<PAGE>

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                    U.S. SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, DC 20549

                                  FORM 10-KSB

     [X]  ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
          SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)

                       FOR THE FISCAL YEAR ENDED
                           DECEMBER 31, 1996

                                  OR

     [ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
          SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

               FOR THE TRANSITION PERIOD FROM ______ TO  _______

                         COMMISSION FILE NUMBER 1-9933

                           AMERAC ENERGY CORPORATION

                (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

                 DELAWARE                               75-2181442
       (State or Other Jurisdiction of              (I.R.S. Employer
       Incorporation or Organization)              Identification No.)

       1201 LOUISIANA, SUITE 3350
       Houston, Texas                               77002-5609
       (Address of Principal Executive Offices)     (Zip Code)

     Issuer's Telephone Number, Including Area Code:   (713) 308-5250

        Securities registered under Section  12(b) of the Exchange Act:

                                               NAME OF EACH EXCHANGE
          TITLE OF EACH CLASS                   ON WHICH REGISTERED
          -------------------                  ---------------------
 Common Stock (Par Value $.05 per share)       American Stock Exchange
 Common Stock (Par Value $.05 per share)         Boston Stock Exchange

  SECURITIES REGISTERED PURSUANT TO SECTION  12(G) OF THE EXCHANGE ACT: NONE

Check whether the issuer: (1) has filed all reports required by Section 13 or
15(d) of the Exchange Act during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES  X   NO

Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB: [X]

For  the  twelve-month  period ended December  31,  1996, the  issuers revenue
was $10,644,000.

As of March 20, 1997, the aggregate market value of the issuers Common Stock
held by non-affiliates was approximately $32,565,000.

The number of shares outstanding of the issuer's Common Stock as of March 22,
1997, was 3,885,588.

                  DOCUMENTS INCORPORATED BY REFERENCE

The issuers definitive proxy statement for the 1996 Annual Meeting of
Stockholders is incorporated by reference into Part III of the Form 10KSB.

      Transitional Small Business Disclosure Format (check
one):    YES        NO   X
             ___       ____


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<PAGE>

ITEM 1. DESCRIPTION OF BUSINESS

THE COMPANY

   Amerac Energy Corporation (the "Company" or "Amerac") is engaged in the
acquisition, development and enhancement of and exploration for oil and gas in
the United States. While the Company was formed in 1969, it is only since mid
1994 that the Company has been focused on growth through acquisitions and
exploitation. Since that time, the Company has grown its asset base and market
capitalization substantially. Total proved reserves increased from 12.8 billion
cubic feet equivalent ("Bcfe") at December 31, 1995 to 30.1 Bcfe at December 31,
1996, an increase of 135%. Since the beginning of 1996, the Company has
increased its estimated undiscounted future net cash flows assuming unescalated
prices prevailing at the time from $14.1 million to $31.3 million at December
31, 1996, a 122% increase. The Company's finding and development cost for 1996
was $4.89 per barrel of oil equivalent ("BOE"). As of March 20, 1997, the market
value of the Company's common stock was approximately $33 million.

   The Company's headquarters is in Houston, Texas. At December 31,1996, Amerac
employed ten people.

ACQUISITIONS

   During 1996, the Company spent $10.1 million in cash and issued 220,000
common shares in connection with five acquisitions of oil and gas properties
located primarily in Texas and Oklahoma. Those acquisitions, which included
interests in 174 producing wells, increased the Company's reserve base by nearly
21 Bcfe.

   In 1995, the Company spent $4.3 million in cash in connection with three
acquisitions in Texas. The 1995 acquisitions included interests in ten producing
wells and added 7.4 Bcfe of reserves.

   In 1994, Amerac acquired interests in four wells with reserves of 1.8 Bcfe
for $1.5 million.

  (See Note 2 to the Consolidated Financial Statements.)

SIGNIFICANT PROPERTY

   The Company's South Timbalier 198 offshore property accounted for
approximately 44% of the Company's gross revenues in 1996. In December 1996, the
property began to produce water. It is anticipated that the primary well on this
property, which at year-end was producing at a rate of 567 million cubic feet
("MMcf") a month (109 MMcf per month net to the Company's interest), is expected
to deplete in 1997. Should the second of the two wells on this property deplete,
and if no additional drilling takes place, the Company estimates that its share
of the cost of plugging the existing wells and abandoning the offshore platform
could be as much as $600,000. The Company will need to replace the revenue from
this property by acquisitions of producing properties in order to maintain its
revenues and earnings.

SIGNIFICANT OIL AND GAS PURCHASERS

   Oil sales are made on a day-to-day basis or under short-term contracts at
approximately the current area posted price. The loss of any oil purchaser would
not be expected to have an adverse effect upon the Company's operations. The
following is a listing of significant oil purchasers during the three-year
period ended December 31, 1996, and the approximate percentage of oil revenue
derived from each:


                                            PERCENT
                                        ----------------
           CRUDE OIL PURCHASERS         1996  1995  1994
           --------------------         ----  ----  ----
          Sun Refining & Marketing
           Company                       28    31    13
          Transco Liquids Company        14    11    16
          EOTT Energy Corporation        13    --    --
          Koch Oil Company               10    --    10
          Union Pacific Fuels, Inc.       5    15    10
          Marathon                       --    34    55

                                       1
<PAGE>

   A majority of the Company's natural gas is sold pursuant to short-term
contracts at prices that fluctuate at a premium or discount to the spot market.
Under the terms of the contracts, the gas purchasers may elect to purchase less
gas than the wells are able to produce, and the Company may be unable to sell
the excess production to other purchasers. Following is a listing of the
significant natural gas purchasers during the three-year period ended December
31, 1996, and the approximate percentage of natural gas revenues derived from
each:

          NATURAL GAS PURCHASERS            PERCENT
          ----------------------        --------------
                                        1996 1995 1994
                                        ---- ---- ----

          MG Natural Gas Corporation     27    18  --
          Amoco Production Company       22    --  ---
          Energy Source                  12    --  ---
          Transco Liquids Company       ---    39   77

   There are no other customers of the Company that individually accounted for
more than 10% of the Company's revenues during the three years ended December
31, 1996.

COMPETITION

   The oil and gas acquisitions market is highly competitive and thus the
opportunities for high rates of return on investment are limited. The price paid
for in-place oil and gas reserves is highly dependent on forecast oil and
gas prices, which historically has been very volatile (see Price Volatility).
Many companies with which the Company competes possess resources far greater
than those of the Company.

   The marketing of oil and gas is affected by a number of factors that are
beyond the control of the operators of the properties, the effect of which
cannot be accurately predicted. These factors include, among others, crude oil
imports, the availability of adequate pipeline and other transportation
facilities, the marketing of competitive fuels, and other matters affecting the
availability of a ready market, such as fluctuating supply and demand.

PRICE VOLATILITY

   The revenues generated by the company are highly dependent upon the prices of
oil and natural gas. Approximately 55% of the Company's future gross revenues
attributable to its proved reserves as of December 31, 1996, are from natural
gas based on an average price of approximately $2.95 per thousand cubic feet
("Mcf"), and the balance of such revenues are from oil based on an average price
of approximately $24.25 per barrel ("Bbl"). In the past five years the Company's
annual average sales price for natural gas has ranged from a high of $2.29 per
Mcf in 1996 to a low of $1.62 per Mcf in 1995, and its annual average sales
price for oil has ranged from a low of $14.52 per Bbl in 1993 to a high of
$21.12 per Bbl for 1996. Various factors beyond the control of the Company will
continue to affect oil and gas prices.

   Pursuant to requirements of the Securities and Exchange Commission,
calculations of the Company's reserves and present value of future net cash
flows from proved reserves ("PV-10") are based upon prices prevailing at the end
of the year. Crude oil and natural gas prices at December 31, 1996 were
substantially higher than those realized on average by the Company over the past
five years. Also, prices at the end of the first quarter of 1997 are below those
at year-end 1996. For purposes of assessing the sensitivity of the Company's PV-
10 to changes in prices, the Company estimates that if the natural gas and crude
oil prices in its calculations were reduced by $.10 per Mcf and $1.00 per Bbl,
the PV-10 value would be reduced by approximately $0.5 million and $1.0 million,
respectively. Such calculations assume that quantities of recoverable reserves
remain constant and therefore would not be accurate if prices decreased to a
level at which reserves would no longer be economically recoverable.

REGULATION

  The Company's operations are affected in various degrees by political
developments, federal, and state laws and regulations. In particular, oil and
gas production operations and economics are affected by price controls, tax and
other laws relating to the petroleum industry, by changes in such laws and by
constantly changing administrative regulations and the interpretation and
application of such rules and regulations.

                                       2
<PAGE>

  Environmental Laws. The Company's activities are subject to existing federal
and state laws and regulations governing environmental quality and pollution
control. Such laws and regulations may substantially increase the costs of
exploring for, developing or producing oil and gas and may prevent or delay the
commencement or continuation of a given operation. In the opinion of the
Company's management, its operations comply with all applicable environmental
laws and regulations, and the cost of such compliance has not been material.
Where the Company's properties are operated by other companies, the Company
relies on the operator to comply with environmental laws.

   General. The Company's activities are subject to statutory provisions
regulating oil and gas drilling and production. Such statutes and regulations
require permits for drilling operations, drilling bonds and reports to be filed
concerning operations and production from oil and gas wells. Such statutes and
regulations may limit the rate at which oil and gas could otherwise be produced
from the Company's properties. Some jurisdictions have enacted statutes
prescribing ceiling prices for gas sold therein.

TAXATION

  Certain provisions of the Internal Revenue Code of 1986 (the "Code"), as
amended, applicable to the petroleum industry affect the Company's oil and gas
operations. Current law permits the Company to deduct currently, rather than
capitalize, intangible drilling and development costs incurred or borne
by it. The Company, as an independent producer, is also entitled to a deduction
for percentage depletion with respect to the first 1,000 barrels per day of
domestic crude oil (and/or equivalent units of domestic natural gas) produced by
it, if such percentage depletion exceeds cost depletion. Generally, this
deduction is 15% of gross income from an oil or gas property, without reference
to the taxpayer's basis in the property. Beginning in 1991, percentage depletion
may not exceed 100% of the taxable income from any property (computed without
allowance for depletion), and as limited, however, may be carried forward
indefinitely.

   The Company has accumulated a substantial net operating loss ("NOL") carry-
forward. Under federal tax law, the amount and availability of NOL carryforwards
are subject to a variety of interpretations and restrictive tests. Under the
Code, the utilization of such NOL carryforwards could be limited or effectively
lost upon certain changes in ownership. In determining the amount of NOL
available after an "ownership change", the use of a corporation's NOL
carryforward is limited annually to a prescribed rate times the value of the
loss corporation's stock immediately before the ownership change. In general, an
ownership change occurs if more than 50% in value of the stock of the loss
corporation changes during the three-year period preceding the test date. Due to
the conversion of its preferred stock into common shares on July 12, 1996, and
in conjunction with other recent equity transactions, management believes that
there was an ownership change sufficient to trigger an additional limitation on
the NOL carryforwards. Based on the aggregate trading value of the stock
immediately before the conversion, and the prescribed applicable federal rate
for the period, the Company believes the limitation on future utilization of the
NOL carryforwards to be $990,000 per taxable year. Any unused NOL's accumulate
for use in subsequent taxable years, subject to the 15-year limitation. In
addition, any losses occurring in years after the ownership change are added
(without limitation) to arrive at the amount of NOL available for use in any
post change year. Subsequent additional ownership changes could result in
adjustments to the annual limitation amount. The Company at December 31, 1996,
has a total NOL carryforward of approximately $198 million for regular tax
purposes and approximately $170 million for alternative minimum tax purposes.

