or other stipulations as to title or evidence of commencement of title or otherwise which the Trustee shall deem proper and with full power to buy in or rescind or vary any contract for sale of the said premises or any part thereof and to resell the same without being responsible for any loss which may be occasioned thereby and with full power to compromise and effect compositions and for the purposes of the aforesaid, or any of them, to execute and do all such assurances and things as it shall think fit. (d) Upon any such sale, calling-in, collection or conversion as aforesaid, the receipt of the Trustee for the purchase money of the premises sold and for any other monies paid to it shall effectually discharge the purchaser or purchasers or other person or persons paying the same therefrom and from being concerned to see to the application or being answerable for the loss or misapplication thereof. Any such sale, calling-in, collection or conversion shall be a perpetual bar, both in law and in equity, against the Corporation and all other persons claiming the Mortgaged Property sold or any part thereof by, through or under the Corporation. (e) The Trustee shall hold and apply monies which arise from any sale, calling-in, collection or conversion against the principal amount and other monies which are secured hereby in such order and to such indebtedness of the Corporation to the Trustee as the Trustee may determine in its sole and absolute discretion from time to time and as prescribed by law. (f) The Trustee shall out of the rents and profits and income of the Mortgaged Property, pay and discharge the expenses incurred in and about the carrying on -26- and management of the assets or in the exercise of any of the powers under the last preceding clauses hereof or otherwise in respect of the premises and all outgoings which it shall think fit to pay and shall pay and apply the residue of the said rents, profits, income and monies in the same manner as is hereinbefore provided. (g) Subject to Permitted Encumbrances, the Trustee at any time after the security hereby constituted becomes enforceable may, by writing appoint or a court of competent jurisdiction, on application of the Trustee, may appoint a receiver or receivers or receiver-manager of the Mortgaged Property or any part thereof and remove any receiver or receivers or receiver-manager so appointed and appoint another in his stead and the following provisions shall have effect: (i) Such appointment may be made either before or after the Trustee shall have entered into or taken possession of the Mortgaged Property or any part thereof; (ii) Such receiver may be vested by the Trustee with such powers and discretions as the Trustee may think expedient; (iii) Unless otherwise directed by the Trustee, such receiver may exercise all the powers and authorities vested in the Trustee by this Indenture; (iv) Such receiver shall, in the exercise of his powers, authorities and discretions, conform to the regulations and directions from time to time made and given by the Trustee; (v) The Trustee may from time to time fix the remuneration of such receiver and direct payment thereof out of the Mortgaged Property; (vi) The Trustee may from time to time and at any time require any such receiver to give security for the due performance of his duties as such receiver and may fix the nature and the amount of the security to be so given, but the Trustee shall not be bound in any case, to require any such security; (vii) Save so far as otherwise directed by the Trustee, all monies from time to time received by such receiver shall be paid in trust for and over to the Trustee; (viii) The Trustee may pay over to such receiver, any monies constituting part of the Mortgaged Property to the intent that the same may be applied for the purposes hereof by such receiver, and the Trustee may from time to time determine what funds the receiver shall be at liberty to keep in hand with a view to the performance of his duties as such receiver; and (ix) The receiver shall be the agent of the Corporation and the Corporation shall be solely responsible for his acts and defaults (including negligence, -27- misconduct or misfeasance on the part of any such receiver) and for his remuneration. (h) The receiver appointed hereunder by the Trustee may be any person, whether an officer or officers or employee or employees of the Trustee or not, and the Trustee may appoint another or others in his or their stead. (i) The rights and powers conferred herein, in regard to appointment and powers of the receiver, are in supplement to and not in substitution for any rights or powers the Trustee may from time to time have as the Trustee of this Indenture and every such receiver may, in the discretion of the Trustee, be vested with all or any of the rights and powers of the Trustee. (j) After the security hereby created shall have become enforceable and the Trustee shall have determined or become bound to enforce the same, the Corporation will from time to time, execute and do all such assurances and things as the Trustee may reasonably require for facilitating the realization of the Mortgaged Property and for exercising all the powers, authorities and discretions hereby conferred upon the Trustee and for confirming to any purchaser of any of the Mortgaged Property, whether sold by the Trustee hereunder or by judicial proceedings, the title to the property so sold, and that it will give all notices and directions which the registered holder hereof may consider expedient; provided that for said purposes the Corporation does hereby irrevocably appoint the Trustee to be the attorney of the Corporation in the name and on behalf of it to execute and do any deeds, transfers, conveyances, assignments, assurances and things which the Corporation ought to execute and do under the covenants and provisions herein contained, and generally, to use the name of the Corporation in the exercise of all or any of the powers hereby conferred on the Trustee. (k) The Trustee shall not nor shall any receiver as aforesaid by reason of the Trustee or such receiver entering into possession of the Mortgaged Property or any part thereof be liable to account as mortgagee in possession or for anything or be liable for any loss upon realization or for any default or omission for which a mortgagee in possession might be liable. (l) The Trustee shall also have power at any time and from time to time to institute and to maintain such suits and proceedings as it may be advised shall be necessary or advisable to preserve and protect its interests and the interests of the Debentureholders. (i) All rights of action hereunder including the realization of the Security Interest granted hereunder may be enforced by the Trustee without the possession of any of the Debentures or the production thereof on the trial or other proceedings related thereto. Any such suit or proceeding instituted by the Trustee shall be brought in the name of the Trustee as trustee of an express trust, and any recovery of judgment shall be for the rateable benefit of the holders of the Debentures subject to the provisions of this Indenture. In any proceeding brought by the Trustee (and also any proceeding in which a -28- declaratory judgment of a court may be sought as to the interpretation or construction of any provision of this Indenture, to which the Trustee shall be a party) the Trustee shall be held to represent all the holders of the Debentures, and it shall not be necessary to make any holders of the Debentures parties to any such proceeding. 6.5 NO SUITS BY DEBENTUREHOLDERS No holder of any Debenture shall have any right to institute any action, suit or proceeding at law or in equity for the purpose of enforcing its Security Interest and payment of the principal of the Debentures or any other monies payable hereunder or for the execution of any trust or power hereunder or for the appointment of a liquidator or receiver or for a receiving order under the BANKRUPTCY & INSOLVENCY ACT (Canada) to have the Corporation wound up or to file or prove a claim in any liquidation or bankruptcy proceeding or for any other remedy hereunder, unless: (a) such holder shall previously have given to the Trustee written notice of the happening of an Event of Default hereunder; (b) the Debentureholders by extraordinary resolution (as hereinafter defined) or consent of holders of not less than sixty-six and two- thirds (66-2/3%) percent in principal amount of the Debentures then outstanding shall have made a request to the Trustee and the Trustee shall have been afforded reasonable opportunity either itself to proceed to exercise the powers hereinbefore granted or to institute an action, suit or proceeding in its name and for such purpose. (c) the Debentureholders or any of them shall have furnished to the Trustee, when so requested by the Trustee, sufficient funds and security and indemnity satisfactory to it against the costs, expenses and liabilities to be incurred therein or thereby; and (d) the Trustee shall have failed to act within a reasonable time after such notification, request and provision of indemnity and such notification, request and provision of indemnity are hereby declared in every such case, at the option of the Trustee, to be conditions precedent to any such proceeding. 6.6 APPLICATION OF MONIES BY TRUSTEE Except as herein otherwise expressly provided any monies received by the Trustee from the Corporation pursuant to the foregoing provisions or as a result of legal or other proceedings or from any receiver, trustee in bankruptcy or liquidator of the Corporation, shall be applied, together with any other monies in the hands of the Trustee available for such purpose, as follows: (a) first, in payment or in reimbursement to the Trustee of its compensation, costs, charges, expenses, borrowings, advances and other monies furnished or provided by or at the instance of the Trustee in or about the execution of its trusts under, or otherwise in relation to, this Indenture, with interest thereon as herein provided; -29- (b) second, in payment, rateably and proportionately to the holders of Debentures (taking into consideration any sums received directly by one or more of the Debentureholders), of the principal amount of the Debentures in the specific order of priority and to such specific indebtedness as set forth in clause 3.4 and clause 3.5 hereof; and (c) third, in payment of the surplus, if any, of such monies to the Corporation or its assigns; provided, however, that no payment shall be made pursuant to subclause (b) above in respect of the principal amount due on any Debenture held, directly or indirectly, by or for the benefit of the Corporation or any Subsidiary (other than any Debenture pledged for value and in good faith to a person other than the Corporation or any Subsidiary but only to the extent of such person's interest therein) except subject to the prior payment in full of the principal due on all Debentures which are not so held. 6.7 DISTRIBUTION OF PROCEEDS Payments to Debentureholders pursuant to subclause (b) of clause 6.6 shall be made at least seven (7) Business Days' notice of every such payment shall be given in the manner provided in clause 10.2 specifying the time when and the place or places where the Debentures are to be presented and the amount of the payment and the application thereof. 6.8 REMEDIES CUMULATIVE No remedy herein conferred upon or reserved to the Trustee, or upon or to the holders of Debentures is intended to be exclusive of any other remedy, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now existing or hereafter to exist by law or by statute. 6.9 JUDGMENT AGAINST THE CORPORATION The Corporation covenants and agrees with the Trustee that in case of any judicial or other proceedings to enforce the rights of the Debentureholders, judgment may be rendered against it in favour of the Debentureholders or in favour of the Trustee, as trustee for the Debentureholders, for any amount which may remain due in respect of the Debentures and any other monies owing hereunder. 6.10 IMMUNITY OF SHAREHOLDERS AND OTHERS Subject to section 8.1, the Debentureholders and the Trustee hereby waive and release any right, cause of action or remedy now or hereafter existing in any jurisdiction against any past, present or future incorporator, shareholder, director or officer of the Corporation or of any successor company for the payment of the principal amount on any of the Debentures or on any covenant, agreement, representation or warranty by the Corporation herein or in the Debentures contained. -30- 6.11 TRUSTEE APPOINTED ATTORNEY The Corporation hereby irrevocably appoints the Trustee to be the attorney of the Corporation in the name and on behalf of the Corporation to execute any instruments and do any acts and things which the Corporation ought to execute and do, and has not executed or done, under the covenants and provisions contained in this Indenture and generally to use the name of the Corporation in the exercise of all or any of the powers hereby conferred on the Trustee, with full powers of substitution and revocation. ARTICLE 7 SATISFACTION AND DISCHARGE 7.1 CANCELLATION AND DESTRUCTION All Debentures shall forthwith after payment or conversion thereof be delivered to the Trustee and cancelled by it. All Debentures cancelled or required to be cancelled under this or any other provision of this Indenture shall be destroyed by the Trustee and if required by the Corporation the Trustee shall furnish to it a destruction certificate setting out the designating numbers of the Debentures so destroyed. 