-----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, BTNgSp+8lSBhEdtuyJpBZ4s72WvQRI3EX8i+R+nE590MIQF+3M4eNzM8RI+ri61r nJa1ZJ7ayJnsjg+3VN9EVw== 0001005150-03-001801.txt : 20031117 0001005150-03-001801.hdr.sgml : 20031117 20031117160207 ACCESSION NUMBER: 0001005150-03-001801 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031117 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN NATURAL ENERGY CORP CENTRAL INDEX KEY: 0000870732 STANDARD INDUSTRIAL CLASSIFICATION: OIL AND GAS FIELD EXPLORATION SERVICES [1382] IRS NUMBER: 731605215 STATE OF INCORPORATION: OK FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-18956 FILM NUMBER: 031008121 BUSINESS ADDRESS: STREET 1: 7030 SOUTH YALE STREET 2: SUITE 404 CITY: TULSA STATE: OK ZIP: 74136 BUSINESS PHONE: 9184811440 MAIL ADDRESS: STREET 1: 7030 SOUTH YALE STREET 2: SUITE 404 CITY: TULSA STATE: OK ZIP: 74136 FORMER COMPANY: FORMER CONFORMED NAME: ALN RESOURCES CORPORATION DATE OF NAME CHANGE: 19600201 10QSB 1 form10qsb.txt FORM 10QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) _X_ Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2003; or ___ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ____________ to ____________. Commission File Number 0-18596 AMERICAN NATURAL ENERGY CORPORATION ------------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) OKLAHOMA 73-1605215 ------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S employer incorporation of organization) identification no.) 7030 SOUTH YALE, SUITE 404, TULSA, OKLAHOMA 74136 ------------------------------------------------- (Address of principal executive offices, zip code) (918) 481-1440 ------------------------------------------------- (Issuer's Telephone Number, Including Area Code) Check 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 issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X| APPLICABLE ONLY TO CORPORATE ISSUERS: As of November 12, 2003, 26,054,546 shares of the Registrant's Common Stock, $0.01 par value, were outstanding. AMERICAN NATURAL ENERGY CORPORATION QUARTERLY REPORT ON FORM 10-QSB INDEX PART I - FINANCIAL INFORMATION
Page ---- Item 1. Financial Statements (unaudited) Condensed Consolidated Balance Sheets - September 30, 2003 and December 31, 2002 3 Condensed Consolidated Statements of Operations - Three Months and Nine Months Ended September 30, 2003 and September 30, 2002 4 Condensed Consolidated Statements of Cash Flows - Three Months and Nine Months Ended September 30, 2003 and September 30, 2002 5 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis or Plan of 16 Operations Item 3. Controls and Procedures 23 PART II - OTHER INFORMATION Item 1. Legal Proceedings 23 Item 2. Changes In Securities 23 Item 5. Other Information 24 Item 6. Exhibits and Reports on Form 8-K 31
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AMERICAN NATURAL ENERGY CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, 2003 DECEMBER 31, 2002 $ $ ------------------ ------------------ ASSETS Current assets: Cash and cash equivalents 55,743 86,295 Accounts receivable - net 539,818 357,127 Prepaid expenses 106,021 28,291 Marketable securities -- 192,947 Oil inventory 15,140 53,228 ----------- ----------- Total current assets 716,722 717,888 Proved oil and natural gas properties, net of accumulated depletion, depreciation, amortization and impairment of $7,650,183 and $6,960,678 2,658,047 1,089,200 Unproved oil and natural gas properties 3,283,274 2,710,994 Equipment and other fixed assets, net of accumulated depreciation of $171,684 and $76,706 662,503 742,672 Deferred expenses 11,035 -- ----------- ----------- Total assets 7,331,581 5,260,754 =========== =========== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable and accrued liabilities 4,229,357 1,894,267 Accrued interest 82,004 314,275 Notes payable -- 500,000 Current portion of long-term debt -- 3,961,887 ----------- ----------- Total current liabilities 4,311,361 6,670,429 Long-term debt (Note 6) 4,412,440 -- Production payments (Note 7) 1,076,268 -- Asset retirement obligation (Note 5) 1,398,283 -- ----------- ----------- 6,886,991 -- ----------- ----------- Total liabilities 11,198,352 6,670,429 ----------- ----------- Stockholders' deficit: Common stock Authorized - 100,000,000 shares with par value of $0.01 Issued - 26,054,546 (2002 - 25,199,846) 260,545 251,998 Additional paid-in capital 7,758,331 7,427,503 Accumulated deficit, since January 1, 2002 (in conjunction with the quasi- Reorganization stated capital was reduced by an accumulated deficit of $(2,015,495) (12,659,344) (8,730,517) Accumulated other comprehensive income (loss) 773,697 (358,659) ----------- ----------- Total stockholders' (deficit) (3,866,771) (1,409,675) ----------- ----------- Total liabilities and stockholders' (deficit) 7,331,581 5,260,754 =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 AMERICAN NATURAL ENERGY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) For the three-month and nine-month periods ended September 30, 2003 and September 30, 2002
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- -------------------------- 2003 2002 2003 2002 $ $ $ $ ----------- ----------- ----------- ----------- Revenues: Oil and gas sales 620,895 230,760 1,334,839 233,591 Operations income 7,586 -- 16,937 -- Interest and other income -- 680 1,408 167,273 ----------- ----------- ----------- ----------- 628,481 231,440 1,353,184 400,864 ----------- ----------- ----------- ----------- Expenses: Lease operating expense 66,445 161,497 382,801 195,678 Production taxes 27,336 6,184 55,219 6,184 Depletion, depreciation and amortization 265,986 121,916 773,629 130,821 General and administrative 633,535 361,857 1,498,185 1,093,777 Foreign exchange (gain) loss (45,126) (339,726) 1,294,395 (58,502) Interest 124,133 11,566 293,046 14,574 Impairment of oil and gas properties -- 281,449 152,064 281,449 Gain on sale of marketable securities -- -- (172,788) (284,018) Loss on sale of fixed assets -- -- -- 3,280 ----------- ----------- ----------- ----------- Total expenses 1,072,309 604,743 4,276,551 1,383,243 ----------- ----------- ----------- ----------- Loss before cumulative effect of accounting change (443,828) (373,303) (2,923,367) (982,379) ----------- ----------- ----------- ----------- Cumulative effect of accounting change (Note 5) -- -- (1,005,460) -- ----------- ----------- ----------- ----------- Net loss (443,828) (373,303) (3,928,827) (982,379) ----------- ----------- ----------- ----------- Other comprehensive income (loss): Unrealized gain (loss) on marketable securities -- (51,771) 13,870 (313,092) Foreign exchange translation (45,101) (341,323) 1,291,274 (98,833) Reclassification adjustment for gain on sale of marketable securities included in net income -- -- (172,788) (212,933) ----------- ----------- ----------- ----------- Other comprehensive income (loss) (45,101) (393,094) 1,132,356 (624,858) ----------- ----------- ----------- ----------- Comprehensive loss (488,929) (766,397) (2,796,471) (1,607,237) ----------- ----------- ----------- ----------- Basic and diluted loss per share before cumulative effect of accounting change (0.02) (0.01) (0.11) (0.04) ----------- ----------- ----------- ----------- Cumulative effect of accounting change -- -- (0.04) -- ----------- ----------- ----------- ----------- Net loss per share (0.02) (0.01) (0.15) (0.04) ----------- ----------- ----------- ----------- Weighted average number of shares outstanding - basic and diluted 26,054,546 25,199,846 25,690,007 25,192,097 ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 AMERICAN NATURAL ENERGY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the three-month and nine-month periods ended September 30, 2003 and September 30, 2002
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------ ------------------------ 2003 2002 2003 2002 $ $ $ $ ---------- ---------- ---------- ---------- Cash flows from operating activities: Income (loss) for the period (443,828) (373,303) (3,928,827) (982,379) Non cash items: Depreciation, depletion and amortization 265,986 121,916 773,629 130,821 Foreign exchange (gain) loss (45,126) (339,726) 1,294,395 (58,502) Gain on sale of marketable securities -- -- (172,788) (284,018) Loss on sale of fixed asset -- -- -- 3,280 Impairment of oil and gas properties -- 281,449 152,064 281,449 Cumulative effect of accounting change -- -- 1,005,460 -- Non cash compensation expense -- -- 39,375 23,625 Changes in assets and liabilities: Accounts receivables 664,944 (167,471) (182,691) 37,596 Oil inventory 6,749 -- 5,012 -- Prepaid expenses and other assets 24,937 20,126 71,981 (12,159) Accounts payable, accrued liabilities and interest (133,056) 495,412 2,298,764 1,663,649 ---------- ---------- ---------- ---------- Net cash provided by (used in) operating activities 340,606 38,403 1,356,374 803,362 ---------- ---------- ---------- ---------- Cash flows from investing activities: Proceeds from sale of marketable securities -- -- 208,051 2,439,905 Proceeds from the sale of oil and gas properties -- -- 461,544 -- Purchase of marketable securities -- -- -- (163,600) Purchase and development of oil and gas properties (38,635) (580,411) (2,774,545) (3,693,298) Purchase of fixed assets -- (44,015) (14,809) (922,818) ---------- ---------- ---------- ---------- Net cash provided by (used in) investing activities (38,635) (624,426) (2,119,759) (2,339,811) ---------- ---------- ---------- ---------- Cash flows from financing activities: Issuance of notes payable -- 500,000 2,500,000 500,000 Payments of notes payable (141,674) -- (2,973,918) -- Production payment loan -- -- 1,538,456 -- Production payments (160,898) -- (327,350) -- Issuance of capital stock -- -- -- 11,719 ---------- ---------- ---------- ---------- Cash provided by financing activities (302,572) 500,000 737,188 511,719 Effect of exchange rate changes on cash 25 2,931 (4,355) (44,672) ---------- ---------- ---------- ---------- Increase (decrease) in cash and cash equivalents (576) (83,092) (30,552) (1,069,402) Cash beginning of period 56,319 130,985 86,295 1,117,295 ---------- ---------- ---------- ---------- Cash end of period 55,743 47,893 55,743 47,893 ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 AMERICAN NATURAL ENERGY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED) For the three-month and nine-month periods ended September 30, 2003 and September 30, 2002
THREE MONTHS ENDED NINE MONTH ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2003 2002 2003 2002 $ $ $ $ ------- ------- ------- ------- Supplemental disclosures: Interest paid 101,961 11,566 243,357 14,574 Non cash operating activities Capitalized interest included in unproved properties 60,653 70,090 232,942 204,567 Non cash financing activities Common shares issued in conjunction with issuance of notes payable -- -- 300,000 -- Accounts payable refinanced as notes payable -- -- 203,823 -- Prepaid expenses financed -- -- 160,746 -- Accrued interest refinanced upon modification of debt -- -- 331,728 --
The accompanying notes are an integral part of these condensed consolidated financial statements. 6 AMERICAN NATURAL ENERGY CORPORATION Notes to Condensed Consolidated Financial Statements (Unaudited) September 30, 2003 and 2002 - ------------------------------------------------------------------------------- 1 SIGNIFICANT ACCOUNTING POLICIES The accounting policies and methods followed in preparing these unaudited condensed consolidated financial statements are those used by American Natural Energy Corporation (the "Company") as described in Note 1 of the notes to consolidated financial statements included in the Annual Report on Form 10-KSB. However, the unaudited consolidated financial statements for the three-month and nine-month periods ended September 30, 2003 and 2002 do not conform in all respects to the disclosure and information that is required for annual consolidated financial statements. These interim condensed consolidated financial statements should be read in conjunction with the most recent annual consolidated financial statements of the Company. In the opinion of management, all adjustments considered necessary for fair statement have been included in these interim condensed consolidated financial statements. Operating results for the three-month and nine-month periods ended September 30, 2003 are not indicative of the results that may be expected for the full year ending December 31, 2003. The Company has elected to follow APB No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its employee stock options. Under APB No. 25, compensation expense is recognized for the difference if any, on the date of the grant, between the estimated fair value of the Company's stock and the amount the employee must pay to acquire the stock. Compensation expense is recognized immediately for past services and rateably for future services over the option-vesting period. Compensation expense has been recognized for any grants to individuals who do not meet the definition of employee. The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation.
Three Months Ended, Nine Months Ended, September 30 September 30 2003 2002 2003 2002 $ $ $ $ ---------- ---------- ---------- ---------- Net loss as reported (443,828) (373,303) (3,928,827) (982,379) Pro forma compensation expense, net of tax (17,173) (64,252) (51,519) (192,755) ---------- ---------- ---------- ---------- Pro forma net loss (461,001) (437,555) (3,980,346) (1,175,134) ---------- ---------- ---------- ---------- Basic and diluted loss per share As reported (0.02) (0.01) (0.15) (0.04) Compensation expense, net of tax -- -- -- (0.01) ---------- ---------- ---------- ---------- Pro forma (0.02) (0.01) (0.15) (0.05) ---------- ---------- ---------- ----------
7 AMERICAN NATURAL ENERGY CORPORATION Notes to Condensed Consolidated Financial Statements (Unaudited) September 30, 2003 and 2002 - ------------------------------------------------------------------------------- For purposes of the pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period, which is two years. Because our stock options vest over two years and additional awards may be made each year, the above pro forma disclosures may not be representative of the effects on pro forma net income for future periods. The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with SFAS No. 123 and the conclusions reached by the Emerging Issues Task Force in Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services" (EITF 96-18). Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earlier of a performance commitment or completion of performance by the provider of goods or services as defined by EITF 96-18. 2 EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share is computed by dividing net income or loss (the numerator) by the weighted average number of shares outstanding during the period (the denominator). The computation of diluted earnings per share is the same as for basic earnings per share except the denominator is increased to include the weighted average additional number of shares that would have been outstanding if previously granted stock options had been exercised, unless they are anti-dilutive. The numerators and denominators used in calculating basic and diluted earnings per share were as follows:
Three Months Ended Nine Months Ended September 30, September 30, 2003 (1) 2002 (1) 2003 (2) 2002 (2) $ $ $ $ ---------- ---------- ---------- ---------- Numerator - net income (loss) before cumulative effect of accounting change Basic and diluted (443,828) (373,303) (2,923,367) (982,379) Cumulative effect of accounting change -- -- (1,005,460) -- ---------- ---------- ---------- ---------- Net income (loss) - basic and diluted (443,828) (373,303) (3,928,827) (982,379) ========== ========== ========== ========== Denominator - weighted average number of shares outstanding Basic and diluted 26,054,546 25,199,846 25,690,007 25,192,097
8 AMERICAN NATURAL ENERGY CORPORATION Notes to Condensed Consolidated Financial Statements (Unaudited) September 30, 2003 and 2002 - ------------------------------------------------------------------------------- ------------------- (1) The denominator excludes the effect of 1,550,000 and 1,750,000 outstanding potentially dilutive options and warrants, in 2003 and 2002 respectively, at a weighted average price of $0.33 per share due to the net loss. (2) The denominator excludes the effect of 1,550,000 and 1,950,000 outstanding potentially dilutive options and warrants, in 2003 and 2002 respectively, at a weighted average price of $0.33 per share due to the net loss. 3 REORGANIZATION On January 18, 2002, the shareholders of Gothic Resources, Inc. (Gothic) approved an arrangement under Section 192 of the Canada Business Corporation Act with its subsidiary, American Natural Energy Corporation (ANEC), whereby all of the Gothic shareholders exchanged their shares of common stock for shares of common stock of ANEC and Gothic became a subsidiary of ANEC. On that date, the shareholders also approved the reduction of the stated capital of Gothic by the amount of the accumulated deficit of $2,015,495. This transaction has been accounted for as a quasi-reorganization. Gothic may be deemed a predecessor of the Company. 4 RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 141, Business Combinations (FAS 141) and Statement of Financial Accounting Standards, No. 142, Goodwill and Intangible Assets (FAS 142) were issued by the Financial Accounting Standards Board (FASB) in June 2001 and became effective for us on July 1, 2001 and January 1, 2002, respectively. FAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Additionally, FAS 141 requires companies to disaggregate and report separately from goodwill certain intangible assets. FAS 142 establishes new guidelines for accounting for goodwill and other intangible assets. Under FAS 142, goodwill and certain other intangible assets are not amortized, but rather are reviewed annually for impairment. One interpretation being considered relative to these standards is that oil and gas mineral rights held under lease and other contractual arrangements representing the right to extract such reserves for both undeveloped and developed leaseholds should be classified separately from oil and gas properties, as intangible assets on our balance sheets. In addition, the disclosures required by FAS 141 and 142 relative to intangibles would be included in the notes to financial statements. Historically, we have included these oil and gas mineral rights held under lease and other contractual arrangements representing the right to extract such reserves as part of the oil and gas properties, even after FAS 141 and 142 became effective. As applied to companies like us that have adopted full cost accounting for oil and gas activities, we understand that this interpretation of FAS 141 and 142, as described above, would only affect our balance sheet classification of proved oil and gas leaseholds acquired after June 30, 2001 and our unproved oil and gas leaseholds. Our results of operations and cash flows would not be affected, since these oil and gas mineral rights held under lease and other contractual 9 AMERICAN NATURAL ENERGY CORPORATION Notes to Condensed Consolidated Financial Statements (Unaudited) September 30, 2003 and 2002 - ------------------------------------------------------------------------------- arrangements representing the right to extract such reserves would continue to be amortized in accordance with full cost accounting rules. At September 30, 2003 and December 31, 2002, we had undeveloped leaseholds of approximately $3.3 million and $2.7 million, respectively, that would be classified on our balance sheet as "intangible undeveloped leasehold" and developed leaseholds of an estimated net book value of $1.6 million and $830,000 at September 30, 2003 and December 31, 2002, respectively, that would be classified as "intangible developed leaseholds", if we applied the interpretation currently being considered. We will continue to classify our oil and gas mineral rights held under lease and other contractual rights representing the right to extract such reserves as tangible oil and gas properties until further guidance is provided. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS 146 is effective for exit or disposal activities initiated after December 31, 2002. Adoption of this standard did not have any impact on our financial position or results of operations. In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (FAS 149). FAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This pronouncement is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after that date. The Company currently has no derivatives or hedging activities, therefore, the implementation of FAS 149 did not have any effect on our financial opposition, results of operations, or cash flows. In May 2003, the FASB issued Statement on Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity ("SFAS 150"). SFAS 150 establishes standards regarding the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. Certain provisions of SFAS 150 are effective for us starting in the quarter ended September 30, 2003. The application of SFAS 150 did not have any effect on our financial position, results of operations or cash flow. 5 ASSET RETIREMENT OBLIGATIONS Effective January 1, 2003, the Company adopted SFAS No. 143, Accounting for Asset Retirement Obligations. This statement applies to obligations associated with the retirement of tangible long-lived assets that result from the acquisition, construction and development of the assets. SFAS 143 requires that the fair value of a liability for a retirement obligation be recognized in the period in which the liability is incurred. For oil and gas properties, this is the period in which 10 AMERICAN NATURAL ENERGY CORPORATION Notes to Condensed Consolidated Financial Statements (Unaudited) September 30, 2003 and 2002 - ------------------------------------------------------------------------------- an oil or gas well is acquired or drilled. The asset retirement obligation is capitalized as part of the carrying amount of the asset at its discounted fair value. The liability is then accreted each period until the liability is settled or the asset is sold, at which time the liability is reversed and any gain or loss resulting from the settlement of the obligation is recorded. We identified and estimated all of our asset retirement obligations for tangible, long-lived assets as of January 1, 2003. These obligations were for plugging and abandonment costs for depleted oil and gas wells. Prior to the adoption of SFAS 143, we included an estimate of our asset retirement obligations related to our oil and gas properties in our calculation of oil and gas depreciation, depletion and amortization expense. Upon adoption of SFAS 143, we recorded the discounted fair value of our expected future obligations of $1.4 million and recorded an increase in unproved properties of $0.4 million. The cumulative effect of the change in accounting principles was a $1.0 million loss which was recorded in the condensed consolidated statement of operations for the quarter ended March 31, 2003. Had SFAS 143 been adopted as of January 1, 2002, the Company's net loss for the nine-month and three-month periods ended September 30, 2002 would have increased by approximately $88,000 and $18,000 and there would have been no effect on the reported earnings per share. The effect of SFAS 143 for the nine-month and three month periods ended September 30, 2003 was an increase in the net loss before cumulative effect of accounting change of approximately $108,000 and $36,000, respectively. The components of the change in our asset retirement obligations are shown below. Information for the quarters ended March 31, 2002, June 30, and September 30, 2002 is shown on a pro forma basis. For the Quarters Ended 2003 2002 $ $ ---------- ---------- Asset retirement obligations, January 1 1,435,460 1,292,538 Additions and revisions 9,385 -- Settlements and disposals (157,082) -- Accretion expense 36,732 34,337 ---------- ---------- Asset retirement obligations, March 31 1,324,495 1,326,875 Additions and revisions 2,386 -- Settlements and disposals -- -- Accretion expense 35,119 35,249 ---------- ---------- Asset retirement obligations, June 30 1,362,000 1,362,124 Additions and revisions -- -- Settlements and disposals -- -- Accretion expense 36,283 36,187 ---------- ---------- Asset retirement obligations, September 30 1,398,283 1,398,311 ---------- ---------- 11 AMERICAN NATURAL ENERGY CORPORATION Notes to Condensed Consolidated Financial Statements (Unaudited) September 30, 2003 and 2002 - ------------------------------------------------------------------------------- 6 NOTES PAYABLE In March 2003 the Company borrowed $2,500,000 from Quest Capital Corporation, as successor to Quest Investment Corporation (collectively "Quest") in the form of a note payable due October 31, 2003. Interest is payable monthly at an annual rate of 12% (effective rate 22.0%). The note is collateralized by a mortgage on all oil and gas properties of the Company. The Company also issued 688,000 shares of its stock to Quest as additional consideration. A director of the Company is also a director of Quest. Concurrent with the sale of Convertible Secured Debentures on October 21, 2003 the Company paid the Quest note in full and the Company received a release of collateral held by Quest (See Note 8). On March 12, 2003 the Company also entered into a refinancing transaction with Bank One whereby Bank One was paid $2,250,000 and the Company received a partial release of collateral held by Bank One resulting from the ANEC/Couba Reorganization Plan. Additionally, the Company entered into a note payable with Bank One for the remaining balances due pursuant to the Plan in the amount of $1,715,134. The note is due December 31, 2003 and bears interest at the Bank One prime rate plus 2%, currently 6.25%, payable quarterly. The note is collateralized by oil and gas assets of the Company and is subordinated to the Quest financing and net profits production payments owed to TransAtlantic Petroleum (USA) Corp (See Note 7). Concurrent with the sale of Convertible Secured Debentures on October 21, 2003 the Company paid the Bank One note in full and the Company received a release of collateral held by Bank One (See Note 8). The outstanding balance of the notes payable due to Quest and Bank One in the amount of $4.4 million, at September 30, 2003, refinanced in October 2003, with the proceeds of the Convertible Debentures, are classified as long-term debt in the condensed consolidated balance sheet as of September 30, 2003. 7 PRODUCTION PAYMENT FINANCING On March 12, 2003, we entered into a funding arrangement with TransAtlantic Petroleum (USA) Corp. ("TransAtlantic") whereby TransAtlantic agreed to advance to us up to $2.0 million, of which up to $1.8 million is to be used to fund our share of the drilling and completion costs for the four initial wells we drill in St. Charles Parish, Louisiana ("Subject Wells"). In exchange, TransAtlantic received a production payment payable out of 75% of the net revenues from the Subject Wells, and, upon repayment, a 10% working interest in such wells. In addition, TransAtlantic received a 10% interest in our Bayou Couba lease and our lease with the State of Louisiana ("Subject Leases"). Further, TransAtlantic has the right to acquire a 10% participation in any additional interests we acquire in the 23.138 square mile Bayou Couba salt dome development area, including any interests acquired through our area of mutual interest joint development agreement with ExxonMobil Corp. Our obligations to TransAtlantic are collateralized by a lien against our interest in the Subject Wells and their hydrocarbon production. At September 30, 2003 we had drawn a total of $2,000,000, including the $200,000 not specifically identified with the drilling of the Subject Wells. Imputed interest on the $2,000,000 amounted to $461,544, which was recorded as a discount on the production payment liability, with a corresponding reduction in the value of proved and unproved oil and natural gas properties, representing the sale of the 10% working interest in the Subject Leases and Subject Wells. The discount is accreted to interest expense, using the units of production method. As of 12 AMERICAN NATURAL ENERGY CORPORATION Notes to Condensed Consolidated Financial Statements (Unaudited) September 30, 2003 and 2002 - ------------------------------------------------------------------------------- September 30, 2003 the outstanding balance of the production payment loan was $1,369,986, of which $293,718 attributable to produced volumes is included in accounts payable and accrued liabilities. Concurrent with the sale of Convertible Secured Debentures on October 21, 2003 the Company paid the TransAtlantic production payment loan in full and the Company received a release of collateral held by TransAtlantic (See Note 8). A current director and a former director of the Company are current directors of TransAtlantic. Therefore, this transaction represents a related party transaction. Concurrent with the sale of Convertible Secured Debentures on October 21, 2003 the chairman of TransAtlantic was appointed to the board of directors of the Company (See Note 8). 8 SUBSEQUENT EVENT On October 21, 2003 and October 31, 2003 the Company completed financing transactions of US$11.695 million and US$305,000, respectively, by issuing Convertible Secured Debentures (the "Debentures"). The Debentures are repayable on September 30, 2005 with interest payable quarterly commencing December 31, 2003 at 8% per annum. The outstanding principal of the Debentures is convertible into common shares of the Company at any time prior to maturity at a conversion price of US$0.45 per share, subject to antidilution adjustment, and the Debentures are redeemable by the Company at any time after October 1, 2004 if the weighted price per share on the TSX Venture Exchange for a 20 consecutive trading day period prior to the date notice of redemption is given has exceeded 1662/3% of the conversion price. A finder's fee in the amount of US$360,000 was paid to Middlemarch Partners Limited of London, England in connection with the financing. The Company used approximately US$5.9 million of the proceeds of the financing for the repayment of the secured debt held by Quest Capital Corporation, Bank One and TransAtlantic Petroleum (USA) Corp. and approximately US$2.1 million of the proceeds for the payment of accounts payable and intends to use the balance primarily for exploration and development of its Bayou Couba oil and gas leases within its ExxonMobil Joint Development Project in St. Charles Parish, Louisiana. The Debentures are collateralized by substantially all of ANEC's assets. The Debentures and any common shares issued upon conversion of the Debentures will be subject to a statutory hold period of four months under applicable Canadian securities legislation and stock exchange policies. The offer and sale of the Debentures was not registered under the US Securities Act of 1933, as amended (the "Act"), and the Debentures and the shares issuable on conversion may not be offered and sold free of any restrictions on resale under the Act absent registration under that Act or an applicable exemption from the registration requirements. Concurrent with the financing, two additional directors were elected to the board of directors of the Company. One of the newly elected directors is the chairman of TransAtlantic. 9 LIQUIDITY AND CAPITAL RESOURCES The Company has sustained substantial losses in the first three quarters of 2003 and for the year 2002, totaling approximately $3.9 13 AMERICAN NATURAL ENERGY CORPORATION Notes to Condensed Consolidated Financial Statements (Unaudited) September 30, 2003 and 2002 - ------------------------------------------------------------------------------- million and $8.6 million, has a stockholders' deficit of $3.9 million and $1.4 million at September 30, 2003 and December 31, 2002, a working capital deficiency of approximately $3.6 million all of which lead to questions concerning the ability of the Company to meet its obligations as they come due. The Company also has a need for substantial funds to develop its oil and gas properties. The accompanying financial statements have been prepared on a going concern basis which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. As a result of the losses incurred and current negative working capital, there is no assurance that the carrying amounts of assets will be realized or that liabilities will be liquidated or settled for the amounts recorded. The ability of the Company to continue as a going concern is dependent upon adequate sources of capital and the ability to sustain positive results of operations and cash flows sufficient to continue to explore for and develop its oil and gas reserves. In the ordinary course of business, the Company makes substantial capital expenditures for the exploration and development of oil and natural gas reserves. Historically, the Company has financed its capital expenditures, debt service and working capital requirements with the proceeds of debt and private offering of its securities. Cash flow from operations is sensitive to the prices the Company receives for its oil and natural gas. A reduction in planned capital spending or an extended decline in oil and gas prices could result in less than anticipated cash flow from operations and an inability to sell more of its common stock or refinance its debt with current lenders or new lenders, which would likely have a further material adverse effect on the Company. The net proceeds of the Convertible Secured Debenture issuance, after the payment of various debt and payables obligations, are being used to fund the Company's exploration program on its ExxonMobil joint development area. To the extent additional funds are required to fully exploit and develop this area, it is management's plan to raise additional capital through the sale of its common stock, however, it currently has no firm commitment from any potential investors. 10 COMMITMENTS AND CONTINGENCIES As part of the purchase price of the assets acquired from Couba Operating Company pursuant to Second Amended Plan of Reorganization effective December 31, 2001, the Company agreed that the holders of unsecured claims aggregating approximately $4.9 million would receive payment of 100% of their allowed claim out of a net profits interest and overriding royalty in the production from existing wells on the Bayou Couba lease (as described below) and new wells drilled on an area of mutual interest covering an approximately 23.5 square mile area outside the area covered by the Bayou Couba lease. The net profits interest and overriding royalty provide that such creditors will be allocated 50% of the net profits from production from the workover of wells existing on December 31, 2001 on the Bayou Couba lease acreage, 15% of the net profits from production from the drilling after December 31, 2001 of new wells on the Bayou Couba lease acreage and 6% of the net profits from production from the drilling after December 31, 2001 of new wells on the area of mutual interest. The net profits interest and overriding royalty interest terminate upon repayment of the unsecured claims. As new wells are drilled the overriding royalty interest and net profits interest will reduce future revenues of the Company. 14 AMERICAN NATURAL ENERGY CORPORATION Notes to Condensed Consolidated Financial Statements (Unaudited) September 30, 2003 and 2002 - ------------------------------------------------------------------------------- Additionally, the Company agreed that, after repayment to it of 200% of all costs of bankruptcy, drilling, development and field operations from net revenues of the Bayou Couba lease and the area of mutual interest, the former holders of equity securities of Couba will be entitled to a reversionary interest in the wells in the Bayou Couba lease equal to 25% of the working interest obtained by the Company directly from Couba at the time of confirmation and as a result of the plan of reorganization of Couba. We are a defendant in a number of legal proceedings which we consider to be routine litigation that is incidental to our business. We do not expect to incur any material liability as a consequence of such litigation. 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION GENERAL We are engaged in the acquisition, development, exploitation and production of oil and natural gas. Our revenues and profitability can be expected to be dependent, to a significant extent, upon prevailing spot market prices for oil and natural gas. Additionally, our revenues and profitability can be expected to be dependent upon the quantities of oil and natural gas produced and sold. Prices for oil and natural gas are subject to wide fluctuations in response to changes in supply of and demand for oil and natural gas, market uncertainty and a variety of additional factors that are beyond our control. Such factors include political conditions, weather conditions, government regulations, the price and availability of alternative fuels and overall economic conditions. Prior to December 31, 2001, our principal activities, including those of our predecessor, Gothic Resources, Inc., involved very limited oil and natural gas exploration in the southern United States. We also invested in shares of other public oil and gas exploration companies resulting in material capital gains. Since December 31, 2001, we have engaged in several transactions which we believe will enhance our oil and natural gas development, exploitation and production activities and our ability to finance further activities. On December 31, 2001, we acquired the assets and capital stock of Couba Operating Company ("Couba"). Couba, organized in 1993, was primarily engaged in the production of oil from properties located in St. Charles Parish, Louisiana. Couba's principal acreage is the subject of a lease (the "Bayou Couba Lease") under which Couba owned a 72% working interest in 1,319.991 gross acres. There are 58 well bores of varying depths located on the property. In addition, the assets include a gathering system covering approximately 25 miles located on the Bayou Couba Lease and various production facilities, geological data, well logs and production information. The information includes 3-D seismic information completed in 1997. The seismic information relates to an area of approximately 23.5 square miles that includes the Bayou Couba lease, among other acreage. Production from the wells commenced in 1941 and only oil and non-commercial quantities of natural gas were produced. Natural gas has never been produced in commercial quantities, and all gas production wells from the original development of the property were plugged. On January 22, 2002, we completed a corporate reorganization which resulted in our domestication as a corporation into the U.S. from Canada. In February 2002, we leased 1,729 acres from the State of Louisiana giving us in excess of 3,000 acres under lease, all within the boundaries of the 3-D seismic data acquired as a part of the Couba transaction described above. In November 2002, we entered into a four-year joint development agreement with ExxonMobil Corp. relating to both our Couba properties and additional properties owned by ExxonMobil Corp. The agreement creates an area of mutual interest ("AMI") covering approximately 8,400 acres, all within the 23.5 square mile 3-D seismic area and calls for both parties to make available for development, leases and/or mineral interests each owns within the 16 AMI. Both parties may propose wells for drilling and the non-proposing party may elect whether or not to participate, with that election affecting only the proposed location. If both parties elect to participate in the proposed well, the interest in the well will be shared equally. Each party is responsible for its share of costs to develop the acreage within the AMI. Operations of the wells are at the election of the ExxonMobil Corp. but we anticipate that we will drill and operate most wells within the AMI. In March 2003, we assigned a 10% participation right in this AMI to Trans-Atlantic Petroleum Corp. in partial consideration for a $2.0 million financing. Our financial statements have been prepared on a going concern basis which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. We had a net loss of $3.9 million during the nine months ended September 30, 2003 and had a working capital deficiency of $3.6 million, and a shareholder deficit of $3.9 million as of that date. We have sustained substantial losses during the years ended December 31, 2002 and 2001, , and had negative cash flow from operations in each of 2002 and 2001, all of which lead to questions concerning our ability to meet our obligations as they come due. We also have a need for substantial funds to develop our oil and gas properties. We have financed our activities using private debts and equity financings and we have no line of credit or other financing agreement providing borrowing availability with a commercial lender. As a result of the losses incurred and current negative working capital and other matters described above, there is no assurance that the carrying amounts of our assets will be realized or that liabilities will be liquidated or settled for the amounts recorded. Our ability to continue as a going concern is dependent upon adequate sources of capital and the ability to sustain positive results of operations and cash flows sufficient to continue to explore for and develop our oil and gas reserves. See the discussion under the caption "How we financed our activities" The independent accountants' report on our financial statements as of and for the year ended December 31, 2002 includes an explanatory paragraph which states that we have sustained substantial losses, a shareholders' deficit, a working capital deficiency and negative cash flow from operations in each of 2002 and 2001 that raise substantial doubt about our ability to continue as a going concern. In the ordinary course of business, we have made and expect to continue to make substantial capital expenditures for the exploration and development of oil and natural gas reserves. In the past, we have financed our capital expenditures, debt service and working capital requirements with the proceeds of debt and private offerings of our securities. Our cash flow from operations is sensitive to the prices we receive for our oil and natural gas. A reduction in planned capital spending or an extended decline in oil and gas prices could result in less than anticipated cash flow from operations and a lessened ability to sell more of our common stock or refinance our debt with current lenders or new lenders, which would likely have a further material adverse effect on us. 17 A COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002 We incurred a net loss of $3.9 million in the nine months ended September 30, 2003 compared to a net loss of $982,000 for the same period in 2002. During the nine months ended September 30, 2003, our revenues were comprised of oil and gas sales and operations income totaling $1.4 million compared with oil and gas sales of $234,000 in 2002. We had interest and other income in 2003 of $1,000 compared with interest and other income of $167,000 in 2002. Other income in 2002 of $167,000 principally represents the recovery of accounts receivable written off in prior periods. Our total expenses were $4.3 million for the nine months ended September 30, 2003 as compared