NOVISTAR INC, S-1, 2000-09-20

NOVISTAR INC
S-1, 2000-09-20

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<PAGE>

As filed with the Securities and Exchange Commission on September 20, 2000.
Registration No. 333-

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
NOVISTAR, INC.
(Exact name of registrant as specified in its charter)

Delaware 7374 76-0576212
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)

1331 Lamar, Suite 1650
Houston, Texas 77010
(713) 652-4995
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)

John V. Sobchak
1331 Lamar, Suite 1650
Houston, Texas 77010
Telephone: (713) 756-1780
Telecopy: (713) 756-1744
(Name, address, including zip code, and telephone
number, including area code, of agent for service)

Copies to:

George G. Young III Richard J. Wilkie
Haynes and Boone, LLP Howard B. Hacker
1000 Louisiana Street, Suite 4300 Kristy T. Harlan
Houston, Texas 77002 Akin, Gump, Strauss, Hauer & Feld,
Telephone: (713) 547-2081 L.L.P.
Telecopy: (713) 547-2600 1900 Pennzoil Place, South Tower
711 Louisiana Street
Houston, Texas 77002
Telephone: (713) 220-5800
Telecopy: (713) 236-0822

Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

CALCULATION OF REGISTRATION FEE

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<TABLE>
<CAPTION>
Proposed
Maximum Amount of
Title of Each Class Aggregate Registration
of Securities to be Registered Offering Price Fee
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<S> <C> <C>
Common Stock, par value $0.01 per share............ $100,000,000(1) $26,400
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</TABLE>
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(1) In accordance with Rule 457(o) under the Securities Act of 1933, the number
of shares being requested and the proposed maximum offering price per share
are not included in this table.

The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.

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<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, Dated September 20, 2000

The information contained in this prospectus is not complete and may be
changed. These securities may not be sold until the registration statement
filed with the Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities and it is not soliciting an offer to
buy these securities in any state where the offer or sale is not permitted.

[LOGO]

Novistar, Inc.

Common Stock

$ per share

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This is an initial public offering of common stock of Novistar, Inc.

We expect that the price to the public in the offering will be between $ and
$ per share. The market price of the shares after the offering may be higher
or lower than the offering price.

We intend to apply to include the common stock on the Nasdaq National Market
under the symbol "NOVS."

Investing in the common stock involves risks. See "Risk Factors" beginning on
page 9.

<TABLE>
<CAPTION>
Per
Share Total
-------- --------
<S> <C> <C>
Price to the public................................... $ $
Underwriting discount.................................
Proceeds to Novistar..................................
</TABLE>

We have granted an over-allotment option to the underwriters. Under this
option, the underwriters may elect to purchase a maximum of additional
shares from us within 30 days following the date of this prospectus to cover
over-allotments.

--------------------------------------------------------------------------------

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.

CIBC World Markets Stephens Inc.

The date of this prospectus is , 2000.
<PAGE>

Front Inside Cover
<PAGE>

Table of Contents

<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 9
Forward-Looking Statements............................................... 17
Use of Proceeds.......................................................... 18
Dividend Policy.......................................................... 19
Capitalization........................................................... 19
Dilution................................................................. 20
Unaudited Pro Forma Combined Financial Statements........................ 21
Selected Financial Data.................................................. 25
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 26
Business................................................................. 32
Management............................................................... 44
Principal Stockholders................................................... 51
Certain Transactions..................................................... 53
Description of Capital Stock............................................. 57
Shares Eligible for Future Sale.......................................... 60
Underwriting............................................................. 61
Legal Matters............................................................ 63
Experts.................................................................. 64
Where You Can Find More Information...................................... 64
Index to Financial Statements............................................ F-1
</TABLE>

3
<PAGE>

Prospectus Summary

This summary highlights information contained in other parts of this
prospectus. Because it is a summary, it does not contain all of the information
that you should consider before investing in the shares. You should read the
entire prospectus carefully.

Novistar

Novistar is a provider of comprehensive business process solutions to the oil
and gas industry. Our solutions combine our software with consistent business
practices to optimize transaction processing, improve workflow and provide
greater business intelligence to our customers and their partners. By employing
our solutions, our customers are able to focus on their core business
competencies, reduce costs and improve profitability.

To meet our customers' requirements, we provide the following solutions:

. business process outsourcing, in which we provide transaction processing
services using our personnel and host our software and software we license
from third-party vendors;

. application hosting, in which we provide our customers remote access to
software hosted on our servers, as well as technical assistance; and

. licensing, in which our customers receive the perpetual right to use our
software.

We provide our customers the flexibility to outsource some of their business
processes while using our hosting or license arrangements for other processes.
Many of our customer contracts span multiple years and contain significant
early-termination penalties. We believe these contract terms result in
predictable and recurring revenue. As of September 1, 2000, we had 70
customers, including Bellwether Exploration, BHP, Kerr-McGee, Newfield
Exploration, Nuevo Energy, Occidental, Phillips Petroleum, Shell and Unocal.

Our solutions are focused on the upstream oil and gas industry, which is a
large and capital-intensive business. The upstream business involves the
exploration for and production of oil and gas. In order to share the risks of
their exploration and production activities, upstream companies conduct their
operations in complex partnerships owned by numerous participants. These
participants may have different obligations and rights to share in production,
to receive the proceeds of production, to pay costs and to participate in
drilling and other activities conducted by the partnership. These participants
also regularly acquire and divest wells, increase or decrease interests in
wells, and enter into new exploration partnerships. Managing these activities
is time and manpower intensive because of the number of transactions,
complexity of partnerships and the number of participants in a well.

To manage their transaction processing requirements, most oil and gas companies
use customized software, developed by them or by consulting firms. We believe
these customized software solutions:

. have a high total cost of ownership, which includes a large initial capital
investment and the expense of maintaining and upgrading the systems to keep
pace with technological innovations;

. require expensive in-house information-technology personnel, who are
difficult to recruit and retain;

. are not able to effectively share information among industry participants;

. do not have the required flexibility to efficiently account for the
changing asset portfolio of an oil and gas company;

. do not provide useful business intelligence tools to access, analyze and
share data for better decision making; and

. require time-consuming, redundant paper and telephone communications.

4
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Oil and gas companies are seeking to adopt better business processes and web-
enabled applications in order to increase efficiency and lower costs. While oil
and gas companies have traditionally retained business processes deemed core to
their business, they have outsourced business functions in which they do not
have a core competency, such as seismic surveying, drilling, and plugging and
abandonment. We believe the definition of non-core processes is widening to
include the transaction processing our solutions address.

We believe that our solutions provide the following competitive advantages:

Industry-specific software. In February 2000, we acquired the Oracle Energy
Upstream business from Oracle Corporation, which included core modules of our
software, as well as software engineers and other technical personnel. Oracle
designed our software to address the complexity and volume of transactions
inherent in the operation of oil and gas wells. Since the acquisition, we have
extended our software solutions to provide business intelligence applications
that allow both our business process outsourcing and license customers to
access, analyze and share data gathered by our transactional support software
and third-party software applications to enhance their business intelligence
and decision making.

Extensive domain knowledge. Because of the complicated relationships among
participants in the upstream oil and gas industry, we believe that our in-depth
knowledge of the unique characteristics of the industry is imperative to
providing our solutions. We combine our extensive experience in the oil and gas
industry with feedback from an active customer user group to continually
improve our software and services.

Flexible delivery and pricing models. Although we believe our business process
outsourcing service provides the most comprehensive solution, we also provide
our customers with the flexibility to purchase licenses for specific software
modules or contract for our application hosting services. This flexibility
allows our customers to choose the manner in which they deploy our solutions to
meet their needs. The fees we charge for business process outsourcing are based
on the number of wells owned by our customers. Our fees therefore vary based on
our customers' asset portfolios, providing our customers with a predictable
cost structure as their asset base changes. In addition, our outsourcing and
application hosting services do not require a substantial initial payment by
our customers to purchase licenses of our software.

Advanced technology infrastructure. We are able to recruit and retain a staff
of experienced information technology professionals, whom we believe oil and
gas companies have difficulty attracting. We have a strong foundation on which
we are building, with our customers and partners, an advanced technology
infrastructure that includes high-end servers and network performance
management applications.

Standardized software and processes. Our software addresses the unique needs of
the oil and gas industry without customization, enabling us to easily upgrade
and maintain our software. We believe our solutions provide a framework upon
which we can build additional functionality to facilitate collaboration among
industry participants. We use our extensive industry experience and feedback
from our customer user group to design standardized procedures that gather,
store and process data. This consistency in transaction processing reduces the
costs to gather data, provides higher quality information and permits related
business functions to share information.

Key elements of our strategy include:

. extending our product and business process services leadership;

. facilitating more efficient workflow collaboration among industry
participants;

. continuing to strengthen global sales channels; and

. expanding alliances and strategic relationships.

We are developing Internet-based extensions to our software to optimize
transaction processing among industry participants. We believe that our
established customer base, which has implemented our standardized solutions,
will provide the critical mass necessary to successfully establish a foundation
for information exchange and transaction processing among industry
participants.

5
<PAGE>

Corporate Information

In this prospectus, unless otherwise stated or the context requires, the words
"company," "Novistar," "we," "us," and "our" refer to Novistar, Inc., a
Delaware corporation, its subsidiary, Petroleum Financial Inc., and the Torch
contracts. References to the Torch contracts include the three outsourced
wellhead administration contracts that Torch will assign to us at the closing
of the offering. Under the Torch contracts, we will market, negotiate,
administer and account for oil and gas sales activities.

We were incorporated on April 24, 1998, and commenced operations on January 1,
1999. Our principal executive office is located at 1331 Lamar, Suite 1650,
Houston, Texas 77010. Our telephone number is (713) 652-4995. The information
on our website, www.novistar.com, does not constitute part of this prospectus.

6
<PAGE>

The Offering

<TABLE>
<S> <C>
Common stock offered by Novistar.. shares

Common stock to be outstanding
after the offering............... shares

Use of proceeds................... To repay indebtedness to Torch and Oracle,
to acquire the Torch contracts and for
other general corporate purposes, including
working capital, software development and
expansion of our operations. See "Use of
Proceeds" for more detailed information.

Proposed Nasdaq National Market
symbol........................... NOVS
</TABLE>

The calculation of the shares of common stock outstanding is based on the
number of shares outstanding as of September 15, 2000 after giving effect to
the automatic conversion of preferred stock owned by Oracle into common stock
in accordance with the terms of the preferred stock. The shares of common stock
outstanding exclude:

. 2,138,824 shares underlying options outstanding as of September 15, 2000;

. 161,066 shares subject to warrants outstanding as of September 15, 2000;

. 400,000 shares underlying options that will be issued immediately prior to
the offering;

. 920,000 shares subject to warrants that we have agreed to issue; and

. up to shares of common stock that the underwriters may purchase if they
exercise their over-allotment option.

7
<PAGE>

Summary Financial Information
(in thousands, except per share data)

The summary financial data consist of:

. the service fee activities of Torch, which include the activities of
Novistar, management consulting services, services in connection with the
acquisition and divestiture of oil and gas properties, land
administration services, human resources and other administrative
services not conducted by Novistar.

. combined Novistar, which includes the results of Petroleum Financial and
the Torch contracts and presents our combined financial position and
results of operations as if we had been a stand-alone entity. The
revenues of combined Novistar include the service fees earned from
Bellwether Exploration, one of our largest customers, since October 1,
1999.

. pro forma combined Novistar, which includes the historical revenues of
the Oracle Energy Services business. The historical revenues for the
Oracle Energy Services business include, in addition to the historical
revenues of the Oracle Energy Upstream business which we acquired,
revenues from consulting services provided by Oracle in connection with
its downstream and financial applications, neither of which are part of
our business.

. the pro forma as adjusted balance sheet data at June 30, 2000, which give
effect to our sale of common stock in this offering at an assumed initial
public offering price of $ per share, after deducting underwriting
discounts and our estimated offering expenses.

This financial information may not be indicative of our future performance and
does not necessarily reflect what our financial position and results of
operations would have been had we operated as a separate stand-alone entity
during the periods presented. For further information that will help you better
understand this summary data, see "Unaudited Pro Forma Combined Financial
Statements," "Selected Financial Data," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the historical financial
statements and related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
Predecessor
Service Fee
Activities of Pro Forma
Torch Combined Novistar Combined Novistar
---------------- ----------------------------- ---------------------
Six
Year Ended Six Months Months
December 31, Year Ended Ended June 30, Year Ended Ended
---------------- December 31, ---------------- December 31, June 30,
1998 1999 1999 1999 2000 1999 2000
------- ------- ------------ ------- ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues............... $19,667 $21,215 $18,122 $ 7,563 $14,844 $42,773 $17,160
Cost of revenues....... 20,040 23,794 15,581 8,107 9,656 38,351 11,346
------- ------- ------- ------- ------- ------- -------
Gross profit (loss).... (373) (2,579) 2,541 (544) 5,188 4,422 5,814
Operating loss......... N/A N/A (3,294) (3,206) (3,772) (16,699) (5,062)
Basic and diluted net
loss per share........ N/A N/A $ (0.36) $ (0.35) $ (0.34)
</TABLE>

<TABLE>
<CAPTION>
At June 30, 2000
-------------------
Actual As Adjusted
------- -----------
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............................... $ 151 $
Total assets............................................ 40,533
Due to Torch............................................ 11,114
Note payable--Oracle.................................... 10,000
Note payable--Torch..................................... 8,675
Stockholders' equity.................................... 5,353
</TABLE>

Unless otherwise stated, all information contained in this prospectus assumes
no exercise of the over-allotment option granted to the underwriters.

8
<PAGE>

Risk Factors

You should carefully consider the following factors and other information in
this prospectus before deciding to invest in the shares.

Risks Relating to Our Business

Our limited operating history makes it difficult for you to evaluate our
business and our prospects.

Although our parent company, Torch, has provided services to customers in the
oil and gas industry since 1981, our operations began in 1999. In 1999 we added
substantially to our management team and in February 2000 we acquired the
Oracle Energy Upstream business from Oracle. Consequently, our management team
has not worked together for an extended period of time. In addition, period-to-
period comparisons of our operating results to date may not be meaningful. You
should not rely on our results of operations for any prior period as an
indication of our future performance or prospects. In addition, our business
process outsourcing solution, in which a customer turns over its transaction
processing to us and which was the model for 39.8% of our pro forma revenues
for the first six months of 2000, has not been widely accepted in the oil and
gas business. While we believe the trend toward accepting business process
outsourcing is increasing, we cannot assure you that a significant number of
companies in the oil and gas industry will accept it as a business model. The
failure of business process outsourcing to be widely accepted in the oil and
gas industry, or a material delay in its acceptance, would impair our growth
and could materially harm our business.

You should not rely on our historical and pro forma financial information in
deciding whether to invest in our common stock because such information may
not be representative of our results as a combined company.

The historical financial information included in this prospectus combines our
operating results with the operating results of our subsidiary, Petroleum
Financial, and the Torch contracts. Our pro forma financial information
includes the Oracle Energy Upstream business as if acquired by us at the
beginning of the periods presented. Our historical and pro forma information
may not reflect what our results of operations, financial position and cash
flows would have been if we had been a combined entity during the periods
presented, or what our results of operations, financial position and cash flows
will be in the future. The historical and pro forma financial information does
not reflect many significant changes that have occurred or may occur in our
operational arrangements as a combined entity. Further, the historical revenues
reported for the Oracle Energy Upstream business include revenues from
consulting services provided by Oracle in connection with its downstream and
financial applications, none of which are part of our business. In addition,
Torch's service fee activities include management consulting services, services
in connection with the acquisition of oil and gas properties, land
administration services and human resources, as well as the services we
provide. The revenues of Novistar only include the service fees earned from
Bellwether Exploration, one of our largest customers, after October 1, 1999.
Accordingly, you should not rely on our historical and pro forma financial
information as an indication of our future operating results or financial
performance.

We have operated as a subsidiary of Torch and have several customers related
to Torch. We may not be able to successfully operate as an independent company
and may lose customers if we or our customers experience problems with Torch.

In 1999, Torch consolidated several of the business activities it previously
conducted into Novistar, hired new executive management and adopted a new
business model and pricing and marketing plan. Although Torch will continue to
have a majority ownership interest in us after the offering, we will operate as
a separate company. Problems in our relationship with Torch could adversely
affect our relationship with several of our significant customers affiliated
with Torch, such as Nuevo Energy and Bellwether Exploration. In addition, if
Torch were to develop strained relationships with our common customers it could
adversely affect our relations with these customers.

9
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If any of these customers were to substantially reduce or discontinue use of
our solutions, our business, operating results and financial condition could
be materially harmed. While these customers will continue to be important to
our business, we intend to focus on adding additional customers not affiliated
with Torch. We may be unable to successfully market our services to persons
unaffiliated with Torch, which would impair our growth and could harm our
business.

Our costs related to corporate services could increase as our relationship
with Torch changes in the future.

We are party to a support services agreement with Torch. The services Torch
provides to us under this agreement are primarily human resources, office
administration, office facilities, risk management, corporate secretary, legal
support, graphic services, tax and financial planning, corporate relations and
internal and joint interest audit. Fees under this agreement are based on a
monthly fee and provisions for time and materials charges for requested
services.

The agreement terminates in January 2005, and then is renewable on an annual
basis. We can terminate this agreement at any time upon 90 days' notice and
payment of a termination fee of $1.0 million. If the agreement is terminated,
and if we are unable to engage third parties to perform these services and
have to replicate facilities, services or employees that we are not using full
time, or are not able to engage a third party at costs similar to those
charged by Torch, our costs would increase.

Our business may be harmed if we lose the services of Thomas Ray, Kelly
Parrino, Richard Williams or other key employees.

We believe our future success is dependent on our key employees, especially
Thomas Ray, our chief executive officer, Kelly Parrino, our chief information
officer, and Richard Williams, our senior vice president--strategy and
marketing. The loss of the services of one or more of our key officers, or
their decision to join a competitor or otherwise compete with us, could harm
our business and stock price.

If our agreements with Oracle are terminated or our relationship with Oracle
becomes strained, we could lose the ability to effectively market our
solutions.

We have an agreement with Oracle under which we jointly market our products
and services, and coordinate upgrades and new releases of our software with
new releases of Oracle's financial application and database software. Oracle's
cooperation is essential for this marketing and technology coordination
agreement to be successful. If we have any difficulties in our relationship
with Oracle, we may not receive the full benefit of this agreement which could
result in a loss of revenue and customers.

Our software requires Oracle's database software to operate. We have entered
into an agreement with Oracle that grants us the right to sublicense its
database software in connection with licenses of our software. This agreement
is terminable at any time by either party. If this agreement is terminated,
our license customers will have to obtain licenses of the database software
directly from Oracle in order to use our software. Our inability to continue
to offer Oracle's database software to our license customers could cause us to
lose revenue and customers.

A small number of customers account for a high percentage of revenue and the
loss of a major customer would materially harm our operating results.

During 1999, Nuevo Energy represented 20.2% of our pro forma revenues and
during the first six months of 2000 represented 25.9% of our pro forma
revenues. For the first six months of 2000, Bellwether Exploration represented
12.7% of our pro forma revenues. For the first six months of 2000, Torch
represented 12.0% of our pro forma revenues. The loss of any of these
customers or any of our existing business process outsourcing customers would
result in significant lost revenues and an important customer reference that
we expect to be instrumental in securing future customers. Our business
process outsourcing customer contracts generally have a term of three to five
years, but may be terminated by our customers upon six months prior notice if
our customers pay a termination fee. If our current business process
outsourcing

10
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customers do not maintain their relationship with us or continue to contract
for the current level of services, or we are not able to sell our services to
new customers at comparable or greater levels, our revenues will decline. In
addition, technical support fees received from licensees pursuant to contracts
that are renewed on an annual basis account for approximately ten percent of
our current revenues. If one or more licensees fails to renew a technical
support contract, our operating results would be materially harmed.

The oil and gas industry is characterized by substantial consolidation, which
makes our customer base volatile.

The oil and gas industry is characterized by a high level of mergers and
acquisitions and dispositions of assets. As a result, our customer base may be
more volatile than the customer bases of providers of business process
solutions that target industries not characterized by a high level of
consolidation. We could lose significant customers as a result of industry
consolidation which would materially harm our business.

Changes in the economic condition of the oil and gas industry may harm our
business, our operating results and our profitability.

We currently derive all of our revenues from business process outsourcing and
software licensing to the upstream sector of the oil and gas industry. We also
receive revenues from the Torch contracts, the fees for which are calculated in
part based on oil and gas prices. Although we believe that our solutions reduce
operating costs of industry participants, demand for our solutions could
nevertheless be harmed by significant downturns, fluctuations or instability in
the upstream sector of the oil and gas industry. These events may be caused by
factors such as a protracted decline in oil and gas prices, a reduction in
demand for oil and gas, or worldwide economic recession.

Our solutions are critical to our customers' business. Our failure to deliver
error-free products and services could result in loss of customers and
substantial liability.

We may make mistakes in performing our services that result in claims being
made against us. Because our services relate to critical functions of our
customers, our mistakes could cause substantial damage. Our mistakes could
subject us to payment of damages or requirements to provide services at no
charge. Most of our contracts for business process outsourcing require us to
provide free services or services at a reduced cost in the future if we do not
meet the service levels specified in the contracts, which could adversely
affect our revenues and earnings. Service levels are agreed to by us and our
customers based on our customers' requirements, and include delivery of
critical reports on a timely basis, monthly reconciliation of accounts, posting
of cash receipts within a customer-defined time period and providing network
and database availability during predefined times. Our mistakes may also damage
our business reputation which could adversely affect our relationships with
existing customers and affect our ability to attract new customers.

Our software could contain defects that are not discovered until after the
software is in use, particularly when new versions or enhancements are
released. Any interruptions caused by defects or any other disruptions in our
services, even if temporary, could damage our reputation, result in product
liability suits against us, divert research and development resources and delay
or reduce market acceptance of our business process outsourcing solutions based
on the software, any of which could harm our business.

Oracle's and other third parties' software applications used with our software
or in our solutions may contain defects when introduced or when new versions or
enhancements are released. If this were to occur, our business and reputation
may be harmed, and we may lose revenues.

We have guaranteed cost savings to Nuevo Energy.