7.2 NON-PRESENTATION OF DEBENTURES In case the holder of any Debenture shall fail to present the same for payment or conversion on the date on which the principal thereof becomes payable either at maturity or otherwise: (a) the Corporation shall be entitled to pay the principal amount, if any, or deliver Common Shares to the Trustee and direct it to set aside; or (b) in respect of monies in the hands of the Trustee which may or should be applied to the payment of the Debentures, the Corporation shall be entitled to direct the Trustee to set aside; such amounts or Common Shares, in trust to be paid or delivered to the holder of such Debenture upon due presentation or surrender thereof in accordance with the provisions of this Indenture; and thereupon the principal monies payable on or represented by each Debenture in respect whereof such monies have been set aside shall be deemed to have been paid and the holder thereof shall thereafter have no right in respect thereof except that of receiving payment of the monies or Common Shares so set aside by the Trustee upon due presentation and surrender thereof, subject always to the provisions of clause 7.3. 7.3 REPAYMENT OF UNCLAIMED MONIES OR COMMON SHARES Any monies or Common Shares set aside under clause 7.2 and not claimed by and paid or delivered to Debentureholders as provided in clause 7.2 within two (2) years after the date of such setting aside shall be repaid or re- delivered to the Corporation by the Trustee on demand and thereupon the Trustee shall be released from all further liability with respect to such monies. Thereafter the holders of the Debentures in respect of which such monies -31- or Common Shares were so repaid or delivered to the Corporation shall have no rights in respect thereof except to obtain payment of the monies or Common Shares due thereon from the Corporation up to such time as the right to proceed against the Corporation for recovery of such monies has become statute barred under the laws of the Province of Alberta. ARTICLE 8 SUCCESSOR CORPORATIONS 8.1 CERTAIN REQUIREMENTS The Corporation shall not enter into any transaction (including by way of reconstruction, reorganization, consolidation, amalgamation, merger, liquidation, transfer, sale or otherwise) whereby all or substantially all of its undertakings, property and assets would become the property of any other person, or, in the case of any such amalgamation, of the continuing corporation resulting therefrom, unless: (a) such other person or continuing corporation (herein called the "Successor Corporation") is a corporation incorporated under the laws of Canada or one of its provinces; (b) the Successor Corporation shall execute, prior to or contemporaneously with the consummation of such transaction, such instruments, if any, as are in the opinion of Counsel to the Trustee necessary or advisable to evidence the assumption by the Successor Corporation of liability for the due and punctual payment of all the Debentures, interest thereon and all other monies payable hereunder, the covenant of the Successor Corporation to observe and perform all the covenants and obligations of the Corporation under this Indenture; (c) such transaction, in the opinion of Counsel to the Trustee, shall be upon such terms as to substantially preserve and not impair any of the rights and powers of the Trustee or the Debentureholders hereunder; and (d) no condition or event shall exist in respect of the Successor Corporation at the time of such transaction or after giving full effect thereto which constitutes or would constitute an Event of Default hereunder; provided however, that the provisions hereof shall not apply in respect of any reorganization, reconstruction, amalgamation, merger, liquidation, transfer, sale or otherwise involving the Corporation and its Subsidiaries whereby there is no effective change in control or effective ownership of the assets, undertakings and property of the Corporation or its Subsidiaries. 8.2 VESTING OF POWERS IN SUCCESSOR Whenever the conditions of clause 8.1 have been duly observed and performed, the Successor Corporation shall possess and from time to time may exercise each and every right and power of the Corporation under this Indenture in the name of the Corporation or otherwise and any act or proceeding by any provision of this Indenture required to be done or -32- performed by any directors or officers of the Corporation may be done and performed with like force and effect by the directors or officers of such Successor Corporation. ARTICLE 9 MEETINGS OF DEBENTUREHOLDERS 9.1 RIGHT TO CONVENE MEETING The Trustee may at any time and from time to time and the Trustee shall on receipt of a written request of the Corporation or a written request signed by the holders of not less than sixty-six and two-thirds (66-2/3%) percent in principal amount of the Debentures then outstanding and upon being indemnified to its reasonable satisfaction by the Corporation or by the Debentureholders signing such request against the costs which may be incurred in connection with the calling and holding of such meeting, convene a meeting of the Debentureholders. In the event of the Trustee failing within fifteen (15) Business Days after receipt of any such request and such indemnity to give notice convening a meeting, the Corporation or such Debentureholders, as the case may be, may convene such meeting. Every such meeting shall be held in the City of Calgary or at such other place as may be approved or determined by the Trustee. 9.2 NOTICE OF MEETINGS At least fifteen (15) Business Days' notice of any meeting shall be given to the Debentureholders in the manner provided in clause 10.2. A copy of the notice shall be sent by post to the Trustee, unless the meeting has been called by it. Such notice shall state the time when and the place where the meeting is to be held and shall state briefly the general nature of the business to be transacted thereat. It shall not be necessary for any such notice to set out the terms of any resolution to be proposed or any of the provisions of this Article. The accidental omission to give notice of a meeting to any holder of Debentures shall not invalidate any resolution passed at any such meeting. 9.3 CHAIRMAN Some person, who need not be a Debentureholder, nominated in writing by the Trustee shall be chairman of the meeting and if no person is so nominated, or if the person so nominated is not present within fifteen (15) minutes from the time fixed for the holding of the meeting, the Debentureholders present in person or by proxy shall choose some person present to be chairman. 9.4 QUORUM Subject to the provisions of clause 9.12, at any meeting of the Debentureholders a quorum shall consist of Debentureholders present in person or by proxy and representing at least sixty-six and two-thirds (66-2/3%) percent in principal amount of the outstanding Debentures. If a quorum of the Debentureholders shall not be present within thirty (30) minutes from the time fixed for holding any meeting, the meeting, if summoned by the Debentureholders or pursuant to a request of the Debentureholders, shall be dissolved; but in any other case the meeting shall be adjourned to the same day in the next week (unless such -33- day is a non-business day in which case it shall be adjourned to the next following business day thereafter) at the same time and place and no notice shall be required to be given in respect of such adjourned meeting. At the adjourned meeting the Debentureholders present in person or by proxy shall form a quorum and may transact the business for which the meeting was originally convened notwithstanding that they may not represent fifty one (51%) percent of the principal amount of the outstanding Debentures. Any business may be brought before or dealt with at an adjourned meeting which might have been brought before or dealt with at the original meeting in accordance with the notice calling the same. No business shall be transacted at any meeting unless the required quorum is present at the commencement of business. 9.5 POWER TO ADJOURN The chairman of any meeting at which a quorum of the Debentureholders is present may with the consent of the holders of a majority in principal amount of the Debentures represented thereat adjourn any such meeting, and no notice of such adjournment need be given except such notice, if any, as the meeting may prescribe. 9.6 SHOW OF HANDS Every question submitted to a meeting shall, subject to clause 9.7, be decided in the first place by a majority of the votes given on a show of hands. At any such meeting, unless a poll is duly demanded as herein provided, a declaration by the chairman that a resolution has been carried or carried unanimously or by a particular majority or lost or not carried by a particular majority shall be conclusive evidence of the fact. The chairman of any meeting shall be entitled, both on a show of hands and on a poll, to vote in respect of the Debenture, if any, held by him. 9.7 POLL On every extraordinary resolution, and on any other question submitted to a meeting, when demanded by the chairman or by one or more Debentureholders or proxies for Debentureholders, a poll shall be taken in such manner and either at once or after an adjournment as the chairman shall direct. Questions other than extraordinary resolutions shall, if a poll be taken, be decided by the votes of the holders of a majority in principal amount of the Debentures represented at the meeting and voted on the poll. 9.8 VOTING On a show of hands every person who is present and entitled to vote, whether as a Debentureholder or as proxy for one or more Debentureholders or both, shall have one vote. On a poll each Debentureholder present in person or represented by a proxyholder duly appointed by an instrument in writing shall be entitled to one vote in respect of each $1,000 principal amount of Debentures of which he shall then be the holder. A proxyholder need not be a Debentureholder. In the case of joint registered holders of a Debenture, any one of them present in person or by proxy at the meeting may vote in the absence of the other or others; but in case more than one of them be present in person or by proxy, they shall vote together in respect of the Debentures of which they are joint registered holders. -34- 9.9 REGULATIONS The Trustee, or the Corporation with the approval of the Trustee, may from time to time make, vary or revoke such regulations as it shall think fit providing for and governing: (a) the form of the instrument appointing a proxy, which shall be in writing, the manner in which the same shall be executed and the production of the authority of any person signing on behalf of a Debentureholder; (b) the deposit of instruments appointing proxies at such place as the Trustee, the Corporation or the Debentureholder convening the meeting, as the case may be, may, in the notice convening the meeting, direct and the time, if any, before the holding of the meeting or any adjournment thereof by which the same be deposited; and (c) the deposit of instruments appointing proxies at some approved place or places other than the place at which the meeting is to be held and enabling particulars of such instruments appointing proxies to be mailed, cabled, telegraphed or sent by telex before the meeting to the Corporation or to the Trustee at the place where the same is to be held and for the voting of proxies so deposited as though the instruments themselves were produced at the meeting. Any regulations so made shall be binding and effective and the votes given in accordance therewith shall be valid and shall be counted. Save as such regulations may provide, the only persons who shall be recognized at any meeting as the holders of any Debentures, or as entitled to vote or be present at the meeting in respect thereof, shall be Debentureholders and persons whom Debentureholders have by instrument in writing duly appointed as their proxies. 