American Natural Energy Corporation - Exhibit 10.3 - Filed by newsfilecorp.com






Exhibit 10.3  

NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS
SECURITY IS CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
“SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO
AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO
THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY
ACCEPTABLE TO THE COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON
CONVERSION OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN
ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES. 

Original Issue Date: July 3, 2014 
Original
Conversion Price (subject to adjustment herein): $0.10 


$835,899.76 

8% ORIGINAL ISSUE DISCOUNT SENIOR SECURED CONVERTIBLE
DEBENTURE 
DUE JANUARY 1, 2016 

           
THIS 8% ORIGINAL ISSUE DISCOUNT SENIOR SECURED CONVERTIBLE DEBENTURE is one of a
series of duly authorized and validly issued 8% Original Issue Discount Senior
Secured Convertible Debentures of American Natural Energy Corporation, an
Oklahoma corporation, (the “Company”), having its principal place of
business at 6100 South Yale, Suite 2010, Tulsa, Oklahoma 74136, designated as
its 8% Original Issue Discount Senior Secured Convertible Debenture due January
1, 2016 (this debenture, the “Debenture” and, collectively with the other
debentures of such series, the “Debentures”). 

      
     FOR VALUE RECEIVED, the Company promises to pay to
Hillair Capital Investments, L.P. or its registered assigns (the
“Holder”), or shall have paid pursuant to the terms hereunder, the
principal sum of $835,899.76 on January 1, 2016 (the “Maturity Date”) or
such earlier date as this Debenture is required or permitted to be repaid as
provided hereunder, and to pay interest to the Holder on the aggregate
unconverted and then outstanding principal amount of this Debenture in
accordance with the provisions hereof. This Debenture is subject to the
following additional provisions: 

           
Section 1.        Definitions.
For the purposes hereof, in addition to the terms defined elsewhere in this
Debenture, (a) capitalized terms not otherwise defined herein shall have the meanings set forth in the Purchase Agreement and (b) the
following terms shall have the following meanings:


1




           
“Alternate Consideration” shall have the meaning set forth in Section
5(e). 

            “Bankruptcy
Event” means any of the following events: (a) the Company or any Significant
Subsidiary (as such term is defined in Rule 1-02(w) of Regulation S-X) thereof
commences a case or other proceeding under any bankruptcy, reorganization,
arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or
liquidation or similar law of any jurisdiction relating to the Company or any
Significant Subsidiary thereof, (b) there is commenced against the Company or
any Significant Subsidiary thereof any such case or proceeding that is not
dismissed within 60 days after commencement, (c) the Company or any Significant
Subsidiary thereof is adjudicated insolvent or bankrupt or any order of relief
or other order approving any such case or proceeding is entered, (d) the Company
or any Significant Subsidiary thereof suffers any appointment of any custodian
or the like for it or any substantial part of its property that is not
discharged or stayed within 60 calendar days after such appointment, (e) the
Company or any Significant Subsidiary thereof makes a general assignment for the
benefit of creditors, (f) the Company or any Significant Subsidiary thereof
calls a meeting of its creditors with a view to arranging a composition,
adjustment or restructuring of its debts or (g) the Company or any Significant
Subsidiary thereof, by any act or failure to act, expressly indicates its
consent to, approval of or acquiescence in any of the foregoing or takes any
corporate or other action for the purpose of effecting any of the foregoing.


           
“Base Conversion Price” shall have the meaning set forth in Section 5(b).


            “Beneficial
Ownership Limitation” shall have the meaning set forth in Section 4(d).

            “Business
Day” means any day except any Saturday, any Sunday, any day which is a
federal legal holiday in the United States or any day on which banking
institutions in the State of New York are authorized or required by law or other
governmental action to close. 

           
“Buy-In” shall have the meaning set forth in Section 4(c)(v). 

            “Change
of Control Transaction” means the occurrence after the date hereof of any of
(a) an acquisition after the date hereof by an individual or legal entity or
“group” (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of
effective control (whether through legal or beneficial ownership of capital
stock of the Company, by contract or otherwise) of in excess of 33% of the
voting securities of the Company (other than by means of conversion or exercise
of the Debentures and the Securities issued together with the Debentures), (b)
the Company merges into or consolidates with any other Person, or any Person
merges into or consolidates with the Company and, after giving effect to such
transaction, the stockholders of the Company immediately prior to such
transaction own less than 66% of the aggregate voting power of the Company or
the successor entity of such transaction,
(c) the Company sells or transfers all or substantially all of its assets to
another Person and the stockholders of the Company immediately prior to such
transaction own less than 66% of the aggregate voting power of the acquiring
entity immediately after the transaction, (d) a replacement at one time or
within a three year period of more than one-half of the members of the Board of
Directors which is not approved by a majority of those individuals who are
members of the Board of Directors on the Original Issue Date (or by those
individuals who are serving as members of the Board of Directors on any date
whose nomination to the Board of Directors was approved by a majority of the
members of the Board of Directors who are members on the date hereof), or (e)
the execution by the Company of an agreement to which the Company is a party or
by which it is bound, providing for any of the events set forth in clauses (a)
through (d) above. 

2




           
“Conversion” shall have the meaning ascribed to such term in Section
4.

           
“Conversion Date” shall have the meaning set forth in Section 4(a). 

           
“Conversion Price” shall have the meaning set forth in Section 4(b). 

            “Conversion
Schedule” means the Conversion Schedule in the form of Schedule 1
attached hereto. 

            “Conversion
Shares” means, collectively, the shares of Common Stock issuable upon
conversion of this Debenture in accordance with the terms hereof. 

           
“Debenture Register” shall have the meaning set forth in Section 2(c).


           
“Dilutive Issuance” shall have the meaning set forth in Section 5(b).


           
“Dilutive Issuance Notice” shall have the meaning set forth in Section
5(b). 

            “Equity
Conditions” means, during the period in question, (a) the Company shall have
duly honored all conversions and redemptions scheduled to occur or occurring by
virtue of one or more Notices of Conversion of the Holder, if any, (b) the
Company shall have paid all liquidated damages and other amounts owing to the
Holder in respect of this Debenture, (c)(i) there is an effective Registration
Statement pursuant to which the Holder is permitted to utilize the prospectus
thereunder to resell all of the shares of Common Stock issuable pursuant to the
Transaction Documents (and the Company believes, in good faith, that such
effectiveness will continue uninterrupted for the foreseeable future) or (ii)
all of the Conversion Shares issuable pursuant to the Transaction Documents (and
shares issuable in lieu of cash payments of interest) may be resold pursuant to
Rule 144 without volume or manner-of-sale restrictions or current public
information requirements as determined by the counsel to the Company as set
forth in a written opinion letter to such effect, addressed and acceptable to
the Transfer Agent and the Holder, (d) the Common Stock is trading on a Trading
Market and all of the shares issuable pursuant to the Transaction Documents are
listed or quoted for trading on such Trading Market (and the Company
believes, in good faith, that trading of the Common Stock on a Trading Market
will continue uninterrupted for the foreseeable future), (e) there is a
sufficient number of authorized but unissued and otherwise unreserved shares of
Common Stock for the issuance of all of the shares then issuable pursuant to the
Transaction Documents, (f) there is no existing Event of Default and no existing
event which, with the passage of time or the giving of notice, would constitute
an Event of Default, (g) the issuance of the shares in question (or, in the case
of an Optional Redemption or Periodic Redemption, the shares issuable upon
conversion in full of the Optional Redemption Amount or Periodic Redemption
Amount) to the Holder would not violate the limitations set forth in Section
4(d) herein, (h) there has been no public announcement of a pending or proposed
Fundamental Transaction or Change of Control Transaction that has not been
consummated, (i) the applicable Holder is not in possession of any information
provided by the Company that constitutes, or may constitute, material non-public
information and (j) with respect to payments under Section 2 and Section 6(b),
the number of shares of Common Stock proposed to be issued in respect of such
payments at issue, in each case as attributable to all holders of Debentures, is
less than 10% of the aggregate number of shares of Common Stock traded on the
principal Trading Market during the 20 Trading Days immediately prior to such
payment date. 

3




           
“Event of Default” shall have the meaning set forth in Section 8(a). 

           
Fundamental Transaction” shall have the meaning set forth in Section
5(e). 

            “Interest
Conversion Rate” means the lesser of (a) the Conversion Price or (b) 90% of
the lesser of (i) the average of the VWAPs for the 20 consecutive Trading Days
ending on the Trading Day that is immediately prior to the applicable Interest
Payment Date or (ii) the average of the VWAPs for the 20 consecutive Trading
Days ending on the Trading Day that is immediately prior to the date the
applicable Interest Conversion Shares are issued and delivered if such delivery
is after the Interest Payment Date (provided, however, in the case of clause (b)
the Interest Conversion Rate shall be at least a $.01 discount to the VWAP on
the Trading Day immediately preceding such payment date).

           
“Interest Conversion Shares” shall have the meaning set forth in Section
2(a). 

           
“Interest Notice Period” shall have the meaning set forth in Section
2(a). 

           
“Interest Payment Date” shall have the meaning set forth in Section
2(a).

             “Interest
Share Amount” shall have the meaning set forth in Section 2(a). 

           
“Late Fees” shall have the meaning set forth in Section 2(d). 