We renewed our contracts with Nuevo Energy in 2000. In connection with this
renewal, we agreed to cause Nuevo Energy to realize $3.5 million in cost
savings over three years beginning in August 2000, with a minimum savings of
$500,000 per year, compared with the amount Nuevo Energy would have paid if the
contract terms had not changed from those in effect in 1999. This $3.5 million
cost savings target will be reduced by one-half of the profit Nuevo Energy
realizes on warrants to purchase our common stock that we have agreed to issue
to them. If we fail to cause Nuevo Energy to realize all or a portion of

11
<PAGE>

these cost savings and the value of their warrants does not increase
sufficiently, we would be required to pay Nuevo Energy up to $3.5 million over
the next three years.

The market for business process solutions in the oil and gas industry is
highly competitive and we may not be able to compete successfully.

The market for providers of business process solutions to the upstream sector
of the oil and gas industry is extremely competitive. Although there are
currently a limited number of companies against whom we directly compete, we
anticipate that technology and consulting companies currently focused on
providing solutions across multiple industries may enter our market. In
addition, traditional service and start-up companies focused on the upstream
sector of the oil and gas industry may compete with us. Our current and
potential competitors include:

. international, national and regional accounting and consulting firms, such
as PricewaterhouseCoopers, Cap Gemini Ernst & Young and KPMG, that provide
consulting services and outsourced accounting and transactional services,
or that enter into collaborative alliances with software and hardware
providers to perform these services;

. providers of software solutions for the upstream oil and gas industry,
such as Petroleum Place and Artesia Data Systems;

. enterprise resource planning software providers such as PeopleSoft and
SAP; and

. application service providers such as Corio, Interliant, USinternetworking
and FutureLink.

Some of our competitors have substantially greater financial, technical and
marketing resources and possess greater name recognition that they can use to
gain market share. As a result, they may be able to provide customers with
additional benefits at lower costs and may be in a better position to respond
more quickly to new or emerging technologies or changes in customer
requirements. If we are unable to compete, we will lose customers or be unable
to attract new customers.

We engage in international operations which subject us to additional risks
that may harm our operating results and limit our future international growth.

We currently have limited international operations but plan to expand our
international sales and marketing efforts. International operations are
generally subject to a number of risks that may adversely affect our operating
results or limit our prospects for international expansion, including:

. adapting software for foreign countries;

. protectionist laws that favor local competition;

. our dependence on local distributors and consultants;

. multiple, conflicting and changing governmental laws and regulations;

. longer sales cycles;

. the need to enforce contractual rights and judgments in foreign courts;

. difficulties in collecting accounts receivable;

. foreign currency exchange rate fluctuations; and

. political and economic instability.

We may not be able to manage our expanding operations.

The growth of our customer base has placed and will continue to place a
significant demand on our management, financial and operational resources. We
have expanded our operations rapidly and intend to continue to expand our U.S.
and international operations in the foreseeable future, to pursue existing and
potential market opportunities, and to support our growing customer base. In
order to manage growth effectively, we must implement and improve our
operational systems, procedures and controls on a timely and cost-effective
basis. If we fail to improve our operational systems in a timely and cost-
effective manner, we could experience customer dissatisfaction, cost
inefficiencies and lost revenue opportunities.

In addition, demands on our limited resources have already required us and may
require us in the future to engage third-party resources over which we have

12
<PAGE>

limited control to assist us in implementing our growth strategy. We depend on
third parties to provide administrative and other services and to assist our
clients in the transition of their employees to us when we provide business
process outsourcing. One or more of our third-party providers may fail to
deliver the services we require. The failure of any of these third parties to
provide services or any disruption of these services could result in an
interruption of our outsourcing services or support for our licensing
arrangements. Any such event would diminish the attractiveness of our solutions
to our customers.

We may not be able to attract and retain the qualified staff necessary to grow
our business.

Our business is growing at a rapid pace and we intend to continue the expansion
of our current operations and pursue existing and potential market
opportunities. In order to manage our growth, we must attract, retain, manage
and motivate qualified information technology, accounting and transaction
processing personnel, as well as oil and gas industry professionals.
Competition for these individuals, especially information technology personnel,
is intense and recruiting and training them requires substantial resources.
Other employers may offer significantly greater compensation and benefits or
more attractive career paths or geographic locations than we are able to offer.
We may not be able to hire and retain the necessary personnel or we may need to
pay higher compensation for employees than we currently expect. If we are
unable to attract and retain skilled employees, the growth of our business will
be limited.

Our prior S corporation status could result in future tax liability.

Prior to February 2000, we were an S corporation for federal income tax
purposes. Unlike a C corporation, an S corporation generally is not subject to
income tax at the corporate level. We could have liability from our previous
activities if our S corporation status were denied by the Internal Revenue
Service in the future.

Risks Associated with Our Technology

Our business may be harmed if we fail to develop and deliver new software and
services that are valuable to our customers.

Our market is characterized by rapidly changing technology and frequent new
product and service introductions. If we fail to introduce new software or
services, or to improve our existing software or services in response to
industry developments, we may lose customers, which would lead to a loss of
revenue.

There are a number of risks associated with new software development projects,
including:

. we may not complete the projects in a timely manner;

. we may be unable to attract or retain required technical and management
personnel to develop and manage these projects;

. we may need to develop or acquire new technology; or

. we may encounter technical challenges that we cannot overcome.

Any one of the above events could delay the timing of a software release or
decrease the quality of our solutions and services and, thereby, decrease
market acceptance of our products.

We plan to extend our software and services to further automate business
processes and to facilitate workflow collaboration among oil and gas industry
participants. There are a number of risks and uncertainties associated with
this extension, including:

. we may not accurately determine the features required by oil and gas
industry participants and develop solutions that incorporate these
features;

. this extension is unproven and may not be adopted by oil and gas industry
participants; and

. we have no experience in establishing a new strategy like this among
industry participants.

Any of these risks or uncertainties could prevent us from successfully
implementing this extension, which could hamper our growth and would harm our
operating results.

13
<PAGE>

If we fail to adapt our solutions to rapid changes in the oil and gas
industry, our existing products could become obsolete.

The market for our solutions is characterized by frequent introduction of new
software products and related technology enhancements, changes in customer
demands and evolving industry standards. We may not be able to successfully
develop and market new software or updates to our existing software. Software
based on new technologies or new industry standards could render our existing
software obsolete and unmarketable. If we fail or are delayed in developing
enhancements to our current products or new products, we could lose revenue
opportunities and customers and our cost of doing business may increase.

Losses from damage to hardware or loss of data through viruses could undermine
customer confidence in our services, which could harm our business and
reputation.

We currently conduct all of our data processing and network operations at our
facility in Houston, Texas. Sunguard Recovery Services is our primary disaster
recovery provider. In the event of a disaster, Sunguard has agreed to provide
us with the infrastructure and computer hardware necessary to resume
operations. Nevertheless, our customers' data may not be available in the event
of a disaster and our recourse against Sunguard is limited. Any disruption that
results in the unavailability of our services to our customers could result in
the loss of existing customers and the inability to attract future customers.

In the event of a major catastrophe, our operations are dependent on Sunguard
being able to successfully provide back-up processing capability and our
ability to restore back-up data to the most recent time frame possible. Some of
the events that could lead to a major catastrophe include:

. physical damage or interruption from long-term power loss,
telecommunication failure, fire, storms and other natural disasters;

. computer viruses; and

. physical or electronic break-ins.

We cannot assure you that the precautions we have taken will protect us against
these types of events. In the event that a disaster occurs, our reputation and
business could be materially harmed due to claims by customers, loss of
contract revenues, the costs of replacing lost systems, the loss of current
customers and an inability to attract new customers.

Our limited ability to protect our intellectual property rights in our
software could harm our operating results and competitive position.

Our business and financial performance depends to a significant degree upon our
software and other proprietary technology. If we are unable to successfully
protect this technology, we may be unable to effectively compete in this
industry. We do not have any patents. We generally enter into confidentiality
agreements with employees and other persons who have access to our software and
license agreements with customers. The measures we have taken may be inadequate
and afford only limited protection. Our competitors may independently develop
technologies that are substantially similar to ours. In addition, detecting
unauthorized use of our intellectual property rights may be difficult. Even if
we do detect unauthorized use of our intellectual property rights, we may not
be able to enforce our rights, particularly in foreign countries where the laws
may not protect our proprietary rights as fully as those in the United States.
If we litigate to enforce our rights, it could be expensive, divert management
resources and could be inadequate to protect our business.

We could be subject to claims alleging infringement on patents or copyrights
of others.

There has been substantial litigation in the software industry regarding
intellectual property rights. We could be the subject of claims alleging
infringement of third-party intellectual property rights, which could divert
management's attention and resources and disrupt our operations. In addition,
we may be required to indemnify partners and customers for similar claims made
against them. Defending an infringement claim, even if without merit, could be
time consuming, costly and involve substantial risk. As a result of an
infringement claim, we may be required to pay damages, develop non-infringing
intellectual property or acquire licenses to intellectual property that is the
subject of the infringement claim.

14
<PAGE>

If our security system is breached, our business and reputation could suffer.

Our activities involve the storage and transmission of proprietary
information, such as financial accounting information, of our customers and
security breaches could damage our reputation and expose us to a risk of loss
or litigation. We rely on encryption and authentication technology licensed
from third parties in an effort to secure transmission of confidential
information. Advances in computer capabilities, new discoveries in the field
of cryptography or other developments may result in a compromise of the
methods we use to protect customer transaction data. Anyone who is able to
avoid our security measures or those of our customers could misappropriate our
proprietary information or cause interruptions in our Internet operations. We
may need to spend significant funds or other resources to protect against the
threat of security breaches or to address problems caused by breaches, which
may not be effective.

Despite the implementation of security measures, our networks and those of our
customers may be vulnerable to unauthorized access, computer viruses and other
disruptions. Internet service providers have experienced and may experience
future interruptions in service as a result of the accidental or intentional
actions of Internet users, employees or others. Additionally, concerns over
the security of transactions conducted on the Internet may inhibit the growth
of the Internet as a means of conducting commercial transactions which could
hinder the development of our business.

Risks Relating to this Offering

Torch will own approximately % of our stock following the offering ( % if
the underwriter's over-allotment option is exercised in full), and will be
able to exert influence over our operations.

After the offering, Torch will own approximately % of our outstanding common
stock ( % if the underwriter's over-allotment option is exercised in full). As
a result, Torch will be able to significantly influence our board of directors
and all matters that our stockholders vote upon, even if other directors or
stockholders oppose them. These matters include the election of directors and
significant transactions, such as business combinations. Such concentration of
ownership may have the effect of delaying, deterring or preventing a change of
control or other business combination which would be economically beneficial
to us or our other stockholders.

You will be subject to immediate and substantial dilution in connection with
your purchase of our common stock.

The net tangible book value of shares of our common stock that you purchase in
this offering will be substantially less than the price you pay for them. This
immediate and substantial dilution in the net tangible book value of the
shares you purchase will be $ per share based on the initial public offering
price. If and to the extent that outstanding common stock options are
exercised after the offering, you will experience further dilution in the net
tangible book value of your shares of common stock. See "Dilution."

An active public market for our stock may not develop.

Before this offering, there has been no market for our common stock. We cannot
offer any assurance that an active trading market for these shares will
develop or continue, or how active that market might become after this
offering. Active trading markets generally result in lower price volatility
and more efficient execution of buy and sell orders for investors. The initial
public offering price will be determined by negotiations between us and
representatives of the underwriters and may bear no relationship to the price
at which the common stock will trade in the market upon completion of the
offering. You may not be able to sell your shares at prices above the initial
public offering price. You should read "Underwriting" for a description of the
factors considered in determining the initial public offering price.

Our stock price may be volatile, resulting in expensive securities class
action litigation.

The securities markets have experienced significant price and volume
fluctuations, and the market prices of the securities of technology companies
in particular have been especially volatile. This market volatility, as well
as general economic, market or political conditions, could reduce the market
price of our common stock in spite of our operating performance. In addition,

15
<PAGE>

the price of our common stock could decrease significantly if our operating
results are below the expectations of public market analysts and investors. In
the past, securities class action litigation has often been brought against a
company following periods of volatility in the market price of its securities.
If we are the target of securities class action litigation, it could result in
substantial costs, a diversion of management's attention and resources and
harm to our reputation.

The lapse of legal restrictions on the sale of our stock could affect our
stock price and dilute your stock ownership.

Sales of substantial amounts of our common stock in the public market by
insiders following the offering, or the perception that these sales may occur,
could cause the market price of our common stock to fall. After the offering,
assuming the underwriters do not exercise their over-allotment option, there
will be shares of our common stock outstanding. If the underwriters
exercise their over-allotment option, this number will increase to shares.
Of these, shares will be held as follows:

<TABLE>
<CAPTION>
Number
Stockholder of Shares
----------- ---------
<S> <C>
Torch.............................................................. 9,076,675
Oracle............................................................. 2,484,395
</TABLE>

The holding periods under Rule 144 with respect to the shares of our common
stock held by Torch and Oracle will expire before the scheduled expiration of
the lock-up agreements to be entered into by our directors, officers and
specified shareholders, including Torch and Oracle. These lock-up agreements
are scheduled to expire 180 days after the date of this prospectus.

We have a substantial number of shares subject to options and warrants with
exercise prices substantially below the price to the public in the offering,
which may dilute your investment and decrease the market price.

As of September 15, 2000, we had:

. 2,138,824 shares underlying outstanding options at a weighted average
exercise price of $1.63 per share;

. 161,066 shares subject to outstanding warrants at an exercise price of
$4.00 per share;

. 170,000 shares subject to warrants that we have agreed to issue to Nuevo
Energy at an exercise price of $4.00 per share;

. 750,000 shares subject to warrants that we have agreed to issue to Unocal,
the final terms of which are still subject to negotiation; and

. 400,000 shares underlying options that will be issued to our chief
executive officer immediately prior to the offering with an exercise price
equal to the price to the public in the offering.

The issuance of these shares will dilute our common stock and may cause our
stock price to decline.

We have anti-takeover defenses that could delay or prevent a takeover that
shareholders may consider favorable.

Provisions of our certificate of incorporation, bylaws and Delaware law could
have the effect of delaying, deterring or preventing a merger, acquisition or
other change of control of Novistar even if such change of control would be
beneficial to us or our stockholders. For example,

. our board of directors is divided into three classes, the members of which
serve three year terms;

. after the offering, we may issue up to 5,000,000 shares of preferred
stock, with rights, terms and preferences determined by our board of
directors;

. our stockholders may take action only at a stockholders meeting, and may
not take action by written consent;

. our stockholders must give 90 days notice of an intent to nominate a
person to our board of directors; and

. Section 203 of the Delaware General Corporation Law provides that a person
who owns 15% of our common stock, or any affiliate or associate of such
person, is an interested stockholder and that an interested stockholder
must receive a vote of 66 2/3% of our shares not owned by the interested
stockholder to engage in a merger or other business combination with us.

16
<PAGE>

Forward-Looking Statements

Some of the information in this prospectus contains forward-looking statements
within the meaning of the federal securities laws. These statements include,
among others, the following:

. our future business plans and intent of management;

. the capabilities and date of release of future versions and upgrades of
our software; and

. expectations about the market acceptance of our software and services.

These statements may be found under "Prospectus Summary," "Management's
Discussion and Analysis of Financial Condition and Result of Operations,"
"Business" and elsewhere that are forward-looking and not based on historical
facts. Forward looking statements are typically identified by use of terms such
as "may," "will," "expect," "anticipate," "estimate" and similar words,
although some forward-looking statements are expressed differently. You should
be aware that our actual results could differ materially from those contained
in the forward-looking statements due to a number of factors, including those
we discuss under "Risk Factors" and other sections of this prospectus. These
forward-looking statements speak only as of the date of this prospectus, and we
caution you not to rely on these statements about our business that are
addressed in this prospectus.

17
<PAGE>

Use of Proceeds

We estimate that the net proceeds from the sale of the shares of common stock
we are offering will be approximately $ million. If the underwriters fully
exercise the over-allotment option, the net proceeds of the shares we sell will
be $ million. "Net proceeds" is what we expect to receive after paying the
underwriting discount and other expenses of the offering. For the purpose of
estimating net proceeds, we are assuming that the public offering price will be
$ per share.

We will use:

. $ million of the net proceeds to repay working capital advances made to
us by Torch. These advances are due on demand and bear interest at 9% per
annum.

. $ million of the net proceeds to repay principal and interest owed to
Oracle. The amount owed to Oracle was incurred as part of the purchase
price of the Oracle Energy Upstream business. Amounts owed to Oracle are
due upon the earlier of the offering or February 18, 2005. Interest on the
Oracle loan is currently 9% and increases to 17% in annual increments
until maturity.

. $ million of net proceeds to repay principal and interest owed to Torch
and incurred to finance the acquisition of the Oracle Energy Upstream
business. The amounts owed to Torch have the same terms as the amounts
owed to Oracle.

. up to $5.7 million of net proceeds to acquire the Torch contracts. This
amount was agreed upon by us, Torch and Oracle as the value of the Torch
contracts based on the revenues anticipated to be generated in the future
by the Torch contracts. We will seek a fairness opinion from an investment
bank reasonably acceptable to the underwriters of this offering regarding
the fairness, from a financial point of view, of the value assigned to the
Torch contracts. If the investment bank is unable to opine that the value
assigned to the Torch contracts is fair to us, from a financial point of
view, Torch has agreed to reduce the purchase price of the Torch contracts
to the value determined by the investment bank to be fair to us.

. the balance of the net proceeds for general corporate purposes, including
working capital, software development and the expansion of our operations,
including the recruitment and retention of personnel.

See "Certain Transactions" for additional information about the foregoing
transactions.

In addition, we may pursue the acquisition of new or complementary businesses,
products or technologies in an effort to enter into new business areas,
diversify our sources of revenue and expand our product and service offerings.
A portion of the net proceeds may be used to fund these acquisitions or
investments. We currently have no agreements or understandings, and are not
engaged in active negotiations, for any acquisitions or investments. We will
retain broad discretion in the allocation of the net proceeds of this offering.
This discussion represents our best estimate of the allocation of the net
proceeds of this offering based upon our current plans. Actual expenditures may
vary substantially from these estimates and we may find it necessary or
advisable to reallocate the net proceeds within the above-described categories
or to use portions for other purposes.

Until we use the net proceeds of the offering, we will invest the funds in
short-term, investment grade, interest-bearing securities.

18
<PAGE>

Dividend Policy

We have never paid any cash dividends on our capital stock. We do not expect to
pay cash dividends in the foreseeable future. We anticipate that we will retain
earnings to support operations and to finance the growth and development of our
business. In addition, as part of our letter of intent with Unocal for business
processing outsourcing and a concurrent investment in us by them, we have
agreed not to pay cash dividends prior to 2004.

Capitalization

The following table shows:

. Our actual capitalization on June 30, 2000.

. Our capitalization on June 30, 2000, assuming the completion of the
offering at an assumed public offering price of $ per share and the use
of the net proceeds as described under "Use of Proceeds."

This table should be read in conjunction with "Use of Proceeds," "Unaudited Pro
Forma Combined Financial Statements," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our historical financial
statements and related notes appearing elsewhere in this prospectus.

<TABLE>
<CAPTION>
June 30, 2000
---------------------
Actual As Adjusted
-------- -----------
(in thousands)
<S> <C> <C>
Cash and cash equivalents............................ $ 151 $
======== ====
Due to Torch......................................... $ 11,114
========
Note payable--Oracle................................. 10,000
Note payable--Torch.................................. 8,675
Stockholders' equity:
Common stock, $0.01 par value per share; 20,000,000
shares authorized, 9,076,675 shares issued and
outstanding; 50,000,000 shares authorized,
shares issued and outstanding, as adjusted.. 91
Preferred stock, $0.01 par value per share;
3,000,000 shares authorized, 2,484,395 shares of
series A preferred stock issued and outstanding
(liquidation preference $9,950,000); 5,000,000
shares authorized, no shares issued and
outstanding, as adjusted.......................... 25
Warrants........................................... 15
Additional paid-in capital......................... 15,748
Accumulated deficit................................ (10,526)
-------- ----
Total stockholders' equity....................... 5,353
-------- ----
Total capitalization............................. $ 24,028 $
======== ====
</TABLE>

19
<PAGE>

Dilution

Our net tangible book value on June 30, 2000, was approximately $(26.4)
million, or $(2.91) per share. "Net tangible book value" is total assets minus
the sum of liabilities and intangible assets. "Net tangible book value per
share" is net tangible book value divided by the total number of shares
outstanding.

After giving effect to adjustments relating to the offering, our pro forma net
tangible book value on June 30, 2000, would have been $ , or $ per share.
The adjustments made to determine pro forma net tangible book value per share
are the following:

. An increase in total assets to reflect the net proceeds of the offering as
described under "Use of Proceeds" (assuming that the public offering price
will be $ per share).

. The addition of the number of shares offered by this prospectus to the
number of shares outstanding.

The following table illustrates the pro forma increase in net tangible book
value of $ per share and the dilution (the difference between the offering
price per share and net tangible book value per share) to new investors:

<TABLE>
<S> <C> <C>
Assumed public offering price per share.......................... $
Net tangible book value per share as of June 30, 2000............ $
Increase in net tangible book value attributable to the
offering........................................................
----
Pro forma net tangible book value per share as of June 30, 2000
after giving effect to the offering.............................
----
Dilution per share to new investors in the offering.............. $
====
</TABLE>

The following table shows the difference between existing stockholders and new
investors with respect to the number of shares purchased from us, the total
consideration paid and the average price paid per share. The table assumes that
the public offering price will be $ per share.

<TABLE>
<CAPTION>
Shares Total Average
Purchased Consideration Price
-------------- -------------- Per
Number Percent Amount Percent Share
------ ------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................. % $ % $
New investors..........................
--- --- --- ---
Total................................ % $ %
=== === === ===
</TABLE>

The foregoing table assumes no exercise of the underwriters' over-allotment
option and excludes the following:

. 2,138,824 shares underlying options outstanding as of September 15, 2000
at a weighted average exercise price of $1.63 per share;

. 161,066 shares subject to warrants outstanding as of September 15, 2000 at
an exercise price of $4.00 per share;

. 170,000 shares subject to warrants that we have agreed to issue to Nuevo
Energy at an exercise price of $4.00 per share;

. 750,000 shares subject to warrants that we have agreed to issue to Unocal,
the final terms of which are still subject to negotiations; and

. 400,000 shares underlying options that will be issued to our chief
executive officer immediately prior to the offering with an exercise price
equal to the price to the public in the offering.