ITEM 2. DESCRIPTION OF PROPERTY

OIL AND GAS OPERATIONS

   The following tables set forth information with respect to Amerac's
properties and drilling and production activities. As used in these tables,
"gross" refers to the total acres or wells in which Amerac has an interest;
"net" as it applies to acres or wells refers to gross acres or wells multiplied
by the percentage interest owned by Amerac; "producing wells" include all wells
estimated by independent petroleum engineers to be capable of economic
production, including shut-in wells; "Mcfe" refers to one thousand cubic feet of
natural gas on an equivalent basis using a 6 Mcf to 1 Bbl gas-to-oil conversion
ratio; ("MMcfe") refers to one million cubic feet of natural gas on an
equivalent basis, using a 6 Mcf to 1 Bbl gas-to-oil conversion ratio; "MBbl"
refers to one thousand barrels of crude oil or other liquid hydrocarbons; and
"MBOE" refers to one thousand barrels of crude oil on an equivalent basis using
a 6 Mcf to 1 Bbl gas-to-oil conversion ratio.

                                       3
<PAGE>

   Oil and Gas Acreage. The following table sets forth Amerac's acreage position
at December 31, 1996:


<TABLE>
<CAPTION>

                                        DEVELOPED         UNDEVELOPED
                                      ------------     ----------------
                                      GROSS   NET      GROSS       NET
                                      -----  -----     -----      -----
          <S>                         <C>    <C>      <C>         <C>
          Texas                       5,496  3,251     6,779      4,270
          Oklahoma                    3,540  1,714        --         --
          Kansas                        640    224        --         --
          Offshore Louisiana          6,328  1,463        --         --
          Wyoming                        --     --    14,079      3,522
          Utah                           --     --    18,084      4,586
                                      -----  -----    ------      -----
            Totals                   16,004  6,652    38,942     12,378
                                     ======  =====    ======     ======

</TABLE>

   Productive Wells.  The following  table sets forth both the gross and
net productive wells at December 31, 1996:


                               GROSS                    NET
                         -------------------     --------------------
                                     SHUT-IN                  SHUT-IN
                         OIL    GAS    GAS       OIL    GAS     GAS
                         ---    ---  -------     ---    ---   -------
Texas                     44     29    ----      37.0   16.9   ----
Oklahoma                  29     40    ----      11.5   17.5   ----
Kansas                    37      1    ----      34.4    0.4   ----
Offshore Louisiana        --      2       4      ----    0.4    0.8
Wyoming                    1      2    ----      ----   ----   ----
Utah                       3    ----   ----      ----   ----   ----
New Mexico                 1    ----   ----      ----   ----   ----
Oregon                   ----      2   ----      ----   ----   ----
                         ----   ----   ----      ----   ----   ----
   Totals                 115     76      4      82.9   35.2    0.8
                         ====   ====   ====      ====   ====   ====

   Drilling Activity. The following table sets forth the results of drilling
activity for the years ended December 31, 1996, 1995 and 1994:


                               GROSS WELLS            NET  WELLS
                          ----------------------  ----------------------
                          TOTAL  PRODUCTIVE  DRY  TOTAL  PRODUCTIVE  DRY
                          -----  ----------  ---  -----  ----------  ---

  1996 Exploratory         ---      ---      ---   ---       ---     ---
       Development          16       16      ---   12.7      12.7    ---

  1995 Exploratory         ---      ---      ---   ---       ---     ---
       Development           1        1      ---   0.8       0.8     ---

  1994 Exploratory           4        4      ---   1.6       1.6     ---
       Development         ---      ---      ---   ---       ---     ---


   Production. The following table shows, for the period indicated, net
production and revenues and average prices received by the Company and average
production costs per BOE of crude oil and per Mcfe of natural gas:


                                    YEAR ENDED DECEMBER 31,
                         -----------------------------------------------
                         1996     1995      1994        1993        1992
                         ----     ----      -----       ----        ----
Net Production
  Crude oil and
    condensate  (MBbls)   185      127        95         112         233
  Natural gas (MMcf)    2,867    1,349     1,332       1,467       5,425
  MBOE                    663      352       317         357       1,137
  MMcfe                 3,976    2,111     1,902       2,139       6,823

Revenues (thousands)
  Crude oil and
   condensate        $  3,902  $ 2,146   $ 1,449      $1,626    $  4,345
  Natural  gas          6,556    2,182     2,676       2,753       8,810
                     --------  -------   -------      ------    --------
Total                $ 10,458  $ 4,328   $ 4,125      $4,379    $ 13,155
                     ========  =======   =======      ======    ========

                                       4
<PAGE>

                                    YEAR ENDED DECEMBER 31,
                         -----------------------------------------------
                         1996     1995      1994        1993        1992
                         ----     ----      -----       ----        ----
Average sales price
  Crude oil and
   condensate ($/Bbls)  $21.12   $16.53   $15.25      $14.52      $18.64
  Natural gas ($/Mcf)     2.29     1.62     2.01        1.88        1.62
  All products ($/BOE)   15.78    12.29    13.01       12.27       11.57
  All products ($/Mcfe)   2.63     2.05     2.17        2.05        1.93

Average production costs
  All products ($/BOE)  $ 3.82   $ 3.15   $ 2.82      $ 2.87      $ 2.61
  All products ($/Mcfe)    .64      .53      .47         .48         .44


LEASE COMMITMENTS

   The Company is committed to various lease contracts for office space and
miscellaneous office equipment expiring at various intervals through 2003, with
total minimum payments aggregating $763,000 at December 31, 1996. The Company
incurred net rent expense of approximately $72,000, $85,000 and $93,000 for the
years ended December 31, 1996, 1995 and 1994, respectively. The minimum annual
rental commitments are $105,000 for 1997.

ITEM 3.  LEGAL PROCEEDINGS

   The Company is not currently a party to any litigation that would have a
material impact on its financial statements. However, due to the nature of its
business, certain legal or administrative proceedings may arise in the ordinary
course of its business.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY-
HOLDERS

   On November 20, 1996, the shareholders approved an amendment to the Company's
Certificate of Incorporation to effect a one for fifteen reverse stock split and
to reduce the number of authorized shares from 100 million to 20 million. The
approximate shares voted on the amendment were 32.8 million for; .7 million
against; .1 million abstained; and .4 million not voted.


                          PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

PRICE RANGE OF COMMON STOCK

   The Company's securities currently are traded on the American Stock Exchange
and the Boston Stock Exchange. In 1996 and 1995, the Company's securities traded
on the OTC Bulletin Board. At March 1, 1997, there were approximately 2,500
holders of record of the Common Stock.


   During the past two years, trading of the Common Stock has been limited. The
following table sets forth the reported high and low sales prices quoted by
National Quotations Bureau, Inc. for 1995 and 1996, as adjusted for the effect
of the one for fifteen reverse stock split in November 1996.


                                1996                1995
                             -----------        -------------
                             HIGH    LOW        HIGH     LOW
                             ----    ---        ----     ---

          First Quarter    $ 5.10  $3.00       $3.00   $0.45
          Second Quarter     7.95   3.75        5.25    1.20
          Third Quarter      6.45   4.65        3.30    1.20
          Fourth Quarter    10.25   4.50        3.30    1.20

                                       5
<PAGE>

COMMON STOCK DIVIDENDS

   The Company has not paid any Common Stock dividends since its organization,
and it is not contemplated that it will pay such dividends in the foreseeable
future. The Company's ability to declare and pay dividends on Common Stock is
restricted under certain conditions under its bank loan agreement.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

   With the exception of historical information, the matters discussed herein
involve risk and uncertainties including, but not limited to, oil and gas price
fluctuations, oil and gas reserve estimates, economic conditions, interest rate
fluctuations, the regulatory and political environments and other risks
indicated in filings with the Securities and Exchange Commission. All prior
period share and per share information has been restated to reflect the one for
fifteen reverse stock split in November 1996.

CAPITAL RESOURCES AND LIQUIDITY

  Liquidity Issues and Capital Requirements

   As a result of two private offerings completed in 1996, higher production and
improved prices for oil and natural gas, the Company's financial position has
improved from 1995. Primarily, the funds raised in the private offerings were
used to eliminate the $1.0 million bridge loan entered into during 1996, and
reduce the outstanding indebtedness under the Company's existing revolving bank
loan ("Revolver"). During 1996, the Company negotiated an extension of the term
of the Revolver to May 31, 1998 and increased its credit line to $30 million.
The Company as of March 26, 1997, had $6 million outstanding under the Revolver
with a borrowing base of $9.8 million. Subsequent to year end, the Company
increased the line to $50 million and extended the agreement until June 30,
1999. The Company has planned $5.6 million in capital expenditures on existing
properties in 1997. Management anticipates that cash flow from operations and
additional bank indebtedness will be sufficient to fund these expenditures.

   The Company also completed its Eastern Shelf Exploitation Agreement in 1997.
The agreement provides among other things that an investor group will fund half
of the Company's expenditures in this project up to at least $1.2 million and
the Company plans to fund its half from cash flow from operations and additional
bank indebtedness. Pursuant to this agreement the investor group will also
reimburse the Company for a portion of the Company's general and administrative
costs related to the project. (See Note 10 to the Consolidated Financial
Statements.)

   The Company anticipates that it must seek additional sources of financing to
fund its acquisition activities. Amerac may finance additional acquisitions
through a combination of working capital, bank borrowings, mezzanine financing,
production payments and equity. However, there is no assurance that the Company
will be successful in obtaining such additional financing. Also, the sale of
additional equity and the utilization of equity in acquisitions may further
limit the Company's utilization of its net operating loss carryforward.

  Recent Developments

   On March 18, 1997, the Company commenced trading on the American Stock
Exchange under the symbol "AMC". Management believes that the listing on the
American Stock Exchange will have a number of advantages to both the Company and
its shareholders. Primarily, the listing is expected to give the Company greater
market exposure and reduce shareholder transaction costs. The listing was made
possible as a result of among other things, the Company's improved financial
condition and the one for fifteen reverse stock split approved by shareholders
in November 1996. The shareholders, at the same November 1996 meeting, also
approved a reduction in the authorized common shares from 100 million to 20
million.

  Acquisitions

   During 1996, the Company spent $10.1 million in cash and issued 220,000
common shares in connection with five acquisitions, primarily in Texas and
Oklahoma. Those acquisitions, which included interests in 174 producing wells,
increased the Company's reserve base by nearly 21 Bcfe. (See Note 2 to the
Consolidated Financial Statements.)

                                       6
<PAGE>

  1996 Sources and Uses of Cash

   During 1996, the Company received $3.8 million from operations, $1.3 million
from the sale of properties, approximately $5 million from the sale of Common
Stock and Warrants and borrowed $10.9 million. The Company's primary uses of
cash were $10.1 million for the acquisition of oil and gas properties, $6.7
million to repay bank indebtedness and its bridge financing and $3.5 million for
property development leaving a net cash increase of $0.6 million for the year
and a cash and cash equivalents balance at December 31, 1996 of $712,000.