to $1.4 million for the nine months ended September 30, 2002. Our general and administrative expenses in 2003 were $1.5 million compared to $1.1 million in 2002. Interest expense in 2003 of $293,000 compared to $15,000 in 2002 and reflects increased debt outstanding during 2003. Lease operating expenses of $383,000, production taxes of $55,000 and depletion, depreciation and amortization of $774,000 in 2003 increased from $196,000, $6,000, and $131,000, respectively in 2002 reflecting the increase in operating activity. We incurred an impairment charge reflecting a write-down of the carrying value of our oil and gas properties of $152,000 in 2003 compared to an impairment charge of $281,000 in 2002. In 2003, we had a gain on the sale of marketable securities of $173,000 and a foreign exchange loss of $1.3 million. In 2002, we had a gain on the sale of marketable securities of $284,000 and a foreign exchange gain of $59,000. We also had a charge for the cumulative effect of an accounting change resulting from the application of Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations, in the amount of $1.0 million. We had no comparable charge in 2002. LIQUIDITY AND CAPITAL RESOURCES A COMPARISON OF CASH FLOW FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002 Our net cash provided by operations was $1.4 million for the nine months ended September 30, 2003 as compared to net cash provided by operations of $803,000 for 2002. Cash provided by operating activities was impacted in 2003 by a gain of $173,000 on the sale of marketable securities and a foreign currency exchange loss of $1.3 million, which did not affect our cash position. Depletion, depreciation and amortization was $774,000 in 2003, resulting from commenced oil and gas operations, compared to $131,000 in 2002. Accounts receivable, accounts payable, accrued liabilities and interest increased significantly in 2003 over 2002 because of the expanded scope of our activities. We also incurred a non cash impairment of our oil and gas properties in the amount of $152,000, resulting from ceiling test write-down, in 2003 compared to $281,000 in 2002. During the nine months ended September 30, 2003 we had a charge for the cumulative effect of an accounting change resulting from the application of 18 Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations, in the amount of $1.0 million. We had no comparable charge in 2002. We used $2.1 million of net cash in investing activities during the nine months ended September 30, 2003 compared to net cash used of $2.3 million in 2002. The 2003 cash used in investing activities includes $2.8 million for the purchase and development of oil and gas properties and $15,000 for the purchase of fixed assets compared to $3.6 million and $923,000, respectively, in 2002. Proceeds from the sale of marketable securities, net of cash expended in 2002 on purchases of marketable securities, were $208,000 in 2003 compared to approximately $2.3 million in 2002. Proceeds from the sale of oil and gas properties amounted to $462,000 in 2003. We had no property sales in 2002. Our net cash provided by financing activities for the nine months ended September 30, 2003 was $737,000 compared to $512,000 provided in 2002. Current nine month activity was the result of new financing from Quest Investment Corporation and TransAtlantic Petroleum (USA) Corp. and repayments to a private investor and Bank One. Additional information regarding liquidity and capital resources is included under the caption "Future Capital Requirements and Resources." CRITICAL ACCOUNTING POLICIES We consider accounting policies related to stock options, oil and gas properties, and income taxes to be critical accounting policies. These policies are summarized in Management's Discussion and Analysis or Plan of Operations in our Annual Report on Form 10-KSB for the year ended December 31, 2002, except for our accounting policy related to stock options which is summarized in Note 1 to the notes to the consolidated financial statements included in our Annual Report on Form 10-KSB. HOW WE HAVE FINANCED OUR ACTIVITIES Our activities since 2002 have been financed primarily from private sales of debt and equity securities. Most recently, in October 2003, we completed the private sale of $12.0 million principal amount of 8% Convertible Secured Debentures (the "Debentures") due September 30, 2005. The Debentures bear interest payable quarterly commencing December 31, 2003 at 8% per annum. The outstanding principal of the Debentures is convertible into shares of our Common Stock at any time prior to maturity at a conversion price of $0.45 per share, subject to anti-dilution adjustment, and the Debentures are redeemable by us at any time after October 1, 2004 if the average weighted price per share on the TSX Venture Exchange for a 20 consecutive trading day period prior to the date notice of redemption is given has exceeded 166-2/3% of the conversion price. The Debentures are collateralized by substantially all of our assets. A finder's fee in the amount of $360,000 was paid in connection with the financing. We used approximately $5.9 million of the proceeds of the financing for the repayment of secured debt, approximately $2.1 million for the payment of accounts payable and intend to use the balance primarily for exploration and development of our Bayou Couba oil and gas leases within its ExxonMobil Joint Development Project in St. Charles Parish, Louisiana. The secured 19 indebtedness repaid included $2.5 million to Quest Investment Corporation, which bore interest at 12% per annum, was due October 31, 2003, and was collateralized by a first lien on substantially all our assets, and approximately $1.7 million owing to Bank One Michigan, NA, which bore interest at the bank's prime rate plus 2%, was due December 31, 2003 and was collateralized by a junior lien on substantially all our assets. In addition, we paid out of the proceeds a $1.7 million production payment owing to TransAtlantic Petroleum (USA) Corp. TransAtlantic retained its 10% participation right in our AMI with ExxonMobil Corp. described above which was granted as partial consideration for the $2.0 million financing entered into in March 2003. In connection with the financing, John Fleming, Chairman and Director of TransAtlantic, and Jules Poscente, Chairman and Director of Eurogas Corp, both of Calgary, Alberta, were elected to our Board of Directors. Purchasers of the Debentures included TransAtlantic Petroleum (USA) Corp., $3.0 million principal amount, Quest Capital Corp., $500,000 principal amount, and Mr. Jules Poscente, $300,000 principal amount. Mr. John Fleming, who was elected a Director of our company at the closing of the sale of the Debentures, is the Chairman of TransAtlantic. Mr. Brian Bayley, who has been a Director of our company since June 2001, is also President and Chief Executive Officer of Quest Capital Corp. and a Director of TransAtlantic. In addition, a corporation of which Mr. Fleming is the sole shareholder, purchased $500,000 principal amount of Debentures. Mr. Poscente was elected a Director of our company at the closing. Out of the proceeds of the sale of the Debentures, TransAtlantic was paid $1.7 million in payment in full of a production payment owing to it and Quest Capital Corp. was paid $2.5 million in repayment of a loan. FUTURE CAPITAL REQUIREMENTS AND RESOURCES Our capital requirements relate to the acquisition, exploration, enhancement, development and operation of oil and natural gas properties. In general, because our oil and natural gas reserves will be depleted by production over time, the success of our business strategy is dependent upon a continuous acquisition, exploitation, enhancement, and development program. In order to achieve profitability and generate cash flow, we are dependent upon acquiring or developing additional oil and natural gas properties or entering into joint oil and natural gas well development arrangements. We currently expect that available cash and, the proceeds of the sale of the Debentures issued in October 2003, will be sufficient to fund planned capital expenditures for our ExxonMobil joint development area through 2003. To the extent additional funds are required to fully exploit and develop this area, it is management's plan to raise additional capital through the sale of its common stock, however, it currently has no firm commitment from any potential investors and such additional capital may not be available to us in the future. Our business strategy requires us to obtain additional financing and our failure to do so can be expected to adversely affect our ability to grow our revenues, oil and gas reserves and 20 achieve and maintain a significant level of revenues and profitability. There can be no assurance we will obtain this additional funding. Such funding may be obtained through the sale of equity securities or by incurring additional indebtedness. Without such funding, our revenues will continue to be limited and it can be expected that our operations will not be profitable. In addition, any additional equity funding that we obtain may result in material dilution to the current holders of our common stock. We intend, as opportunities arise, to evaluate the acquisition and development of additional leasehold interests. We are unable at this time to state whether or where any such additional properties may be acquired, to estimate the purchase price for any properties we may acquire or to state the terms on which financing for these purposes can be obtained. ACCOUNTING MATTERS Statement of Financial Accounting Standards No. 141, Business Combinations (FAS 141) and Statement of Financial Accounting Standards, No. 142, Goodwill and Intangible Assets (FAS 142) were issued by the Financial Accounting Standards Board (FASB) in June 2001 and became effective for us on July 1, 2001 and January 1, 2002, respectively. FAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Additionally, FAS 141 requires companies to disaggregate and report separately from goodwill certain intangible assets. FAS 142 establishes new guidelines for accounting for goodwill and other intangible assets. Under FAS 142, goodwill and certain other intangible assets are not amortized, but rather are reviewed annually for impairment. One interpretation being considered relative to these standards is that these oil and gas mineral rights held under lease and other contractual arrangements representing the right to extract such reserves for both undeveloped and developed leaseholds should be classified separately from oil and gas properties, as intangible assets on our balance sheets. In addition, the disclosures required by FAS 141 and 142 relative to intangibles would be included in the notes to financial statements. Historically, we have included these oil and gas mineral rights held under lease and other contractual arrangements representing the right to extract such reserves as part of the oil and gas properties, even after FAS 141 and 142 became effective. As applied to companies like us that have adopted full cost accounting for oil and gas activities, we understand that this interpretation of FAS 141 and 142, as described above, would only affect our balance sheet classification of proved oil and gas leaseholds acquired after June 30, 2001 and our unproved oil and gas leaseholds. Our results of operations and cash flows would not be affected, since these oil and gas mineral rights held under lease and other contractual arrangements representing the right to extract such reserves would continue to be amortized in accordance with full cost accounting rules. At September 30, 2003 and December 31, 2002, we had undeveloped leaseholds of approximately $3.3 million and $2.7 million, respectively, that would be classified on our condensed consolidated balance sheets as "intangible undeveloped leasehold" and developed leaseholds of an estimated net book value of $1.6 million and $830,000 at September 30, 2003 and December 31, 2002, respectively, that would be classified as "intangible developed leaseholds" if we applied the interpretation currently being considered. 21 We will continue to classify our oil and gas mineral rights held under lease and other contractual rights representing the right to extract such reserves as tangible oil and gas properties until further guidance is provided. CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 With the exception of historical matters, the matters we discussed below and elsewhere in this Report are "forward-looking statements" as defined under the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties. The forward-looking statements appear in various places including under the headings Item 1. Financial Information and Item 2. Management's Discussion and Analysis or Plan of Operation. These risks and uncertainties relate to our capital requirements, business strategy, ability to raise capital and fund our oil and gas well drilling and development plans, our ability to fund the repayment of our outstanding indebtedness, our ability to attain and maintain profitability and cash flow and continue as a going concern, our ability to increase our reserves of oil and gas through drilling activities and acquisitions, our ability to enhance and maintain production from existing wells and successfully develop additional producing wells, our access to debt and equity capital and the availability of joint venture development arrangements, our ability to remain in compliance with the terms of any agreements pursuant to which we borrow money and to repay the principal and interest when due, our estimates as to our needs for additional capital and the times at which additional capital will be required, our expectations as to our sources for this capital and funds, our ability to successfully implement our business strategy, our ability to identify and integrate successfully any additional producing oil and gas properties we acquire and operate such properties profitably, our ability to maintain compliance with covenants of our loan documents and other agreements pursuant to which we issue securities or borrow funds and to obtain waivers and amendments when and as required, our ability to borrow funds or maintain levels of borrowing availability under our borrowing arrangements, our ability to meet our budgeted capital expenditures, our statements and estimates about quantities of production of oil and gas as it implies continuing production rates at those levels, proved reserves or borrowing availability based on proved reserves and our future net cash flows and their present value. Readers are cautioned that the risk factors described in our registration statement on Form 10-SB and other reports filed with the Commission, as well as those described elsewhere in this Report, in some cases have affected, and in the future could affect, our business plans and actual results of operations and could cause our actual consolidated results during 2003 and beyond, to differ materially from those expressed in any forward-looking statements made by or on our behalf. Our common shares have no trading market in the United States, and there can be no assurance as to the liquidity of any markets that may develop for our common shares, the ability of the holders of common shares to sell their common shares in the United States or the price at which holders would be able to sell their common shares. Any future trading prices of the common shares will depend on many factors, including, among others, our operating results and the market for similar securities. 22 ITEM 3. CONTROLS AND PROCEDURES Under the supervision and with the participation of our management, including Michael K. Paulk, our President, and Steven P. Ensz, our Vice President, Finance, we have evaluated our disclosure controls and procedures as of the end of the period covered by this report, and, based on their evaluation, Mr. Paulk and Mr. Ensz have concluded that these controls and procedures are effective. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including Mr. Paulk and Mr. Ensz, as appropriate to allow timely decisions regarding required disclosure. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On October 7, 2003, we were served with a Summons and Complaint in litigation instituted against us by Wiser Oil Company in the United States District Court for the Eastern District of Louisiana. In the litigation, Wiser is seeking declaratory and injunctive relief and specific performance with respect to matters arising under a Leasehold Acquisition and Development Agreement entered into by us with Wiser in February 2002. The matters relate to interpretations under the agreement of Wiser's rights to a 25% participation in oil and gas interests acquired by us in an area of mutual interest created by the agreement in return for a payment of 25% of the acquisition cost. These interests relate to acreage outside our Bayou- Couba lease acreage in the area that is the subject of our joint development agreement with Exxon/Mobil Corporation. Wiser is also seeking unspecified damages based on allegations that ANEC has not performed under the agreement in good faith. We believe that we have good and meritorious defenses in the litigation. ITEM 2. CHANGES IN SECURITIES. (a) and(b) In October 2003, we sold $12.0 million principal amount of our 8% Convertible Secured Debentures due September 30, 2005. See Item 5. Other Information. The Indenture pursuant to which the Debentures were issued contains a number of covenants among which is a covenant that prohibits us from declaring or paying any dividends (other than stock dividends) on any of our shares or calling for 23 redemption or purchase for cancellation or making any capital distribution with respect to any of our shares. (c) Subsequent to September 30, 2003, in October 2003, we issued $12.0 million of our 8% Convertible Secured Debentures due September 30, 2005. The Debentures were issued in a transaction exempt from and not requiring registration under the U.S. Securities Act of 1933, as amended, by virtue of Regulation D and Regulation S adopted under that Act. The securities were sold to "accredited investors", as defined in Regulation D, and all of whom resided outside of the United States. No underwriter participated in the sale of the securities. We paid a commission of $360,000 in connection with the transaction. Reference is made to Item 5. Other Information of this Quarterly Report on Form 10-QSB for a description of the conversion rights of the Debentures. ITEM 5. OTHER INFORMATION. In October 2003, we completed a $12.0 million private convertible debt financing transaction. We issued $12.0 million of our 8% Convertible Secured Debentures due September 30, 2005. The Debentures were issued in a transaction not requiring registration requirements of the U.S. Securities Act of 1933, as amended, and were sold to investors outside of the United States. GENERAL. The Debentures were issued and sold pursuant to the terms of a Trust Indenture dated as of October 8, 2003 entered into with Computershare Trust Company of Canada, Vancouver, British Columbia, as Trustee. The aggregate principal amount of Debentures that may be issued under the Indenture is limited to $12.0 million. Each Debenture will mature on September 30, 2005 and bears interest at 8% per annum from the date of original issuance, payable in equal quarterly amounts on March 31, June 30, September 30 and December 31 of each year and on maturity, with the first interest payment due on December 31, 2003. The Debentures were issued as fully registered Debentures in denominations of $1,000 and integral multiples of $1,000. Each Debenture is equally and proportionately entitled to the benefits of the Indenture. REDEMPTION. Commencing October 1, 2004 and subject to the limitations and restrictions described below, the Debentures are redeemable prior to maturity, in whole at any time, but not in part, at our option at a price equal to the principal amount together with accrued and unpaid interest to the date fixed for redemption. The Debentures are not redeemable unless we have filed with the Trustee on the day notice of redemption is first given an Officers' Certificate certifying that the weighted average price per share for our Common Stock on the TSX Venture Exchange (or if the Common Stock is not listed on the TSX Venture Exchange, on the Toronto Stock Exchange, or if the Common Stock is not listed on the Toronto Stock Exchange, on such stock exchange on which the Common Stock is listed as may be selected for such purpose by our Directors or, if the Common Stock is not so listed, then on the over-the-counter market) during twenty (20) consecutive trading days ended not more than five (5) trading days preceding the date on which such notice of redemption is first given was at least 166-2/3% of the Debenture conversion price on the date of filing the Officers' Certificate with the Trustee. The weighted average price is determined by dividing the aggregate sale price of all shares sold 24 on the said exchange or market, as the case may be, during the twenty (20) consecutive trading days by the total number of shares so sold. In addition, the Debentures are not redeemable unless a registration statement we have agreed in the Indenture to file under the U.S. Securities Act with respect to the shares of Common Stock issuable on conversion of the Debentures has been declared effective by the U.S. Securities and Exchange Commission and remains effective on the date the Debentures are redeemed. At such time as we give notice of the redemption of the Debentures, all of the Debentures called for redemption are due and payable at the redemption price and, provided the monies necessary to redeem the Debentures have been deposited with the Trustee, interest on the Debentures ceases to accrue. CONVERSION. The holder of each Debenture has the right and option, at any time prior to the close of business on the earlier of September 29, 2005 or, if such Debenture has been previously called for redemption, the business day immediately preceding the date fixed for redemption, to convert the whole or any integral multiple of $1,000 principal amount of Debentures into shares of our Common Stock at the conversion price then in effect. The initial conversion price is $0.45 per share of Common Stock, subject to adjustment under certain circumstances, or a conversion rate of approximately 2,222.2 shares of Common Stock for each $1,000 principal amount of Debentures. No fractional shares are issuable upon conversion of a Debenture; however, if more than one Debenture is surrendered for conversion at one time by the same holder, the number of shares issuable is to be computed on the basis of the aggregate principal amount to be converted. In lieu of issuing a fractional share, we can satisfy such fractional interest by paying to the holder a sum of money equal to the appropriate fraction of the value of a share based on the last reported sale price or, if none, the mean between the closing bid and ask quotations on the stock exchange on which our shares are listed or, if not listed, a value determined by our Directors, on the business day next preceding the date the shares are converted. In the event such amount is less than $10.00, such fractional interest is cancelled without compensation. The conversion price is subject to adjustment under certain circumstances, including among others, (a) in the event we (i) subdivide or re-divide our outstanding Common Stock, (ii) reduce, combine or consolidate our outstanding Common Stock, or (iii) issue shares of Common Stock to the holders of all or substantially all of our outstanding Common Stock by way of a stock dividend, in which event, the conversion price in effect is to be proportionately adjusted; (b) in the event we issue shares of Common Stock (other than options outstanding on the closing date of the sale of the Debentures) or rights, options or warrants or convertible securities exercisable or convertible at a price less than the conversion price, or in the event of certain rights offerings of shares of Common Stock to all our stockholders at a price per share less than 95% of the current market price, as defined, or certain other issuances of other shares, or other rights, options or warrants, evidences of indebtedness or asset to all our stockholders, the conversion price is to be proportionately adjusted under the terms provided in the Indenture, or (d) in the event of any reclassification or change of the shares of Common Stock or a merger, consolidation, amalgamation or reorganization or in case of a sale of all or substantially all our assets, each Debenture will be convertible into the number of shares or the number, kind or amount of other securities or property which the Debentureholder would have received if, on the 25 effective date of the event or transaction, the Debentureholder held the number of shares into which the Debenture was convertible. The Certificates for shares issuable on conversion of the Debentures are to bear legends relating to restrictions on re-sales of the shares under United States and Canadian securities' laws. The legend under United States law is to appear until the resale of the shares of Common Stock issuable on conversion of the Debenture has been registered under the U.S. Securities Act and the legend under Canadian law is to appear until a date which is four months and one day after the issue of the Debenture. COVENANTS WE MADE. In the Indenture we agreed that so long as any of the Debentures remain outstanding, we will, among other things, (a) duly and punctually pay the principal and interest on the Debentures, (b) carry on our business in accordance with ordinary business practice and do all things necessary to preserve our corporate existence and not consolidate, amalgamate or merge with another corporation or transfer substantially all our business except with the approval of the Debentureholders by adoption of an extraordinary resolution at a meeting of Debentureholders, (c) take all such steps and actions as may be required to maintain our listing and posting for trading of our Common Stock on a recognized Canadian stock exchange, and (d) remain a reporting issuer and not be in default in any filing or other requirement under the securities laws of British Columbia, Alberta and Ontario and remain in compliance with all required filings under the U.S. Exchange Act and the U.S. Securities Act. In addition, we agreed that so long as any of the Debentures remain outstanding, we will not, among other things, (a) incur any indebtedness without the prior approval of the Debentureholders by adoption of an extraordinary resolution at a meeting, except that we are entitled to incur unsecured indebtedness of up to $2.0 million aggregate principal amount, (b) create or permit to exist any security interest, mortgage, pledge or lien on any of our assets or property other than those that are incurred or may arise by operation of law, so long as we are not in default of the obligation, or those in favor of a government or political sub-division or instrumentality to secure the performance of a covenant or obligation or entered into at the request of such authorities where the security interest is required pursuant to a contract, statute, order or regulation; or (c) declare or pay any dividends, other than stock dividends, on our shares or call for redemption or purchase for cancellation or make any capital distribution with respect to our shares. We have also agreed to file as promptly as practicable, at our expense, under the U.S. Securities Act, one or more registration statements with respect to our shares of Common Stock issuable on conversion of the Debentures. We agreed to use our best efforts to cause such registration statement to be declared effective as promptly as possible and to use our best efforts to maintain the effectiveness of such registration statement for a period of two years following the closing of the sale of the Debentures, plus a number of days equal to the number of days, if any, during which the right of the holders of the shares issuable on conversion of the Debentures to offer and sell the shares has been suspended. Debentureholders whose securities are included in a registration statement are to furnish us such information regarding the holders of securities to be registered and the proposed manner of distribution as we may request and such holder is to otherwise co-operate with us in 26 connection with such registration, qualification or compliance. We have agreed to indemnify and defend each such holder and each underwriter of securities being sold by any such holder (and any person who controls such holder or underwriter) against all claims, losses, damages, liabilities and expenses resulting from any untrue statement or alleged untrue statement of a material fact contained therein or from any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same may have been based upon information furnished in writing to us by such holder or underwriter expressly for use therein, and with respect to such information furnished to us, such holder will indemnify and defend us against all claims, losses, damages, liabilities and expenses resulting from any untrue statement or alleged untrue statement of a material fact contained therein or any omission or alleged omission to state a material fact required to be stated or necessary to make the information not misleading. The rights to registration of the securities may be transferred or assigned by the holder to any transferee or assignee of the securities subject to such transferee or assignee agreeing to be bound by the terms of the registration provisions of the Indenture. COLLATERAL. To secure the due and punctual payment of principal and interest on the Debentures and other amounts owing and outstanding under the Indenture, we granted to the Trustee, including an agent of the Trustee acting as collateral agent, a mortgage, lien, and security interest in substantially all our oil and gas leasehold and other interests in lands and mineral interests, overriding royalty, royalty and surface leases, unitization, operating agreements, pooling agreements relating to those properties, hydrocarbons in and under those properties, contracts for the sale, purchase or exchange of hydrocarbons produced from those properties, and accounts and contract rights, operating equipment used on those properties, and other properties that may from time to time be subjected to the lien created. In addition, we have agreed to execute and deliver in favor of the Trustee charges or mortgages and liens against any assets or property acquired after the sale of the Debentures. DEFAULT AND ACCELERATION. ------------------------- Upon the happening of any one or more of the following events, namely: o if we default in payment of the principal when it becomes due and payable; o if we default in payment of any interest due on any Debenture and any such default continues for a period of 10 days; o if a decree or order of a court having jurisdiction is entered adjudging us a bankrupt or insolvent under any bankruptcy, insolvency or analogous laws, or appointing a receiver of, or of substantially all of our property or ordering the winding-up or liquidation of our affairs, and any such decree or order continues unstayed and in effect for a period of 30 days; 27 o if a resolution is passed for the winding-up or liquidation of us, except in the course of carrying out or pursuant to a transaction in respect of which the conditions of the Indenture are performed, or if we institute proceedings to be adjudicated a bankrupt or insolvent, or consent to the institution of bankruptcy or insolvency proceedings against us under any bankruptcy, insolvency or analogous laws, or consent to the filing of any such petition or to the appointment of a receiver of, or of any substantial part of, our property or if we make a general assignment for the benefit of creditors, or admit in writing our inability to pay our debts generally as they become due or take corporate action in furtherance of any of the foregoing; o if we fail to make any payment of principal or interest on any indebtedness in an amount greater than $250,000 in respect of which we are liable when the same becomes due and beyond any period of grace provided with respect thereto; o if any event or circumstance occurs under an agreement or instrument relating to our indebtedness in an amount greater than $250,000 which could permit a person to declare such indebtedness or any part thereof to become due prior to the stipulated date for repayment or maturity, and such event or circumstance shall not be remedied or cured, or waived by the holders of such indebtedness, within 30 days after such event or circumstance shall have occurred; o if we shall neglect to observe or perform any other covenant or condition contained, in the Indenture or related collateral agreements to be observed or performed by us and, after notice has been received by us from the Trustee, we shall fail to make good such default within a period of 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; o if there is a change of our control (as defined in the Indenture and determined by the Trustee, based on the advice of counsel); or o if Jules Poscente or John J. Fleming, or any replacement Director for either of them, ceases at any time to be two of our directors on our board and any of the following occurs: (i) such Director has so ceased to be a Director as a result of a resolution passed or an election of Directors approved by our shareholders; or (ii) we fail to give notice to the Trustee and the holders of the Debentures that one or more of such Directors has ceased to be a Director of our corporation within five days after the date such person ceased to be such a director; or (iii) we fail to appoint or elect an individual, who has been approved as a replacement Director by resolution of the Debentureholders and who has consented to act as such, to fill a vacancy in such two Directors' positions within five days of such resolution being passed by the Debentureholders and we receive notice thereof; 28 then in each and every such event the mortgage and lien against our assets shall become enforceable and the Trustee may in its discretion and shall upon receipt of a request in writing signed by the holders of not less than 25% in principal amount of the Debentures then outstanding, subject to the provisions of the Indenture, by notice in writing to us declare the principal of and interest on all Debentures then outstanding and all other moneys outstanding to be due and payable and whereupon we must forthwith pay to the Trustee for the benefit of the Debentureholders the principal of, accrued and unpaid interest and such other moneys due on the Debentures, As the term is used above, a change of control includes any person or group of persons becoming the beneficial holder of 50% or more of our outstanding total voting power or there is consummated a consolidation or merger in which we are not the continuing or surviving corporation or pursuant to which our outstanding shares are converted into cash, securities or other property, other than a merger in which the holders of our shares immediately prior to the merger hold a majority of the shares of the surviving corporation. Subject to the provisions of any extraordinary resolution that may be passed by the Debentureholders, in case we shall fail to pay to the Trustee, forthwith after the same shall have been declared to be due and payable, the principal of and interest on all Debentures then outstanding, together with any other amounts due, the Trustee may in its discretion and shall upon receipt of a request in writing signed by the holders of not less than 25% in principal amount of the Debentures then outstanding, proceed to obtain or enforce payment of the principal of and interest on all the Debentures then outstanding together with any other amounts due, and to enforce and to realize on, collateral for the Debentures. MEETINGS OF DEBENTUREHOLDERS. ----------------------------- Meetings of Debentureholders are to be held upon receipt by the Trustee of a written request from us or a written request signed by the holders of not less than 25% in principal amount of the Debentures then outstanding. In the event of the Trustee fails within 30 days after receipt of any such request to give notice convening a meeting, we or such Debentureholders, as the case may be, may convene such meeting. Every such meeting shall be held in the City of Vancouver or at such other place as may be approved or determined by the Trustee. 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. 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 Debentures, if any, held by him. 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. 29 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 proxy 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 proxy need not be a Debentureholder. 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, among others, exercisable from time to time by extraordinary resolution: o power to sanction any modification, abrogation, alteration, compromise or arrangement of the rights of the Debentureholders or the Trustee against us, or against our property, o power to assent to any modification of or change in or addition to or omission from the provisions contained in the Indenture, any Debenture, the Documents relating to the collateral which shall be agreed to by us and to authorize the execution of the documents embodying any modification, change, addition or omission; o power to sanction any scheme or plan for the reconstruction or reorganization of us or for the consolidation, amalgamation or merger of us with any other corporation or for the sale, leasing, transfer or other disposition of our undertaking, property and assets or any part thereof; o power to direct or authorize the Trustee to exercise any power, right, remedy or authority given to it by Indenture, or the documents relating to the collateral in any manner specified in any such extraordinary resolution or to refrain from exercising any such power, right, remedy or authority; o power to waive and direct the Trustee to waive any default or cancel any declaration of acceleration made by the Trustee either unconditionally or upon any condition specified in such extraordinary resolution; o power to remove the Trustee from office and to appoint a new Trustee or Trustees; o power to sanction the exchange of the Debentures for or the conversion thereof into shares, bonds, debentures or other securities or obligations of ours or of any company formed or to be formed; o power to authorize us 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 30 An "extraordinary resolution" means a resolution proposed to be passed as an extraordinary resolution at a meeting of Debentureholders for the purpose and held in accordance with the provisions of the Indenture at which, the holders of not less than 50% 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 66-2/3% of the principal amount of Debentures represented at the meeting and voted on a poll upon such resolution. If, at any such meeting, the holders of not less than 50% in principal amount of the Debentures outstanding are not present in person or by proxy within 30 minutes after the time appointed for the meeting, then the meeting, if convened by or on the requisition of Debentureholders, shall be dissolved, but in any other case it shall stand adjourned to such date, being not less than 10 nor more than 60 days later, and to such place and time as may be appointed by the chairman. Not less than 10 days notice shall be given of the time and place 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 and a resolution proposed at such adjourned meeting and passed by the favorable vote of not less than 66-2/3% of the principal amount of Debentures represented at the meeting and voted on a poll upon such resolution shall be an extraordinary resolution so long as the holders of not less than 25% in principal amount of the Debentures then outstanding are present in person or by proxy at such adjourned meeting. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 2.0 Second Amended Joint Plan of Reorganization Proposed by Couba Operating Company, American Natural Energy Corporation and Gothic Resources Inc. filed in the United States Bankruptcy Court, Western District of Oklahoma. Case No. 00-11837-W (Chapter 11)(1). 2.1 Order Confirming Plan, filed November 16, 2001 with U.S. Bankruptcy Court, Western District of Oklahoma(2) 3.1 Certificate of Incorporation of American Natural Energy Corporation, formerly named Dayton Energy Corporation(1) 3.2 Certificate of Amendment filed March 23, 2001(2) 3.3 Certificate of Amendment filed December 20, 2001(2) 10.2 Loan Agreement dated August 2, 2002 between Middlemarch Partners Limited and the Registrant(2) 10.3 Leasehold Acquisition and Development Agreement with The Wiser Oil Company(2) 10.4 Assignment of Oil, Gas and Mineral Lease dated as of February 18, 2002 relating to State Lease Number 17353(2) 10.5 Loan Agreement effective as of March 12, 2003 between Registrant and Bank One, N.A.(2) 10.6 Loan Agreement dated March 12, 2003 between Registrant and Quest Investment Corporation(2) 10.7.1 Production Payment Purchase and Sale Agreement between Registrant and TransAtlantic Petroleum (USA) Corp. dated March 10, 2003(2) 31 10.7.2 Production Payment Conveyance from Registrant to TransAtlantic Petroleum (USA) Corp. dated March 10, 2003(2) 10.7.3 Purchase and Exploration Agreement between Registrant and TransAtlantic Petroleum (USA) Corp. dated March 10, 2003(2) 10.8.1 Form of Subscription Agreement to purchase the Registrant's 8% Convertible Secured Debenture due September 30, 2005(3) 10.8.2 Trust Indenture dated as of October 8, 2003 between the Registrant and Computershare Trust Company of Canada(3) 21.0 Subsidiaries of the Registrant NAME JURISDICTION OF ORGANIZATION ---- ---------------------------- Gothic Resources Inc. Canada Business Corporations Act Couba Operating Company Oklahoma 31.1 Certification of President and Chief Executive Officer Pursuant to Rule 13a-14(a)(3) 31.2 Certification of Chief Financial Officer Pursuant to Rule 13a- 14(a)(3) 32.1 Certification of President and Chief Executive Officer Pursuant to Section 1350 (furnished, not filed)(3) 32.2 Certification of Chief Financial Officer Pursuant to Section 1350 (furnished, not filed)(3) - ---------------------------- (1) Filed as an exhibit to registration statement on Form 10-SB filed August 12, 2002. (2) Filed as an exhibit to Amendment No. 1 to registration statement on Form S-B. (3) Filed or furnished herewith. (b) Reports on Form 8-K During the quarter ended September 30, 2003, we filed the following Current Reports on Form 8-K in response to the Items named: Report Date Item ----------- ---- September 10, 2003 Item 7. Financial Statements and Exhibit (Press Release dated September 10, 2003 attached as exhibit) 32 SIGNATURES Pursuant to the requirements 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. AMERICAN NATURAL ENERGY CORPORATION ----------------------------------- (Registrant) Date: November 13, 2003 /S/ Michael K. Paulk -------------------------------------------- Michael K. Paulk President and Chief Executive Officer /S/ Steven P. Ensz -------------------------------------------- Steven P. Ensz Principal Financial and Accounting Officer 33 EX-10 3 ex108_1.txt EXHIBIT 10.8.1 EXHIBIT 10.8.1 THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933 (THE "1933 ACT"), AND ARE BEING OFFERED AND SOLD IN RELIANCE UPON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THE 1933 ACT. SUCH SECURITIES MAY NOT BE REOFFERED FOR SALE OR RESOLD OR OTHERWISE TRANSFERRED UNLESS THEY ARE REGISTERED UNDER THE APPLICABLE PROVISIONS OF THE 1933 ACT OR ARE EXEMPT FROM SUCH REGISTRATION. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR BY ANY STATE SECURITIES ADMINISTRATION OR REGULATORY AUTHORITY. AMERICAN NATURAL ENERGY CORPORATION CONVERTIBLE SECURED DEBENTURE SUBSCRIPTION AGREEMENT - -------------------------------------------------------------------------------- INSTRUCTIONS: To properly complete this Subscription Agreement: (1) All subscribers must complete this page and page 2; (2) All subscribers must complete and sign the Schedule A, Certificate of Accredited Investor; (3) If a resident of Ontario or otherwise subject to the securities laws of the Province of Ontario, a subscriber must complete and sign Schedule B, Accredited Investor Certification (Ontario); (4) All subscribers must complete and sign Schedule C, U.S. Certification (even if you are not a U.S. resident or citizen); (5) If a portfolio manager or NOT an individual (i.e., you are a corporation, partnership, trust or entity other than an individual), a subscriber must complete and sign Schedule D, Form 4C Corporate Placee Registration Form; (6) All subscribers must complete and sign the applicable Form W-8 Certificate of Foreign Status for United States Tax Withholding (Schedule E); and (7) All subscribers must provide the purchase price for their Debentures to Macleod Dixon LLP in Calgary, Alberta (Purchasers' Special Counsel), Attention: Andrew Love, by certified cheque, bank draft or wire transfer, so that it will be available for payment to the Corporation at Closing, or make other arrangements for payment for their Debentures acceptable to the Lead Investor, Macleod Dixon LLP and the Corporation. - -------------------------------------------------------------------------------- TO: American Natural Energy Corporation (the "CORPORATION") The undersigned (hereinafter referred to as the "PURCHASER") hereby irrevocably subscribes for and agrees to purchase from the Corporation the principal amount of convertible secured debentures (the "DEBENTURE(S)") of the Corporation set forth below for a total consideration equal to such principal amount (the "PURCHASE PRICE"), upon and subject to the terms and conditions, and hereby covenants, represents and warrants, as set forth in "Terms and Conditions of Subscription for Convertible Secured Debentures of American Natural Energy Corporation" dated for reference October 3, 2003 attached hereto and expressly incorporated herein. 1. The Purchaser represents that securities of the Corporation presently owned (beneficially, directly or indirectly) by the Purchaser are as follows:
- ---------------------------------------------------------------------------------------------------------------------- Type of Security Number or Amount - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------
2. The Purchaser represents that the Purchaser IS/IS NOT (CIRCLE ONE) an Insider(1) of the Corporation (as defined below). - ------------------------------------------------------------------------------- 1 "Insider" of the Issuer as defined in the British Columbia Securities Act means: (a) a director or senior officer of the issuer; (b) a director or senior officer of a person that is itself an insider or subsidiary of the issuer; (c) a person that has: (i) direct or indirect beneficial ownership of; (ii) control or direction over; or (iii) a combination of direct or indirect beneficial ownership of and of control or direction over securities of the issuer carrying more than 10% of the voting rights attached to all the issuer's outstanding voting securities, excluding, for the purpose of the calculation of the percentage held, any securities held by the person as underwriter in the course of a distribution; or (d) the issuer itself, if it has purchased, redeemed or otherwise acquired any securities of its own issue, for so long as it continues to hold those securities. - -------------------------------------------------------------------------------
- ------------------------------------------------------ ----------------------------------------------------------- PURCHASER'S INFORMATION SUBSCRIPTION INFORMATION - ----------------------- ------------------------ Name: _____________________________________________ Principal Amount of Debentures Purchased: Name of Purchaser - please print US$ _______________________________________________________ By: _______________________________________________ ----------------------------------------------------------- Signature of Authorized Signatory ___________________________________________________ ----------------------------------------------------------- Official Capacity or Title - please print NON PRINCIPAL INFORMATION ------------------------- If the Purchaser is signing as an agent for one or Please print name of individual whose signature appears more principals and is not a trust company or an above if different than the name of the Purchaser printed insurer or, in British Columbia a portfolio manager, above. in either case purchasing as trustee or agent for accounts fully managed by it, complete the following: ___________________________________________________ _______________________________________________________ Purchaser's Address Name of Principal ___________________________________________________ _______________________________________________________ Principal's Address ___________________________________________________ Telephone Number and Facsimile Number ______________________________________________________ ___________________________________________________ _______________________________________________________ Email Address Telephone Number ___________________________________________________ _______________________________________________________ Social Insurance Number / Tax Identification Number Email Address - ------------------------------------------------------ ----------------------------------------------------------- - ------------------------------------------------------ ----------------------------------------------------------- REGISTRATION INSTRUCTIONS (IF DIFFERENT FROM THE DELIVERY INSTRUCTIONS (IF DIFFERENT FROM THE PURCHASER'S NAME AND ADDRESS GIVEN UNDER PURCHASER'S PURCHASER'S ADDRESS GIVEN UNDER PURCHASER'S INFORMATION): INFORMATION): ___________________________________________________ _______________________________________________________ Name Name ___________________________________________________ _______________________________________________________ Account reference, if applicable Account reference, if applicable ___________________________________________________ _______________________________________________________ Address Address ___________________________________________________ _______________________________________________________ ___________________________________________________ _______________________________________________________ Telephone Number Telephone Number and Contact Name - ------------------------------------------------------ -----------------------------------------------------------
ACCEPTANCE: The Corporation hereby accepts the above subscription and the Corporation covenants, represents and warrants to the Purchaser as set forth in this Subscription Agreement including the above specified "Terms and Conditions of Subscription for Convertible Secured Debentures of American Natural Energy Corporation". AMERICAN NATURAL ENERGY CORPORATION , 2003 -------------------------------- Acceptance and Execution Date Per: -------------------------------------- Authorized Signatory 2 TERMS AND CONDITIONS OF SUBSCRIPTION FOR CONVERTIBLE SECURED DEBENTURES OF AMERICAN NATURAL ENERGY CORPORATION Dated for reference October 3, 2003 1. Definitions. In this Subscription Agreement, unless the context otherwise requires: (a) A "CHANGE OF CONTROL" of the Corporation will be deemed to have occurred at such time as (i) any person or group of related persons for purposes of Section 13(d) of the U.S. Exchange Act becomes the beneficial owner (as defined under Rule 13d-3 or any successor rule or regulation promulgated under the U.S. Exchange Act), directly or indirectly, of 50% or more of the total voting power of the common shares in the capital of the Corporation or (ii) there shall be consummated any consolidation or merger of the Corporation in which the Corporation is not the continuing or surviving corporation or pursuant to which the common shares in the capital of the Corporation would be converted into cash, securities or other property, other than a merger or consolidation of the Corporation in which the holders of the common shares in the capital of the Corporation outstanding immediately prior to the consolidation or merger hold, directly or indirectly, at least a majority of the common shares in the capital of the surviving corporation immediately after such consolidation or merger; (b) "CLOSING" means the completion of the issue and sale by the Corporation and the purchase by the Purchaser of Debentures pursuant to this Subscription Agreement; (c) "CLOSING DATE" means the day on which Debentures are issued to the Purchaser pursuant to this Subscription Agreement; (d) "CORPORATION" means American Natural Energy Corporation, a corporation organized under the laws of the State of Oklahoma; (e) "CURRENT AIF" has the meaning defined in MI 45-102; (f) "DEBENTURES" means the convertible secured debentures of the Corporation offered for sale by the Corporation, as described herein; (g) "DISTRIBUTION DATE" means the date that the Debentures are distributed to the Purchaser; (h) "EXCHANGE" means the TSX Venture Exchange or, if the Shares of the Corporation become listed on The Toronto Stock Exchange, The Toronto Stock Exchange; (i) "LEAD INVESTOR" means TransAtlantic Petroleum Corp., of Calgary, Alberta; (j) "MIDDLEMARCH" means Middlemarch Partners Limited; (k) "MI 45-102" means Multilateral Instrument 45-102, entitled "Resale of Securities", adopted by the Securities Commissions; (l) "MI 45-103" means Multilateral Instrument 45-103, entitled "Capital Raising Exemptions", adopted by, among other regulatory authorities, the British Columbia Securities Commission and the Alberta Securities Commission; (m) "OFFERING" means the offering by the Corporation of up to US$12.0 million aggregate principal amount of Debentures; (n) "PUBLIC DOCUMENTS" means, in respect of the Corporation, its annual information form dated August 29, 2003 for the year ended December 31, 2002, which includes its audited annual financial statements as at and for the year ended December 31, 2002, its proxy statement dated August 29, 2003 for its annual meeting of shareholders called for September 24, 2003, its unaudited interim financial statements as at and for the six months ended June 30, 2003 as contained in its BC Form 51-901F, Schedule A dated August 27, 2003, and its material change report dated September 11, 2003, all of which documents have been filed on SEDAR in Canada; (o) "PURCHASERS" means the purchasers, including the Purchaser, of Debentures; (p) "PURCHASERS' SPECIAL COUNSEL" means Macleod Dixon LLP, of Calgary, Alberta; (q) "QUALIFYING ISSUER" means a qualifying issuer as defined in MI 45-102; (r) "REPORTING ISSUER JURISDICTION" means, for the purpose of MI 45-102, one of Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Quebec or Saskatchewan; (s) "RULE 45-501" means Rule 45-501, entitled "Exempt Distributions", as adopted by the Ontario Securities Commission; (t) "SECURITIES" means, collectively, the Debentures and the Shares; (u) "SECURITIES COMMISSIONS" means, collectively, the securities commissions of British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick, Prince Edward Island and Newfoundland and Labrador; (v) "SECURITIES LAWS" means, collectively, the applicable securities laws of each of the Provinces of British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick, Prince Edward Island and Newfoundland and Labrador and the respective rules and regulations made and forms prescribed thereunder together with all applicable published policy statements and blanket orders and rulings of the Securities Commissions; (w) "SHARES" means the shares of common stock, par value of US$0.01, in the capital of the Corporation; (x) "TRUST INDENTURE" means the trust indenture to be dated on or before the Closing Date between the Corporation and Computershare Trust Company of Canada, as trustee, together with all other documentation, instruments and agreements dated on or before the Closing Date incidental thereto, including without limitation a collateral agency agreement with a U.S. collateral agent and security and mortgage documents in favour of the U.S. collateral agent; (y) "U.S. EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, of the United States of America; and (z) "U.S. SECURITIES ACT" and "1933 ACT" means the Securities Act of 1933, as amended, of the United States of America. 2. Terms of Offering. (a) The Debentures will be sold by private placement pursuant to available exemptions from securities legislation in British Columbia, Alberta and Ontario and pursuant to the exemptions from the registration requirements of the U.S. Securities Act provided by Regulation S and Rule 506 of Regulation D of the U.S. Securities Act. By its acceptance of this offer from the Purchaser, the Corporation covenants, agrees and confirms that the Purchaser will have the benefit of all of the representations, warranties, covenants, agreements, terms and conditions set forth herein. (b) The Purchaser acknowledges and the Corporation agrees and covenants that: (i) the Offering will provide additional financing for the Corporation of up to US$12.0 million for the repayment of outstanding debt of the Corporation to Bank One, N.A., TransAtlantic Petroleum (USA) Corp. and Quest Investment Corporation, for the future exploration and development of the Corporation's Bayou Couba oil and gas leases and for working capital purposes; 2 (ii) each of the placees in the Offering is entering into substantially this form of subscription agreement; (iii) the Offering is subject to the Corporation receiving a minimum of US$10.0 million in aggregate principal amount of subscriptions; and (iv) upon Closing, a finder's fee will be paid to Middlemarch equal to 3% of the gross proceeds to the Corporation from the Offering. 3. Debentures. The Debentures shall have the following terms and conditions attached, which terms and conditions shall be reflected in the Trust Indenture: (a) Principal Amount. The Debentures shall be in the aggregate principal amount of up to US$12 million; (b) Interest. The Debentures shall bear interest at 8% per annum, payable in equal quarterly payments on the last day of each calendar quarter, with the first payment due on December 31, 2003. If any interest payments to a Purchaser are subject to U.S. withholding tax, the interest payments to that Purchaser will be grossed-up so that the additional amount of interest compensates the Purchaser for the applicable U.S. withholding tax on a net basis after all taxes; provided that the Purchaser will be obliged to repay to the Corporation any amount of the withholding tax that the Purchaser effectively recovers on a net basis, as a tax credit or otherwise, under the tax laws of its jurisdiction of residence. This gross-up will not apply to subsequent purchasers of Debentures; (c) Maturity Date. The Debentures shall mature and be repayable in cash on September 30, 2005 (the "MATURITY DATE"); (d) Conversion. The Debentures shall be convertible into Shares at any time and from time to time after the issuance of the Debentures and prior to the Maturity Date on the basis, subject to adjustment under the anti-dilution provisions, of one Share for each US$0.45 of principal amount of Debenture; (e) Redemption. The Debentures shall not be redeemable prior to October 1, 2004. The Debentures shall be redeemable at the option of the Corporation at any time on or following October 1, 2004 and prior to the Maturity Date if the registration statement referred to below in section 5(e) has been declared effective and remains effective and if the weighted average trading price of the Shares on the Exchange exceeds a price (which price would currently be US$0.75) equal to 166 2/3% of the conversion price per share in paragraph 3(d) above for a 20 consecutive trading day period; (f) Anti-Dilution. Anti-dilution provisions satisfactory to the Lead Investor and Purchasers' Special Counsel shall apply to the conversion rate in paragraph 3(d) above; (g) Change of Control. The Debentures shall become immediately due and payable in cash in the event of a Change of Control of the Corporation; (h) Other Debt. During the period in which any Debentures are outstanding, the Corporation shall not be entitled to incur any additional debt in excess of US$2.0 million without the approval of holders of 66 2/3% of the outstanding principal amount of the Debentures; (i) Security. The Debentures shall be secured by a first charge on all assets of the Corporation, including oil and gas leases and rights, wells, facilities and other assets including seismic data; (j) Address of Purchaser. The Debentures shall be issued and registered in the name of the Purchaser at the address indicated on the first two pages of this Subscription Agreement; and (k) Other Provisions. The provisions, attributes and characteristics of the Debentures shall be as fully set forth in the Trust Indenture. 3 4. Corporation's Representations and Warranties. The Corporation represents, warrants and covenants to the Purchaser and its counsel as follows, and agrees that by delivery of the Debentures at Closing it shall be representing and warranting as of the Closing Date that: (a) the Corporation is duly organized and in good standing as a corporation under the laws of the State of Oklahoma and is duly registered and otherwise qualified and in good standing to carry on business and own property in each jurisdiction, including without limitation the State of Louisiana, where the Corporation carries on business or owns property. (b) the Corporation is a "reporting issuer" under the Securities Laws, is current and in compliance with all required filings under the Securities Laws and is not in default on the records of any of the Securities Commissions. The Corporation is current and in compliance with all required filings under the U.S. Exchange Act and the U.S. Securities Act. (c) the Corporation's authorized share capital consists of 100,000,000 shares of common stock with a par value of US$0.01 per share of which, as at October 3, 2003, there were 26,054,546 common shares outstanding all of which are fully-paid and non-assessable. The Corporation has outstanding stock options to acquire up to an aggregate of 1,550,000 common shares, as follows:
NUMBER OF SHARES UNDER OPTION OPTION EXERCISE PRICE OPTION EXPIRY DATE ---------------------------------------------------------------------------------------------- 150,000 US$0.47 May 1, 2005 1,400,000 US$0.32 December 13, 2006 ---------- 1,550,000 ==========
Other than such outstanding options and the Debentures, there are no rights to purchase, options to acquire, warrants, convertible or exchangeable securities or other rights or claims to acquire, or other agreements or obligations, contingent or otherwise, to issue, any unissued shares in the capital of the Corporation and there are no shares of the Corporation held in treasury. Except for the exercise of any such outstanding options, after October 3, 2003 and on and before the Closing Date the Corporation will not issue or agree to issue or be or become obligated, contingently or otherwise, to issue any shares in the capital of the Corporation. (d) the Corporation's Public Documents contain full, true and plain disclosure of all material facts and information in respect of the Corporation and its assets, liabilities, financial condition, operations, prospects, business and affairs. The Public Documents do not contain any misrepresentation (as defined in the Securities Act (British Columbia)). (e) the audited annual financial statements and the unaudited interim financial statements of the Corporation contained in the Corporation's Public Documents have been prepared in accordance with accounting principles generally accepted in the United States of America and such financial statements fairly present in all material respects the financial condition, results of operations and cash flows of the Corporation as of the dates and for the periods presented in such financial statements. (f) since June 30, 2003, there have been no material changes in the business or affairs of the Corporation and the Corporation has not incurred any liabilities or obligations, except for: (i) material changes, liabilities and obligations disclosed in the Public Documents; and (ii) other liabilities and obligations incurred in the ordinary course of the Corporation's business and operations as described in the Public Documents, which other liabilities and obligations are individually and in the aggregate not material. (g) the description in the Corporation's Annual Information Form contained in its Public Documents of its interests in the Bayou Couba properties in Louisiana discloses all material terms, limitations and burdens of the Corporation's interest in such properties and of the agreements and obligations 4 of the Corporation in respect of such properties. To the best of the Corporation's knowledge, all proceedings in respect of the bankruptcy of Couba Operating Company are complete and final and there are no outstanding proceedings, appeals or rights of appeal in respect thereof, and neither Couba nor any of the creditors or shareholders of Couba have any claims or rights against the Bayou Couba properties or the Corporation except as described in the Public Documents; provided that the Corporation is aware of a claim, which the Corporation does not believe is material and is not disclosed in the Public Documents, by a Class 7 unsecured creditor for inclusion in the unsecured creditors' pool in the amount of approximately US$300,000. (h) the engineers and the engineering firm that prepared the May 13, 2003 Bayou Couba Report and the May 15, 2003 Bayou Couba Report (each as defined in the annual information form contained in the Corporation's Public Documents) were provided, in the course of their preparation of such reports, with all pertinent and relevant information relating to the Bayou Couba properties including without limitation full details of the interest and obligations of the Corporation in respect of such properties. To the best of the Corporation's knowledge, the results in such reports properly reflect the interest and obligations of the Corporation in respect of such properties and such reports fairly present the Corporation's estimated proved reserves and its estimated future net revenue therefrom and the present value thereof as of the effective dates indicated in the reports and do not contain any misrepresentation (as defined in the Securities Act (British Columbia)). (i) the Corporation has no further interest or obligation whatsoever (other than for any liability fully reflected in the balance sheet of the Corporation as at June 30, 2003, including the notes to such financial statements) in respect of (i) the South Fort Stockton Project, Pecos County, Texas; (ii) First Calgary Petroleums Ltd.; (iii) Block 43, Yemen; or (iv) the Corporation's former eastern Oklahoma coal seam trend leases and operations. The Corporation has no business or property interests or operations other than in respect of its Bayou Couba properties and its head office premises in Tulsa, Oklahoma. (j) To the best of the Corporation's knowledge, the Corporation is in compliance, in all material respects, with all laws pertaining to its oil and gas operations and all environmental laws, and is not subject to any operational orders or notices or environmental clean-up orders or notices from governmental authorities, and the Corporation is not in default, in any material respect, under any of its contractual obligations. (k) the Corporation is not aware of any current, pending or threatened litigation proceedings or potential claims which are not disclosed in the Public Documents and which, if adversely determined against the Corporation, could result in a material liability to the Corporation. 5. Covenants of the Corporation. The Corporation covenants that: (a) the Corporation, at the Distribution Date, will have filed all documents that it is required to file under the continuous disclosure provisions of the Securities Laws, including annual and interim financial information, annual reports, press releases disclosing material changes and material change reports; (b) there will not have been a material adverse change in the financial position of the Corporation on or prior to the Closing Date from the financial position set out in the Corporation's unaudited financial statements as at and for the six month period ended June 30, 2003; (c) at the Distribution Date, the Corporation will not have made a material transaction since its Current AIF, except for this Offering, unless a material change report has been filed in compliance with Securities Laws with respect thereto; (d) the Corporation is now, and on the Closing Date the Corporation will be, a Qualifying Issuer and the Corporation will remain a reporting issuer, and not in default, under the Securities Laws in British Columbia, Alberta and Ontario for a minimum of 24 months immediately following the Distribution Date; 5 (e) the Corporation will, as promptly as practicable after the Closing Date, file with and will thereafter use its best efforts to have declared effective by the U.S. Securities and Exchange Commission a registration statement with respect to the issue of Shares pursuant to the Debentures and the Purchaser agrees to provide to the Corporation such information as it may reasonably request in connection therewith; and (f) the Corporation is now, and on the Closing Date the Corporation will be, an "issuer" (as defined under the U.S. Securities Act). 6. Purchaser's Documents. The Purchaser shall deliver to the Corporation concurrently with the execution of this Subscription Agreement or prior to the Closing a completed and originally executed copy of: (a) the Certificate of Accredited Investor (Schedule A); (b) if the Purchaser is a resident of Ontario or otherwise subject to the securities laws of the Province of Ontario, the Accredited Investor Certification (Ontario) (Schedule B); (c) the U.S. Certification (Schedule C); (d) if the Purchaser is a portfolio manager or is NOT an individual (i.e., a corporation, partnership, trust or entity other than an individual), the Form 4C Corporate Placee Registration Form (Schedule D), and (e) the applicable Form W-8 Certificate of Foreign Status for United States Tax Withholding (Schedule E); and such information, additional undertakings, questionnaires and other documents as the Corporation may reasonably request in connection with the issue and sale of the Debentures. The Purchaser shall deliver AT OR PRIOR TO CLOSING the total purchase price for the Debentures, either by paying such amount to Purchasers' Special Counsel in trust, to be paid by it at Closing on behalf of the Purchaser; or by making other arrangements for payment which are acceptable to the Lead Investor, Purchasers' Special Counsel and the Corporation. The Purchaser acknowledges and agrees that such undertakings, questionnaires and other documents, when executed and delivered by the Purchaser, will form part of and will be incorporated into this Subscription Agreement with the same effect as if each constituted a representation and warranty or covenant of the Purchaser hereunder in favour of the Corporation. The Purchaser consents to the filing of such undertakings, questionnaires and other documents as may be required to be filed with any stock exchange or securities regulatory authority in connection with the transactions contemplated hereby. 7. Acceptance or Rejection. The Corporation will have the right in its sole discretion to accept or reject this offer at any time at or prior to the Closing. The Purchaser acknowledges and agrees that the acceptance of this offer by the Corporation is subject to acceptance of the Offering by the Exchange and any other regulatory authority having jurisdiction with respect to the Corporation, and will be conditional upon issuance and the sale of the Purchaser's Debentures to the Purchaser being exempt from any prospectus and registration requirements of all applicable securities legislation, including under the U.S. Securities Act and state securities laws. The Corporation will be deemed to have accepted this offer upon the delivery at the Closing of the Purchaser's Debentures to the Purchaser or Purchasers' Special Counsel in accordance with the provisions hereof. If the Purchaser's Debentures have not been delivered to the Purchaser or Purchasers' Special Counsel on or before October 31, 2003, then this Subscription Agreement shall terminate and all subscription funds advanced to Purchasers' Special Counsel or to the Corporation hereunder shall be repaid forthwith to the Purchaser. 8. Purchaser's Representations and Warranties. The Purchaser acknowledges that the following representations and warranties by it, and those given in the Certificates attached hereto as Schedules A, B, C, D and E, are given with the intention that they will be relied upon by the Corporation and its counsel in determining the Purchaser's eligibility or, if applicable, the eligibility of others on whose behalf the Purchaser is contracting hereunder to purchase the Debentures under applicable securities legislation. The Purchaser represents and warrants to the Corporation and its counsel that its representations and warranties 6 are true as of the date of this offer and will be true as of the date of this Subscription Agreement and agrees that by accepting delivery of the Debentures it shall be representing and warranting as of the Closing Date, that: (a) Attached Schedules. The Purchaser has duly completed and executed all Certificates in Schedules A, B, C, D and E attached hereto applicable to such Purchaser and hereby confirms the truth and accuracy of all statements made therein; (b) Residency. The Purchaser is a resident or is otherwise subject to the jurisdiction referred to under "Purchaser's Information" on the execution page hereof, which address is the residence or place of business of the Purchaser and not created or used solely for the purpose of acquiring the Debentures. (c) Acknowledgements. The Purchaser hereby acknowledges to the Corporation that it is aware that: (i) no securities commission or similar regulatory authority in Canada, the United States of America or elsewhere has reviewed or passed on the merits of the Securities; or (ii) there is no government or other insurance covering the Securities; (iii) there are risks associated with the purchase of the Securities; (iv) there are restrictions on the Purchaser's ability to resell the Securities and it is the responsibility of the Purchaser to find out what those restrictions are and to comply with them before selling such Securities; (v) the Corporation is relying on an exemption under the securities laws of British Columbia, Alberta and Ontario from the requirements to provide the Purchaser with a prospectus and to sell the Securities through a person registered to sell securities under securities laws and, as a consequence of acquiring the Securities pursuant to this exemption, certain protections, rights and remedies provided by securities legislation in British Columbia, Alberta or Ontario, including statutory rights of recession or damages, will not be available to the Purchaser; and (vi) the certificates to be delivered to the Purchaser representing the Securities purchased by the Purchaser will be in compliance with the applicable securities law of British Columbia, Alberta and Ontario and contain a legend stating that the Securities are subject to resale restrictions; (d) Compliance with Securities Legislation. Each Purchaser will comply with the requirements of all applicable securities legislation in British Columbia, Alberta, Ontario and the United States in connection with the acquisition of Debentures and will provide such evidence of compliance with all such matters as the Corporation may reasonably request; (e) U.S. Securities Laws. Each Purchaser acknowledges being aware that the Securities are "restricted securities" as defined under Rule 144 under the U.S. Securities Act and have not been registered under the U.S. Securities Act or the securities laws of any State of the United States and that, except as provided in paragraph 5(e) above regarding the registration of the Shares and as provided in the Trust Indenture, the Corporation has no other obligation to register any of the Securities under the U.S. Securities Act or the securities laws of any state of the United States. The Securities may not be offered or sold in the United States unless registered in accordance with United States federal securities laws and all applicable state securities laws or exemptions from such requirements are available. The Purchaser acknowledges that the Corporation will not register any transfer of any of the Securities not made pursuant to such registration or pursuant to an available exemption from registration; 7 (f) Offshore Purchasers - Compliance with Laws of Purchaser's Residence. If a Purchaser or any beneficial purchaser for whom it is acting is not a resident of British Columbia, Alberta, Ontario or the United States, the Purchaser represents and warrants to the Corporation that: (i) the Purchaser has knowledge of, or has been independently advised as to, the applicable securities laws of its and any such beneficial purchaser's jurisdiction of residence which would apply to this subscription, if there are any; (ii) the Purchaser and any such beneficial purchaser are purchasing the Debentures pursuant to exemptions from any substantive or procedural requirements under the applicable securities laws of the Purchaser's and such beneficial purchaser's jurisdiction of residence or, if such is not applicable, the Purchaser and any such beneficial purchaser are permitted to purchase the Purchaser's Debentures under the applicable securities laws of the Purchaser's and such beneficial purchaser's jurisdiction of residence without the need for the Corporation, the Purchaser or any such beneficial purchaser to comply with any substantive or procedural requirements of any kind whatsoever in the Purchaser's and such beneficial purchaser's jurisdiction of residence; and (iii) the Purchaser will, if requested by the Corporation, deliver to the Corporation a certificate or opinion of local counsel from the Purchaser's and such beneficial purchaser's jurisdiction of residence which will confirm the matters referred to in subparagraph (ii) above to the satisfaction of the Corporation, acting reasonably; (g) Authorization and Effectiveness. If the Purchaser is a corporation, the Purchaser is a valid and subsisting corporation, has the necessary corporate capacity and authority to execute and deliver this offer and to observe and perform its covenants and obligations hereunder and has taken all necessary corporate action in respect thereof, if the Purchaser is a partnership, syndicate or other form of unincorporated organization, the Purchaser has the necessary legal capacity and authority to execute and deliver this offer and to observe and perform its covenants and obligations hereunder and has obtained all necessary approvals in respect thereof, or, if the Purchaser is an individual, the Purchaser has attained the age of majority and is legally competent to execute this agreement and to take all actions required pursuant thereto, and, in each case, upon acceptance by the Corporation, this Subscription Agreement constitutes a legal, valid, binding and enforceable contract of the Purchaser or the beneficial purchaser for which it is purchasing, as the case may be; (h) Absence of Offering Memorandum. The offering and sale of the Purchaser's Debentures to the Purchaser were not made through an advertisement of the Debentures in printed media of general and regular paid circulation, radio or television, or any other form of advertisement, and the Purchaser has not requested, nor does it need to receive, an offering memorandum or other document prepared by the Corporation describing its business and affairs, in order to assist it in making an investment decision in respect of the Debentures, and, except for this Subscription Agreement, no other documents have been delivered or otherwise furnished by the Corporation to the Purchaser in connection with such offering and sale; (i) Unincorporated Organization. If the Purchaser is a syndicate, partnership or other form of unincorporated organization, the Purchaser warrants and represents that it was not created solely to permit purchases of securities without a prospectus by groups of individuals or other persons who are not "accredited investors" as that term is defined in MI 45-103 (see Schedules attached hereto); (j) Economic Risks. The Purchaser has such knowledge and experience in financial and business affairs as to be capable of evaluating the merits and risks of the investment hereunder and is able to bear the economic risk of loss of such investment; (k) Disclosure to Regulatory Authorities. The funds representing the Purchase Price advanced by the Purchaser to the Corporation hereunder do not represent proceeds of crime for the purposes of the Proceeds of Crime (Money Laundering) Act (Canada) and the Purchaser acknowledges that the Corporation may in the future be required by law to disclose the Purchaser's name and other 8 information relating to this Subscription Agreement and the Purchaser's subscription hereunder, on a confidential basis, to securities regulatory authorities or pursuant to the Proceeds of Crime (Money Laundering) Act (Canada). To the best of its knowledge none of the subscription funds provided by the Purchaser (A) have been or will be derived from or related to any activity that is deemed criminal under the law of Canada, the United States of America, or any other jurisdiction, or (B) are being tendered on behalf of a person or entity who has not been identified to the Purchaser, and (ii) it shall promptly notify the Issuer if the Purchaser discovers that any of such representations ceases to be true, and to provide the Issuer with appropriate information in connection therewith; (l) No Undisclosed Information. The Debentures are not being purchased by the Purchaser as a result of any material information concerning the Corporation that has not been publicly disclosed and the Purchaser's decision to tender this offer and acquire the Debentures has not been made as a result of any oral or written representation as to fact or otherwise made by or on behalf of the Corporation or any other person and is based entirely upon currently available public information concerning the Corporation; (m) Adequate Information. The Purchaser has had access to and has received all such information concerning the Corporation that the Purchaser considers necessary in connection with the Purchaser's investment decision; (n) No Recommendation or Endorsement. The Purchaser acknowledges that no agency, governmental authority, regulatory body, stock exchange or other entity has made any finding or determination as to the merit for investment of, nor have any such agencies or government authorities made any recommendation or endorsement with respect to, the Securities; and (o) No Representation as to the Securities. No person has made to the Purchaser any written or oral representations: (i) that any person will resell or repurchase the Securities; (ii) that any person will refund the purchase price for the Securities; (iii) as to the future price or value of the Securities; or (iv) that the Securities will be listed and posted for trading on any stock exchange or that application has been made to list the Shares on any stock exchange other than the TSX Venture Exchange. 9. Conditions to Closing. Closing of the purchase by the Purchaser of the Debentures pursuant to this Subscription Agreement is subject to fulfilment of the following conditions: (a) completion of due diligence investigations in respect of the Corporation by or on behalf of the Lead Investor, and the information obtained thereby being acceptable to the Lead Investor in its sole discretion; (b) the Corporation and Computershare Trust Company of Canada (or such other trust company as may be acceptable to the Corporation and to the Lead Investor and Purchasers' Special Counsel, acting reasonably), as trustee, entering into the Trust Indenture, to provide for the creation and issue of the Debentures on the terms provided herein, and other documents to provide the security for the Debentures being entered into as contemplated herein, all in form and substance satisfactory (in their sole discretion, acting reasonably) to the Lead Investor and Purchasers' Special Counsel; (c) the issue of the Debentures to the Purchaser, all in form and substance satisfactory (in their sole discretion, acting reasonably) to the Lead Investor and Purchasers' Special Counsel; (d) concurrently with the Closing of the offering of the Debentures, all indebtedness of the Corporation to Bank One, N.A., TransAtlantic Petroleum (USA) Corp. and Quest Investment 9 Corporation being repaid in full with the proceeds from the Offering, and such creditors fully releasing or undertaking to release all security interests and mortgages held by them for such indebtedness, all in form and substance satisfactory (in their sole discretion acting reasonably) to the Lead Investor and Purchasers' Special Counsel; (e) Jules Poscente and John Fleming being validly appointed or elected members of the Board of Directors of the Corporation effective on the Closing; (f) the Chief Executive Officer and the Chief Financial Officer of the Corporation certifying to the Purchasers and Purchasers' Special Counsel at Closing that the representations and warranties of the Corporation contained herein and in the Trust Indenture are true and correct at such time, as if made at such time, and that the Corporation is not in default of any of its covenants contained herein or in the Trust Indenture, and in each case neither the Lead Investor nor Purchasers' Special Counsel having any knowledge to the contrary; (g) the receipt of legal opinions, addressed to the Purchasers and Purchasers' Special Counsel, from the Corporation's Canadian and U.S. legal counsel, all in form and substance satisfactory (in their sole discretion, acting reasonably) to the Lead Investor and Purchasers' Special Counsel; and (h) the receipt by the Corporation of all necessary regulatory and stock exchange approvals for the issue of the Debentures and the issue of Shares on conversion of the Debentures, all in form and substance satisfactory (in their sole discretion, acting reasonably) to the Lead Investor and Purchasers' Special Counsel. 