9.10 PERSONS ENTITLED TO ATTEND MEETINGS The Corporation and the Trustee, by their respective officers and directors, and the legal advisors of each of the Corporation and the Trustee may attend any meeting of the Debentureholders, but none of such persons shall have a vote as such. 9.11 POWERS EXERCISABLE BY EXTRAORDINARY RESOLUTION In addition to the powers conferred upon them by any other provisions of this Indenture or by law, a meeting of the Debentureholders shall have the following powers exercisable from time to time by extraordinary resolution: (a) power to sanction and agree to any modification, abrogation, alteration, compromise or arrangement of the rights of the Debentureholders or the Trustee against the Corporation, whether such rights arise under this Indenture or the Debentures or otherwise; (b) power to assent to any modification of or change in or addition to or omission from the provisions contained in this Indenture or any Debenture which shall be agreed to by the Corporation and to authorize the Trustee to concur in and -35 execute any indenture supplemental hereto embodying any such modification, change, addition or omission; (c) power to sanction any scheme for the reconstruction or reorganization of the Corporation or for the consolidation, amalgamation or merger of the Corporation with any other corporation or for the sale, leasing, transfer or other disposition of the undertaking, property and assets of the Corporation or any part thereof. provided that no such sanction shall be necessary in respect of any such transaction if the provisions of clause 8.1 shall have been complied with; (d) power to direct or authorize the Trustee to exercise any power, right, remedy or authority given to it by this Indenture in any manner specified in any such extraordinary resolution or to refrain from exercising any such power, right, remedy or authority; (e) power to waive and direct the Trustee to waive any default hereunder to cancel any declaration made by the Trustee pursuant to clause 6.1 either unconditionally or upon any condition specified in such extraordinary resolution; (f) power to direct any Debentureholder who, as such, has brought any action, suit or proceeding to stay or discontinue or otherwise deal with the same upon payment, if the taking of such suit, action or proceeding shall have been permitted by clause 6.5, of the costs. charges and expenses reasonably and properly incurred by such Debentureholder in connection therewith; (g) power to assent to any compromise or arrangement with any creditor or creditors or any class or classes of creditors, whether secured or otherwise, and with holders of any shares or other securities of the Corporation; (h) power to remove the Trustee from office and to appoint a new Trustee or Trustees; (i) power to sanction the exchange of the Debentures for or the conversion thereof into shares, bonds, debentures or other securities or obligations of the Corporation or of any corporation formed or to be formed; (j) power, notwithstanding clause 5.6, to authorize the Corporation and the Trustee to grant extensions of time for payment of interest on any of the Debentures, whether or not the interest the payment in respect of which is extended, is at the time due or overdue; and (k) power to amend, alter or repeal any extraordinary resolution previously passed or sanctioned by the Debentureholders. - 36 - 9.12 MEANING OF "EXTRAORDINARY RESOLUTION" (a) The expression "extraordinary resolution" when used in this Indenture means, subject as hereinafter in this Article provided, a resolution proposed to be passed as an extraordinary resolution at a meeting of Debentureholders (including an adjourned meeting) duly convened for the purpose and held in accordance with the provisions of this Article at which the holders of not less than sixty-six and two-thirds (66- 2/3%) percent in principal amount of the Debentures then outstanding are present in person or by proxy and passed by the favourable votes of the holders of not less than sixty-six and two-thirds (66-2/3%) percent of the principal amount of Debentures represented at the meeting and voted on a poll upon such resolution. (b) If, at any such meeting, the holders of not less than sixty-six and two-thirds (66-2/3%) percent in principal amount of the Debentures outstanding are not present in person or by proxy within thirty (30) minutes after the time appointed for the meeting, then the meeting, if convened by or on the requisition of the Debentureholders, shall be dissolved; but in any case it shall stand adjourned to such date, being not less than seven (7) nor more than sixty (60) days later, and to such place and time as may be appointed by the chairman. Not less than ten (10) days' notice shall be given of the time and place of such adjourned meeting in the manner provided in clause 10.2. Such notice may be given prior to the convening of the original meeting, in anticipation of no quorum being present thereat, in which event it shall state that it is to have effect only if the original meeting is adjourned for lack of a quorum. Such notice shall state that at the adjourned meeting the Debentureholders present in person or by proxy shall form a quorum but it shall not be necessary to set forth the purposes for which the meeting was originally called or any other particulars. At the adjourned meeting the Debenture-holders present in person or by proxy shall form a quorum and may transact the business for which the meeting was originally convened. A resolution proposed at such adjourned meeting and passed by the requisite vote as provided in clause 9.12(a) shall be an extraordinary resolution within the meaning of this Indenture, notwithstanding that the holders of not less than fifty-one (51%) percent in principal amount of the Debentures then outstanding are not present in person or by proxy at such adjourned meeting. (c) Votes on an extraordinary resolution shall always be given on a poll, and no demand for a poll on an extraordinary resolution shall be necessary. 9.13 POWERS CUMULATIVE It is hereby declared and agreed that any one or more of the powers in this Indenture stated to be exercisable by the Debentureholders by extraordinary resolution or otherwise may be exercised from time to time and the exercise of any one or more of such powers from time to time shall not be deemed to exhaust the rights of the Debentureholders to exercise the same or any other such power or powers thereafter from time to time. - 37 - 9.14 MINUTES Minutes of all resolutions and proceedings at every meeting as aforesaid shall be made and duly entered in books to be from time to time provided for that purpose by secretary of the meeting, and any such minutes as aforesaid, if signed by the chairman of the meeting at which such resolutions were passed or proceedings had, or by the chairman of the next succeeding meeting of the Debentureholders, shall be prima facie evidence of the matters therein stated. Until the contrary is proved, every such meeting, in respect of the proceedings of which minutes shall have been made, shall be deemed to have been duly held and convened, and all resolutions passed thereat or proceedings taken thereat to have been duly passed and taken. 9.15 INSTRUMENTS IN WRITING All actions which may be taken and all powers that may be exercised by the Debentureholders at a meeting held as hereinbefore in this Article provided may also be taken and exercised by the holders of sixty-six and two-thirds (66-2/3%) percent of the principal amount of all the outstanding Debentures, by an instrument in writing signed in one or more counterparts and the expression "extraordinary resolution" when used in this Indenture shall include an instrument so signed. 9.16 BINDING EFFECT OF RESOLUTIONS Every resolution and every extraordinary resolution passed in accordance with the provisions of this Article at a meeting of Debentureholders shall be binding upon all the Debentureholders, whether present at or absent from such meeting, and every instrument in writing signed by Debentureholders in accordance with clause 9.15 shall be binding upon all the Debentureholders, whether signatories thereto or not, and each and every Debentureholder and the Trustee (subject to the provisions for its indemnity herein contained) shall be bound to give effect accordingly to every such resolution, extraordinary resolution and instrument in writing. 9.17 EVIDENCE OF RIGHTS OF DEBENTUREHOLDERS Any request, direction, notice, consent or other instrument which this Indenture may require or permit to be signed or executed by the Debentureholders may be in any number of concurrent instruments of similar tenor and may be signed or executed by such Debentureholders in person or by attorney duly appointed in writing. Proof of the execution of any such request or other instrument or of a writing appointing any such attorney or (subject to the provisions of this Article with regard to voting at meetings of Debentureholders) of the holding by any person of Debentures shall be sufficient for any purpose of this Indenture if made in the following manner, namely, the fact and date of execution by any person of such request or other instrument or writing may be proved by the certificate of any notary public, or other officer authorized to take acknowledgements of deeds to be recorded at the place where such certificate is made, that the person signing such request or other instrument in writing acknowledged to him the execution thereof, or by an affidavit of a witness of such execution or in any other manner which the Trustee may consider adequate. - 38 - The Trustee may, nevertheless, in its discretion require further proof in cases where it deems further proof desirable or may accept such other proof as it shall consider proper. ARTICLE 10 NOTICES 10.1 NOTICE TO CORPORATION Any notice to the Corporation under the provisions of this Indenture shall be valid and effective if given by registered letter, postage prepaid, addressed to the Corporation at: Battery One, Inc. 7850 Woodbine Avenue, Suite 201 Markham, Ontario L3R 0B9 Attention: The President and shall be deemed to have been effectively given from the time when in the ordinary course of post the said letter should have reached its destination. The Corporation may from time to time notify the Trustee in writing of a change of address which thereafter, until changed by like notice, shall be the address of the Corporation for all purposes of this Indenture. If, by reason of a strike, lockout or other work stoppage, actual or threatened, involving postal employees, any notice to be given to the Corporation hereunder could reasonably be considered unlikely to reach its destination, such notice shall be valid and effective only if it is delivered to the named officer of the party to which it is addressed or, if it is delivered to such party at the appropriate address as provided above, by cable, telegram, telecopy or other means of prepaid, transmitted and recorded communication. 10.2 NOTICE TO DEBENTUREHOLDERS All notices to be given hereunder with respect to the Debentures shall be deemed to be validly given to the holders thereof if sent by mail, postage prepaid, by letter or circular addressed to such holders at their post office addresses appearing in any of the registers hereinbefore mentioned and shall be deemed to have been given on the day of mailing. Accidental error or omission in giving notice or accidental failure to mail notice to any Debentureholder or the inability of the Corporation to give or mail any notice due to anything beyond the reasonable control of the Corporation shall not invalidate any action or proceeding founded thereon. All notices with respect to any Debenture may be given to whichever one of the holders thereof (if more than one) is named first in the registers hereinbefore mentioned, and any notice so given shall be sufficient notice to all holders of and persons interested in such Debenture. - 39 - If, by reason of a strike, lockout or other work stoppage, actual or threatened, involving postal employees, any notice to be given to the Debentureholders or to the Corporation hereunder could reasonably be considered unlikely to reach its destination, such notice shall be valid and effective only if it is delivered personally to such Debentureholders or if delivered to the address for such Debentureholders contained in the register of Debentures maintained by the Trustee, by cable, telegram, telex or other means of prepaid transmitted and recorded communication. 10.3 NOTICE TO TRUSTEE Any notice to the Trustee under the provisions of this Indenture shall be valid and effective if given by registered letter, postage prepaid, addressed to the Trustee at Suite 710, 530 - 8th Avenue S.W., Calgary, Alberta, T2P 3S8, Attention: Corporate Trust Department and shall be deemed to have been effectively given from the time when in the ordinary course of post the said letter should have reached its destination. If, by reason of a strike, lockout or other work stoppage, actual or threatened, involving postal employees, any notice to be given to the Trustee hereunder could reasonably be considered unlikely to reach its destination, such notice shall be valid and effective only if it is delivered to the named officer of the party to which it is addressed or, if it is delivered to such party at the appropriate address as provided above, by cable, telegram, telecopy or other means of prepaid, transmitted and recorded communication. ARTICLE 11 CONCERNING THE TRUSTEE 11.1 NO CONFLICT OF INTEREST The Trustee represents to the Corporation that at the date of execution and delivery by it of this Indenture there exists no material conflict of interest in the role of the Trustee as a fiduciary hereunder. 