PROSPECTUS Filed pursuant to Rule 424(b)(3) of the Securities Act of 1933. 5,865,325 SHARES VAALCO ENERGY, INC. COMMON STOCK The shares of common stock offered hereby (the "Offered Securities") are shares of common stock, par value $.10 per share ("Common Stock"), of VAALCO Energy, Inc., a Delaware corporation (the "Company"), owned by certain stockholders of the Company. See "Selling Stockholders." The Company will not receive any of the proceeds from the sale of the Offered Securities hereby. The Company's Common Stock trades on the OTC Bulletin Board under the symbol "VEIX." On July 24, 1998, the average of the closing bid and asking price of a share of the Common Stock on the OTC Bulletin Board was $2.13 per share. The Offered Securities may be offered and sold from time to time by Selling Stockholders through brokers or to dealers or directly to one or more purchasers in negotiated transactions, at market prices prevailing at the time of sale or at prices related to such market prices. The Offered Securities may be sold from time to time in transactions on the OTC Bulletin Board at the market price then prevailing although sales may also be made in negotiated transactions or otherwise. The Selling Stockholders and brokers executing selling orders on behalf of the Selling Stockholders and dealers to whom the Selling Stockholders may sell may be deemed to be "underwriters" within the meaning of the Securities Act of 1933, as amended ("Securities Act"), in which event commissions received by such brokers may be deemed to be underwriting commissions under the Securities Act. Although each Selling Stockholder may sell all or a portion of the shares of Common Stock offered hereby, no Selling Stockholder is required to make any such sale. See "Plan of Distribution" for further information concerning the plan of distribution of the Offered Securities. The expenses of registration incurred in connection with this offering, estimated at $50,000, will be paid by the Company, but all selling and other expenses incurred by Selling Stockholders will be borne by such Selling Stockholders. See "Plan of Distribution." PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY SHOULD CAREFULLY CONSIDER THE MATTERS SET FORTH UNDER THE CAPTION "RISK FACTORS," BEGINNING ON PAGE 3. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS PROSPECTUS IS JULY 30, 1998. AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Comission (the "Commission") in Washington, D.C., a Registration Statement on Form S-3 ("Registration Statement") under the Securities Act with respect to the Common Stock offered by this Prospectus. Certain portions of the Registration Statement have not been included in this Prospectus. For further information, reference is made to the Registration Statement and the Exhibits thereto. The Company is subject to the information requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Commission. The Registration Statement (with exhibits), as well as such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at its principal offices at Judiciary Plaza, 450 Fifth Street, Room 1024, N.W., Washington, D.C. 20549, and its regional offices at Citicorp Center, 500 Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such material can be obtained at prescribed rates from the Public Reference Section of the Commission at its principal office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. The Commission maintains a Web site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the Commission at http://www.sec.gov. The Company provides its security holders an annual report containing audited financial statements for the fiscal year covered thereby. Such report usually is provided within 120-days after the end of the Company's most recent fiscal year. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The Company's (i) annual report on Form 10-KSB for the fiscal year ended December 31, 1997, filed on March 30, 1998, as supplemented by Form 10-KSB/A, filed May 15, 1998, (ii) the Company's quarterly report on Form 10-QSB for the fiscal quarter ended March 31, 1998, (iii) the description of the Company's Common Stock contained in the Company's Registration Statement on Form 10 (Reg. No. 0-20928) as amended by a Form 8 filed by the Company with the Commission on January 7, 1993 and a Form 8 filed by the Company with the Commission on January 25, 1993, (iv) the Company's Definitive Proxy Statement filed on June 4, 1998 relating to the Annual Meeting of Stockholders on June 24, 1998, (v) the Company's current report on Form 8-K dated March 4, 1998, and (vi) the Company's current report on Form 8-K filed on May 6, 1998, as supplemented by Form 8-K/A filed on May 29, 1998, are hereby incorporated herein by reference. All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act after the date of this Prospectus and before the termination of the offering covered hereby shall be deemed to be incorporated by reference in this Prospectus and to be a part hereof from the date of filing of such documents. Any statement contained in this Prospectus, in any supplement to this Prospectus or in a document incorporated or deemed to be incorporated by reference in this Prospectus shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained in this Prospectus or in any other subsequently filed document which also is or is deemed to be incorporated by reference modifies or replaces such statement. Any such statement shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will provide without charge to each person to whom this Prospectus is delivered, upon the written or oral request of such person, a copy of any or all of the documents incorporated by reference in this Prospectus, other than exhibits to such documents, unless such exhibits are specifically incorporated by reference into the information that this Prospectus incorporates. All such requests should be directed to VAALCO Energy, Inc., 4600 Post Oak Place, Suite 309, Houston, Texas 77027, Attention: Investor Relations Department, telephone number (713) 623-0801. 