10. Hold Period and Resale Conditions. The Purchaser understands and acknowledges that the Securities will be subject to certain resale restrictions under applicable securities laws and the rules and policies of the Exchange and the Purchaser agrees to comply with such restrictions and further acknowledges that the Securities specifically cannot be resold unless: (a) subject to certain exceptions provided under the 1933 Act, the Securities are registered under the 1933 Act and applicable state securities laws or unless an exemption from such registration requirements is available (Schedule F hereto provides a description of some exemptions from registration requirements); and (b) for any resale in the Reporting Issuer Jurisdictions, the resale is made pursuant to private placement exemptions from prospectus requirements under applicable Canadian securities laws, or a prospectus is filed in respect of the resale, or the Purchaser complies with the following conditions: (i) the Corporation is at the time of the resale trade, and has been for the four months immediately preceding the resale trade, a reporting issuer in one of the Reporting Issuer Jurisdictions; (ii) the selling security holder has held the Securities for at least four months from the Distribution Date; (iii) the resale trade is not a "control distribution" as defined in MI 45-102 (generally speaking, the resale trade is not from the holdings of a control person or control group in respect of the Corporation); (iv) no unusual effort is made to prepare the market or to create a demand for the Securities that are the subject of the trade; (v) no extraordinary commission or consideration is paid to a person or company in respect of the trade; 10 (vi) if the selling security holder is an insider or officer of the Corporation, the selling security holder has no reasonable grounds to believe that the Corporation is in default of the Securities Laws; and (vii) the Purchaser files a report, if required, of any resale, in the form, within the time and where required, in accordance with applicable securities legislation. 11. Legend. The Purchaser acknowledges and accepts that certificates representing the Securities will bear the following legends: (a) "Unless permitted under securities legislation, the holder of the securities shall not trade the securities before [four months and one day after the Closing Date]."; and (b) The legend set forth in Schedule C hereto. In addition, the Purchaser acknowledges and accepts that certificates representing the Shares will bear the following legend: "Without the prior written approval of the TSX Venture Exchange (the "Exchange") and compliance with applicable securities legislation, the securities represented by this certificate may not be sold, transferred, hypothecated or otherwise traded on or through the facilities of the Exchange or otherwise in Canada or to or for the benefit of a Canadian resident before [four months and one day after the Closing Date]" 12. No Revocation. The Purchaser agrees that this offer is made for valuable consideration and may not be withdrawn, cancelled, terminated or revoked by the Purchaser, subject to any conditions in favour of the Purchaser not being fulfilled on or prior to Closing or any other legal rights to withdraw, cancel or terminate this Subscription Agreement contained herein. 13. Indemnity. The Purchaser agrees to indemnify and hold harmless the Corporation and its directors, officers, employees, agents, advisers and shareholders from and against any and all loss, liability, claim, damage and expense whatsoever (including, but not limited to, any and all fees, costs and expenses whatsoever reasonably incurred in investigating, preparing or defending against any claim, law suit, administrative proceeding or investigation whether commenced or threatened) arising out of or based upon any representation or warranty of the Purchaser contained herein or in any document furnished by the Purchaser to the Corporation in connection herewith being untrue in any material respect or any breach or failure by the Purchaser to comply with any covenant or agreement made by the Purchaser herein or in any document furnished by the Purchaser to the Corporation in connection herewith. The Corporation agrees to indemnify and hold harmless the Purchaser and its directors, officers, employees, agents, advisers and shareholders from and against any and all loss, liability, claim, damage and expense whatsoever (including, but not limited to, any and all fees, costs and expenses whatsoever reasonably incurred in investigating, preparing or defending against any claim, law suit, administrative proceeding or investigation whether commenced or threatened) arising out of or based upon any representation or warranty of the Corporation contained herein or in any document furnished by the Corporation to the Purchaser in connection herewith being untrue in any material respect or any breach or failure by the Corporation to comply with any covenant or agreement made by the Corporation herein or in any document furnished by the Corporation to the Purchaser in connection herewith. 14. Modification. Neither this Subscription Agreement nor any provision hereof shall be modified, changed, discharged or terminated except by an instrument in writing signed by the party against whom any waiver, change, discharge or termination is sought. 15. Assignment. This Subscription Agreement and any interest herein or any of the rights arising hereunder may be assigned only together with a transfer of the Debentures purchased hereunder and in accordance with applicable securities laws and the rules of the Exchange, and provided that the assignee agrees in writing to be bound by the terms and conditions of this Subscription Agreement and completes and executes the Acknowledgment of Assignment Form attached to the certificates representing the Debentures and delivers it to the Corporation. 11 16. Notice. All notices or other communications to be given hereunder shall be delivered by hand or by telecopier, and if delivered by hand, shall be deemed to have been given on the date of delivery or, if sent by telecopier, on the date of transmission if sent before 5:00 p.m. and such day is a business day or, if not, on the first business day following the date of transmission. Notice to the Corporation shall be addressed to: American Natural Energy Corporation 7030 South Yale, Suite 404 Tulsa, Oklahoma 74136 Attention: President Telecopier: 918-481-1473 Notices to the Purchaser shall be addressed to the address of the Purchaser set out on the execution page hereof under "Purchaser's Information". Either the Corporation or the Purchaser may change its address for service aforesaid by notice in writing to the other party hereto specifying its new address for service hereunder. 17. Miscellaneous. The agreement resulting from the acceptance of this Subscription Agreement by the Corporation contains the whole agreement between the Corporation and the Purchaser in respect of the subject matter hereof and there are no warranties, representations, terms, conditions or collateral agreements, express, implied or statutory, other than as expressly set forth herein and in any amendments hereto and in the Trust Indenture and the Debentures. All representations, warranties, agreements and covenants made or deemed to be made by the Purchaser herein will survive the execution and delivery, and acceptance, of this offer and the Closing. Time shall be of the essence of this Subscription Agreement. This Subscription Agreement and the rights and obligations of the parties hereunder will be governed by and construed according to the laws of the Province of British Columbia. This Subscription Agreement will enure to the benefit of and be binding upon the parties hereto, and their heirs, executors, administrators, successors and permitted assigns. This Subscription Agreement may be executed in any number of counterparts, each of which when delivered, either in original or facsimile form, shall be deemed to be an original and all of which together shall constitute one and the same document. The Purchaser acknowledges and agrees that all costs incurred by the Purchaser, including any fees and disbursements of any counsel retained by the Purchaser (other than the fees and disbursements of Purchasers' Special Counsel and fees and disbursements of U.S. counsel retained by it which shall be paid by the Corporation if the Closing occurs or if the Closing does not occur solely as a result of the fault of the Corporation), relating to the sale of the Debentures to the Purchaser shall be borne by the Purchaser. The Purchaser, on its own behalf and, if applicable, on behalf of others for whom it is contracting hereunder, agrees that this offer is made for valuable consideration and may not be withdrawn, cancelled, terminated or revoked by the Purchaser, on its own behalf and, if applicable, on behalf of others for whom it is contracting hereunder. The covenants, representations and warranties of the Corporation contained herein and in the Trust Indenture and the Debentures shall survive the closing of the transactions contemplated hereby. 12 SCHEDULE A CERTIFICATE OF ACCREDITED INVESTOR (ALL PURCHASERS TO COMPLETE) TO: AMERICAN NATURAL ENERGY CORPORATION RE: SUBSCRIPTION FOR CONVERTIBLE SECURED DEBENTURES OF THE CORPORATION Capitalized terms not specifically defined in this Certificate have the meaning ascribed to them in the Convertible Secured Debenture Subscription Agreement to which this Schedule A is attached. In the event of a conflict between the terms of this Certification and such Subscription Agreement, the terms of this Certification shall prevail. The undersigned Purchaser of Debentures hereby certifies that: 1. The Purchaser, or an authorized representative of the Purchaser, has read the Convertible Secured Debenture Subscription Agreement and understands that the offering of the Debentures is being made on a prospectus exempt basis. 2. The Purchaser is an accredited investor as defined in Multilateral Instrument 45-103, by virtue of being: [PLEASE CHECK ONE] a. _____ a Canadian financial institution(1), or an authorized foreign bank listed Schedule III of the Bank Act (Canada), b. _____ the Business Development Bank of Canada incorporated under the Business Development Bank of Canada Act (Canada), c. _____ an association under the Cooperative Credit Associations Act (Canada) located in Canada or a central cooperative credit society for which an order has been made under subsection 473(1) of that Act, d. _____ a subsidiary of any person or company referred to in paragraphs (a) to (c), if the person or company owns all of the voting securities of the subsidiary, except the voting securities required by law to be owned by directors of that subsidiary, e. _____ a person or company registered under the securities legislation of a jurisdiction of Canada, as an adviser or dealer, other than a limited market dealer registered under the Securities Act (Ontario) or the Securities Act (Newfoundland and Labrador), f. _____ an individual registered or formerly registered under the securities legislation of a jurisdiction of Canada, as a representative of a person or company referred to in paragraph (e), g. _____ the government of Canada or a jurisdiction of Canada, or any crown corporation, agency or wholly owned entity of the government of Canada or a jurisdiction of Canada, h. _____ a municipality, public board or commission in Canada, i. _____ any national, federal, state, provincial, territorial or municipal government of or in any foreign jurisdiction, or any agency of that government, j. _____ a pension fund that is regulated by either the Office of the Superintendent of Financial Institutions (Canada) or a provincial pension commission or similar regulatory authority of a jurisdiction of Canada, k. _____ a registered charity under the Income Tax Act (Canada) that, in regard to the trade, has obtained advice from an eligibility adviser or other adviser registered to provide advice on the securities being traded, l. _____ an individual who, either alone or with a spouse, beneficially owns, directly or indirectly, financial assets(2) having an aggregate realizable value that before taxes, but net of any related liabilities(3), exceeds $1,000,000, m. _____ an individual whose net income before taxes exceeded $200,000 in each of the two most recent years or whose net income before taxes combined with that of a spouse exceeded $300,000 in each of the two most recent years and who, in either case, reasonably expects to exceed that net income level in the current year, n. _____ a person or company, other than a mutual fund or non-redeemable investment fund, that, either alone or with a spouse, had net assets of at least $5,000,000, and unless the person or company is an individual, that amount is shown on its most recently prepared financial statements, o. _____ a mutual fund or non-redeemable investment fund that, in the local jurisdiction, distributes its securities only to persons or companies that are accredited investors, p. _____ a mutual fund or non-redeemable investment fund that, in the local jurisdiction, is distributing or has distributed its securities under one or more prospectuses for which the regulator has issued receipts, q. _____ a trust company or trust corporation registered or authorized to carry on business under the Trust and Loan Companies Act (Canada) or under comparable legislation in a jurisdiction of Canada or a foreign jurisdiction, trading as a trustee or agent on behalf of a fully managed account(4), r. _____ a person or company trading as agent on behalf of a fully managed account(4) if that person or company is registered or authorized to carry on business under the securities legislation of a jurisdiction of Canada or a foreign jurisdiction as a portfolio manager or under an equivalent category of adviser or is exempt from registration as a portfolio manager or the equivalent category of adviser, s. _____ an entity organized in a foreign jurisdiction that is analogous to any of the entities referred to in paragraphs (a) through (e) and paragraph (j) in form and function, or t. _____ a person or company in respect of which all of the owners of interests, direct or indirect, legal or beneficial, except the voting securities required by law to be owned by directors, are persons or companies that are accredited investors. (1) A Canadian financial institution means a bank, loan corporation, trust company, insurance company, treasury branch, credit union or caisse populaire that in each case is authorized to carry on business in Canada or a province or territory of Canada, or the Confederation des caisses populaires et d'economie Desjardins du Quebec. (2) For the purposes of Multilateral Instrument 45-103 and this Certificate, the term "financial assets" means cash and securities. (3) For the purposes of Multilateral Instrument 45-103 and this Certificate, the term "related liabilities" means (a) liabilities incurred or assumed for the purpose of financing the acquisition or ownership of financial assets, or (b) liabilities that are secured by financial assets. (4) For the purposes of Multilateral Instrument 45-103 and this Certificate, the term "fully managed account" means an account for which a person or 2 company makes the investment decisions if that person or company has fully discretion to trade in securities for the account without requiring the client's express consent to a transaction. 3. The Purchaser is purchasing the Debentures as principal (i.e., for its own account and benefit only). For this purpose, a trust company or trust corporation described in paragraph (q) above (other than a trust company or trust corporation registered under the laws of Prince Edward Island that is not registered under the Trust and Loan Companies Act (Canada) or under comparable legislation in another jurisdiction of Canada) and a person or company described in paragraph (r) above is deemed to be purchasing as principal. DATED _______________________________, 2003. _________________________________________________ Signature of Purchaser _________________________________________________ Name of Purchaser _________________________________________________ _________________________________________________ Address of the Purchaser 3 SCHEDULE B ACCREDITED INVESTOR CERTIFICATION (ONTARIO PURCHASERS) TO: AMERICAN NATURAL ENERGY CORPORATION RE: SUBSCRIPTION FOR CONVERTIBLE SECURED DEBENTURES OF THE CORPORATION Capitalized terms not specifically defined in this Certification have the meaning ascribed to them in the Convertible Secured Debenture Subscription Agreement to which this Schedule B is attached. In the event of a conflict between the terms of this Certification and such Subscription Agreement, the terms of this Certification shall prevail. The following certification must be completed and signed by each purchaser of securities of American Natural Energy Corporation (the "Corporation") that is resident in, or is otherwise subject to the securities laws of, the Province of Ontario. The undersigned purchaser acknowledges and agrees that the Corporation is relying on the matters certified hereto by the purchaser to determine the ability of the Corporation to issue securities of the Corporation to the purchaser in a manner exempt from the prospectus requirements of the Securities Act (Ontario). The undersigned purchaser of Debentures of the Corporation hereby certifies that: 1. The undersigned purchaser is an "accredited investor" within the meaning of Rule 45-501 of the Ontario Securities Commission, and is an "accredited investor" in the following category (please check the applicable category below): ______ (a) a bank listed in Schedule I or II of the Bank Act (Canada), or an authorized foreign bank listed in Schedule III of that Act; ______ (b) the Business Development Bank incorporated under the Business Development Bank Act (Canada); ______ (c) a loan corporation or trust corporation registered under the Loan and Trust Corporations Act or under the Trust and Loan Companies Act (Canada), or under comparable legislation in any other jurisdiction; ______ (d) a co-operative credit society, credit union central, federation of caisses populaires, credit union or league, or regional caisse populaire, or an association under the Cooperative Credit Associations Act (Canada), in each case, located in Canada; ______ (e) a company licensed to do business as an insurance company in any jurisdiction; ______ (f) a subsidiary of any company referred to in paragraph (a), (b), (c), (d) or (e), where the company owns all of the voting shares of the subsidiary; ______ (g) a person or company registered under the Securities Act (Ontario) or securities legislation in another jurisdiction as an adviser or dealer, other than a limited market dealer; ______ (h) the government of Canada or of any jurisdiction, or any crown corporation, instrumentality or agency of a Canadian federal, provincial or territorial government; ______ (i) any Canadian municipality or any Canadian provincial or territorial capital city; ______ (j) any national, federal, state, provincial, territorial or municipal government of or in any foreign jurisdiction, or any instrumentality or agency thereof; ______ (k) a pension fund that is regulated by either the Office of the Superintendent of Financial Institutions (Canada) or a provincial pension commission or similar regulatory authority; ______ (l) a registered charity under the Income Tax Act (Canada); ______ (m) an individual who beneficially owns, or who together with a spouse beneficially own, financial assets [meaning cash, securities, or any contract of insurance or deposit or evidence thereof that is not a security for purposes of the Securities Act (Ontario)] having an aggregate realizable value that, before taxes but net of any related liabilities [meaning liabilities incurred or assumed for the purpose of financing the acquisition or ownership of financial assets and liabilities that are secured by financial assets], exceeds $1,000,000; ______ (n) an individual whose net income before taxes exceeded $200,000 in each of the two most recent years or whose net income before taxes combined with that of a spouse exceeded $300,000 in each of those years and who, in either case, has a reasonable expectation of exceeding the same net income level in the current year; ______ (o) an individual who has been granted registration under the Securities Act (Ontario) or securities legislation in another jurisdiction as a representative of a person or company referred to in paragraph (g), whether or not the individual's registration is still in effect; ______ (p) a promoter of the Corporation or an affiliated entity of a promoter of the Corporation; ______ (q) a spouse, parent, grandparent or child of an officer, director or promoter of the Corporation; ______ (r) a person or company that, in relation to the Corporation, is an affiliated entity or a person or company referred to in clause (c) of the definition of distribution in subsection 1(1) of the Securities Act (Ontario); ______ (s) an issuer that is acquiring securities of its own issue; ______ (t) a company, limited partnership, limited liability partnership, trust or estate, other than a mutual fund or non-redeemable investment fund, that had net assets of at least $5,000,000 as reflected in its most recently prepared financial statements; ______ (u) a person or company that is recognized by the Ontario Securities Commission as an accredited investor; ______ (v) a mutual fund or non-redeemable investment fund that, in Ontario, distributes its securities only to persons or companies that are accredited investors (within the meaning of Rule 45-501 of the Ontario Securities Commission); ______ (w) a mutual fund or non-redeemable investment fund that, in Ontario, distributes its securities under a prospectus for which a receipt has been granted by the Director under the Securities Act (Ontario); ______ (x) a managed account (within the meaning of Rule 45-501 of the Ontario Securities Commission) if it is acquiring a security that is not a security of a mutual fund or non-redeemable investment fund; ______ (y) an account that is fully managed by a trust corporation registered under the Loan and Trust Corporations Act (Ontario); ______ (z) an entity organized outside of Canada that is analogous to any of the entities referred to in paragraphs (a) through (g) and paragraph (k) in form and function; or ______ (aa) a person or company in respect of which all of the owners of interests, direct or indirect, legal or beneficial, are persons or companies that are accredited investors. 2. The undersigned purchaser of Debentures of the Corporation is purchasing the Debentures as principal (i.e., for its own account and benefit only). DATED ________________________ , 2003. __________________________________________ Signature of Purchaser __________________________________________ Name of Purchaser __________________________________________ __________________________________________ Address of the Purchaser 2 SCHEDULE C U.S. CERTIFICATE OF ACCREDITED INVESTOR (ALL PURCHASERS TO COMPLETE) TO: AMERICAN NATURAL ENERGY CORPORATION RE: SUBSCRIPTION FOR CONVERTIBLE SECURED DEBENTURES OF THE CORPORATION Capitalized terms not specifically defined in this Certification have the meaning ascribed to them in the Convertible Secured Debenture Subscription Agreement to which this Schedule C is attached. In the event of a conflict between the terms of this Certification and such Subscription Agreement, the terms of this Certification shall prevail. In addition to the covenants, representations and warranties contained in the Subscription Agreement to which this Schedule C is attached, the undersigned (the "Purchaser") covenants, represents and warrants to the Corporation that: (a) It is authorized to consummate the purchase of the Debentures. (b) It has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of an investment in the Debentures and it is able to bear the economic risk of loss of its entire investment. (c) The Corporation has provided to it the opportunity to ask questions and receive answers concerning the terms and conditions of the offering and it has had access to such information concerning the Corporation as it has considered necessary or appropriate in connection with its investment decision to acquire the Debentures, including access to the Corporation's public filings available on the Internet at www.sec.gov and at www.sedar.com, and that any answers to questions and any request for information have been complied with to the Purchaser's satisfaction. (d) It is acquiring the Debentures for its own account, for investment purposes only and not with a view to any resale, distribution or other disposition of the Debentures in violation of the United States securities laws. (e) The address of the Purchaser set out on page 1 of the Subscription Agreement is the true and correct principal address of the Purchaser and can be relied on by the Corporation and the Agent for the purposes of state blue-sky laws. (f) It understands (i) the Securities have not been registered under the United States Securities Act of 1933, as amended (the "1933 Act") or the securities laws of any state of the United States and, except as provided in paragraph 5(e) of the Subscription Agreement regarding the registration of the Shares and as provided in the Trust Indenture, there is no other obligation of the Corporation to do so, (ii) the sale contemplated hereby is being made in reliance on an exemption from such registration requirements; and (iii) subject to certain exceptions provided under the 1933 Act, the Securities may not be transferred or converted unless such Securities, as applicable, are registered under the 1933 Act and applicable state securities laws or unless an exemption from such registration requirements is available. (g) The Purchaser is an "accredited investor" as defined in Rule 501 of Regulation D of the 1933 Act by virtue of meeting one of the following criteria (PLEASE HAND-WRITE YOUR INITIALS ON THE APPROPRIATE LINES): 1. An organization described in Section 501(c)(3) of the Initials _______ United States Internal Revenue Code, a corporation, a Massachusetts or similar business trust or partnership, not formed for the specific purpose of acquiring the Debentures, with total assets in excess of USD $5,000,000; 2. A trust that (a) has total assets in excess of USD Initials _______ $5,000,000, (b) was not formed for the specific purpose of acquiring the Debentures and (c) is directed in its purchases of the Debentures by a person who has such knowledge and experience in financial and business matters that he/she is capable of evaluating the merits and risks of an investment in the Debentures; 3. An investment company registered under the Investment Initials _______ Company Act of 1940 or a business development company as defined in Section 2(a)(48) of that Act; 4. A Small Business Investment Company licensed by the U.S. Initials _______ Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958; 5. A private business development company as defined in Initials _______ Section 202(a)(22) of the Investment Advisors Acts of 1940; or 6. The Purchaser is a natural person whose total personal Initials _______ net worth, either individually or jointly with such person's spouse, at the time of purchase, exceeds $1,000,000. 7. The Purchaser is a natural person who had individual Initials _______ income in excess of $200,000, or joint income with the person's spouse in excess of $300,000, in each of the two most recent years and reasonably expects to reach the same income level in the current year. 8. An entity in which all of the equity owners satisfy the Initials _______ requirements of one or more of the foregoing categories. (h) The Purchaser has not purchased the Debentures as a result of any form of general solicitation or general advertising (as those terms are used in Regulation D under the 1933 Act), including advertisements, articles, notices or other communications published in any newspaper, magazine or similar media or broadcast over radio or television, or other form of telecommunications, including electronic display, or any seminar or meeting whose attendees have been invited by general solicitation or general advertising. (i) If the Purchaser decides to offer, sell or otherwise transfer any of the Securities, it will not offer, sell or otherwise transfer any of such Securities directly or indirectly, unless: i. such Securities are registered under the 1933 Act and any applicable state securities laws; ii. the sale is to the Corporation; iii. the sale is made pursuant to the exemption from the registration requirements under the 1933 Act provided by Rule 144 thereunder and in accordance with any applicable state securities or "blue sky" laws; iv. the sale is to an institutional "accredited investor" as defined in Rule 501(a)(1), (2), (3) or (7) under the 1933 Act and a purchaser's letter containing the same representations, warranties and agreements as those contained in this certification, and satisfactory to the Corporation, is executed by the purchaser and delivered to the Corporation prior to the sale; or v. the securities are sold in a transaction that does not require registration under the 1933 Act or any applicable state laws and regulations governing the offer and sale of securities. (j) It understands and agrees that the Shares may not be issued to the Purchaser unless they are registered under the 1933 Act and any applicable state securities laws or unless an exemption from such registration requirements is available. 2 (k) It acknowledges that it has not purchased the Securities as a result of, and will not itself engage in, any "directed selling efforts" (as defined in Regulation S under the 1933 Act) in the United States in respect of the Securities which would include any activities undertaken for the purpose of, or that could reasonably be expected to have the effect of, conditioning the market in the United States for the resale of the Securities; provided however that the Purchaser may sell or otherwise dispose of any of the Securities pursuant to registration of the Securities pursuant to the 1933 Act and any applicable state securities laws or under an exemption from such registration requirements and as otherwise provided herein; and (l) The certificates representing the Securities, as well as all certificates issued in exchange for or in substitution of the foregoing, until such time as is no longer required under the applicable requirements of the 1933 Act or applicable state securities laws, will bear, on the face of such certificate, a legend substantially as follows: "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAW. NO INTEREST THEREIN MAY BE SOLD, DISTRIBUTED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE TRANSFERRED OR DISPOSED OF WITHOUT (A) AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND ANY OTHER APPLICABLE UNITED STATES STATE OR FEDERAL SECURITIES LAWS COVERING ANY SUCH TRANSACTION OR (B) AN EXEMPTION FROM REGISTRATION (BASED ON RECEIPT BY THE CORPORATION OF AN ACCEPTABLE LEGAL OPINION STATING THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION, IF SO REQUESTED BY THE CORPORATION), OR (C) THE CORPORATION OTHERWISE SATISFYING ITSELF THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION." (m) It understands and agrees that there may be material tax consequences to the Purchaser of an acquisition or disposition of the Securities. The Corporation gives no opinion and makes no representation with respect to the tax consequences to the Purchaser under United States, state, local or foreign tax law of the undersigned's acquisition or disposition of such Securities. (o) It consents to the Corporation making a notation on its records or giving instructions to any transfer agent of the Corporation in order to implement the restrictions on transfer set forth and described in this U.S. Certification and the Subscription Agreement. Dated _______________ 2003 X_________________________________________ Signature of individual (if Purchaser IS an individual) X_________________________________________ Authorized signatory (if Purchaser is NOT an individual) __________________________________________ Name of Purchaser (PLEASE PRINT) __________________________________________ Name of authorized signatory (PLEASE PRINT) __________________________________________ Official capacity of authorized signatory (PLEASE PRINT) 3 SCHEDULE D FORM 4C CORPORATE PLACEE REGISTRATION FORM The subscriber either [CHECK APPROPRIATE BOX]: [ ] has previously filed with the TSX Venture Exchange (the "Exchange") a Form 4C, Corporate Placee Registration Form and represents and warrants that there has been no change to any of the information in the Corporate Placee Registration Form previously filed with the Exchange up to the date hereof; or [ ] hereby delivers a completed Form 4C, Corporate Placee Registration Form filing with the Exchange. Where subscribers to a Private Placement are not individuals, the following information about the placee must be provided. This Form will remain on file with the Exchange. The corporation, trust, portfolio manager or other entity (the "Placee") need only file it on one time basis, and it will be referenced for all subsequent Private Placements in which it participates. If any of the information provided in this Form changes, the Placee must notify the Exchange prior to participating in further placements with Exchange listed companies. If as a result of the Private Placement, the Placee becomes an Insider of the Issuer, Insiders of the Placee are reminded that they must file a Personal Information Form (2A) with the Exchange. 1. Placee Information: (a) Name: ________________________________________________________________ (b) Complete Address: ____________________________________________________ ______________________________________________________________________ (c) Jurisdiction of Incorporation or Creation: ___________________________ 2. (a) Is the Placee purchasing securities as a portfolio manager (Yes/No)? ____________________________________________________________ (b) Is the Placee carrying on business as a portfolio manager outside of Canada (Yes/No)? _____________________________________________________ 3. If the answer to 2(b) above was "Yes", the undersigned certifies that: (a) It is purchasing securities of an Issuer on behalf of managed accounts for which it is making the investment decision to purchase the securities and has full discretion to purchase or sell securities for such accounts without requiring the client's express consent to a transaction; (b) it carries on the business of managing the investment portfolios of clients through discretionary authority granted by those clients (a "portfolio manager" business) in ____________________ [jurisdiction], and it is permitted by law to carry on a portfolio manager business in that jurisdiction; (c) it was not created solely or primarily for the purpose of purchasing securities of the Issuer; (d) the total asset value of the investment portfolios it manages on behalf of clients is not less than $20,000,000; and (e) it has no reasonable grounds to believe, that any of the directors, senior officers and other insiders of the Issuer, and the persons that carry on investor relations activities for the Issuer has a beneficial interest in any of the managed accounts for which it is purchasing. 4. If the answer to 2(a) above was "No", please provide the names and addresses of control persons of the Placee:
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The undersigned acknowledges that it is bound by the provisions of applicable Securities Law, including provisions concerning the filing of insider reports and reports of acquisitions (See for example, sections 87 and 111 of the Securities Act (British Columbia) and sections 176 and 182 of the Securities Act (Alberta). Dated at ______________________________________ on _____________________________ _______________________________________________ (Name of Purchaser - please print) _______________________________________________ (Authorized Signature) _______________________________________________ (Official Capacity - please print) _______________________________________________ (please print name of individual whose signature appears above) THIS IS NOT A PUBLIC DOCUMENT 2 SCHEDULE E FORM W-8 CERTIFICATE OF FOREIGN STATUS OF BENEIFICAL OWNER FOR UNITED STATES TAX WITHHOLDING Payments of interest to a Purchaser will be subject to U.S. income tax withholding unless certain certification requirements are satisfied. The certification requirements will be satisfied if either (i) the beneficial owner of the Debentures timely certifies to the Corporation (or the Corporation's paying agent), under penalties of perjury, that such owner is a non-U.S. person and provides its name and address, or (ii) a custodian, broker, nominee, or other intermediary acting as an agent for the beneficial owner (such as a securities clearing organization, bank or other financial institution that holds customers' securities in the ordinary course of its trade or business) that holds the Debentures in such capacity timely certifies to the Corporation (or the Corporation's paying agent), under penalties of perjury, that such statement has been received from the beneficial owner of the Debentures by such intermediary, or by any other financial institution between such intermediary and the beneficial owner, and furnishes to the Corporation (or the Corporation's paying agent) a copy thereof. The foregoing certification may be provided on a properly completed Internal Revenue Service ("IRS") Form W-8BEN or W-8IMY (attached), as applicable, or any successor forms, duly executed under penalties of perjury. With respect to the certification requirement for Debentures that are held by an entity that is classified for United States federal income tax purposes as a foreign partnership, unless the foreign partnership has entered into a withholding agreement with the IRS, the foreign partnership will be required, in addition to providing an intermediary Form W-81MY, to attach an appropriate certification by each partner. Notwithstanding certification as aforesaid, interest payments to Debentureholders who own, directly or on an attribution basis, more than 10% of the outstanding Common Shares of the Corporation (calculated under the provisions of the Internal Revenue Code, which includes conversion of such Debentureholder's Debentures into Common Shares) will be subject to U.S. withholding tax. The Trust Indenture governing the Debentures will provide that, if any interest payments to a Purchaser are subject to U.S. withholding tax, the interest payments to that Purchaser will be grossed-up so that the additional amount of interest compensates the Purchaser for the applicable U.S. withholding tax on a net basis after all taxes; provided that the Purchaser will be obliged to repay to the Corporation any amount of the withholding tax that the Purchaser effectively recovers on a net basis, as a tax credit or otherwise, under the tax laws of its jurisdiction of residence. This gross-up provision will not apply to subsequent purchasers of Debentures. SCHEDULE F UNITED STATES RESALE RESTRICTIONS The following discussion is a general description of the provisions of U.S. securities laws and related rules and regulations relating to the re-sale of Shares. In every instance, facts and circumstances relating to a specific re-sale transaction may make the following discussion inapplicable. Persons proposing to engage in a re-sale transaction are advised to consult with experts before engaging in a re-sale transaction to assure compliance with U.S. securities laws. Restricted Securities In Section 8(e) of the Subscription Agreement, the Purchaser acknowledges that it is aware that the Debentures, and the Shares issuable on conversion, are "restricted securities" as defined under the U.S. Securities Act. Re-sales of Conversion Shares In order to enable the Purchaser to resell Shares issuable upon conversion of a Debenture, the Corporation has agreed in Section 5(e) of the Subscription Agreement to file and use its best efforts to have declared effective by the U.S. Securities and Exchange Commission a registration statement under the U.S. Securities Act. The Corporation has no reason to believe at this time that it will be unable to have the registration statement declared effective. However, in the event the registration statement is not declared effective, a Purchaser will be able to resell the Shares, even if the resale occurs outside the United States, only upon compliance with an exemption from the registration requirements of the U.S. Securities Act. Rule 144 Re-sales Among other possible exemptions, the exemption under U.S. law most frequently relied upon by persons who have purchased "restricted securities" is Rule 144 adopted under the U.S. Securities Act. After Twelve Months. Rule 144 is available for the sale of restricted securities after a period of twelve months has expired from the date the Debentures are purchased and fully paid for. Under the tacking provisions of Rule 144, the twelve-month period will begin to run on the date the Debentures are purchased and fully paid for. The holding period relates to the entire time period the Debentures and Shares are held; it is not necessary that the Shares issued on conversion be held for twelve months in order to meet the holding period requirement. After the twelve-month holding period has been met by a non-U.S. subscriber, sales of Shares can be made pursuant to Rule 144 through a non-U.S. broker on a non-U.S. exchange, subject to compliance with (1) the limitations on the amount of securities that can be sold and (2) the manner of sale provisions of Rule 144. The limitation on the amount of Shares that can be sold limits a selling Shareholder to selling, including sales of Shares made by the selling Shareholder during the preceding three months, an amount of Shares not exceeding 1% of the Shares outstanding. This calculation is made without reflecting Shares issuable on conversion or exercise of securities, including the Debentures, options or warrants. Under certain facts and circumstances, Rule 144 contains specific provisions regarding the determination of the amount of Shares that can be sold during the three-month period including, but not limited to, the following: When two or more affiliates or other persons agree to act in concert for the purpose of selling Shares of the Corporation, all Shares sold for the account of such persons during any three-month period will be aggregated for purposes of determining the limitation on the amount of Shares sold. Rule 144 does not define "acting in concert" and it is a determination made based on facts and circumstances at the time of the proposed sale. Shares which a selling Shareholder can sell but which are not included in its determination of the amount of Shares it can sell in reliance upon Rule 144 include Shares sold in a transaction exempt pursuant to Section 4 of the U.S. Securities Act and not involving any public offering (a private sale) and Shares sold offshore pursuant to Regulation S under the U.S. Securities Act. The manner of sale provisions require that the Shares be sold in brokers' transactions and that the person or persons making the sale not solicit or arrange for the solicitation of orders to purchase the securities in anticipation of or in connection with the sale or make any payment in connection with the offer or sale to any person other than the broker who executes the sale. In order to be a broker's transaction, the broker executing the sale can do nothing more than execute the order to sell as agent for the person selling the Shares and receive no more than the customary commission. In addition, the broker cannot solicit or arrange for the solicitation of orders to buy the Shares or be aware of circumstances indicating that the sale is a part of an unlawful distribution of the Shares in violation of the registration requirements of the U.S. Securities Act. A notice of sale on Form 144 is to be filed with the U.S. Securities and Exchange Commission at the time of making a 144 sale. After Twenty-four Months. After a period of twenty-four months has expired from the date the Debentures are purchased and fully paid for, and provided the Shares are to be sold by a person who is not an "affiliate" of the Corporation, the Shares can be resold through a non-U.S. broker on a non-U.S. exchange without complying with the above limitations on the amount of securities sold, the manner of sale provisions and the notice filing requirements of Rule 144 described above. This exemption is pursuant to Rule 144(k). Under these circumstances, it is the practice of U.S. securities lawyers to permit the removal of U.S. restrictive legends on securities held by non-affiliates after the twenty-four month holding period. Persons who are deemed to be "affiliates" of the Corporation will continue to be required to comply with the provisions of Rule 144 in making re-sales of Shares after the twenty-four month holding period including the limitations on the amount of securities that can be sold, compliance with the manner of sale provisions and the notice filing requirement of the Rule. You can assume that under Rule 144 an "affiliate" of the Corporation includes executive officers, Directors and persons listed in the Corporation's disclosure documents as 5% or greater stockholders (including shares which the relevant person has the right to acquire, including through convertible securities and options). "Affiliate" status is a determination made based upon the facts and circumstances of the stockholders' relationships with the Corporation at the time of the proposed sale. Therefore, it is difficult to state a general rule as to when and whether or not a person may be deemed to be an "affiliate" of the Corporation. Generally speaking, affiliate status will need to be considered by the person intending to sell at the time of a proposed sale. Possible U.S. Trading. If the Corporation's Shares are in the future listed on a U.S. national securities exchange or are included in the NASDAQ Stock Market, those facilities would be available for re-sales of Shares pursuant to Rule 144 on substantially the same terms as re-sales are able to be conducted on a non-U.S. exchange. However, until the Shares are listed or included, it should not be expected that public re-sales in the U.S. will be able to be made. Absent U.S. trading in the Shares, subject to compliance with the provisions of Rule 144 with respect to re-sales occurring on a non-U.S. exchange and any required compliance with Regulation S under the U.S. Securities Act, there is no prohibition applicable to the Corporation preventing a U.S. citizen or resident from purchasing Shares. Possible Private Sales In addition to re-sales of Shares pursuant to Rule 144, re-sales of Shares as well as of Debentures may be possible at any time, provided the transaction is not deemed to be a public distribution by a selling security holder. In order to rely on this exemption from the registration requirements of the U.S. Securities Act, care must be taken at the outset to structure the transaction properly. It is probably sufficient to be aware that an exemption of this nature can be available but a Shareholder is well advised to seek expert advice on how to structure and complete the transaction before embarking on it. Otherwise, a Shareholder may find that steps it takes at the outset may make the exemption unavailable. Shares purchased in a private re-sale transaction will continue to be "restricted securities" as held by the purchaser and continue to be subject to the re-sale restrictions discussed above. Unless purchased from an affiliate of the Corporation, the twelve and twenty-four month periods referred to above do not start again for the purchaser. The purchaser in the private sale is entitled to tack onto his holding period for the securities the period of time the securities were held by the initial Purchaser. If the Shares are purchased from an affiliate of the Corporation in a private sale, the holding period starts again from the date of the private transaction. 