            “Mandatory
Default Amount” means the sum of (a) the greater of (i) the outstanding
principal amount of this Debenture, plus all accrued and unpaid interest hereon,
divided by the Conversion Price on the date the Mandatory Default Amount is either (A) demanded (if demand or
notice is required to create an Event of Default) or otherwise due or (B) paid
in full, whichever has a lower Conversion Price, multiplied by the VWAP on the
date the Mandatory Default Amount is either (x) demanded or otherwise due or (y)
paid in full, whichever has a higher VWAP, or (ii) 130% of the outstanding
principal amount of this Debenture, plus 100% of accrued and unpaid interest
hereon, and (b) all other amounts, costs, expenses and liquidated damages due in
respect of this Debenture. 

4




           
“New York Courts” shall have the meaning set forth in Section 9(d). 

           
“Notice of Conversion” shall have the meaning set forth in Section 4(a).


           
“Optional Redemption” shall have the meaning set forth in Section 6(a).


            “Optional
Redemption Amount” means the sum of (a) 120% of the then outstanding
principal amount of the Debenture, (b) accrued but unpaid interest and (c) all
liquidated damages and other amounts due in respect of the Debenture. 

           
“Optional Redemption Date” shall have the meaning set forth in Section
6(a). 

           
“Optional Redemption Notice” shall have the meaning set forth in Section
6(a). 

            “Optional
Redemption Notice Date” shall have the meaning set forth in Section 6(a).


           
“Optional Redemption Period” shall have the meaning set forth in Section
6(a). 

            “Original
Issue Date” means the date of the first issuance of the Debentures,
regardless of any transfers of any Debenture and regardless of the number of
instruments which may be issued to evidence such Debentures. 

            “Periodic
Conversion Period” shall have the meaning set forth in Section 6(b) hereof.


            “Periodic
Conversion Price” shall have the meaning set forth in Section 6(b)
hereof.

            “Periodic
Redemption” means the redemption of this Debenture pursuant to Section 6(b)
hereof.

            “Periodic
Redemption Amount” means, as to a Periodic Redemption, $208,974.94, plus
accrued but unpaid interest, liquidated damages and any other amounts then owing
to the Holder in respect of this Debenture. 

            “Periodic
Redemption Date” means March 1, 2015, July 1, 2015, October 1, 2015, and
January 1, 2016.

5




            “Periodic
Redemption Notice” shall have the meaning set forth in Section 6(b)
hereof.

            “Permitted
Indebtedness” means (a) the indebtedness evidenced by the Debentures, (b)
the Indebtedness existing on the Original Issue Date and set forth on
Schedule 3.1(aa) attached to the Purchase Agreement and expressly
subordinated to the Debentures as evidenced by written subordination agreements
satisfactory to the Holders, and (c) lease obligations and purchase money
indebtedness of up to $50,000, in the aggregate, incurred in connection with the
acquisition of capital assets and lease obligations with respect to newly
acquired or leased assets. 

            “Permitted
Lien” means the individual and collective reference to the following: (a)
Liens for taxes, assessments and other governmental charges or levies not yet
due or Liens for taxes, assessments and other governmental charges or levies
being contested in good faith and by appropriate proceedings for which adequate
reserves (in the good faith judgment of the management of the Company) have been
established in accordance with GAAP, (b) Liens imposed by law which were
incurred in the ordinary course of the Company’s business, such as carriers’,
warehousemen’s and mechanics’ Liens, statutory landlords’ Liens, and other
similar Liens arising in the ordinary course of the Company’s business, and
which (x) do not individually or in the aggregate materially detract from the
value of such property or assets or materially impair the use thereof in the
operation of the business of the Company and its consolidated Subsidiaries or
(y) are being contested in good faith by appropriate proceedings, which
proceedings have the effect of preventing for the foreseeable future the
forfeiture or sale of the property or asset subject to such Lien, (c) Liens
incurred in connection with Permitted Indebtedness under clause (a) thereunder,
and (d) Liens incurred in connection with Permitted Indebtedness under clause
(c) thereunder, provided that such Liens are not secured by assets of the
Company or its Subsidiaries other than the assets so acquired or leased. 

            “Pre-Redemption
Conversion Shares” shall have the meaning set forth in Section 6(b)
hereof.

            “Purchase
Agreement” means the Securities Purchase Agreement, dated as of July 3, 2014
among the Company and the original Holders, as amended, modified or supplemented
from time to time in accordance with its terms. 

            “Registration
Statement” means a registration statement covering the resale of the
Underlying Shares by each Holder. 

            “Securities
Act” means the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder. 

           
“Share Delivery Date” shall have the meaning set forth in Section
4(c)(ii). 

6




           
“Successor Entity” shall have the meaning set forth in Section 5(e).

            “Trading
Day” means a day on which the principal Trading Market is open for trading.


            “Trading
Market” means any of the following markets or exchanges on which the Common
Stock is listed or quoted for trading on the date in question: the NYSE MKT, the
Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select
Market, the New York Stock Exchange, the TSX-V or the OTC Bulletin Board (or any
successors to any of the foregoing). 

            “VWAP”
means, for any date, the price determined by the first of the following clauses
that applies: (a) if the Common Stock is then listed or quoted on a Trading
Market, the daily volume weighted average price of the Common Stock for such
date (or the nearest preceding date) on the Trading Market on which the Common
Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading
Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), (b)
if the OTC Bulletin Board is not a Trading Market, the volume weighted average
price of the Common Stock for such date (or the nearest preceding date) on the
OTC Bulletin Board, (c) if the Common Stock is not then listed or quoted for
trading on the OTC Bulletin Board and if prices for the Common Stock are then
reported in the “Pink Sheets” published by Pink OTC Markets, Inc. (or a similar
organization or agency succeeding to its functions of reporting prices), the
most recent bid price per share of the Common Stock so reported, or (d) in all
other cases, the fair market value of a share of Common Stock as determined by
an independent appraiser selected in good faith by the Holders of a majority in
interest of the Securities then outstanding and reasonably acceptable to the
Company, the fees and expenses of which shall be paid by the Company. 

           
Section 2. Interest. 

            a)       
Payment of Interest in Cash or Kind. The Company shall pay interest to
the Holder on the aggregate unconverted and then outstanding principal amount of
this Debenture at the rate of 8% per annum, payable quarterly on January 1,
April 1, July 1 and October 1, beginning on January 1, 2015, on each Periodic
Redemption Date (as to that principal amount then being redeemed), on each
Conversion Date (as to that principal amount then being converted), on each
Optional Redemption Date (as to that principal amount then being redeemed) and
on the Maturity Date (each such date, an “Interest Payment Date”) (if any
Interest Payment Date is not a Business Day, then the applicable payment shall
be due on the next succeeding Business Day), in cash or, at the Company’s
option, in duly authorized, validly issued, fully paid and non-assessable shares
of Common Stock at the Interest Conversion Rate (the dollar amount to be paid in
shares, the “Interest Share Amount”) or a combination thereof;
provided, however, that payment in shares of Common Stock may only
occur if (i) all of the Equity Conditions have been met (unless waived by the
Holder in writing) during the 20 Trading Days immediately prior to the
applicable Interest Payment Date (the “Interest Notice Period”) and
through and including the date such shares of Common Stock are actually issued
to the Holder, (ii) the Company shall have
given the Holder notice in accordance with the notice requirements set forth
below and (iii) as to such Interest Payment Date, prior to such Interest Notice
Period (but not more than five (5) Trading Days prior to the commencement of
such Interest Notice Period), the Company shall have delivered to the Holder’s
account with The Depository Trust Company a number of shares of Common Stock to
be applied against such Interest Share Amount equal to the quotient of (x) the
applicable Interest Share Amount divided by (y) the lesser of the (i) then
Conversion Price and (ii) the Interest Conversion Rate assuming for such
purposes that the Interest Payment Date is the Trading Day immediately prior to
the commencement of the Interest Notice Period (the “Interest Conversion
Shares”).

7




            b)       
Company’s Election to Pay Interest in Cash or Kind. Subject to the terms
and conditions herein, the decision whether to pay interest hereunder in cash,
shares of Common Stock or a combination thereof shall be at the sole discretion
of the Company. Prior to the commencement of any Interest Notice Period, the
Company shall deliver to the Holder a written notice of its election to pay
interest hereunder on the applicable Interest Payment Date either in cash,
shares of Common Stock or a combination thereof and the Interest Share Amount as
to the applicable Interest Payment Date, provided that the Company may indicate
in such notice that the election contained in such notice shall apply to future
Interest Payment Dates until revised by a subsequent notice. During any Interest
Notice Period, the Company’s election (whether specific to an Interest Payment
Date or continuous) shall be irrevocable as to such Interest Payment Date.
Subject to the aforementioned conditions, failure to timely deliver such written
notice to the Holder shall be deemed an election by the Company to pay the
interest on such Interest Payment Date in cash. The aggregate number of shares
of Common Stock otherwise issuable to the Holder on an Interest Payment Date
shall be reduced by the number of Interest Conversion Shares previously issued
to the Holder in connection with such Interest Payment Date. 

            c)       
Interest Calculations. Interest shall be calculated on the basis of a
360-day year, consisting of twelve 30 calendar day periods, and shall accrue
daily commencing on the Original Issue Date until payment in full of the
outstanding principal, together with all accrued and unpaid interest, liquidated
damages and other amounts which may become due hereunder, has been made. Payment
of interest in shares of Common Stock (other than the Interest Conversion Shares
issued prior to an Interest Notice Period) shall otherwise occur pursuant to
Section 4(c)(ii) herein and, solely for purposes of the payment of interest in
shares, the Interest Payment Date shall be deemed the Conversion Date. Interest
shall cease to accrue with respect to any principal amount converted, provided
that, the Company actually delivers the Conversion Shares within the time period
required by Section 4(c)(ii) herein. Interest hereunder will be paid to the
Person in whose name this Debenture is registered on the records of the Company
regarding registration and transfers of this Debenture (the “Debenture
Register”). Except as otherwise provided herein, if at any time the Company
pays interest partially in cash and partially in shares of Common Stock to the
holders of the Debentures, then such payment of cash shall be distributed
ratably among the holders of the then-outstanding Debentures based on their (or their predecessor’s)
initial purchases of Debentures pursuant to the Purchase Agreement. 