11.2 REPLACEMENT OF TRUSTEE The Trustee may resign its trust and be discharged from all further duties and liabilities hereunder by giving to the Corporation three (3) months' notice in writing or such shorter notice as the Corporation may accept as sufficient. If at any time a material conflict of interest exists in the Trustee's role as a fiduciary hereunder the Trustee shall, within ninety (90) days after ascertaining that such a material conflict of interest exists, either eliminate such material conflict of interest or resign in the manner and with the effect specified in this clause. The validity and enforceability of this Indenture and of the Debentures issued hereunder shall not be affected in any manner whatsoever by reason only that such material conflict of interest exists. In the event of the Trustee resigning or being removed or being dissolved, becoming bankrupt, going into liquidation or otherwise becoming incapable of acting hereunder, the Corporation shall forthwith appoint a new Trustee unless a new Trustee has already been appointed by the Debentureholders; failing such appointment by the Corporation, the retiring Trustee or any Debentureholder may apply to a Judge of the Court of Queen's Bench of Alberta, on such notice as such Judge may direct, for the appointment of a new - 40 - Trustee; but any new Trustee so appointed by the Corporation or by the Court shall be subject to removal as aforesaid by the Debentureholders. Any new Trustee appointed under any provision of this clause shall be a corporation authorized to carry on business of a trust company in the Province of Alberta. On any new appointment the new Trustee shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named herein as Trustee. Upon the written request of the successor Trustee or of the Corporation, the Trustee ceasing to act shall execute and deliver an instrument assigning and transferring to such successor Trustee, upon the trusts herein expressed, all the rights, powers and trusts of the Trustee so ceasing to act, and shall duly assign, transfer and deliver all property and money held by such Trustee to the successor Trustee so appointed in its place. Should any deed, conveyance or instrument in writing from the Corporation be required by any new Trustee for more fully and certainly vesting in and confirming to it such estates' properties, rights, powers and trusts, then any and all such deeds, conveyances and instruments in writing shall on request of said new Trustee, be made, executed, acknowledged and delivered by the Corporation. Notwithstanding the foregoing, any company into which the Trustee may be merged or with which it may be consolidated or amalgamated or any company resulting from any merger, consolidation or amalgamation to which the Trustee shall be a party, shall be the successor Trustee under this Indenture without the execution of any instrument or any further act. 11.3 DUTIES OF TRUSTEE In the exercise of the rights, duties and obligations prescribed or conferred by the terms of this Indenture, the Trustee shall exercise that degree of care, diligence and skill that a reasonably prudent trustee would exercise in comparable circumstances. 11.4 RELIANCE UPON DECLARATIONS In the exercise of its rights, duties and obligations hereunder the Trustee may, if acting in good faith, rely, as to the truth of the statements and accuracy of the opinions expressed therein, upon statutory declarations, opinions, reports or certificates furnished pursuant to any covenant, condition or requirement of this Indenture or required by the Trustee to be furnished to it in the exercise of its rights and duties hereunder, if the Trustee examines such statutory declarations, opinions, reports or certificates and determines that they comply with clause 11.5, if applicable, and with any other applicable requirements of this Indenture. 11.5 EVIDENCE OF COMPLIANCE TO TRUSTEE The Corporation shall furnish to the Trustee evidence of compliance with the conditions precedent provided for in this Indenture relating to any action or step required or permitted to be taken by the Corporation or the Trustee under this Indenture or as a result of any obligation imposed under this Indenture. including without limitation, the certification and delivery of Debentures hereunder, the satisfaction and discharge of this Indenture and the taking of any other action to be taken by the Trustee at the request of or on the application of the Corporation, forthwith if and when: - 41 - (a) such evidence is required by any other clause of this Indenture to be furnished by the Trustee in accordance with the terms of this clause 11.5; or (b) the Trustee, in the exercise of its rights and duties under this Indenture, gives the Corporation written notice requiring it to furnish such evidence in relation to any particular action or obligation specified in such notice. Such evidence shall consist of: (a) a certificate made by any officer of the Corporation stating that any such condition precedent has been complied with in accordance with the terms of this Indenture; (b) in the case of a condition precedent compliance with which is, by the terms of this Indenture, made subject to review or examination by a solicitor, an opinion of Counsel that such condition precedent has been complied with in accordance with the terms of this Indenture; and (c) in the case of any such condition precedent compliance with which is subject to review or examination by auditors or accountants, an opinion or report of the Auditors of the Corporation whom the Trustee for such purposes hereby approves, that such condition precedent has been complied with in accordance with the terms of this Indenture. Whenever such evidence relates to a matter other than the certification and delivery of Debentures and the satisfaction and discharge of this Indenture, and except as otherwise specifically provided herein, such evidence may consist of a report or opinion of any solicitor, auditor, accountant, engineer or appraiser or any other person whose qualifications give authority to a statement made by him, provided that if such report or opinion is furnished by a director, officer or employee of the Corporation it shall be in the form of a statutory declaration. Such evidence shall be, so far as appropriate, in accordance with the immediately preceding paragraph of this Article. Each certificate, opinion or report with respect to compliance with a condition precedent provided for in this Indenture shall include: (a) a statement by the person giving the evidence that he has read and is familiar with those provisions of this Indenture relating to the condition precedent in question; (b) a brief statement of the nature and scope of the examination or investigation upon which the statements or opinions contained in such evidence are based; (c) a statement that, in the belief of the person giving such evidence, he has made such examination or investigation as is necessary to enable him to make the statements or give the opinions contained or expressed therein; and (d) a statement whether in the opinion of such person the conditions precedent in question have been complied with or satisfied. - 42 - The Corporation shall furnish to the Trustee annually, and at any other reasonable time if the Trustee so requires, a certificate signed by an officer of the Corporation certifying that the Corporation has complied with all covenants, conditions or other requirements contained in this Indenture, the non-compliance with which would, with the giving of notice or the lapse of time, or both, or otherwise, constitute an Event of Default, or if such is not the case, specifying the covenant, condition or other requirement which has not been complied with and giving particulars of such non-compliance. The Corporation shall, whenever the Trustee so requires, furnish the Trustee with evidence by way of statutory declaration, opinion, report or certificate as specified by the Trustee as to any action or step required or permitted to be taken by the Corporation or as a result of any obligation imposed by this Indenture. 11.6 OFFICERS' CERTIFICATE AS EVIDENCE Except as otherwise specifically provided or prescribed by this Indenture, whenever in the administration of the provisions of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or omitting any action hereunder, the Trustee, if acting in good faith, may rely upon an Officers' Certificate. 11.7 EXPERTS, ADVISORS AND AGENTS The Trustee may: (a) in relation to these presents act on the opinion or advice of or information obtained from any solicitor, auditor, valuer, engineer, surveyor, appraiser or other expert, whether obtained by the Trustee or by the Corporation, or otherwise, and may employ such assistants as may be necessary to the proper discharge of its duties and may pay proper and reasonable compensation for all such legal and other advice or assistance as aforesaid; and (b) employ such agents and other assistants as it may reasonably require for the proper discharge of its duties hereunder, and may pay reasonable remuneration for all services performed for it (and shall be entitled to receive reasonable remuneration for all services performed by it) in the discharge of the trusts hereof and compensation for all disbursements, costs and expenses made or incurred by such agents or other assistants in the discharge of the Trustee's duties hereunder and in the management of the trusts hereof. Any solicitors employed or consulted by the Trustee may, but need not be, solicitors for the Corporation. 11.8 TRUSTEE MAY DEAL IN DEBENTURES Subject to clause 11.2, the Trustee may, in its personal or other capacity, buy, sell, lend upon and deal in the Debentures and generally contract and enter into financial transactions with the Corporation or otherwise, without being liable to account for any profits made thereby. - 43 - 11.9 INVESTMENT OF MONIES HELD BY TRUSTEE Unless otherwise provided in this Indenture, any monies held by the Trustee which under the trusts of this Indenture may or ought to be invested or which may be on deposit with the Trustee or which may be in the hands of the Trustee may be invested and reinvested in the name or under the control of the Trustee in securities in which, under the laws of the Province of Alberta, trustees are authorized to invest trust monies, provided that such securities are expressed to mature within one (1) year after their purchase by the Trustee, and unless and until the Trustee shall have declared the principal of the Debentures to be due and payable, the Trustee shall so invest such monies at the request of the Corporation. Pending the investment of any monies as hereinbefore provided, such monies may be deposited in the name of the Trustee in any chartered bank of Canada or, with the consent of the Corporation, in the deposit department of the Trustee or any other loan or trust company authorized to accept deposits under the laws of Canada or any Province thereof at the rate of interest then current on similar deposits. Unless and until the Trustee shall have declared the principal of the Debentures to be due and payable, the Trustee shall pay over to the Corporation all interest received by the Trustee in respect of any investments or deposits made pursuant to the provisions of this clause. 11.10 TRUSTEE NOT ORDINARILY BOUND Except as provided in clause 6.2 and as otherwise specifically provided herein, the Trustee shall not, subject to clause 11.3, be bound to give notice to any person of the execution hereof, nor to do, observe or perform or see to the observance or performance by the Corporation of any of the obligations herein imposed upon the Corporation or of the covenants on the part of the Corporation herein contained, nor in any way to supervise or interfere with the conduct of the Corporation's business, unless the Trustee shall have been required to do so in writing by the holders of not less than fifty-one (51%) percent of the aggregate principal amount of the Debentures then outstanding or by any extraordinary resolution of the Debentureholders passed in accordance with the provisions contained in Article 9, and then only after it shall have been indemnified to its satisfaction against all actions, proceedings, claims and demands to which it may render itself liable and all costs, charges, damages and expenses which it may incur by so doing. 11.11 TRUSTEE NOT REQUIRED TO GIVE SECURITY The Trustee shall not be required to give any bond or security in respect of the execution of the trusts and powers of this Indenture or otherwise in respect of the premises. -44- 11.12 TRUSTEE NOT TO BE APPOINTED RECEIVER The Trustee and any person related to the Trustee shall not be appointed a receiver or receiver and manager or liquidator of all or any part of the assets or undertaking of the Corporation. 11.13 TRUSTEE NOT BOUND TO ACT ON CORPORATION'S REQUEST Except as in this Indenture otherwise specifically provided, the Trustee shall not be bound to act in accordance with any direction or request of the Corporation or of the directors until a duly authenticated copy of the instrument or resolution containing such direction or request shall have been delivered to the Trustee, and the Trustee shall be empowered to act upon any such copy purporting to be authenticated and believed by the Trustee to be genuine. 