2 Regulation S Re-sales Re-sales of Shares may also be effected pursuant to the provisions of Regulation S. Under Rule 904 of Regulation S, re-sales by Shareholders who are non-affiliates of the Corporation or persons who are dealers or persons receiving a selling concession may be made in "offshore transactions" provided no directed selling efforts are made in the United States by or on behalf of the seller. To meet the requirements of Regulation S for an "offshore transaction," the offer to sell the Shares may not be made to a person in the United States and either (i) at the time the buy order originates, the buyer is outside the United States or the seller and any person acting on its behalf reasonably believes the buyer is outside the United States, or (ii) the transaction is executed on a physical trading floor of an established foreign securities exchange located outside the United States or the transaction is executed on a designated offshore trading market and neither the seller nor anyone acting on its behalf knows that the transaction has been pre-arranged with a buyer in the United States. Unless the provisions of Rule 144 described above also are complied with in effecting the Regulation S re-sale, by virtue of the Corporation being a U.S. domestic issuer and the provisions of Rule 905 of Regulation S providing that the Shares held by the selling Shareholder are "restricted securities," the Shares will remain "restricted securities" in the hands of the re-sale purchaser and a legend and re-sale restrictions will be required to be imposed with respect to any further re-sale of the Shares transferred to the person purchasing Shares in the Rule 904 re-sale transaction. As a practical matter, this legend requirement, arising out of Rule 905, will generally make re-sales under Rule 904 of Regulation S that are not also made in compliance with Rule 144 on a Canadian exchange unavailable to be effected, since the exchanges do not consider that delivery of legended certificates is valid delivery for trades on the exchange. 3 EX-10 4 ex108_2.txt EXHIBIT 10.8.2 EHIBIT 10.8.2 TRUST INDENTURE Dated as of October 8, 2003 BETWEEN AMERICAN NATURAL ENERGY CORPORATION - and - COMPUTERSHARE TRUST COMPANY OF CANADA Providing for the issuance of 8% Convertible Secured Debentures due September 30, 2005 Prepared by Macleod Dixon LLP 3700, 400 - 3rd Avenue S.W. Calgary, Alberta T2P 4H2 - and - DuMoulin Black 10th Floor, 595 Howe Street Vancouver, British Columbia V6C 2T5 TABLE OF CONTENTS
PAGE ARTICLE 1 INTERPRETATION.............................................................................1 1.1 Definitions................................................................................1 1.2 Meaning of "Outstanding"...................................................................5 1.3 Headings, Etc..............................................................................6 1.4 Applicable Law and Submission to Jurisdiction..............................................6 1.5 Invalidity and Severability................................................................6 1.6 Successors and Assigns.....................................................................6 1.7 Day Not A Business Day.....................................................................6 1.8 Currency...................................................................................6 1.9 Language Clause - English..................................................................7 ARTICLE 2 THE DEBENTURES.............................................................................7 2.1 Form, Terms and Issue of Debentures........................................................7 2.2 Signature of Debentures....................................................................8 2.3 Certification..............................................................................8 2.4 Concerning Interest........................................................................8 2.5 Additional Amounts.........................................................................8 2.6 Debentures to Rank Pari Passu.............................................................10 2.7 Registration of Debentures................................................................10 2.8 Persons Entitled to Payment...............................................................11 2.9 Mutilation, Loss, Theft or Destruction....................................................13 2.10 Exchanges of Debentures...................................................................13 2.11 Option of Holder as to Place of Payment...................................................13 2.12 Trustee Not Bound to Make Inquiries.......................................................14 ARTICLE 3 REDEMPTION AND PURCHASE FOR CANCELLATION OF DEBENTURES....................................14 3.1 Redemption of Debentures..................................................................14 3.2 Limitations on Redemption.................................................................14 3.3 Notice of Redemption......................................................................15 3.4 Debentures Due on Redemption Dates........................................................15 3.5 Deposit of Redemption Moneys..............................................................15 3.6 Failure to Surrender Debentures Called for Redemption.....................................16 3.7 Cancellation and Destruction of Debentures................................................16 3.8 Surrender of Debentures for Cancellation..................................................16 3.9 Purchase of Debentures for Cancellation...................................................16 ARTICLE 4 CONVERSION OF DEBENTURES..................................................................17 4.1 Conversion Privilege and Conversion Price.................................................17 4.2 Revival of Right to Convert...............................................................17 4.3 Manner of Exercise of Right to Convert....................................................18 4.4 Adjustment of Conversion Price............................................................19 4.5 No Requirement to Issue Fractional Shares.................................................23 4.6 Corporation to Reserve Shares.............................................................24 4.7 Taxes and Charges on Conversion...........................................................24 4.8 Cancellation of Converted Debentures......................................................24
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PAGE 4.9 Legending of Share Certificates...........................................................24 4.10 Certificate as to Adjustment..............................................................25 4.11 Notice of Special Matters.................................................................26 4.12 Protection of Trustee.....................................................................26 ARTICLE 5 COVENANTS OF THE CORPORATION..............................................................26 5.1 To Pay Principal and Interest.............................................................26 5.2 Negative Covenants........................................................................27 5.3 To Carry on Business......................................................................27 5.4 To Pay Trustee's Remuneration.............................................................27 5.5 To Provide Financial Statements...........................................................28 5.6 Not to Extend Time for Payment of Interest................................................28 5.7 Trustee May Perform Covenants.............................................................28 5.8 Stock Exchange Listing....................................................................28 5.9 Securities Laws Compliance................................................................28 5.10 U.S. Registration.........................................................................29 5.11 Not to Pay Dividends and Make Capital Distributions.......................................31 5.12 To Give Notice of Default.................................................................31 5.13 Keeping of Books..........................................................................31 5.14 Annual Certificate of Compliance..........................................................31 5.15 Collateral Agency Agreement and Collateral Documents......................................31 ARTICLE 6 COLLATERAL DOCUMENTS......................................................................31 6.1 Security..................................................................................31 6.2 Covenant to Provide Additional Fixed Charges..............................................32 6.3 Registration and Perfection...............................................................32 6.4 Legal Opinions............................................................................32 6.5 Continuing Security.......................................................................32 6.6 Dealing with Security.....................................................................33 6.7 Effectiveness.............................................................................33 6.8 Conflict..................................................................................33 6.9 Permitted Encumbrances and Indebtedness...................................................33 6.10 Composite Mortgage........................................................................34 6.11 Amendments to Security....................................................................34 ARTICLE 7 DEFAULT...................................................................................35 7.1 Acceleration of Maturity..................................................................35 7.2 Notice of Event of Default................................................................37 7.3 Waiver of Default.........................................................................37 7.4 Enforcement by the Trustee................................................................37 7.5 No Suits by Debentureholders..............................................................39 7.6 Application of Moneys by Trustee..........................................................39 7.7 Distribution of Proceeds..................................................................40 7.8 Remedies Cumulative.......................................................................41 7.9 Judgment Against the Corporation..........................................................41 7.10 Judgment Currency.........................................................................41
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PAGE 7.11 Immunity of Shareholders and Others.......................................................41 7.12 Trustee Appointed Attorney................................................................42 ARTICLE 8 SATISFACTION AND DISCHARGE................................................................42 8.1 Cancellation and Destruction..............................................................42 8.2 Non-Presentation of Debentures............................................................42 8.3 Repayment of Unclaimed Moneys.............................................................43 8.4 Discharge.................................................................................43 ARTICLE 9 SUCCESSOR CORPORATIONS....................................................................43 9.1 Certain Requirements......................................................................43 9.2 Vesting of Powers in Successor............................................................44 ARTICLE 10 MEETINGS OF DEBENTUREHOLDERS..............................................................44 10.1 Right to Convene Meeting..................................................................44 10.2 Notice of Meetings........................................................................44 10.3 Chairman..................................................................................45 10.4 Quorum....................................................................................45 10.5 Power to Adjourn..........................................................................45 10.6 Show of Hands.............................................................................45 10.7 Poll......................................................................................46 10.8 Voting....................................................................................46 10.9 Regulations...............................................................................46 10.10 Persons Entitled to Attend Meetings.......................................................47 10.11 Powers Exercisable by Extraordinary Resolution............................................47 10.12 Meaning of "Extraordinary Resolution".....................................................49 10.13 Powers Cumulative.........................................................................50 10.14 Minutes...................................................................................50 10.15 Instruments In Writing....................................................................51 10.16 Binding Effect of Resolutions.............................................................51 10.17 Evidence of Rights of Debentureholders....................................................51 ARTICLE 11 NOTICES...................................................................................51 11.1 Notice to Corporation and Trustee.........................................................51 11.2 Notice to Debentureholders................................................................52 ARTICLE 12 CONCERNING THE TRUSTEE....................................................................53 12.1 No Conflict of Interest...................................................................53 12.2 Replacement of Trustee....................................................................53 12.3 Duties of Trustee.........................................................................54 12.4 Reliance Upon Declarations................................................................54 12.5 Evidence and Authority to Trustee.........................................................54 12.6 Officers' Certificate as Evidence.........................................................56 12.7 Experts, Advisers and Agents..............................................................56 12.8 Trustee May Deal in Debentures............................................................56 12.9 Investment of Moneys Held by Trustee......................................................56 12.10 Trustee Not Ordinarily Bound..............................................................57 12.11 Trustee Not Required to Give Security.....................................................57
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PAGE 2.12 Trustee Not to be Appointed Receiver......................................................57 2.13 Trustee Not Bound to Act on Corporation's Request.........................................57 2.14 Conditions Precedent to Trustee's Obligations to Act Hereunder............................57 2.15 Authority to Carry on Business............................................................58 2.16 Acceptance of Trust.......................................................................58 2.17 Direction of Trustee's Actions by Holders.................................................58 2.18 Indemnity.................................................................................59 2.19 Environmental Indemnity...................................................................59 2.20 Anti-Money Laundering and Anti-Terrorist Legislation......................................60 ARTICLE 13 SUPPLEMENTAL INDENTURES...................................................................60 13.1 Supplemental Indenture....................................................................60 ARTICLE 14 EXECUTION AND FORMAL DATE.................................................................61 14.1 Execution.................................................................................61 14.2 Formal Date...............................................................................62 SCHEDULE A - Form of Debenture........................................................................A-1
-iv- THIS INDENTURE made as of the 8th day of October, 2003. BETWEEN: AMERICAN NATURAL ENERGY CORPORATION, a corporation organized under the laws of the State of Oklahoma (hereinafter called the "CORPORATION"), - and - COMPUTERSHARE TRUST COMPANY OF CANADA, a trust company having an office in the City of Vancouver, in the Province of British Columbia (hereinafter called the "TRUSTEE"), WITNESSETH THAT: WHEREAS the Corporation is desirous of raising money for its corporate purposes and with a view to so doing is desirous of creating and issuing the Debentures provided for by this indenture; AND WHEREAS the Corporation, under the laws relating thereto, is duly authorized to create and issue the Debentures to be issued as herein provided; AND WHEREAS all necessary by-laws and resolutions of the directors of the Corporation have been duly enacted, passed, and/or confirmed and other proceedings taken and conditions complied with to make the creation and issuance of the Debentures proposed to be issued hereunder and this indenture and the other documents and agreements (including the Collateral Agency Agreement and the Collateral Documents) contemplated herein and the execution thereof legal, valid and binding on the Corporation in accordance with the laws relating to the Corporation; AND WHEREAS the foregoing recitals are made as representations and statements of fact by the Corporation and not by the Trustee; NOW THEREFORE it is hereby covenanted, agreed and declared as follows: 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 expressions following shall have the following meanings, namely: "THIS INDENTURE", "THIS TRUST INDENTURE", "HERETO", "HEREIN", "HEREBY", "HEREUNDER", "HEREOF" and similar expressions refer to this indenture and not to any particular Article, Section, subsection, paragraph, clause, subdivision or other portion hereof and include any and every instrument supplemental or ancillary hereto; "ADDITIONAL AMOUNTS" has the meaning set forth in Section 2.5; "BUSINESS DAY" means a day which is not a Saturday or Sunday or a civic or statutory holiday in Vancouver, British Columbia; "CHANGE OF CONTROL" of the Corporation will be deemed to have occurred at such time as (i) any person or group of related persons for purposes of Section 13(d) of the U.S. Exchange Act becomes the beneficial owner (as defined under Rule 13d-3 or any successor rule or regulation promulgated under the U.S. Exchange Act), directly or indirectly, of 50% or more of the total voting power of the common shares in the capital of the Corporation or (ii) there shall be consummated any consolidation or merger of the Corporation in which the Corporation is not the continuing or surviving corporation or pursuant to which the common shares in the capital of the Corporation would be converted into cash, securities or other property, other than a merger or consolidation of the Corporation in which the holders of the common shares in the capital of the Corporation outstanding immediately prior to the consolidation or merger hold, directly or indirectly, at least a majority of the common shares in the capital of the surviving corporation immediately after such consolidation or merger; "COLLATERAL AGENCY AGREEMENT" means the collateral agency agreement dated October 8, 2003 being entered into between the Trustee and the Collateral Agent, and acknowledged and consented to by the Corporation, pursuant to which the Collateral Agent will hold the Security as security for the indebtedness and obligations of the Corporation under, inter alia, this indenture and the Debentures; "COLLATERAL AGENT" means Computershare Trust Company, Inc., a Colorado trust company having an office in the City of Golden, in the State of Colorado, or its successor or successors for the time being as collateral agent under the Collateral Agency Agreement; "COLLATERAL DOCUMENTS" means the Mortgage, Collateral Assignment, Security Agreement, and Financing Statement dated October 8, 2003 granted by the Corporation in favour of the Collateral Agent and providing a first charge on all assets of the Corporation, including (without limitation) oil and gas leases and rights, wells, facilities and seismic data; "COMMON SHARES" means the shares of Common Stock, par value $0.01, in the capital of the Corporation as such shares exist at the date of this indenture; provided that in the event of a subdivision, redivision, reduction, combination or consolidation thereof, or successive such subdivisions, redivisions, reductions, combinations or consolidations then, subject to adjustments, if any, having been made in accordance with the provisions -2- of Section 4.4, "COMMON SHARES" shall thereafter mean the shares resulting from such change, subdivision, redivision, reduction, combination or consolidation; "CONVERSION PRICE" means the dollar amount for which each Common Share may be issued from time to time upon the conversion of Debentures in accordance with the provisions of Article 4; "CORPORATION" means American Natural Energy Corporation and includes any successor corporation to or of the Corporation which shall have complied with the provisions of Article 9; "CORPORATION'S AUDITORS" or "AUDITORS OF THE CORPORATION" means PricewaterhouseCoopers LLP, Chartered Accountants or such other independent firm of chartered or certified public accountants as may be duly appointed as auditors of the Corporation from time to time; "COUNSEL" means a lawyer or firm of lawyers retained or employed by the Trustee or retained or employed by the Corporation and acceptable to the Trustee; "DEBENTURES" means the 8% Convertible Secured Debentures of the Corporation issued hereunder and for the time being outstanding; "DEBENTUREHOLDERS" or "HOLDERS" means the several persons for the time being entered in the registers hereinafter mentioned as holders of Debentures; "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; "EVENT OF DEFAULT" means any event specified in Section 7.1, continued for the period of time, if any, therein designated; "INDEBTEDNESS" means, for any person, whether recourse is to all or a portion of the assets of such person and whether or not contingent, (i) every obligation of such person for money borrowed, (ii) every obligation of such person evidenced by bonds, debentures, notes or similar instruments, (iii) every reimbursement obligation of such person with respect to letters of credit, bankers' acceptances or similar facilities issued for the account of such person, (iv) every obligation of such person issued or assumed as the deferred purchase price of property or services (but excluding trade accounts payable or accrued liabilities arising in the ordinary course of business), (v) every capitalized lease obligation of such person, (vi) every obligation of such person with respect to swap or hedging agreements (whether related to interest, currency, commodity, equity or otherwise, and whether settled by cash, physical delivery or otherwise), and (vii) every obligation of the type referred to in clauses (i) through (vi) of another, the payment of which such person has guaranteed or is otherwise responsible or liable for, directly or indirectly, as obligor, guarantor or otherwise; "INTEREST PAYMENT DATES" has the meaning set forth in Section 2.1; -3- "OFFICERS' CERTIFICATE" means a certificate signed by the Chairman of the Board, the President or any Vice-President and by any other Vice-President, the Secretary, the Treasurer, the Controller, an Assistant Secretary or an Assistant Treasurer of the Corporation; "PERSON" means an individual, a corporation, a company, a partnership, a trustee or an unincorporated organization and pronouns have a similar extended meaning; "RECORD DATE" has the meaning set forth in Section 2.1; "REPRESENTATIVE DIRECTOR" means each of Jules Poscente and John J. Fleming and, if either of them (or any replacement approved and appointed or elected as a director of the Corporation as indicated hereinafter) resigns or ceases to be qualified to act as a director of the Corporation, such other individual who (i) is approved as a replacement director for such resigning or ceasing to qualify director by resolution of the Debentureholders, (ii) duly and validly consents to act as such, and (iii) is duly and validly appointed or elected as a director of the Corporation; "SECURITY" has the meaning set forth in Section 6.1; "SECURITY INTEREST" means a mortgage, pledge, deposit by way of security, charge, hypothec, assignment by way of security, security interest, lien (whether statutory, equitable or at common or civil law), title retention agreement, lease with option to purchase, a right of off-set (if created for the purpose of securing, directly or indirectly, indebtedness or other debts or liabilities), and any other interest in property or assets, howsoever created or arising, that secures payment or performance of an obligation (including a lease without option to purchase if the economic effect thereof is to secure an obligation other than reasonable rent for the current use of the leased property, and a trust, including statutory deemed trusts); "SUBSIDIARY" or "SUBSIDIARY CORPORATION" means any person 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 (or similar governing body) of such person and includes any person in like relation to a Subsidiary; "TRUSTEE" means Computershare Trust Company of Canada or its successor or successors for the time being as trustee hereunder; "U.S. EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, of the United States of America; "U.S. SECURITIES ACT" means the Securities Act of 1933, as amended, of the United States of America; "VOTING SHARES" means shares of capital stock, or other equity interests, of any class of any person carrying voting rights under all circumstances, provided that, for the purposes of such definition, shares or other equity interests which only carry the right to vote -4- 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 or other equity interests be deemed to cease to be Voting Shares solely by reason of a right to vote accruing to shares or other equity interests of another class or classes by reason of the happening of such event; and "WRITTEN DIRECTION OF THE CORPORATION" means an instrument in writing signed by the Chairman of the Board, the President or a Vice-President together with any other Vice-President, the Secretary, the Treasurer, the Controller, an Assistant Secretary or an Assistant Treasurer of the Corporation. Words importing the singular number only shall include the plural and vice versa and words importing any of the masculine, feminine or neuter genders shall include the others and words importing persons shall include firms and corporations and vice versa. 1.2 MEANING OF "OUTSTANDING" ------------------------ Every Debenture certified and delivered by the Trustee hereunder shall be deemed to be outstanding until it shall be cancelled or delivered to the Trustee for cancellation or moneys for the payment or redemption thereof shall have been set aside under Section 3.6 or Section 8.2, as the case may be, provided that: (a) Debentures which have been partially redeemed, purchased or converted shall be deemed to be outstanding only to the extent of the unredeemed, unpurchased or unconverted part of the principal amount thereof; (b) if a new Debenture has been issued in substitution for a Debenture which has been lost, stolen or destroyed, only the newly-issued Debenture 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, or to constitute a quorum for any meeting of Debentureholders, 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, or on the Debentureholders present or represented at any meeting, 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, and to sign consents, requisitions or other instruments in respect of, such -5- Debentures in his discretion free from the control of the Corporation or any Subsidiary. 1.3 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 or of the Debentures. 1.4 APPLICABLE LAW AND SUBMISSION TO JURISDICTION --------------------------------------------- This indenture and the Debentures shall be construed in accordance with the laws of the Province of British Columbia and shall be treated in all respects as British Columbia contracts. Any legal action or proceeding with respect to this indenture or the Debentures, or actions of the Trustee or the Corporation, may be brought in the courts of the Province of British Columbia, and the parties hereto submit to the non-exclusive jurisdiction of the courts of the Province of British Columbia with respect to all actions and proceedings in respect of this indenture and the Debentures. Each of the Corporation and the Trustee hereby irrevocably waive any objections, including any objection to the laying of venue or based on the grounds of forum non convenience which it may now or hereafter have to the bringing of such action or proceeding in such jurisdiction. 1.5 INVALIDITY AND SEVERABILITY --------------------------- Any provision hereof which is prohibited or unenforceable shall be ineffective only to the extent of such prohibition or unenforceability, without invalidating the remaining provisions hereof. 1.6 SUCCESSORS AND ASSIGNS ---------------------- All covenants and agreements in this indenture by the Corporation shall bind its successors and assigns, whether expressed or not. 1.7 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 on or before the requisite time on the next succeeding day that is a business day. 1.8 CURRENCY -------- All references to currency herein and in the Debentures shall be to lawful money of the United States of America, unless otherwise expressed. -6- 1.9 LANGUAGE CLAUSE - ENGLISH ------------------------- The parties hereto have agreed and required that this indenture, the Debentures and all documents and notices related thereto and/or resulting therefrom be drawn up in the English language. Les parties aux presentes ont convenu et demande que la presente acte de fiducie, les debentures et tous les documents et avis afferents et(ou) en decoulant soient rediges en anglais. ARTICLE 2 THE DEBENTURES -------------- 2.1 FORM, TERMS AND ISSUE OF DEBENTURES ----------------------------------- The Debentures to be issued hereunder shall consist of and be limited to the aggregate principal amount of $12,000,000 in lawful money of the United States of America and shall be designated as "8% CONVERTIBLE SECURED DEBENTURES". Debentures, to a maximum aggregate principal amount of $12,000,000, may be executed by the Corporation from time to time 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. The Debentures shall be dated as of the date of original issue thereof, shall mature on the 30th day of September, 2005 and shall bear interest (subject to the provisions of Sections 2.4 and 2.5) from the date of original issue thereof at the rate of 8% per annum, calculated and payable, after as well as before maturity, default and judgment, with interest on amounts in default at the same rate, in equal quarterly amounts on March 31, June 30, September 30 and December 31 of each year ("INTEREST PAYMENT DATES") and on maturity, with the first payment due December 31, 2003. Interest payable on the Debentures on any interest payment date (other than on maturity) shall be payable to the registered holder of such Debenture on the date (the "RECORD DATE") which is 10 days prior to the applicable interest payment date. The principal of the Debentures and interest thereon shall be payable in lawful money of the United States of America at the principal office of the Trustee in the City of Vancouver, in the Province of British Columbia. The Debentures shall be issued only as fully registered Debentures in denominations of $1,000 and integral multiples of $1,000. The Debentures and the certificate of the Trustee endorsed thereon shall be in the English language substantially in the form set forth in Schedule A hereto, with such insertions, omissions, substitutions or other variations as shall be required or permitted by this indenture and may have imprinted or otherwise reproduced thereon such legend or legends or endorsements, not inconsistent with the provisions of this indenture, as may be required to comply with any law or with any rules or regulations pursuant thereto or with any rules or regulations of any securities exchange or securities regulatory authority or to conform with general usage, all as may be determined by the officer of the Corporation executing such Debentures in accordance with Section 2.2 hereof, as conclusively evidenced by his execution of a Debenture. The Debentures shall bear such distinguishing letters and numbers as the Trustee may approve. The Debentures may be engraved, printed or lithographed, or partly in one form and partly in another, as the Corporation may determine. -7- 2.2 SIGNATURE OF DEBENTURES ----------------------- The Debentures shall be signed (either manually or by facsimile signature) by any one of the Chairman of the Board, the President or a Vice 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. Notwithstanding that any person whose signature, either manual or in facsimile, may appear on any of 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 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 hereinafter mentioned 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. 2.4 CONCERNING INTEREST ------------------- Every Debenture issued hereunder, whether issued originally or in exchange for other Debentures, shall bear interest from its date of issue or from the last interest payment date to which interest shall have been paid or made available for payment on the outstanding Debentures, whichever shall be the later. Interest on each Debenture will cease to accrue from the maturity date of such Debenture unless, upon due presentation thereof, payment of principal and any accrued and unpaid interest is improperly withheld or refused. 2.5 ADDITIONAL AMOUNTS ------------------ All payments made by the Corporation in respect of the Debentures will be made without withholding or deduction for or on account of any present or future taxes, duties, assessments, or other governmental charges of any nature imposed or levied by or on behalf of the United States of America or any political subdivision or authority thereof or therein having power to tax, unless the Corporation is required by law or by the interpretation or administration thereof by the relevant government authority or agency to withhold or deduct such taxes, duties, assessments, or other governmental charges. The Corporation will make the required withholding or -8- deduction, make payment of the amount so withheld or deducted to the appropriate government authority and pay any additional amounts that may be necessary to ensure that the net amounts received by the Debentureholders after the withholding or deduction (including any withholding or deduction for such additional amounts and after taking into account any taxes payable in respect of such additional amounts) equals the respective amounts of principal and interest which would have been receivable in respect of the Debentures in the absence of the withholding or deduction ("ADDITIONAL AMOUNTS"). The Corporation shall furnish to the applicable Debentureholders evidence of payment to the relevant taxation authority of all amounts so deducted or withheld. No Additional Amounts shall, however, be payable: (a) to the extent that the taxes, duties, assessments or other governmental charges would not have been imposed but for the failure of the Debentureholder to comply with any certification, identification or other reporting requirements concerning the nationality, residence, identity or connection with the United States of America of the Debentureholder if: (i) such compliance is required or imposed by law as a precondition to exemption from all or a part of the tax, duty, assessment or other governmental charge; and (ii) at least 30 days prior to the first interest payment date with respect to which this clause (a) will apply, the Corporation has notified the Debentureholder that the Debentureholder will be required to comply with this requirement; provided, however, that this clause (a) shall no longer apply if a Debentureholder subsequently complies with a certification, identification or other reporting requirement (as described above) and under applicable law such compliance satisfies a precondition to exemption from all or a part of the tax, duty, assessment or other governmental charge; or (b) to persons other than purchasers of the Debentures from the Corporation at the time of the first issuance of the Debentures. If as a result of any payment by the Corporation in respect of the Debentures, any Debentureholder is required to pay any withholding tax with respect to such payment to the United States of America or any political subdivision of authority thereof or therein having power to tax, then the Corporation will, upon demand by such Debentureholder, indemnify such Debentureholder for the payment of any such taxes, together with any interest, penalties and expenses in connection therewith, and for any taxes on such indemnity payment. All such amounts shall be payable by the Corporation on demand and shall bear interest at the rate set forth herein calculated from the date demanded by such holder to the date paid by the Corporation. If, following any payment made by the Corporation to any Debentureholder under the first paragraph above or any indemnity payment made by the Corporation to any Debentureholder under the second paragraph above, such Debentureholder shall receive or be granted a refund, credit, allowance or remission in respect of the taxes or duties resulting in the -9- payment thereof and such Debentureholder is able to readily identify such refund, credit, allowance or remission as being attributable to such taxes or duties, such Debentureholder shall, to the extent that it can do so without prejudice to the retention of the amount of such refund, credit, allowance or remission and without prejudice to the right of such Debentureholder to obtain any other relief or allowance which may be available to it, reimburse the Corporation with such amount as such Debentureholder, acting reasonably, determines to be the amount of money attributable to such refund, credit, allowance or remission that may be paid by such Debentureholder to leave it (after such reimbursement) in no worse position than it would have been in had there been no such deduction or withholding or payment of tax which resulted in the payment under the first two paragraphs above. Such Debentureholder may charge to the Corporation (and may deduct from amounts reimbursable to the Corporation hereunder) a fee reasonably determined by such Debentureholder to compensate it for any additional effort expended or cost incurred in determining such credit or remission or allocating it to the Corporation. Notwithstanding the foregoing, Debentureholders shall be entitled to arrange their tax affairs as they think fit, and no Debentureholder shall be obligated to disclose to the Corporation, or any of its agents, any computation made by such Debentureholder in connection with this paragraph or any information regarding such Debentureholder's tax status or affairs. 