8




            d)       
Late Fee. All overdue accrued and unpaid interest to be paid hereunder
shall entail a late fee at an interest rate equal to the lesser of 18% per annum
or the maximum rate permitted by applicable law (the “Late Fees”) which
shall accrue daily from the date such interest is due hereunder through and
including the date of actual payment in full. Notwithstanding anything to the
contrary contained herein, if, on any Interest Payment Date the Company has
elected to pay accrued interest in the form of Common Stock but the Company is
not permitted to pay accrued interest in Common Stock because it fails to
satisfy the conditions for payment in Common Stock set forth in Section 2(a)
herein, then, at the option of the Holder, the Company, in lieu of delivering
either shares of Common Stock pursuant to this Section 2 or paying the regularly
scheduled interest payment in cash, shall deliver, within three (3) Trading Days
of each applicable Interest Payment Date, an amount in cash equal to the product
of (x) the number of shares of Common Stock otherwise deliverable to the Holder
in connection with the payment of interest due on such Interest Payment Date
multiplied by (y) the highest VWAP during the period commencing on the Interest
Payment Date and ending on the Trading Day prior to the date such payment is
actually made. If any Interest Conversion Shares are issued to the Holder in
connection with an Interest Payment Date and are not applied against an Interest
Share Amount, then the Holder shall promptly return such excess shares to the
Company. 

            e)       
Prepayment. Except as otherwise set forth in this Debenture, the Company
may not prepay any portion of the principal amount of this Debenture without the
prior written consent of the Holder.

           
Section 3.        Registration of
Transfers and Exchanges.

            a)       
Different Denominations. This Debenture is exchangeable for an equal
aggregate principal amount of Debentures of different authorized denominations,
as requested by the Holder surrendering the same. No service charge will be
payable for such registration of transfer or exchange. 

            b)       
Investment Representations. This Debenture has been issued subject to
certain investment representations of the original Holder set forth in the
Purchase Agreement and may be transferred or exchanged only in compliance with
the Purchase Agreement and applicable federal and state securities laws and
regulations.

            c)       
Reliance on Debenture Register. Prior to due presentment for transfer to
the Company of this Debenture, the Company and any agent of the Company may
treat the Person in whose name this Debenture is duly registered on the
Debenture Register as the owner hereof for the purpose of receiving payment as
herein provided and for all other purposes, whether or not this Debenture is
overdue, and neither the Company nor any such agent shall be affected by notice
to the contrary. 

9




           
Section 4.        Conversion.


            a)       
Voluntary Conversion. At any time after the Original Issue Date until
this Debenture is no longer outstanding, this Debenture shall be convertible, in
whole or in part, into shares of Common Stock at the option of the Holder, at
any time and from time to time (subject to the conversion limitations set forth
in Section 4(d) hereof). The Holder shall effect conversions by delivering to
the Company a Notice of Conversion, the form of which is attached hereto as
Annex A (each, a “Notice of Conversion”), specifying therein the
principal amount of this Debenture to be converted and the date on which such
conversion shall be effected (such date, the “Conversion Date”). If no
Conversion Date is specified in a Notice of Conversion, the Conversion Date
shall be the date that such Notice of Conversion is deemed delivered hereunder.
No ink-original Notice of Conversion shall be required, nor shall any medallion
guarantee (or other type of guarantee or notarization) of any Notice of
Conversion form be required. To effect conversions hereunder, the Holder
shall not be required to physically surrender this Debenture to the Company
unless the entire principal amount of this Debenture, plus all accrued and
unpaid interest thereon, has been so converted. Conversions hereunder shall have
the effect of lowering the outstanding principal amount of this Debenture in an
amount equal to the applicable conversion. The Holder and the Company shall
maintain records showing the principal amount(s) converted and the date of such
conversion(s). The Company may deliver an objection to any Notice of Conversion
within one (1) Business Day of delivery of such Notice of Conversion. In the
event of any dispute or discrepancy, the records of the Holder shall be
controlling and determinative in the absence of manifest error. The Holder,
and any assignee by acceptance of this Debenture, acknowledge and agree that, by
reason of the provisions of this paragraph, following conversion of a portion of
this Debenture, the unpaid and unconverted principal amount of this Debenture
may be less than the amount stated on the face hereof. 

            b)       
Conversion Price. The conversion price in effect on any Conversion Date
shall be equal to $0.10, subject to adjustment herein (the “Conversion
Price”). 

           
c)        Mechanics of Conversion.


            i.       
Conversion Shares Issuable Upon Conversion of Principal Amount.
The number of Conversion Shares issuable upon a conversion hereunder shall be
determined by the quotient obtained by dividing (x) the outstanding principal
amount of this Debenture to be converted by (y) the Conversion Price. 

            ii.       
Delivery of Certificate Upon Conversion. Not later than three (3) Trading
Days after each Conversion Date (the “Share Delivery Date”), the Company shall
deliver, or cause to be delivered, to the Holder (A) a certificate or
certificates representing the Conversion Shares which, on or after the earlier
of (i) the six month anniversary of the Original Issue Date or (ii) the
Effective Date, shall be free of restrictive legends and trading restrictions
(other than those which may then be required by the Purchase
Agreement) representing the number of Conversion Shares being acquired upon the
conversion of this Debenture (including, if the Company has given continuous
notice pursuant to Section 2(b) for payment of interest in shares of Common
Stock at least 20 Trading Days prior to the date on which the Notice of
Conversion is delivered to the Company, shares of Common Stock representing the
payment of accrued interest otherwise determined pursuant to Section 2(a) but
assuming that the Interest Notice Period is the 20 Trading Days period
immediately prior to the date on which the Notice of Conversion is delivered to
the Company and excluding for such issuance the condition that the Company
deliver Interest Conversion Shares as to such interest payment prior to the
commencement of the Interest Notice Period) and (B) a bank check in the amount
of accrued and unpaid interest (if the Company has elected or is required to pay
accrued interest in cash). On or after the earlier of (i) the six month
anniversary of the Original Issue Date or (ii) the Effective Date, the Company
shall deliver any certificate or certificates required to be delivered by the
Company under this Section 4(c) electronically through the Depository Trust
Company or another established clearing corporation performing similar
functions.

10




            iii.      Failure
to Deliver Certificates. If, in the case of any Notice of Conversion, such
certificate or certificates are not delivered to or as directed by the
applicable Holder by the Share Delivery Date, the Holder shall be entitled to
elect by written notice to the Company at any time on or before its receipt of
such certificate or certificates, to rescind such Conversion, in which event the
Company shall promptly return to the Holder any original Debenture delivered to
the Company and the Holder shall promptly return to the Company the Common Stock
certificates issued to such Holder pursuant to the rescinded Conversion
Notice.

            iv.     
Obligation Absolute; Partial Liquidated Damages. The Company’s
obligations to issue and deliver the Conversion Shares upon conversion of this
Debenture in accordance with the terms hereof are absolute and unconditional,
irrespective of any action or inaction by the Holder to enforce the same, any
waiver or consent with respect to any provision hereof, the recovery of any
judgment against any Person or any action to enforce the same, or any setoff,
counterclaim, recoupment, limitation or termination, or any breach or alleged
breach by the Holder or any other Person of any obligation to the Company or any
violation or alleged violation of law by the Holder or any other Person, and
irrespective of any other circumstance which might otherwise limit such
obligation of the Company to the Holder in connection with the issuance of such
Conversion Shares; provided, however, that such delivery shall not
operate as a waiver by the Company of any such action the Company may have
against the Holder. In the event the Holder of this Debenture shall elect to
convert any or all of the outstanding principal amount hereof, the Company may
not refuse conversion based on any claim that the Holder or anyone associated or
affiliated with the Holder has been engaged in any
violation of law, agreement or for any other reason, unless an injunction from a
court, on notice to Holder, restraining and or enjoining conversion of all or
part of this Debenture shall have been sought and obtained, and the Company
posts a surety bond for the benefit of the Holder in the amount of 150% of the
outstanding principal amount of this Debenture, which is subject to the
injunction, which bond shall remain in effect until the completion of
arbitration/litigation of the underlying dispute and the proceeds of which shall
be payable to the Holder to the extent it obtains judgment. In the absence of
such injunction, the Company shall issue Conversion Shares or, if applicable,
cash, upon a properly noticed conversion. If the Company fails for any reason to
deliver to the Holder such certificate or certificates pursuant to Section
4(c)(ii) by the Share Delivery Date, the Company shall pay to the Holder, in
cash, as liquidated damages and not as a penalty, for each $1,000 of principal
amount being converted, $10 per Trading Day (increasing to $20 per Trading Day
on the fifth (5th) Trading Day after such liquidated damages begin to
accrue) for each Trading Day after such Share Delivery Date until such
certificates are delivered or Holder rescinds such conversion. Nothing herein
shall limit a Holder’s right to pursue actual damages or declare an Event of
Default pursuant to Section 8 hereof for the Company’s failure to deliver
Conversion Shares within the period specified herein and the Holder shall have
the right to pursue all remedies available to it hereunder, at law or in equity
including, without limitation, a decree of specific performance and/or
injunctive relief. The exercise of any such rights shall not prohibit the Holder
from seeking to enforce damages pursuant to any other Section hereof or under
applicable law. 