1 THE COMPANY VAALCO Energy, Inc., a Delaware corporation (the "Company" or "VAALCO"), is engaged in the acquisition, exploration, development and production of oil and gas properties. VAALCO owns producing properties and conducts exploration activities internationally in the Philippines and domestically in the Texas Gulf Coast area, and has recently begun international exploration activities in Gabon, West Africa. VAALCO recently acquired a 7.5% interest in Hunt Overseas Exploration Company, L.P., which has exploration prospects in a number of international areas. The Company has also recently entered into a joint venture agreement to engage in the exploration of oil and gas properties in the United States, primarily in the onshore Gulf Coast area, including Alabama, Mississippi and Louisiana. The Company's executive offices are located at 4600 Post Oak Place, Suite 309, Houston, Texas 77027, telephone number (713) 623-0801. RECENT DEVELOPMENTS GABON DISCOVERY. In June 1998, the Company successfully drilled its first exploration well offshore southern Gabon, West Africa. The well, located in the block covered by the Etame Marin Permit ("Permit"), tested at 3.5 MBbls/day (0.6 net to the Company), and is temporariliy shut-in pending evaluation of the well results. The well is located just north of hydrocarbon accumulations in Tehibala North and Tehibala South which were identified in the 1970s but deemed non-commercial at that time. The Company has identified several other prospects in the block, and believes that this block has the potential to add significantly to the Company's reserves if initial interpretations prove correct. The Company is the operator of the Permit and owns a 17.85% working interest. Western Atlas Afrique Ltd. has a 65% working interest and three additional partners collectively own the remaining 17.15% working interest. Under the terms of the Permit, the Gabonese government has the option to participate with up to a 7.5% working interest in the development of any commercial discoveries on the block which, if exercised, would reduce proportionately the interest of the other participants. HUNT TRANSACTION/PRIVATE PLACEMENT. On April 21, 1998, the Company completed the acquisition of 1818 Oil Corp. from The 1818 Fund II, L.P. ("Fund") in exchange for 10,000 shares of the Company's preferred stock ("Preferred Stock") convertible into 27.5 million shares of Common Stock. The general partner of the Fund is Brown Brothers Harriman & Co. The principal assets of 1818 Oil Corp. are a limited partner interest in Hunt Overseas Exploration Company, L.P. ("Hunt"), a partnership engaged in the exploration for oil internationally, and $12.6 million in cash. The cash held by 1818 Oil Corp. will be used to fund its obligations to make capital contributions to Hunt. Simultaneously with the acquisition of 1818 Oil Corp., VAALCO completed a private placement of 5.2 million shares of Common Stock for estimated net proceeds of $9.5 million. Of such shares, 3,763,441 were acquired by the Fund as part of the acquisition of the 1818 Oil Corp. and the balance was acquired by institutional investors. Proceeds of the offering were allocated to fund VAALCO's capital budget for 1998. As a result of the acquisition of 1818 Oil Corp. and the private placement, the Fund beneficially owns approximately 64% of the outstanding shares of VAALCO, assuming conversion of the Preferred Stock. Pursuant to rights granted in the Preferred Stock, the Fund has appointed T. Michael Long, Lawrence Tucker and Walter Grist to VAALCO's Board of Directors. See "Risk Factors-Control by Major Stockholder." FORMATION OF JOINT VENTURE. In April 1998, VAALCO also completed the formation of a joint venture with Paramount Petroleum Company ("Paramount") and Robert Schneeflock, the owner of Paramount, to explore for oil and gas primarily in the onshore Gulf Coast area. 2 RISK FACTORS PROSPECTIVE PURCHASERS OF THE OFFERED SECURITIES SHOULD CAREFULLY CONSIDER, TOGETHER WITH OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING FACTORS THAT MAY AFFECT THE COMPANY. CONTROL BY MAJOR STOCKHOLDER Currently, the Fund owns Common Stock and Preferred Stock which votes as a class with the Common Stock on an as converted basis, and which, in the aggregate, represents approximately 64% of the outstanding voting power of the Company on an as converted basis (excluding options and warrants). In addition, the terms of the Preferred Stock held by the Fund provide that while the Preferred Stock is outstanding, the holders of Preferred Stock voting together as a class will be entitled to elect three directors of the Company. Accordingly, the Fund is able to control all matters submitted to a vote of the stockholders of the Company, including the election of directors. The Company's Bylaws contain provisions which require that at least a majority of the directors constituting the entire Board of Directors, which majority must include at least one of the directors elected by the holders of Preferred Stock, approve each of the following transactions effected by either the Company or, as applicable, any subsidiary of the Company: any issuance of or agreement to issue any equity securities, including securities convertible into or exchangeable for such equity securities (other than issuances pursuant to an employee benefit