RESULTS OF OPERATIONS

1996 Compared with 1995

  Operations for 1996 resulted in net income of $1.6 million (a loss of $1.65
per common share) as compared to net income of $208,000 (a loss of $.46 per
common share) for the comparable period in 1995. The improved results are
primarily attributable to increased production due to acquisitions in 1996 and
higher oil and natural gas prices. The 1996 and 1995 losses per share are due to
a deduction from net income, which approximated $5 million, to arrive at
earnings available to common stockholders for the excess of the fair value of
Common Stock issued to preferred shareholders in the July 1996 conversion over
the carrying value of the Preferred Stock and preferred dividends of $411,000
and $807,000 in 1996 and 1995 respectively. If the Common Stock transactions,
including the conversion of preferred stock, described in Note 5 to the
Consolidated Financial Statements had occurred at January 1, 1996, the Company
estimates that its net income per share would have been approximately $0.50 for
the full year 1996. Also in 1996, the Company recorded a gain of $132,000 on the
settlement of a contractual obligation and in 1995 reported a gain of $850,000
on the sales of properties.

   Oil and gas revenues increased from $4.3 million in 1995 to $10.5 million
during 1996 primarily as a result of increased oil and gas production from
acquisitions in 1996 and higher prices. Oil production increased to 507 barrels
per day in 1996 from approximately 348 barrels per day in 1995 and gas
production increased to 7.8 million cubic feet of gas per day from approximately
3.7 million cubic feet of gas per day in 1995. Average prices for the year also
increased for oil from $16.53 per barrel in 1995 to $21.12 per barrel for 1996
and the average price for natural gas increased from $1.62 per Mcf for 1995 to
$2.29 per Mcf for 1996.

   Lease operating expenses increased from $1.1 million during 1995 to $2.6
million during 1996 as a result of increased operations from acquisitions and
higher workover expense. Exploration expenses increased from $246,000 during
1995 to $305,000 for 1996 as a result of higher seismic expenditures.

   Depreciation, depletion and amortization also increased from $1.7 million
during 1995 to $2.9 million during 1996 due to both an increase in overall
production, investment in oil and gas properties and downward revisions to
reserves, primarily attributable to the Company's South Timbalier 198 offshore
property.

   Interest expense increased from $237,000 in 1995 to $888,000 in 1996 as the
Company's debt increased due to acquisitions made using the Bank Credit
Agreement, which had an outstanding balance of $7.7 million at year end 1996.

  1995 Compared with 1994

   Operations for 1995 resulted in net income of $208,000 (a loss of $0.46 per
common share) as compared to net income of $272,000 (a loss of $3.61 per common
share) for the comparable period in 1994. The comparison of 1995 versus 1994 was
affected by the net gain on sale of various producing properties and other
assets totaling $850,000 in 1995, the recognition of a gain in 1994 related to
the settlement of contractual obligations (see Note 7 to the Consolidated
Financial Statements) in the amount of $474,000, and a $102,000 loss on sale of
asset in 1994.

   Oil and gas revenues increased slightly from $4.1 million in 1994 to $4.3
million in 1995, as a result of increases in both oil and gas production. The
average price for oil for the year increased from $15.25 per barrel in 1994 to
$16.53 per barrel for

                                       7
<PAGE>

1995 while the average price for natural gas decreased from $2.01 per Mcf for
1994 to $1.62 per Mcf for 1995. Oil production increased to 348 barrels per day
in 1995 from approximately 260 barrels per day in 1994 and gas production
increased from approximately 3.6 million cubic feet of gas per day in 1994 to
3.7 million cubic feet of gas per day for the comparable period in 1995.

  During 1994, the Company recorded a loss of $102,000 from the sale of
property, primarily warehouse inventories and other small items. During 1995,
the Company recognized an $850,000 gain on sales of properties, $736,000 related
to Northwest Arapahoe and a $106,000 gain on the sale of Riley Ridge properties.

   Lease operating expenses increased from $894,000 during 1994 to $1.1 million
during 1995, as a result of acquisition activity and workover expense.
Exploration expenses decreased from $345,000 during 1994 to $246,000 for 1995 as
the Company discontinued substantially all of its exploration activities. The
1995 expenses are related to 3D seismic for extensions for the North
Blackwell Field.

   Depreciation, depletion and amortization also increased from $1.2 million
during 1994 to $1.7 million during 1995, due to both an increase in overall
production and investment in oil and gas properties and the downward revisions
to reserves, primarily at the Company's South Timbalier 198 offshore property.

  Interest expense increased from $229,000 in 1994 to $237,000 in 1995, as the
Company's debt increased due to acquisitions made using the Bank Credit
Agreement, which had an outstanding balance of $3.5 million at year end 1995.

ACCOUNTING STANDARDS ADOPTED IN 1996

   The Company has adopted Statement of Financial Accounting Standards ("SFAS")
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", which requires that long-lived assets (i.e. property,
plant and equipment) held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the net book value of
the asset may not be recoverable. An impairment loss will be recognized if the
sum of the expected future cash flows (undiscounted and before interest) from
the use of the asset is less than the net book value of the asset. SFAS 121 had
no material impact on the Company in 1996.

   The Company has adopted SFAS 123 "Accounting for Stock Based Compensation"
which establishes financial accounting and reporting standards for stock based
employee compensation plans. The pronouncement defines a fair-value based method
of accounting for an employee stock option or similar equity instrument.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic-value based method of accounting as prescribed
by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). The Company has elected to continue accounting for stock
based compensation plans pursuant to APB 25 and has made pro forma disclosures
of net income and earnings per share as if the fair-value based method of
accounting defined in SFAS 123 had been applied. (See Note 5 to the Consolidated
Financial Statements.)

ITEM 7.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

   The information required by Item 7 is set forth in the Report of Independent
Accountants and Consolidated Financial Statements included herein following the
signature page.

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

  None

                                       8
<PAGE>

                                   PART III


ITEM 9, 10, 11 AND 12. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

   The information required by these items is included in issuer's definitive
proxy statement for the 1996 Annual Meeting of Stockholders and is incorporated
herein by reference.

                                    PART IV

ITEM 13.    EXHIBITS AND REPORTS ON FORM 8-K

EXHIBITS

      The following exhibits are filed as a part hereof:

3-(1)   Certificate of Incorporation of Wolverine Exploration Company
        (incorporated by reference as Exhibit 3-(1) to the Company's
        Registration Statement No. 33-21824 filed May 13, 1988).

3-(2)   Amendment to Certificate of Incorporation of Wolverine Exploration
        Company dated September 12, 1988 (incorporated by reference as Exhibit
        3-(1 )(a) to the Company's Registration Statement No. 33-24429 filed
        September 28, 1988).

3-(3)   Amendment to Certificate of Incorporation of Wolverine Exploration
        Company dated March 28, 1995 (incorporated by reference to Annex IV to
        Exhibit (a)(1) to Schedule 13E-4, dated November 15, 1994)

3-(4)   Amendment to Certificate of Incorporation of Amerac Energy Corporation
        dated July 12, 1996 (incorporated by reference to Exhibit 4(i).4 and
        4(i).5 to the Company's Current Report on Form 8-K dated February 28,
        1997).

3-(5)   Amendment to Certificate of Incorporation of Amerac Energy Corporation
        dated November 21, 1996 (Incorporated by reference to Exhibit 4(i).6 to
        the Company's Current Report on Form 8-K dated February 28, 1997).

3-(6)   Corporate Bylaws (Incorporated by reference to Exhibit 3C to the
        Company's Annual Report on Form 10-K for the fiscal year ended December
        31, 1987, File No. 0-5003).

4-(1)   Warrant Agreement, dated November 18, 1996, between Amerac Energy
        Corporation and Petroleum Financial, Inc. (Incorporated by reference to
        Exhibit 4.(i).9 to the Company's Form 8-K dated February 28, 1997.

4-(2)   Form of Warrant (Incorporated by reference to Exhibit 4(i).10 to the
        Company's Form 8-K dated February 28, 1997).

4-(3)   Registration Rights Agreement, (Incorporated by reference to Exhibit
        4(i).8 to the Company's Form 8-K dated February 28, 1997, included as
        Exhibit VII to the Exploitation Agreement).

10-(1)  Wolverine Exploration Company Stock Option Plan (incorporated by
        reference to Exhibit 10M to the Company's Annual Report on Form 10-K for
        the fiscal year ended December 31, 1987, File No. 0-5003).

10-(2)  Restated Agreement for financial and accounting services between the
        Company and Petroleum Financial, Inc., dated October 26, 1995 for 1996.
        (Incorporated by reference, as Exhibit 10-(8) by reference to Form 10K
        for year ended December 31, 1995.)

10-(3)  Acquisition Agreement including amendment number 1 to said agreement
        among Amerac Energy Corporation, as Buyer, Powell Resources, Inc., and
        the Other Stockholders named herein as Seller and Ridgepointe Resources,
        Inc., Fremont Energy Corporation and Fremont Petroleum Corporation Dated
        January 5, 1996. (Incorporated by reference, as Exhibit 10-(9) to Form
        10K for year ended December 31, 1995.)

10-(4)  Registration Rights Agreement, dated January 16, 1996 among Amerac
        Energy Corporation, Powell Resources, Inc., The Langestroth Family
        Limited I, Thomas O. Goldsworthy and James B. Tollerton. Related to
        acquisition of Fremont Energy Corporation Properties. (Incorporated by
        reference, as Exhibit 10-(10) to Form 10K for year ended December 31,
        1995.)

                                       9
<PAGE>

10-(5)  Assignment, conveyance and Bill of Sale, Northwest Arapahoe Properties,
        Cheyenne County, Colorado. (Incorporated by reference, as Exhibit 10-
        (11) to Form 10K for year ended December 31, 1995.)

10-(6)  Agreement with Bentley Securities Corporation dated May 17, 1996,
        relating to the private placement of preferred stock. (Incorporated by
        reference, as Exhibit 10-(12) to the Company's Quarterly Report on Form
        10-QSB for the period ended June 30, 1996.)

10-(7)  Credit Agreement between Amerac Energy Corporation and Bank One dated
        August 15, 1996.  (Incorporated by reference, as Exhibit 10-(13) to the
        Company's Quarterly Report on Form 10-QSB for the period ended September
        30, 1996.)

10-(8)  First Amendment to Amended and Restated Credit Agreement dated January
        16, 1996. (Incorporated by reference, as Exhibit 10(14) to the Company's
        Quarterly Report on Form 10-QSB for the period ended September 30,
        1996.)

10-(9)  Second Amendment to Amended and Restated Credit Agreement dated August
        15, 1996. (Incorporated by reference, as Exhibit 10-(15) to the
        Company's Quarterly Report on Form 10-QSB for the period ended September
        30, 1996.)

10-(10) Third Amendment to Amended and Restated Credit Agreement dated February
        3, 1997, filed herewith.

10-(11) Exploitation Agreement, dated effective January 1, 1997, between Amerac
        Energy Corporation and the parties identified therein (incorporated by
        reference to Exhibit 4(i).8 to the Company's Current Report on Form 8-K
        dated February 28, 1997.)

19-(1)  Form of Indemnification Agreement between the Company and its officers
        and directors (incorporated by reference as Exhibit 19(1) to the
        Company's Annual Report on Form 10-K for the fiscal year ending December
        31, 1995).