11




            v.       
Compensation for Buy-In on Failure to Timely Deliver Certificates Upon
Conversion. In addition to any other rights available to the Holder, if the
Company fails for any reason to deliver to the Holder such certificate or
certificates by the Share Delivery Date pursuant to Section 4(c)(ii), and if
after such Share Delivery Date the Holder is required by its brokerage firm to
purchase (in an open market transaction or otherwise), or the Holder’s brokerage
firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a
sale by the Holder of the Conversion Shares which the Holder was entitled to
receive upon the conversion relating to such Share Delivery Date (a
“Buy-In”), then the Company shall (A) pay in cash to the Holder (in
addition to any other remedies available to or elected by the Holder) the
amount, if any, by which (x) the Holder’s total purchase price (including any
brokerage commissions) for the Common Stock so purchased exceeds (y) the product
of (1) the aggregate number of shares of Common Stock that the Holder was
entitled to receive from the conversion at issue multiplied by (2) the actual
sale price at which the sell order giving rise to such purchase obligation was
executed (including any brokerage commissions) and (B) at the option of the
Holder, either reissue (if surrendered) this Debenture in a principal amount
equal to the principal amount of the attempted conversion (in which case such
conversion shall be deemed rescinded) or deliver to the Holder the number of
shares of Common Stock that would have been issued if the Company had timely
complied with its delivery requirements under Section 4(c)(ii). For example, if
the Holder purchases Common Stock having a total purchase price of $11,000 to
cover a Buy-In with respect to an attempted conversion of this Debenture with
respect to which the actual sale price of the Conversion Shares (including any
brokerage commissions) giving rise to such purchase obligation was a total of
$10,000 under clause (A) of the immediately preceding sentence, the Company
shall be required to pay the Holder $1,000. The Holder shall provide the Company
written notice indicating the amounts payable to the Holder in respect of the
Buy-In and, upon request of the Company, evidence of the amount of such loss.
Nothing herein shall limit a Holder’s right to pursue any other remedies
available to it hereunder, at law or in equity including, without limitation, a
decree of specific performance and/or injunctive relief with respect to the
Company’s failure to timely deliver certificates representing shares of Common
Stock upon conversion of this Debenture as required pursuant to the terms
hereof. 

12




            vi.       
Reservation of Shares Issuable Upon Conversion. The Company covenants
that it will at all times reserve and keep available out of its authorized and
unissued shares of Common Stock for the sole purpose of issuance upon conversion
of this Debenture and payment of interest on this Debenture, each as herein
provided, free from preemptive rights or any other actual contingent purchase
rights of Persons other than the Holder (and the other holders of the
Debentures), not less than such aggregate number of shares of the Common Stock
as shall (subject to the terms and conditions set forth in the Purchase
Agreement) be issuable (taking into account the adjustments and restrictions of
Section 5) upon the conversion of the then outstanding principal amount of this
Debenture and payment of interest hereunder. The Company covenants that all
shares of Common Stock that shall be so issuable shall, upon issue, be duly
authorized, validly issued, fully paid and nonassessable and, if a Registration
Statement is then effective under the Securities Act, shall be registered for
public resale in accordance with such Registration Statement. 

            vii.       
Fractional Shares. No fractional shares or scrip representing fractional
shares shall be issued upon the conversion of this Debenture. As to any fraction
of a share which the Holder would otherwise be entitled to purchase upon such
conversion, the Company shall at its election, either pay a cash adjustment in
respect of such final fraction in an amount equal to such fraction multiplied by
the Conversion Price or round up to the next whole share. 

            viii.       
Transfer Taxes and Expenses. The issuance of certificates for shares of
the Common Stock on conversion of this Debenture shall be made without charge to
the Holder hereof for any documentary stamp or similar taxes that may be payable
in respect of the issue or delivery of such certificates, provided that, the
Company shall not be required to pay any tax that may be payable in respect of
any transfer involved in the issuance and delivery of any such certificate upon conversion in a
name other than that of the Holder of this Debenture so converted and the
Company shall not be required to issue or deliver such certificates unless or
until the Person or Persons requesting the issuance thereof shall have paid to
the Company the amount of such tax or shall have established to the satisfaction
of the Company that such tax has been paid. The Company shall pay all Transfer
Agent fees required for same-day processing of any Notice of Conversion and all
fees to the Depository Trust Company (or another established clearing
corporation performing similar functions) required for same-day electronic
delivery of the Conversion Shares. 

13




            d)       
Holder’s Conversion Limitations. The Company shall not effect any
conversion of this Debenture, and a Holder shall not have the right to convert
any portion of this Debenture, to the extent that after giving effect to the
conversion set forth on the applicable Notice of Conversion, the Holder
(together with the Holder’s Affiliates, and any Persons acting as a group
together with the Holder or any of the Holder’s Affiliates) would beneficially
own in excess of the Beneficial Ownership Limitation (as defined below). For
purposes of the foregoing sentence, the number of shares of Common Stock
beneficially owned by the Holder and its Affiliates shall include the number of
shares of Common Stock issuable upon conversion of this Debenture with respect
to which such determination is being made, but shall exclude the number of
shares of Common Stock which are issuable upon (i) conversion of the remaining,
unconverted principal amount of this Debenture beneficially owned by the Holder
or any of its Affiliates and (ii) exercise or conversion of the unexercised or
unconverted portion of any other securities of the Company subject to a
limitation on conversion or exercise analogous to the limitation contained
herein (including, without limitation, any other Debentures or the Warrants)
beneficially owned by the Holder or any of its Affiliates. Except as set forth
in the preceding sentence, for purposes of this Section 4(d), beneficial
ownership shall be calculated in accordance with Section 13(d) of the Exchange
Act and the rules and regulations promulgated thereunder. To the extent that the
limitation contained in this Section 4(d) applies, the determination of whether
this Debenture is convertible (in relation to other securities owned by the
Holder together with any Affiliates) and of which principal amount of this
Debenture is convertible shall be in the sole discretion of the Holder, and the
submission of a Notice of Conversion shall be deemed to be the Holder’s
determination of whether this Debenture may be converted (in relation to other
securities owned by the Holder together with any Affiliates) and which principal
amount of this Debenture is convertible, in each case subject to the Beneficial
Ownership Limitation. To ensure compliance with this restriction, the Holder
will be deemed to represent to the Company each time it delivers a Notice of
Conversion that such Notice of Conversion has not violated the restrictions set
forth in this paragraph and the Company shall have no obligation to verify or
confirm the accuracy of such determination. In addition, a determination as to
any group status as contemplated above shall be determined in accordance with
Section 13(d) of the Exchange Act and the rules and regulations promulgated
thereunder. For purposes of this Section 4(d), in determining the number of
outstanding shares of Common Stock, the Holder may rely on the number of
outstanding shares of Common Stock as stated in the most recent of the following: (i) the Company’s most
recent periodic or annual report filed with the Commission, as the case may be,
(ii) a more recent public announcement by the Company, or (iii) a more recent
written notice by the Company or the Company’s transfer agent setting forth the
number of shares of Common Stock outstanding. Upon the written or oral request
of a Holder, the Company shall within two Trading Days confirm orally and in
writing to the Holder the number of shares of Common Stock then outstanding. In
any case, the number of outstanding shares of Common Stock shall be determined
after giving effect to the conversion or exercise of securities of the Company,
including this Debenture, by the Holder or its Affiliates since the date as of
which such number of outstanding shares of Common Stock was reported. The
“Beneficial Ownership Limitation” shall be 4.99% of the number of
shares of the Common Stock outstanding immediately after giving effect to the
issuance of shares of Common Stock issuable upon conversion of this Debenture
held by the Holder. The Holder, upon not less than 61 days’ prior notice to the
Company, may increase or decrease the Beneficial Ownership Limitation provisions
of this Section 4(d), provided that the Beneficial Ownership Limitation in no
event exceeds 9.99% of the number of shares of the Common Stock outstanding
immediately after giving effect to the issuance of shares of Common Stock upon
conversion of this Debenture held by the Holder and the Beneficial Ownership
Limitation provisions of this Section 4(d) shall continue to apply. Any such
increase or decrease will not be effective until the 61st day after
such notice is delivered to the Company. The Beneficial Ownership Limitation
provisions of this paragraph shall be construed and implemented in a manner
otherwise than in strict conformity with the terms of this Section 4(d) to
correct this paragraph (or any portion hereof) which may be defective or
inconsistent with the intended Beneficial Ownership Limitation contained herein
or to make changes or supplements necessary or desirable to properly give effect
to such limitation. The limitations contained in this paragraph shall apply to a
successor holder of this Debenture. 