plan); the declaration of any dividend; the incurrence, assumption of or refinancing of indebtedness; the adoption of any employee stock option or similar plan; entering into employment or consulting agreements with annual compensation exceeding $100,000; any merger or consolidation; the sale, conveyance, exchange or transfer of the voting stock or all or substantially all of the assets; the sale or other disposition to another person, or purchase, lease or other acquisition from another person, of any material assets, rights or properties; certain expenditures in excess of $300,000; the formation of any entity that is not wholly-owned by the Company; material changes in accounting methods or policies; any amendment, modification or restatement of the certificate of incorporation or bylaws; the settlement of any claim or other action against the Company or subsidiary in an amount in excess of $50,000; approval or amendment of the annual operating budget; any other action which is not in the ordinary course of business; and the agreement to take any of the foregoing actions. Accordingly, none of the foregoing actions can be taken by the Company without the approval of at least one director designated by the holders of the Preferred Stock. VOLATILITY OF OIL AND GAS PRICES AND MARKETS The Company's revenues, cash flow, profitability and future rate of growth are substantially dependent upon prevailing prices for oil and gas. The Company's ability to borrow funds and to obtain additional capital on attractive terms is also substantially dependent on oil and gas prices. The Company's production in the Philippines (representing substantially all of the Company's oil production since 1994) is from mature offshore fields with high production costs. The Company's margin on sales from these fields (the price received for oil less the production costs for the oil) is lower than the margin on oil production from many other areas. As a result, the profitability of the Company's production in the Philippines is affected more by changes in prices than production located in other areas. Historically, oil and gas prices and markets have been volatile and are likely to continue to be volatile in the future. Prices for oil and gas are subject to wide fluctuations in response to relatively minor changes in supply of and demand for oil and gas, market uncertainty and a variety of additional factors that are beyond the control of the Company. These factors include international political conditions, the domestic and foreign supply of oil and gas, the level of consumer demand, weather conditions, domestic and foreign governmental regulations, the price and availability of alternative fuels and overall economic conditions. In addition, various factors, including the availability and capacity of gas gathering systems and pipelines, the effect of federal, state and foreign regulation of production and transportation, general economic conditions, changes in supply due to drilling by other producers and changes in demand may adversely affect the Company's ability to market its oil and gas production. Any significant decline in the price of oil or gas would adversely affect the Company's revenues, operating income, cash flows and borrowing capacity and may require a reduction in the carrying value of the Company's oil and gas properties and its planned level of capital expenditures. 3 The recent downturn in certain of the economies in Asia has resulted in a substantial oversupply of crude oil products in the area. The Company's Philippine production competes as an energy source with crude oil products, so the price received for the Company's production is being adversely affected by market instability and the current oversupply of crude oil products in the area. For example, average prices during the first quarter of 1998 were $7.50 per Bbl, compared with $9.00 per Bbl in the first quarter of 1997. Although the Company believes the oversupply of crude oil products will not be permanent, no assurances can be given as to the amount of time that will be required to return the supplies of crude oil products to normal. REPLACEMENT OF RESERVES The Company's future success depends upon its ability to find, develop or acquire additional oil and gas reserves that are economically recoverable. Except to the extent that the Company conducts successful exploration or development activities or acquires properties containing proved reserves, the estimated net proved reserves of the Company will generally decline as reserves are produced. There can be no assurance that the Company's planned development and exploration projects and acquisition activities will result in significant additional reserves or that the Company will have continuing success drilling productive wells at economic finding costs. The drilling of oil and gas wells involves a high degree of risk, especially the risk of dry holes or of wells that are not sufficiently productive to provide an economic return on the capital expended to drill the wells. In addition, the Company's drilling operations may be curtailed, delayed or canceled as a result of numerous factors, including title problems, weather conditions, political instability, economic/currency imbalances, compliance with governmental requirements and shortages or delays in the delivery of equipment and availability of drilling rigs. Certain of the Company's oil and gas properties are operated by third parties or may be subject to operating committees controlled by national oil companies and, as a result, the Company has limited control over the nature and timing of exploration and development of such properties or the manner in which