20
<PAGE>

Unaudited Pro Forma Combined Financial Statements

Basis of Presentation

The following table sets forth our selected historical and unaudited pro forma
combined financial information for the periods shown. The pro forma statement
of operations and balance sheet data were derived from the historical combined
financial statements of the respective companies and give effect to:

. the combination of Novistar, Petroleum Financial and the Torch contracts
which were under common control, as an integral part of Torch's overall
operations;

. the acquisition of the Oracle Energy Upstream business;

. the common stock offering and related transactions as described in this
prospectus at an offering price of $ per share; and

. the provision (benefit) for corporate income taxes as if we had been a C
corporation for tax purposes during the periods presented.

These items are collectively referred to as the "pro forma adjustments."

The unaudited pro forma combined financial information is provided for
illustrative purposes only and does not purport to represent what our actual
results of operations or financial position would have been had the events
described above occurred on the date assumed, nor is it necessarily indicative
of future results of operations or financial position. You should read the
unaudited pro forma combined financial information with our historical combined
financial statements and accompanying notes and the statement of assets
acquired and liabilities assumed of Oracle Energy Services and the related
statements of revenues and direct operating expenses from certain activities.

As permitted by the rules and regulations of the SEC, the unaudited pro forma
combined financial information is presented on a condensed basis.

The unaudited pro forma combined statements of operations for the fiscal year
ended December 31, 1999 and the six months ended June 30, 2000 were prepared as
if the pro forma adjustments had occurred as of January 1, 1999. The unaudited
pro forma combined balance sheet was prepared as if the pro forma adjustments
had occurred as of June 30, 2000.

21
<PAGE>

UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

For the Year Ended December 31, 1999

<TABLE>
<CAPTION>
Pro Forma
Historical Historical Pro Forma As Adjusted
Combined Oracle Energy Acquisition Combined Offering Combined
Novistar Services(A) Adjustments Novistar Adjustments Novistar
---------- ------------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $ 18,122 $ 24,651 $ -- $ 42,773 $ $
Cost of revenues........ (15,581) (22,770) -- (38,351)
---------- -------- ------- -------- ------- -------
Gross profit............ 2,541 1,881 -- 4,422

Operating expenses...... (5,835) (8,609) (6,677)(B) (21,121)
---------- -------- ------- -------- ------- -------
Operating loss.......... (3,294) $ (6,728) (6,677) (16,699)
Interest expense........ -- -- (1,681)(B) (1,681)
---------- -------- ------- -------- ------- -------
Loss before income
taxes.................. (3,294) $ (6,728) (8,358) (18,380)
========
Income tax benefit(G)... -- 3,828 (C) 3,828
---------- ------- -------- ------- -------
Net loss................ $ (3,294) $(4,530) $(14,552) $ $
========== ======= ======== ======= =======
Basic and diluted net
loss per share......... $ (0.36) $
========== =======
Weighted average number
of shares used in per
share computation,
basic and diluted...... 9,076,675
========== =======
</TABLE>

For the Six Months Ended June 30, 2000

<TABLE>
<CAPTION>
Historical
Oracle Energy
Services, Period From Pro Forma
Historical January 1, 2000 Pro Forma As Adjusted
Combined Through Acquisition Combined Offering Combined
Novistar February 18, 2000(A) Adjustments Novistar Adjustments Novistar
---------- --------------------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $ 14,844 $2,316 $ -- $17,160 $ $
Cost of revenues........ (9,656) (1,690) -- (11,346)
--------- ------ ------- -------- -------- --------
Gross profit............ 5,188 626 -- 5,814

Operating expenses...... (8,960) (1,081) (835)(B) (10,876)
--------- ------ ------- -------- -------- --------
Operating loss.......... (3,772) (455) (835) (5,062)
Interest expense........ (930) -- (210)(B) (1,140)
--------- ------ ------- -------- -------- --------
Loss before income
taxes.................. (4,702) $ (455) (1,045) (6,202)
======
Income tax benefit(G)... 1,592 (1,592)(C) --
--------- ------- -------- -------- --------
Net loss................ $ (3,110) $(2,637) $ (6,202) $ $
========= ======= ======== ======== ========
Basic and diluted net
loss per share......... $ (0.34)
========= ========
Weighted average number
of shares used in per
share computation,
basic and diluted...... 9,076,675
========= ========
</TABLE>

See accompanying notes to financial statements.

22
<PAGE>

UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(in thousands)

At June 30, 2000

<TABLE>
<CAPTION>
Pro Forma
Historical As Adjusted
Combined Offering Combined
Novistar Adjustments(D) Novistar
---------- -------------- -----------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.............. $ 151 $ $
Accounts receivable.................... 4,476
Other current assets................... 384
------- ------- --------
Total current assets................. 5,011

Property and equipment, net.............. 3,738
Intangibles, net......................... 31,784
------- ------- --------
Total assets......................... $40,533 $ $
======= ======= ========
Current liabilities:
Due to affiliates...................... $11,114 $ $
Accounts payable and accrued
liabilities........................... 2,418
------- ------- --------
Total current liabilities............ 13,532
Note payable--preferred stockholder...... 10,000
Note payable--common stockholder......... 8,675
Deferred tax liabilities................. 1,815
Deferred revenues and other.............. 1,158
------- ------- --------
Total long-term liabilities.......... 21,648
Total liabilities.................... 35,180
Stockholders' equity:
Common stock........................... 91
Preferred stock........................ 25
Warrants............................... 15
Additional paid-in capital............. 15,748
Accumulated deficit.................... (10,526)
------- ------- --------
Total stockholders' equity........... 5,353
------- ------- --------
Total liabilities and stockholders'
equity.............................. $40,533 $ $
======= ======= ========
</TABLE>

See accompanying notes to financial statements.

23
<PAGE>

Notes to Unaudited Pro Forma Combined Financial Statements

Oracle Energy Acquisition Adjustments

A. The unaudited pro forma combined statements of operations reflect the
historical revenues and direct operating expenses from certain activities
of Oracle Energy Services. Except for consulting activity, the amounts
reflect the activity for the Oracle Energy Upstream business which was
acquired by Novistar. Due to the historical record-keeping methodology
followed by Oracle for its consulting practice, consulting services cannot
be separately identified. Therefore, consulting revenues and the related
direct operating expenses reflect upstream, downstream and financials'
activity.

B. To reflect depreciation and amortization of $6.7 million related to the
assets acquired with the Oracle Energy Upstream business based on a three-
year life for tangible assets and a five-year life for intangible assets,
and $1.7 million of interest expense on related financing costs for the
year ended December 31, 1999. To reflect depreciation and amortization of
$835,000 related to the assets acquired with the Oracle Energy Upstream
business based on a three-year life for tangible assets and a five-year
life for intangible assets, and $210,000 of interest expense on financing
costs for the six months ended June 30, 2000.

C. The income tax effect related to the acquisition of the Oracle Energy
Upstream business in the unaudited pro forma combined statement of
operations for the year ended December 31, 1999 reflects the benefit
associated with the recognition of the deferred tax asset generated in
1999 to the extent of the deferred tax liability established at the
acquisition date due to the excess of book basis over tax basis of the
assets acquired.

The income tax effect related to the acquisition of the Oracle Energy
Upstream business in the unaudited pro forma combined statement of
operations for the six months ended June 30, 2000 reflects the
elimination of the historical income tax benefit because had the
acquisition occurred as of January 1, 1999, Novistar would have been
unable to recognize a benefit for the deferred tax asset generated during
the period.

Offering Adjustments

D. The unaudited pro forma combined balance sheet gives the effect to the
sale of common stock in the offering at an initial price of $ per share,
after deducting underwriting discounts and estimated offering expenses;
the application of the net proceeds therefrom to repay working capital
advances, and related interest, from Torch; principal and interest owed to
Oracle in connection with the acquisition of the Oracle Energy Upstream
business; principal and interest owed to Torch in connection with their
financing for the acquisition of the Oracle Energy Upstream business; and
the payment to Torch in connection with the transfer to Novistar of the
Torch contracts.

E. The unaudited pro forma combined statements of operations reflect the
reversal of interest expense related to amounts due to Oracle and Torch
which will be repaid upon consummation of the initial public offering.

F. The preferred stock issued to Oracle in connection with the acquisition of
the Oracle Energy Upstream business is convertible into 2,484,395 shares
of common stock. The conversion is automatic upon the sale of Novistar's
common stock in an initial public offering at a price per share of not
less than $10 from which Novistar receives gross proceeds of not less than
$50 million. Pro forma earnings per share calculations assume automatic
conversion will be required on the effective date of the stock offering.

Income Tax Adjustments

G. The unaudited pro forma combined statements of operations reflect the
benefit for corporate income taxes, as if Novistar had been a C
corporation for tax purposes during the periods presented.

24
<PAGE>

Selected Financial Data
(in thousands, except per share data)

This section presents selected historical financial data. Prior to 1999, we
operated as a division of Torch. Torch is in the business of providing services
to the oil and gas industry, including the services offered by us. Torch did
not separately allocate the fees it received from clients or the costs and
expenses associated with those fees between Novistar and the other divisions of
Torch until 1999. It is therefore impossible to prepare separate financial
statements for the activities currently performed by Novistar before 1999.

The following table shows Novistar's selected historical financial data for
1999 and the first six months of 2000. The table also shows operating, balance
sheet and other data about the service fee activities of Torch for the five
years ended December 31, 1999, which includes the activities of Novistar. We
believe that Novistar has represented a substantial portion of the revenues and
expenses of Torch's service fee activities since 1997. Torch was sold to its
management in September 1996, so we have divided the 1996 information to
reflect activities before and after this transaction. You should carefully read
the financial statements included in this prospectus, including the notes to
the financial statements. The selected financial data in this section is not
intended to replace the financial statements.

The selected financial data consists of:

<TABLE>
<CAPTION>
Predecessor Service Fee Activities of Torch Combined Novistar
---------------------------------------------------------------- -----------------------------
Nine Months Three Months Six Months
Year Ended Ended Ended Year Ended December 31, Year Ended Ended June 30,
December 31, September 30, December 31, ------------------------ December 31, ----------------
1995 1996 1996 1997 1998 1999 1999 1999 2000
------------ ------------- ------------ ------- ------- ------- ------------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Revenues............. $19,577 $17,627 $5,724 $23,710 $19,667 $21,215 $18,122 $ 7,563 $14,844
Cost of revenues..... 19,899 15,881 6,135 20,885 20,040 23,794 15,581 8,107 9,656
------- ------- ------ ------- ------- ------- ------- ------- -------
Gross profit (loss).. (322) 1,746 (411) 2,825 (373) (2,579) 2,541 (544) 5,188
Operating loss....... N/A N/A N/A N/A N/A N/A (3,294) (3,206) (3,772)
Basic and diluted net
loss per share...... N/A N/A N/A N/A N/A N/A $ (0.36) $ (0.35) $ (0.34)
</TABLE>

<TABLE>
<CAPTION>
At At
December 31, June 30,
1999 2000
------------ --------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents......................... $ 61 $ 151
Total assets...................................... 7,200 40,533
Due to affiliates................................. 7,497 11,114
Note payable--preferred stockholder............... -- 10,000
Note payable--common stockholder.................. -- 8,675
Stockholders' equity (deficit).................... (1,114) 5,353
</TABLE>

25
<PAGE>

Management's Discussion and Analysis of
Financial Condition and Results of Operations

You should read the following discussion and analysis in conjunction with our
financial statements and the related notes appearing elsewhere in this
prospectus. This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results may differ materially from those
projected in these forward-looking statements. Factors that might cause future
results to differ materially from those projected in these forward-looking
statements include those discussed in "Risk Factors" and "Forward-Looking
Statements."

Overview

Our History

We commenced operations on January 1, 1999 as a wholly-owned subsidiary of
Torch. Torch has provided administrative and other services to the oil and gas
business since 1981. Torch began using the Oracle Energy Upstream software in
its business process outsourcing services in 1996. Effective January 1, 1999,
Torch contributed to us its business process outsourcing activities. In
February 2000, we acquired the Oracle Energy Upstream business.

In connection with this offering, Torch has transferred Petroleum Financial and
will transfer the Torch contracts to us. Petroleum Financial provides business
process outsourcing activities to small and mid-sized oil and gas companies
using software licensed from Petroleum Place. Under the Torch contracts, Torch
negotiates agreements for oil and gas sales by Nuevo Energy and Bellwether
Exploration, and uses our software to account for the oil or gas they sell.
Since 1999, our employees have performed the services required by the Torch
contracts as a subcontractor for Torch. See "Certain Transactions--Transactions
with Torch--Transactions in Connection with the Offering."

Our Historical Financial Statements

Because Torch did not separately allocate the fees and expenses received from
its clients between those attributable to our operations and to Torch's other
service activities prior to January 1, 1999, it is not possible to prepare
historical financial statements of Novistar for periods prior to 1999. The
historical financial statements in this prospectus include the following:

. the service fee activities of Torch, which include the activities of
Novistar, management consulting services, services in connection with the
acquisition and divestiture of oil and gas properties, land administration
services, human resources and other administrative services not conducted
by Novistar.

. combined Novistar, which includes the results of Petroleum Financial and
the Torch contracts and presents our combined financial position and
results of operations as if we had been a stand-alone entity. The revenues
of combined Novistar include the service fees earned from Bellwether
Exploration, one of our largest clients, since October 1, 1999.

Description of Our Solutions

We deliver our solutions through business process outsourcing, application
hosting and licensing arrangements. Our business process outsourcing contracts
vary, but generally provide for the following fee arrangements:

. a fixed charge per month.

. a fee based on a fixed dollar amount per business unit. A business unit is
usually an individual well, although our solutions permit our customers to
select other business units such as productive formations or groups of
wells.

. a variable charge for services such as marketing, which is based on the
amount of oil and gas marketed or time and materials expended on select
items specified in the customer's contract.

. subjective incentive fees payable at the discretion of our customers if we
meet service levels.

Our service fee revenues include revenues from business process outsourcing
contracts, application hosting, license fees and annual maintenance fees.

26
<PAGE>

Our fee arrangements are as follows:

. Our business process outsourcing contracts are usually multi-year
agreements, which provide for termination at the customer's election on
six months prior notice. If a customer terminates the agreement before the
end of the contract term, it must pay a termination fee generally equal to
one year's revenue.

. Our fees for application hosting are based on the number of concurrent
users. We currently do not have any customers that use our application
hosting services separately from our business process outsourcing
services.

. Our fees for licenses require an initial payment for the license based on
the number of our customers' employees who will access our software
simultaneously. Typically our customers purchase an annual maintenance
contract for approximately 20% of the license fee.

We also receive consulting fees from our outsourcing, hosting and licensing
customers for implementing our solutions and transitioning our customers' data
and business processes to our solutions. Our service fee revenues from
affiliates consist of revenues we received from Torch. Our marketing
commissions include revenues we received as a subcontractor under the Torch
contracts.

Results of Operations of Novistar for the Six Months Ended June 30, 1999 and
June 30, 2000

The following table provides additional information about our revenues and
expenses in the first six months of 1999 and 2000.
<TABLE>
<CAPTION>
Six Months
Ended June 30,
----------------
1999 2000
------- -------
(Unaudited)
(in thousands)
<S> <C> <C>
Revenues:
Service fees............................................... $ 4,852 $12,022
Service fees--affiliates................................... 1,531 1,512
Marketing commissions...................................... 1,180 1,310
------- -------
Total revenues........................................... 7,563 14,844
Cost of revenues............................................. 8,107 9,656
------- -------
Gross profit (loss)...................................... (544) 5,188
------- -------
Operating expenses:
General and administrative--affiliates..................... 1,133 1,346
Selling, general and administrative........................ 271 1,383
Research and development................................... -- 2,329
Depreciation and amortization.............................. 1,258 3,902
------- -------
Total operating expenses................................. 2,622 8,960
Operating loss............................................... (3,206) (3,772)
Interest expense........................................... -- 930
------- -------
Loss before income taxes..................................... (3,206) (4,702)
Income tax benefit........................................... -- 1,592
------- -------
Net loss..................................................... $(3,206) $(3,110)
======= =======
</TABLE>

Revenues

For the six months ended June 30, 2000, our revenues were $14.8 million,
representing an increase of $7.3 million, or 96%, over revenues for the same
period in 1999.

27
<PAGE>

Service Fees. Service fees were $12.0 million in the six months ended June 30,
2000, representing an increase of $7.2 million, or 147.8%, over the same period
in 1999. Service fees represented 64.2% and 81.0% of total revenues during the
six months ended June 30, 1999 and 2000. The increase in service fees is
attributable to the consulting and support contracts acquired in the Oracle
Energy Upstream acquisition in February 2000 and to service fee revenues
generated from four new outsourcing customers. In addition, we received
$800,000 of revenue from transition services provided to new outsourcing
customers during the six months ended June 30, 2000.

Service Fees--Affiliates. Service fees from affiliates remained constant for
the six-month periods ended June 30, 1999 and 2000. Service fees from
affiliates represented 20.2% and 10.2% of total revenues during the six months
ended June 30, 1999 and 2000.

Marketing Commissions. Marketing commissions were $1.3 million during the six
months ended June 30, 2000, representing an increase of $130,000, or 11.0%,
over the same period in 1999. These commissions represented 15.6% and 8.8% of
total revenues during the six months ended June 30, 1999 and 2000. The increase
in commissions resulted from an increase in oil and gas prices during the six
months ended June 30, 1999 when compared to the six months ended June 30, 2000.

Costs and Expenses

Cost of Revenues. Cost of revenues was $9.7 million during the six months ended
June 30, 2000, representing an increase of $1.5 million, or 19.1%, over the
same period in 1999. The most significant expense increases during the six-
months ended June 30, 2000 were for salaries and salary-related expenses
incurred in connection with the acquisition of the Oracle Energy Upstream
business.

General and Administrative Expense--Affiliates. General and administrative
expense paid to affiliates were $1.1 million and $1.3 million during the six
months ended June 30, 1999 and 2000. Effective January 1, 2000, Torch has
charged us general and administrative expenses in accordance with a support
services agreement. Prior to January 1, 2000, Torch charged us pursuant to an
oral agreement on terms similar to the contract effected as of January 1, 2000.

Selling, General and Administrative. Selling, general and administrative
expenses were $271,000 and $1.4 million during the six months ended June 30,
1999 and 2000. The increase of $1.1 million is primarily due to the
establishment of a sales function subsequent to June 30, 1999 and increases to
the sales force attributed to the acquisition of the Oracle Energy Upstream
business.

Depreciation and Amortization. Depreciation and amortization costs were $3.9
million during the six months ended June 30, 2000, representing an increase of
$2.6 million, or 210%, over the same period in 1999. The increase is primarily
due to the amortization of intangible assets related to the acquisition of the
Oracle Energy Upstream business, which is being amortized over a five-year
period. Fixed assets, which include computer equipment and related
infrastructure, are depreciated over a three-year period, and did not change
significantly.

Interest Expense. We did not have any interest expense during the six months
ended June 30, 1999. For the six months ended June 30, 2000, we had interest
expense of $930,000 related to notes payable to Oracle and Torch.

Income Taxes. The income tax benefit for the six months ended June 30, 2000 was
$1.6 million. Prior to February 18, 2000, the corporation was treated as an S
corporation for federal income tax purposes, whereby taxable income or losses
flow through to, and are reported by, our stockholders. The S corporation
status was terminated on February 18, 2000, as a result of the issuance of
preferred stock in connection with the acquisition of the Oracle Energy
Upstream business. Accordingly, we have made a provision for federal income
taxes beginning February 18, 2000.

28
<PAGE>

Impact of Inflation

Inflation did not have a significant effect on our results of operations or
financial position for the six months ended June 30, 1999 and 2000.

Results of Operations of the Service Fee Activities of Torch for Years Ended
December 31, 1999, 1998 and 1997

Revenues

Torch provides services to oil and gas companies, often through outsourcing
arrangements. In addition to the services provided by Novistar, Torch's service
fee activities include management consulting services, services in connection
with the acquisition and divestiture of oil and gas properties, land
administration services and human resources.

Revenues for Torch's service activities are received under outsourcing and
management contracts and are classified as service fees. Service fees include
payments for management and administrative services, oil and gas marketing
activities and consulting services as well as transaction fees received for
arranging or advising clients on acquisitions and divestitures.

The manner in which Torch calculates fees for its contracts for outsourcing and
management services differs from contract to contract. Prior to January 1,
1999, customer contract fees were calculated based on a percentage of the book
value of assets and operating cash flow. On January 1, 1999, substantially all
of the contracts were revised to provide for a combination of fixed and
variable fees related to the activities performed. As of October 1, 1999, all
contracts under which fees were calculated based on book value of assets and
cash flows were terminated.

Below are the statements of revenues and direct operating expenses of the
service fee activities of Torch. This information was derived from the
historical accounting records of Torch and prepared on the accrual basis of
accounting. The statements do not include depreciation and amortization,
general and administrative or interest expenses.
<TABLE>
<CAPTION>
For the Year Ended
December 31,
------------------------
1997 1998 1999
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Revenues:............................................ $23,710 $19,667 $21,215
Direct operating expenses:
Cost of revenues.................................... 20,885 20,040 23,794
------- ------- -------
Total direct operating expenses.................... 20,885 20,040 23,794
------- ------- -------
Excess (deficiency) of revenues over direct
operating expenses................................ $ 2,825 $ (373) $(2,579)
======= ======= =======
</TABLE>

Revenues. Revenues were $19.7 million and $21.2 million for the years ended
December 31, 1998 and 1999. The 7.9% increase in revenues was primarily
attributed to the purchase of Petroleum Financial on December 15, 1998.
Revenues associated with Petroleum Financial were $2.4 million for the year
ended December 31, 1999. In addition, Torch received $600,000 from a new
outsourcing customer during 1999 as well as a transaction fee in the amount of
$700,000 for advising a customer on a divestiture. These increases were
partially offset by several decreases in service fees. Fees received from
Bellwether Exploration decreased $900,000 primarily due to a decrease in total
assets and operating cash flow. Fees under this agreement were based on total
assets and operating cash flow until October 1, 1999. Marketing commissions
decreased $800,000 primarily as a result of a new contract with Nuevo Energy,
one of the Torch contracts, that provides for lower fees for those services.
Similarly, fees we charged for reviewing possible acquisitions for clients
decreased $600,000 due to new contracts for Bellwether Exploration and Nuevo
Energy that provide for lower fees.

29
<PAGE>

Revenues were $23.7 million and $19.7 million for the years ended December 31,
1997 and 1998. The 17.1% decrease in revenues was due to a decrease in the book
value of assets and operating cash flow of Nuevo Energy. For the years ended
December 31, 1997 and 1998, the service fees charged to Nuevo Energy were based
on a percentage of the book value of assets and operating cash flow. Marketing
commissions decreased $1.3 million as a result of depressed oil and gas prices.
In addition, in April 1997, partnerships managed by Torch were sold, resulting
in a decrease in fees of $900,000. These decreases were partially offset by an
increase in fees of $700,000 from a new outsourcing customer.