14




           
Section 5.        Certain
Adjustments. 

            a)       
Stock Dividends and Stock Splits. If the Company, at any time while this
Debenture is outstanding: (i) pays a stock dividend or otherwise makes a
distribution or distributions payable in shares of Common Stock on shares of
Common Stock or any Common Stock Equivalents (which, for avoidance of doubt,
shall not include any shares of Common Stock issued by the Company upon
conversion of, or payment of interest on, the Debentures), (ii) subdivides
outstanding shares of Common Stock into a larger number of shares, (iii)
combines (including by way of a reverse stock split) outstanding shares of
Common Stock into a smaller number of shares or (iv) issues, in the event of a
reclassification of shares of the Common Stock, any shares of capital stock of
the Company, then the Conversion Price shall be multiplied by a fraction of
which the numerator shall be the number of shares of Common Stock (excluding any
treasury shares of the Company) outstanding immediately before such event, and
of which the denominator shall be the number of shares of Common Stock
outstanding immediately after such event. Any adjustment made pursuant to this
Section shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or distribution and shall
become effective immediately after the effective date in the case of a
subdivision, combination or re-classification. 

15




            b)       
Subsequent Equity Sales. If, at any time while this Debenture is
outstanding, the Company or any Subsidiary, as applicable, sells or grants any
option to purchase or sells or grants any right to reprice, or otherwise
disposes of or issues (or announces any sale, grant or any option to purchase or
other disposition), any Common Stock or Common Stock Equivalents entitling any
Person to acquire shares of Common Stock at an effective price per share that is
lower than the then Conversion Price (such lower price, the “Base Conversion
Price” and such issuances, collectively, a “Dilutive
Issuance”) (if the holder of the Common Stock or Common Stock Equivalents
so issued shall at any time, whether by operation of purchase price adjustments,
reset provisions, floating conversion, exercise or exchange prices or otherwise,
or due to warrants, options or rights per share which are issued in connection
with such issuance, be entitled to receive shares of Common Stock at an
effective price per share that is lower than the Conversion Price, such issuance
shall be deemed to have occurred for less than the Conversion Price on such date
of the Dilutive Issuance), then the Conversion Price shall be reduced to equal
the Base Conversion Price. Such adjustment shall be made whenever such Common
Stock or Common Stock Equivalents are issued. Notwithstanding the foregoing, no
adjustment will be made under this Section 5(b) in respect of an Exempt
Issuance. If the Company enters into a Variable Rate Transaction, despite the
prohibition set forth in the Purchase Agreement, the Company shall be deemed to
have issued Common Stock or Common Stock Equivalents at the lowest possible
conversion price at which such securities may be converted or exercised. The
Company shall notify the Holder in writing, no later than the Trading Day
following the issuance of any Common Stock or Common Stock Equivalents subject
to this Section 5(b), indicating therein the applicable issuance price, or
applicable reset price, exchange price, conversion price and other pricing terms
(such notice, the “Dilutive Issuance Notice”). For purposes of
clarification, whether or not the Company provides a Dilutive Issuance Notice
pursuant to this Section 5(b), upon the occurrence of any Dilutive Issuance, the
Holder is entitled to receive a number of Conversion Shares based upon the Base
Conversion Price on or after the date of such Dilutive Issuance, regardless of
whether the Holder accurately refers to the Base Conversion Price in the Notice
of Conversion. 

           
c)        Subsequent Rights Offerings.
In addition to any adjustments pursuant to Section 5(a) above, if at any time
the Company grants, issues or sells any Common Stock Equivalents or rights to
purchase stock, warrants, securities or other property pro rata to the record
holders of any class of shares of Common Stock (the “Purchase Rights”),
then the Holder will be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which the Holder could have
acquired if the Holder had held the number of shares of Common Stock acquirable
upon complete conversion of this Debenture (without regard to any limitations on
exercise hereof, including without limitation, the Beneficial Ownership
Limitation) immediately before the date on which a record is taken for the
grant, issuance or sale of such Purchase Rights, or, if no such record is taken,
the date as of which the record holders of shares of Common Stock are to be determined for the grant, issue or
sale of such Purchase Rights (provided, however, to the extent that the Holder’s
right to participate in any such Purchase Right would result in the Holder
exceeding the Beneficial Ownership Limitation, then the Holder shall not be
entitled to participate in such Purchase Right to such extent (or beneficial
ownership of such shares of Common Stock as a result of such Purchase Right to
such extent) and such Purchase Right to such extent shall be held in abeyance
for the Holder until such time, if ever, as its right thereto would not result
in the Holder exceeding the Beneficial Ownership Limitation). 

16




            d)       
Pro Rata Distributions. During such time as this Debenture is
outstanding, if the Company shall declare or make any dividend or other
distribution of its assets (or rights to acquire its assets) to holders of
shares of Common Stock, by way of return of capital or otherwise (including,
without limitation, any distribution of cash, stock or other securities,
property or options by way of a dividend, spin off, reclassification, corporate
rearrangement, scheme of arrangement or other similar transaction) (a
“Distribution”), at any time after the issuance of this Debenture, then,
in each such case, the Holder shall be entitled to participate in such
Distribution to the same extent that the Holder would have participated therein
if the Holder had held the number of shares of Common Stock acquirable upon
complete exercise of this Debenture (without regard to any limitations on
exercise hereof, including without limitation, the Beneficial Ownership
Limitation) immediately before the date of which a record is taken for such
Distribution, or, if no such record is taken, the date as of which the record
holders of shares of Common Stock are to be determined for the participation in
such Distribution (provided, however, to the extent that the
Holder's right to participate in any such Distribution would result in the
Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not
be entitled to participate in such Distribution to such extent (or in the
beneficial ownership of any shares of Common Stock as a result of such
Distribution to such extent) and the portion of such Distribution shall be held
in abeyance for the benefit of the Holder until such time, if ever, as its right
thereto would not result in the Holder exceeding the Beneficial Ownership
Limitation). 

            e)       
Fundamental Transaction. If, at any time while this Debenture is
outstanding, (i) the Company, directly or indirectly, in one or more related
transactions effects any merger or consolidation of the Company with or into
another Person, (ii) the Company, directly or indirectly, effects any sale,
lease, license, assignment, transfer, conveyance or other disposition of all or
substantially all of its assets in one or a series of related transactions,
(iii) any, direct or indirect, purchase offer, tender offer or exchange offer
(whether by the Company or another Person) is completed pursuant to which
holders of Common Stock are permitted to sell, tender or exchange their shares
for other securities, cash or property and has been accepted by the holders of
50% or more of the outstanding Common Stock, (iv) the Company, directly or
indirectly, in one or more related transactions effects any reclassification,
reorganization or recapitalization of the Common Stock or any compulsory share
exchange pursuant to which the Common Stock is effectively converted into or
exchanged for other securities, cash or property, (v) the Company, directly or
indirectly, in one or more related transactions consummates a stock 

17




or share purchase agreement or other
business combination (including, without limitation, a reorganization,
recapitalization, spin-off or scheme of arrangement) with another Person whereby
such other Person acquires more than 50% of the outstanding shares of Common
Stock (not including any shares of Common Stock held by the other Person or
other Persons making or party to, or associated or affiliated with the other
Persons making or party to, such stock or share purchase agreement or other
business combination) (each a “Fundamental Transaction”), then, upon any
subsequent conversion of this Debenture, the Holder shall have the right to
receive, for each Conversion Share that would have been issuable upon such
conversion immediately prior to the occurrence of such Fundamental Transaction
(without regard to any limitation in Section 4(d) on the conversion of this
Debenture), the number of shares of Common Stock of the successor or acquiring
corporation or of the Company, if it is the surviving corporation, and any
additional consideration (the “Alternate Consideration”) receivable as a
result of such Fundamental Transaction by a holder of the number of shares of
Common Stock for which this Debenture is convertible immediately prior to such
Fundamental Transaction (without regard to any limitation in Section 4(d) on the
conversion of this Debenture). For purposes of any such conversion, the
determination of the Conversion Price shall be appropriately adjusted to apply
to such Alternate Consideration based on the amount of Alternate Consideration
issuable in respect of one (1) share of Common Stock in such Fundamental
Transaction, and the Company shall apportion the Conversion Price among the
Alternate Consideration in a reasonable manner reflecting the relative value of
any different components of the Alternate Consideration. If holders of Common
Stock are given any choice as to the securities, cash or property to be received
in a Fundamental Transaction, then the Holder shall be given the same choice as
to the Alternate Consideration it receives upon any conversion of this Debenture
following such Fundamental Transaction. The Company shall cause any successor
entity in a Fundamental Transaction in which the Company is not the survivor
(the “Successor Entity”) to assume in writing all of the
obligations of the Company under this Debenture and the other Transaction
Documents (as defined in the Purchase Agreement) in accordance with the
provisions of this Section 5(e) pursuant to written agreements in form and
substance reasonably satisfactory to the Holder and approved by the Holder
(without unreasonable delay) prior to such Fundamental Transaction and shall, at
the option of the holder of this Debenture, deliver to the Holder in exchange
for this Debenture a security of the Successor Entity evidenced by a written
instrument substantially similar in form and substance to this Debenture which
is convertible for a corresponding number of shares of capital stock of such
Successor Entity (or its parent entity) equivalent to the shares of Common Stock
acquirable and receivable upon conversion of this Debenture (without regard to
any limitations on the conversion of this Debenture) prior to such Fundamental
Transaction, and with a conversion price which applies the conversion price
hereunder to such shares of capital stock (but taking into account the relative
value of the shares of Common Stock pursuant to such Fundamental Transaction and
the value of such shares of capital stock, such number of shares of capital
stock and such conversion price being for the purpose of protecting the economic
value of this Debenture immediately prior to the consummation of such
Fundamental Transaction), and which is reasonably satisfactory in form and
substance to the Holder. 