11.14 PROTECTION OF TRUSTEE Subject to clause 11.3, the Trustee: (a) shall not at any time be under any duty or responsibility to any Debentureholder to determine whether any facts exist which may require any adjustment in the conversion formula, or with respect to the nature or extent of any such adjustment when made, or with respect to the method employed in making the same; (b) shall not be accountable with respect to the validity or value (or the kind or amount) of any Common Shares or of any shares or other securities or property which may at any time be issued or delivered upon the conversion of any Debenture; and (c) shall not be responsible for any failure of the Corporation to make any cash payment or to issue, transfer or deliver Common Shares or share certificates upon the surrender of any Debenture for the purpose of conversion, or to comply with any of the covenants contained in this Article. 11.15 CONDITIONS PRECEDENT TO TRUSTEE'S OBLIGATIONS TO ACT HEREUNDER The obligation of the Trustee to commence or continue any act, action or proceeding for the purpose of enforcing the rights of the Trustee and of the Debentureholders hereunder shall be conditional upon the Debentureholders furnishing, when required by notice in writing by the Trustee' sufficient funds to commence or continue to such act, action or proceeding and indemnity reasonably satisfactory to the Trustee to protect and hold harmless the Trustee against the costs, charges, expenses and liabilities to be incurred thereby and any loss and damage it may suffer by reason thereof. None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur financial liability in the performance of any of its duties or in the exercise of any of its rights or powers unless indemnified as aforesaid. -45- The Trustee may, before commencing or at any time during the continuance of any such act, action or proceeding, require the Debentureholders at whose instance it is acting to deposit with the Trustee the Debentures held by them for which Debentures the Trustee shall issue receipts. 11.16 AUTHORITY TO CARRY ON BUSINESS The Trustee represents to the Corporation that at the date of execution and delivery by it of this Indenture it is authorized to act as trustee hereunder. 11.17 ACCEPTANCE OF TRUST The Trustee hereby accepts the trusts in this Indenture declared and provided for and agrees to perform the same upon the terms and conditions herein set forth and to hold all rights, privileges and benefits conferred hereby and by law in trust for the various persons who shall from time to time be Debentureholders, subject to all the terms and conditions herein set forth. 11.18 DIRECTION OF TRUSTEE'S ACTIONS BY HOLDERS If and so long as the Trustee shall not have received notice from any holder of Debentures of an Event of Default hereunder then, notwithstanding any other provision hereof to the contrary, the Trustee shall only perform such non- discretionary duties as are specifically set forth in this Indenture but shall not be obligated to take any other action hereunder except as may be requested from time to time in writing by the holders of not less than sixty-six and two- thirds (66-2/3%) percent in principal amount of the Debentures at the time outstanding; the making of any decision or judgment, giving of any approval or consent, or exercise of any power, which would otherwise be within the discretion of the Trustee under the provisions hereof to make, give or exercise, or not to make, give or exercise, shall only be done upon the written instructions of the holders of not less than sixty five (65%) percent in principal amount of the Debentures at the time outstanding. Copies of all certificates, notices, reports and other communications given by the Corporation to the Trustee shall be given to each Debentureholder. The Trustee shall not be required to examine any such certificate, notice, report or other communication or be on notice of the contents thereof. 11.19 ENVIRONMENTAL INDEMNITY The Corporation hereby agrees and by these presents does hereby indemnify the Trustee, its directors, officers, employees, and agents, and all of their successors and assigns (collectively the "Indemnified Parties") against any loss, expense, claim liability or asserted liability (including strict liability and including costs and expenses of abatement and remediation of spills or releases or releases of contaminants and including liabilities of the Indemnified Parties to third parties (including governmental agencies) in respect of bodily injuries, property damage, damage to or impairment of the environment or any other injury or damage and including liabilities of the Indemnified Parties to third parties for the third parties' foreseeable and unforeseeable consequential damages) incurred as a result of: (a) the administration of the trust created hereby; -46- (b) the exercise by the Trustee of any rights hereunder or under any mortgage or charge created hereunder; which result from or relate, directly or indirectly, to: (c) the presence or release of any contaminants, by any means or for any reason, on the Mortgaged Property, whether or not release or presence of the contaminants was under the control, care or management of the Corporation, or of a previous owner, or of a tenant; (d) any contaminant present on or released from any contiguous property to the Mortgaged Property; or (e) the breach or alleged breach of any environmental laws by the Corporation. For purposes of this clause, "liability" shall include (i) liability of an Indemnified Party for costs and expenses of abatement and remediation of spills and releases of contaminants, (ii) liability of an Indemnified Party to a third party to reimburse the third party for bodily injuries, property damages and other injuries or damages which the third party suffers, including (to the extent, if any, that the Indemnified Party is liable therefor) foreseeable and unforeseeable consequential damages suffered by the third party and (iii) liability for the Indemnified Party for damage to or impairment of the environment. In no event shall the Corporation be liable to indemnify an Indemnified Party against any loss, expense, claims, liability or asserted liability to the extent resulting from the gross negligence or wilful misconduct of the Indemnified Party. The obligations of the Corporation to the Indemnified Parties under this clause shall be joint and several. ARTICLE 12 CONVERSION OF DEBENTURES 12.1 CONVERSION (a) Upon and subject to the provisions and conditions of this Article 12, the holders of Debentures shall have the right, at their option, at any time during the term hereof, in denominations of one thousand ($1,000) dollars principal amount, to convert the whole or, in the case of a Debenture having a denomination in excess of one thousand ($1,000) dollars, any part which is one thousand ($1,000) dollars or an integral multiple thereof, the principal amount payable by the Corporation to the holder as herein provided into fully paid and non- assessable Common Shares of the Corporation at the Conversion Price as hereinafter set forth. Such right of conversion shall extend only to the maximum number of whole Common Shares into which the aggregate principal amount of the Debenture or Debentures surrendered for conversion at any one time by the holder thereof -47- may be converted in accordance with the foregoing provisions of this clause. Fractional interests in Common Shares shall be adjusted for in the manner provided in clause 12.4. Subject to the provisions and conditions of this Article 12, the Conversion Price for conversion of the whole or any part of a Debenture, at the option of a holder hereunder shall be $0.125 per Common Share. (b) If at any time after the third anniversary date of the date of this Indenture, the Current Market Price per Common Share of the Corporation is equal to or greater than $0.20 per Common Share, the Corporation shall have the right, at its option, upon giving not less than fifteen (15) Business Days prior notice in writing to the holders in the manner herein provided, in denominations of one thousand ($1,000) dollars principal amount, to convert the whole, or in the case of a Debenture having a denomination in excess of one thousand ($1,000) dollars, any part which is one thousand ($1,000) dollars or an integral multiple thereof, the principal amount into fully paid and non-assessable Common Shares of the Corporation at a Conversion Price of $0.125 per Common Share. (c) For the purposes of this Article 12, the "Current Market Price" per Common Share shall be the weighted average closing price of the Corporation's Common Shares for ten (10) consecutive trading days commencing not more than twenty (20) trading days before such date on the principal stock exchange on which the Common Shares, or if the Common Shares are not listed on any stock exchange, then on the principal over-the-counter market on which the Common Shares are traded. If there is no market for the Common Shares for the period during which the Current Market Price thereof would otherwise be determined, the Current Market Price in respect of the Common Shares shall be determined by the board of directors of the Corporation acting in good faith. The weighted average price shall be determined by dividing the aggregate sale price of all Common Shares sold on the said stock exchange or market, as the case may be, during the said ten (10) consecutive trading days by the total number of Common Shares so sold. 12.2 MANNER OF EXERCISE OF RIGHT TO CONVERT (a) The holder of a Debenture desiring to convert such Debenture in whole or in part into Common Shares, or in the alternative, the holder who is required to convert such Debenture in whole or in part into Common Shares in accordance with clause 12.1(b) hereof shall surrender such Debenture to the Trustee at its principal office in the City of Calgary together with the conversion form on the back of such Debenture or any other written notice in a form satisfactory to the Corporation, in either case duly executed by the holder or his executors or administrators or other legal representatives or his or their attorney duly appointed by an instrument in writing in a form and executed in a manner satisfactory to the Corporation, exercising his right or obligation to convert such Debenture in accordance with the provisions of this Article. Thereupon such Debentureholder or, subject to payment of all applicable stamp or security transfer taxes or other governmental charges and compliance with all -48- reasonable requirements of the Trustee, his nominee(s) or assignee(s) shall be entitled to be entered in the books of the Corporation as at the date of conversion (or the date as is specified in the notice as contemplated in clause 12.2(b)) as the holder of the number of Common Shares into which such Debenture is convertible in accordance with the provisions of this Article and, as soon as practicable thereafter, the Corporation shall deliver to such Debentureholder or, subject as aforesaid, his nominee(s) or assignee(s) a certificate or certificates for such Common Shares. (b) For the purposes of Article 12, a Debenture shall be deemed to be surrendered for conversion by the holder on the date on which it is so surrendered by the holder in accordance with the provisions of this Article and, in the case of a Debenture so surrendered by post or other means of transmission, on the date on which it is received by the Trustee at its office specified herein or on the date in the notice given by the Corporation under clause 12.1(b) hereof, whichever is the first to occur (herein referred to as the "Conversion Date"); provided that if a Debenture is surrendered for conversion on a day on which the register of Common Shares is closed, the person or persons entitled to receive Common Shares shall become the holder or holders of record of such Common Shares as at the date on which such registers are next reopened. (c) Any part, being one thousand ($1,000) dollars or an integral multiple thereof, of a Debenture of a denomination in excess of one thousand ($1,000) dollars may be converted as provided in this Article and all references in this Indenture to conversion of Debentures shall be deemed to include conversion of such parts. (d) The holder of any Debenture of which part only is converted shall surrender the said Debenture to the Trustee, and the Trustee shall cancel the same and shall without charge forthwith certify and deliver to the holder a new Debenture or Debentures in an aggregate principal amount equal to the unconverted part of the principal amount of the Debenture so surrendered. (e) The holder of a Debenture surrendered for conversion in accordance with Article shall rank only in respect of dividends declared in favour of shareholders of record on and after the Conversion Date or such later date as such holder shall become the holder of record of such Common Shares pursuant to this Article, from which applicable date they will for all purposes be and be deemed to be issued and outstanding as fully paid and non-assessable Common Shares. (f) The forwarding of Common Shares by the Trustee or the Corporation to the holders of the Debenture upon conversion of the Debentures as provided in this Article 12 shall satisfy and discharge the Corporation and the Trustee of their obligations hereunder, provided that in the event of non-receipt of certificates representing such Common Shares by the holder, or the loss or destruction thereof, the Corporation, upon being furnished with reasonable evidence of such non-receipt, loss or destruction and indemnity reasonably satisfactory to it, shall issue to such holder a replacement certificate or certificates. -49- (g) In the event the principal amount of a Debenture, or any portion thereof, is converted into Common Shares pursuant to the terms hereof, then same shall be applied in the reverse order of payment of indebtedness as is set forth in clause 3.4 hereof. 