Cost of Revenues. Cost of revenues was $20.0 million and $23.8 million for the
years ended December 31, 1998 and 1999. The 18.7% increase in cost of revenues
primarily is attributed to the expenses from Petroleum Financial, acquired in
December 1998.

Cost of revenues was $20.9 million and $20.0 million for the years ended
December 31, 1997 and 1998. The 4.0% decrease was primarily attributed to a
decrease in the performance incentive paid to employees, offset by an increase
in staffing in anticipation of obtaining new clients.

Liquidity and Capital Resources

Our principal use of capital since our formation was to acquire the Oracle
Energy Upstream business. The agreed upon purchase price was $30.0 million,
consisting of $10.0 million in cash, subject to purchase price adjustments,
$10.0 million in a promissory note and $10.0 million in shares of our series A
preferred stock, convertible into 2,484,395 shares of our common stock. We
borrowed the cash portion of the purchase price actually paid at closing from
Torch pursuant to a promissory note.

To finance the cash portion of the purchase price of the acquisition of the
Oracle Energy Upstream business, we borrowed $8.7 million from Torch. The
interest rate on the Oracle and the Torch notes is currently 9% per annum and
increases to 17% in annual increments until maturity. Both notes are due upon
the earlier of closing of this offering or February 18, 2005. Accordingly, we
will repay the notes to Torch and Oracle with a portion of the proceeds of this
offering.

To date, our working capital has been funded by Torch. In February 2000, we
executed a $15.0 million revolving promissory note, which bears interest at 9%
per annum, payable monthly, with principal payable on demand. As of September
15, 2000, our total borrowings from Torch, other than to finance the
acquisition of the Oracle Energy Upstream business, were approximately $11.1
million. We will repay all amounts under the revolving note with a portion of
the proceeds of this offering.

We are currently in preliminary discussions with a commercial bank for a credit
facility to fund our working capital requirements over the next twelve months.
We expect to have a credit facility in place prior to the completion of this
offering to replace the Torch revolving note.

We believe that the cash proceeds from this offering, the availability of
borrowings from our proposed credit facility and cash flow from operating
activities will be sufficient to meet our working capital and capital
expenditure requirements for at least the next twelve months. However, we could
elect, or we could be required, to raise additional funds during that period
and we may need to raise additional capital in the future. Additional capital
may not be available at all, or may not be available on terms favorable to us.
We may also issue equity or equity-related securities for acquisitions from
time to time in the future. Any additional issuance of equity or equity-related
securities will be dilutive to our stockholders.

Disclosures About Market Risk

The following discusses our exposure to market risk related to changes in
interest rates and equity prices. This discussion contains forward-looking
statements that are subject to risks and uncertainties. Actual results could
vary materially as a result of a number of factors including those set forth in
the Risk Factors section.

30
<PAGE>

As of June 30, 2000, all of our investments were classified as cash equivalents
with maturities at the date of purchase of less than three months. The
principal portion of our investments are not subject to interest rate risk;
however, declines in interest rates over time will reduce our interest income.

We do not have any investments in equity or debt securities traded in the
public markets. Therefore, we do not currently have any direct equity price
risk.

Our exposure to market risk for changes in interest rates relates to our long-
term debt, the proceeds of which we used to finance the acquisition of the
Oracle Energy Upstream business. We believe the carrying value of this debt
approximates its fair value. We anticipate using the net proceeds from this
offering to pay off this debt. However, if we were not able to do so and had to
replace this debt, we might have to do it at average interest rates higher than
those on our current debt instruments.

31
<PAGE>

Business

Overview

We provide comprehensive business process solutions to the oil and gas
industry. Our solutions combine our software with consistent business practices
to automate and standardize transaction processing, improve workflow and
provide greater business intelligence to our customers and their partners. By
employing our solutions, our customers are able to focus on their core business
competencies, reduce costs and improve profitability.

In February 2000, we acquired the Oracle Energy Upstream business, which
consisted of software applications, development, sales and marketing personnel,
and related infrastructure. The predecessor company to Oracle Energy Upstream
had marketed earlier versions of this software since 1991, and since 1996 our
predecessors have provided business process outsourcing services using this
software.

To meet our customers' requirements, we deliver our solutions through business
process outsourcing, application hosting and licensing arrangements. We provide
our customers the flexibility to outsource some of their business processes
while using our hosting or license arrangements for other processes. Many of
our customer contracts span multiple years and contain significant early-
termination penalties. We believe these contract terms result in predictable
and recurring revenue. As of September 1, 2000, we had 70 customers, including
Bellwether Exploration, BHP, Kerr-McGee, Newfield Exploration, Nuevo Energy,
Occidental, Phillips Petroleum, Shell and Unocal.

Industry Background

The oil and gas industry consists of three sectors:

. upstream, which includes exploring for, producing and selling oil and
natural gas;

. midstream, which encompasses the transportation, marketing and storage of
oil, natural gas and natural gas liquids; and

. downstream, which includes refining oil into gasoline and other petroleum
products and distributing and marketing refined petroleum products.

Our solutions are focused on the upstream oil and gas industry, which is a
large and capital-intensive business. According to the Energy Information
Administration, during 1999 upstream companies produced $74.4 billion barrels
of oil and gas in the United States. In addition, according to John S. Herold,
Inc., 155 leading oil and gas companies spent $25.8 billion in 1999 exploring
for, developing and acquiring oil and gas reserves in the United States.

Due to the uncertainty and expense involved in drilling oil and gas wells,
producing reserves are generally held by complex partnerships allowing numerous
participants to share risks. A partnership developing a well is generally
managed by a single entity, the operator, which is responsible for coordinating
group expenditures, procuring goods and services, managing production and
reporting results to the other participants. Interests held by other
participants in a well may include:

. working interests, which entitle the owner to its share of production and
require it to pay its share of expenses;

. royalty interests, which entitle the owner to a share of gross production
free of costs;

. overriding royalty interests, which entitle the owner to a share of a
working interest owner's production or net production;

32
<PAGE>

. production payments, which entitle the owner to a volume of production or a
cash payment free of costs of production for a fixed period of time or
until a fixed volume of hydrocarbons has been produced or cash has been
paid;

. net profits interests, which entitle the owner to a percentage of gross or
net production; and

. interests of domestic and international governmental agencies, which are
entitled to tax, royalty and other payments out of production.

A participant's share of production and its obligation to pay costs
attributable to a well may differ according to productive formation or geologic
zone and the nature of the costs, and may change based on the volume and costs
of production, passage of time and the participant's agreement to participate
in the capital costs of a well. Participants in the domestic upstream oil and
gas industry include over 7,750 companies and over 4.5 million royalty interest
owners with interests in over 860,000 wells. According to the Energy
Information Administration, in 1999, these complex partnerships produced
approximately 5.4 billion barrels of oil equivalents in the United States.
These participants also regularly acquire and divest wells, increase or
decrease interests in wells and enter into new exploration partnerships.
Managing these activities is time and manpower intensive because of the number
of transactions, complexity of partnerships and the number of participants in a
well.

Oil and gas companies are highly dependent on commodity prices for their
revenues. Because they have no direct control of the sales price of their
production, oil and gas companies focus on controlling costs as a way to remain
competitive, especially when prices decline. To manage their transaction
processing requirements, most oil and gas companies use customized software,
developed by them or by consulting firms. We believe these customized software
solutions:

. have a high total cost of ownership, which includes a large initial capital
investment and the expense of maintaining and upgrading the systems to keep
pace with technological innovations;

. require expensive in-house information-technology personnel, who are
difficult to recruit and retain;

. are not able to effectively share information among industry participants;

. do not have the required flexibility to efficiently account for the
changing asset portfolio of an oil and gas company;

. do not provide useful business intelligence tools to access, analyze and
share data for better decision making; and

. require time-consuming, redundant paper and telephone communications.

Recently, companies known as application service providers, or ASPs, began
providing integrated software applications, which they host at their data
centers. Most ASPs fail to address the needs of the oil and gas industry
because they do not provide personnel and industry-specific services.

The Novistar Solution

We provide our customers with a full range of business process outsourcing
services using our software, which is designed to meet the specific needs of
upstream oil and gas companies. We believe our customers benefit from the
economies of scale that our solutions provide and enable them to focus on their
core competencies. For customers who prefer to maintain their own back-office
functions, we offer licensing arrangements and

33
<PAGE>

application hosting. Our solutions reduce the costs of upstream oil and gas
transaction processing and provide business intelligence, resulting in quicker
and better informed business decisions.

We believe that our solutions provide the following competitive advantages:

. Industry-specific software. In February 2000, we acquired the Oracle Energy
Upstream business which included core modules of our software, as well as
software engineers and other technical personnel. Oracle designed our
software to address the complexity and volume of transactions inherent in
the operation of oil and gas wells. Since the acquisition, we have extended
our software solutions to provide business intelligence applications. Our
software is scalable to allow customers to efficiently increase and
decrease the size of their asset portfolio. Our software is also based on
open standards, which enables our software to integrate with our customers'
existing systems.

. Extensive domain knowledge. Because of the complicated relationships among
participants in the upstream oil and gas industry, we believe that our in-
depth knowledge of the unique characteristics of the industry is imperative
to providing our solutions. We combine our extensive experience in the oil
and gas industry with feedback from an active customer user group to
continually improve our software and services. Our executive management
team has an average of 16 years of oil and gas industry experience. Our six
product managers have an average of 15 years of industry experience and our
ten product support professionals have an average of 17 years.

. Flexible delivery and pricing models. Although we believe our business
process outsourcing service provides the most comprehensive solution, we
also provide our customers with the flexibility to purchase licenses for
specific software modules or contract for our application hosting services.
This flexibility allows our customers to choose the manner in which they
deploy our solutions to meet their needs. The fees we charge for business
process outsourcing are based on the number of wells owned by our
customers. Our fees therefore vary based on our customers' asset
portfolios, providing our customers with a predictable cost structure as
their asset base changes. In addition, our outsourcing and application
hosting services do not require a substantial initial payment by our
customers to purchase licenses of our software.

. Advanced technology infrastructure. We are able to recruit and retain a
staff of experienced information technology professionals, whom we believe
oil and gas companies have difficulty attracting. We have a strong
foundation on which we are building, with our customers and partners, an
advanced technology infrastructure that includes high-end servers and
network performance management applications.

. Standardized software and processes. Our software addresses the unique
needs of the oil and gas industry without customization, enabling us to
easily upgrade and maintain our software. We believe our solutions provide
a framework upon which we can build additional functionality to facilitate
collaboration among industry participants. We use our extensive industry
experience and feedback from our customer user group to design standardized
procedures that gather, store and process data. This consistency in
transaction processing reduces the costs to gather data, provides higher
quality information and permits related business functions to share
information.

We measure our performance against service levels tailored specifically to our
customers' business requirements. Provisions for service level credits are
included in our contracts, which obligate us to deliver services at a reduced
cost if we fail to meet service levels.

Our Strategy

Our objective is to be the premier global provider of comprehensive business
process outsourcing solutions based on industry-leading software for the oil
and gas industry. Key elements of our strategy include:

34
<PAGE>

Extending our product and business process services leadership. Our expertise
and in-depth understanding of the upstream oil and gas industry has allowed us
to be at the forefront of providing solutions to industry participants. Our
software is extensible, allowing us to add functions to our existing products
and to introduce new software applications into our solutions. For example, in
October 2000, we plan to introduce our Upstream Performance Advisor, or UPA,
business intelligence product, which allows both our business process
outsourcing and software customers to access, analyze and share data gathered
by our transactional support software and other software applications to
enhance their business intelligence and decision making.

Facilitating more efficient workflow collaboration among industry
participants. We are developing Internet-based extensions to our software to
optimize transaction processing among industry participants. We believe that
our established customer base, which has implemented our solutions, will
provide the critical mass necessary to successfully establish a foundation for
information exchange and transaction processing among industry participants.
During the first half of 2001, we plan to begin introducing solutions which
will use extensible markup language and extend our workflow management and
standard business processes to facilitate efficient workflow collaboration
among participants in the oil and gas industry.

Continuing to strengthen global sales channels. We have a sales organization
consisting of 14 employees based in Houston, two of whom are dedicated to
international sales. We intend to expand our international sales efforts by
partnering with industry leaders such as Oracle and global consulting firms and
establishing relationships with resellers and local distributors in Europe,
Asia and Latin America. Since the acquisition of our software from Oracle, we
have added PTT Thailand and Repsol YPF as new license clients.

Expanding alliances and strategic relationships. We seek to establish strategic
alliances to generate new sales opportunities, provide additional technology
and implement and enhance our solutions. We have established alliances with
Oracle and formed a customer user group, and are developing relationships with
leading systems integrators and industry consultants, as well as energy
procurement and trading exchanges.

Products and Services

Business Process Outsourcing

For our business process outsourcing customers, we provide application hosting
of our software and software we license from Oracle and other vendors as well
as transaction processing services. We price these services according to a
variable cost structure, which typically provides for price adjustments as our
customers add or sell wells. We believe that our business process outsourcing
customers benefit from the following advantages:

. greater focus on their core business functions;

. substantial cost savings from economies of scale resulting from fewer
personnel, shared hardware and software resources and standardized
business practices;

. advanced technology infrastructure resulting in improved reliability,
availability and performance; and

. standardized processes providing efficient and reliable transaction
processing.

We typically hire some of our customers' existing personnel when we undertake a
new business process outsourcing project. Our business process outsourcing
operations are primarily located in Houston, enabling us to benefit from
centralized resources. As of September 1, 2000, we employed 168 professionals
to provide transactional and technical support to our customers. We provide
ongoing training for our employees through regularly scheduled internal
interactive presentations and participation in external seminars and
conferences.

Using our software, which integrates with financial, procurement and database
applications licensed from Oracle, we are able to provide our business process
outsourcing customers with a range of services. Our

35
<PAGE>

business process outsourcing organization is divided into five groups
responsible for different aspects of customer relationships. These groups
include:

. Business Applications. Business applications is responsible for day-to-day
customer interaction at a management level, coordination of transition
services and maintenance of system controls.

. Operational Cost Accounting. Operational cost accounting records invoice
amounts into the customers' books, generates monthly joint interest
billings to working interest partners and monitors cost overruns on
various projects.

. Revenue Recognition. Revenue recognition records volume data associated
with oil and gas production, records related revenue into the customers'
books and pays royalty owners.

. Regulatory Reporting. Regulatory reporting performs lease administration
functions, responds to royalty owner inquiries and prepares all monthly
reports required by government agencies.

. Cash Management. Cash management records cash receipts and generates
checks for invoice payments, performs preliminary monthly reconciliations
of bank accounts and collects receivables owed to our customers.

Customer representatives are assigned to each customer to ensure that service
levels are met and to respond to any issues that require attention. Typical
service level requirements include delivery of critical reports on a timely
basis, monthly reconciliation of accounts, posting of cash receipts within a
customer-defined time period and providing network and database availability
during predefined times.

Application Hosting

We offer application hosting for our software, as well as software we license
from Oracle and other vendors. When we host software applications, our
customers manage their transaction processing personnel while we maintain the
software applications. To date, our application hosting services have accounted
for a small portion of our business, but we expect these services to represent
an increasingly larger portion of our business in the future.

Our application hosting services enable customers to purchase subscriptions for
applications through payment of a monthly service fee instead of incurring a
large initial cost. Our prices are based on the number of users, types of
applications hosted and number of support services that our customers use. Our
application hosting team provides active monitoring and support for our
applications 24 hours a day, seven days a week. These support capabilities
often reduce the customers' need for a large information technology staff. We
provide fast response times, reliability, scalability and security.

Licensing

For customers who prefer to maintain their software applications and personnel
internally, we offer licenses of our software for an initial, up-front license
fee based on the number of users who may simultaneously access our software. We
also provide consulting services to implement our software and optimize its use
within each customer's organization. Our consulting services are priced on a
time and materials basis. Typically, our customers purchase an annual
maintenance contract for approximately 20% of the license fee. These
maintenance contracts provide for regular software upgrades and help desk
support. Customers who have purchased licenses of our software include Coastal,
Kerr-McGee, Phillips Petroleum and Shell.

36
<PAGE>

Software

Our software consists of transactional processing and business intelligence
applications which enable oil and gas companies to efficiently process
transactions and improve decision making.

. Our transactional processing software is divided into production volume
and asset management functions. Our volumes management software allows our
customers to monitor their daily production and optimize their production
processes by efficiently allocating production volumes. Our asset
management software enables customers to accurately assign proceeds and
costs of production to multiple participants in a well. Both our volumes
and asset management software allow our customers to streamline
administrative processes, store data in a centralized location and access
data across different business processes.

. Our business intelligence application integrates with our transactional
support software or third-party software applications to permit our
customers to access, analyze and share critical management and operations
data. This enables our customers to make quicker and more accurate
decisions at all levels within an organization, from field technician to
chief executive officer.

[Diagram entitled Novistar Software Framework. The diagram is divided into
three horizontal columns:

. The bottom column is labeled Technology Foundation and contains two boxes.
The first box is labeled Oracle Database. The second box, labeled Oracle
Internet Infrastructure, sits on top of the box labeled Oracle Database.

. The middle column is labeled Transactional Support. There is a box at the
bottom of this column labeled Novistar Energy Base--Reference &
Integration. On top of this box sit four boxes with arrows pointing to the
right of the column. The boxes are labeled, from left to right: Novistar
Volumes Management Suite, Novistar Asset Management Suite, Financials and
Procurement. The third and fourth box from the left have the words Oracle
and 3rd Party listed underneath the labels. To the right of these four
boxes is an arrow that points from the four boxes up to the box on the far
right of the top column. On the bottom of the far right side of the middle
column is a box labeled Budgets & Forecasts with the words 3rd Party
underneath the label. An arrow points from this box to the far right box
of the top column.

. The top column is labeled Business Intelligence. There are two boxes on
the far left side of this box. The bottom box is labeled Operational and
the top box is labeled Management. Above these boxes is a title called
Presentation Layers. The middle box in this column has the words Novistar
Upstream Performance Advisor above it. On the top left side of this box
are the words Decision Support Application. Beneath this label are three
circles. The center circle has the word Well in it. Surrounding this
circle is a circle containing the word Basin. Surrounding both of these
circles is a circle labeled Region. There are three lines coming out of
the right side of the outer circle. The top line is labeled Data Analysis,
the middle line is labeled "What-if" Scenarios and the bottom line is
labeled Performance Measurement. The box on the far right of this column
is connected to the middle box by a line. This box is labeled Data
Warehouse and has the following bullet points: Capital, Land, Reserves,
Incidents, Human Resources, Production, Revenues and Expenses.]

37
<PAGE>

Transactional Support Software

Our transactional support applications and their functionality are summarized
below.

<TABLE>
<C> <S>
Volume Management
-----------------------------------------------------------------------------
Field Operations . Enables field technicians to measure oil and
gas volumes at locations designated by our
customers, using hand-held devices.
. Transmits data to a corporate repository,
making the measured volumes available for
reports and analysis.
-----------------------------------------------------------------------------
Production Management . Allocates production volumes from wells
according to complex allocation rules
contained in contracts for oil and gas
partnerships.
. Manages complex allocations with graphical
tools.
. Provides information that can be used to
optimize production.
-----------------------------------------------------------------------------
Production Planning . Estimates future production from wells and
lifespan of wells.
. Allocates company production quotas to
individual wells.
-----------------------------------------------------------------------------
Supply Planning . Automates process of estimating amounts of
natural gas available for sale.
. Reports results by partner, marketing group
and delivery point.
. Transfers results to third-party applications
for marketing analysis and pipeline
deliveries.
-----------------------------------------------------------------------------
Terminal Management . Tracks the transportation of production to a
refinery, and forecasts daily deliveries of
oil at the refinery for each owner of
production.
. Maintains levels of oil in storage tanks
within operational limits and tracks the
quantities of oil removed from tanks by
partners.
-----------------------------------------------------------------------------
First Purchaser . Tracks purchases of oil and gas at a well.
. Generates payments to the royalty owners of a
well.
</TABLE>

<TABLE>
<C> <S>
Asset Management
--------------------------------
</TABLE>
<TABLE>
<C> <S>
Land and Concessions . Tracks complex ownership in oil and gas
properties.
. Enables customers to meet contractual
obligations, such as payments and
notifications, to other participants in a
well.
------------------------------------------------------------------------------
Partner Balancing . Identifies volumes produced and allocates,
based on marketing arrangements, the volumes
to working interest partners.
------------------------------------------------------------------------------
Revenue Settlement . Calculates taxes and deductions based on
partnership terms.
. Allocates revenues after deductions and
credits based on applicable partnership terms.
. Writes a check or remits documentation to
support an electronic funds transfer to
royalty owners.
------------------------------------------------------------------------------
Authorizations for . Facilitates creation of budgeting for well
Expenditure expenditures.
. Compares budgeted to actual expenditures.
. Creates amendments and supplements to, and
reclassifies, authorizations for expenditure.
. Creates accruals of capitalized overhead and
interest.
------------------------------------------------------------------------------
Partnership Accounting . Tracks direct and indirect costs of
partnership activities relating to wells,
including cost recovery (payout) situations.
. Automates the allocation of overhead and
payroll burden among participants in a well
based on contract terms.
. Generates joint interest statements and
invoices that are sent to participants in a
well.
------------------------------------------------------------------------------
Regulatory Reporting . Generates and submits electronic reports to
governmental entities covering domestic
reporting requirements for production volumes,
purchase price information, royalties,
severance taxes and federal and state tax
returns.
</TABLE>

38
<PAGE>

Business Intelligence Software

Our web-enabled business intelligence software application, UPA, provides real-
time graphical representations of key performance indicators which our
customers use as the basis for decisions. UPA is flexible and allows our
customers to design key performance indicators which they feel are important to
their business, including production, expenses, revenues and reserves. UPA also
allows our customers to calculate relationships among data, such as cash flows
per barrel of oil equivalent and return on capital employed. UPA enables users
to access historical data, derive projections, monitor variations between
forecasts and actual results, receive alerts of relevant news and simulate
"what if" scenarios. UPA is designed for use by all levels of employees within
an upstream oil and gas company, from operating personnel and field supervisors
to senior management. UPA enables customers to define and enforce appropriate
security rules by providing different levels of access for different user
groups. We plan to release UPA in the fourth quarter of 2000.