18




Upon the occurrence of any such
Fundamental Transaction, the Successor Entity shall succeed to, and be
substituted for (so that from and after the date of such Fundamental
Transaction, the provisions of this Debenture and the other Transaction
Documents referring to the “Company” shall refer instead to the Successor
Entity), and may exercise every right and power of the Company and shall assume
all of the obligations of the Company under this Debenture and the other
Transaction Documents with the same effect as if such Successor Entity had been
named as the Company herein. 

            f)       
Calculations. All calculations under this Section 5 shall be made to the
nearest cent or the nearest 1/100th of a share, as the case may be. For purposes
of this Section 5, the number of shares of Common Stock deemed to be issued and
outstanding as of a given date shall be the sum of the number of shares of
Common Stock (excluding any treasury shares of the Company) issued and
outstanding. 

           
g)        Notice to the Holder. 

            i.       
Adjustment to Conversion Price. Whenever the Conversion Price is adjusted
pursuant to any provision of this Section 5, the Company shall promptly deliver
to each Holder a notice setting forth the Conversion Price after such adjustment
and setting forth a brief statement of the facts requiring such adjustment.

            ii.       
Notice to Allow Conversion by Holder. If (A) the Company shall declare a
dividend (or any other distribution in whatever form) on the Common Stock, (B)
the Company shall declare a special nonrecurring cash dividend on or a
redemption of the Common Stock, (C) the Company shall authorize the granting to
all holders of the Common Stock of rights or warrants to subscribe for or
purchase any shares of capital stock of any class or of any rights, (D) the
approval of any stockholders of the Company shall be required in connection with
any reclassification of the Common Stock, any consolidation or merger to which
the Company is a party, any sale or transfer of all or substantially all of the
assets of the Company, or any compulsory share exchange whereby the Common Stock
is converted into other securities, cash or property or (E) the Company shall
authorize the voluntary or involuntary dissolution, liquidation or winding up of
the affairs of the Company, then, in each case, the Company shall cause to be
filed at each office or agency maintained for the purpose of conversion of this
Debenture, and shall cause to be delivered to the Holder at its last address as
it shall appear upon the Debenture Register, at least twenty (20) calendar days
prior to the applicable record or effective date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose of such
dividend, distribution, redemption, rights or warrants, or if a record is not to
be taken, the date as of which the holders of the Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants are to
be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of the
Common Stock of record shall be entitled to exchange their shares of the Common
Stock for securities, cash or other property deliverable upon such
reclassification, consolidation, merger, sale, transfer or share exchange,
provided that the failure to deliver such notice or any defect therein or in the
delivery thereof shall not affect the validity of the corporate action required
to be specified in such notice. To the extent that any notice provided hereunder
constitutes, or contains, material, non-public information regarding the Company
or any of the Subsidiaries, the Company shall simultaneously file such notice
with the Commission pursuant to a Current Report on Form 8-K. The Holder shall
remain entitled to convert this Debenture during the 20-day period commencing on
the date of such notice through the effective date of the event triggering such
notice except as may otherwise be expressly set forth herein.

19




           
Section 6.        Redemption.


            a)       
Optional Redemption at Election of Company. Subject to the provisions of
this Section 6(a), at any time after the 6-month anniversary of the Closing
Date, the Company may deliver a notice to the Holder (an “Optional Redemption
Notice” and the date such notice is deemed delivered hereunder, the
“Optional Redemption Notice Date”) of its irrevocable election to redeem
some or all of the then outstanding principal amount of this Debenture for cash
in an amount equal to the Optional Redemption Amount on the 10th
Trading Day following the Optional Redemption Notice Date (such date, the
“Optional Redemption Date”, such 10 Trading Day period, the “Optional
Redemption Period” and such redemption, the “Optional
Redemption”). The Optional Redemption Amount is payable in full on the
Optional Redemption Date. The Company may only effect an Optional Redemption if
each of the Equity Conditions on each Trading Day during the period commencing
on the Optional Redemption Notice Date through to the Optional Redemption Date
and through and including the date payment of the Optional Redemption Amount is
actually made in full. If any of the Equity Conditions shall cease to be
satisfied at any time during the Optional Redemption Period, then the Holder may
elect to nullify the Optional Redemption Notice by notice to the Company within
3 Trading Days after the first day on which any such Equity Condition has not
been met (provided that if, by a provision of the Transaction Documents, the
Company is obligated to notify the Holder of the non-existence of an Equity
Condition, such notice period shall be extended to the third Trading Day after
proper notice from the Company) in which case the Optional Redemption Notice
shall be null and void, ab initio. The Company covenants and
agrees that it will honor all Notices of Conversion tendered from the time of
delivery of the Optional Redemption Notice through the date all amounts owing
thereon are due and paid in full. The Company’s determination to pay an Optional
Redemption in cash shall be applied ratably to all of the holders of the then
outstanding Debentures based on their (or their predecessor’s) initial purchases
of Debentures pursuant to the Purchase Agreement. 

20




            b)       
Periodic Redemption. On each Periodic Redemption Date, the Company shall
redeem the Periodic Redemption Amount (the “Periodic Redemption”). The
Periodic Redemption Amount payable on each Periodic Redemption Date shall be
paid in cash; provided, however, as to any Periodic Redemption and
upon 20 Trading Days’ prior written irrevocable notice (the “Periodic
Redemption Notice”), in lieu of a cash redemption payment the Company may
elect to pay all or part of a Periodic Redemption Amount in Conversion Shares
based on a conversion price equal to the lesser of (i) the price at which
Pre-Redemption Conversion Shares are calculated in respect of such Periodic
Redemption, (ii) the then Conversion Price or (iii) 90% of the average of the
VWAPs for the 20 consecutive Trading Days ending on the Trading Day that is
immediately prior to the applicable Periodic Redemption Date (subject to
adjustment for any stock dividend, stock split, stock combination or other
similar event affecting the Common Stock during such 20 Trading Day period)
provided, however, in the case of this clause (iii) the conversion price shall
be equal to at least a $.01 discount the VWAP on the Trading Day immediately
prior to the applicable Periodic Redemption Date (the lowest of (i), (ii) or
(iii), the “Periodic Conversion Price” and such 20 Trading Day period,
the “Periodic Conversion Period”); provided, further, that
the Company may not pay the Periodic Redemption Amount in Conversion Shares
unless (y) from the date the Holder receives the duly delivered Periodic
Redemption Notice through and until the date such Periodic Redemption is paid in
full, the Equity Conditions have been satisfied, unless waived in writing by the
Holder, and (z) as to such Periodic Redemption, prior to such Periodic
Conversion Period (but not more than 5 Trading Days prior to the commencement of
the Periodic Conversion Period), the Company shall have delivered to the
Holder’s account with The Depository Trust Company a number of shares of Common
Stock to be applied against such Periodic Redemption Amount equal to the
quotient of (x) the applicable Periodic Redemption Amount divided by (y) the
lesser of (A) the Conversion Price and (B) 90% of the average of the 20 VWAPs
during the period ending on the 3rd Trading Day immediately prior to
the date of the Periodic Redemption Notice (the “Pre-Redemption Conversion
Shares”). The Holder may convert, pursuant to Section 4(a), any principal
amount of this Debenture subject to a Periodic Redemption at any time prior to
the date that the Periodic Redemption Amount, plus accrued but unpaid interest,
liquidated damages and any other amounts then owing to the Holder are due and
paid in full. Unless otherwise indicated by the Holder in the applicable Notice
of Conversion, any principal amount of this Debenture converted during the
applicable Periodic Conversion Period until the date the Periodic Redemption
Amount is paid in full shall be first applied to the principal amount subject to
the Periodic Redemption Amount payable in cash and then to the Periodic
Redemption Amount payable in Conversion Shares. Any principal amount of this
Debenture converted during the applicable Periodic Conversion Period in excess
of the Periodic Redemption Amount shall be applied against the last principal
amount of this Debenture scheduled to be redeemed hereunder, in reverse time
order from the Maturity Date; provided, however, if any such
conversion is applied against such Periodic Redemption Amount, the
Pre-Redemption Conversion Shares, if any were issued in connection with such
Periodic Redemption or were not already applied to such conversions, shall be
first applied against such conversion. The Company covenants and agrees that it
will honor all Notices of Conversion tendered up until such amounts are paid in full.
The Company’s determination to pay a Periodic Redemption in cash, shares of
Common Stock or a combination thereof shall be applied ratably to all of the
holders of the then outstanding Debentures based on their (or their
predecessor’s) initial purchases of Debentures pursuant to the Purchase
Agreement.