operations are conducted on such properties. SUBSTANTIAL CAPITAL REQUIREMENTS The Company makes, and will continue to make, substantial capital expenditures for the acquisition, exploitation, development, exploration and production of oil and gas reserves. Historically, the Company has financed these expenditures primarily with cash flow from operations, asset sales, private sales of equity, bank borrowings and purchase money debt. The Company believes that it will have sufficient capital to finance planned capital expenditures through June 1999. If revenues decrease as a result of lower oil and gas prices, operating difficulties or declines in reserves, the Company may have limited ability to finance planned capital expenditures in the future. There can be no assurances that additional equity financing or cash generated by operations or borrowings will be available to meet these requirements. The Company has committed to invest $3.0 million in the Paramount joint venture, of which $0.7 million has already been funded. There can be no assurance that the Company will realize a return on this investment or that the Company's investment in the Paramount joint venture will be successful. 4 HISTORY OF LOSSES Without giving effect to the acquisition of 1818 Oil Corp., the Company incurred net losses (after preferred dividends requirement) of $12.3 million, $8.2 million, $7.2 million and $0.6 million for each of the years ended December 31, 1993, 1994, 1995 and 1996, respectively. In addition, 1818 Oil Corp. had net losses of $0.2 million, $1.0 million and $16.0 million for each of the years ended December 31, 1995, 1996 and 1997, respectively and $0.4 million for the three months ended March 31, 1998 (unaudited). No assurance can be made that the Company will operate profitably in the future. The likelihood of the Company's future profitability must be considered in light of the financial, business and operating risks, expenses, difficulties, and delays frequently encountered in connection with the oil and gas acquisition, exploration, development and production business in which the Company is engaged. The financial statements incorporated by reference herein do not include any adjustments that may result from these uncertainties. DRILLING RISKS Drilling activities are subject to many risks, including the risk that no commercially productive reservoirs will be encountered. There can be no assurance that new wells drilled by the Company will be productive or that the Company will recover all or any portion of its investment. Drilling for oil and natural gas may involve unprofitable efforts, not only from dry wells, but from wells that are productive but do not produce sufficient net revenues to return a profit after drilling, operating and other costs. The cost of drilling, completing and operating wells is often uncertain and cost overruns are common. The Company's drilling operations may be curtailed, delayed or canceled as a result of numerous factors, many of which are beyond the Company's control, including title problems, weather conditions, compliance with governmental requirements and shortages or delays in the delivery of equipment and services. OPERATING HAZARDS AND UNINSURED RISKS The oil and gas business involves a variety of operating risks, including fire, explosions, blow-outs, pipe failure, casing collapse, abnormally pressured formations and environmental hazards such as oil spills, gas leaks, ruptures and discharges of toxic gases, the occurrence of any of which could result in substantial losses to the Company due to injury and loss of life, severe damage to and destruction of property, natural resources and equipment, pollution and other environmental damage, clean-up responsibilities, regulatory investigation and penalties and suspension of operations. The Company's production facilities are also subject to hazards inherent in marine operations, such as capsizing, sinking, grounding, collision and damage from severe weather conditions. The relatively deep offshore drilling conducted by the Company overseas involves increased drilling risks of high pressures and mechanical difficulties, including stuck pipe, collapsed casing and separated cable. The impact that any of these risks may have upon the Company is increased due to the low number of producing properties owned by the Company. The Company and operators of properties in which it has an interest maintain insurance against some, but not all, potential risks; however, there can be no assurance that such insurance will be adequate to cover any losses or exposure for liability. The occurrence of a significant unfavorable event not fully covered by insurance could have a material adverse effect on the Company's financial condition and results of operations. Furthermore, the Company cannot predict whether insurance will continue to be available at a reasonable cost or at all. UNCERTAINTIES IN ESTIMATING RESERVES AND FUTURE NET CASH FLOWS There are numerous uncertainties inherent in estimating quantities of proved oil and gas reserves, including many factors beyond the control of the Company. Reserve engineering is a subjective process of estimating the underground accumulations of oil and gas that cannot be measured in an exact manner. 