2.6 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, and either at par or at a discount or at a premium, as the directors may determine. Each Debenture as soon as issued 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. 2.7 REGISTRATION OF DEBENTURES -------------------------- The Corporation shall cause to be kept registers hereinafter referred to 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. No transfer of a Debenture shall be valid unless made on the appropriate register by the holder or his executors or administrators or other legal representative, or his or their attorney duly appointed by an instrument in writing in form and execution satisfactory to the Trustee or other registrar, and upon compliance with such reasonable requirements as the Trustee or other registrar may prescribe, nor unless such transfers have been duly noted on such Debenture by the Trustee or other registrar. The registers referred to in this Section 2.7 shall be kept by and at the principal office of the Trustee in the City of Vancouver, British Columbia and at such other place or places and by the Trustee or by such other registrar or registrars, if any, as the Corporation with the approval of the Trustee may designate from time to time. The registers referred to in this Section 2.7 shall at all reasonable times be open for inspection by the Corporation, by the Trustee and by any Debentureholder. The holder of a Debenture may at any time and from time to time have such Debenture transferred at any of the places at which a register is kept pursuant to the provisions of this -10- Section 2.7, in accordance with such reasonable regulations as the Trustee or other registrar may prescribe. Neither the Corporation nor the Trustee shall be required (i) to transfer or exchange any Debentures on the day of any selection by the Trustee of any Debentures to be redeemed or purchased or during the five preceding business days or thereafter until after the mailing of any notice of redemption or purchase; or (ii) to transfer or exchange any Debenture selected or called for redemption in whole or in part unless upon due presentation thereof such Debenture or part thereof called for redemption shall not be redeemed. As a prior condition to the transfer of a Debenture, each proposed transferee of a Debenture shall (i) deliver to the Trustee an opinion of counsel acceptable to the Trustee and the Corporation, or otherwise satisfy the Corporation, that the Debenture can be transferred without violation of the registration requirements of the U.S. Securities Act and (ii) deliver to the Trustee an acknowledgement of being aware that the Debentures are "restricted securities" as defined under Rule 144 under the U.S. Securities Act and have not been registered under the U.S. Securities Act or the securities laws of any state of the United States, that the Corporation has no obligation to register any of the Debentures under the U.S. Securities Act or the securities laws of any state of the United States, that the Debentures may not be offered or sold unless registered in accordance with United States federal securities laws and all applicable state securities laws or exemptions from such requirements are available, that the Trustee will not register any transfer of any Debenture not made pursuant to an available exemption from the registration requirements of the U.S. Securities Act and that the Debentures shall bear a legend to that effect. Subject to applicable law, none of the Trustee, any registrar for any of the Debentures and the Corporation 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. Except in the case of the register required to be kept at the City of Vancouver, British Columbia, 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 Trustee shall, when requested so to do by the Corporation, furnish the Corporation with a list of names and addresses of the registered holders of Debentures showing the principal amounts and serial numbers of such Debentures held by each holder. 2.8 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 of such Debentures shall be made only to or upon the order in writing of such holder thereof and 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. -11- At least four business days prior to each interest payment date (except for interest payable at maturity or on redemption which may be paid upon presentation and surrender of such Debentures for payment) the Corporation either directly or through the Trustee or an agent of the Trustee shall forward or cause to be forwarded by prepaid post, to the holder at the record date for such interest payment date, at his address appearing on the appropriate register hereinbefore mentioned, or in the case of joint holders, to the one whose name appears first on such register, a cheque for such interest (less any tax required by law to be deducted) payable to the order of such holder or holders and negotiable in immediately available funds at par at any of the places at which interest upon such Debentures is payable. The forwarding of such cheque shall satisfy and discharge the liability for the interest upon such Debentures to the extent of the sum or sums represented thereby (plus the amount of any tax deducted as aforesaid) unless such cheque is not paid on presentation; provided that in the event of the non-receipt of such cheque by the holder, or the loss or destruction thereof, the Corporation, upon being furnished with satisfactory evidence of such non-receipt, loss or destruction and an indemnity reasonably satisfactory to it, shall issue to such holder a replacement cheque for the amount of such cheque. The registered holder for the time being of any Debenture shall be entitled to the principal moneys and interest evidenced by such Debenture, free from all equities or rights of set-off or counterclaim between the Corporation and the original or any intermediate holder thereof and all persons may act accordingly and 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 the appropriate register as the owner of such Debenture free from all equities or 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 Corporation by a Debentureholder of a Debenture or the receipt of such holder for the principal moneys and interest evidenced by such Debenture respectively shall be a good 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 bound to see to the execution of any trust affecting the ownership 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 moneys and interest from time to time payable in respect thereof may be paid by cheque payable to the order of all such holders, failing written instruction from them to the contrary, and such payment and receipt thereof by such holders shall be a valid 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 registered holders, the principal moneys of and interest on any Debentures may be paid to the surviving registered holder or holders, as the case may be, whose receipt therefor shall constitute a valid discharge to the Trustee and any registrar and to the Corporation and any paying agent. -12- 2.9 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 substantially the same form as the Debenture originally issued 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 ownership and of such loss, theft or destruction as shall be satisfactory to them in their discretion and shall also furnish an indemnity satisfactory to them in their discretion. The applicant shall pay all reasonable expenses incidental to the issuance of any substituted Debenture. 2.10 EXCHANGES OF DEBENTURES ----------------------- Debentures of any denomination may be exchanged for Debentures of any other authorized denomination or denominations, any such exchange to be for an equivalent aggregate principal amount of Debentures. Exchanges of Debentures may be made at the offices of the Trustee or other registrar where a register is maintained for such Debentures. Any Debentures tendered for exchange shall be surrendered to the Trustee or appropriate registrar and shall be cancelled. The Corporation shall execute and the Trustee shall certify all Debentures necessary to carry out exchanges as aforesaid. For greater certainty, any such exchange of Debentures of any denomination for an equivalent aggregate principal amount of Debentures of any other authorized denomination or denominations is not intended to be and will not constitute the repayment of the debt obligation evidenced by the Debenture or the Debentures so exchanged or the issuance of a new debt obligation. Except as herein otherwise provided, in every case of exchange of Debentures of any denomination or form for other Debentures and for any transfer of Debentures, the Trustee or other registrar may make a sufficient charge to reimburse it for any stamp, security transfer taxes or other governmental charge required to be paid and, in addition, a reasonable charge for its services for each Debenture exchanged or transferred, and may charge a reasonable sum for every Debenture issued upon such exchange or transfer, and payment of the said charges shall be made by the party requesting such exchange or transfer as a condition precedent thereto. Debentures issued in exchange for Debentures which at the time of such issue have been elected or called for redemption at a later date shall be deemed to have been selected or called for redemption in the same manner and shall have noted thereon a statement to that effect. 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 on a declaration or on redemption or otherwise, on account of any Debenture or interest thereon shall be payable at the option of the holder at any of the places at which the principal of and interest on such Debenture are payable. -13- 2.12 TRUSTEE NOT BOUND TO MAKE INQUIRIES ----------------------------------- The Trustee, prior to the certification and delivery of any Debentures, shall not be bound to make any inquiry 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. ARTICLE 3 REDEMPTION AND PURCHASE FOR CANCELLATION OF DEBENTURES ------------------------------------------------------ 3.1 REDEMPTION OF DEBENTURES ------------------------ Subject to the provisions of Section 3.2, the Debentures shall be redeemable prior to maturity, in whole at any time, but not in part, at the option of the Corporation (in the manner herein provided and in accordance with and subject to the provisions herein set forth) at prices equal to the principal amount, together with accrued and unpaid interest on the principal amount of the Debentures so redeemed to the date fixed for redemption (the applicable price, including accrued and unpaid interest, at which Debentures may be redeemed being hereinafter referred to as the "REDEMPTION PRICE"). 3.2 LIMITATIONS ON REDEMPTION ------------------------- (a) Notwithstanding the provisions of Section 3.1, the Debentures shall not be redeemable on or prior to October 1, 2004. Thereafter, the Debentures will not be redeemable unless the Corporation shall have filed with the Trustee, on the day that a notice of redemption of the Debentures is first given pursuant to Section 3.3, an Officers' Certificate certifying that the weighted average price per share for Common Shares on the TSX Venture Exchange (or if the Common Shares are not listed on the TSX Venture Exchange, on the Toronto Stock Exchange, or if the Common Shares are not listed on the Toronto Stock Exchange, on such stock exchange on which the Common Shares are listed as may be selected for such purpose by the directors or if the Common Shares are not so listed then on the over-the-counter market) during 20 consecutive trading days ended not more than five trading days preceding the date on which such notice of redemption is first given was at least 166 2/3% of the Conversion Price in effect on the date of the filing of such Officers' Certificate. The weighted average price shall be determined by dividing the aggregate sale price of all Common Shares sold on the said exchange or market, as the case may be, during the said 20 consecutive trading days by the total number of Common Shares so sold. (b) Notwithstanding the provisions of Section 3.1 and subsection 3.2(a), the Debentures will not be redeemable unless the registration statement referred to in Section 5.10 with respect to the Common Shares issuable on conversion of the -14- Debentures has been declared effective and remains effective at the Date of Redemption. 3.3 NOTICE OF REDEMPTION -------------------- Notice of intention to redeem any Debentures shall be given by or on behalf of the Corporation to the Trustee and to each holder of such Debentures by letter or circular sent through the ordinary mail, postage prepaid, addressed to such holder or delivered by hand (or so mailed to certain holders and so delivered to the other holders) at the holder's last address appearing upon one of the registers hereinbefore mentioned and mailed not more than 60 days and not less than 30 days prior to the date specified for redemption, provided that the accidental omission to mail or deliver any such letter or circular or the non-receipt of any such letter or circular or the non-receipt of any such letter or circular by any such holder or holders shall not invalidate or otherwise prejudicially affect the redemption of such Debentures. Every notice of redemption shall specify the redemption date and the redemption price, the place or places of payment and shall state that if the Debentures are not presented for redemption on such redemption date all interest thereon shall cease from and after the said date. Every notice sent by post or delivered by hand as aforesaid shall be deemed to have been given on the day on which it is posted or delivered, as the case may be. 3.4 DEBENTURES DUE ON REDEMPTION DATES ---------------------------------- Upon notice having been given as aforesaid, all the Debentures so called for redemption shall thereupon be and become due and payable at the redemption price (less any tax required by law to be deducted from accrued and unpaid interest), on the redemption date specified in such notice, in the same manner and with the same effect as if it were the date of maturity specified in such Debentures, anything therein or herein to the contrary notwithstanding, and from and after such redemption date, if the moneys necessary to redeem such Debentures shall have been deposited as hereinafter provided and affidavits or other proof satisfactory to the Trustee as to the giving of such notices shall have been lodged with it, interest upon such Debentures shall cease to accrue after said date. In case any question shall arise as to whether any notice has been given as above provided and any such deposit made, such question shall be decided by the Trustee whose decision shall be final and binding upon all parties in interest. 3.5 DEPOSIT OF REDEMPTION MONEYS ---------------------------- Upon Debentures having been called for redemption as hereinbefore provided, the Corporation shall deposit with the Trustee or any paying agent to the order of the Trustee, at least one business day before the redemption date fixed in the notice of the redemption thereof, such sums as may be sufficient to pay the redemption price of the Debentures (less any tax required -15- to be deducted from accrued and unpaid interest) so to be redeemed together with the estimated charges and expenses to be incurred in connection with such redemption. From the sums so deposited the Trustee shall pay or cause to be paid to the holders of such Debentures so called for redemption, upon surrender of such Debentures, the principal and interest (less any tax required to be deducted from accrued and unpaid interest) to which they are respectively entitled on redemption. 3.6 FAILURE TO SURRENDER DEBENTURES CALLED FOR REDEMPTION ----------------------------------------------------- In case the holder of such Debentures so called for redemption shall within 30 days from the date fixed for redemption fail so to surrender any of such holder's Debentures, or shall not within such time accept payment of the redemption price payable in respect thereof or give such receipt therefor, if any, as the Trustee may require, such redemption price (less any tax required to be deducted from accrued and unpaid interest) shall be set aside in trust for such holder, either in the deposit department of the Trustee or in some chartered bank in Canada and such setting aside shall for all purposes be deemed a payment to the Debentureholder of the sum so set aside, and to that extent such Debentures shall thereafter not be considered as outstanding hereunder and the Debentureholder shall have no right except to receive payment out of the moneys so paid and deposited upon surrender and delivery up of his Debenture or Debentures of the redemption price (less any tax required to be deducted from accrued and unpaid interest) of such Debenture or Debentures, without further interest thereon, subject always to the provisions of Section 8.3. 3.7 CANCELLATION AND DESTRUCTION OF DEBENTURES ------------------------------------------ All Debentures so redeemed under this Article and all Debentures purchased by the Corporation under this Article shall forthwith be delivered to the Trustee and shall be cancelled by it and no Debentures shall be issued in substitution therefor. All matured Debentures of which the Corporation may be able to regain possession shall likewise be delivered to the Trustee and cancelled by it and no Debentures shall be issued in substitution therefor. 3.8 SURRENDER OF DEBENTURES FOR CANCELLATION ---------------------------------------- If the principal moneys due upon any Debenture issued hereunder shall become payable by redemption or otherwise before the date of maturity thereof, the person presenting such Debenture for payment must surrender the same for cancellation, the Corporation nevertheless paying or causing to be paid the interest accrued and unpaid thereon (computed on a per diem basis if the date fixed for payment is not an interest due date). 3.9 PURCHASE OF DEBENTURES FOR CANCELLATION --------------------------------------- At any time when the Corporation is not in default hereunder, it may purchase and surrender to the Trustee for cancellation (and no Debentures shall be issued in substitution therefor) all or any of the Debentures by tender available to all holders alike at any price. If, upon an invitation for tenders, more Debentures than the Corporation is prepared to accept are tendered at the same lowest price, the Debentures to be purchased by the Corporation will be selected by the Trustee, in such manner as the Trustee may deem equitable, from the Debentures tendered by each tendering Debentureholder who tendered at such lowest price. For this purpose the Trustee may make, and from time to time amend, regulations with respect to the manner in which Debentures may be so selected and regulations so made shall be valid and -16- binding upon all Debentureholders, notwithstanding the fact that, as a result thereof, one or more of such Debentures become subject to purchase in part only. The holder of a Debenture of which a part only is purchased, upon surrender of such Debenture for payment, shall be entitled to receive, without expense to such holder, one or more new Debentures for the unpurchased part so surrendered, and the Trustee shall certify and deliver such new Debenture or Debentures upon receipt of the Debenture so surrendered. ARTICLE 4 CONVERSION OF DEBENTURES ------------------------ 4.1 CONVERSION PRIVILEGE AND CONVERSION PRICE ----------------------------------------- Upon and subject to the provisions and conditions of this Article, the holder of each Debenture shall have the right, at his option, at any time prior to the close of business on the earlier of September 29, 2005 or, if such Debenture is previously called for redemption, the business day immediately preceding the date fixed for redemption of such Debenture (such time and date in this Article being referred to as the "TIME OF EXPIRY"), to convert the whole or, in the case of a Debenture of a denomination in excess of $1,000, any part which is $1,000 or an integral multiple thereof, of the principal amount of such Debenture into fully paid and non-assessable Common Shares of the Corporation at the Conversion Price in effect on the Date of Conversion (as defined in subsection 4.3(b)). Subject to Section 4.4, the Conversion Price shall be $0.45 for each Common Share to be issued upon the conversion of Debentures, being a conversion rate of approximately 2,222.2 Common Shares for each $1,000 principal amount of Debentures. 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 may be converted in accordance with the foregoing provisions of this Section. Fractional interests in Common Shares shall be adjusted for in the manner provided in Section 4.5. "CLOSE OF BUSINESS" as used in this Article shall mean the normal closing hour of the office of the Trustee referred to in subsection 4.3(a) at which such conversion right is being exercised. Notice of the expiry of the conversion privileges of the Debentures shall be given by or on behalf of the Corporation, not more than 60 days and not less than 30 days prior to the date fixed for the Time of Expiry, in the manner provided in Section 11.2. For greater certainty, only the principal amount of the Debentures shall be convertible into Common Shares in accordance with the provisions of this Article. 4.2 REVIVAL OF RIGHT TO CONVERT --------------------------- If payment of the redemption price or the purchase price of any Debenture which has been called for redemption or tendered in acceptance of an offer by the Corporation to purchase Debentures for cancellation is not made, in the case of a redemption upon due surrender of such -17- Debenture or in the case of a purchase on the date on which such purchase is required to be made, as the case may be, then the right to convert such Debenture shall revive and continue as if such Debenture had not been called for redemption or tendered in acceptance of the Corporation's offer, respectively. 4.3 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 shall surrender such Debenture to the Trustee at its principal office in the City of Vancouver, British Columbia together with the Conversion Form on the back of such Debenture or any other written notice in a form satisfactory to the Trustee, 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 form and executed in a manner satisfactory to the Trustee, exercising his right to convert such Debenture in accordance with the provisions of this Article. Thereupon such Debentureholder, and subject to payment of all applicable stamp or security transfer taxes or other governmental charges and compliance with all 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 such later date as is specified in subsection 4.3(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, if requested, deliver to such Debentureholder or, subject as aforesaid, his nominee(s) or assignee(s), a certificate or certificates for such Common Shares and, if applicable, a cheque for any amount payable under Section 4.5. (b) For the purposes of this Article, a Debenture shall be deemed to be surrendered for conversion on the date (herein called "DATE OF CONVERSION") on which it is so surrendered when the register of the Trustee is open and 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 in subsection (a) of this Section. (c) Any part of a Debenture 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) Upon a holder of any Debenture exercising his or her right of conversion in respect of only a part of a Debenture and surrendering such Debenture to the Trustee, 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 this Section shall be entitled to receive accrued and unpaid interest in respect thereof -18- up to the Date of Conversion of such Debenture, and the Common Shares issued upon such conversion shall rank only in respect of dividends declared in favour of shareholders of record on and after the Date of Conversion, from which date they will for all purposes be and be deemed to be issued and outstanding as fully paid and non-assessable Common Shares. 4.4 ADJUSTMENT OF CONVERSION PRICE ------------------------------ The Conversion Price 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 Time of Expiry 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 subsections (b), (c) and (g) of this Section 4.4. (b) If and whenever at any time prior to the Time of Expiry the Corporation shall fix a record date for the issuance of rights, options or warrants to all or substantially all the holders of its outstanding Common Shares entitling them, for a period expiring not more than 45 days after such record date, to subscribe for or purchase Common Shares (or securities convertible into or exchangeable for Common Shares) at a price per Common Share (or having a conversion or exchange price per Common Share) less than 95% of the Current Market Price (as defined in subsection 4.4(d)) of a Common Share on such record date, the Conversion Price shall be adjusted immediately after such record date so that it shall equal the price determined by multiplying the Conversion Price in effect on such record date by a fraction, of which the numerator shall be the total number of Common Shares outstanding on such record date plus a number of Common Shares equal to the quotient obtained by dividing the aggregate price of the total number of additional Common Shares offered for subscription or purchase (or the aggregate conversion or exchange price of the convertible or exchangeable securities so offered) by such Current Market Price per Common Share, and of which the denominator shall be the total number of Common Shares outstanding on such record date plus -19- the total number of additional Common Shares offered for subscription or purchase (or into which the convertible or exchangeable securities so offered are convertible or exchangeable). Any Common Shares owned by or held for the account of the Corporation shall be deemed not to be outstanding for the purpose of any such computation. Such adjustment shall be made successively whenever such a record date is fixed. To the extent that any such rights, options or warrants are not so issued or any such rights, options or warrants are not exercised prior to the expiration thereof, the Conversion Price shall be re-adjusted to the Conversion Price which would then be in effect if such record date had not been fixed or to the Conversion Price which would then be in effect based upon the number of Common Shares (or securities convertible into or exchangeable for Common Shares) actually issued upon the exercise of such rights, options or warrants, as the case may be. (c) If and whenever at any time prior to the Time of Expiry the Corporation shall fix a record date for the making of a distribution to all or substantially all the holders of its outstanding Common Shares of (i) shares of any class other than Common Shares or (ii) rights, options or warrants (excluding those exercisable for 45 days or less) or (iii) evidences of its indebtedness or (iv) assets then, in each such case, the Conversion Price shall be adjusted immediately after such record date so that it shall equal the price determined by multiplying the Conversion Price in effect on such record date by a fraction, of which the numerator shall be the total number of Common Shares outstanding on such record date multiplied by the Current Market Price per Common Share on such record date, less the fair market value (as determined by the board of directors at the time such distribution is authorized, which determination shall be conclusive) of such shares or rights, options or warrants or evidences of indebtedness or assets so distributed, and of which the denominator shall be the total number of Common Shares outstanding on such record date multiplied by such Current Market Price per Common Share. Any Common Shares owned by or held for the account of the Corporation shall be deemed not to be outstanding for the purpose of any such computation. Such adjustment shall be made successively whenever such a record date is fixed. To the extent that such distribution is not so made, the Conversion Price shall be readjusted to the Conversion Price which would then be in effect if such record date had not been fixed or to the Conversion Rate which would then be in effect based upon such shares or rights, options or warrants or evidences of indebtedness or assets actually distributed, as the case may be. (d) For the purpose of any computation under subsections (b) or (c) of this Section, the "CURRENT MARKET PRICE" per Common Share at any date shall be the weighted average price per share for Common Shares for the 20 consecutive trading days ending three trading days before such date on the TSX Venture Exchange, or, if the Common Shares are not listed thereon, on the Toronto Stock Exchange, or if the Common Shares are not listed on the Toronto Stock Exchange, on such stock exchange on which the Common Shares are listed as may be selected for such purpose by the directors or, if the Common Shares are not listed on any stock exchange, then on the over-the-counter market. The -20- weighted average price shall be determined by dividing the aggregate sale price of all Common Shares sold on the said exchange or market, as the case may be, during the said 20 consecutive trading days by the total number of Common Shares so sold. (e) 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, arrangement, reorganization 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 or other person, or in the case of a liquidation, dissolution or winding-up of the Corporation, the Conversion Price shall be adjusted so that each Debenture shall, after such reclassification, change, amalgamation, consolidation, arrangement, reorganization, merger, sale, liquidation, dissolution or winding-up, 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 person, as the case may be, which the holder thereof would have been entitled to receive as a result of such reclassification, change, amalgamation, consolidation, arrangement, reorganization, merger, sale, liquidation, dissolution or winding-up, if on the effective date thereof the holder had been the holder of the number of Common Shares into which the Debenture was convertible prior to the effective date of such reclassification, change, amalgamation, consolidation, arrangement, reorganization, merger, sale, liquidation, dissolution or winding-up. No such reclassification, change, amalgamation, consolidation, arrangement, reorganization, merger, sale, liquidation, dissolution or winding-up shall be carried into effect unless, in the opinion of the board of directors, 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 person, as the case may be, subject to adjustment thereafter in accordance with provisions similar, as nearly as may be, to those contained in this Section 4.4. If determined appropriate by the board of directors to give effect to or to evidence the provisions of this Section 4.4, the Corporation, or such continuing, successor or purchasing person, as the case may be, shall, prior to or contemporaneously with any such reclassification, change, amalgamation, consolidation, arrangement, reorganization, merger, sale, liquidation, dissolution or winding-up, enter into an indenture which shall provide, to the extent possible, for the application of the provisions set forth in this indenture with respect to the rights and interests thereafter of the holder of Debentures to the end that the provisions set forth in this indenture shall thereafter correspondingly be made applicable, as nearly as may reasonably be, with respect to any shares or other securities or property to which a holder of Debentures is entitled on the exercise of its conversion rights thereafter. Any indenture entered into between the Corporation and the Trustee pursuant to the provisions of this Section 4.4 shall be a supplemental indenture entered into pursuant to the provisions of Article 13. Any indenture entered into between the Corporation, any successor to the Corporation or such purchasing corporation or other person -21- and the Trustee shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided in this Section 4.4 and which shall apply to successive reclassifications, changes, amalgamations, consolidations, arrangements, reorganizations, mergers, sales, liquidations, dissolutions or windings-up. (f) In any case in which this Section 4.4 shall require that an adjustment shall become effective immediately after a record date for an event referred to herein, the Corporation may defer, until the occurrence of such event, issuing to the holder of any Debenture converted after such record date and before the occurrence of such event the additional Common Shares issuable upon such conversion by reason of the adjustment required by such event before giving effect to such adjustment; provided, however, that the Corporation shall deliver to such holder an appropriate instrument evidencing such holder's right to receive such additional Common Shares upon the occurrence of the event requiring such adjustment and the right to receive any distributions made on such additional Common Shares declared in favour of holders of record of Common Shares on and after the Date of Conversion or such later date as such holder would, but for the provisions of this subsection (f), have become the holder of record of such additional Common Shares pursuant to subsection 4.3(b). (g) If and whenever at any time prior to the Time of Expiry the Corporation shall issue Common Shares (other than pursuant to options outstanding on the date hereof), or rights, options or warrants entitling the holder thereof to subscribe for or purchase Common Shares, or securities convertible into or exchangeable for Common Shares, to any person at a price per Common Share (or a subscription, purchase, conversion or exchange price per Common Share) less than the then Conversion Price, the Conversion Price shall be adjusted immediately after the date of such issue so that it shall equal the price determined by multiplying the Conversion Price in effect on such date of issue by a fraction, of which the numerator shall be the aggregate of the total number of Common Shares outstanding on such date of issue multiplied by the Conversion Price on such date of issue plus the total number of additional Common Shares issued or issuable under the rights, options, warrants or convertible or exchangeable securities multiplied by the issue, subscription, purchase, conversion or exchange price of such additional Common Shares, and of which the denominator shall be the aggregate of the total number of Common Shares outstanding on such date of issue plus the total number of additional Common Shares issued or issuable under the rights, options, warrants or convertible or exchangeable securities multiplied by the Conversion Price on such date of issue. If the Conversion Price is adjusted pursuant to this subsection 4.4(g) as a result of an issue of securities, then subsections 4.4(b) and (c), if applicable, would not be applied to further adjust the Conversion Price in respect of such issue of securities. (h) The adjustments provided for in this Section 4.4 are cumulative and shall apply to successive subdivisions, redivisions, reductions, combinations, consolidations, distributions, issues or other events resulting in any adjustment under the -22- provisions of this Section, provided that, notwithstanding any other provision of this Section, no adjustment of the Conversion Price shall be required unless such adjustment would require an increase or decrease of at least 1% in the Conversion Price then in effect; provided however, that any adjustments which by reason of this subsection (h) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. (i) No adjustment of the Conversion Price shall be made in respect of any event described in subsections (a)(iii), (b) or (c) of this Section 4.4 if the holders of the Debentures are allowed to participate on substantially the same terms as though they had converted their Debentures prior to the applicable record date or effective date. A decision by the directors of the Corporation as to whether such participation is on substantially the same terms shall be final and conclusive. (j) In the event of any question arising with respect to the adjustments provided in this Section 4.4, such question shall be conclusively determined by a firm of chartered accountants appointed by the Corporation and acceptable to the Trustee (who may be the 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. (k) If the Corporation shall take any action affecting the Common Shares other than action described in this Section 4.4, which in the opinion of the board of directors would materially affect the rights of Debentureholders, the Conversion Price shall be adjusted in such manner and at such time, by action of the board of directors as the board of directors in their sole discretion may determine to be equitable in the circumstances. Failure of the directors to make such an adjustment shall be conclusive evidence that they have determined that it is equitable to make no adjustment in the circumstances. 4.5 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 provisions of this Section, 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 paying to the holder of such surrendered Debenture an amount in lawful money of the United States of America equal (computed to the nearest cent) to the appropriate fraction of the value (being the last reported sale price or, if none, the mean between the closing bid and ask quotations on the TSX Venture Exchange, or, if the Common Shares are not listed on the TSX Venture Exchange, on the Toronto Stock Exchange, or if the Common Shares are not listed on the Toronto Stock Exchange, on such stock exchange on which the Common Shares are listed, as may be selected for such purpose by the directors or, if the Common Shares are not listed on any stock exchange, a value determined by the directors) -23- of a Common Share on the business day next preceding the Date of Conversion; provided that if the value of the fractional interest determined as aforesaid is less than $10.00, such fractional interest will be cancelled with no compensation paid in respect thereof. 4.6 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, 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, when issued, be duly and validly issued as fully paid and non-assessable. 4.7 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, if any) which shall be payable with respect to the issuance or delivery to the holders of Debentures, upon the exercise of their right to conversion, of Common Shares of the Corporation pursuant to the terms of the Debentures and of this indenture. 4.8 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 Section 4.3(d), no Debenture shall be issued in substitution therefor. 4.9 LEGENDING OF SHARE CERTIFICATES ------------------------------- The share certificates representing Common Shares issued under this Article shall have the following legends affixed thereto: (a) for any Common Shares issued on or before the date which is four months and one day after the date of issue of the Debentures under which the Common Shares are issued: "UNLESS PERMITTED UNDER CANADIAN SECURITIES LEGISLATION, THE HOLDER OF THE SECURITIES SHALL NOT TRADE THE SECURITIES BEFORE [FOUR MONTHS AND ONE DAY AFTER THE DATE OF ISSUE OF THE DEBENTURES UNDER WHICH THE COMMON SHARES ARE ISSUED]." and "WITHOUT THE PRIOR WRITTEN APPROVAL OF THE TSX VENTURE EXCHANGE (THE "EXCHANGE") AND COMPLIANCE WITH ALL APPLICABLE SECURITIES LEGISLATION, THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT -24- BE SOLD, TRANSFERRED, HYPOTHECATED OR OTHERWISE TRADED ON OR THROUGH THE FACILITIES OF THE EXCHANGE OR OTHERWISE IN CANADA OR TO OR FOR THE BENEFIT OF A CANADIAN RESIDENT BEFORE [FOUR MONTHS AND ONE DAY AFTER THE DATE OF ISSUE OF THE DEBENTURES UNDER WHICH THE COMMON SHARES ARE ISSUED]." (b) for any Common Shares issued before a registration statement with respect to the issue of Common Shares pursuant to the Debentures is declared effective by the United States Securities and Exchange Commission: "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAW. NO INTEREST THEREIN MAY BE SOLD, DISTRIBUTED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE TRANSFERRED OR DISPOSED OF WITHOUT (A) AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND ANY OTHER APPLICABLE UNITED STATES STATE OR FEDERAL SECURITIES LAWS COVERING ANY SUCH TRANSACTION OR (B) AN EXEMPTION FROM REGISTRATION (BASED ON RECEIPT BY THE CORPORATION OF AN ACCEPTABLE LEGAL OPINION STATING THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION, IF SO REQUESTED BY THE CORPORATION) OR (C) THE CORPORATION OTHERWISE SATISFYING ITSELF THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION." 4.10 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 Section 4.4, deliver an Officers' Certificate to the Trustee specifying the nature of the event requiring the same and the amount of the adjustment necessitated hereby and setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based, which Officers' 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 Common Shares, forthwith give notice to the Debentureholders in the manner provided in Section 11.2 specifying the event requiring such adjustment or readjustment and the results thereof, including the resulting Conversion Price; provided that, if the Corporation has given notice under Section 4.11 covering all the relevant facts in respect of such event and if the Trustee approves, no such notice need be given under this Section 4.10. -25- 4.11 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 Section 11.2, of its intention to fix a record date for any event referred to in Sections 4.4(a), (b) or (c) (other than the subdivision, redivision, reduction, combination or consolidation of its Common Shares) which may give rise to an adjustment in the Conversion Price, and, in each case, 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 10 days in each case prior to such applicable record date. 4.12 PROTECTION OF TRUSTEE --------------------- Subject to Section 12.3, 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 Price, 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. ARTICLE 5 COVENANTS OF THE CORPORATION ---------------------------- So long as any Debenture remains outstanding, the Corporation hereby covenants and agrees, with the Trustee for the benefit of the Trustee and the Debentureholders as follows: 5.1 TO PAY PRINCIPAL AND INTEREST ----------------------------- The Corporation will duly and punctually pay or cause to be paid to every Debentureholder the principal of and interest accrued on the Debentures of which such Debentureholder is the holder, on the dates, at the places, and in the manner provided herein and in the Debentures. -26- 5.2 NEGATIVE COVENANTS ------------------ (a) Except with the prior approval of the Debentureholders by extraordinary resolution, the Corporation will not incur any Indebtedness; provided that, subject to the other provisions of this indenture, the Corporation shall be entitled to incur unsecured Indebtedness of up to $2,000,000 aggregate principal amount. (b) The Corporation will not create, nor permit to exist, any Security Interest on any of its assets or property; provided that the provisions of this subsection 5.2(b) shall not apply to or operate to prevent the creation of: (i) Security Interests, not related to Indebtedness, incurred or arising by operation of law or incidental to the ownership and operation of property or assets, so long as the Corporation is not in default of the secured obligation or liability; or (ii) a Security Interest on any specific property in favour of a government or any political subdivision, department agency or instrumentality thereof to secure the performance of any covenant or obligation to or in favour of or entered into at the request of any such authorities where such Security Interest is required pursuant to any contract, statute, order or regulation, so long as the Corporation is not in default of the covenant or obligation; and provided further that it is understood that the foregoing proviso shall not constitute in any manner a subordination of the Security to such permitted Security Interests. 