Source data on key performance indicators typically resides in multiple,
disparate corporate databases. Our UPA product allows our customers to extract
and consolidate data into a centralized data warehouse. Users can access data
from this warehouse to identify problems, manage assets and consider new
opportunities. For example, customers can evaluate their oil and gas portfolios
based on product, asset, capital investment and reserve type.

For in-depth analysis, users can access information at various levels of detail
such as well, field, basin and geographic region, across any time period. Users
can then analyze and combine reported data to create customized reports that
are project- or company-specific. For example, if a manager observes that
monthly production is below forecast levels, she could review the underlying
data in progressively greater detail, beginning with groups of assets, and
continuing down to the field, asset type and individual well level.

Our current UPA module is designed to operate with our volume and asset
management software and Oracle's financials applications but can be configured
to integrate with other applications.

Related Third-Party Modules

Our volume and asset management applications integrate with third-party
financial applications offered by Oracle, SAP and PeopleSoft. These financial
applications contain general ledger, accounts receivable and accounts payable
programs enabling our customers to perform accounting-related tasks. We
currently have a sub-licensing agreement with Oracle to incorporate their
financial applications either into our business processing outsourcing or
application hosting services.

Our software integrates with select modules from Oracle's procurement software,
including inventory, purchasing and projects, to enable our customers to
automate the process and reduce the cost of acquiring goods and services. We
recently completed negotiations with Oracle to enable us to host its
procurement and human resource applications in connection with hosting our
software.

Through our subsidiary, Petroleum Financial, we also provide business process
outsourcing services using the Excalibur software, which we license from
Petroleum Place. The Excalibur software provides some of the same functionality
as ours, but was originally designed for small oil and gas companies. As of
September 1, 2000, we provided transaction processing services on the Excalibur
platform to 27 customers who own approximately 8,000 wells in the United
States.

Strategic Relationship with Oracle

When we purchased the Oracle Energy Upstream business, we entered into an
agreement with Oracle that provides for the following benefits:

. receipt of releases of Oracle applications which integrate with our
software to enable us to coordinate updates;

39
<PAGE>

. the ability to host Oracle applications, including financials, human
resources and procurement; and

. joint marketing of our solutions.

We believe our alliance with Oracle will provide us with additional credibility
in the marketplace as well as access to customers to whom we may not otherwise
be able to effectively market. See "Certain Transactions--Transactions with
Oracle in Connection with Our Purchase of the Oracle Energy Upstream Business."

Customers and Case Studies

We provide a wide range of application and business process outsourcing
solutions and services to the upstream oil and gas industry. The following list
includes all of our license customers and business process outsourcing
customers that accounted for at least $100,000 of our pro forma revenues during
the 18-month period ended June 30, 2000.

Arguello Nuevo Energy
Bargo Oracle Middle East
Bellwether PG&E Texas Management
Exploration PennzEnergy
Coastal Phillips
Conoco Plains Resources
Dynegy Shell
Kerr-McGee Torch
MCN Weatherford
Newfield Exploration

Nuevo Energy represented 20.2% of our pro forma revenues during 1999 and 25.9%
of our pro forma revenues during the first six months of 2000. Bellwether
Exploration represented 4.5% of our pro forma revenues during 1999 and 12.7% of
our pro forma revenues during the first six months of 2000. Torch represented
7.7% of our pro forma revenues during 1999 and 12.0% of our pro forma revenues
during the first six months of 2000.

The following case studies illustrate how a select group of representative
upstream oil and gas companies are using our solutions, delivered using both
our license and business process outsourcing arrangements.

Newfield Exploration. Newfield is a publicly traded oil and gas exploration
and production company with properties located in the Gulf of Mexico, onshore
in the Gulf Coast region and offshore in Australia and China. Newfield selected
our business process outsourcing solutions because these solutions scale with
Newfield's growing business, are supported with Oracle's technology and provide
predictable price adjustments as they add or sell wells. Taking advantage of
our economies of scale, we were able to use fewer employees. We provide
transaction support services as part of our business process outsourcing
agreement. Newfield's employees administer land applications in the environment
we host.

Unocal. Unocal is a publicly traded, international oil and gas company with
production in North America, Europe, Asia and Africa. Unocal first became a
licensee of our software in 1991 and is one of our long-term customers. On
August 16, 2000, Unocal signed a letter of intent with us to enter into a ten-
year business process outsourcing agreement whereby we will provide Unocal with
certain domestic transaction processing services and related information
technology support. Negotiations are currently underway and, contingent on the
signing of a definitive agreement, transition of service responsibility to
Novistar could begin as early as November 2000.

Bargo. Bargo is a domestic oil and gas production, exploitation and acquisition
company headquartered in Houston, Texas with properties located in Texas, New
Mexico, Louisiana and California. Prior to becoming our customer in March 2000,
Bargo outsourced its transaction support to another third-party vendor. Bargo
increased its portfolio of wells from approximately 1,000 to 4,500 wells when
it acquired properties from Texaco in March 2000. We worked closely with Texaco
to obtain all of the information necessary to provide for a smooth and quick
transition to our solutions, which we accomplished in just eight weeks.

40
<PAGE>

BHP. BHP is an Australian-based, public, global resources company. BHP has oil
and gas properties in Australia, offshore Gulf of Mexico, the North Sea, the
Irish Sea, Algeria, Pakistan and Bolivia. In 1999, BHP became a license
customer by purchasing our production, revenue and marketing software modules
to use on all BHP's operated petroleum properties worldwide. The Internet
architecture of our software has enabled BHP's employee base on five different
continents to access the same applications and database, centralized in their
Houston office, via their corporate Intranet.

Sales and Marketing

We sell our solutions primarily through our direct sales force and marketing
staff, based in Houston and Denver. Our sales force includes a vice president
of international sales, a vice president of domestic sales, three account
managers and nine sales consultants. Our two sales vice presidents and three
account managers are compensated on a quota-based system and are responsible
for generating and qualifying leads, managing the sales process and closing the
sale. Our sales consultants, who have extensive industry experience, assist
sales vice presidents and account managers throughout the sales process.
Technical personnel from the research and development group are available to
support the sales effort. Our sales cycle varies based on the size of the
company and the needs of the customer. Small to mid-sized companies generally
have a sales cycle of up to 12 months and large companies usually have sales
cycles from six to 18 months. We generally direct our sales efforts to chief
executive and chief financial officers and other key personnel responsible for
ensuring cost and operational efficiencies within their organizations.

We have also established a marketing alliance with Oracle to jointly market our
solutions to oil and gas companies worldwide. See "--Key Strategic Relationship
with Oracle." To enhance our presence in international markets, we are also
establishing relationships with resellers and local distributors in Europe,
Asia and Latin America.

Our marketing efforts are focused on generating incremental revenue from
current customers, identifying new sales opportunities and creating awareness
about the value of our solutions. We have successfully generated repeat
business through the following channels:

. sales executives and sales consultants;

. resellers and local distributors;

. a user group of our customers;

. our consulting organization; and

. our technical support center.

To support our sales effort, we conduct marketing programs, including
advertising, direct mail, public relations, web-based and face-to-face seminars
and demonstrations at customer sites and at our offices, participate in trade
shows and maintain an ongoing customer communications programs.

Research and Development

Our research and development group is divided into product teams, consisting of
program, product and development managers; development engineers and technical
writers. We have largely developed our software in-house with minimal use of
consultants. Our product managers have an average of 15 years of experience in
the oil and gas industry, and members of our technical staff, which test
commercial applications, typically have at least eight years of experience. As
of September 1, 2000, we had 53 employees in our research and development
group.

We believe that our software is the leading product in our market. Our software
leverages Oracle's developments in database, network communications and
applications technology. Following the acquisition of

41
<PAGE>

the Oracle Energy Upstream business, we have further enhanced our software's
industry-specific functionality and are extending it to integrate with any
third-party application.

We follow a disciplined process to design, develop and commercialize new
software modules.

. Planning stage. We draft a description of the business requirements of a
product based on input from product managers, consultants and our customer
user group. Next, we develop detailed product and technical
specifications, a testing strategy and the basic documentation for the
product.

. Development stage. Our developers write and test the product code and then
identify and resolve problems.

. Product completion stage. The software code undergoes further testing,
including in-house and beta testing by a select group of users. We also
run a field readiness program to ensure that our sales force and technical
support services are prepared to sell and support the commercial release
of our products.

Customer Service and Support

We believe that a high level of customer service and technical support is
necessary to maintain our existing customers and attract additional customers.
Our primary technical support center is located in Denver, and our primary
business process outsourcing service center is located in Houston.

Professional Services. We provide integration services to our customers to
enable them to transition to our solutions in the following manner:

. we configure our software to accommodate our customers' requirements;

. we transfer our customers' historical data to our solution;

. we train personnel to become proficient with our solution; and

. we run our solution in parallel with the customers' existing systems, then
terminate those systems.

We also provide upgrades and additional services on an as needed basis. As of
September 1, 2000, we had 35 employees in our professional services
organization.

Customer Support. We provide our customers with technical support through
telephone, e-mail and on-site assistance. We are currently developing our
website to offer our customers online product support. For our license
customers, we offer maintenance contracts which typically provide for an annual
payment of 20% of the initial license fee. As of September 1, 2000, we employed
ten individuals in Denver devoted to product support, with an average of 17
years of experience in the oil and gas industry, as well as 13 employees
devoted to desktop and network support and 12 employees devoted to application
support in Houston.

Competition

The market for providers of business process outsourcing solutions to the
upstream oil and gas industry is competitive. Although there are currently a
limited number of companies against whom we directly compete, we anticipate
that large technology and consulting companies currently focused on providing
solutions across multiple industries may enter our market. In addition,
traditional service and start-up companies focused on the oil and gas industry
may compete with us. Many of these companies have substantially greater
resources and access to capital than we have. Our current and potential
competitors include:

. international, national and regional accounting and consulting firms that
provide system integration and outsourced accounting and transactional
services, or that enter into collaborative alliances with software and
hardware providers to perform these services;

42
<PAGE>

. providers of software solutions for the upstream oil and gas industry;

. enterprise resource planning software vendors; and

. application service providers.

We believe that the principal competitive factors with respect to our solutions
include:

. software functionality and performance;

. industry expertise;

. flexible delivery and pricing models;

. established customer base;

. customer service and support; and

. information technology staff and infrastructure.

We believe that we have a leadership position in the upstream oil and gas
marketplace because of our sophisticated software, optimized business process
solutions, industry experience and a strategic alliance with a technology
leader.

Proprietary Rights

We rely on a combination of copyright, trademark and trade secret laws,
nondisclosure agreements and other contractual provisions to establish,
maintain and protect our proprietary rights. We have copyright and trade secret
rights for our products, consisting mainly of source code and product
documentation. We attempt to protect our trade secrets and other proprietary
information through agreements with suppliers, non-disclosure agreements with
employees and consultants, and other security measures.

Employees

As of September 1, 2000, we had a total of 284 full-time employees. None of our
employees is represented by a labor union. We believe that our relations with
our employees are satisfactory.

Facilities

Our executive offices, located in downtown Houston, consist of approximately
43,000 square feet of office space which is provided under an agreement with
Torch whereby Torch has agreed to offer space to us on a best-efforts basis.
Torch has orally agreed to lease us an additional 15,000 square feet in
downtown Houston beginning on October 1, 2000. We also lease approximately
12,000 square feet in Denver from Oracle and approximately 10,000 square feet
in Fort Worth. The Denver facility is devoted almost exclusively to our
software development organization. The sublease for the Denver facility expires
in February 2001, and the lease for the Fort Worth facility expires in May
2002. We are currently evaluating alternative leasing arrangements in Denver.

Legal Proceedings

From time to time, we may be involved in legal proceedings that arise in the
ordinary course of business. As of the date of this prospectus, we are not a
party to any pending legal proceedings that we believe could reasonably be
expected to have a material adverse effect on our business or results of
operations.

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<PAGE>

Management

Directors and Executive Officers

The following table presents information about our directors and executive
officers. Each of our executive officers serves at the discretion of our board
of directors and holds office until his successor is elected and qualified or
until his earlier resignation or removal. There are no family relationships
among any of our directors and executive officers.

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Class I Directors:
(Term Expires in 2003)
Thomas M. Ray III....... 46 President, Chief Executive Officer and Chairman
J.P. Bryan.............. 60 Director

Class II Directors:
(Term Expires in 2002)
Michael B. Smith........ 39 Director
Ian Thacker............. 43 Director

Class III Directors:
(Term Expires in 2001)
Frost W. Cochran........ 35 Director

Other Executive
Officers:
Kelly C. Parrino........ 47 Senior Vice President and Chief Information Officer
John V. Sobchak......... 40 Chief Financial Officer
Richard E. Williams..... 47 Senior Vice President--Strategy and Marketing
Timothy M. McHugh....... 33 Vice President--North American Sales
Claudio Grossling....... 41 Vice President--International Sales
Scott W. DeVries........ 42 Vice President--Corporate Development
Ralph E. Carthrae....... 57 Vice President--Energy Marketing Services
</TABLE>

Thomas M. Ray III. Mr. Ray has been our President and Chief Executive Officer
since joining Novistar in May 1999. Mr. Ray was appointed Chairman in September
2000. Prior to joining Novistar, Mr. Ray had served as Group Vice President and
General Manager of Oracle Energy, Oracle's Global Oil and Gas vertical markets
division, since 1998. Mr. Ray joined Oracle in 1990. During his tenure at
Oracle, Mr. Ray served as Vice President of Sales for the Oracle Energy
Americas sales division from 1997 until 1998 and as Global Energy Applications
Sales Director from 1996 until 1997. From 1995 until 1996, Mr. Ray served as
Director of Alliances for Oracle Energy. Prior to joining Oracle in 1990, Mr.
Ray had served as Computer Corporation of America's Regional Vice President of
Sales for the Southwest Region since 1988. Mr. Ray received a BBA from Texas
A&M University in 1978.

J.P. Bryan. Mr. Bryan has served as one of our directors since May 1999. Since
October 1998, Mr. Bryan has served as Senior Managing Director of Torch. Mr.
Bryan was Chairman of the Board and Chief Executive Officer of Torch and its
predecessor from January 1981 until May 1997. Mr. Bryan has served as the
Chairman of the Board of Bellwether Exploration since August 1999. He has
served as a Director of Bellwether since its inception. Mr. Bryan was
Bellwether's Chairman from August 1987 to June 1997, and Chief Executive
Officer from August 1999 until May 2000, from June 1994 to January 1995 and
from August 1987 to March 1988. From January 1995 to February 1998, Mr. Bryan
was Chief Executive Officer of Gulf Canada Resources Limited. He was Chairman
of the Board of Nuevo Energy from March 1990 to December 1997, and was Chief
Executive Officer of Nuevo Energy from March 1990 to January 1995. Mr. Bryan is
also a member of the Board of Directors of AutoNation, Inc. Mr. Bryan received
a bachelors of Foreign Trade in 1966 from Thunderbird, The American Graduate
School of International Management, a JD in 1965 and a BA in 1962 from the
University of Texas.

44
<PAGE>

Michael B. Smith. Mr. Smith has been a director of the company since its
incorporation on April 1998. From April of 1998 until May of 1999, Mr. Smith
served as our President. Mr. Smith has been Chief Financial Officer of Torch
since September 1995. Prior to joining Torch in April 1995 as Vice President of
Acquisitions and Financial Analysis, Mr. Smith had held various positions in
finance with ARCO since 1989. From January 1984 until August 1987, Mr. Smith
worked in oil and gas exploration at Unocal. Mr. Smith received an MBA from the
University of California at Los Angeles in 1989 and a BS from the University of
Texas in 1983.

Ian Thacker. Mr. Thacker has served as one of our directors since February
2000. Mr. Thacker was appointed to the board of directors by Oracle pursuant to
the stockholders agreement between Novistar, Oracle and Torch dated February
2000. Mr. Thacker has worked for Oracle since 1984. From June 1994 until
February 2000, Mr. Thacker was a Development Senior Vice President responsible
for a number of product areas within Oracle including, from July 1998, the
Oracle Energy Upstream products that Oracle sold to Novistar. Mr. Thacker is
currently Senior Vice President of Oracle Support Services.

Frost W. Cochran. Mr. Cochran has served as one of our directors since May
1999. Mr. Cochran has been a Managing Director of Torch since December 1998.
Mr. Cochran heads up Torch's Capital Markets Group. Before joining Torch, Mr.
Cochran had served as Managing Director and Partner at Energy Asset Management
LLC since 1996. Prior to joining Energy Asset Management, Mr. Cochran served as
Vice President of Enron Development Corporation from 1993 until 1996, as
Project Finance Manager at Destec Energy Incorporated from 1991 until 1993 and
as a Senior Associate with Kemper Securities Group from 1989 until 1991. Mr.
Cochran received an MBA from the University of Texas in 1989 and a BBA from the
University of Mississippi in 1987.

Kelly C. Parrino. Mr. Parrino has served as our Senior Vice President and Chief
Information Officer since May 1998. He has over 20 years of experience managing
information systems and technologies in the energy industry. Prior to joining
Novistar, Mr. Parrino had served as Chief Information Officer of Torch since
April 1995. While at Torch, Mr. Parrino served as President of the Oracle
Energy User Group. Prior to joining Torch, Mr. Parrino was employed at Union
Texas Petroleum from 1979 until 1991, most recently in the position of
Manager--E&P Technical Systems, and at Nerco Oil and Gas from 1991 until 1993
as Director of Information Technology. While working at Nerco, Mr. Parrino
directed a team of developers working on the co-development of the Apogee
products, the first release of the software products we acquired from Oracle.
Mr. Parrino received a BS degree in engineering from Louisiana State.

John V. Sobchak. Mr. Sobchak has served as our Chief Financial Officer since
June 2000. Prior to joining Novistar, he had served as Director and Treasurer
of Torch since 1997. Prior to joining Torch, he was Treasurer of MESA, Inc.,
where he had worked since 1988. Before joining MESA, Mr. Sobchak held
engineering positions at Brooklyn Union Gas and American Cyanamid. Mr. Sobchak
has a BE in Chemical Engineering from Cooper Union and an MBA in Finance and
International Business from New York University.

Richard E. Williams. Mr. Williams has served as our Senior Vice President--
Strategy and Marketing since joining us in February 2000. Prior to this time,
Mr. Williams had served in several capacities, including Senior Director of
Product Marketing and Management, Director--Business Development, Regional
Application Sales Manager and Application Salesman for Oracle's Energy
Division. He joined Oracle in March 1995 as part of Oracle's acquisition of
Apogee Open Systems, which developed the first releases on the products that
became Oracle Energy Upstream. Mr. Williams founded Apogee in August 1991 and
served as its Executive Vice President responsible for all operations including
product development, sales, and administration. Prior to Apogee, he founded and
led two successful information management consulting companies and served as an
early employee of Oracle in sales consulting. He began his career as an
exploration geologist for Exxon and BP. Mr. Williams graduated with honors from
Amherst College in 1975 with a BA in Geology and received an MS in Applied
Earth Sciences from Stanford University in 1978.

45
<PAGE>

Timothy M. McHugh. Mr. McHugh has served as our Vice President--North American
Sales since July 1999. Mr. McHugh has ten years' experience in the exploration
and production segment of the energy industry. Prior to joining Novistar, he
had served in sales management at Oracle Energy since 1995. He managed Oracle's
upstream application sales organization for the Americas from June 1997 until
June 1999. Mr. McHugh holds a BA from Southern Illinois University.

Claudio Grossling. Mr. Grossling has served as our Vice President--
International Sales since February 2000. Prior to joining Novistar, Mr.
Grossling had served as Regional Manager for Oracle Energy Latin America since
September 1996. Mr. Grossling worked with Oracle Chile as a Senior Account
Manager for Energy and Natural Resources from September 1996 until January
2000, and for IBM de Chile S.A. as a Sales Manager for the Mining, Oil and Gas
and Manufacturing segments from September 1989 until August 1996. He worked in
the drilling, production and seismic areas for Empresa Nacional del Petroleo
and acted as information technology system engineer and analyst from January
1982 until August 1989. Mr. Grossling holds a BS in Petroleum and Mining
Engineering as well as postgraduate degrees in Computer Engineering and Systems
Analysis from the Universidad de Santiago de Chile.

Scott W. DeVries. Mr. DeVries has served as our Vice President--Corporate
Development since our incorporation in April 1998. Prior to joining Novistar,
Mr. DeVries had served as Director of Outsourcing Services for Torch since
January 1997. Mr. DeVries joined Torch in October 1991 and served as Vice
President of Accounting until December 1996. Prior to joining Torch, he worked
for Deloitte & Touche from 1980 until September 1991. Mr. DeVries received a BS
from Michigan State University and is a certified public accountant.

Ralph E. Carthrae. Mr. Carthrae has served as our Vice President--Energy
Marketing Services since May 2000. Mr. Carthrae had previously served as the
Director of Crude Oil Marketing for Novistar since January 1999 and, prior to
that, he had held the same position at Torch since November 1996. From
September 1993 until November 1996, Mr. Carthrae served as Vice President of
Galveston Terminals, Inc. Mr. Carthrae has 33 years of experience in the oil
and gas industry, 28 years of which have been involved in the marketing,
trading and transportation sector. Mr. Carthrae holds a BS in engineering from
Kansas State University.

Director Compensation

We reimburse our directors for reasonable out-of-pocket costs incurred in
attending meetings of the board of directors and its committees. We have not
provided any compensation to our directors for acting as directors. Following
the offering, we have advised our non-employee directors that they will receive
the following compensation for serving on our board:

. an annual grant of an option to purchase 5,000 shares of our common stock
at an exercise price equal to the market price on the date of grant; and

. cash in the amount of $10,000 per year for service on our board of
directors or any committee of our board.

Board Committees

Compensation Committee. Following the offering we will form a compensation
committee composed of Mr. , Mr. and Mr. . The compensation
committee will review the performance of our chief executive officer annually,
and will determine his or her compensation. Our compensation committee will
also review the compensation for our executive officers and make
recommendations to our chief executive officer regarding executive officer
compensation. The compensation committee will also administer the 1999 stock
option plan.

Audit Committee. Following the offering, we will form an audit committee
composed of Mr. , Mr. and Mr. . The audit committee will
recommend to the board of directors the selection

46
<PAGE>

of our independent auditors and will review the scope and results of the audit
with them. Our audit committee will also evaluate our internal auditing
procedures.

Commitments to Nominate Directors

When we purchased the Oracle Energy Upstream business, we agreed to nominate an
Oracle designee to our board of directors until Oracle owned less than 2% of
our common stock. Torch agreed to vote for the Oracle nominee. Mr. Thacker is
the current Oracle nominee.

