-----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, UAKJPPt3hzsMDb7O8QH80sxwGCNcKZyFz0IpaN51gZXYYGqhU55Wi1uThduKVAiw 9NVnL6DsEB5q4y9l/m5lzg== 0001005150-04-000196.txt : 20040209 0001005150-04-000196.hdr.sgml : 20040209 20040209095851 ACCESSION NUMBER: 0001005150-04-000196 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20040209 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-18956 FILM NUMBER: 04576195 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/A 1 form10qsba.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB/A AMENDMENT NO. 1 (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 Operations................................................... 16 Item 3. Controls and Procedures...................................... 23 PART II - OTHER INFORMATION Item 1. Legal Proceedings............................................ 23 Item 2. Changes In Securities........................................ 24 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, DECEMBER 31, 2003 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 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 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 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 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 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 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 Financial Statements (Unaudited) September 30, 2003 and 20022 - -------------------------------------------------------------------------------- 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 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 are convertible into common shares at a conversion price of $0.45 per share. On the dates the transaction was completed, the closing price for shares of the Company's common stock on the TSX Venture Exchange was $0.70 per share. Accordingly, because of the conversion price being less than the market price on the dates the transaction was completed, there was created a beneficial conversion feature to the Debentures of approximately $6.7 million. This amount will be amortized to interest expense over the life of the Debentures which mature on September 30, 2005. In the event any Debentures are converted prior to September 30, 2005, any un-amortized discount attributed to those proportionate holdings will be expensed at the time of conversion. 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 13 AMERICAN NATURAL ENERGY CORPORATION Notes to Condensed Financial Statements (Unaudited) September 30, 2003 and 2002 - -------------------------------------------------------------------------------- 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 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 14 AMERICAN NATURAL ENERGY CORPORATION Notes to Condensed Financial Statements (Unaudited) September 30, 2003 and 2002 - -------------------------------------------------------------------------------- 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. The Company has not evaluated the future liability associated with this contingency. 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. The Debentures are convertible into common shares at a conversion price of $0.45 per share. On the dates the transaction was completed, the closing price for shares of our common stock on the TSX Venture Exchange was $0.70 per share. Accordingly, because of the conversion price being less than the market price on the dates the transaction was completed, there was created a beneficial conversion feature to the Debentures of approximately $6.7 million. This amount will be amortized to interest expense over the life of the Debentures which mature on September 30, 2005. In the event any Debentures are converted prior to September 30, 2005, any un-amortized discount attributed to those proportionate holdings will be expensed at the time of conversion. 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 20 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 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 21 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. 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 22 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. 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 23 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 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 24 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 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. 25 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 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, 26 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 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. 27 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; 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 28 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; 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 29 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. 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; 30 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 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) 31 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) 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)(4) 31.2 Certification of Chief Financial Officer Pursuant to Rule 13a- 14(a)(4) 32.1 Certification of President and Chief Executive Officer Pursuant to Section 1350 (furnished, not filed)(4) 32.2 Certification of Chief Financial Officer Pursuant to Section 1350 (furnished, not filed)(4) - ---------------------------- (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 with the Registrant's Quarterly Report on Form 10-QSB for the quarter ended September 30, 2003. (4) Filed or furnished with Amendment No. 1 to the Registrant's Quarterly Report on Form 10-QSB for the quarter ended September 30, 2003. (b) Reports on Form 8-K 32 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) 33 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: February 6, 2004 /S/ Michael K. Paulk ------------------------------------- Michael K. Paulk President and Chief Executive Officer /S/ Steven P. Ensz ------------------------------------- Steven P. Ensz Principal Financial and Accounting Officer 34 EX-31 3 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/A 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: February 6, 2004 /s/ Michael K. Paulk -------------------- Michael K. Paulk President EX-31 4 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/A 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: February 6, 2004 /s/Steven P. Ensz ----------------------- Steven P. Ensz Vice President, Finance EX-32 5 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/A 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 February 6, 2004 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 6 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/A 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 February 6, 2004 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-----