27      Financial Data Schedule

REPORTS ON FORM 8-K

    The following Reports on Form 8-K were filed during the fourth quarter of
1996:

   On October 31, 1996 the Company filed a Form 8-K and a Form 8-KA in
conjunction with its acquisition of the certain properties in the Texan Gardens
Field it acquired from L.B. Industries and Larry Barnes for $1.8 million on
August 16, 1996.

  On December 3, 1996, the Company filed a Form 8-K in conjunction with the
shareholder approval of the one for fifteen reverse stock split and the
reduction of authorized shares from 100 million to 20 million.

                                       10
<PAGE>

                           AMERAC ENERGY CORPORATION

                         INDEX TO FINANCIAL STATEMENTS

                       December 31, 1996, 1995, and 1994



                                                      PAGE
                                                      ----
Report of Independent Accountants                      F-2

Consolidated Balance Sheets                            F-3

Consolidated Statements of Operations                  F-4

Consolidated Statements of Cash Flows                  F-5

Consolidated Statements of Changes in
 Stockholders' Equity                                  F-6

Notes to Consolidated Financial Statements             F-7 through F-23


FINANCIAL STATEMENT SCHEDULES

  All financial statement schedules are omitted because they are not
applicable or the required information is shown in the consolidated financial
statements or notes thereto.

                                      F-1
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors and Shareholders
of Amerac Energy Corporation


In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Amerac
Energy Corporation and its subsidiaries at December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.


PRICE WATERHOUSE LLP

Fort Worth, Texas
March 25, 1997

                                      F-2
<PAGE>

                       AMERAC ENERGY CORPORATION

                      CONSOLIDATED BALANCE SHEETS

                                                    AT DECEMBER 31,
                                              ---------------------------
                                                  1996            1995
                                              ------------    -----------
                              A S S E T S
CURRENT ASSETS
  Cash and cash equivalents                    $   712,000    $   144,000
  Receivables
     Receivable from property sale                    ----      1,005,000
     Trade and other, net of allowance for
      bad debts of $41,000                         473,000        111,000
     Gas and oil receivable                      1,451,000        993,000
                                               -----------    -----------
       Total current assets                      2,636,000      2,253,000
                                               -----------    -----------

PROPERTY AND EQUIPMENT
  Oil and gas properties at cost                32,290,000     20,614,000
  Less accumulated depreciation, depletion and
   amortization                                (12,949,000)   (12,020,000)
                                               -----------    -----------
    Net property and equipment                  19,341,000      8,594,000

OTHER ASSETS                                       395,000        347,000
                                               -----------    -----------

TOTAL ASSETS                                   $22,372,000    $11,194,000
                                               ===========    ===========

                 LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
   Trade payables                              $   199,000    $   234,000
   Accrued liabilities                             527,000        372,000
   Obligation under gas contract                   370,000           ----
                                               -----------    -----------
    Total current liabilities                    1,096,000        606,000
                                               -----------    -----------

LONG-TERM LIABILITIES
  Notes payable banks                            7,704,000      3,547,000
  Other long-term liabilities                      140,000        406,000
  Obligation under gas contract                       ----        641,000
                                               -----------    -----------
   Total long-term liabilities                   7,844,000      4,594,000
                                               -----------    -----------

COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 7)

STOCKHOLDERS' EQUITY
  Preferred shares, $1 par value
   10,000,000 shares authorized;
   $4.00 Senior Preferred, outstanding
   1,786,347 at December 31, 1995                     ----      1,786,000
  Common stock, $.05 par value;
   20,000,000 shares authorized; outstanding
   3,883,526 shares at December 31, 1996 and
   1,375,294 at December 31, 1995
   ( as adjusted  )                                194,000      1,031,000
  Additional paid-in capital                   151,104,000    142,211,000
  Accumulated deficit                         (137,866,000)  (139,034,000)
                                              ------------   ------------
   Total stockholders' equity                   13,432,000      5,994,000
                                              ------------   ------------


TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY     $22,372,000   $ 11,194,000
                                               ===========   ============


             (The accompanying notes are an integral part of these
                      consolidated financial statements.)

                                      F-3
<PAGE>

                           AMERAC ENERGY CORPORATION

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>


                                                                               Year Ended December 31,
                                                                     ------------------------------------------
                                                                        1996             1995           1994
                                                                     ---------        ---------       ---------
<S>                                                                  <C>              <C>           <C>
REVENUES
  Oil, gas and related product sales                                   $10,458,000    $4,328,000    $ 4,125,000
  Gain on contractual settlements                                          132,000          ----        474,000
  Interest income                                                           19,000        74,000        237,000
  Other income                                                              35,000          ----          3,000
                                                                       -----------    ----------     ----------
    Total revenues                                                      10,644,000     4,402,000      4,839,000
                                                                       -----------    ----------     ----------
EXPENSES
  Lease operating                                                        2,588,000     1,108,000        894,000
  Exploration expenses, including dry hole costs and
  impairments                                                              305,000       246,000        345,000
  Depreciation, depletion and amortization                               2,947,000     1,686,000      1,222,000
  Administrative                                                         2,309,000     1,767,000      1,775,000
  Loss (gain) on sale of oil and gas properties                            (22,000)     (850,000)       102,000
  Interest                                                                 888,000       237,000        229,000
                                                                        ----------    ----------     ----------
    Total expenses                                                       9,015,000     4,194,000      4,567,000
                                                                        ----------    ----------     ----------
Income before income taxes                                               1,629,000       208,000        272,000
Provision for federal income taxes                                          50,000          ----           ----
                                                                        ----------    ----------     ----------
NET INCOME                                                               1,579,000       208,000        272,000

Preferred dividends and excess conversion consideration                 (5,434,000)     (807,000)    (4,100,000)
                                                                       -----------    ----------    -----------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS                             $(3,855,000)   $ (599,000)   $(3,828,000)
                                                                       ===========    ==========    ===========
NET LOSS PER COMMON SHARE                                              $     (1.65)   $    (0.46)   $     (3.61)
                                                                       ===========    ==========    ===========
Average common shares and equivalents outstanding                        2,331,000     1,306,000      1,059,000
                                                                       ===========    ==========    ===========
</TABLE>



            (The accompanying notes are an integral part of these
                      consolidated financial statements.)

                                      F-4
<PAGE>

                           AMERAC ENERGY CORPORATION
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>


                                                                                              Year Ended December 31,
                                                                                     -----------------------------------------
                                                                                          1996            1995         1994
                                                                                     ----------        --------     ----------
<S>                                                                                  <C>             <C>           <C>

CASH FLOW FROM OPERATING ACTIVITIES
  Net income                                                                          $  1,579,000   $   208,000   $   272,000
  Adjustments needed to reconcile net income to net cash flow provided by
   operating activities:
    Depreciation, depletion and amortization                                             2,947,000     1,686,000     1,222,000
    Exploration expenses, including dry holes and impairments                              305,000         -----       345,000
    (Gain) loss on sale of properties                                                      (22,000)     (850,000)      102,000
    Recognition of deferred revenue                                                       (140,000)     (116,000)     (289,000)
    Gain on contractual settlements                                                       (132,000)         ----      (474,000)
    Other                                                                                   23,000        37,000        24,000
    Changes in operating assets and liabilities:
      Trade receivables                                                                   (362,000)       31,000        81,000
      Oil and gas receivables                                                             (458,000)     (637,000)      105,000
      Trade payables                                                                       (35,000)      187,000      (117,000)
      Accrued and other long-term liabilities                                               74,000        97,000      (212,000)
                                                                                        ----------     ---------    ----------
NET CASH FLOW PROVIDED BY OPERATING ACTIVITIES                                           3,779,000       643,000     1,059,000
                                                                                       -----------    ----------   -----------
CASH FLOW FROM INVESTING ACTIVITIES
  Proceeds from sale of assets                                                           1,304,000       140,000       102,000
  Oil and gas acquisitions                                                             (10,101,000)   (4,275,000)   (1,500,000)
  Oil and gas expenditures                                                              (3,500,000)   (1,202,000)     (879,000)
  Purchases of other assets                                                                (84,000)      (94,000)      (14,000)
                                                                                       -----------   -----------   -----------
NET CASH USED FOR INVESTING ACTIVITIES                                                 (12,381,000)   (5,431,000)   (2,291,000)
                                                                                       -----------   -----------   -----------
CASH FLOW FROM FINANCING ACTIVITIES
  Subordinated debt repayment                                                                 ----    (1,879,000)     (574,000)
  Bank borrowings                                                                       10,881,000     3,547,000          ----
  Bank repayments                                                                       (6,725,000)      (50,000)         ----
  Proceeds from sale of Common Stock                                                     5,004,000          ----          ----
  Other                                                                                     10,000      (123,000)     (102,000)
                                                                                       -----------    ----------   -----------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES                                     9,170,000     1,495,000      (676,000)
                                                                                       -----------    ----------   -----------
NET INCREASE (DECEASE) IN CASH AND CASH EQUIVALENTS                                        568,000    (3,293,000)   (1,908,000)
  Cash and cash equivalents at beginning of period                                         144,000     3,437,000     5,345,000
                                                                                      ------------   -----------   -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                            $    712,000   $   144,000   $ 3,437,000
                                                                                      ============   ===========   ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
  Cash paid  for interest                                                             $    888,000   $   276,000   $   315,000
  Cash paid for income taxes                                                                30,000          ----          ----

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
  Exchanged $2.25 Convertible Exchangeable Preferred for Senior
   Preferred Stock (See Note 5)                                                       $       ----   $       ---   $       ---
  Senior Preferred Stock conversion to Common Stock (See Note 5)                              ----          ----          ----
  Senior Preferred Stock dividends (See Note 5)                                            410,000       807,000          ----
  Compensation paid in Common Stock                                                        157,000        30,000          ----
  Approximate value of Common Stock issued for Fremont Acquisition                         640,000          ----          ----

</TABLE>



            (The accompanying notes are an integral part of these
                      consolidated financial statements.)