5.3 TO CARRY ON BUSINESS -------------------- The Corporation will itself or through its Subsidiaries carry on its business in accordance with ordinary industry practice and, subject to the other provisions of this indenture, will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, and will not consolidate, amalgamate or merge with any other corporation or transfer its undertaking and property as an entirety or substantially as an entirety to any other person, except in compliance with the provisions of Article 8; provided, however, that nothing herein contained shall prevent the Corporation from ceasing to carry on any portion of its business (but not substantially all of its business) or from ceasing to operate any premises or property if it shall be advisable and in the best interests of the Corporation. 5.4 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 moneys which shall have been paid by the Trustee in and about the execution of the trusts hereby created, with interest, if demanded by the Trustee, from 15 days following the date of receipt by the Corporation of the invoice from the Trustee to the Corporation in respect of such expenditure until repayment, and such moneys and the interest thereon, including the Trustee's remuneration, shall be payable out of any funds coming into the possession of the Trustee in priority to any of the Debentures or interest thereon. -27- 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 a court of competent jurisdiction. 5.5 TO PROVIDE FINANCIAL STATEMENTS ------------------------------- The Corporation will furnish to the Trustee, and will send to the Debentureholders upon receipt of written request for same, a copy of all financial statements, and the report, if any, of the Corporation's Auditors thereon, which is furnished to holders of Common Shares. The Trustee shall have no obligation to review or analyze any such information or to evaluate the performance or condition of the Corporation. 5.6 NOT TO EXTEND TIME FOR PAYMENT OF INTEREST ------------------------------------------ In order to prevent any accumulation after maturity of unpaid interest, the Corporation will not directly or indirectly extend or assent to the extension of time for payment of any interest upon any Debentures and it will not, directly or indirectly, be or become a party to or approve any such arrangement by purchasing or funding any interest on Debentures or in any other manner. In case the time for the payment of any such interest shall be so extended, whether or not such extension is by or with the consent of the Corporation, notwithstanding anything herein or in the Debentures contained, such interest shall not be entitled in case of default hereunder to the benefits of this indenture except subject to the prior payment in full of all principal and interest on Debentures the payment of which has not been so extended. 5.7 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 Section 7.2) 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; and all sums so expended or advanced shall be repayable by the Corporation in the manner provided in Section 5.4, but no such performance or payment shall be deemed to relieve the Corporation from any default hereunder. 5.8 STOCK EXCHANGE LISTING ---------------------- The Corporation shall take all such steps and actions and do all such things as may be required to maintain the listing and posting for trading of the Common Shares of the Corporation on a recognized Canadian stock exchange. 5.9 SECURITIES LAWS COMPLIANCE -------------------------- (a) The Corporation shall remain a reporting issuer, and not in default of any filing or other requirement, under the securities laws of British Columbia, Alberta and Ontario. -28- (b) The Corporation shall remain in compliance with all required filings under and other requirements of the U.S. Exchange Act and the U.S. Securities Act. 5.10 U.S. REGISTRATION ----------------- The Corporation agrees as follows: (a) The Corporation agrees that as promptly as practicable after the Closing it will, at its expense, prepare and file under the U.S. Securities Act one or more registration statement(s) with respect to the Common Shares issuable on conversion of the Debentures, (herein such Common Shares issuable on conversion of the Debentures are referred to as the "REGISTRABLE Securities") in accordance with the then applicable law and regulations and practices of the U.S. Securities and Exchange Commission (the "COMMISSION"). The Corporation will use its best efforts to cause such registration statement(s) to be declared effective as promptly as possible, and shall use its best efforts to maintain the effectiveness of the registration statement(s) under the U.S. Securities Act for a period of not less than two years following the date of Closing with respect to the shares issuable on conversion of the Debentures, plus a number of days equal to the number of days, if any, during which the right of holders of Registrable Securities to offer and sell such Registrable Securities shall have been suspended. (b) Any Debentureholder whose securities shall be included in the Corporation's registration(s) under the U.S. Securities Act pursuant to subsection (a) of this Paragraph 5.10 shall furnish to the Corporation such information regarding his holdings of Registrable Securities to be registered and the proposed manner of distribution thereof as the Corporation may request in writing and as shall be required in connection with any registration, qualification or compliance referred to in subsection (a) of this Paragraph 5.10 and shall otherwise co-operate with the Corporation in connection with such registration, qualification or compliance. The Corporation, at its expense, will furnish to holders of Registrable Securities such number of prospectuses, offering circulars or other documents incident to any registration, qualification or compliance referred to in this Paragraph 5.10 as such holders from time to time reasonably may request, and will indemnify and defend each such holder and each underwriter of Registrable Securities being sold by any such holder (and any person who controls such holder or underwriter within the meaning of Section 15 of the Act) against all claims, losses, damages, liabilities and expenses resulting from any untrue statement or alleged untrue statement of a material fact contained therein (or in any related registration statement, notification or the like) or from any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same may have been based upon information furnished in writing to the Corporation by such holder or underwriter expressly for use therein, and with respect to such information furnished to the Corporation, such holder will indemnify and defend the Corporation against all claims, losses, damages, liabilities and expenses resulting from any untrue statement or alleged untrue statement of a material fact contained -29- therein or any omission or alleged omission to state a material fact required to be stated or necessary to make the information not misleading. (c) The Corporation shall, at its expense, (i) notify the Trustee and the Debentureholders promptly after it shall receive notice thereof, of the time when the registration statement(s) has(have) become effective or any supplement to any prospectus forming a part of the registration statement(s) has been filed, (ii) notify the Trustee and the Debentureholders promptly of any request by the Commission for the amending or supplementing of the registration statement(s) or prospectus(es) or additional information, (iii) prepare and file with the Commission, promptly upon request by a holder of Registrable Securities, any amendment or supplement to the registration statement(s) which, in the opinion of counsel for the holder and counsel for the Corporation, may be necessary or available in connection with the distribution of the Registrable Securities, (iv) prepare and file with the Commission, and promptly notify the Trustee, the Debentureholders and holders of Registrable Securities of, any amendment or supplement to the registration statement(s) or related prospectus(es) as may be necessary to correct any statement or omission, if at any time when a prospectus relating to the Registrable Securities is required to be delivered under the U.S. Securities Act, any event shall have occurred as a result of which any such prospectus would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading; (v) in case the holder of Registrable Securities is required to deliver a prospectus, at a time when the prospectus then in effect may no longer be used under the U.S. Securities Act, prepare promptly upon request such amendment or amendments to the registration statement(s) and such prospectus or prospectuses as may be necessary to permit compliance with the requirements of Section 10 of the U.S. Securities Act; (vi) advise the Trustee, the Debentureholders and holders of Registrable Securities promptly after it shall receive notice or obtain knowledge thereof of the issuance of any stop order by the Commission suspending the effectiveness of the registration statement(s) or the initiation or threatening of any proceeding for that purpose and promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal if such stop order should be issued; (vii) furnish to the Trustee, the Debentureholders and holders of Registrable Securities as soon as available copies of the registration statement(s) and each preliminary or final prospectus, or supplement required to be prepared, pursuant to this Paragraph 5.10, all in such quantities as may from time to time be reasonably requested; and (viii) if any of the Corporation's Common Shares are then listed on any securities exchange, the Corporation will cause all shares covered by the registration statement(s) to be listed on such exchange(s). Notwithstanding anything herein contained, the Corporation shall not be obligated to pay any underwriting or brokers' discounts or commissions applicable to the holder's Registrable Securities or fees or disbursements of counsel to the selling shareholders. (d) The rights to registration of the Registrable Securities may be transferred or assigned by the holder of Registrable Securities to any transferee or assignee of -30- the Registrable Securities subject to such transferee or assignee agreeing to be bound by the terms of this Section 5.10. 5.11 NOT TO PAY DIVIDENDS AND MAKE CAPITAL DISTRIBUTIONS --------------------------------------------------- The Corporation shall not, without the prior approval of the holders of Debentures: (a) declare or pay any dividends (other than stock dividends in Common Shares of the Corporation) on any shares of the Corporation; or (b) call for redemption or purchase for cancellation or make any capital distribution with respect to any shares of the Corporation. 5.12 TO GIVE NOTICE OF DEFAULT ------------------------- The Corporation shall notify the Trustee immediately upon the occurrence of any Event of Default hereunder. 5.13 KEEPING OF BOOKS ---------------- The Corporation will keep or cause to be kept proper books of record and account, in which full and correct entries shall be made of all financial transactions and the assets and business of the Corporation in accordance with generally accepted accounting principles. 5.14 ANNUAL CERTIFICATE OF COMPLIANCE -------------------------------- The Corporation shall deliver to the Trustee, within 120 days after the end of each calendar year, an Officer's Certificate certifying that after reasonable investigation and inquiry, the Corporation has complied with all covenants, conditions or other requirements contained in this indenture, the non-compliance with which could, with the giving of notice, lapse of time or otherwise, constitute an Event of Default hereunder, or if such is not the case, setting forth with reasonable particulars the circumstances of any failure to comply and steps taken or proposed to be taken to eliminate such circumstances and remedy such Event of Default, as the case may be. 5.15 COLLATERAL AGENCY AGREEMENT AND COLLATERAL DOCUMENTS ---------------------------------------------------- The Corporation shall promptly fulfill and satisfy all of its covenants and obligations under the Collateral Agency Agreement and the Collateral Documents. ARTICLE 6 COLLATERAL DOCUMENTS -------------------- 6.1 SECURITY -------- To secure the due and punctual payment of principal and interest on the Debentures and all other amounts owing, outstanding and payable hereunder and under the Debentures, the Corporation shall execute and deliver the Collateral Documents (collectively, and as added to or amended from time to time pursuant to the provisions of this indenture, the "SECURITY") to the -31- Collateral Agent or the Trustee, as directed by the Trustee, as and by way of continuing collateral security, and shall keep and maintain the same in full force and effect for so long as any amounts are owing hereunder, under the Debentures, under the Collateral Agency Agreement or under the Security. Any or all of the Security may be held by the Trustee directly, or by the Collateral Agent on behalf of the Trustee, and the Trustee is hereby authorized to enter into the Collateral Agency Agreement with the Collateral Agent to give effect hereto. The Corporation shall execute and deliver to the Trustee and the Collateral Agent an acknowledgement and consent in respect of the Collateral Agency Agreement in form and substance acceptable to the Trustee. Any power or authority conferred herein to the Trustee in respect of Security held by the Collateral Agent may be exercised by the Collateral Agent at the direction and under the supervision of the Trustee. 6.2 COVENANT TO PROVIDE ADDITIONAL FIXED CHARGES -------------------------------------------- Upon written request by the Trustee, which request may be made at any time and from time to time, the Corporation shall execute and deliver in favour of the Trustee or the Collateral Agent, as directed by the Trustee, fixed and specific charges over any assets or property of the Corporation acquired after the dates of the Collateral Documents, all of which shall form part of the Security. All of the foregoing shall be prepared (in form and substance satisfactory to the Trustee and the Collateral Agent), executed, delivered and registered at the expense of the Corporation. 6.3 REGISTRATION AND PERFECTION --------------------------- The Corporation shall register and perfect the Security in all jurisdictions in which any property forming part of the collateral subject thereto is situate. The Corporation shall further take such action and execute and deliver to the Trustee and the Collateral Agent such agreements, conveyances, deeds, financing statements, UCC filings and other documents and instruments as the Trustee or the Collateral Agent may request for the purpose of establishing, perfecting, preserving and protecting the Security, in each case satisfactory in form and substance to the Trustee and the Collateral Agent. 6.4 LEGAL OPINIONS -------------- The Corporation shall cause favourable legal opinions (satisfactory in form and substance to the Trustee and the Collateral Agent) in respect of the Security and the Security Interests created thereby, and the ranking thereof, to be delivered to the Trustee and the Collateral Agent in respect of the validity and enforceability thereof, and the registration and perfection of the Security Interests created thereby. 6.5 CONTINUING SECURITY ------------------- Each item or part of the Security shall for all purposes be treated as a separate and continuing collateral security and shall be deemed to have been given in addition to and not in place of any other item or part of the Security or any other security now held or hereafter acquired by the Trustee, the Collateral Agent or any Debentureholder. No item or part of the Security shall be merged or be deemed to have been merged in or by this indenture, the -32- Debentures, the Collateral Agency Agreement or any documents, instruments or acknowledgements delivered hereunder, any simple contract debt or any judgment and any realization of or steps taken under or pursuant to any security, instrument or agreement shall be independent of and not create a merger with any other right available to any the Trustee, the Collateral Agent or any Debentureholder under any security, instruments or agreements held by the Trustee, the Collateral Agent or such Debentureholder or at law or in equity. 6.6 DEALING WITH SECURITY --------------------- The Trustee may grant extensions of time or other indulgences, take and give securities (including the Security or any part thereof), accept compositions, grant releases and discharges and otherwise deal with the Corporation and other parties and with securities (including the Security and each part thereof) as the Trustee may, based on the advice of Counsel, see fit, provided the Trustee is of the opinion, based on the advice of Counsel, that any such action is not prejudicial to the interests of the Debentureholders. 6.7 EFFECTIVENESS ------------- The Security hereby contemplated or required to be created shall be effective, and the undertakings as to the Security herein or in any document hereunder shall be continuing, whether the moneys hereby or thereby secured or any part thereof shall be advanced before or after or at the same time as the creation of any such Security or before or after or upon the date of execution of any amendments to this indenture. 6.8 CONFLICT -------- In the event of any conflict between the terms of this indenture and the Security, the provisions of this indenture shall prevail to the extent necessary to remove such conflict. 6.9 PERMITTED ENCUMBRANCES AND INDEBTEDNESS. ---------------------------------------- None of: (a) the fact that the Corporation is permitted to create, assume or suffer to exist any permitted Security Interest or permitted Indebtedness; (b) the fact that any representation, warranty or covenant herein may make an exception for the existence of any permitted Security Interest or permitted Indebtedness; or (c) the fact that the Security Interests created pursuant to the Security may be stated to be subject to, or are not required to rank in priority to, permitted Security Interests; shall, in and of themselves, in any manner, nor in any cause or proceeding, directly or indirectly, be taken to constitute a subordination of any Security Interest created pursuant to the Security to any permitted Security Interests or to any other Security Interest or other obligation whatsoever, or that the Indebtedness under this indenture, the Debentures or the Security is in any way -33- subordinate or junior in right of payment to any permitted Indebtedness, it being the intention of the parties that all Security Interests created pursuant to the Security shall at all times rank as first priority Security Interests in priority to permitted Security Interests and all other Security Interests or other obligations whatsoever. 6.10 COMPOSITE MORTGAGE ------------------ Each item of the Security is a composite mortgage and security agreement covering the property of the Corporation located in the various states of the United States of America and elsewhere and each item of the Security shall be a separate mortgage and security agreement enforceable against the Corporation without regard to the application of the Security to portions of the property of the Corporation located in other jurisdictions. All provisions thereof shall be applicable separately to the portions of the property located in each separate jurisdiction with the same effect as if a separate mortgage and security agreement with respect thereto had been executed and delivered. Upon request of the Trustee, the Corporation shall prepare at its expense a separate mortgage and security agreement covering the portion of the property located in any such jurisdiction or jurisdictions, such separate mortgage and security agreement to be substantially in the form of the Security except for such modifications as shall be required by the fact that such mortgage and security agreement relates only to the property of the Corporation located in such jurisdiction or jurisdictions or as may be required by the Trustee in connection therewith. The Corporation hereby agrees to execute and deliver to the Trustee and, if directed by the Trustee, the Collateral Agent, all such separate mortgage and security agreements which may be so requested in form and substance satisfactory to the Trustee and the Collateral Agent, and, at the request of the Trustee, but at the expense of the Corporation, the Corporation shall record, register and file, and keep recorded, registered and filed, such separate mortgage and security agreements to the extent required hereby, so as to make the same valid, binding and enforceable obligations of the Corporation and to make effective and perfect the Security Interests created by thereby and by the Security. 6.11 AMENDMENTS TO SECURITY ---------------------- The Security and the Collateral Agency Agreement shall not be amended, except: (a) with the prior approval of the Debentureholders by extraordinary resolution passed as provided in Article 10; or (b) if the amendments are, in the opinion of the Trustee, based on the advice of Counsel, not prejudicial to the interests of the Debentureholders; or (c) where necessary to evidence the succession, or successive successions, of other persons as the Collateral Agent; or (d) as set forth in Section 6.2. -34- ARTICLE 7 DEFAULT ------- 7.1 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 the principal of any Debenture when the same becomes due and payable under any provision hereof or of the Debentures; (b) if the Corporation makes default in payment of any interest due on any Debenture and any such default continues for a period of 10 days; (c) if a decree or order of a court having jurisdiction in the premises is entered adjudging the Corporation a bankrupt or insolvent under any bankruptcy, insolvency or analogous laws, or issuing sequestration or process of execution against, all or substantially all of the property of the Corporation, or appointing a receiver of, or of substantially all 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 30 days; (d) 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 Section 9.1 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 any 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; (e) if the Corporation fails to make any payment of principal or interest on any Indebtedness in an amount greater than $250,000 in respect of which the Corporation is liable when the same becomes due and beyond any period of grace provided with respect thereto; (f) if any event or circumstance occurs under an agreement or instrument relating to Indebtedness of the Corporation in an amount greater than $250,000 which could permit a person to declare such Indebtedness or any part thereof to become due prior to the stipulated date for repayment thereof or maturity, and such event or circumstance shall not be remedied or cured, or waived by the holders of such Indebtedness, within 30 days after such event or circumstance shall have occurred; -35- (g) if the Corporation shall neglect to observe or perform any other covenant or condition herein contained, or contained in the Collateral Agency Agreement or the Collateral Documents, on its part to be observed or performed and, after notice in writing has been received by the Corporation from the Trustee 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 holders of not less than 25% in principal amount of the Debentures then outstanding), the Corporation shall fail to make good such default within a period of 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; (h) if there is a Change of Control of the Corporation (as determined by the Trustee, based on the advice of Counsel); or (i) if there ceases at any time to be two Representative Directors on the board of directors of the Corporation, and any of the following occurs: (i) a Representative Director or the Representative Directors have so ceased to be directors of the Corporation as a result of a resolution passed or an election of directors approved by the shareholders of the Corporation; or (ii) the Corporation fails to give notice to the Trustee and the Debentureholders that one or more Representative Directors has ceased to be a director of the Corporation within five days after the date such person ceased to be such a director; or (iii) the Corporation fails to appoint or elect an individual, who has been approved as a replacement director by resolution of the Debentureholders and who has consented to act as such, to fill a vacancy in such two Representative Directors' positions within five days of such resolution being passed by the Debentureholders and notice thereof being given to the Corporation; then in each and every such event the Security shall become enforceable and the Trustee may in its discretion and shall upon receipt of a request in writing signed by the holders of not less than 25% in principal amount of the Debentures then outstanding, subject to the provisions of Section 7.3, by notice in writing to the Corporation declare the principal of and interest on all Debentures then outstanding and all other moneys 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 Corporation shall forthwith pay to the Trustee for the benefit of the Debentureholders the principal of, accrued and unpaid interest and such other moneys, together with interest at the rate borne by the Debentures on such principal, interest and such other moneys from the date of the said declaration until payment is received by the Trustee, all less any tax required by law to be deducted from interest payments. Such payment when made shall be deemed to have been made in discharge of the Corporation's -36- obligation hereunder and any moneys so received by the Trustee shall be applied in the manner provided in Section 7.6. 7.2 NOTICE OF EVENT OF DEFAULT -------------------------- If an Event of Default shall occur and be continuing the Trustee shall, within 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 Section 11.2, provided that, notwithstanding the foregoing, unless the Trustee shall have been requested to do so by the holders of at least 25% 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 would not be prejudicial to the Debentureholders and shall have so advised the Corporation in writing. 7.3 WAIVER OF DEFAULT ----------------- Upon the happening of any Event of Default hereunder: (a) the holders of more than 50% 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 and to cancel any declaration made by the Trustee pursuant to Section 7.1 and the Trustee shall thereupon waive the Event of Default and cancel such declaration, upon such terms and conditions as shall be prescribed in such requisition; and (b) the Trustee, so long it has not become bound to declare the principal of and interest on 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. 7.4 ENFORCEMENT BY THE TRUSTEE -------------------------- Subject to the provisions of Section 7.3 and to the provisions of any extraordinary resolution that may be passed by the Debentureholders, in case the Corporation shall fail to pay to the Trustee, forthwith after the same shall have been declared to be due and payable under Section 7.1, the principal of and interest on all Debentures then outstanding, together with any other amounts due hereunder, the Trustee may in its discretion and shall upon receipt of a request in writing signed by the holders of not less than 25% 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 or in the name of the -37- Collateral Agent or otherwise to obtain or enforce payment of the said principal of and interest on all the Debentures then outstanding together with any other amounts due hereunder, and to enforce and to realize on, and to cause the Collateral Agent to enforce and to realize on, the Security Interests constituted by the Security, by such proceedings authorized by this indenture and the Security 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 or the Collateral Agent shall act without such request, then by such proceedings authorized by this indenture and the Security or by suit at law or in equity as the Trustee or the Collateral Agent shall deem expedient. 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 (or cause the Collateral Agent 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, the Collateral Agent and of the holders of the Debentures allowed in any insolvency, bankruptcy, liquidation or other judicial proceedings relative to the Corporation or its creditors or relative to or affecting its property, or to enforce the Security. 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 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 the respective claims of the Trustee, the Collateral Agent 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 of reorganization or otherwise by action of any character in such proceeding to waive or change in any way any right of any Debentureholder. The Trustee shall also have power at any time and from time to time to institute and to maintain, and to cause the Collateral Agent 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. All rights of action hereunder and under the Security may be enforced by the Trustee or the Collateral Agent without the possession of any of the Debentures or the production thereof on the trial or other proceedings relating thereto. Any such suit or proceeding instituted by the Trustee or the Collateral Agent shall be brought in the name of the Trustee as trustee of an express trust or in the name of the Collateral Agent as agent for such Trustee, and any recovery of judgment shall be for the rateable benefit of the holders of the Debentures subject to the provisions of this indenture and the Security. In any proceeding brought by the Trustee or the Collateral Agent (and also any proceeding in which a declaratory judgment of a court may be -38- sought as to the interpretation or construction of any provision of this indenture or the Security, to which the Trustee or the Collateral Agent shall be a party) the Trustee and the Collateral Agent 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. 7.5 NO SUITS BY DEBENTUREHOLDERS ---------------------------- No holder of any Debenture shall have any right to institute any action, suit or proceedings at law or in equity for the purpose of enforcing payment of the principal of or interest on the Debentures or for the execution of any trust or power hereunder or under the Security or for the appointment of a liquidator or receiver or for a receiving order under any bankruptcy, insolvency or analogous laws or 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; and (b) the Debentureholders by extraordinary resolution (as hereinafter defined) or by written instrument signed by the holders of at least 25% in principal amount of the Debentures then outstanding shall have made a request to the Trustee and the Trustee and the Collateral Agent shall have been afforded reasonable opportunity either themselves to proceed to exercise the powers hereinbefore granted or to institute an action, suit or proceeding in their name for such purpose; and (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 or the Collateral Agent shall have failed to act within a reasonable time after such notification, request and offer of indemnity; and such notification, request and offer of indemnity are hereby declared in every such case, at the option of the Trustee, to be conditions precedent to any such proceeding. 7.6 APPLICATION OF MONEYS BY TRUSTEE -------------------------------- Except as herein otherwise expressly provided, any moneys received by the Trustee or the Collateral Agent from the Corporation pursuant to the foregoing provisions of this Article, or as a result of legal or other proceedings or from any trustee in bankruptcy or liquidator of the Corporation, shall be applied, together with any other moneys in the hands of the Trustee or the Collateral Agent available for such purpose, as follows: (a) first, in payment or in reimbursement to the Trustee and the Collateral Agent of their compensation, costs, charges, expenses, borrowings, advances or other moneys furnished or provided by or at the instance of the Trustee or the Collateral Agent in or about, the execution of the trusts under, or otherwise in relation to, this indenture and the Security, with interest thereon as herein provided; (b) second, but subject as hereinafter in this Section 7.6 provided, in payment, rateably and proportionately to the holders of Debentures, of the principal of and accrued and unpaid interest and interest on amounts in default on the Debentures and other amounts payable hereunder which shall then be outstanding in the priority of principal first, then accrued and unpaid interest, then interest on amounts in default and then any such other amounts payable hereunder, unless -39- otherwise directed by extraordinary resolution and in that case in such order or priority as between principal, interest and other amounts as may be directed by such resolution; and (c) third, in payment of the surplus, if any, of such moneys to the Corporation or its assigns; provided, however, that no payment shall be made pursuant to clause (b) above in respect of the principal, interest or other amounts payable 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, interest and other amounts payable on all Debentures which are not so held. 7.7 DISTRIBUTION OF PROCEEDS ------------------------ Payments to holders of Debentures pursuant to clause (b) of Section 7.6 shall be made as follows: (a) at least 15 days notice of every such payment shall be given in the manner provided in Section 11.2 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 as between principal, interest and any other amounts; (b) payment of any Debenture shall be made upon presentation thereof at any one of the places specified in such notice and any such Debenture thereby paid in full shall be surrendered, otherwise a memorandum of such payment shall be endorsed thereon; but the Trustee may in its discretion dispense with presentation and surrender for endorsement in any special case upon such indemnity being given as it shall deem sufficient; (c) from and after the date of payment specified in the notice, interest shall accrue only on the amount owing on each Debenture after giving credit for the amount of the payment specified in such notice unless the Debenture in respect of which such amount is owing be duly presented on or after the date so specified and payment of such amount be not made; and (d) the Trustee shall not be bound to apply or make any partial or interim payment of any moneys coming into its hands if the amount so received by it, after reserving thereout such amount as the Trustee may think necessary to provide for the payments mentioned in subsection 7.6(a), is insufficient to make a distribution of at least 2% of the aggregate principal amount of the outstanding Debentures, but it may retain the money so received by it and invest or deposit the same as provided in Section 12.9 until the money or the investments representing the same, with the income derived therefrom, together with any other moneys for the time being under its control shall be sufficient for the said purpose or until it shall consider it advisable to apply the same in the manner hereinbefore set forth. The foregoing shall, however, not apply to a final payment in distribution hereunder. -40- 7.8 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. 7.9 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, or in favour of the Collateral Agent, as agent for the Trustee, for any amount which may remain due in respect of the Debentures and the interest thereon and any other moneys owing hereunder. 7.10 JUDGMENT CURRENCY ----------------- (a) If for the purposes of obtaining judgment in any court it is necessary to convert all or any part of any amount due under the Debentures or to the Trustee hereunder in any currency (the "Original Currency") into another currency (the "Other Currency"), then the Corporation, to the fullest extent that it may effectively do so, agrees that the rate of exchange used shall be that at which, in accordance with normal banking procedures, the Trustee could purchase the Original Currency with the Other Currency in the principal relevant market on a Business Day immediately preceding the day on which any such judgment, or any relevant part thereof, is paid or otherwise satisfied. (b) The obligation of the Corporation in respect of any sum due hereunder or under the Debentures in the Original Currency shall, notwithstanding any judgment in any Other Currency, be discharged only to the extent that on the Business Day following receipt by a party of any sum adjudged to be so due in such Other Currency or of any other sum in any Other Currency the Trustee may, in accordance with normal banking procedures, purchase the Original Currency with such Other Currency. If the amount of the Original Currency so purchased is less than the sum originally due to the Debentureholders or the Trustee, as the case may be, in the Original Currency, the Corporation shall, as a separate obligation, and notwithstanding any such judgment, indemnify the Debentureholders or the Trustee, as the case may be, against such loss, and if the amount of the Original Currency so purchased exceeds the sum originally due to the Debentureholders or the Trustee, as the case may be, the Debentureholders or the Trustee, as the case may be, shall remit such excess to the Corporation. 7.11 IMMUNITY OF SHAREHOLDERS AND OTHERS ----------------------------------- 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, officer or agent of the Corporation or of any successor -41- company for the payment of the principal of or interest on any of the Debentures or on any covenant, agreement, representation or warranty by the Corporation herein or in the Debentures contained. 7.12 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 8 SATISFACTION AND DISCHARGE -------------------------- 8.1 CANCELLATION AND DESTRUCTION ---------------------------- All matured Debentures shall forthwith after payment 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. 8.2 NON-PRESENTATION OF DEBENTURES ------------------------------ In case the holder of any Debenture shall fail to present the same for payment on the date on which the principal thereof becomes payable either at maturity or otherwise or shall not accept payment on account thereof and give such receipt therefor and for any interest thereon or represented thereby, if any, as the Trustee may require: (a) the Corporation shall be entitled to pay to the Trustee and direct it to set aside; or (b) in respect of moneys 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; the principal moneys or the interest, as the case may be, in trust for the holder of such Debenture, either in the deposit department of the Trustee or in some chartered bank in Canada, to be paid to such holder, with no interest thereon, upon due presentation or surrender thereof in accordance with the provisions of this indenture; and thereupon the principal moneys and any interest payable on or represented by each Debenture in respect whereof such moneys 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 moneys so set aside, by the Trustee upon due presentation and surrender thereof, subject always to the provisions of Section 8.3. -42- 8.3 REPAYMENT OF UNCLAIMED MONEYS ----------------------------- Subject to applicable law, any moneys set aside under Sections 3.6 or 8.2 and not claimed by and paid to holders of Debentures as provided in Sections 3.6 or 8.2 within six years after the date of such setting aside shall be repaid to the Corporation by the Trustee on demand and thereupon the Trustee shall be released from all further liability with respect to such moneys and thereafter the holders of the Debentures in respect of which such moneys were so repaid to the Corporation shall have no rights in respect thereof except to obtain payment of the moneys due thereon from the Corporation up to such time as the right to proceed against the Corporation for recovery of such moneys has become statute barred under the laws of the Province of British Columbia. 8.4 DISCHARGE --------- The Trustee shall at the request of the Corporation release and discharge this indenture, the Collateral Agency Agreement and the Security and execute and deliver such instruments as it shall be advised by Counsel are requisite for that purpose and to release the Corporation from its covenants herein and therein contained (other than the provisions relating to the indemnification of the Trustee and the Collateral Agent), upon proof being given to the reasonable satisfaction of the Trustee that (i) the principal of and interest (including interest on amounts in default, if any) on all the Debentures and all other moneys payable hereunder, under the Collateral Agency Agreement and under the Security have been paid or satisfied, or (ii) all the Debentures having matured or having been duly called for redemption, payment of the principal of and interest (including interest on amounts in default, if any) on such Debentures and of all other moneys payable hereunder, under the Collateral Agency Agreement and under the Security has been duly and effectually provided for in accordance with the provisions hereof, or (iii) all the Debentures have been converted into Shares, or (iv) by reason of one of the events set forth in (i), (ii) and (iii) aforesaid having occurred with respect to all Debentures in aggregate, no Debentures are outstanding. ARTICLE 9 SUCCESSOR CORPORATIONS ---------------------- 9.1 CERTAIN REQUIREMENTS -------------------- The Corporation shall not enter into any transaction (including by way of reconstruction, reorganization, consolidation, amalgamation, arrangement, merger, liquidation, dissolution, winding-up, transfer, sale or otherwise) whereby all or substantially all of its undertaking, property and assets would become the property of any other person, or, in the case of any such amalgamation or merger, of the continuing corporation resulting therefrom, unless: (a) such transaction is approved by extraordinary resolution of the Debentureholders as set forth in Article 10; (b) such other person or continuing corporation (herein called "SUCCESSOR CORPORATION") is a corporation incorporated under the laws of the United States of America or Canada or one of its states or provinces, as the case may be; -43- (c) 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 pay the same and the agreement of the Successor Corporation to observe and perform all the covenants and obligations of the Corporation under this indenture; (d) such transaction, in the opinion of Counsel, 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 (e) 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. 