5 The estimates incorporated by reference in this Prospectus are based on various assumptions required by the Commission, including unescalated prices and costs and capital expenditures, and, therefore, are inherently imprecise indications of future net revenues. Actual future production, revenues, taxes, operating expenses, development expenditures and quantities of recoverable oil and gas reserves may vary substantially from those assumed in the estimates. Any significant variance in these assumptions could materially affect the estimated quantity and value of reserves, In addition, the Company's reserves may be subject to downward or upward revision based upon production history, results of future development, availability of funds to acquire additional reserves, prevailing oil and gas prices and other factors. Moreover, the calculation of the estimated present value of the future net revenue using a 10% discount rate as required by the Commission is not necessarily the most appropriate discount factor based on interest rates in effect from time to time and risks associated with the Company's reserves or the oil and gas industry in general. It is also possible that reserve engineers may make different estimates of reserves and future net revenues based on the same available data. In calculating reserves on a BOE basis, gas was converted to oil at the ratio of six Mcf of gas to one Bbl of oil. While this conversion ratio approximates the energy equivalent of oil and gas on a Btu basis, it may not represent the relative prices received by the Company on the sale of its oil and gas production. The estimated future net revenues attributable to the Company's net proved reserves are prepared in accordance with Commission guidelines, and are not intended to reflect the fair market value of the Company's reserves. In accordance with the rules of the Commission, the Company's reserve estimates are prepared using period end prices received for oil and gas. The estimated quantities and present values of the Company's reserves at December 31, 1996 would have been lower if prices in effect on December 31, 1997 were used to calculate such quantities and present values. Future reductions in prices below those prevailing at year end 1997 would result in the estimated quantities and present values of the Company's reserves being further reduced. A substantial portion of the Company's proved reserves are or will be subject to service contracts, production sharing contracts and other arrangements. See "-Foreign Operations." The quantity of oil and gas the Company will ultimately receive under these arrangements will differ based on numerous factors, including the price of oil and gas, production rates, production costs, cost recovery provisions and local tax and royalty regimes. Changes in many of these factors do not affect estimates of U.S. reserves in the same way they affect estimates of proved reserves in foreign jurisdictions, or will have a different effect on reserves in foreign countries than in the United States. As a result, proved reserves in foreign jurisdictions may not be comparable to proved reserve estimates in the United States. FOREIGN OPERATIONS The Company's international assets and operations are subject to various political, economic and other uncertainties, including, among other things, the risks of war, expropriation, nationalization, renegotiation or nullification of existing contracts, taxation policies, foreign exchange restrictions, changing political conditions, international monetary fluctuations, currency controls and foreign governmental regulations that favor or require the awarding of drilling contracts to local contractors or require foreign contractors to employ citizens of, or purchase supplies from, a particular jurisdiction. In addition, if a dispute arises with foreign operations, the Company may be subject to the exclusive jurisdiction of foreign courts or may not be successful in subjecting foreign persons, especially foreign oil ministries and national oil companies, to the jurisdiction of the United States. 6 The Company's private ownership of oil and gas reserves under oil and gas leases in the United States differs distinctly from its ownership of foreign oil and gas properties. In the foreign countries in which the Company does business, the state generally retains ownership of the minerals and consequently retains control of (and in many cases, participates in) the exploration and production of hydrocarbon reserves. Accordingly, operations outside the United States may be materially affected by host governments through royalty payments, export taxes and regulations, surcharges, value added taxes, production bonuses, participation options and other charges. Certain of the Company's producing properties are located offshore Palawan Island in the Philippines, and, consequently, a portion of the Company's assets is subject to regulation by the government of the Philippines. Although there has been unrest and uncertainty in the Philippines, to date, the country's Office of Energy Affairs has been largely unaffected by political changes. The Company has operated in the Philippines since 1985 and believes that it has good relations with the current Philippine government. However, there can be no assurance that present or future governmental regulation in the Philippines will not materially adversely affect the operations or cash flows of the Company. All of the Company's current Philippine producing properties are located in fields covered under Service Contract 14. To obtain favorable tax treatment, at least 15% of Service Contract 14 must be owned by Philippine nationals. Residents of the Philippines currently own in excess of 15% of Blocks A, B, C and D of Service Contract 14, including 71% of Block C. The Company's ability to export oil produced in the Philippines is restricted by the terms of Service Contract 14. The Company currently sells its oil production within the Philippines and therefore may be exposed to foreign currency risk. INVESTMENT IN HUNT The Company is a limited partner in Hunt. Generally, all decisions