                                      F-5
<PAGE>

                           AMERAC ENERGY CORPORATION
          CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                    December 31, 1993 to December 31, 1996

<TABLE>
<CAPTION>

                                                                                            $2.25 Convertible
                                                             $4.00 Senior                      Exchangeable
                                                            Preferred Stock                   Preferred Shares
                                                     -----------------------------     ----------------------------
                                                        Shares             Amount         Shares          Amount
                                                     ------------       ----------      ----------     ------------
<S>                                                  <C>                <C>             <C>            <C>

BALANCE -- DECEMBER 31, 1993                                 ----       $      ----       1,822,592     $ 1,823,000
                                                       ----------       -----------     -----------     -----------
BALANCE -- DECEMBER 31, 1994                                 ----              ----       1,822,592       1,823,000
                                                       ----------       -----------     -----------     -----------
  Preferred exchange                                    1,634,305          1,634,000     (1,822,592)     (1,823,000)
  Preferred stock dividend                                152,042            152,000           ----            ----
                                                       ----------       ------------    -----------     -----------
BALANCE -- DECEMBER 31, 1995                            1,786,347          1,786,000           ----     $      ----
                                                       ----------       ------------    ===========     ============

  Preferred exchange                                   (1,867,584)        (1,867,000)
  Preferred stock dividend                                 81,237             81,000
                                                       ----------        -----------
BALANCE -- DECEMBER 31, 1996                                 ----        $      ----
                                                       ==========        ===========

                                                             Common Shares
                                                            ($.05 par value)             Additional
                                                       ---------------------------        Paid-In       Accumulated
                                                         Shares             Amount        Capital         Deficit        Total
                                                      -----------        ------------  ------------   -------------    ----------
BALANCE -- DECEMBER 31, 1993                            1,058,915        $    53,000   $143,677,000   $(140,071,000)   $5,482,000
  Exercise of warrants                                          3               ----           ----            ----           ---
  Net income                                                 ----               ----           ----         272,000       272,000
                                                       ----------        -----------   ------------   -------------    ----------
BALANCE -- DECEMBER 31, 1994                            1,058,918             53,000    143,677,000    (139,799,000)    5,754,000

  Preferred exchange                                      303,315             15,000     (1,190,000)      1,364,000          ----
  Stock issued for director's fees                         10,395              1,000         29,000            ----        30,000
  Options exercised                                         2,667               ----          2,000            ----         2,000
  Preferred stock dividend                                   ----               ----        655,000        (807,000)         ----
  Net income                                                  ---               ----           ----         208,000       208,000
                                                     ------------        -----------   ------------   -------------   -----------
BALANCE -- DECEMBER 31, 1995                            1,375,295             69,000    143,173,000    (139,034,000)    5,994,000

  Preferred exchange                                    1,120,550             56,000      1,811,000            ----          ----
  Fremont acquisition                                     219,554             11,000        629,000            ----       640,000
  Stock issued for director's fees                         18,688              1,000         88,000            ----        89,000
  Options exercised                                         9,890               ----         10,000            ----        10,000
  Preferred dividend                                         ----               ----        329,000        (410,000)         ----
  Stock issued for compensation and payment of services    14,624              1,000         67,000            ----        68,000
  Stock issued in private placements                    1,123,040             56,000      4,994,000            ----     5,050,000
  Net income                                                 ----               ----           ----       1,579,000     1,579,000
  Other                                                     1,885               ----          3,000          (1,000)        2,000
                                                       ----------        -----------   ------------   -------------   -----------
BALANCE -- DECEMBER 31, 1996                            3,883,526        $   194,000   $151,104,000   $(137,866,000)  $13,432,000
                                                      ===========        ===========   ============   =============   ===========
</TABLE>

             (The accompanying notes are an integral part of these
                      consolidated financial statements.)

                                      F-6
<PAGE>

                           AMERAC ENERGY CORPORATION

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                      December 31, 1996, 1995,  and 1994


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS AND CONSOLIDATION

    Amerac Energy Corporation ("Amerac" or the "Company"), formerly Wolverine
Exploration Company was formed in 1969. The Company, incorporated in the state
of Delaware, changed its name to Amerac in March 1995. In 1994, the Company
changed its primary focus from oil and gas exploration to acquisitions and
development of proved oil and gas properties.  The Company's producing
properties are primarily located in Texas and Oklahoma and its only offshore
property is located offshore Louisiana.

    The consolidated financial statements include the accounts of Amerac and its
wholly-owned subsidiaries. All significant intercompany transactions and
accounts have been eliminated.

OIL AND GAS EXPLORATION AND DEVELOPMENT COSTS

    The Company follows the successful efforts method of accounting for its oil
and gas operations as prescribed in Statement of Financial Accounting Standards
("SFAS") 19 issued by the Financial Accounting Standards Board.

    Under the successful efforts method, costs of productive wells, development
dry holes and productive leases are capitalized and amortized on a unit-of-
production basis over the life of remaining proved reserves. Cost centers for
amortization purposes are determined on a field-by-field basis.

    Prior to January 1, 1996, capitalized costs of proved properties were
reviewed for impairment on a field by field basis limiting capitalized costs to
estimated future net revenues from proved properties assuming current prices and
costs. Commencing January 1, 1996 the Company adopted SFAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." Pursuant to SFAS 121, the Company assesses the need for an impairment of
capitalized costs of proved oil and gas properties on a field-by-field basis
utilizing undiscounted expected future cash flows. If an impairment is
indicated, the amount of such impairment is recognized to the extent that the
net capitalized costs of the proved oil and gas property exceeds the fair market
value so determined.

    Oil and gas leasehold costs are capitalized when incurred. The acquisition
costs of all unproved properties that are not individually significant are
aggregated, and the portion of such costs estimated to be non-productive, based
on historical experience, is amortized on an average holding period basis. Any
individually significant unproved properties are assessed periodically, and any
impairments in value are charged to expense. Costs of such properties
surrendered are charged against the valuation allowance.

    Exploratory expenses, including geological and geophysical expenses and
delay rentals for oil and gas leases, are charged to expense as incurred.
Exploratory drilling costs, including stratigraphic test wells, are initially
capitalized, but charged to expense if and when the well is determined to be
unsuccessful.

    Future obligations for site restoration costs, including dismantling and
abandoning properties, are accrued using the unit of production method and
expensed as depletion.

    Sales of oil and gas properties result in adjustments to the cost and
accumulated depreciation, depletion and amortization as provided under the
successful efforts method of accounting. Gain or loss is recognized if the
entire amortization base is sold and represents the difference between the
proceeds and book basis of the properties sold. See Note 2 regarding significant
Sales of Oil and Gas Properties.

CASH EQUIVALENTS

    Cash equivalents are highly liquid investments with original maturities of
three months or less.

REVENUE RECOGNITION

    The Company follows the "sales method" of accounting for its oil and gas
revenue whereby the Company recognizes

                                      F-7
<PAGE>
                          AMERAC ENERGY CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED

                      DECEMBER 31, 1996, 1995, AND 1994

sales revenue on all oil or gas sold to its purchasers, regardless of whether
the sales are proportionate to the Company's ownership in the property. A
receivable or liability is recognized only to the extent that the Company has an
imbalance on a specific property greater than the expected remaining life of the
reservoir. As of December 31, 1996, the Company had gas imbalances of
approximately $456,000 under its entitlements on its South Timbalier 198
Property and $70,000 over its entitlements on its Texan Gardens Properties.
These imbalances were resolved in the normal course of business subsequent to
year end.

NET INCOME OR LOSS PER COMMON SHARE

    Net income or loss per common share is computed by dividing the net income
or loss applicable to common stockholders by the weighted average number of
shares of common stock and common stock equivalents outstanding. In computing
net income or loss per common share for 1995 and 1994, the Convertible Preferred
dividends, either declared or in arrearage for the period, decreases the income
or increases the loss applicable to common stockholders. For computation of the
1996 loss per common share, the Senior Preferred dividends of $411,000 and the
excess of the fair value of common stock issued over the net carrying amount of
preferred stock converted which approximated $5.0 million related to the
conversion of Senior Preferred Stock to Common Stock (see Note 5) decreases net
income applicable to common stockholders. The Company has also presented a
supplemental net income per share for 1996 (see Note 5). For 1995 and 1994,
stock options and convertible debt are anti-dilutive and were not included in
the calculation of net income or loss per common share.

FINANCIAL INSTRUMENTS

    The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash equivalents, short-term investments and
receivables.

    The Company's cash equivalents and short-term investments represent high-
quality securities placed with various investment grade institutions. This
investment practice limits the Company's exposure to concentrations of credit
risk.

    Financial instruments which potentially expose the Company to concentrations
of credit risk, as defined by SFAS 105, consist primarily of trade and oil and
gas receivables. The Company's trade and oil and gas receivables are dispersed
among various domestic customers and purchasers; therefore, concentrations of
credit risk are limited. Generally the Company receives no collateral from its
customers.

    SFAS 107, "Disclosures about Fair Value of Financial Instruments",
requires the disclosure of the estimated fair value of financial instruments.
The estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies. At
December 31, 1996, the estimated fair values of the Company's financial
instruments, primarily receivables and debt, approximate their carrying value
because either the receivables are short term in nature or debt instruments have
variable interest rates.

ACCOUNTING FOR INCOME TAXES

    The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of tax credits and other carry forwards, as well as
temporary differences between the book and tax basis of assets and liabilities.
A valuation allowance for deferred tax assets is recorded when it is more likely
than not that the benefit from the deferred tax asset will not be realized.

    The Company files a consolidated tax return and the consolidated group
follows a policy of allocating consolidated income tax charges and credits, and
providing charges in lieu of taxes, based on each member's contribution to
consolidated income or loss.

PERVASIVENESS OF ESTIMATES

    The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities, and
related revenues and expenses, and disclosure of gain and loss contingencies at
the date of the financial statements. Actual results could differ from estimated
amounts.

                                      F-8
<PAGE>

                           AMERAC ENERGY CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED

                       DECEMBER 31, 1996, 1995, AND 1994


RECLASSIFICATIONS AND RESTATEMENTS

    Reclassifications have been made to prior year amounts to conform to current
year presentations.

    As described in Note 5, the Company's shareholders approved a 1 for 15
reverse common stock split in November, 1996. Earnings per share amounts as well
as the weighted average common shares outstanding have been retroactively
restated to reflect the reverse split.  All footnote disclosures herein are
presented on a post reverse split basis unless otherwise stated.

2.  PROPERTY ACQUISITIONS AND DISPOSITIONS

PROPERTY ACQUISITIONS

    During 1996, the Company made three significant acquisitions described
below:

    Effective January 1, 1996, the Company acquired the Common Stock of Fremont
Energy Corporation, an Oklahoma-based oil and gas company, for $7 million paid
in cash and 220,000 million shares of Common Stock of the Company valued at
approximately $600,000 at the date of purchase.

    The Company acquired on August 16, 1996 a majority interest in sixteen gas
wells in the Texan Gardens Field, located in Hidalgo County, Texas for $1.8
million. The field is situated in the heart of the Vicksburg Trend of the Texas
Gulf Coast region. The Company's average working interest in these properties
approximates 58%, with a net revenue interest averaging 40%.

     The Company acquired on August 19, 1996 a majority non-operated interest in
22 producing wells from numerous working interest owners on the McLemore-
Drummonds Ranch and the Sloan X's Ranch in Shackelford, Stephens, Throckmorton,
and Haskell Counties of Central Texas for $1.1 million. Amerac's working
interest in the McLemore-Drummonds Ranch and the Sloan X's Ranch approximates
76% and 82%, respectively. The net revenue interests in the two ranches are 57%
and 65%, respectively.

    During 1995, the company made three acquisitions described below:

    In October 1995, the Company acquired a portion of the Truby field located
in Jones County, Texas for $650,000. This acquisition included a 320-acre lease
with two producing wells and a 200-acre undeveloped lease. The additional
acreage will provide the Company with both proved and probable drilling
locations.

     In May 1995, the Company acquired the Myrtle B field in Loving County,
Texas for $725,000. This acquisition included four producing wells and four
proved undeveloped locations. The Company has a 100% working interest and a 75%
revenue interest in this property.

    In April 1995, the Company announced the acquisition of the Cosden field in
Bee County, Texas for $2.9 million. This field produces from three wells. The
Company has a 68% working interest and a 52% revenue interest in this property.

    These acquisitions were accounted for under the purchase accounting method
and results of operations were consolidated from the date of the respective
consummation.

    The unaudited pro forma impact of the Fremont acquisition, the Texan Gardens
Field acquisition, the 1995 Cosden acquisition, and the December 1995 sale of
N.W. Arapahoe, assuming the transactions had occurred at January 1, 1995, would
have been as follows for the twelve months ended December 31, 1996 and December
31, 1995.  The 1996

                                      F-9
<PAGE>

                           AMERAC ENERGY CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED

                       DECEMBER 31, 1996, 1995, AND 1994


Throckmorton acquisition and the 1996 Cosden acquisition would not have a
material impact on the Pro Forma Statement of Operations, and, thus have not
been included.


