FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1996

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. Stockholders' Equity

Common Stock. In September 1994, the Company declared a 10% stock dividend to shareholders of record. The transaction was valued based on the closing price ($11.00) of the Company’s common stock on the New York Stock Exchange on September 6, 1994. As a result of the issuance of 606,262 shares of the Company’s common stock as a dividend, retained earnings were reduced by $6,668,882, with the common stock and additional paid-in capital accounts increased by the same amount. Primary and fully diluted income (loss) per share was restated for all periods presented to reflect the effect of the stock dividend.

During the third quarter of 1995, the Company closed the sale to the public of 5,750,000 shares of common stock at a price of $8.50 per share. Net proceeds from this offering were $45,698,912 and were used to repay outstanding indebtedness, with the remaining proceeds being used principally to finance the Company’s exploration and development activities.

In August 1996, the holders of the Company’s Debentures converted such Debentures into 2,343,108 shares of the Company’s common stock, which resulted in a third quarter 1996 increase in the Company’s capital accounts of approximately $27,650,000.

Stock-Based Compensation Plans. The Company has two stock option plans, the 1990 stock compensation plan and the 1990 nonqualified plan, as well as an employee stock purchase plan.

Under the 1990 compensation plan, incentive stock options and other options and awards may be granted to employees to purchase shares of common stock. Under the 1990 non-qualified plan, non-employee members of the Company’s Board of Directors may be granted options to purchase shares of common stock. Both plans provide that the exercise prices equal 100% of the fair value of the common stock on the date of grant. Options become exercisable for 20% of the shares on the first anniversary of the grant of the option and are exercisable for an additional 20% per year thereafter. Options granted expire 10 years after the date of grant or earlier in the event of the optionee’s separation from employment. No accounting entries are required until the stock options are exercised, at which time the option price is credited to the common stock and additional paid-in capital accounts.

The Company also granted certain stock options to individuals who are neither employees, officers, nor directors for specific services rendered to the Company. During 1996 all of these remaining options were either exercised (57,555) or cancelled (11,195) so that no such options remain outstanding at December 31, 1996.

The employee stock purchase plan provides eligible employees the opportunity to acquire shares of Company common stock at a discount through payroll deductions. This plan was approved at the May 11, 1993, shareholders meeting. The plan year is from June 1 to the following May 31. The first year of the plan commenced June 1, 1993. Employees may authorize payroll deductions of up to 10% of their base salary during the plan year by making an election to participate prior to the start of a plan year. The purchase price for stock acquired under the plan will be 85% of the lower of the closing price of the Company’s common stock as quoted on the New York Stock Exchange at the beginning or end of the plan year or a date during the year chosen by the participant. Under this plan the Company issued 36,387 shares at a price range of $6.59 to $7.97 in 1996, 37,689 shares at a price range of $6.80 to $7.92 in 1995, and 29,840 shares at a price of $8.71 in 1994. As of December 31, 1996, there were 443,100 shares available for issuance under this plan. There are no charges or credits to income in connection with this plan.