9.2 VESTING OF POWERS IN SUCCESSOR ------------------------------ Whenever the conditions of Section 9.1 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 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 10 MEETINGS OF DEBENTUREHOLDERS ---------------------------- 10.1 RIGHT TO CONVENE MEETING ------------------------ The Trustee or the Corporation 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 25% 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 30 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 Vancouver or at such other place as may be approved or determined by the Trustee. 10.2 NOTICE OF MEETINGS ------------------ At least 15 days notice of any meeting shall be given to the Debentureholders in the manner provided in Section 11.2 and a copy thereof shall be sent by post to the Trustee, unless the meeting has been called by it, and to the Corporation, 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 -44- state the business to be transacted thereat and 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. 10.3 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 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. 10.4 QUORUM ------ Subject to the provisions of Section 10.12, at any meeting of the Debentureholders a quorum shall consist of Debentureholders present in person or by proxy and representing at least 25% in principal amount of the outstanding Debentures. If a quorum of the Debentureholders shall not be present within 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 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 25% 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 be present at the commencement of business. 10.5 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. 10.6 SHOW OF HANDS ------------- Every question submitted to a meeting shall, subject to Section 10.7, 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 Debentures, if any, held by him. -45- 10.7 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. 10.8 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 proxy 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 proxy 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. 10.9 REGULATIONS ----------- The Trustee, or the Corporation with the approval of the Trustee, may (for the purpose of enabling the holders of Debentures to be represented and vote at any such meeting by proxy and for the purpose of enabling the lodging of such proxies at some place or places other than the place where the meeting is to be held) from time to time make and from time to time vary or revoke such regulations as it shall from time to time think fit providing for and governing: (a) the voting by proxy by holders of Debentures and the form of the instrument appointing a proxy, which shall be in writing, and 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 shall 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 or sent by telecopier 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. -46- 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 registered holders of Debentures. 10.10 PERSONS ENTITLED TO ATTEND MEETINGS ----------------------------------- The Corporation and the Trustee, by their respective officers and directors, and the legal advisers of the Corporation, the Trustee and any Debentureholder may attend any meeting of the Debentureholders, but shall have no vote as such. 10.11 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 any modification, abrogation, alteration, compromise or arrangement of the rights of the Debentureholders or the Trustee against the Corporation, or against its property, whether such rights arise under this indenture, the Debentures, the Collateral Agency Agreement, the Collateral Documents 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, any Debenture, the Collateral Agency Agreement or the Collateral Documents which shall be agreed to by the Corporation and to authorize the Trustee to concur in and execute any indenture supplemental hereto or authorize the Collateral Agent to concur in and execute any supplemental to the Collateral Agency Agreement or the Collateral Documents, embodying any modification, change, addition or omission; (c) power to sanction any scheme or plan 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; (d) power to direct or authorize the Trustee or the Collateral Agent to exercise any power, right, remedy or authority given to it by this indenture, the Collateral Agency Agreement or the Collateral Documents 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 or cancel any declaration made by the Trustee pursuant to Section 7.1 either unconditionally or upon any condition specified in such extraordinary resolution; -47- (f) power to restrain any Debentureholder from taking or instituting any suit, action or proceeding for the purpose of enforcing payment of the principal of or interest on the Debentures, or for the execution of any trust or power hereunder; (g) 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 Section 7.5, of the costs, charges and expenses reasonably and properly incurred by such Debentureholder in connection therewith; (h) 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; (i) power to appoint a committee with power and authority (subject to such limitations, if any, as may be prescribed in the resolution) to exercise, and to direct the Trustee to exercise, on behalf of the Debentureholders, such of the powers of the Debentureholders as are exercisable by extraordinary or other resolution as shall be included in the resolution appointing the committee. The resolution making such appointment may provide for payment of the expenses and disbursements of and compensation to such committee. Such committee shall consist of such number of persons as shall be prescribed in the resolution appointing it and the members need not be themselves Debentureholders. Every such committee may elect its chairman and may make regulations respecting its quorum, the calling of its meetings, the filling of vacancies occurring in its number and its procedure generally. Such regulations may provide that the committee may act at a meeting at which a quorum is present or may act by minutes signed by the number of members thereof necessary to constitute a quorum. All acts of any such committee within the authority delegated to it shall be binding upon all Debentureholders. Neither the committee nor any member thereof shall be liable for any loss arising from or in connection with any action taken or omitted to be taken by them in good faith; (j) power to authorize the distribution in specie of any shares, bonds, debentures or other securities or obligations or cash or other consideration received hereunder or the use or disposal of the whole or any part of such shares, bonds, debentures or other securities or obligations or cash or other consideration in such manner and for such purpose as may be deemed advisable and specified in such extraordinary resolution; (k) power to authorize the Trustee or any other person or persons to bid at any sale of the Corporation's properties or assets or any part thereof and to borrow the moneys required to make any deposit at said sale or pay the balance of the purchase price and to hypothecate, mortgage, pledge, charge, cede and transfer the property or assets so purchased as security for the repayment of the moneys so borrowed and interest thereon, or itself, himself or themselves, as the case may be, to advance such moneys in which event it, he or they shall have a lien upon -48- the property or assets so purchased for the amount so advanced and interest thereon) and to hold any property or assets so purchased (subject to any hypothec, mortgage, pledge, charge or lien to secure any moneys so borrowed or advanced) in trust for all the holders of the Debentures outstanding at the time of such sale pro rata in proportion to the amounts due to them thereon respectively for principal and interest before such sale, and to sell, transfer and convey the whole or any part or parts of the property or assets so purchased for such consideration in cash or in the shares, bonds, debentures or other securities or obligations of any company formed or to be formed, or partly in cash and partly in such securities or obligations, and upon such terms and conditions as may be determined by such extraordinary resolution of the Debentureholders and, subject to such terms and conditions, to dispose of such cash, shares, bonds, debentures or other securities or obligations pursuant to the provisions of subsection (j) of this Section 10.11, and until the sale, transfer or conveyance of the whole of such property or assets so purchased to maintain and operate such part of said property and assets as has not been disposed of, and for such purposes to borrow moneys and to hypothecate, mortgage, pledge, charge and cede and transfer the property and assets so purchased, or any part thereof, as security for the repayment of the moneys so borrowed, with interest thereon, or itself, himself or themselves, as the case may be, to advance such moneys (in which event it, he or they shall have a lien or charge upon the property and assets so purchased for the amounts so advanced and interest thereon) and otherwise deal with such property and assets and the proceeds of any sale, transfer or conveyance thereof as the Debentureholders may by such extraordinary resolution direct; (l) power to remove the Trustee from office and to appoint a new Trustee or Trustees and power to require the Trustee to remove the Collateral Agent from office and to appoint a new Collateral Agent; (m) 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 company formed or to be formed; (n) power, notwithstanding Section 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 (o) power to amend, alter or repeal any extraordinary resolution previously passed or sanctioned by the Debentureholders or by any committee appointed pursuant to subsection 10.11(i). 10.12 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 -49- adjourned meeting) duly convened for the purpose and held in accordance with the provisions of this Article at which, subject to Section 10.12(b), the holders of not less than 50% 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 66 2/3% 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 50% in principal amount of the Debentures outstanding are not present in person or by proxy within 30 minutes after the time appointed for the meeting, then the meeting, if convened by or on the requisition of Debentureholders, shall be dissolved, but in any other case it shall stand adjourned to such date, being not less than 10 nor more than 60 days later, and to such place and time as may be appointed by the chairman. Not less than 10 days notice shall be given of the time and place of such adjourned meeting in the manner provided in Section 11.2. 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 Debentureholders 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 (a) of this Section shall be an extraordinary resolution within the meaning of this indenture, so long as the holders of not less than 25% in principal amount of the Debentures then outstanding are 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. 10.13 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. 10.14 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 the Corporation, 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 and, until the -50- 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. 10.15 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 66 2/3% 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. 10.16 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 Section 10.15 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. 10.17 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. 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 11 NOTICES ------- 11.1 NOTICE TO CORPORATION AND TRUSTEE --------------------------------- (a) Notices to the Corporation and the Trustee may be delivered: -51- (i) personally by leaving them with the party, or at the offices of the party, to whom they are addressed at that party's address hereinafter given, and notices so served shall be deemed to have been received by the addressee thereof on the day of delivery, unless actually delivered on a day which is not a business day or after 4:00 p.m. on the day of delivery, in which case notice shall be deemed to be received on the next ensuing business day; (ii) by telecopier, or any other like method by which a message may be sent directed to the party to whom they are to be delivered at that party's address hereinafter given, and notices so sent shall be deemed to have been received by the addressee thereof on the business day next ensuing after the day of sending; and (iii) by mailing them first class registered post, postage prepaid, to the party to whom they are to be delivered, in which case notices mailed shall be deemed (in the absence of general postal disruption) to be received by the addressee thereof on the fifth business day following the day of mailing thereof. (b) The address of each of the parties to this indenture shall be as follows: (i) to the Corporation: American Natural Energy Corporation 7030 South Yale, Suite 404 Tulsa, Oklahoma U.S.A. 74136 Telecopy: (918) 481-1473 Attention: President (ii) to the Trustee: Computershare Trust Company of Canada 510 Burrard Street, 3rd Floor, Vancouver, British Columbia V6C 3B9 Telecopy: (604) 685-4079 Attention: Manager, Corporate Trust (c) Any party to this indenture may change its address by notice delivered in accordance with this indenture. 11.2 NOTICE TO DEBENTUREHOLDERS -------------------------- Except as herein otherwise expressly provided, all notices to be given hereunder with respect to the Debentures shall be deemed to be validly given to the holders of Debentures if -52- delivered or if sent through the ordinary post, postage prepaid, by letter or circular addressed to such holders at their post office addresses appearing in any of the registers hereinbefore mentioned. Any notice so delivered or served by post shall be deemed to have been given or served on the day upon which it is delivered or posted as aforesaid. Any accidental error, omission or failure in giving or in delivering or mailing any such notice or the inability of the Corporation to give or mail any notice due to anything beyond the reasonable control of the Corporation or the non-receipt of any such notice by the Debentureholder or holders shall not invalidate or otherwise prejudicially affect any action or proceeding founded thereon. All notices with respect to any jointly owned 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. ARTICLE 12 CONCERNING THE TRUSTEE ---------------------- 12.1 NO CONFLICT OF INTEREST ----------------------- The Trustee represents to the Corporation and the Debentureholders 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 but if, notwithstanding the provisions of this Section 12.1, such a material conflict of interest exists, the validity and enforceability of this indenture, and the securities issued hereunder shall not be affected in any manner whatsoever by reason only that such material conflict of interest exists but the Trustee shall, within 90 days after ascertaining that it has a material conflict of interest, either eliminate such material conflict of interest or resign in the manner and with the effect specified in Section 12.2. 12.2 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 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 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 Section. 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 Supreme Court of British Columbia, on such notice as such Judge 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 Debentureholders. Any new Trustee appointed under any provision of this Section shall be a corporation authorized to carry on business of a trust company in the Province of British Columbia. On any new -53- 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. 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 and under the Collateral Agency Agreement without the execution of any instrument or any further act. Nevertheless, 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 confining 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. 12.3 DUTIES OF TRUSTEE ----------------- In the exercise of the rights, duties and obligations prescribed or conferred by the terms of this indenture, the Trustee shall act honestly and in good faith with a view to the best interests of the Debentureholders and shall exercise that degree of care, diligence and skill that a reasonably prudent trustee would exercise in comparable circumstances. 12.4 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 Section 12.5, if applicable, and with any other applicable requirements of this indenture. 12.5 EVIDENCE AND AUTHORITY 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 (a) such evidence is required by any other Section of this indenture to be furnished by the Trustee in accordance with the terms of this Section 12.5 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. -54- Such evidence shall consist of: (a) a statutory declaration or certificate made by the Chairman of the Board, the President, a Vice-President or the Treasurer 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 Section. Each statutory declaration, 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. The Corporation shall furnish to the Trustee annually, and at any other reasonable time if the Trustee so requires, its certificate 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. -55- 12.6 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. 12.7 EXPERTS, ADVISERS 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 it in the discharge of its 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. 12.8 TRUSTEE MAY DEAL IN DEBENTURES ------------------------------ Subject to Section 12.2, 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. 12.9 INVESTMENT OF MONEYS HELD BY TRUSTEE ------------------------------------ Unless otherwise provided in this indenture, any moneys 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 British Columbia, trustees are authorized to invest trust moneys, provided that such securities are expressed to mature within two years after their purchase by the Trustee, and unless and until the Trustee shall have declared the principal of and interest on the Debentures to be due and payable, the Trustee shall so invest such moneys at the request of the Corporation. Pending the investment of any moneys as hereinbefore provided, such moneys may be deposited in the name of the Trustee in any chartered bank in Canada or, with the consent of the Corporation, in the deposit department of the Trustee or any other loan or trust company -56- 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 and interest on 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 Section. 12.10 TRUSTEE NOT ORDINARILY BOUND ---------------------------- Except as otherwise specifically provided herein, the Trustee shall not, subject to Section 12.3, 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 then 25% 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 10, and then only after it shall have been funded and 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. 12.11 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. 12.12 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. 12.13 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. 12.14 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 such act, action or proceeding and indemnity reasonably satisfactory to the Trustee to protect and hold harmless the Trustee against the costs, -57- 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 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 funded and indemnified as aforesaid. 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. 12.15 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 carry on the business of a trust company in the Province of British Columbia but if, notwithstanding the provisions of this Section 12.15, it ceases to be so authorized to carry on business, the validity and enforceability of this indenture and the securities issued hereunder shall not be affected in any manner whatsoever by reason only of such event but the Trustee shall, within 90 days after ceasing to be authorized to carry on the business of a trust company in the Province of British Columbia either become so authorized or resign in the manner and with the effect specified in Section 12.2. 12.16 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, by the Security, by the Collateral Agency Agreement 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. 12.17 DIRECTION OF TRUSTEE'S ACTIONS BY HOLDERS ----------------------------------------- If and so long, as all of the following conditions shall be met: (a) there shall be no more than five holders of Debentures; and (b) 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 66 2/3% 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 66 2/3% in principal amount of the Debentures at the time outstanding; and copies of all certificates, notices, reports and other communications given by the Corporation to the Trustee shall be given to each Debentureholder, and the Trustee shall not be required to examine any such certificate, notice, report or other communication or be on notice of the contents thereof. -58- 12.18 INDEMNITY --------- Without limiting any protection or indemnity of the Trustee under any other provision hereof, or otherwise at law, the Trustee shall be indemnified by the Corporation from and against any and all liabilities, losses, damages, penalties, claims, actions, suits, costs, expenses and disbursements, including reasonable legal or adviser fees and disbursements, of whatever kind and nature which may at any time be imposed on, incurred by or asserted against such Trustee in connection with the performance of their duties and obligations hereunder, other than such liabilities, losses, damages, penalties, claims, actions, suits, costs, expenses and disbursements arising by reason of the gross negligence or fraud of such Trustee. This provision shall survive the resignation or removal of each Trustee, and the termination of this indenture. 12.19 ENVIRONMENTAL INDEMNITY ----------------------- (a) Subject to subsection 12.19(c), the Corporation hereby indemnifies the Debentureholders, the Trustee and the Collateral Agent, their respective directors, officers, employees, and agents, and all of their successors and assigns (collectively, the "INDEMNIFIED PARTIES") against any loss, expenses, 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: (i) the administration of the trust created hereby; and (ii) the exercise by the Trustee of any rights or obligations hereunder or by the Collateral Agent of its rights or obligations under the Collateral Agency Agreement or the Security; which result from or relate, directly or indirectly, to the breach or alleged breach of any environmental laws by the Corporation. (b) For purposes of this Section 12.19, "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 of the Indemnified Party for damage to or impairment of the environment. (c) 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. -59- 12.20 ANTI-MONEY LAUNDERING AND ANTI-TERRORIST LEGISLATION ---------------------------------------------------- (a) The Corporation hereby represents to the Trustee that any account to be opened by, or interest to held by, the Trustee in connection with this indenture, for or to the credit of such party, either (i) is not intended to be used by or on behalf of any third party; or (ii) if it is intended to be used by or on behalf of a third party, the Corporation will complete and execute forthwith a declaration, in form satisfactory to the Trustee, as to the particulars of such third party. (b) The Trustee shall retain the right not to act and shall not be liable for refusing to act if, due to a lack of information or for any other reason whatsoever, the Trustee, in its sole judgement, determines that such act might cause it to be in non-compliance with any applicable anti-money laundering or anti-terrorist legislation, regulation or guideline. Further, should the Trustee, in its sole judgment, determine at any time that its acting under this indenture has resulted in its being in non-compliance with any applicable anti-money laundering or anti-terrorist legislation, regulation or guideline, then it shall have the right to resign on 10 days written notice to the Corporation, provided (i) that the Trustee's written notice shall describe the circumstances of such non-compliance; and (ii) that if such circumstances are rectified to the Trustee's satisfaction within such 10 day period, then such resignation shall not be effective. ARTICLE 13 SUPPLEMENTAL INDENTURES ----------------------- 13.1 SUPPLEMENTAL INDENTURE ---------------------- 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, indentures or other agreements supplemental hereto or to the Collateral Agency Agreement, which thereafter shall form part hereof or thereof, and may direct the Collateral Agent to execute, acknowledge and deliver by its proper officers agreements supplemental to the Collateral Agency Agreement and the Collateral Documents for any one or more of the following purposes: (a) adding to the covenants and agreements of the Corporation herein or therein contained for the protection of the holders of the Debentures or providing for Events of Default in addition to those herein or therein specified; (b) making such provisions not inconsistent with this indenture or the Collateral Agency Agreement as may be necessary or desirable with respect to matters or questions arising hereunder or thereunder, 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, based on advice of counsel, that such provisions and modifications will not be prejudicial to the interests of the Debentureholders; -60- (c) evidencing the succession, or successive successions, of other corporations to the Corporation and the covenants of and obligations assumed by any such successor in accordance with the provisions of this indenture and the Collateral Agency Agreement; (d) giving effect to any extraordinary resolution passed as provided in Article 10; (e) making such amendments to this indenture as may be necessary to qualify this indenture under the United States Trust Indenture Act, if such qualification is necessary, provided that the Trustee shall be of the opinion, based on advice of counsel that such amendments will not be prejudicial to the interests of the Debentureholders; and (f) 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 in this indenture, the Collateral Agency Agreement or the Collateral Documents which it shall have been advised by Counsel are required for the purpose or 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 or thereto, provided that in the opinion of the Trustee, acting on the advice of Counsel, 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. -61- 14.2 FORMAL DATE ----------- For the purpose of convenience this indenture may be referred to as bearing formal date of October 8, 2003, 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. AMERICAN NATURAL ENERGY CORPORATION Per: -------------------------------- c/s Per: -------------------------------- COMPUTERSHARE TRUST COMPANY OF CANADA Per: -------------------------------- c/s Per: -------------------------------- -62- SCHEDULE A to the annexed Indenture dated as of the 8th day of October, 2003 between AMERICAN NATURAL ENERGY CORPORATION and COMPUTERSHARE TRUST COMPANY OF CANADA, as Trustee. UNLESS PERMITTED BY CANADIAN SECURITIES LEGISLATION, THE HOLDER OF THIS DEBENTURE SHALL NOT TRADE THE DEBENTURE OR ANY PART HEREOF BEFORE [FOUR MONTHS AND ONE DAY AFTER DATE OF ISSUE OF THE DEBENTURES]. THIS DEBENTURE AND THE SHARES ISSUABLE ON CONVERSION THEREOF HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAW. NO INTEREST THEREIN MAY BE SOLD, DISTRIBUTED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE TRANSFERRED OR DISPOSED OF WITHOUT (A) AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND ANY OTHER APPLICABLE UNITED STATES STATE OR FEDERAL SECURITIES LAWS COVERING ANY SUCH TRANSACTION OR (B) AN EXEMPTION FROM REGISTRATION (BASED ON RECEIPT BY THE CORPORATION OF AN ACCEPTABLE LEGAL OPINION STATING THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION, IF SO REQUESTED BY THE CORPORATION) OR (C) THE CORPORATION OTHERWISE SATISFYING ITSELF THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION. NO. SPECIMEN $ --------------- AMERICAN NATURAL ENERGY CORPORATION (organized under the laws of the State of Oklahoma) 8% CONVERTIBLE SECURED DEBENTURE DUE SEPTEMBER 30, 2005 American Natural Energy Corporation (hereinafter referred to as the "CORPORATION") for value received hereby promises to pay to the registered holder hereof on September 30, 2005 (being the maturity date) or on such earlier date as the principal amount hereof may become due in accordance with the provisions of the Indenture hereinafter mentioned, on presentation and surrender of this Debenture, the sum of _________________________________ Dollars in lawful money of the United States of America at the principal office of the Trustee in the City of Vancouver, British Columbia, and to pay interest on the principal amount hereof at a rate of 8% per annum from the date of issue, or from the last interest payment date on which interest has been paid or made available for payment on the outstanding Debentures, whichever is later, at the said place, at the holder's option, in like money, calculated and payable quarterly in equal quarterly amounts on March 31, June 30, September 30 and December 31 in each year (an "INTEREST PAYMENT DATE"), the first payment to fall due on December 31, 2003, and should the Corporation at any time make default in the payment of any principal or interest, to pay interest on the amount in default at the same rate, in like money, at such place, and quarterly on the same dates. Interest on this Debenture for any interest payment date (except on maturity) will be payable to the registered holder of the Debenture at the close of business on the date (the "RECORD DATE") which is 10 days before the interest payment date. As interest on this Debenture becomes due, the Corporation, either directly or through the Trustee or an agent of the Trustee (except in case of payment at maturity or on redemption at which time payment of interest may be made upon surrender of this Debenture), shall, at least four business days prior to each interest payment date, forward or cause to be forwarded by prepaid post to the registered A-1 address of the registered holder of this Debenture on the record date for such interest payment date, or in the case of joint holders to the registered address of whichever of such joint holders is named first in the registers referred to hereafter, a cheque for such interest, less any tax required by law to be deducted, payable to the order of such holder or holders and negotiable at par at the place at which interest upon this Debenture is payable. The forwarding of such cheque shall satisfy and discharge the liability for interest upon this Debenture to the extent of the sum represented thereby (plus the amount of any tax deducted as aforesaid) unless such cheque is not paid on presentation. This Debenture is one of the 8% Convertible Secured Debentures (herein referred to as the "DEBENTURES") in the aggregate principal amount of up to $12,000,000 in lawful money of the United States of America issued under a trust indenture (herein referred to as the "INDENTURE") dated as of October 8, 2003 and made between the Corporation and Computershare Trust Company of Canada, 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. The Debentures are issuable as fully registered Debentures in denominations of $1,000 and any integral multiples of $1,000. 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. This Debenture is convertible, at the option of the holder hereof, upon surrender of this Debenture at the principal office of the Trustee in the City of Vancouver, British Columbia at any time up to the close of business on September 29, 2005 or on the business day immediately preceding the date specified for redemption of this Debenture, whichever is earlier, into fully paid and non-assessable Common Shares of the Corporation (the "COMMON SHARES"), as constituted on October 8, 2003 (with payment of interest accrued hereon and without adjustment for dividends on Common Shares issuable upon conversion) at a Conversion Price of U.S.$0.45 per Common Share, all subject to the terms and conditions and in the manner set forth in the Indenture. The Indenture makes provision for the adjustment of the Conversion Price in certain events. This Debenture may be redeemed at the option of the Corporation on the terms and conditions set out in the Indenture at the redemption prices therein set out, provided that this Debenture is not redeemable on or prior to September 30, 2004, and is not redeemable thereafter unless, among other conditions, the Corporation shall have filed with the Trustee, on the day that notice of redemption of this Debenture is first given, an Officers' Certificate certifying that the weighted average price per share at which Common Shares have traded on the TSX Venture Exchange (or elsewhere in accordance with the Indenture) during 20 consecutive trading days ended not more than 5 trading days preceding the date on which such notice of redemption is given was at least 166 2/3% of the Conversion Price in effect on the date of the filing of such Officers' Certificate. The indebtedness evidenced by this Debenture and by all other Debentures now or hereinafter certified and delivered under the Indenture is secured pursuant to security held by a collateral agent for the Trustee pursuant to the provisions of a Collateral Agency Agreement dated A-2 October 8, 2003 between the Trustee and the Collateral Agent, and acknowledged and consented to by the Corporation. The right is reserved to the Corporation, subject to the terms and conditions set out in the Indenture, to purchase Debentures at any time or times by tender made available to all Debentureholders. 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. The Indenture contains provisions for the holding of meetings of Debentureholders and rendering resolutions passed at such meetings and provides that instruments in writing signed by the holders of a specified majority of Debentures outstanding shall be 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 one of the registers to be kept at the offices of the Trustee in the City of Vancouver, British Columbia and at such other place or places, if any, and by such other registrar or registrars, 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 or other registrar may prescribe. This Debenture shall be construed in accordance with the laws of the Province of British Columbia and shall be treated in all respects as a British Columbia contract. This Debenture shall not become obligatory for any purpose until it shall have been certified by or on behalf of the Trustee under the Indenture. IN WITNESS WHEREOF AMERICAN NATURAL ENERGY CORPORATION has caused this Debenture to be signed by the President of the Corporation as of ________________, 200__. AMERICAN NATURAL ENERGY CORPORATION Per: ----------------------------------- President A-3 ================================================================================ - -------------------------------------------------------------------------------- TRUSTEE'S CERTIFICATE This Debenture is one of the 8% Convertible Secured Debentures, referred to in the Indenture within mentioned. COMPUTERSHARE TRUST COMPANY OF CANADA Per: ----------------------------------- Date of Certification: ----------------------------------- - -------------------------------------------------------------------------------- (No writing on this panel except by the Trustee or other Registrar) NUMBER OF DATE OF PRINCIPAL IN WHOSE NAME SIGNATURE OF TRUSTEE DEBENTURE REGISTRATION AMOUNT($) REGISTERED OR OTHER REGISTRAR ================================================================================ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- A-4 CONVERSION FORM --------------- TO: AMERICAN NATURAL ENERGY CORPORATION The undersigned registered holder of the within Debenture hereby irrevocably elects to convert the said Debenture (or $_________ principal amount thereof) into Common Shares of American Natural Energy Corporation in accordance with the terms of the Indenture referred to in the 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 $1,000 or integral multiples thereof) to be converted. Dated _______________ ________________________________________ (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, a trust company, or a member of an approved signature guarantee medallion program]. Name ----------------------------------------------------------------------- Address ----------------------------------------------------------------------- (Print name and address in which Common Shares issued on conversion are to be issued, delivered and registered) A-5 TRANSFER FORM ------------- FOR VALUE RECEIVED the undersigned sells, assigns and transfers unto - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Please print or typewrite name and address and social insurance number of assignee - -------------------------------------------------------------------------------- $_______________ principal amount of the within Debenture of American Natural Energy Corporation and hereby irrevocably constitutes and appoints __________________________ Attorney to transfer the said Debenture on the registers of the 8% Convertible Secured Debentures due September 30, 2005 of the said Corporation, with full power of substitution in the premises. It is understood that any transfer or attempted transfer of this Debenture is invalid and unenforceable until the Acknowledgement of Assignee in the form below has been signed by the assignee, as a precondition to the transfer of this Debenture. Dated _______________ ________________________________________ (SIGNATURE OF REGISTERED HOLDER) The signature of the registered holder of the within Debenture to the foregoing assignment must be guaranteed by a chartered bank, a trust company, or a member firm of an approved signature guarantee medallion program]. ACKNOWLEDGEMENT OF ASSIGNEE --------------------------- The undersigned Assignee of this Debenture, or part thereof, as referred to in the above Transfer Form hereby acknowledges that it is aware that the Debentures are "restricted securities" as defined under Rule 144 under the U.S. Securities Act and have not been registered under the U.S. Securities Act or the securities laws of any State of the United States, that the Corporation has no obligation to register any of the Debentures under the U.S. Securities Act or the securities laws of any state of the United States, that the Debentures may not be offered or sold in the United States unless registered in accordance with United States federal securities laws and all applicable state securities laws or exemptions from such requirements are available, that the Trustee will not register any transfer of any Debenture not made pursuant to an available exemption from the registration requirements of the U.S. Securities Act and that the Debentures shall bear a legend to that effect. If the above transfer of the Debenture is accompanied by an assignment of the Subscription Agreement with the Corporation in respect of the Debenture, or any interest therein, or of any of the rights arising thereunder, the undersigned Assignee of the Debenture agrees to be bound by the terms and conditions of such Subscription Agreement Dated ______________ ________________________________________ SIGNATURE OF ASSIGNEE A-6 EX-31 5 ex31_1.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATIONS CHIEF EXECUTIVE OFFICER'S CERTIFICATION PURSUANT TO RULE 13a-14(a) ------------------------------------------------------------------ I, Michael K. Paulk, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of American Natural Energy Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: November 13, 2003 /s/ Michael K. Paulk -------------------- Michael K. Paulk President EX-31 6 ex31_2.txt EXHIBIT 31.2 EXHIBIT 31.2 CHIEF FINANCIAL OFFICER'S CERTIFICATION PURSUANT TO RULE 13a-14(a) ------------------------------------------------------------------ I, Steven P. Ensz, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of American Natural Energy Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: November 13, 2003 /s/ Steven P. Ensz ------------------- Steven P. Ensz Vice President, Finance EX-32 7 ex32_1.txt EXHIBIT 32.1 EXHIBIT 32.1 PRINCIPAL EXECUTIVE OFFICER'S CERTIFICATION PURSUANT TO SECTION 1350 (FURNISHED, BUT NOT FILED) In connection with the Quarterly Report of American Natural Energy Corporation (the Company) on Form 10-QSB for the period ending September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Michael K. Paulk, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that: 1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Michael K. Paulk - -------------------- Michael K. Paulk Chief Executive Officer November 13, 2003 A signed original of this written statement required by Section 906 has been provided to American Natural Energy Corporation and will be retained by American Natural Energy Corporation and furnished to the Securities and Exchange Commission or its staff upon request. EX-32 8 ex32_2.txt EXHIBIT 32.2 EXHIBIT 32.2 PRINCIPAL EXECUTIVE OFFICER'S CERTIFICATION PURSUANT TO SECTION 1350 (FURNISHED, BUT NOT FILED) In connection with the Quarterly Report of American Natural Energy Corporation (the Company) on Form 10-QSB for the period ending September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Steven P. Ensz, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that: 1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Steven P. Ensz - ----------------------- Steven P. Ensz Chief Financial Officer November 13, 2003 A signed original of this written statement required by Section 906 has been provided to American Natural Energy Corporation and will be retained by American Natural Energy Corporation and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----