                                       1996                    1995
                                -----------------        ----------------
                                            (unaudited)

Net income                         $ 1,777,000               $  50,000
Net loss applicable
     to common stockholders         (3,657,000)               (757,000)
Net loss per common share                (1.57)                   (.58)


SALE OF OIL AND GAS PROPERTIES

    The Company sold certain minor properties in 1996 for proceeds of $299,000
resulting in a reported gain of approximately $22,000.

    In December 1995, the Company agreed to sell its interest in the Northwest
Arapahoe field, in Colorado for $1.0 million. The Company recognized a gain of
approximately $.7 million in 1995 relating to this transaction.

3.  PROPERTY AND EQUIPMENT

    Property and equipment, at cost, are  summarized as follows:


                                                 December 31,
                                              ------------------
                                                1996       1995
                                              -------    -------
                                                (in thousands)
Proved properties                              $24,603   $15,047
Undeveloped properties                           1,034       191
Wells and related equipment and facilities       6,653     5,376
                                               -------   -------
Total                                          $32,290   $20,614
                                               =======   =======


4.  NOTES PAYABLE, LONG-TERM INDEBTEDNESS AND PLEDGED ASSETS

    At December 31, 1996, the Company had a $30 million revolving line of credit
agreement with BankOne, Texas National Association ("Bank Credit Agreement").
This line was increased to $50 million in February 1997.  The Bank Credit
Agreement is a facility with interest due monthly and principal due June 30,
1999.  The Bank Credit Agreement is secured by all of the Company's oil and gas
properties, and contains various restrictive covenants which may, if not met,
cause the Company to be in default or reduce its access to additional
borrowings.  The borrowing base at December 31, 1996 was approximately $11
million.  At December 31, 1996, approximately $7.7 million was outstanding under
the Bank Credit Agreement, accruing interest at the BankOne Texas Base Rate plus
three-quarter percent (9.00% at December 31, 1996).

    At December 31, 1996 and 1995, the Company had a $125,000 letter of credit
issued on its behalf collateralized by a $125,000 certificate of deposit, which
is reflected in other assets.

    During May 1995, the Company extinguished its subordinated indebtedness of
$1,879,000.

                                      F-10
<PAGE>

                           AMERAC ENERGY CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED

                       DECEMBER 31, 1996, 1995, AND 1994


5.  STOCKHOLDERS' EQUITY AND STOCK COMPENSATION

COMMON STOCK

    Each share of Common Stock entitles the holder thereof to one vote on all
matters on which holders are permitted to vote. No stockholder has any right or
other similar right to purchase or subscribe to any additional securities issued
by the Company, and no stockholder has any right to convert Common Stock into
other securities. The holders of shares of Common Stock are entitled to
dividends when and if declared by the Board of Directors from funds legally
available and, upon liquidation, on a pro rata share in any distribution to
stockholders. The Company is restricted under certain conditions by its loan
agreement from declaring or paying any cash dividend on the Common Stock .

   In July 1995, the Company filed a registration statement with the Securities
and Exchange Commission for the purpose of registering the 243,413 shares of
Common Stock held by Investment Limited Partnership ("ILP") who in turn sold the
shares to certain individuals. Three of these individuals, Jeffrey Robinson,
President and Chief Executive Officer, Kenneth R. Peak and William P. Nicoletti
are Directors of the Company, and acquired from ILP 53,333, 13,333 and 13,333
shares, respectively.

    In June 1996, the Company completed a private sale of 72,000 shares of
Common Stock at an average price of approximately $5.10 per share.

    On November 18, 1996, the Company completed a private sale of approximately
1.04 million shares of Common Stock at a price of $4.80 per share. The private
placement also included warrants to purchase 104,175 additional shares of Common
Stock. Each purchaser received the right, through warrants, to purchase one
share of Common Stock for every 10 shares of common stock purchased in the
private placement at an exercise price of $5.76 per share at any time on or
before November 18, 1999.

    On November 20, 1996, the shareholders of the Company approved a 1 for 15
reverse stock split and a change in the authorized shares of Common Stock from
100 million shares to 20 million shares.

PREFERRED STOCK

    In March 1995, the Company exchanged, with holders who accepted the
exchange, one share of its Senior Preferred, with a stated value and liquidation
value of $4.00 per share, par value $1.00 per share and an initial dividend rate
of $.36 per share, and .1667 shares of Common Stock (the "Exchange Offer") for
each outstanding share of $2.25 Convertible Exchangeable Preferred Stock ("Old
Preferred"), which carried a stated value of $25.00 per share and a dividend
rate of $2.25 per share. At the time of the Exchange Offer, the Company had
dividends in arrears on the Old Preferred of approximately $14.4 million and a
liquidation preference of approximately $45.6 million. The Exchange Offer was
approved by the holders of the majority of the Common Stock and by approximately
90% of the holders of Old Preferred. As a result, 1,634,305 shares of Old
Preferred were exchanged for 1,634,305 shares of Senior Preferred and 271,937
shares of Common Stock. Holders of Old Preferred that did not exchange received
 .1667 shares of Common Stock for each share of Old Preferred not exchanged,
resulting in the issuance of 31,378 shares of Common Stock. This Exchange Offer
eliminated all Old Preferred and related dividend arrearages. This Exchange
Offer did not have any material impact on the supplemental earnings per share
disclosed herein.

    In July 1996, the Company converted the $4.00 Senior Preferred Stock to
Common Stock based on an exchange ratio of one share of $4.00 Senior Preferred
Stock into .6 shares of Common Stock. At December 31, 1996, the Company did not
have any preferred stock outstanding. As described in Note 1, this transaction
reduced earnings applicable to Common Stock holders by approximately $5 million
for the year ended December 31, 1996. This reduction represents the difference
between the estimated fair value of the Common Stock and the net carrying value
of the Senior Preferred Stock.

                                      F-11
<PAGE>

                           AMERAC ENERGY CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED

                       DECEMBER 31, 1996, 1995, AND 1994

SUPPLEMENTARY NET INCOME PER COMMON SHARE

    The supplementary net income per common share of the Company for the year
ended December 31, 1996, approximated $0.50, giving effect to Common Stock
transactions as if they had been outstanding for all of 1996. The dividends and
excess conversion value attributable to the Senior Preferred Stock as well as
the interest expense associated with proceeds from the sale of common stock were
added back to the historical net loss applicable to common stockholders to
determine net income used to compute supplemental net income per share.

STOCK OPTION PLANS

    Under the Company's Stock Option Plan, as amended February 1, 1988, ("the
Plan") stock options may be granted to officers, directors, employees and
independent contractors at exercise prices which are not less than the fair
market value at the date of grant. The options vest either after one year or
equally over three years and expire ten years from the date of grant. As of
December 31, 1996, the Company had reserved 317,999 shares of Common Stock for
issuance upon exercise of stock options.

    As allowed by SFAS 123 "Accounting for Stock Based Compensation", the
Company accounts for stock options and any other similar instruments issued to
employees in accordance with Accounting Principles Board Opinion No. 25, under
which no compensation cost is recognized when stock options are issued at
exercise prices not less than the fair market value of the Common Stock on the
date of grant. Had the Company recognized compensation cost for options granted
to employees and directors consistent with the fair value method specified by
SFAS 123, the Company's net income and loss per common share would have been
impacted as presented below on a pro forma basis:

                                          1996                  1995
                                           ----                  ----
Net income              As reported     $1,579,000             $208,000
                        Pro Forma        1,518,000              182,000

Loss per common share   As reported          (1.65)                (.46)
                        Pro Forma            (1.68)                (.48)

    Because SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.

    Information about the Company's stock option plan for the three years ended
December 31, 1996, is set forth below:

                                                     Weighted
                                                      Average      Shares
                                           Number of  Exercise   Exercisable
                                            Shares     Price     at Year End
                                           --------  ---------   -----------
Options outstanding at December 31, 1993     71,532   $15.99      64,866
  Granted                                     2,667      .90
  Expired                                   (43,265)   16.63
                                            -------
Options outstanding at December 31, 1994     30,934    13.78      28,267
  Granted                                    62,667     2.40
  Exercised                                  (2,667)     .90
  Expired                                    (9,467)    9.77
                                            -------
Options outstanding at December 31, 1995     81,467     5.92      18,800
  Granted                                    50,001     5.13
  Exercised                                 (12,667)    1.98
  Expired                                    (2,333)   43.13
                                            -------
Options outstanding at December 31, 1996    116,468   $ 5.26      35,356
                                            =======

                                      F-12
<PAGE>

                           AMERAC ENERGY CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED

                       DECEMBER 31, 1996, 1995, AND 1994

    The following table summarizes information about stock options outstanding
at December 31, 1996:

<TABLE>
<CAPTION>

                                        Options Outstanding               Options Exercisable
                            ---------------------------------------    --------------------------
                                             Weighted      Weighted                    Weighted
Range of                                      Average      Average                      Average
Exercise                     Shares          Remaining    Exercise      Shares         Exercise
Prices                     Outstanding      Contract Life   Price      Exercisable       Price
--------                   -----------      ------------- -------     ------------     -------
<S>                       <C>               <C>            <C>         <C>              <C>
$108.75-118.13                 1,467        1.6 years       $110.88        1,467        $110.88
    7.50-15.00                 8,334        7.0 years          9.60        5,000          10.00
     4.65-6.30                46,667        9.3 years          4.85         ----           ----
     2.34-2.58                60,000        8.2 years          2.40       28,889           2.45
--------------               -------                                      ------
$  2.34-118.13               116,468        8.4 years       $  5.26       35,356        $  8.02
==============               =======                                      ======
</TABLE>

    The weighted average per share fair values of options and warrants granted
in 1996 and 1995 were $1.75 and $.87, respectively. The fair value of each
option and warrant grant is estimated on the date of grant, using the Black
Scholes option pricing model with the following weighted average assumptions
used for options issued in 1996 and 1995, respectively: risk-free interest rates
of 6.4% and 7.2%, volatility of 47.4% for 1996 and 51.6% for 1995, dividend
yields of 0% in both years, and expected lives of 3 years for warrants and 10
years for options in both years.

6. INCOME TAXES

   The provision for income taxes differs from the amount of income taxes,
computed by applying the U.S. statutory federal tax rate to pretax income before
extraordinary items, as a result of the following differences:

                                             1996       1995         1994
                                             ----       ----         ----
Provision based on statutory rate         $ 537,389   $ 71,000   $  95,000
Changes in valuation allowance related
 to net operating losses.                  (449,936)   (71,000)    (95,000)
Other                                       (37,453)      ----        ----
                                          ---------   --------   ---------
Provision for income taxes                $  50,000   $   ----   $    ----
                                          =========   ========   =========

    Deferred tax assets (liabilities) are comprised of the following at December
31:

                                             1996           1995
                                             ----           ----
Net operating loss carryforwards         $ 69,232,000   $ 70,200,000
Oil and gas properties                     (1,703,000)      (259,000)
Small producers' depletion carryforward     4,553,000      4,324,000
Tax credit carryforwards                    1,031,000      2,792,000
Asset valuation allowance                 (73,113,000)   (77,057,000)
                                         ------------   ------------
Net deferred tax asset                   $       ----   $       ----
                                         ============   ============

    The current year change to the deferred tax balances primarily relates to
the purchase of Fremont Energy Corporation and the expiration of certain tax
credits. For tax purposes, the Fremont acquisition had carryover basis, whereas,
for financial statement purposes the acquisition was treated as a purchase with
a step up basis in the acquired assets equal to the estimated fair value of the
consideration given. As a result, the financial statements reflect a basis in
the assets of Fremont greater than the carryover basis assigned for tax. This
results in a deferred tax liability of approximately $2.0 million. As Amerac
anticipates filing a consolidated return with Fremont in the future, it is
expected that any future tax liability related to the Fremont purchase will be
fully offset by the deferred tax assets of Amerac.