21




            c)       
Redemption Procedure. The payment of cash or issuance of Common Stock, as
applicable, pursuant to an Optional Redemption or a Periodic Redemption shall be
payable on the Optional Redemption Date or Periodic Redemption Date, as
applicable. If any portion of the payment pursuant to an Optional Redemption or
Periodic Redemption shall not be paid by the Company by the applicable due date,
interest shall accrue thereon at an interest rate equal to the lesser of 18% per
annum or the maximum rate permitted by applicable law until such amount is paid
in full. Notwithstanding anything herein contained to the contrary, if any
portion of the Optional Redemption Amount or Periodic Redemption Amount remains
unpaid after such date, the Holder may elect, by written notice to the Company
given at any time thereafter, to invalidate such Optional Redemption or Periodic
Redemption, ab initio, and, with respect to the Company’s failure
to honor the Optional Redemption, the Company shall have no further right to
exercise such Optional Redemption. Notwithstanding anything to the contrary in
this Section 6, the Company’s determination to redeem in cash or its elections
under Section 6(b) shall be applied ratably among the Holders of Debentures. The
Holder may elect to convert the outstanding principal amount of the Debenture
pursuant to Section 4 prior to actual payment in cash for any redemption under
this Section 6 by the delivery of a Notice of Conversion to the Company. 

            Section
7.        Negative Covenants. As
long as any portion of this Debenture remains outstanding, unless the holders of
at least 50.1% in principal amount of the then outstanding Debentures shall have
otherwise given prior written consent, the Company shall not, and shall not
permit any of the Subsidiaries to, directly or indirectly: 

            a)       
other than Permitted Indebtedness, enter into, create, incur, assume, guarantee
or suffer to exist any indebtedness for borrowed money of any kind, including,
but not limited to, a guarantee, on or with respect to any of its property or
assets now owned or hereafter acquired or any interest therein or any income or
profits therefrom; 

            b)       
other than Permitted Liens, enter into, create, incur, assume or suffer to exist
any Liens of any kind, on or with respect to any of its property or assets now
owned or hereafter acquired or any interest therein or any income or profits
therefrom; 

            c)       
amend its charter documents, including, without limitation, its certificate of
incorporation and bylaws, in any manner that materially and adversely affects
any rights of the Holder; 

            d)       
repay, repurchase or offer to repay, repurchase or otherwise acquire more than a
de minimis number of shares of its Common Stock or Common Stock
Equivalents other than as to (i) the Conversion Shares or Warrant Shares as
permitted or required under the Transaction Documents and
(ii) repurchases of Common Stock or Common Stock Equivalents of departing
officers and directors of the Company, provided that such repurchases shall not
exceed an aggregate of $5,000 for all officers and directors during the term of
this Debenture;

22




            e)       
repay, repurchase or offer to repay, repurchase or otherwise acquire any
Indebtedness, other than the Debentures if on a pro-rata basis; 

            f)       
pay cash dividends or distributions on any equity securities of the Company;


            g)       
enter into any transaction with any Affiliate of the Company which would be
required to be disclosed in any public filing with the Commission, unless such
transaction is made on an arm’s-length basis and expressly approved by a
majority of the disinterested directors of the Company (even if less than a
quorum otherwise required for board approval); or 

           
h)        enter into any agreement with
respect to any of the foregoing. 

           
Section 8.        Events of
Default.

            a)       
“Event of Default” means, wherever used herein, any of the following
events (whatever the reason for such event and whether such event shall be
voluntary or involuntary or effected by operation of law or pursuant to any
judgment, decree or order of any court, or any order, rule or regulation of any
administrative or governmental body): 

            i.       
any default in the payment of (A) the principal amount of any Debenture or (B)
interest, liquidated damages and other amounts owing to a Holder on any
Debenture, as and when the same shall become due and payable (whether on a
Conversion Date or the Maturity Date or by acceleration or otherwise) which
default, solely in the case of an interest payment or other default under clause
(B) above, is not cured within 3 Trading Days; 

            ii.       
the Company shall fail to observe or perform any other covenant or agreement
contained in the Debentures (other than a breach by the Company of its
obligations to deliver shares of Common Stock to the Holder upon conversion,
which breach is addressed in clause (x) below) which failure is not cured, if
possible to cure, within the earlier to occur of (A) 5 Trading Days after notice
of such failure sent by the Holder or by any other Holder to the Company and (B)
10 Trading Days after the Company has become or should have become aware of such
failure; 

            iii.       
a default or event of default (subject to any grace or cure period provided in
the applicable agreement, document or instrument) shall occur under 

23




(A) any of the Transaction Documents
or (B) any other material agreement, lease, document or instrument to which the
Company or any Subsidiary is obligated (and not covered by clause (vi) below);


            iv.       
any representation or warranty made in this Debenture, any other Transaction
Documents, any written statement pursuant hereto or thereto or any other report,
financial statement or certificate made or delivered to the Holder or any other
Holder shall be untrue or incorrect in any material respect as of the date when
made or deemed made; 

            v.       
the Company or any Significant Subsidiary (as such term is defined in Rule
1-02(w) of Regulation S-X) shall be subject to a Bankruptcy Event; 

            vi.       
the Company or any Subsidiary shall default on any of its obligations under any
mortgage, credit agreement or other facility, indenture agreement, factoring
agreement or other instrument under which there may be issued, or by which there
may be secured or evidenced, any indebtedness for borrowed money or money due
under any long term leasing or factoring arrangement that (a) involves an
obligation greater than $15,000, whether such indebtedness now exists or shall
hereafter be created, and (b) results in such indebtedness becoming or being
declared due and payable prior to the date on which it would otherwise become
due and payable;

            vii.       
the Common Stock shall not be eligible for listing or quotation for trading on a
Trading Market and shall not be eligible to resume listing or quotation for
trading thereon within five Trading Days; 

            viii.       
the Company shall be a party to any Change of Control Transaction or Fundamental
Transaction or shall agree to sell or dispose of all or in excess of 33% of its
assets in one transaction or a series of related transactions (whether or not
such sale would constitute a Change of Control Transaction); 

            ix.       
the Company does not meet the current public information requirements under Rule
144 in respect of the Underlying Shares;

            x.       
the Company shall fail for any reason to deliver certificates to a Holder prior
to the fifth Trading Day after a Conversion Date pursuant to Section 4(c) or the
Company shall provide at any time notice to the Holder, including by way of
public announcement, of the Company’s intention to not honor requests for
conversions of any Debentures in accordance with the terms hereof; 

            xi.       
any Person shall breach any agreement delivered to the initial Holders pursuant
to Section 2.2 of the Purchase Agreement; 

24




            xii.       
the electronic transfer by the Company of shares of Common Stock through the
Depository Trust Company or another established clearing corporation is no
longer available or is subject to a “chill”; or 

           
xiii.        any monetary judgment, writ or
similar final process shall be entered or filed against the Company, any
subsidiary or any of their respective property or other assets for more than
$5,000, and such judgment, writ or similar final process shall remain unvacated,
unbonded or unstayed for a period of 45 calendar days. 

            b)       
Remedies Upon Event of Default. If any Event of Default occurs, the
outstanding principal amount of this Debenture, plus accrued but unpaid
interest, liquidated damages and other amounts owing in respect thereof through
the date of acceleration, shall become, at the Holder’s election, immediately
due and payable in cash at the Mandatory Default Amount. Commencing 5 days after
the occurrence of any Event of Default that results in the eventual acceleration
of this Debenture, the interest rate on this Debenture shall accrue at an
interest rate equal to the lesser of 18% per annum or the maximum rate permitted
under applicable law. Upon the payment in full of the Mandatory Default Amount,
the Holder shall promptly surrender this Debenture to or as directed by the
Company. In connection with such acceleration described herein, the Holder need
not provide, and the Company hereby waives, any presentment, demand, protest or
other notice of any kind, and the Holder may immediately and without expiration
of any grace period enforce any and all of its rights and remedies hereunder and
all other remedies available to it under applicable law. Such acceleration may
be rescinded and annulled by Holder at any time prior to payment hereunder and
the Holder shall have all rights as a holder of the Debenture until such time,
if any, as the Holder receives full payment pursuant to this Section 8(b). No
such rescission or annulment shall affect any subsequent Event of Default or
impair any right consequent thereon. 

           
Section 9.       
Miscellaneous.

            a)       
Notices. Any and all notices or other communications or deliveries to be
provided by the Holder hereunder, including, without limitation, any Notice of
Conversion, shall be in writing and delivered personally, by facsimile, or sent
by a nationally recognized overnight courier service, addressed to the Company,
at the address set forth above, or such other facsimile number or address as the
Company may specify for such purposes by notice to the Holder delivered in
accordance with this Section 9(a). Any and all notices or other communications
or deliveries to be provided by the Company hereunder shall be in writing and
delivered personally, by facsimile, or sent by a nationally recognized overnight
courier service addressed to each Holder at the facsimile number or address of
the Holder appearing on the books of the Company, or if no such facsimile number
or address appears on the books of the Company, at the principal place of
business of such Holder, as set forth in the Purchase Agreement. Any notice or
other communication or deliveries hereunder shall be deemed given and effective
on the earliest of (i) the date of transmission, if such notice or communication
is delivered via facsimile at the
facsimile number set forth on the signature pages attached hereto prior to 5:30
p.m. (New York City time) on any date, (ii) the next Trading Day after the date
of transmission, if such notice or communication is delivered via facsimile at
the facsimile number set forth on the signature pages attached hereto on a day
that is not a Trading Day or later than 5:30 p.m. (New York City time) on any
Trading Day, (iii) the second Trading Day following the date of mailing, if sent
by U.S. nationally recognized overnight courier service or (iv) upon actual
receipt by the party to whom such notice is required to be given. 