concerning the operations of Hunt are made by the general partner without the consent or input of the limited partners. Accordingly, the Company is not able to influence decisions with respect to operations of Hunt, including decisions regarding the purchase of concessions and other interests, exploration and development operations (including the location, testing, completing or plugging and abandoning of wells, as well as the gathering of seismic and other geophysical data), farm out and other participation agreements, the acquisition or sale of real and personal property, insurance coverage, bank and other financings and other matters significant to the operations of Hunt. The exploration activity of Hunt is ongoing. To date, Hunt's exploration activities have not resulted in the discovery of any commercial oil or gas reserves. No assurance can be given that Hunt's activities will ever result in any commercial production or that the Company will realize a return on its investment in Hunt. Hunt's operations are subject to risks applicable to the oil and gas industry in general as well as to risks inherent in foreign operations, and are subject to many of the risks disclosed herein under "Risk Factors" including, without limitation, "-Foreign Operations," "-Volatility of Oil and Gas Prices and Markets," "-Replacement of Reserves," "-Drilling Risks," "-Operating Hazards and Uninsured Risks," "-Uncertainties in Estimating Reserves and Future Net Cash Flows," "-Environmental and Other Regulations" and "Acquisition Risks." ENVIRONMENTAL AND OTHER REGULATIONS The Company's business is regulated by the laws and regulations of the United States, Philippines and Gabon. In addition, Hunt does business in and is subject to the laws and regulations of other foreign countries. These laws and governmental regulations, which cover matters including drilling operations, taxation and environmental protection, may be changed from time to time in response to economic or political conditions. See "-Foreign Operations." 7 The Company's domestic operations are subject to numerous laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. The Company's domestic operations could result in liability for personal injuries, property damage, oil spills, discharge of hazardous materials, remediation and clean-up costs and other environmental damages. In addition, the Company could be liable for environmental damages caused by previous property owners. As a result, substantial liabilities to third parties or governmental entities may be incurred, the payment of which could have a material adverse effect on the Company's financial condition, results of operations and liquidity. The Company maintains insurance coverage for its operations, including limited coverage for sudden environmental damages, but does not believe that insurance coverage for environmental damages that occur over time is available at a reasonable cost. Moreover, the Company does not believe that insurance coverage for the full potential liability that could be caused by sudden environmental damages is available at a reasonable cost. Accordingly, the Company may be subject to liability or may lose substantial portions of its properties in the event of certain environmental damages. The Company could incur substantial costs to comply with environmental laws and regulations. A substantial portion of the Company's producing properties are located offshore. The costs to abandon offshore wells may be substantial. For financial accounting purposes the Company accrues a per BOE charge over the life of a field to cover such abandonment costs. No assurances can be given that such reserves will be sufficient to pay such costs in the future as they are incurred. The Oil Pollution Act of 1990 imposes a variety of regulations on "responsible parties" related to the prevention of oil spills. The implementation of new, or the modification of existing, environmental laws or regulations, including regulations promulgated pursuant to the Oil Pollution Act of 1990, could have a material adverse impact on the Company. The recent trend toward stricter standards in environmental legislation and regulation in the U.S. is likely to continue. For instance, legislation has been introduced in Congress that would reclassify certain exploration and production wastes as "hazardous wastes" which would make the reclassified wastes subject to much more stringent handling, disposal and clean-up requirements. If such legislation were enacted, it could have a significant impact on the operating costs of the Company, as well as the oil and gas industry in general. Initiatives to further regulate the disposal of oil and gas wastes are also pending in certain states, and these various initiatives could have a similar impact on the Company. In addition, while the Company believes that it is currently in compliance with environmental laws and regulations applicable to the Company's operations in the Philippines and Gabon, no assurances can be given that the Company will be able to continue to comply with such environmental laws and regulations without incurring substantial costs. ACQUISITION RISKS The Company intends to continue acquiring oil and gas properties. Although the Company performs a review of the acquired properties that it believes is consistent with industry practices, such reviews are inherently incomplete. It generally is not feasible to review in depth every individual property involved in each acquisition. Ordinarily, the Company will focus its due diligence efforts on the higher valued properties and will sample the remainder. However, even an in-depth review of all properties and records may not necessarily reveal existing or potential problems nor will it permit a buyer to become sufficiently familiar with the properties to assess fully their deficiencies and capabilities. Inspections may not be performed on every well, and structural or environmental problems, such as ground water contamination, are not necessarily observable even when an inspection is undertaken. The Company may be required to assume preclosing liabilities, including environmental liabilities, and may acquire interests in properties on an "as is" basis. There can be no assurance that the Company's acquisitions will be successful. 