12.3 ADJUSTMENT The Conversion Price as provided for in clause 12.1(a) or 12.1(b) hereof in effect at any date shall be subject to adjustment from time to time as follows: (a) If and whenever at any time prior to the Conversion Date, the Corporation shall: (i) subdivide or redivide the outstanding Common Shares into a greater number of shares; (ii) reduce, combine or consolidate the outstanding Common Shares into a smaller number of shares; or (iii) issue Common Shares of the Corporation to the holders of all or substantially all of the outstanding Common Shares by way of a stock dividend; the Conversion Price in effect on the effective date of such subdivision, redivision, reduction, combination or consolidation or on the record date for such issue of Common Shares by way of a stock dividend, as the case may be, shall in the case of the events referred to in (i) and (iii) above be decreased in proportion to the number of outstanding Common Shares resulting from such subdivision, redivision or dividend, or shall, in the case of the events referred to in (ii) above, be increased in proportion to the number of outstanding Common Shares resulting from such reduction, combination or consolidation. Such adjustment shall be made successively whenever any event referred to in this subsection (a) shall occur; any such issue of Common Shares by way of a stock dividend shall be deemed to have been made on the record date for the stock dividend for the purpose of calculating the number of outstanding Common Shares under this clause 12.3(a). (b) In the case of any reclassification or change (other than a change resulting only from consolidation or subdivision) of the Common Shares or in case of any amalgamation, consolidation or merger of the Corporation with or into any other corporation, or in the case of any sale of the properties and assets of the Corporation, as or substantially as, an entirety to any other corporation, the applicable Conversion Price shall be adjusted so that each Debenture shall, after such reclassification, change, amalgamation, consolidation, merger or sale, be exercisable for the number of shares or the number, kind or amount of other securities or property of the Corporation,, or such continuing, successor or purchaser corporation, as the case may be, which the holder thereof would have been entitled to receive as a result of such reclassification, change, amalgamation, consolidation, merger or sale if on the effective date thereof he had been the holder of the number of Common Shares into which the Debenture -50- was convertible prior to the effective date of such reclassification, change, amalgamation, consolidation, merger or sale. No such reclassification, change, amalgamation, consolidation, merger or sale shall be carried into effect unless, in the opinion of the board of directors acting in good faith, all necessary steps shall have been taken to ensure that the holders shall thereafter be entitled to receive such number of shares or other securities or property of the Corporation, or such continuing, successor or purchasing corporation, as the case may be, subject to adjustment thereafter in accordance with provisions similar, as nearly as may be, to those contained in this clause 12.12. (c) The adjustments provided for in this clause 12.3 are cumulative and shall apply to successive subdivisions, redivisions, reductions, combinations, consolidations, distributions, issues or other events resulting in any adjustment under the provisions of this Article. (d) For the purpose of calculating the number of Common Shares of the Corporation outstanding, Common Shares owned by or for the benefit of the Corporation or its Subsidiaries shall be counted. (e) In the event of any question arising with respect to the adjustments provided in this clause 12.3, such question shall be conclusively determined by a firm of chartered accountants appointed by the Corporation and acceptable to the Trustee (who may be Auditors of the Corporation); such accountants shall have access to all necessary records of the Corporation and such determination shall be binding upon the Corporation, the Trustee, and the Debentureholders. 12.4 NO REQUIREMENT TO ISSUE FRACTIONAL SHARES The Corporation shall not be required to issue fractional Common Shares upon the conversion of Debentures pursuant to this Article. If more than one Debenture shall be surrendered for conversion at one time by the same holder, the number of whole Common Shares issuable upon conversion thereof shall be computed on the basis of the aggregate principal amount of such Debentures to be converted. If any fractional interest in a Common Share would, except for the provision of this Article, be deliverable upon the conversion of any principal amount of Debentures, the Corporation shall, in lieu of delivering any certificate of such fractional interest, satisfy such fractional interest by issuing such additional or lesser number of Common Shares, rounding up or down, as the case may be, to the next whole number of Common Share. 12.5 CORPORATION TO RESERVE SHARES The Corporation covenants with the Trustee that it will at all times reserve and keep available out of its authorized Common Shares, solely for the purpose of issue upon conversion of Debentures as in this Article provided, and conditionally allot to Debentureholders who may exercise their conversion rights hereunder, such number of Common Shares as shall then be issuable upon the conversion of all outstanding Debentures. The Corporation covenants with the Trustee that all Common Shares which shall be so issuable shall be duly and validly issued as fully paid and non-assessable. -51- 12.6 TAXES AND CHARGES ON CONVERSION The Corporation will from time to time promptly pay or make provision satisfactory to the Trustee for the payment of any and all taxes and charges which may be imposed by the laws of Canada or any province thereof (except income tax or security transfer tax, if any) which shall be payable with respect to the issuance or delivery to the holders of Debentures, upon the exercise of their right of conversion or automatic conversion, as the case may be, of Common Shares of the Corporation pursuant to the terms of the Debentures and of this Indenture. 12.7 CANCELLATION OF CONVERTED DEBENTURES All Debentures converted in whole or in part under the provisions of this Article shall be forthwith delivered to and cancelled by the Trustee and, subject to the provisions of clause 12.2(d), no Debenture shall be issued in substitution therefor. 12.8 CERTIFICATE AS TO ADJUSTMENT The Corporation shall from time to time immediately after the occurrence of any event which requires an adjustment or readjustment as provided in clause 12.3, deliver an Officers' Certificate to the Trustee specifying the nature of the event requiring the same and the amount of the adjustment necessitated thereby and setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based, which certificate and the amount of the adjustment specified therein shall be verified by an opinion of a firm of chartered accountants appointed by the Corporation and acceptable to the Trustee (who may be the Auditors of the Corporation) and, when approved by the Trustee shall be conclusive and binding on all parties in interest. When so approved, the Corporation shall, except in respect of any subdivision, redivision, reduction, combination or consolidation of the Shares, forthwith give notice to the Debentureholders in the manner provided in clause 10.2 specifying the event requiring such adjustment or readjustment and the results thereof, including the resulting applicable Conversion formula; provided that, if the Corporation has given notice under clause 12.9 covering all the relevant facts in respect of such event and if the Trustee approves, no such notice need be given under this clause 12.8. 12.9 NOTICE OF SPECIAL MATTERS The Corporation covenants with the Trustee that so long as any Debenture remains outstanding, it will give notice to the Trustee, and to the Debentureholders in the manner provided in clause 10.2, of its intention to fix a record date for the payment of a stock dividend which may give rise to an adjustment in the applicable conversion formula, and such notice shall specify the particulars of such event and the record date and the effective date for such event; provided that the Corporation shall only be required to specify in such notice such particulars of such event as shall have been fixed and determined on the date on which such notice is given. Such notice shall be given not less than fourteen (14) days in each case prior to such applicable record date. -52- ARTICLE 13 SUPPLEMENTAL INDENTURES 13.1 SUPPLEMENTAL INDENTURES From time to time the Trustee and, when authorized by a resolution of the directors, the Corporation may, and they shall when required by this Indenture, execute, acknowledge and deliver by their proper officers deeds or indentures supplemental hereto. which thereafter shall form part hereof, for any one or more of the following purposes: (a) adding to the covenants of the Corporation herein contained for the protection of the holders of the Debentures or providing for Events of Default in addition to those herein specified; (b) making such provisions not inconsistent with this Indenture as may be necessary or desirable with respect to matters or questions arising hereunder, including the making of any modifications in the form of the Debentures which do not affect the substance thereof and which, in the opinion of the Trustee. It may be expedient to make, provided that the Trustee shall be of the opinion that such provisions and modifications will not be prejudicial to the interests of the Debentureholders; (c) evidencing the succession, or successive successions, of other companies to the Corporation and the covenants of and obligations assumed by any such successor in accordance with the provisions of this Indenture; (d) giving effect to any extraordinary resolution passed as provided in Article 9; (e) for any other purpose not inconsistent with the terms of this Indenture. The Trustee may also, without the consent or concurrence of the Debentureholders, by supplemental indenture or otherwise, concur with the Corporation in making any changes or corrections to this Indenture which it shall have been advised by Counsel are required for the purpose of curing or correcting any ambiguity or defective or inconsistent provisions or clerical omissions or mistakes or manifest errors contained herein or in any deed or indenture supplemental or ancillary hereto, provided that in the opinion of the Trustee the rights of the Trustee and of the Debentureholders are in no way prejudiced thereby. ARTICLE 14 EXECUTION AND FORMAL DATE 14.1 EXECUTION This Indenture may be simultaneously executed in several counterparts, each of which when so executed shall be deemed to be an original and such counterparts together shall constitute one and the same instrument. -53- 14.2 FORMAL DATE For the purpose of convenience this Indenture may be referred to as bearing formal date of July 31, 1996, irrespective of the actual date of execution hereof. IN WITNESS WHEREOF the parties hereto have executed these presents under their respective corporate seals and the hands of their proper officers in that behalf. BATTERY ONE, INC. Per: /s/ illegible ---------------------------- Per: ---------------------------- MONTREAL TRUST COMPANY OF CANADA Per: /s/ [illegible] ---------------------------- Per: ---------------------------- EX-4.3C 4 SPECIMEN SPECIAL NOTE SCHEDULE "A" To the annexed Debenture Trust Indenture dated as of August 8, 1996 and made effective as of July 31, 1996 between Battery One, Inc. and Montreal Trust Company of Canada, as Trustee. (Form of Debenture) BATTERY ONE, INC. (Incorporated under the laws of Alberta) No. $ -------------- -------------------- $6,000,000 10% CONVERTIBLE FIXED AND FLOATING CHARGE SECURED DEBENTURE DUE JULY 31, 2001 Battery One, Inc. (hereinafter referred to as the "Corporation") for value received hereby promises to pay to_____________________________________, the registered holder hereof on or before July 31, 2001, or on such earlier date as the principal amount hereof may become due in accordance with the provisions of the Indenture (as hereinafter defined), on presentation and surrender of this Debenture, the sum of _______________________ ($____________________) Dollars in lawful money of Canada, together with such further amount, if any, as may be payable in accordance with the provisions of the