Under the term sheet we signed with Unocal, we agreed that we will annually
nominate one person designated by a member of our user group of customers to
serve on our board of directors, and that a designee of Unocal will be the
first nominee. Our obligation to nominate a user group member designee will not
occur until we execute a definitive business processing outsourcing agreement
with Unocal. Unocal has not advised us who their nominee will be.

Executive Compensation

Summary Compensation Table

The following table summarizes all compensation earned by or paid to our chief
executive officer and to each of our executive officers who received in excess
of $100,000 in compensation for services rendered in all capacities to us
during 1999. We refer to these officers as the named executive officers in this
prospectus.

<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
----------------------------------- ------------------------
Other Annual Restricted Securities All Other
Name and Principal Fiscal Compensation Stock Underlying Compensation
Position Year Salary ($) Bonus ($) ($)(1) Award(s) ($) Options (#) ($)(2)
------------------ ------ ---------- --------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Thomas M. Ray III(3).... 1999 $167,255 $50,000(4) -- -- 500,000 $4,688
President, Chief
Executive Officer and
Chairman

Kelly C. Parrino........ 1999 $142,615 -- -- -- -- $7,150
Senior Vice President
and Chief Information
Officer

Scott W. DeVries........ 1999 $121,488 -- -- -- -- $6,856
Vice President--
Corporate Development
</TABLE>
------------------
(1) None of our executive officers received perquisites or other personal
benefits in excess of the lesser of $50,000 or 10% of their total salary
and bonus.
(2) Amounts reflect our contribution in 1999 to the 401(k) savings plans of the
named executive officers.
(3) Michael B. Smith served as our President until May 1, 1999, the date Mr.
Ray was appointed President. Mr. Smith is an employee of Torch and was not
compensated directly for his services to us.
(4) Mr. Ray received a bonus upon becoming our chief executive officer.

47
<PAGE>

Stock Option Grants in Last Fiscal Year

The following table sets forth information concerning our grants of options to
purchase common stock made during the past year to the named executive
officers.

<TABLE>
<CAPTION>
Number of % of Total
Securities Options Exercise
Underlying Granted to or Base Grant Date
Options Employees Price Expiration Present
Name Granted (#) in Fiscal Year ($/Sh) Date Value ($)(2)
---- ----------- -------------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Thomas M. Ray III (1)... 500,000 75% $2.00 5/1/09 899,420
President, Chief
Executive Officer and
Chairman
</TABLE>
------------------
(1) Michael B. Smith served as our President until May 1, 1999, the date Mr.
Ray was appointed President.
(2) In accordance with the rules of the SEC, this column illustrates the gains
that may exist for the options over a ten-year period using the Black-
Scholes option pricing model. The Black-Scholes option pricing model is a
mathematical formula used for estimating option values that incorporates
various assumptions. The Grant Date Present Value set out in this column is
based on the following assumptions: a ten-year option term; 93% expected
future annual stock volatility; a risk-free rate of return of 6 1/2%; and
no expected dividend yield. The above model does not include any
adjustments for non-transferability or risk of forfeiture. This valuation
model is hypothetical; the actual value, if any, depends on the excess of
the market price of the shares over the exercise price on the date the
option is exercised. If the market price does not increase above the
exercise price, the value of the options will be zero.

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values

The following table shows information about the exercise during the last year
of options to purchase common stock by our named executive officers and the
number and value of unexercised options to purchase common stock held by such
individuals on December 31, 1999. Also reported are the values for "in-the-
money" options, which represent the positive spread between the exercise price
of existing stock options and the price to the public in this offering.
<TABLE>
<CAPTION>
Unexercised Options at December 31, 1999
---------------------------------------------------
Number of Number of Value of
Shares Underlying Securities In-the-Money Options
Acquired Value ------------------------- -------------------------
Name On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas M. Ray III(1).... -- -- -- 500,000 -- $1,000,000(2)
President, Chief
Executive Officer and
Chairman
</TABLE>
------------------
(1) Michael B. Smith served as our President until May 1, 1999, the date Mr.
Ray was appointed President.
(2) Assumes a fair market value of $4.00 per share on December 31, 1999. Using
the estimated offering price of our stock of $ per share, the value of
Mr. Ray's unexercisable options is $ .

1999 Stock Option Plan

Our 1999 Stock Option Plan was adopted by our board of directors and approved
by our stockholders on May 1, 1999. Up to 2,600,000 shares of our common stock,
subject to adjustment in the event of stock splits and other similar events,
may be issued pursuant to awards granted under the 1999 plan. As of September
15, 2000, options to purchase 2,138,824 shares of common stock at a weighted
average exercised price of $1.63 per share were outstanding. Pursuant to the
terms of Mr. Ray's employment offer letter, dated March 23, 1999, immediately
prior to the completion of the offering, Mr. Ray will receive options to
purchase an additional 400,000 shares of common stock that become exercisable
upon completion of the offering.

The 1999 plan provides for the grant of incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code and non-statutory stock
options. Our executive officers, employees, directors and consultants are
eligible to receive awards under the 1999 plan. In addition, executive officers
and employees of our subsidiaries, executive officers and key employees of any
consultant to, administrator for or manager of us

48
<PAGE>

who have the capability of making a substantial contribution to our success are
eligible to receive awards under the 1999 plan. Under the 1999 plan, however,
incentive stock options under the Internal Revenue Code may only be granted to
officers or key employees.

Optionees receive the right to purchase a specified number of shares of our
common stock at a specified option price and subject to such other terms and
conditions as are specified in connection with the option grant. We may grant
non-statutory options at an exercise price less than, equal to or greater than
the fair market value of our common stock on the date of grant. Under the 1999
plan and present law, incentive stock options and options intended to qualify
as performance-based compensation under Section 162(m) of the Internal Revenue
Code may not be granted at an exercise price less than the fair market value of
the common stock on the date of grant or less than 110% of the fair market
value in the case of incentive stock options granted to optionees holding more
than 10% of the voting power of our capital stock.

There are limits on the number of shares that may be granted under an option.
In particular, Section 162(m) of the Internal Revenue Code denies a deduction
to publicly held corporations for compensation paid to the chief executive
officer and the four highest compensated officers in a taxable year to the
extent that the compensation for each officer exceeds $1,000,000.

In addition, an employee may not receive incentive stock options that exceed
the $100,000 per year limitation set forth in Section 422(d) of the Internal
Revenue Code. In calculating the $100,000 per year limitation, we determine the
aggregate number of shares under all incentive stock options granted to that
employee that will become exercisable for the first time during a calendar
year. For this purpose, we include incentive stock options granted under the
incentive plan as well as under any other stock plans that our affiliates or we
maintain. We then determine the aggregate fair market value of the stock as of
the grant date of the option. Taking the options into account in the order in
which they were granted, we treat only the options covering the first $100,000
worth of stock as incentive stock options.

The 1999 plan permits our board of directors to determine how optionees may pay
the exercise price of their options, including by cash, check or in connection
with a "cashless exercise" through a broker, by surrender to us of shares of
common stock, by delivery to us of a promissory note or by any combination of
the permitted forms of payment.

Our board of directors currently administers the 1999 plan. Our board of
directors will delegate the administration of the 1999 plan to our compensation
committee following the offering. The compensation committee will have the full
authority to adopt, amend and repeal the administrative rules, guidelines and
practices relating to the 1999 plan and to interpret its provisions.

Our compensation committee will select the recipients of awards and will
determine:

. the number of shares of common stock covered by options and the dates upon
which such options become exercisable;

. the exercise price of options;

. the term of options; and

. the restrictions and conditions on the award.

As of September 1, 2000, approximately 280 persons would have been eligible to
receive awards under the 1999 plan, including eight executive officers and four
non-employee directors. The granting of awards under the 1999 plan is
discretionary. Unless the compensation committee determines otherwise, the term
of non-statutory stock options is ten years. The maximum term for incentive
stock options is ten years, but the committee may establish a shorter period.

49
<PAGE>

Generally, an option terminates immediately after the optionholder's service to
us terminates. However, if termination is due to the optionholder's retirement,
the exercise period is generally extended three months. If termination is due
to the optionholder's permanent disability, the exercise period generally is
extended six months. If termination is due to the optionholder's death or if
the optionholder dies within the period after his or her service terminates
during which the options are still exercisable, the exercise period generally
is extended to one year following the optionholder's death.

Options granted to recipients are not assignable or transferable except by his
or her will or by the laws of descent and distribution.

If we merge, liquidate or sell all or substantially all of our assets, our
compensation committee is authorized to provide for:

. the assumption or substitution of all outstanding options by the acquiror;

. the termination of all outstanding options as of the effective date of the
acquisition event if each option holder is given 30 days prior notice;

. appropriate cash payments to option holders, if our stockholders will
receive cash payments as consideration in the acquisition event; and

. the vesting in full of outstanding options prior to the acquisition event.

No incentive stock option may be granted under the 1999 plan after July 2009,
but the vesting and effectiveness of awards previously granted may extend
beyond that date. Our board of directors or compensation committee may at any
time amend, suspend or terminate the 1999 plan, except that no award granted
after an amendment of the 1999 plan and designated as subject to Section 162(m)
of the Internal Revenue Code by our compensation committee or the board of
directors shall become exercisable, realizable or vested, to the extent the
amendment was required to grant the award, unless and until the amendment is
approved by our stockholders.

Option Exchange

In January 2000, in contemplation of the Oracle transaction, Torch transferred
to us 9,233.25 shares of our common stock and their right to receive a stock
dividend of 99 shares of common stock per share, representing 923,325 shares
after payment of the dividend, and we issued options to purchase 923,324 shares
of our common stock to 15 of our employees who owned options to purchase stock
of Torch. Simultaneously, these option holders canceled their Torch options.

Compensation Committee Interlocks and Insider Participation

We do not have a compensation committee of our board of directors, but plan to
form one after the offering. During 1999, our board of directors, including our
chief executive officer, determined the compensation of our executive officers.

50
<PAGE>

Principal Stockholders

The following table shows the ownership of our common stock and series A
preferred stock as of September 1, 2000 by:

. each of our named executive officers;

. each of our directors;

. all of our executive officers and directors as a group; and

. anyone who is known to us to beneficially own more than 5% of our
outstanding common stock or series A preferred stock.

Based on SEC rules, shares of common stock which an individual or group has the
right to acquire within 60 days pursuant to the exercise of options or warrants
are deemed to be outstanding for the purpose of computing the percentage of
ownership of such individual or group. These shares are not deemed to be
outstanding for the purpose of computing the percentage ownership of any other
person shown on this table.

Unless otherwise indicated, each person named in the following table has the
sole power to vote and dispose of the shares listed next to their name. The
address of each person listed below is 1331 Lamar, Suite 1650, Houston, Texas
77010, unless a different address is provided.

<TABLE>
<CAPTION>
Common Stock Preferred Stock
-------------------------------------- --------------------
Percentage Percentage
Name and Address of Number of Prior to After Number of
Beneficial Owners Shares Offering Offering Shares Percentage
------------------- ---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Executive Officers:
Thomas M. Ray III...... 600,000(1)(2) 6.2% -- --
Kelly C. Parrino....... 292,141(1)(3) 3.1% -- --
Scott DeVries.......... 251,899(1)(3) 2.7% -- --
Non-Employee Directors:
J.P. Bryan............. 9,076,675(4) 100.0% -- --
Frost Cochran.......... 9,076,675(4) 100.0% -- --
Ian Thacker............ -- -- -- --
Michael B. Smith....... 9,076,675(4) 100.0%
Directors and Executive
Officers as a group (12
persons)................ 10,490,905(5) 100.0%
Certain Beneficial
Owners:
Torch Energy Advisors
Incorporated.......... 9,076,675 100.0% -- --
1221 Lamar, Suite 1600
Houston, Texas 77010
Oracle Corporation
(6)................... 2,484,395 21.5% 2,484,395 100.0%
500 Oracle Parkway
Redwood Shores,
California 94065
</TABLE>
------------------
* Under 1%
(1) Represents options to purchase shares of common stock that become
exercisable upon completion of the offering.
(2) Pursuant to the terms of Mr. Ray's employment offer letter, dated March 23,
1999, immediately prior to the completion of the offering, Mr. Ray will
receive options to purchase an additional 400,000 shares of common stock
that become exercisable upon completion of the offering.
(3) Mr. Parrino and Mr. DeVries received all of their options in exchange for
relinquishing options to purchase Torch common stock in February 2000.

51
<PAGE>

(4) Represents shares of common stock held by Torch. Mr. Bryan is Senior
Managing Director and Mr. Cochran and Mr. Smith are Managing Directors of
Torch. Messrs. Bryan, Cochran and Smith disclaim beneficial ownership of
these shares.
(5) Represents options to purchase 1,414,230 shares of common stock that become
exercisable upon completion of the offering and 9,076,675 shares held by
Torch over which Messrs. Bryan, Cochran and Smith disclaim beneficial
ownership.
(6) Prior to the offering, all of the shares of common stock held by Oracle
represent shares that could be acquired upon conversion of the series A
preferred stock held by Oracle. Upon the closing of the offering, all of
Oracle's preferred stock will automatically be converted into common stock
and we will not have any preferred stock outstanding, assuming we receive
not less than $10 per share and $50 million in gross proceeds pursuant to
this offering.

Sale of Common Stock by Torch to Unocal

We have entered into a letter of intent with Unocal under which Torch will sell
750,000 shares of our common stock to Unocal. Following the sale of 750,000
shares of our common stock to Unocal, Torch's percent ownership of us will be
reduced to 91.7% of our outstanding common stock.

Warrants to be Issued to Unocal

We have entered into a letter of intent with Unocal which contemplates Unocal
outsourcing to us business process services related to its U.S. upstream oil
and gas activities. In connection with this business process outsourcing
agreement, we expect to issue Unocal warrants to purchase 750,000 shares of our
common stock at a price to be determined following Unocal completing its due
diligence investigation of us. The warrants will expire in ten years. Unocal
will own common stock and warrants representing 15.3% of our common stock
following the purchase from Torch and the issuance of warrants by us, which
will represent % of the outstanding common stock following the offering. In
connection with the outsourcing agreement, we have agreed to reinvest our cash
flow in our business, and not to pay cash dividends prior to 2004.

Warrants Issued to Newfield Exploration

In January 2000, we issued warrants to Newfield when it signed a substantial
long term agreement with us. These warrants have a five year term and entitle
Newfield to acquire an aggregate of 161,066 shares of common stock. The
exercise price of the warrants is $4.00 per share.

Warrants to be Issued to Nuevo Energy

In January 2000, we agreed to issue warrants to purchase 170,000 shares of
common stock to Nuevo Energy when it signed an extension of its outsourcing
agreement for three years. The warrants have a term of ten years. In connection
with the renewal of the Nuevo Energy outsourcing agreement, we agreed to
provide $3.5 million in cost savings to Nuevo Energy over the three-year term
of the agreement extension. The amount of cost savings we are required to
provide Nuevo Energy will be reduced by one-half of the profits earned by Nuevo
Energy on the warrants. See "Certain Transactions--Renewal of the Nuevo Energy
Contract."

52
<PAGE>

Certain Transactions

Transactions with Torch

Services Contracts

Prior to February 2000, we were a wholly-owned subsidiary of Torch. J.P. Bryan,
Frost W. Cochran and Michael B. Smith, who are members of our board of
directors, are directors and executive officers of Torch. Mr. Bryan owns
approximately 28.2% of the stock of the parent of Torch and Mr. Smith owns
approximately 5.4%, assuming all employee options and other rights to receive
common stock were exercised. Mr. Cochran owns options to purchase approximately
5.4% of the parent of Torch, assuming all employee options and other rights to
receive common stock were exercised. Prior to January 1, 1999, our operations
were integrated with Torch's other services, and were not accounted for as a
separate entity. Until February 2000, we had an oral agreement to provide
services to Torch. In February 2000, in connection with our acquisition of the
Oracle Energy Upstream business, we entered into a formal written contract with
Torch, effective as of January 1, 2000, with the same basic terms as the oral
agreement in effect during 1999. The agreement terminates in 2005, and then is
renewable on an annual basis. The principal services we provide to Torch are
revenue accounting, operational cost accounting, property administration,
production accounting, treasury, information technology and oil and gas
marketing strategy formulation. Fees under the current contract are based on a
stated monthly fee, variable fee and provisions for time and materials charges
for requested services. The fees under the previous oral agreement were
assessed on substantially the same basis. For the year ended December 31, 1999,
we received $3.0 million for these services, and for the six months ended
June 30, 2000, we received $1.5 million for these services.

Prior to February 2000, we also received services from Torch pursuant to an
oral agreement. In February 2000, in connection with the acquisition of the
Oracle Energy Upstream business, we entered into a formal written contract with
Torch, effective as of January 1, 2000, under the same basic terms as the oral
agreement. The agreement terminates in 2005, and then is renewable on an annual
basis. We can terminate this agreement at any time upon 90 days notice and
payment of a termination fee of $1.0 million. The services Torch provides to us
under this agreement are primarily human resources, office administration,
office facilities, risk management, corporate secretary, legal support, graphic
services, tax and financial planning, corporate relations and internal and
joint interest audit. Fees under this agreement are based on a monthly fee and
provisions for time and materials charges for requested services. The fees
under the previous oral agreement were assessed on the same basis. For the year
ended December 31, 1999, we paid Torch $1.5 million, and for the six months
ended June 30, 2000, we paid Torch $1.0 million. We also sublease our office
space from Torch at the cost paid by Torch. In 1999, we paid Torch $600,000 in
rent, and in the first six months of 2000, we paid Torch $300,000 in rent.

Working Capital Loans

Since our inception, our working capital needs have been met by advances from
Torch. Since February 16, 2000, these advances have borne interest at 9% per
annum, payable monthly, with principal due on demand pursuant to a revolving
subordinated promissory note. Prior to February 16, 2000, advances from Torch
did not bear interest. As of June 30, 2000, $11.1 million was outstanding under
these advances, $306,000 of which represents accrued interest.

Transactions in Connection with the Offering

In connection with the offering, Torch transferred to us the stock of Petroleum
Financials and will transfer the Torch contracts upon completion of the
offering. These assets were transferred to us because Torch and Oracle, our
only stockholders, determined that the operations of Petroleum Financial and
the Torch contracts were appropriately conducted by us.

Acquisition of Petroleum Financial. On September 18, 2000, Torch transferred to
us all of the capital stock of Petroleum Financial, which offers business
process outsourcing services to upstream oil and gas companies

53
<PAGE>

which compete with the services we offer. Petroleum Financial's customers are
small and mid-sized upstream oil and gas companies who primarily use the
Excalibur software package, which Petroleum Financial licenses from Petroleum
Place. We believe that Petroleum Financial provides us with the opportunity to
sell our software solutions to Petroleum Financial's customers as they grow.

The terms of the transfer to us of Petroleum Financial were determined based on
negotiations between Torch and Oracle. In connection with the contribution of
Petroleum Financial, Oracle orally agreed with us, subject to final
documentation, as follows:

. Oracle will amend their alliance agreements with us to allow us to host its
human resources and procurement software applications in connection with
our software and solutions;

. Oracle will waive non-compete agreements with several of its employees in
Oracle's Aberdeen, Scotland office and permit Novistar to offer employment
to them;

. Oracle will subcontract us to complete a software customization project for
a customer in the Middle East. We will be reimbursed by Oracle for our
actual costs incurred, subject to penalties for performance shortfalls not
to exceed $1.3 million. Oracle's contract with this Middle Eastern company
was not assigned to us in connection with our purchase of the Oracle Energy
Upstream business; and

. Oracle will retain contracts with two customers in the Middle East, which
we determined not to be appropriate for our business.

Acquisition of the Torch Contracts. Also in connection with the offering, Torch
will assign business process outsourcing contracts in which Nuevo Energy and
Bellwether Exploration outsource to us the negotiation of agreements for oil
and gas sales, and use our software to record and process the oil or gas they
sell. These contracts are:

. natural gas marketing services agreement with Nuevo Energy, which has a
three year term ending on December 31, 2001;

. crude oil marketing services agreement with Nuevo Energy, which has a four
year term ending on December 31, 2002; and

. crude oil and natural gas marketing services agreement with Bellwether
Exploration, which has a three year term ending on October 1, 2002.

Under the Torch contracts, Bellwether Exploration and Nuevo Energy pay Torch
base charges and time and materials charges, which are subject to annual
increases of a maximum of 4% for Bellwether Exploration and a maximum of 5% for
Nuevo Energy, beginning in the third year of the contracts. In addition,
Bellwether Exploration and Nuevo Energy pay Torch monthly variable charges
based upon a percentage of their crude oil and natural gas sales, purchases,
and exchanges. Bellwether Exploration and Nuevo Energy also pay Torch monthly
incentive fees based upon increases in the sales prices of their crude oil and
natural gas.

The Torch contracts renew automatically on an annual basis unless notice of
termination is provided no later than 120 days before the expiration of the
initial term or any renewal term. Bellwether Exploration can terminate its
contract at any time upon 90 days notice and payment of a termination fee of
approximately half of what Torch would be likely to receive under the remaining
term of the contract. Nuevo Energy can terminate its contracts at any time upon
90 days notice and payment of approximately one year's fees.

Under these contracts, Torch received total fees of $2.9 million during 1999
and $1.3 million during the first six months of 2000.

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<PAGE>

At the closing of the offering, Torch will transfer the Torch contracts to us
for a cash payment not to exceed $5.7 million, which was agreed upon by us,
Torch and Oracle as the value of the Torch contracts based on the revenues
anticipated to be generated in the future by the Torch contracts. We will seek
a fairness opinion from an investment bank reasonably acceptable to the
underwriters of this offering regarding the fairness, from a financial point of
view, of the value assigned to the Torch contracts. If the investment bank is
unable to opine that the value assigned to the Torch contracts is fair to us,
from a financial point of view, Torch has agreed to reduce the purchase price
of the Torch contracts to the value determined by the investment bank to be
fair to us.