8 LIMITED TRADING MARKET At the present time, the Common Stock is not quoted on the Nasdaq Stock Market, Inc. ("NNM") or listed on any national stock exchange. Although the Common Stock currently trades on the OTC Bulletin Board, the trading volume has not been substantial and there can be no assurance as to the liquidity or sustainability of the market for the Common Stock or the ability of stockholders to sell Common Stock at any price. Future trading prices of the Common Stock will depend on many factors including, among others, prevailing market conditions and the Company's operating results. The Company does not currently meet the requirements of the NNM. There can be no assurance that the Common Stock will meet these listing requirements and that it will be accepted for trading on the NNM or on any national stock exchange. As of June 15, 1998, 27,500,000 shares of Common Stock were issuable to the Fund upon conversion of the Preferred Stock, 1,445,325 shares of Common Stock were issuable upon the exercise of certain outstanding warrants and 2,075,000 shares of Common Stock were issuable upon the exercise of certain employee stock options. All of such shares may be exercised or converted within sixty days of the date of this Prospectus. In addition, the Fund has certain registration rights with respect to the shares of Common Stock issuable upon conversion of the Preferred Stock. The Common Stock being offered pursuant to this Prospectus represents approximately 26% of the Company's total outstanding securities (excluding options and outstanding Preferred Stock conversion rights). All of these common shares, to the extent that they are eligible or appear to be eligible for sale in the public market, could have a materially adverse effect on the market price of the Common Stock and therefore make it more difficult to sell equity securities. The Company may issue additional equity securities in order to fund working capital requirements and for other purposes. To the extent the Company does so, existing stockholders may experience substantial dilution, particularly if the terms of such issuance include discounts to market prices or the issuance of convertible securities. RELIANCE ON KEY PERSONNEL The Company is highly dependent upon its executive officers and key employees, particularly Messrs. Gerry, Walston and Scheirman. Moreover, the Company's investment in the Paramount joint venture is highly dependent upon Robert Schneeflock. The unexpected loss of the services of any of these individuals could have a detrimental effect on the Company. The Company has entered into employment agreements with Messrs. Gerry and Scheirman which will terminate in August 1998. The Company does not maintain key man life insurance on any of its employees. QUALIFICATION OF NET OPERATING LOSS CARRY FORWARD As of December 31, 1996, the Company had a net operating loss carry forward of $13.2 million for federal income tax purposes, and 1818 Oil Corp. had a net operating loss carry forward of from $10 million to $12 million. As a result of the acquisition of the capital stock of 1818 Oil Corp., the net operating loss of the Company which may be used to offset future taxable income will be limited to $1.6 million during any year. The net operating losses of 1818 Oil Corp. were not affected by the acquisition. 9 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This Prospectus, including the documents incorporated by reference herein and the exhibits hereto and thereto, includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934 ("Exchange Act"). All statements other than statements of historical facts included or incorporated by reference in this Prospectus, including without limitation, statements regarding the Company's financial position, reserve quantities and net present values, business strategy, plans and objectives of management of the Company for future operations are forward-looking statements. Although the Company believes that the assumptions upon which such forward-looking statements are based are reasonable, it can give no assurance that such assumptions will prove to have been correct. Important factors that could cause actual results to differ materially from the Company's expectations ("Cautionary Statements") are disclosed above and elsewhere in this Prospectus as well as in periodic reports filed by the Company under the Exchange Act. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. SELLING STOCKHOLDERS The following table sets forth as to each Selling Stockholder: (i) such Stockholder's name and relationship to the Company, (ii) the number of shares of Common Stock beneficially owned as of June 30, 1998, (iii) the number of shares of Common Stock to be sold pursuant to this Prospectus, and (iv) the number and percent of shares of Common Stock beneficially owned after the offering, assuming all of the Offered Shares are sold. The Selling Stockholders reserve the right to reduce the number of shares of Common Stock offered for sale or to otherwise decline to sell any or all of the Offered Securities registered hereunder.