Indenture. Interest shall be payable on the outstanding balance of the principal amount of this Debenture at a rate of ten (10%) percent per annum and payable after as well as before maturity, default and judgment with interest payable on overdue interest at the same rate. The Corporation will pay interest semi-annually on the last day of each calendar month of such half year during the term of this Debenture (June 30 and December 31), from the date of execution of this certificate, with the first payment of interest to commence on December 31, 1996. This Debenture is one of a series of $6,000,000 10% Convertible Fixed and Floating Charge Secured Debentures (herein referred to as the "Debentures") in the maximum aggregate principal amount of six million ($6,000,000) dollars in lawful money of Canada issued under an Indenture (herein referred to as the "Indenture") dated as of August 8, 1996 and made effective as of July 31, 1996 and made between the Corporation and Montreal Trust Company of Canada (the "Trustee"), as trustee, to which Indenture and all instruments supplemental thereto or in implementation thereof reference is hereby made for a description of the rights of the holders of the said Debentures, of the Corporation and of the Trustee and of the terms and conditions upon which the Debentures are issued and held, all to the same effect as if the provisions of the Indenture and such instruments supplemental thereto or in implementation thereof were herein set forth, to all of which provisions the holder of this Debenture, by acceptance hereof, assents. -2- The Debentures are issuable as fully registered Debentures in denominations of one thousand ($1,000) dollars and any integral multiples of one thousand ($1,000) dollars. The Debentures of any authorized denomination may be exchanged, as provided in the Indenture, for Debentures of an equal aggregate principal amount in any other authorized denomination or denominations. The principal hereof may also become or be declared due before stated maturity on the conditions, in the manner, with the effect and at the time set forth in the Indenture. This Debenture may be converted into Common Shares of the Corporation at the option of the Holder, on the terms and conditions set out in the Indenture. The Indenture contains provisions for the holding of meetings of Debentureholders and rendering resolutions passed at such meetings and instruments in writing signed by the holders of a specified majority of the Debentures outstanding binding upon all Debentureholders, subject to the provisions of the Indenture. This Debenture may only be transferred upon compliance with the conditions prescribed in the Indenture, on the registers to be kept at the office of the Trustee in the City of Calgary and at such other place or places, if any, as the Corporation with the approval of the Trustee may designate, by the registered holder hereof or his executors or administrators or other legal representatives or his or their attorney duly appointed by an instrument in writing in form and execution satisfactory to the Trustee, and upon compliance with such reasonable requirements as the Trustee may prescribe. This Debenture shall not become obligatory for any purpose until it shall have been certified by the Trustee under the Indenture. THIS DEBENTURE IS SUBJECT TO RESALE RESTRICTIONS AND MAY NOT BE SOLD OR OTHERWISE TRADED OR TRANSFERRED EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF APPLICABLE SECURITIES LEGISLATION. COMPLIANCE WITH THE SECURITIES LAWS OF ANY JURISDICTION TO WHICH THE DEBENTUREHOLDER OR TRANSFEREE IS SUBJECT IS THE RESPONSIBILITY OF THE DEBENTUREHOLDER OR ITS TRANSFEREE. IN WITNESS WHEREOF the Corporation has caused its corporate seal to be hereunto affixed and this Debenture to be signed by its proper officers in that behalf as of August 8, 1996. BATTERY ONE, INC. Per: ----------------------------------- Per: ----------------------------------- -3- (FORM OF TRUSTEE'S CERTIFICATE) This Debenture is one of the $6,000,000 10% Convertible Fixed and Floating Charge Secured Debentures referred to in the Indenture within mentioned. MONTREAL TRUST COMPANY OF CANADA Per: ----------------------------------- TRANSFER FORM FOR VALUE RECEIVED the undersigned sells, assigns and transfers unto: ---------------------------------- (Print name of assignee) ---------------------------------- (Print address of assignee) ---------------------------------- ---------------------------------- the within Debenture of Battery One, Inc. and hereby irrevocably constitutes and appoints -------------------------------- Attorney to transfer the said Debenture on the registers of the Corporation, with full power of substitution in the premises. DATED: ------------------------- - ----------------------- -------------------------- (SIGNATURE GUARANTEED) (SIGNATURE OF TRANSFEROR) The signature of the registered holder of the within Debenture to the foregoing assignment must be guaranteed by a chartered bank, by a trust company or by a member firm of a Canadian Stock Exchange. TRANSFER AGENT Montreal Trust Company of Canada Suite 600, 530 - 8th Avenue S.W. Calgary, Alberta T2P 3S8 BATTERY ONE, INC. CONVERSION FORM TO: BATTERY ONE, INC. The undersigned registered holder of the within Debenture hereby irrevocably elects to convert said Debenture (or $________________ principal amount thereof*) into Common Shares of Battery One, Inc. in accordance with the terms of the Indenture referred to in said Debenture and directs that the Common Shares issuable and deliverable upon the conversion be issued and delivered to the person indicated below. (If Common Shares are to be issued in the name of a person other than the holder, all requisite transfer taxes must be tendered by the undersigned.) * If less than the full principal amount of the within Debenture is to be converted, indicate in the space provided the principal amount (which must be $10,000 or integral multiples thereof) to be converted. - --------------------- --------------------------------------------------- SIGNATURE GUARANTEED (SIGNATURE OF REGISTERED HOLDER) If shares are to be issued in the name of a person other than the holder, the signature must be guaranteed by a chartered bank, by a trust company, or by a member firm of a Canadian Stock Exchange. Name: -------------------------------------- ------------------------------------------- (Address) (City and Province) (Print name in which Common Shares issued on conversion are to be issued, delivered and registered) TRANSFER AGENT Montreal Trust Company of Canada Suite 600, 530 - 8th Avenue S.W. Calgary, Alberta T2P 3S8 EX-3.1 5 AMENDED ARTICLES OF INCORPORATION CORPORATE ACCESS NUMBER 20358149 [logo] BUSINESS CORPORATIONS ACT CERTIFICATE OF AMENDMENT POWER PLUS CORPORATION AMENDED ITS ARTICLES ON AUGUST 1, 1996. /s/ [illegible] [seal] ---------------------------------- Registrar of Corporations BUSINESS CORPORATIONS ACT FORM 4 (SECTION 27 OR 171) ALBERTA CONSUMER AND CORPORATE AFFAIRS ARTICLES OF AMENDMENT - ------------------------------------------------------------------------------- 1. NAME OF CORPORATION: 2. CORPORATE ACCESS NUMBER: BATTERY ONE, INC. 20358149 - ------------------------------------------------------------------------------- 3. THE ARTICLES OF THE ABOVE-NAMED CORPORATION ARE AMENDED IN ACCORDANCE WITH THE BUSINESS CORPORATION ACT AS FOLLOWS: (1) Pursuant to Section 167(1) of the BUSINESS CORPORATIONS ACT (Alberta), Item 1 is hereby amended by changing the name of the Corporation to "Power Plus Corporation". (2) Pursuant to Section 36(1) of the BUSINESS CORPORATIONS ACT (Alberta), the stated capital of the Corporation is hereby reduced by deducting from the stated capital account from the common shares of the Corporation an amount equal to $26,670,824. Item 2 (3) Pursuant to Section 167(1) of the BUSINESS CORPORATIONS ACT (Alberta), Item 6 is hereby amended by the addition of the provisions as set forth in Schedule "A" attached hereto and made a part hereof. - ------------------------------------------------------------------------------- 4. DATE SIGNATURE TITLE July 25, 1996 /s/ [illegible] President - ------------------------------------------------------------------------------- FOR DEPARTMENTAL USE ONLY FILED SCHEDULE "A" ATTACHED TO AND FORMING PART OF THE ARTICLES OF AMENDMENT OF BATTERY ONE, INC. DATED JULY 25, 1996 The following provisions apply to the the Corporation: (I) ROTATING BOARD (A) As used in this paragraph (1), the term "whole board of directors" means the total number of directors which the Corporation would have if there were no vacancies. (B) The board of directors shall be divided into 3 classes, as nearly equal in number as the then total number of directors constituting the whole board of directors permits, with the term of office of one class expiring at the annual meeting of shareholders of each year. (C) At the annual meeting of shareholders held in 1996 directors of the first class shall be elected to hold office for a term expiring at the next succeeding annual meeting of shareholders, directors of the second class shall be elected to hold office for a term expiring at the second succeeding annual meeting of shareholders and directors of the third class shall be elected to hold office for a term expiring at the third succeeding annual meeting of shareholders. (D) At each annual meeting of shareholders the successors to the class of directors whose term shall then expire shall be elected to hold office for a term expiring at the third succeeding annual meeting of shareholders. (II) VACANCIES (A) A quorum of the directors may appoint a person to fill any vacancy among the directors except a vacancy (1) resulting from an increase in the number of minimum number of directors, (2) resulting from a failure by the shareholders to elect the number of minimum number of directors required by the articles, or (3) which is filed by the shareholders as provided in section 4 of this paragraph (1). (B) A director elected or appointed to fill a vacancy among the directors shall hold office for the unexpired term of his predecessor. - 2 - (III) REMOVAL OF DIRECTORS (A) The shareholders may only remove a director from office by ordinary resolution at a special meeting of shareholders at which the holders of 70% or more of the outstanding shares in the capital of the Corporation entitled to vote generally for the election of directors are present in person or represented by proxy. (B) No director may be removed from office by an ordinary resolution of shareholders at a general or special meeting of shareholders at which at the time time the vote on the ordinary resolution takes place the holders of 70% or more of the outstanding shares in the capital of the Corporation entitled to vote generally in the election of directors are not present in person or represented by proxy. (C) Where a director is removed from office in accordance with this section, the shareholders may by ordinary revolution at such special meeting elect a person to fill the vacancy created by the removal of such director, failing which it may be filled by the directors. (D) A resolution to remove a director from office may not be made at any meeting of shareholders unless prior notice in writing of the resolution has been given to the Corporation, delivered or mailed by first-class mail, postage prepaid, and received by the Secretary of the Corporation not less than 14 days nor more than 50 days prior to such meeting of shareholders. (IV) NOMINATIONS FOR THE ELECTION OF DIRECTORS (A) Nominations for the election of directors may be made by the board of directors or by any shareholder entitled to vote for the election of directors. (B) Such nominations must be made by notice in writing to the Corporation, delivered or mailed by first-class mail, postage prepaid, and received by the Secretary not less than 14 days nor more than 50 days prior to any meeting of the shareholders called for the election of directors. (C) Each notice under this subparagraph 4 shall set forth (1) the name, age, business address and residence address of each nominee proposed in such notice, (2) the principal occupation or employment of such nominee for the preceding 5 years, (3) the number of shares in the capital of the Corporation which are beneficially owned by such nominee, and (4) a declaration by each such nominator and nominee that such nominee has not been found by a court in Canada or elsewhere to be of unsound mind and does not have the status of bankrupt. - 3 - (D) The Chairman of the meeting may, in his sole discretion, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. (V) AMENDMENT OF ARTICLE 6 AND BY-LAW NO. 3 (A) Notwithstanding any other provisions of the Corporation's articles or by-laws (and notwithstanding the fact that some lesser percentage may be specified by law, the Corporation's articles or by-laws), the affirmative vote of the holders of 70% or more of the outstanding shares in the capital of the Corporation entitled to vote shall be required to amend, alter, change or repeal this Article 6 of the Corporation's articles as in effect upon filing of the Articles of Amendment and receipt of the Certificate of Amendment under the BUSINESS CORPORATIONS ACT (Alberta), in respect hereto or By-law No. 3 of the Corporation's by-laws. EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM POWER PLUS CORPORATION FOR THE 1997 FISCAL YEAR ENDED 31 JANUARY 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. CANADIAN 12-MOS JAN-31-1997 FEB-01-1996 JAN-31-1997 1.37 4,341,243 0 202,319 0 1,809,529 6,748,940 2,671,310 19,153 11,043,854 2,715,813 4,740,000 0 0 7,398,300 1,400,000 11,043,854 4,080,598 4,080,598 2,389,115 2,389,115 6,854,623 0 391,100 (5,687,427) 0 (5,687,427) 0 0 0 (5,687,427) ($2.54) ($2.54) COMMON SHARES WERE SUBJECT TO REVERSE-SPLIT OF 1 FOR 20 EFFECTIVE 1 NOV. 1996. STATED CAPITAL WAS REDUCED BY $26,670,825. AMOUNT OF EQUITY VALUE ARISING FROM CONVERTIBLE FEATURE IN L-T DEBT. FACE AMOUNT IS $6 MILLION - SEE (F3).