Common Contracts

Our business process outsourcing contracts with Nuevo Energy and Bellwether
Exploration were executed when we were a subsidiary of Torch. These agreements
are subject to the terms and conditions of master services agreements among
Torch, us and each of these companies. In the master services agreements, Torch
guarantees our obligations under each of our contracts. Termination of the
master services agreement does not affect our contracts. During 1999,
Bellwether Exploration paid us $1.9 million, representing 10.6% of our gross
revenues for 1999, and during the first six months of 2000 paid us $2.2
million, representing 14.6% of our gross revenues. During 1999, Nuevo Energy
paid us $8.6 million, representing 47.6% of our gross revenues for 1999, and
during the first six months of 2000 paid us $4.5 million, representing 30% of
our gross revenues. In addition, we perform business process outsourcing
services for Plains Resources pursuant to a subcontracting agreement with
Torch. Termination of the Torch agreement would terminate our agreement with
Plains Resources, unless Plains Resources otherwise agreed. The Plains
Resources agreement has been in effect since September 1999, and we have
received total fees of $271,000 during the first six months of 2000 under this
agreement, representing 1.8% of our revenues.

Renewal of the Nuevo Energy Contract

We renewed our business process outsourcing contract with Nuevo Energy in
August 2000, and extended its term until the end of 2003. We also received an
option to extend the contract to the end of 2004. In the renewal negotiations,
we agreed to cause Nuevo Energy to realize $3.5 million in cost savings over
three years, with a minimum savings of $500,000 per year. We also agreed to
issue to Nuevo Energy warrants to purchase 170,000 shares of our common stock
with a term of ten years at an exercise price of $4.00 per share. The $3.5
million cost savings we agreed to provide Nuevo Energy will be reduced by one-
half of the profit Nuevo Energy realizes on their warrants upon exercise. Nuevo
Energy's profit on the warrant upon exercise is equal to the difference between
the market price of our common stock on the date of exercise and the exercise
price. Also, we may offer to purchase the warrants from Nuevo Energy for a
purchase price per warrant share equal to the market price of our stock less
the exercise price. Whether or not Nuevo Energy elects to sell the warrants to
us, Nuevo Energy will be deemed to have received a profit equal to the offered
purchase price.

At the same time that we renegotiated our contracts with Nuevo Energy, Torch
paid Nuevo Energy $1.5 million in cash to settle claims regarding services
Torch rendered to Nuevo Energy. These claims arose out of a defalcation by a
Nuevo Energy employee of funds from Nuevo Energy by issuing forged wire
transfer instructions processed by Torch.

Transactions With Bellwether Exploration

J.P. Bryan, one of our directors, is the chairman of Bellwether Exploration.
From August 1999 to May 2000, Mr. Bryan also served as chief executive officer
of Bellwether Exploration. Bellwether Exploration is currently a client of
ours, and has been a client of Torch's since 1988. In addition, Bellwether
Exploration represented $4.2 million, or 20%, of the combined service revenues
of Torch for 1999 and $5.1 million, or 26% of the combined service revenues of
Torch in 1998.

55
<PAGE>

Transactions in Connection with Our Purchase of the Oracle Energy Upstream
Business

On February 18, 2000, we purchased software from Oracle, hired most of Oracle's
developers and technical personnel responsible for the software, and assumed
responsibility for a portion of the related consulting and technical support
contracts to which Oracle was a party. The agreed upon purchase price was $30.0
million, consisting of $10.0 million in cash, subject to purchase price
adjustments, $10.0 million in a promissory note and $10.0 million in shares of
our series A preferred stock, convertible into 2,484,395 shares of our common
stock at any time.

To finance the cash portion of the purchase price actually paid for the
acquisition of the Oracle Energy Upstream business at closing, we borrowed $8.7
million from Torch. The interest rate on the Oracle and the Torch notes is
currently 9% per annum and increases to 17% in annual increments until
maturity. Both notes are due upon the earlier of closing of this offering or
February 18, 2005. Accordingly, we will repay the notes to Torch and Oracle
with a portion of the proceeds of this offering.

We entered into a Stockholders Agreement with Torch and Oracle. In the
agreement, we agreed that for so long as Oracle owns more than 2% of our common
stock, or preferred stock convertible into more than 2% of our common stock, we
would cause a representative of Oracle to be nominated or elected to our board
of directors. Oracle currently owns preferred stock convertible into 2,484,395
shares of our common stock. Mr. Thacker is Oracle's current nominee to our
board under this agreement.

We agreed to register the common stock owned by Oracle with the SEC upon
request on two occasions, beginning 180 days after the completion of this
offering. We are obligated to pay Oracle's costs incurred in one of these
registrations. We also granted Oracle rights to include shares they own in
registration statements which we file with the SEC.

From February through July 2000, we paid Oracle $783,000 under all of our
contracts with Oracle, including interest payments of $244,000.

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<PAGE>

Description of Capital Stock

Selected provisions of our organizational documents are summarized below. This
summary is not complete. You should read the organizational documents, which
are filed as exhibits to the registration statement, for other provisions that
may be important to you. In addition, you should be aware that the summary
below does not give full effect to the terms of the provisions of statutory or
common law which may affect your rights as a stockholder.

Pursuant to our certificate of incorporation, we have the authority to issue an
aggregate of 55,000,000 shares of capital stock, consisting of 50,000,000
shares of common stock, par value $0.01 per share, and 5,000,000 shares of
preferred stock, par value $0.01 per share. As of September 1, 2000, 9,076,675
shares of common stock and 2,484,395 shares of series A preferred stock were
outstanding. As of September 1, 2000, 2,138,824 shares underlying outstanding
options to purchase our common stock were reserved for issuance under our 1999
stock incentive plan, 161,066 shares of our common stock were reserved for
issuance pursuant to warrants, 2,484,395 shares of our common stock were
reserved for issuance upon conversion of series A preferred stock, 920,000
shares were subject to warrants that we have agreed to issue and 400,000 shares
were subject to options that we will issue immediately prior to the offering.
We had one holder of record of our outstanding shares of common stock, and one
holder of record of our outstanding shares of series A preferred stock as of
September 1, 2000.

Common Stock

Voting rights. Each share of common stock is entitled to one vote in the
election of directors and on all other matters submitted to a vote of our
stockholders. Our stockholders do not have the right to cumulate their votes in
the election of directors. Our board of directors is divided into three classes
that are elected for staggered three year terms.

Dividends, distributions and stock splits. Holders of our common stock are
entitled to receive dividends if, as and when such dividends are declared by
our board out of assets legally available therefor after payment of dividends
required to be paid on shares of preferred stock, if any.

Liquidation. In the event of any dissolution, liquidation, or winding up of our
affairs, whether voluntary or involuntary, after payment of our debts and other
liabilities and making provision for any holders of our preferred stock who
have a liquidation preference, our remaining assets will be distributed ratably
among the holders of common stock.

Fully Paid. All shares of common stock outstanding are fully paid and
nonassessable, and all the shares of common stock to be outstanding upon
completion of this offering will be fully paid and nonassessable.

Other Rights. Holders of our common stock have no redemption or conversion
rights and no preemptive or other rights to subscribe to our securities.

Preferred Stock

We have designated 2,484,395 shares of the 5,000,000 authorized shares of
preferred stock as series A preferred stock. Immediately prior to the offering,
all of the series A preferred stock will be outstanding. The remaining shares
of preferred stock are undesignated and have not been issued. Our board can,
without the approval of our stockholders, issue one or more additional series
of preferred stock. The board can also determine the number of shares of each
series, establish the rights, preferences, privileges and restrictions,
including the dividend rights, voting rights, conversion rights, redemption
rights, and any liquidation preferences of any series of preferred stock and
the terms and conditions of issue. In some cases, the issuance of preferred
stock could delay or prevent a change in the persons and entities controlling
us and make it harder to remove the present management. Under certain
circumstances, preferred stock could restrict dividend payments to holders of
our common stock and restrict our ability to repurchase or redeem shares of
common stock while there is an arrearage in the payment of dividends to the
holders of preferred stock.

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<PAGE>

Series A Preferred Stock

At any time, each share of series A preferred stock may be converted by the
holder into one share of our common stock. The conversion ratio for our series
A preferred stock is subject to adjustment for stock dividends and splits,
reorganizations and other distributions with respect to our common stock.
Assuming that we receive not less than $10 per share and $50 million in gross
proceeds pursuant to this offering, each share of series A preferred stock will
automatically be converted into one share of our common stock.

The holders of our series A preferred stock are entitled to receive, on an as
converted basis, any dividends paid to holders of our common stock. If we
dissolve, liquidate or wind up our affairs, whether voluntary or involuntary,
after payment of our debts and other liabilities, holders of series A preferred
stock are entitled to a liquidation preference equal to $4.01 per share plus
their ratable share of any assets distributed to holders of our common stock.
Each holder of series A preferred stock is entitled to vote, together as a
single class with all other shares entitled to vote, on all matters voted on by
holders of common stock. Holders of series A preferred stock are entitled to
cast the number of votes they would be entitled to cast if they had converted
their stock to common stock on the applicable record date. As long as shares of
series A preferred stock are outstanding we cannot, without the approval of 90%
of the shares of series A preferred stock:

. amend our certificate of incorporation or bylaws in a manner materially
adverse to the holders of series A preferred stock;

. authorize or issue any equity security that has rights senior to or on
parity with the series A preferred stock;

. repurchase any shares of our capital stock other than from an employee
upon termination;

. consolidate, merge or sell all or substantially all of our assets or
engage in another transaction that results in a change of control; or

. dissolve.

Delaware Anti-Takeover Law And Certain Charter And Bylaw Provisions

Our bylaws and the Delaware General Corporation Law contain certain provisions
that could discourage potential takeover attempts and make it more difficult
for our stockholders to change management or receive a premium for their
shares.

Delaware Law

We are subject to Section 203 of the Delaware General Corporation Law, an anti-
takeover law. In general, the statute prohibits a publicly-held Delaware
corporation from engaging in a business combination with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner that includes approval by at
least 66 2/3% of the outstanding stock not owned by the interested stockholder.
A "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the stockholder. For purposes of Section
203, an "interested stockholder" is defined to include any person that is:

. the owner of 15% or more of the outstanding voting stock of the
corporation;

. an affiliate or associate of the corporation and was the owner of 15% or
more of the voting stock outstanding of the corporation, at any time
within three years immediately prior to the relevant date; and

. an affiliate or associate of the persons described in the foregoing bullet
points.

Stockholders may, by adopting an amendment to the corporation's certificate of
incorporation or bylaws, elect for the corporation not to be governed by
Section 203, effective 12 months after adoption. Neither our

58
<PAGE>

certificate of incorporation nor our bylaws exempt us from the restrictions
imposed under Section 203. Section 203 may encourage companies interested in
acquiring us to negotiate in advance with our board because stockholder
approval of the transaction, as discussed above, would be unnecessary.

Charter and Bylaw Provisions

Our bylaws provide that any action required or permitted to be taken by our
stockholders may only be effected at a duly called annual or special meeting of
the stockholders, and may not be taken by written consent of the stockholders.
Special meetings of stockholders may be called by the chairman or the chief
executive officer or by a majority of the board.

Our bylaws provide for the division of the board of directors into three
classes, as nearly equal in size as possible. Each year at the annual meeting
of stockholders, one class of directors is elected for a three-year term. The
number of directors is fixed by resolution of our board of directors. The size
of the board is currently fixed at five members.

Directors may be removed with the approval of the holders of a majority of our
voting power present and entitled to vote at a meeting of stockholders.
Directors may only be removed by stockholders for cause. Vacancies and newly-
created directorships resulting from any increase in the number of directors
may be filled by a majority of the directors then in office, a sole remaining
director, or the holders of a majority of the voting power present and entitled
to vote at a meeting of stockholders.

Limitation Of Liability; Indemnification

Our certificate of incorporation contains certain provisions permitted under
the Delaware General Corporation Law relating to the liability of directors.
These provisions eliminate a director's personal liability for monetary damages
resulting from a breach of fiduciary duty, except that a director will be
personally liable:

. for any breach of the director's duty of loyalty to us or our
stockholders;

. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;

. under Section 174 of the Delaware General Corporation Law relating to
unlawful stock repurchases or dividends; or

. for any transaction from which the director derives an improper personal
benefit.

These provisions do not limit or eliminate our rights or those of any
stockholder to seek non-monetary relief, such as an injunction or rescission,
in the event of a breach of a director's fiduciary duty. These provisions will
not alter a director's liability under federal securities laws.

Our bylaws also contain provisions indemnifying our directors and officers to
the fullest extent permitted by the Delaware General Corporation Law. We plan
to enter into separate indemnification agreements with our directors and
officers that may, in some cases, be broader than the specific indemnification
provisions contained in our certificate of incorporation, bylaws or the
Delaware General Corporation Law. The indemnification agreements may require
us, among other things, to indemnify the officers and directors against certain
liabilities, other than liabilities arising from willful misconduct, that may
arise by reason of their status or service as directors or officers. These
agreements also may require us to advance the expenses incurred by the officers
and directors as a result of any proceeding against them as to which they could
be indemnified. We believe that these indemnification arrangements are
necessary to attract and retain qualified individuals to serve as directors and
officers.

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<PAGE>

Transfer Agent and Registrar

The Transfer Agent and Registrar for the common stock will be .

Shares Eligible For Future Sale

When the offering is completed, we will have a total of shares of common
stock outstanding. The shares offered by this prospectus will be freely
tradable unless they are purchased by our "affiliates," as defined in Rule 144
under the Securities Act. The remaining 11,561,070 shares will be owned,
9,076,675 by Torch and 2,484,395 by Oracle. The Torch shares may be publicly
sold under Rule 144 following the offering and the Oracle shares may be sold
after February 18, 2001. Rule 144 will limit the amount of stock Torch and
Oracle may sell and the manner in which they may sell their stock while they
are our affiliates.

In addition, 2,299,890 shares are issuable upon exercise of options and
warrants. If any options and warrants are exercised, the shares issued upon
exercise will also be restricted, but may be sold under Rule 144 after the
shares have been held for one year. Sales under Rule 144 may be subject to
volume limitations and other conditions.

Torch, Oracle and holders of options and warrants to purchase shares of
common stock have agreed to a 180-day "lock-up" with respect to these shares.
This generally means that they cannot sell these shares during the 180 days
following the date of this prospectus. See "Underwriting" for additional
details. After the 180-day lock-up period, all of the shares owned by Torch and
Oracle may be sold in accordance with Rule 144. We plan to register with the
SEC the shares subject to issuance upon exercise of options 180 days following
the offering.

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Underwriting

We have entered into an underwriting agreement with the underwriters named
below. CIBC World Markets Corp. and Stephens Inc. are acting as representatives
of the underwriters.

The underwriting agreement provides for the purchase of a specific number of
shares of common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specified number of shares, but is not responsible for the
commitment of any other underwriter to purchase shares. Subject to the terms
and conditions of the underwriting agreement, each underwriter has severally
agreed to purchase the number of shares of common stock set forth opposite its
name below:

<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- -----------
<S> <C>
CIBC World Markets Corp..........................................
Stephens Inc.....................................................
-----------
Total............................................................
===========
</TABLE>

The underwriters have agreed to purchase all of the shares offered by this
prospectus (other than those covered by the over-allotment option described
below) if any are purchased. Under the underwriting agreement, if an
underwriter defaults in its commitment to purchase shares, the commitments of
non-defaulting underwriters may be increased or the underwriting agreement may
be terminated, depending on the circumstances.

The shares should be ready for delivery on or about , 2000 against payment
in immediately available funds. The underwriters are offering the shares
subject to various conditions and may reject all or part of any order. The
representatives have advised us that the underwriters propose to offer the
shares directly to the public at the public offering price that appears on the
cover page of this prospectus. In addition, the representatives may offer some
of the shares to other securities dealers at such price less a concession of
$ per share. The underwriters may also allow, and such dealers may reallow, a
concession not in excess of $ per share to other dealers. After the shares
are released for sale to the public, the representatives may change the
offering price and other selling terms at various times.

We have granted the underwriters an over-allotment option. This option, which
is exercisable for up to 30 days after the date of this prospectus, permits the
underwriters to purchase a maximum of additional shares from us to cover
over-allotments. If the underwriters exercise all or part of this option, they
will purchase shares covered by the option at the initial public offering price
that appears on the cover page of this prospectus, less the underwriting
discount. If this option is exercised in full, the total price to public will
be $ and the total proceeds to us will be $ . The underwriters have
severally agreed that, to the extent the over-allotment option is exercised,
they will each purchase a number of additional shares proportionate to the
underwriter's initial amount reflected in the foregoing table.

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<PAGE>

The following table provides information regarding the amount of the discount
to be paid to the underwriters by us:

<TABLE>
<CAPTION>
Total With
Total Without Full Exercise
Exercise of of
Per Over-Allotment Over-Allotment
Share Option Option
----- -------------- --------------
<S> <C> <C> <C>
Novistar.................................
</TABLE>

We estimate that our total expenses of the offering, excluding the underwriting
discount, will be approximately $ .

We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act.

We, our officers and directors and substantially all other stockholders have
agreed to a 180-day "lock-up" with respect to shares of common stock that
they beneficially own, including securities that are convertible into shares of
common stock and securities that are exchangeable or exercisable for shares of
common stock. This means that, subject to certain exceptions, for a period of
180 days following the date of this prospectus, we and such persons may not
offer, sell, pledge or otherwise dispose of these securities without the prior
written consent of CIBC World Markets Corp.

The representatives have informed us that they do not expect discretionary
sales by the underwriters to exceed five percent of the shares offered by this
prospectus.

The underwriters have reserved for sale up to shares for employees,
directors and other persons associated with us. These reserved shares will be
sold at the initial public offering price that appears on the cover page of
this prospectus. The number of shares available for sale to the general public
in the offering will be reduced to the extent reserved shares are purchased by
such persons. The underwriters will offer to the general public, on the same
terms as other shares offered by this prospectus, any reserved shares that are
not purchased by such persons.

There is no established trading market for the shares. The offering price for
the shares has been determined by us and the representatives, based on the
following factors:

. the history and prospects for the industry in which we compete;

. our past and present operations;

. our historical results of operations;

. our prospects for future business and earning potential;

. our management;

. the general condition of the securities markets at the time of this
offering;

. the recent market prices of securities of generally comparable companies;

. the market capitalization and stages of development of other companies
which we and the representatives believe to be comparable to us; and

. other factors deemed to be relevant.

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<PAGE>

Rules of the SEC may limit the ability of the underwriters to bid for or
purchase shares before the distribution of the shares is completed. However,
the underwriters may engage in the following activities in accordance with the
rules:

. Stabilizing transactions. The representatives may make bids or purchases
for the purpose of pegging, fixing or maintaining the price of the shares,
so long as stabilizing bids do not exceed a specified maximum.

. Over-allotments and syndicate covering transactions. The underwriters may
sell more shares of our common stock in connection with this offering than
the number of shares they have committed to purchase. This over-allotment
creates a short position for the underwriters. This short sales position
may involve either "covered" short sales or "naked" short sales. Covered
short sales are short sales made in an amount not greater than the
underwriters' over-allotment option to purchase additional shares in this
offering described above. The underwriters may close out any covered short
position either by exercising their over-allotment option or by purchasing
shares in the open market. To determine how they will close the covered
short position, the underwriters will consider, among other things, the
price of shares available for purchase in the open market, as compared to
the price at which they may purchase shares through the over-allotment
option. Naked short sales are short sales in excess of the over-allotment
option. The underwriters must close out any naked short position by
purchasing shares in the open market. A naked short position is more
likely to be created if the underwriters are concerned that, in the open
market after pricing, there may be downward pressure on the price of the
shares that could adversely affect investors who purchase shares in this
offering.

. Penalty bids. If the representatives purchase shares in the open market in
a stabilizing transaction or syndicate covering transaction, they may
reclaim a selling concession from the underwriters and selling group
members who sold those shares as part of this offering.

. Passive market making. Market makers in the shares who are underwriters or
prospective underwriters may make bids for or purchases of shares, subject
to limitations, until the time, if ever, at which a stabilizing bid is
made.

Similar to other purchase transactions, the underwriters' purchases to cover
the syndicate short sales or to stabilize the market price of our common stock
may have the effect of raising or maintaining the market price of our common
stock or preventing or mitigating a decline in the market price of our common
stock. As a result, the price of the shares of our common stock may be higher
than the price that might otherwise exist in the open market. The imposition of
a penalty bid might also have an effect on the price of the shares if it
discourages resales of the shares.

Neither we nor the underwriters make any representation or prediction as to the
effect that the transactions described above may have on the price of the
shares. These transactions may occur on the Nasdaq National Market or
otherwise. If such transactions are commenced, they may be discontinued without
notice at any time.

Legal Matters

Certain legal matters with respect to the validity of the common stock offered
hereby are being passed upon for us by Haynes and Boone, LLP. Certain legal
matters in connection with this offering will be passed upon for the
underwriters by Akin, Gump, Strauss, Hauer & Feld, L.L.P.

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<PAGE>

Experts

The combined financial statements of Novistar, Inc. as of December 31, 1999 and
for the year then ended, the statements of revenues and direct operating
expenses of the service fee activities of Torch Energy Advisors Incorporated
for each of the three years in the period ended December 31, 1999, and the
statement of assets and liabilities assumed as of February 18, 2000 and the
statements of revenues and direct operating expenses from certain activities of
Oracle Energy Services for the years ended December 31, 1998 and 1999,
appearing in this prospectus and the registration statement of which it is a
part have been audited by Ernst & Young LLP, independent auditors, as set forth
in their reports thereon appearing elsewhere herein, and are included in
reliance upon such reports given on the authority of such firm as experts in
accounting and auditing.

Where You Can Find More Information

We have filed a registration on Form S-1 with the SEC in connection with this
offering. In addition, upon completion of the offering, we will be required to
file annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy the registration statement and
any other documents we have filed at the SEC's Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-
0330 for further information on the Public Reference Room. Our SEC filings are
also available to the public at the SEC's Internet site at
"http://www.sec.gov."

This prospectus is part of the registration statement and does not contain all
of the information included in the registration statement. Whenever a reference
is made in this prospectus to any of our contracts or other documents, the
reference may not be complete and, for a copy of the contract or document, you
should refer to the exhibits that are a part of the registration statement.

After the offering, we expect to provide annual reports to our stockholders
that include financial information examined and reported on by our independent
public account.