                                      F-13
<PAGE>

                           AMERAC ENERGY CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED

                       DECEMBER 31, 1996, 1995, AND 1994

Therefore, the valuation allowance was reduced by approximately $2.0 million,
which represents the estimated deferred tax liability at acquisition date.
Additionally, the valuation allowance decreased as a result of the expiration of
approximately $1.8 million of investment tax credit carryovers in the current
year.

    Based on management's analysis of future taxable income and potential future
annual limitations of the remaining deferred tax assets, including net operating
loss carryforwards, the Company does not believe it is more likely than not that
it will realize the benefits of its remaining net deferred tax assets.  As a
result, a valuation allowance remains on the net deferred tax assets.

     Due to the conversion of its preferred stock into common shares on July 12,
1996, and in conjunction with other recent equity transactions, management
believes that there was an ownership change sufficient to trigger an additional
limitation on the net operating loss ("NOL") carryforwards into the future.
Based on the aggregate trading value of the stock immediately before the
conversion, and the prescribed applicable federal income tax rate for the
period, the Company believes the limitation on future utilization of the NOL
carryforwards to be $990,000 per taxable year relating to losses incurred prior
to the ownership change in 1996.  Any unused NOL's, pursuant to the limitation
imposed by the ownership change, accumulate for use in subsequent taxable years,
subject to the 15-year limitation on NOL carryforwards.  In addition, any losses
occurring in years after the ownership change are added (without limitation) to
arrive at the amount of NOL available for use in any post change year.
Subsequent additional ownership changes could result in adjustments to the
annual limitation amount.  During 1996, the Company utilized its NOL related to
the 1996 ownership change.

     The Company at December 31, 1996 had a regular NOL of approximately $198
million and approximately $170 million for alternative minimum tax purposes,
subject to the ownership change limitation of $990,000 per year as discussed
above. The NOLs are scheduled to expire as follows:


                              Alternative
                   Regular      Minimum
Year                Tax          Tax
----            -----------  -----------
1998            $13,161,000  $12,861,000
1999             47,624,000   47,624,000
2000             33,818,000   33,818,000
2001              6,403,000    6,403,000
2002             16,452,000   11,528,000
2004             33,063,000   19,106,000
2005             11,379,000    7,144,000
2006              6,783,000    4,816,000
2007             19,600,000   18,084,000
2008              4,784,000    4,091,000
2009              4,545,000    4,269,000

    The Company has approximately $987,000 of unused investment tax credits
expiring through the year 2000, with the majority expiring in 1997. These
carryovers will also be subject to limitation, due to the change in ownership.

    The Company also has small producers depletion carry forwards of
approximately $13 million which may be carried forward indefinitely to offset
the Company's future taxable income.

                                      F-14
<PAGE>

                           AMERAC ENERGY CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED

                       DECEMBER 31, 1996, 1995, AND 1994


7.  COMMITMENTS AND CONTINGENCIES

    In 1988, the Company settled a gas contract dispute with El Paso Natural Gas
Company ("El Paso") relating to the Shurley Ranch properties in Sutton County,
Texas.  These properties had been the subject of litigation until late 1993, at
which time El Paso began purchasing gas on these properties.  Pursuant to the
terms of the gas contract settlement, El Paso applied 65% of the current
production to a prepayment received by the Company in 1988.  The Company's 1996
revenue of $140,000 from this portion of the production has been applied against
this prepayment at an imputed price of $3.25 per Mcf.  The gas contract expired
in February 1997, and at that time, as provided in the contract, the Company is
obligated to pay El Paso the lesser of the remaining prepayment balance or
$360,000.  During the fourth quarter of 1994, the Company concluded that it was
relatively certain that the Shurley Ranch properties could not produce
sufficient gas to recover El Paso's prepayment and the Company released a
portion of the delivered balance to income of $450,000 representing the excess
of the remaining prepayment balance over the sum of the expected production from
January 1995 through February 1997 and the expected $360,000 minimum payment.
The Company updated this assessment during 1996, resulting in a release of the
delivered balance to income of $132,000 in the fourth quarter.  As of December
31, 1996, the remaining prepayment balance was $370,000 and is classified as a
current liability.

    The Company is subject to various possible contingencies which arise
primarily from interpretation of federal and state laws and regulations
affecting the oil and gas industry. Such contingencies include differing
interpretations as to the prices at which oil and gas sales may be made, the
prices at which royalty owners may be paid for production from their leases and
other matters. Although management believes it has complied with the various
laws and regulations, administrative rulings and interpretations thereof,
adjustment could be required as new interpretations and regulations are issued.
In addition, production rates, marketing and environmental matters are subject
to regulation by various federal and state agencies.

    The Company is not currently a party to any litigation which would have a
material impact on its financial statements. However, due to the nature of its
business, certain legal or administrative proceedings may arise in the ordinary
course of its business.

    The Company is committed to various lease contracts for office space and
miscellaneous office equipment expiring at various intervals through 2003, with
total minimum payments aggregating $794,000 at December 31, 1996.  The Company
incurred net rent expense of approximately $72,000, $85,000 and $93,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.  At December 31,
1996, the minimum payments required over the next five years and thereafter are
as follows:

                         Sublease      Net
Year           Lease      Income      Lease
              --------   ---------   --------
1997          $136,000   $( 31,000)  $105,000
1998           116,000        ----    116,000
1999           124,000        ----    124,000
2000           126,000        ----    126,000
2001           134,000        ----    134,000
Thereafter     158,000        ----    158,000
              --------   ---------   --------
Total         $794,000   $ (31,000)  $763,000
              ========   =========   ========

8.  CERTAIN RELATIONSHIPS WITH RELATED PARTIES

    In 1991, the Company entered into a service contract with Petroleum
Financial, Inc. ("PFI") to perform all of the Company's financial and
administrative functions. Through 1996, PFI was owned by the Company (26%) and
Mr. Jeffrey Stevens, Senior Vice President and Chief Financial Officer (through
January 1997) and Director of the Company. Effective December 31, 1996, the
Company agreed to relinquish its investment in PFI in exchange for final
settlement of amounts owed to PFI for 1996 services rendered to the Company. As
a result, the Company gave accounting recognition to the

                                      F-15
<PAGE>

                           AMERAC ENERGY CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED

                       DECEMBER 31, 1996, 1995, AND 1994

services received in exchange for its equity interest in PFI, resulting in a
charge to earnings of $121,000. The aggregate service fees for the years ended
December 31, 1996, 1995, and 1994 were $385,000, $300,000 and $408,000,
respectively. For 1997, PFI has agreed to perform its services for the Company
at a monthly fee of $18,000, with possible upward or downward adjustments
dependent on the workload and achievement of certain goals.

    The Company utilized the services of Bentley Securities Corporation
("Bentley") during 1996 in connection with the private placement of Common
Stock and warrants and its Eastern Shelf Exploitation Agreement. William P.
Nicoletti, Chairman of the Board of Directors of the Company is a Senior Advisor
to Bentley. Total fees paid to Bentley in 1996 were $327,500 ($280,00 in cash
and $47,500 in stock).

    At December 31, 1996, the Company had a receivable outstanding from an
employee of $100,000. This receivable was collected in January 1997 and is
classified in Other Receivables.

9.  ADDITIONAL OPERATIONS AND BALANCE SHEET INFORMATION

SIGNIFICANT OIL AND GAS PURCHASES

    Oil sales are made on a day-to-day basis or under short-term contracts at
approximately the current area posted price.  The loss of any oil purchaser
would not be expected to have a material adverse effect upon operations.
Following is a listing of significant oil purchasers during the three-year
period ended December 31, 1996, and the approximate percentage of oil revenues
derived from each:

Crude Oil Purchasers                        Percent
--------------------                  ------------------
                                      1996  1995    1994
                                      ----  ----    ----
Sun Refining & Marketing Company       28    31       13
Transco Liquids Company                14    11       16
EOTT Energy Corporation                13   ---      ---
Koch Oil Company                       10   ---      ---
Union Pacific Fuels, Inc.               5    15       10
Marathon                              ---    34       55

    A majority of the Company's natural gas is sold pursuant to short-term
contracts at prices which fluctuate at a premium or discount to the spot market.
Under the terms of the contracts, the gas purchasers may elect to purchase less
gas than the wells are able to produce, and the Company may be unable to sell
the excess production to other purchasers. Following is a listing of significant
natural gas purchasers during the three-year period ended December 31, 1996, and
the approximate percentage of natural gas revenues derived from each:

Natural Gas Purchasers                   Percent
----------------------           --------------------
                                 1996   1995     1994
                                 ----   ----     ----
MG Natural Gas Corporation        27      18      ---
Amoco Production Company          22     ---      ---
Energy Source                     12     ---      ---
Transco Liquids Company          ---      39       77

    There are no other customers of the Company which individually accounted for
more than 10% of the Company's revenues during the three years ended December
31, 1996.

                                      F-16
<PAGE>

                           AMERAC ENERGY CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED

                       DECEMBER 31, 1996, 1995, AND 1994

ACCRUED LIABILITIES

    Accrued liabilities as of December 31, 1996, and 1995 consist of the
following:


                                 1996       1995
                               --------   --------
Operating expenses             $209,000   $ 97,000
Accrued salaries and other      318,000    275,000
                               --------   --------
Total                          $527,000   $372,000
                               ========   ========

10.  SUBSEQUENT EVENTS

    Effective January 1, 1997, the Company entered into an agreement with a
group of investors to participate in a program of three dimensional seismic
evaluation, lease acquisition, drilling and development operations in certain
undeveloped properties in a defined area on the Eastern Shelf of the Permian
Basin in Texas. The group is to invest a minimum of $1.2 million for 50% of the
Company's interest in these properties. After payout the Company will have a 20%
reversionary interest in the property from the investor group in the first ten
prospects and a 10% reversionary interest in the next ten prospects. The
investor group will reimburse the Company for a portion of the general and
administrative costs related to the project. The agreed upon reimbursement for
1997 is $200,000. For each $1,000 invested by the investor group they will earn
warrants that allow the investor to purchase 41.667 shares of the Company's
Common Stock at $5.76 per share, which represented a premium over the price of
the underlying common stock at the time the warrants were priced . The warrants
will expire on November 18, 1999 and the maximum number of Common Shares that
can be acquired pursuant to the exercise of warrants under this agreement is
50,000 shares.