EX-99 7 LETTER TO SHAREHOLDERS FROM ANNUAL REPORT REPORT TO SHAREHOLDERS: The reorganizational challenges of Fiscal 1997 which was completed January 31st are behind us. The Company's operations are successfully re-positioned as POWER PLUS CORPORATION, and our unique and exciting POWERFUL STUFF venture is launched. We are pleased to report that 55 new POWERFUL STUFF RETAIL STORES are now open in North America. The initial 51 locations were opened primarily during the last quarter of Fiscal 1997, exceeding the planned target for the year of 40 stores. Although the time during which these stores were fully operational was limited, very encouraging annual sales of $4.1 million were achieved in that short period. The Company's audited Consolidated Financial Statements for Fiscal 1997 are incorporated as part of this Annual Report to shareholders, and the unaudited Fiscal 1998 First Quarter Report for the three-month period ended April 30, 1997 prepared by management is separately enclosed. (ALL DOLLAR AMOUNTS ARE EXPRESSED IN CANADIAN DOLLARS UNLESS OTHERWISE DENOTED.) POWERFUL STUFF'S NICHE POWERFUL STUFF is a new specialty retailing concept launched through Power Plus Corporation. Power Plus' mission is TO BE THE FIRST TO OFFER THE LATEST IN PORTABLE ELECTRONIC SOLUTIONS FOR PERSONAL COMMUNICATION AND ENTERTAINMENT NEEDS -- PRODUCTS AND SERVICES RESPONSIVE TO CONSUMER DEMAND FOR PERSONAL FREEDOM WHILE STAYING CONNECTED. With Power Plus' Corporate Office established in Toronto, Canada, and its North American Operations Office in Sarasota, Florida, the Company is developing a broad network of corporate-owned POWERFUL STUFF stores across North America. This is POWERFUL STUFF's branded distribution channel, focused on portable lifestyle communications, wearable fashion electronics and palm top business technology, to meet the expanding demand for wireless communication products and services (beepers/pagers, cellular phones, Personal Communications Systems (PCS) and related service contracts), together with portable electronics (the latest in hand-held electronic communications, entertainment, business and lifestyle products). Power Plus has combined these distinct merchandising segments into a single retail store -- POWERFUL STUFF! The pagers/beepers and cell phones featured at POWERFUL STUFF stores are a source of significant per transaction revenue, contributing additional strong secondary margins through accessory and airtime sales plus activation fees, and generating recurring revenues from customer airtime and renewals. The fashion electronics and palm top business technology segments of the business also contribute complementary revenues. With approximately 85% of the Company's stores targeted for the US, the Company's POWERFUL CONNECTIONS division will be a major reseller of wireless pager communications services in North America through POWERFUL STUFF stores. Resellers buy wireless services from carriers at a deep discount and provide a high volume of new customers through their own distribution channel. This represents significant recurring income potential for the company -- Power Plus' airtime royalty income stream. Page 1 NEW GENERATION POWERFUL STUFF STORE In partnership with the award-winning North American retail design group, Michel Dubuc Concept, Power Plus has created its new generation store which puts a bold and unique twist on the traditional electronics niche. POWERFUL STUFF stores combine design elements which have mass appeal across age, gender and ethnic boundaries, addressing today's retailers' need to ensure market longevity and flexibility. From the elliptical lines encircling the brand name and the bold lifestyle posters, to the graphic computer circuit boards on the walls, this futuristic hi-tech design with its rich colors and textures has redefined what it means to sell electronic products. By bringing a fashion dimension to the store design, POWERFUL STUFF has created a new portable electronic lifestyle niche in the marketplace. This is a store that doesn't just grab the attention of today's customers, but one that genuinely appeals to their emotions, senses and mind. POWERFUL STUFF stores are not only dramatic but are fun places to go. Unlike some novelty stores, the design doesn't engulf the product but brings it to life. All of the palm-top products are presented in 3 easy to shop lifestyle concepts within the store: FUN TECH -- presented on the whimsical high tech computer graphic wall; COMMUNICATIONS TECH -- presented against a colorful street map illustrating the prominence of communications in our lives; and BUSINESS TECH - -- presented in sleek, energetic, and futuristic cases for the discerning and hurried business customer. POWERFUL STUFF stores grasp the basic premise of retail mass appeal by creating a compelling design that humanizes technology, thereby connecting with consumers again and again because we understand their purchase will have more memorable appeal, and will take on more significance when it is purchased at a POWERFUL STUFF store. POWERFUL STUFF'S PLAN 2000 POWER PLUS is in the second year of implementing its 5-Year Business Plan -- PLAN 2000 -- the blueprint for the Company's business and operating strategy for the future, positioning POWERFUL STUFF as: THE RETAIL LEADER IN INNOVATIVE PORTABLE LIFESTYLE COMMUNICATION AND ENTERTAINMENT TECHNOLOGY. In establishing its distinctive retail identity. POWERFUL STUFF is the FIRST in the retail marketplace to capture the lucrative and untapped ELECTRONICS LIFESTYLE youth market...the 15-25 year olds who define the trends and want the neatest, coolest, hottest stuff. POWERFUL STUFF's marketing strategy is to position stores primarily in major regional malls, in sync with where the primary core customer, the 15-25 year old, and the secondary customer, the 25-30 year old, spend their time and disposable income. Our core customer group, teenagers, is growing nearly twice as fast as the general population and is expected to number some 30 million in the US by the year 2005 -- teens hanging out in malls and each spending, on average, $3,000 a year. Teens make nearly 40% more trips to the malls than other shoppers, spend more time in malls than other age groups, and spend an average of $38.55 per trip to the mall. Page 2 PLAN 2000 forecasts 1000+ compact POWERFUL STUFF stores, of which approximately 60% are planned to be kiosks averaging 150 sq. ft., with the remaining 40% to be inline stores averaging 500 sq. ft. With the average store of 300 sq. ft. initially projected at annualized sales of $400,000, Power Plus' PLAN 2000 anticipates the business can grow by the 5th year to over the 1000 store threshold, representing only some 300,000 sq. ft. in the aggregate under management, and producing $500+ million in annual sales, generating substantial after-tax profit. In addition to the 55 POWERFUL STUFF stores currently open, the Company has new locations planned for this year for the US in Michigan, Ohio, Missouri, Oregon and Washington, as well as Alabama, Florida, North Carolina and Pennsylvania, and for Canada in Ontario, Alberta and British Columbia. These planned store openings meet the Company's revised goal to be +125 POWERFUL STUFF stores open by this November for the strategic holiday season. For the final three years of PLAN 2000, approximately 295 additional stores are called for in each of 1998, 1999 and 2000 to meet the goal of 1000+ stores. The Company's rollout plan is founded in the clustering of POWERFUL STUFF stores in geographic markets, developing District marketing clusters within Regions. At the maturity of PLAN 2000, the Company expects to be throughout 7 North American Regions -- the Southeast, Mid-Atlantic, Northeast, North Central, Southwest and South Central Regions. By the year 2000, the typical Region is planned to be 160 stores comprised of an average of 8 District clusters at 20 stores per District. A typical District will open with a minimum of 5 stores and grow to 20. A District Manager -- a retailing expert responsible for a PROFIT CENTER that may produce more than $7 million in annual sales -- can then be responsible for the growing operations and performance of between 5 and 20 stores. Clustering stores within media areas also creates a viable opportunity to advertise effectively and economically (see Appendix 1 summarizing PLAN 2000's District clustering and Regional rollout program). BUILDING FOR POWERFUL STUFF'S FUTURE To achieve PLAN 2000, a proven senior management team, experienced in profitable multi-unit operations, has been recruited. These are professionals who have been there and who have done it before (see Appendix 2 entitled: "Management Profiles"). Also, to facilitate and support effective management, the Company is implementing an advanced inventory, transaction processing and information management system to empower employees and serve customers, as well as facilitating efficient and effective management of the Company. Page 3 The biggest challenge, however, now facing the Company in its drive to achieve its goals and objectives is in the timing and availability of financing. When 125 POWERFUL STUFF stores are opened and operating to Plan, the Company can expect to attain critical mass and break even on an annualized basis. Until then, the Company remains dependent upon the raising of external capital -- and when the timing and availability of financing deviates materially from the assumptions in PLAN 2000, the overall business and sales are impacted and adjustments must be made. Accordingly, management must be flexible and act responsibly during this period, and be responsive to those matters which it controls, including the pace and timing of the rollout of stores and its commitments to merchandise inventory. The Company's original Financing Plan forming part of its 1996 Reorganization Plan, and incorporated in PLAN 2000, provided the initial framework to raise up to $42 million in an orderly manner as needed over the first three years of the Plan. During the first year, 1996, $15.4 million was received as expected, but later than planned. This year, faced with unforeseen adverse junior capital markets, the Company has encountered difficulty raising all of the capital it had forecasted on the time lines projected. After adjusting the rollout of stores as required, management modified the Financing Plan. On the basis of this revised Plan, the structure is now in place to raise up to an additional $33.7 million over the next two years as follows:
$-MILLIONS ---------- * 1996 Equity Financing Class A Warrants @ $2.00 $ 5.0 September '97 * 1996 Financing Class B Warrants @ $2.00 $ 5.0 September '97 * 1996 Financing Class AA Warrants @ $2.50 $ 6.2 March '98 * 1996 Financing Class BB Warrants @ $2.50 $ 6.1 March '98 * 1997 Additional Convertible Debt @ $2.50 $ 5.0 August '97 * 1997 Equity Financing Common Shares @ $1.75 $ 3.0 August '97 * 1997 Equity Financing Purchase Options @ $2.00 $ 3.4 August '98 ----- Capital Available Up To $33.7 ----- -----
For further particulars on the Financing Plan and details of its impact on the Company's share capitalization, see Note 8 to Fiscal 1997's audited Consolidated Financial Statements which follow. Subject to the availability of these funds and the timing of their receipt, management estimates that the Company will be able to finance its future growth from internally generated cashflow at approximately the 600 store threshold, making the Company self-sustaining by the end of Fiscal 1999 according to Plan. Page 4 Having arrived in North America, POWERFUL STUFF is distinctively conceived to change the face of this specialty marketplace and is strategically poised to capitalize on this burgeoning retail niche -- a niche benefiting from the dynamic growth in and demand for the convenience and independence of personal portable lifestyle communications products and the individuality of fashion electronics and palm top technology. Concentrating on reality and deliverables, management is focused and working diligently to achieve PLAN 2000 in the long term. The ongoing support of the Company's shareholders is essential and appreciated, and your input is invited. Please feel free to call us with any of your thoughts and ideas, toll-free in North America at 1-800-POWERED (769-3733). On behalf of the Board of Directors J. Douglas Elliott, Chairman July 28, 1997 Page 5 -----END PRIVACY-ENHANCED MESSAGE-----