25




            b)       
Absolute Obligation. Except as expressly provided herein, no provision of
this Debenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of, liquidated damages and
accrued interest, as applicable, on this Debenture at the time, place, and rate,
and in the coin or currency, herein prescribed. This Debenture is a direct debt
obligation of the Company. This Debenture ranks pari passu with
all other Debentures now or hereafter issued under the terms set forth
herein.

            c)       
Lost or Mutilated Debenture. If this Debenture shall be mutilated, lost,
stolen or destroyed, the Company shall execute and deliver, in exchange and
substitution for and upon cancellation of a mutilated Debenture, or in lieu of
or in substitution for a lost, stolen or destroyed Debenture, a new Debenture
for the principal amount of this Debenture so mutilated, lost, stolen or
destroyed, but only upon receipt of evidence of such loss, theft or destruction
of such Debenture, and of the ownership hereof, reasonably satisfactory to the
Company. 

            d)       
Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of this Debenture shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York, without regard to the principles of conflict of laws thereof. Each party
agrees that all legal proceedings concerning the interpretation, enforcement and
defense of the transactions contemplated by any of the Transaction Documents
(whether brought against a party hereto or its respective Affiliates, directors,
officers, shareholders, employees or agents) shall be commenced in the state and
federal courts sitting in the City of New York, Borough of Manhattan (the
“New York Courts”). Each party hereto hereby irrevocably submits to the
exclusive jurisdiction of the New York Courts for the adjudication of any
dispute hereunder or in connection herewith or with any transaction contemplated
hereby or discussed herein (including with respect to the enforcement of any of
the Transaction Documents), and hereby irrevocably waives, and agrees not to
assert in any suit, action or proceeding, any claim that it is not personally
subject to the jurisdiction of such New York Courts, or such New York Courts are
improper or inconvenient venue for such proceeding. Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof via
registered or certified mail or overnight delivery (with evidence of delivery)
to such party at the address in effect for notices to it under this Debenture
and agrees that such service shall constitute good and sufficient service of
process and notice thereof.

26




Nothing contained herein shall be
deemed to limit in any way any right to serve process in any other manner
permitted by applicable law. Each party hereto hereby irrevocably waives, to the
fullest extent permitted by applicable law, any and all right to trial by jury
in any legal proceeding arising out of or relating to this Debenture or the
transactions contemplated hereby. If any party shall commence an action or
proceeding to enforce any provisions of this Debenture, then the prevailing
party in such action or proceeding shall be reimbursed by the other party for
its attorneys fees and other costs and expenses incurred in the investigation,
preparation and prosecution of such action or proceeding. 

            e)       
Waiver and Amendments. Any waiver by the Company or the Holder of a
breach of any provision of this Debenture shall not operate as or be construed
to be a waiver of any other breach of such provision or of any breach of any
other provision of this Debenture. The failure of the Company or the Holder to
insist upon strict adherence to any term of this Debenture on one or more
occasions shall not be considered a waiver or deprive that party of the right
thereafter to insist upon strict adherence to that term or any other term of
this Debenture on any other occasion. Any waiver by the Company or the Holder
must be in writing. This Debenture and all other Debentures issued pursuant to
the Purchase Agreement may be modified or amended or the provisions hereof
waived with the prior written consent of the Company and the holders of 50.1% or
more of the aggregate principal amount of all Debentures then outstanding. 

            f)       
Severability. If any provision of this Debenture is invalid, illegal or
unenforceable, the balance of this Debenture shall remain in effect, and if any
provision is inapplicable to any Person or circumstance, it shall nevertheless
remain applicable to all other Persons and circumstances. If it shall be found
that any interest or other amount deemed interest due hereunder violates the
applicable law governing usury, the applicable rate of interest due hereunder
shall automatically be lowered to equal the maximum rate of interest permitted
under applicable law. The Company covenants (to the extent that it may lawfully
do so) that it shall not at any time insist upon, plead, or in any manner
whatsoever claim or take the benefit or advantage of, any stay, extension or
usury law or other law which would prohibit or forgive the Company from paying
all or any portion of the principal of or interest on this Debenture as
contemplated herein, wherever enacted, now or at any time hereafter in force, or
which may affect the covenants or the performance of this Debenture, and the
Company (to the extent it may lawfully do so) hereby expressly waives all
benefits or advantage of any such law, and covenants that it will not, by resort
to any such law, hinder, delay or impede the execution of any power herein
granted to the Holder, but will suffer and permit the execution of every such as
though no such law has been enacted. 

            g)       
Remedies, Characterizations, Other Obligations, Breaches and Injunctive
Relief. The remedies provided in this Debenture shall be cumulative and
in addition to all other remedies available under this Debenture and any of the
other Transaction Documents at law or in equity (including a decree of specific
performance and/or other injunctive relief), and nothing herein shall limit the
Holder’s right to pursue actual and consequential damages for any failure by the
Company to comply with the terms of this Debenture. The Company covenants to the
Holder that there shall be no characterization concerning this instrument other
than as expressly provided herein. Amounts set forth or provided for herein with
respect to payments, conversion and the like (and the computation thereof) shall
be the amounts to be received by the Holder and shall not, except as expressly
provided herein, be subject to any other obligation of the Company (or the
performance thereof). The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the Holder and that the
remedy at law for any such breach may be inadequate. The Company therefore
agrees that, in the event of any such breach or threatened breach, the Holder
shall be entitled, in addition to all other available remedies, to an injunction
restraining any such breach or any such threatened breach, without the necessity
of showing economic loss and without any bond or other security being required.
The Company shall provide all information and documentation to the Holder that
is requested by the Holder to enable the Holder to confirm the Company’s
compliance with the terms and conditions of this Debenture. 

27




            h)       
Next Business Day. Whenever any payment or other obligation hereunder
shall be due on a day other than a Business Day, such payment shall be made on
the next succeeding Business Day. 

            i)       
Headings. The headings contained herein are for convenience only, do not
constitute a part of this Debenture and shall not be deemed to limit or affect
any of the provisions hereof. 

            j)       
Secured Obligation. The obligations of the Company under this Debenture
are secured by all assets of the Company and each Subsidiary pursuant to the
Security Agreement, dated as of __________, 2014 between the Company, the
Subsidiaries of the Company and the Secured Parties (as defined therein). 

********************* 

(Signature Pages Follow) 

28




            IN
WITNESS WHEREOF, the Company has caused this Debenture to be duly executed by a
duly authorized officer as of the date first above indicated. 

 

AMERICAN NATURAL ENERGY CORPORATION


By:      /s/ Steven P.
Ensz                                                            
      
Name: Steven P. Ensz 
       Title: Vice
President 

Facsimile No. for delivery of Notices:
_______________


29




ANNEX A 

NOTICE OF CONVERSION 

           
The undersigned hereby elects to convert principal under the 8% Original Issue
Discount Senior Secured Convertible Debenture due ___________ of American
Natural Energy Corporation, an Oklahoma corporation (the “Company”), into
shares of common stock (the “Common Stock”), of the Company according to
the conditions hereof, as of the date written below. If shares of Common Stock
are to be issued in the name of a person other than the undersigned, the
undersigned will pay all transfer taxes payable with respect thereto and is
delivering herewith such certificates and opinions as reasonably requested by
the Company in accordance therewith. No fee will be charged to the holder for
any conversion, except for such transfer taxes, if any. 

           
By the delivery of this Notice of Conversion the undersigned represents and
warrants to the Company that its ownership of the Common Stock does not exceed
the amounts specified under Section 4 of this Debenture, as determined in
accordance with Section 13(d) of the Exchange Act. 

           
The undersigned agrees to comply with the prospectus delivery requirements under
the applicable securities laws in connection with any transfer of the aforesaid
shares of Common Stock.

Conversion calculations: 

	 	Date to Effect Conversion: 
	 	 
	 	Principal Amount of Debenture to be Converted:
    
	 	 
	 	Payment of Interest in Common Stock __ yes __
      no 
	 	           
             If yes, $_____ of Interest Accrued on Account
      of 
	 	           
             Conversion at Issue. 
	 	 
	 	Number of shares of Common Stock to be issued:
    
	 	  
	 	 
	 	Signature: 
	 	 
	 	Name: 
	 	 
	 	Address for Delivery of Common Stock
      Certificates: 
	 	 
	 	Or 
	 	 
	 	DWAC Instructions: 
	 	 
	 	Broker No:
      ________________________________________
	 	Account No:
      ______________________________________


30




Schedule 1 

CONVERSION SCHEDULE 

This 8% Original Issue Discount Senior Secured Convertible
Debentures due on _____________in the original principal amount of
$____________is issued by American Natural Energy Corporation, an Oklahoma
corporation. This Conversion Schedule reflects conversions made under Section 4
of the above referenced Debenture. 

Dated:


	Date of Conversion 
(or for first entry,
      
Original Issue Date) 	Amount of 
Conversion 	Aggregate 
Principal
      
Amount 
Remaining 
Subsequent to 
Conversion 
(or original
      
Principal 
Amount) 	Company Attest 
	
       

       
	 	 	 
	
       

       
	 	 	 
	
       

       
	 	 	 
	
       

       
	 	 	 
	
       

       
	 	 	 
	
       

       
	 	 	 
	
       

       
	 	 	 
	
       

       
	 	 	 
	
       

       
	 	 	 



31