11.  SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

    Summarized quarterly financial data for the year ended December 31, 1996 is
set forth below:

<TABLE>
<CAPTION>

                                                                      Three Months Ended
                                                          ---------------------------------------------------
                                                           March 31     June 30    September 30   December 31
                                                          ----------   ----------   -----------   -----------
<S>                                                       <C>          <C>          <C>           <C>
Net revenues                                              $2,326,000   $2,613,000   $ 2,580,000    $3,125,000
Net income (loss)                                            706,000      791,000       385,000      (303,000)
Net income (loss) applicable to common
 stockholders, as restated                                   491,000      595,000    (4,638,000)     (303,000)
Net income (loss) applicable to common
 stockholders, as previously reported                        491,000      595,000       385,000           N/A
Net income (loss) applicable to common
 stockholders per share, as restated                             .31          .37         (1.64)         (.13)
Net income (loss) applicable to common
 stockholders per share, as previously reported                  .31          .37           .14           N/A
</TABLE>

    During the third quarter ended September 30, 1996, the Company converted
its outstanding preferred stock into Common Stock (see Note 5). As restated, the
September 30, 1996 net loss applicable to common shareholders has been reduced
by the excess fair value of Common Stock issued over the net carrying value of
the preferred stock converted, which approximated $5 million. This amount, as
well as preferred stock dividends, reduced the net loss applicable to common
shareholders for earnings per share computational purposes. As previously
reported, the excess of fair value of the Common Stock exchanged for the
preferred stock was not deducted in determining the net loss applicable to
common shareholders for the quarter ended September 30, 1996. The restatement
for the quarter ended September 30, 1996 had no effect on the Company's
previously reported revenues, gross profit or net income.

                                      F-17
<PAGE>

                           AMERAC ENERGY CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED

                       DECEMBER 31, 1996, 1995, AND 1994


    The Company recognized 1996 fourth quarter adjustments approximating
$400,000, primarily related to increased depreciation, depletion and
amortization resulting from downward reserve revisions. In addition, the Company
recorded a gain in the fourth quarter of 1996 of $132,000 in connection with
certain gas contract contingencies as described in Note 7.

12.  SUPPLEMENTAL OIL AND GAS DISCLOSURES (UNAUDITED)

    The following table summarizes costs incurred in oil and gas property
acquisition, exploration and development activities.  Property acquisition costs
are those costs incurred to purchase, lease, or otherwise acquire property,
including both undeveloped leasehold and the purchase of reserves in place.
Exploration costs include costs of identifying areas that may warrant
examination and in examining specific areas that are considered to have
prospects containing oil and gas reserves, including costs of drilling
exploratory wells, geological and geophysical costs and carrying costs of
undeveloped properties.  Development costs are incurred to obtain access to
proved reserves, including the cost of drilling development wells and to provide
facilities for extracting, treating, gathering and storing the oil and gas.

    Costs incurred in oil and gas activities for the three years ended December
31 are as follows:

                                    1996    1995    1994
                                    ----    ----    ----
                                   (amounts in thousands)

Property acquisition              $11,046  $4,605  $1,933
Exploration                           208     246     449
Development                         2,815     872      --
                                  -------  ------  ------
                                  $14,069  $5,723  $2,382
                                  =======  ======  ======

     Selected data for the three years ended December 31 follows:

                                           1996     1995    1994
                                           ----     ----    ----
                                           (amounts in thousands
                                          except per unit amounts)

Net oil and gas revenues                  $ 7,870  $3,220  $3,231
Depletion per Mcfe                            .73     .80     .60
Average sales price per barrel of oil       21.12   16.53   15.25
Average sales prices per Mcf of gas          2.29    1.62    2.01
Production costs per equivalent Mcf           .63     .53     .47

    Net proved oil and gas reserves as of December 31, 1996, 1995 and 1994 have
been prepared by the Company and audited by Rider Scott Company, the Company's
independent reservoir engineers. The reserves were prepared in accordance with
guidelines established by the Securities and Exchange Commission and
accordingly, were based on existing economic and operating conditions. Oil and
gas prices in effect at December 31 of each year were used except in those
instances where the sale is covered by contract, in which case the applicable
contract prices including fixed and determinable escalations were used for the
duration of the contract, and thereafter the last contract price was used. Oil
and gas prices at December 31, 1996 were substantially higher than those
realized on average by the Company over the past five years. Also, prices at the
end of the first quarter of 1997 are below those at year-end 1996. Changes in
prices could have a material effect on reserve estimates and related future net
cash flow amounts. Operating costs, production and ad valorem taxes and future
development costs were based on current costs with no escalation.

    There are numerous uncertainties inherent in estimating quantities of proved
reserves and in projecting the future rates of production and timing of
development expenditures.  The following reserve data represents estimates only
and should not be construed as being exact.  Moreover, the present values should
not be construed as the current market value of the Company's oil and gas
reserves or the costs that would be incurred to obtain equivalent reserves.

                                      F-18
<PAGE>

                           AMERAC ENERGY CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED

                       DECEMBER 31, 1996, 1995, AND 1994

ESTIMATED QUANTITIES OF RESERVES

    Oil quantities are expressed in thousands of barrels and gas volumes in
millions of cubic feet. Natural gas liquids are combined with oil quantities.

<TABLE>
<CAPTION>
                                                                        1996                     1995                   1994
                                                                -----------------      -------------------     ------------------
                                                                  Oil        Gas          Oil        Gas         Oil        Gas
                                                                (MBbl)      (MMcf)      (MBbl)       (MMcf)     (MBbl)     (MMcf)
                                                                -----      ------      -------       ------    ------      ------

<S>                                                             <C>        <C>          <C>          <C>        <C>        <C>
PROVED RESERVES
Balance beginning of year                                         689.5     8,704.3       544.6     5,961.2      329.0    5,078.8
Revisions of previous estimates                                    60.3    (1,521.1)      (11.7)   (1,009.3)      55.1    1,879.0
Extensions, discoveries and other additions                       409.9       415.8        ----        ----        4.6      174.2
Production                                                       (187.3)   (2,867.3)     (127.1)   (1,348.6)     (94.6)  (1,332.3)
Acquisition of minerals in place                                  939.4    14,251.4       397.0     5,101.0      250.5      161.5
Sales of minerals in place                                        (18.8)     (269.1)     (113.3)       ----       ----       ----
                                                                -------    --------      -------    -------      -----    -------
Balance end of year                                             1,893.0    18,714.0       689.5     8,704.3      544.6    5,961.2
                                                                =======    ========      ======     =======      =====    =======


PROVED DEVELOPED RESERVES
Balance beginning of year                                         492.7     6,932.4       544.6     5,961.2      329.0    5,078.8
Balance end of year                                             1,345.1    17,276.5       492.7     6,932.4      544.6    5,961.2
</TABLE>

STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES
THEREIN RELATING TO PROVED OIL AND GAS RESERVES

    Standardized Measure Of Discounted Future Net Cash Flows And Changes Therein
Relating To Proved Oil And Gas Reserves ("Standardized Measure") does not
purport to present the fair market value of a Company's oil and gas properties.
An estimate of such value should consider, among other factors, anticipated
future prices of oil and gas the probability of recoveries in excess of existing
proved reserves, the value of probable reserves and acreage prospects, and
perhaps different discount rates. It should be noted that estimates of reserve
quantities, especially from new discoveries, are inherently imprecise and
subject to substantial revision.

    Under the Standardized Measure, future cash inflows were estimated by
applying year-end prices, adjusted for fixed and determinable escalations, to
the estimated future production of year-end proved reserves. Future cash inflows
were reduced by estimated future production and development costs based on year-
end costs to determine pre-tax cash inflows. Future income taxes were computed
by applying the statutory tax rate to the excess of pre-tax cash inflows over
the Company's tax basis in the associated proved oil and gas properties. Tax
credits and net operating loss carryforwards were also considered in the future
income tax calculation. Future net cash inflows after income taxes were
discounted using a 10% annual discount rate to arrive at the Standardized
Measure.
                                                  December 31,
                                         -------------------------------
                                           1996       1995        1994
                                         -------    -------     --------
                                              (amounts in thousands)

Future cash inflows                      $101,056   $ 31,175    $17,826
Future production and development costs   (39,038)   (11,894)    (6,811)
Future income tax expense                  (7,133)      ----       ----
                                         --------   --------    -------
Future net cash flows                      54,885     19,281     11,015
10% annual discount for estimated
 timing of cash flows                     (23,598)    (5,230)    (2,625)
                                         --------   --------    -------
Standardized measure of discounted
 future net cash flows                   $ 31,287   $ 14,051    $ 8,390
                                         ========   ========    =======

                                      F-19
<PAGE>

                           AMERAC ENERGY CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONCLUDED

                       DECEMBER 31, 1996, 1995, AND 1994


    The following table sets forth an analysis of changes in the Standardized
Measure:

<TABLE>
<CAPTION>

                                                                       1996       1995      1994
                                                                     --------   -------   -------
                                                                        (amounts in thousands)
<S>                                                                  <C>        <C>       <C>
Beginning of the year                                                 $14,051   $ 8,390   $ 9,683
Sales of oil and gas produced, net of production costs                 (7,870)   (3,220)   (3,231)
Net changes in sales prices and production costs , and other (1)        7,086     3,919    (2,041)
Extensions and discoveries, less applicable future development
 and production costs                                                   3,768      ----       163
Previously estimated development costs incurred during the period         150       230        12
Revisions of previous estimates, including revised estimates of
 development costs, reserves and rates of production                   (4,736)   (1,406)    1,138
Accretion of discount                                                   1,405       839       968
Purchase of reserves                                                   21,417     6,062     1,698
Sales of reserves                                                        (441)     (763)     ----
Net change in income taxes                                             (3,543)     ----      ----
                                                                      -------   -------   -------
End of year (2)                                                       $31,287   $14,051   $ 8,390
                                                                      =======   =======   =======
</TABLE>
_________

(1)  During 1996, 1995 and 1994, the prices the Company received from its sales
     of oil and gas averaged $21.12, $16.53 and $15.25 per barrel of oil and
     $2.29, $1.62 and $2.01 per Mcf of gas, respectively.
(2)  The revenues generated by the Company are highly dependent upon the prices
     of oil and gas.  In accordance with the guidelines established by the
     Securities and Exchange Commission, the year-end reserves are valued at
     prices in effect at December 31 of each year, even though these prices may
     differ significantly from prices actually received during the year.  Prices
     used to value reserves were approximately $24.25, $17.98 and $14.61 per
     barrel of oil and $2.95, $2.14 and $1.65 per Mcf of gas as of December 31,
     1996, 1995 and 1994, respectively.

                                      F-20
<PAGE>

                           AMERAC ENERGY CORPORATION

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       DECEMBER 31, 1996, 1995, AND 1994


SIGNATURES

    Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                           AMERAC ENERGY CORPORATION
                                           Company



                                               /s/  Richard B. Hallett
                                           --------------------------------
                                                    Richard B. Hallett
                                              Principal Financial Officer

Date: March 28, 1997


    Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the company
and in the capacities and on the dates indicated.


       Signature                           Title                      Date
       ---------                           -----                      ----

/s/  Jeffrey B. Robinson           Director and President and    March 28, 1997
------------------------------     Chief Executive Officer
     Jeffrey B. Robinson           (Principal Executive
                                   Officer)


/s/  Jeffrey L. Stevens            Director                      March 28, 1997
------------------------------
     Jeffrey L. Stevens



/s/  Kenneth R. Peak               Director                      March 28, 1997
------------------------------
     Kenneth R. Peak



/s/  Michael L. Harvey             Director                      March 28, 1997
------------------------------
     Michael L. Harvey

                                      F-21