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<PAGE>

Index to Financial Statements

<TABLE>
<CAPTION>
Page
----
<S> <C>
Combined Financial Statements of Novistar, Inc.
Report of Independent Auditors........................................... F-2
Combined Statement of Operations for the Year Ended December 31, 1999.... F-3
Combined Balance Sheet as of December 31, 1999........................... F-4
Combined Statement of Stockholder's Deficit for the Year Ended December
31, 1999................................................................ F-5
Combined Statement of Cash Flows for the Year Ended December 31, 1999.... F-6
Notes to Combined Financial Statements................................... F-7

Unaudited Combined Financial Statements of Novistar, Inc.
Combined Statements of Operations for the Six Months Ended June 30, 1999
and 2000................................................................ F-16
Combined Balance Sheets as of December 31, 1999 and June 30, 2000........ F-17
Combined Statement of Stockholders' Equity for the Six Months Ended June
30, 2000................................................................ F-18
Combined Statements of Cash Flows for the Six Months Ended June 30, 1999
and 2000................................................................ F-19
Notes to Combined Financial Statements................................... F-20

Service Fee Activities of Torch Energy Advisors, Inc.
Report of Independent Auditors........................................... F-28
Statements of Revenues and Direct Operating Expenses of the Service Fee
Activities of Torch Energy Advisors Incorporated for the Years Ended
December 31, 1997, 1998 and 1999........................................ F-29
Notes to Statements of Revenues and Direct Operating Expenses............ F-30

Oracle Energy Services (A division of Oracle Corporation)
Report of Independent Auditors........................................... F-31
Statement of Assets Acquired and Liabilities Assumed as of February 18,
2000.................................................................... F-32
Statements of Revenues and Direct Operating Expenses from Certain
Activities for the Years Ended December 31, 1998 and 1999 and for the
period from January 1, 2000 through February 18, 2000 (Unaudited)....... F-33
Notes to Statement of Assets Acquired and Liabilities Assumed and
Statements of Revenues and Direct Operating Expenses from Certain
Activities.............................................................. F-34
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Novistar, Inc.:

We have audited the accompanying combined balance sheet of Novistar, Inc.,
combined on the basis described in Note 1, as of December 31, 1999, and the
related combined statements of operations, stockholder's deficit and cash flows
for the year then ended. 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 audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards 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. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of Novistar, Inc. as of
December 31, 1999, and the combined results of its operations and its cash
flows for the year then ended in conformity with accounting principles
generally accepted in the United States.

ERNST & YOUNG LLP

Houston, Texas
September 13, 2000

F-2
<PAGE>

NOVISTAR, INC. (Note 1)

COMBINED STATEMENT OF OPERATIONS FOR THE
YEAR ENDED DECEMBER 31, 1999
(Amounts in Thousands, Except Per Share Data)

<TABLE>
<S> <C>
Revenues:
Service fees....................................................... $ 12,238
Service fees--affiliates........................................... 3,033
Marketing commissions.............................................. 2,851
----------
Total revenues.................................................... 18,122
----------
Cost of revenues.................................................... 15,581
----------
Gross profit...................................................... 2,541
Operating expenses:
General and administrative--affiliates............................. 2,242
Selling, general and administrative................................ 1,095
Depreciation and amortization...................................... 2,498
----------
Total operating expenses.......................................... 5,835
----------
Net loss............................................................ $ (3,294)
==========
Net loss per share:
Historical basic and diluted net loss per share .................... $ (0.36)
==========
Weighted-average shares outstanding basic and diluted............... 9,076,675
==========
Pro forma statement of operations data (unaudited) (Note 2):
Loss before benefit for income taxes, as reported.................. $ (3,294)
Pro forma income tax (benefit)..................................... --
----------
Pro forma net loss................................................. $ (3,294)
==========
Pro forma basic and diluted net loss per share..................... $ --
==========
Pro forma weighted--average shares outstanding basic and diluted... --
==========
</TABLE>

See accompanying notes to financial statements.

F-3
<PAGE>

NOVISTAR, INC. (Note 1)

COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1999

(Amounts in Thousands, Except Per Share Data)

<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents............................................ $ 61
Accounts receivable.................................................. 1,560
Other current assets................................................. 426
-------
Total current assets................................................ 2,047
Property and equipment, at cost:
Office furniture and equipment....................................... 7,842
Accumulated depreciation............................................. (3,753)
-------
4,089
Intangible assets, net of accumulated amortization of $317............ 1,064
-------
Total assets........................................................ $ 7,200
=======
Current liabilities:
Due to affiliates.................................................... $ 7,497
Accounts payable and accrued liabilities............................. 794
-------
Total current liabilities........................................... 8,291
Other................................................................. 23
Stockholder's deficit:
Common stock, par value $.01 per share--authorized, issued and
outstanding 100,000 shares at December 31, 1999..................... 1
Additional paid-in capital........................................... 4,991
Accumulated deficit.................................................. (6,106)
-------
Total stockholder's equity.......................................... (1,114)
-------
Total liabilities and stockholder's deficit......................... $ 7,200
=======
</TABLE>

See accompanying notes to financial statements.

F-4
<PAGE>

NOVISTAR, INC. (Note 1)

COMBINED STATEMENT OF STOCKHOLDER'S DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1999
(Amounts in Thousands)

<TABLE>
<CAPTION>
Additional
Common Paid-in Accumulated Stockholder's
Shares Stock Capital Deficit Deficit
------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1998................... 100 $ 1 $1,250 $ 39 $ 1,290
Contributions........... -- -- 3,741 -- 3,741
Distributions (Note 9).. -- -- -- (2,851) (2,851)
Net loss................ -- -- -- (3,294) (3,294)
--- --- ------ ------- -------
Balance, December 31,
1999................... 100 $ 1 $4,991 $(6,106) $(1,114)
=== === ====== ======= =======
</TABLE>

See accompanying notes to financial statements.

F-5
<PAGE>

NOVISTAR, INC. (Note 1)

COMBINED STATEMENT OF CASH FLOWS FOR THE
YEAR ENDED DECEMBER 31, 1999
(Amounts in Thousands)

<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss............................................................. $(3,294)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization....................................... 2,498
Changes in operating assets and liabilities:
Accounts receivable................................................. (1,181)
Other current assets................................................ (209)
Accounts payable and accrued liabilities............................ 563
-------
Net cash flows used in operating activities........................... (1,623)
Cash flows from investing activities:
Investment in property and equipment................................. (2,846)
-------
Net cash flows used in investing activities........................... (2,846)
-------
Cash flows from financing activities:
Due to affiliates.................................................... 7,338
Distributions........................................................ (2,851)
-------
Net cash flows provided by financing activities....................... 4,487
-------
Net increase in cash and cash equivalents............................. 18
Cash and cash equivalents, at beginning of period..................... 43
-------
Cash and cash equivalents, at end of period........................... $ 61
=======
</TABLE>

Supplemental schedule of noncash financing activities

Novistar (see Note 1) was formed on April 24, 1998 by Torch Energy Advisors
Incorporated and commenced operations effective January 1, 1999. During 1999,
Torch contributed all assets and liabilities related to the operations of
Novistar which have been accounted for in the statement of cash flows as
noncash transactions. The net assets and liabilities contributed are as
follows:

<TABLE>
<S> <C>
Net assets contributed............................................ $3,793
Net liabilities contributed....................................... (52)
------
Contributed capital as of December 31, 1999....................... $3,741
======
</TABLE>

See accompanying notes to financial statements.

F-6
<PAGE>

NOVISTAR, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

1. Organization and basis of presentation

Organization of business

Novistar, Inc. ("Novistar"), a Delaware corporation, was formed on April 24,
1998 by Torch Energy Advisors Incorporated ("Torch") and commenced operations
effective January 1, 1999, for the purpose of providing state-of-the-art
business process services including transaction processing, information
management, and process reengineering in three principal areas: oil and gas
property administration, information technology and procurement and inventory
management. Novistar's clients range from small private energy companies to
major integrated oil companies. Novistar is headquartered in Houston, Texas and
is wholly owned by Torch which is wholly owned by Torch Acquisition Company
("TAC").

Basis of presentation

In September, 2000 Torch transferred to Novistar at book value the stock of
Petroleum Financial Inc. ("Petroleum Financial"). Upon effectiveness of the
public offering discussed in Note 9, Torch will assign to Novistar the crude
oil and natural gas marketing activity under contractual arrangements
administered by a division of Torch, (the "Torch Contracts"). During the year
covered by these combined financial statements, Novistar, Petroleum Financial
and the Torch Contracts (collectively the "Company" or "Novistar") were under
common control as an integral part of Torch's overall operations. These
combined financial statements have been prepared from Torch's historical
accounting records and present the combined financial position and results of
operations of the Company as of December 31, 1999 and for the year then ended
as if the Company had been a separate stand-alone entity.

The financial information included herein may not necessarily reflect the
Company's future or historical combined financial position, results of
operations, cash flows, or changes in stockholder's deficit had the
transactions referred to above occurred as of the beginning of the year
presented.

2. Summary of significant accounting policies

Principles of combination

The accompanying financial statements include the accounts of Novistar,
Petroleum Financial and the Torch Contracts combined as of December 31, 1999
and for the year then ended. All material intercompany transactions between the
combined entities have been eliminated.

Cash and cash equivalents

The Company defines cash and cash equivalents as cash on deposit in banks and
cash invested temporarily in various instruments with original maturities of
three months or less.

Property and equipment

Fixed assets are recorded at historical cost. Depreciation is calculated using
a straight-line basis over the estimated useful life, which generally ranges
from three to five years. Leasehold improvements, which are recorded at cost,
are amortized on a straight-line basis over their estimated useful lives or the
life of the lease, whichever is shorter.

Fair value of financial instruments

The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, and accrued liabilities.
The current carrying amount of these instruments approximates fair market value
due to the relatively short period of time to maturity for these instruments.

F-7
<PAGE>

NOVISTAR, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Concentration of credit risk

Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents,
and accounts receivables. The Company maintains cash and cash equivalents with
high credit quality financial institutions. Accounts receivable are
predominately with energy related companies. The Company performs credit
evaluations of its customers' financial condition and generally does not
require collateral.

Equity instruments issued to customers

For equity instruments issued to customers, the Company follows the guidance
provided in Statement of Financial Accounting Standards ("SFAS") No. 123
"Accounting for Stock-Based Compensation" and in Emerging Issues Task Force
Issue No. 96-18 ("EITF 96-18") "Accounting for Equity Instruments that are
Issued to Other Than Employees for Acquiring or in Conjunction with Selling
Goods or Services."

Intangible assets

Intangible assets represent the excess cost of acquired assets over the amounts
assigned to their tangible net assets at acquisition. Such amounts are
amortized on a straight-line basis over five years.

The Company periodically reviews the propriety of the carrying amount of long-
lived assets and the related intangible assets as well as the related
amortization period to determine whether current events or circumstances
warrant adjustments to the carrying value and/or the estimate of useful lives.
This evaluation consists of the Company's projection of undiscounted future
operating cash flows before interest over the remaining lives of the intangible
assets, in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Based on its
review, the Company believes that no significant impairment of its long-lived
assets or related intangible assets has occurred.

Income taxes

Until February 18, 2000, Novistar elected to be treated as a qualified
Subchapter S corporation under Section 1361(b)(3) of the Internal Revenue Code
of 1986. As a result of this election, TAC filed an S corporation tax return
for the year ended December 31, 1999 that includes Torch and subsidiaries,
including Novistar. Each TAC stockholder is responsible for reporting his share
of taxable income or loss for 1999. In connection with the acquisition by
Novistar of certain assets of Oracle Energy Upstream as further discussed in
Note 9, Novistar was no longer eligible for Subchapter S corporation status.
Until its contribution to Novistar in September 2000, Petroleum Financial also
elected to be treated as a qualified Subchapter S corporation. As required by
Staff Accounting Bulletin No. 98 ("SAB 98"), the accompanying financial
statements reflect a pro forma income tax provision as if Novistar and
Petroleum Financial had been C corporations for tax purposes during the period
presented.

Revenue recognition

Use of estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

F-8
<PAGE>

NOVISTAR, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Stock-based compensation

SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but does
not require companies to record compensation cost for stock-based compensation
plans at fair value. The Company has chosen to account for stock-based
compensation awards to employees using the intrinsic value method prescribed in
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. Accordingly, compensation
cost for stock options awarded to employees and directors is measured as the
excess, if any, of the quoted market price of the Company's stock at the date
of grant over the amount an employee must pay to acquire the stock.

Net loss per share

SFAS No. 128, "Earnings per Share" requires dual presentation of basic and
diluted earnings per share. Basic net income per share includes no dilution and
is computed by dividing net income or loss available to common stockholders by
the weighted-average number of common shares outstanding for the period.
Diluted net income per share includes the impact of dilutive securities, such
as options, warrants and convertible debt or preferred equity securities. The
Company's net loss per share data has been calculated under SFAS No. 128 as if
the number of common shares outstanding immediately prior to the offering (see
Note 9) had been outstanding for the year presented. The Company had a net loss
and, therefore, a separate calculation of diluted earnings per share data was
not required. However, had diluted earnings per share data been required,
options outstanding as of December 31, 1999 would not have been included in the
calculation because they were contingently issuable and the conditions for
exercisability had not been satisfied.

As required by SAB 98, pro forma earnings per share information has been
presented as if Novistar had been a C corporation for tax purposes during the
period presented and also to give effect to the number of shares whose proceeds
would be necessary to pay the distribution to Torch discussed in Note 9.

Recently adopted accounting pronouncements

In December 1999, the staff of the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101 ("SAB 101"). SAB 101 summarizes
certain areas of the SEC's views in applying generally accepted accounting
principles to revenue recognition in financial statements. The Company believes
that its current revenue recognition policies comply with SAB 101.

In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" was issued. SFAS No. 133, as amended by SFAS No. 137 and SFAS No.
138, establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. This statement is effective for fiscal periods beginning
after June 15, 2000. The Company is currently evaluating the possible effects
of SFAS No. 133 on its combined financial statements.

3. Related party transactions

The Company receives support services from Torch. Included in general and
administrative expenses--affiliates are support service charges for human
resources and office administration, risk management, corporate secretary--
legal services, corporate and litigation legal services, graphic services, tax
department services, financial reporting and general accounting, corporate
relations, financial planning and analysis, internal audit and joint interest
audit. These services are provided by Torch for a fixed or variable fee. In
addition, the Company may request Torch to perform services outside the scope
of the support services for additional compensation based on a time and
materials basis for hours worked and materials used by Torch personnel on such
special requests as well as out-of-pocket expenses. For the year ended December
31, 1999, the Company paid $1.5 million for these services. In addition, the
company paid $600,000 to Torch as reimbursement for

F-9
<PAGE>

NOVISTAR, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

office rent on space occupied by Novistar. The Company formalized its support
services arrangement with Torch through a Support Services Agreement dated
January 1, 2000.

The Company provides information management and accounting services to Torch.
Included in service fees--affiliates are fees for revenue accounting,
operational cost accounting, property administration, production accounting,
treasury, information technology, and crude oil and natural gas marketing
strategy formulation provided to Torch. These services are provided by the
Company for a fixed or variable fee. In addition, Torch may request the Company
to perform services outside the scope of the support services for additional
compensation based on a time and materials basis for hours worked and materials
used by Company personnel on such special requests as well as out-of-pocket
expenses. For the year ended December 31, 1999, the Company received $3.0
million for these services. The Company formalized its management and
accounting services arrangements with Torch through an Information Management
and Accounting Services Agreement dated January 1, 2000.

All amounts due to and from Torch related to services rendered or received are
settled through intercompany balances. In addition, the Company's working
capital needs are also funded through intercompany advances from Torch who has
agreed to continue funding the Company's working capital needs at least through
December 31, 2001. As of February 16, 2000, under the terms of an intercompany
note agreement, the Company is being charged interest at the rate of 9% on
outstanding intercompany balances.

The full-time employees of the Company may participate in a 401(K) Retirement
Plan sponsored by Torch. Employer contributions were approximately $184,000
during the year ended December 31, 1999.

During 1999, the Company performed business process outsourcing for two
customers under the terms of contractual arrangements between the customers and
Torch. Service fees in the accompanying financial statements include
approximately $900,000 billed to these customers for the services provided.

4. Major customers

Effective January 1, 1999 and October 1, 1999, the Company negotiated new
service agreements with two of its major customers, Nuevo Energy Corporation
("Nuevo") and Bellwether Exploration Company ("Bellwether"), respectively.
Nuevo, Bellwether and Torch accounted for 48%, 11% and 18%, respectively, of
the revenues of the Company during the year ended December 31, 1999. In
addition, Nuevo and Bellwether are entities that were either formed by Torch or
affiliated with Torch through common management or ownership and the
performance under the service agreements are guaranteed by Torch.

5. Stock option plan

In May 1999, the Company adopted the 1999 Stock Option Plan ( the "Plan"). The
Plan was established to grant incentive stock options to employees and others.
The Company has reserved a total of 2,600,000 shares of common stock for future
grant under the Plan.

Under the provisions of the plan, the exercise price of a stock option shall be
100% of the fair market value of a share of common stock on the date the stock
option is granted. The stock options granted during 1999 vest up to one year
from the date of grant. Stock options granted under the plan shall be
exercisable as provided in the option agreement as described below.

Vested options are exercisable only if:

. Novistar consummates an initial public offering;

. Torch agrees to sell 70% or more of its common stock;

F-10
<PAGE>

NOVISTAR, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

. Novistar merges with another company; or

. Novistar's board of directors declares the options to be exercisable.

Unless otherwise provided in an option agreement, the term of the option is ten
years, subject to earlier termination.

The following table summarizes stock option activity under the Plan through
December 31, 1999:

<TABLE>
<CAPTION>
Weighted
Range of Average
Exercise Exercise
Options Prices Price
------- -------- --------
<S> <C> <C> <C>
Granted............................................ 667,500 $2.00 $2.00
Exercised.......................................... -- -- --
Canceled........................................... -- -- --
------- ----- -----
Outstanding, December 31, 1999..................... 667,500 $2.00 $2.00
======= ===== =====
Exercisable, December 31, 1999..................... -- -- --
======= ===== =====
</TABLE>

The following table summarizes the weighted average grant date fair value and
weighted average exercise price of options granted during the period from
inception of the Plan through December 31, 1999. For purposes of the table
below, the weighted average grant date fair value was computed using the Black-
Scholes options pricing model.

<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Fair Exercise
Year ended December 31, 1999 Shares Value Price
---------------------------- ------- -------- --------
<S> <C> <C> <C>
Exercise price equals fair value................... -- $ -- $ --
Exercise price greater than fair value............. 667,500 0.53 2.00
Exercise price less than fair value................ -- -- --
------- ----- -----
667,500 $0.53 $2.00
======= ===== =====
</TABLE>

There were no options issued to non-employees during 1999.

The Company applies the measurement principles of APB Opinion No. 25 in
accounting for issuances of employee stock options and of SFAS No. 123 for all
other equity instruments. Had compensation expense for employee stock options
granted been determined based on the fair value at the date of grant as
prescribed by SFAS No. 123, the net loss and net loss per share for the year
ended December 31, 1999 would have been as indicated below.

<TABLE>
<CAPTION>
December 31,
1999
------------
<S> <C>
Net loss:
As reported.................................................... $(3,294)
=======
Pro forma...................................................... $(3,294)
=======
Basic and diluted net loss per share:
As reported.................................................... $ (0.36)
=======
Pro forma...................................................... $ (0.36)
=======
</TABLE>

F-11
<PAGE>

NOVISTAR, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

For the period indicated above, the Company calculated the minimum fair value
of each option grant on the date of grant using the Black-Scholes option
pricing model as prescribed by SFAS No. 123 using the following assumptions:

<TABLE>
<CAPTION>
December 31,
1999
------------
<S> <C>
Risk-free interest rates........................................ 6.34%
Expected lives (in years)....................................... 5.0
Dividend yield.................................................. --
Expected volatility............................................. 0%
</TABLE>

Based on these assumptions, the minimum fair value of the options calculated
using the Black-Scholes option pricing model, granted in the period indicated
above was $354,000. Because the determination of fair value of all options
granted after such time as the Company becomes a public entity (see Note 9)
will include an expected volatility factor in addition to the factors described
in the preceding paragraph, the above results may not be indicative of future
periods.

6. Stockholder's deficit

The components of stockholder's deficit are as follows:

<TABLE>
<CAPTION>
December 31, 1999
----------------------------------
Common Paid-in Accumulated
Company Stock Capital Deficit Total
------- ------ ------- ----------- -------
<S> <C> <C> <C> <C>
Novistar................................. $ 1 $3,741 $(5,236) $(1,494)
Petroleum Financial...................... -- 1,250 (870) 380
Torch Contracts.......................... -- -- -- --
--- ------ ------- -------
Total.................................. $ 1 $4,991 $(6,106) $(1,114)
=== ====== ======= =======
</TABLE>

The statement of stockholder's deficit reflects a deemed distribution of $2.9
million related to the cash flows from the Torch Contracts retained by Torch.

7. Commitments and contingencies

Future minimum lease payments under noncancellable operating leases for office
space, equipment and other operating leases are as follows:

<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
(Amounts in Thousands)
<S> <C>
2000............................................................... $178,000
2001............................................................... 162,000
2002............................................................... 118,000
2003............................................................... 1,000
2004............................................................... --
Thereafter......................................................... --
--------
Total future minimum lease payments.............................. $459,000
========
</TABLE>

Total rent expense for operating leases was approximately $300,000 for the year
ended December 31, 1999.

F-12
<PAGE>

NOVISTAR, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Litigation

In the ordinary course of business, the Company has become involved in disputes
and litigation. While the results of such disputes cannot be predicted with
certainty, in management's opinion, based in part on the advice of counsel, the
ultimate resolution of these disputes will not have a material adverse effect
on the Company's financial position or its results of operations.

8. Fixed assets

Fixed assets consist of the following (in thousands):

<TABLE>
<CAPTION>
December 31,
1999
------------
<S> <C>
Computer hardware, software and office equipment................ $5,505
Furniture, fixtures and leasehold improvements.................. 2,337
------
7,842
Less--Accumulated depreciation and amortization................. (3,753)
------
$4,089
======
</TABLE>

Depreciation expense for the period from inception through December 31, 1999
amounted to $2.2 million.

9. Subsequent events

Preferred stock

On February 16, 2000 the Company authorized 3,000,000 shares of preferred
stock. Of these shares, 2,484,395 are designated as convertible preferred
stock, Series A. The remaining shares of preferred stock are undesignated and
have not been issued.

The Series A Preferred Stock may be converted by the holder into a share of
common stock at any time. The conversion ratio for the Series A Preferred Stock
is subject to adjustment for stock dividends and splits, reorganizations and
other distributions with respect to the common stock. In the event of an
initial public offering in which the Company receives not less than $10 per
share and $50 million in gross proceeds, each share of the Series A Preferred
Stock will automatically be converted into one share of common stock.

The holders of the Series A Preferred Stock are entitled to receive, on an as
converted basis, any dividends paid to holders of common stock. In the event of
any dissolution, liquidation, or winding up of the Company's affairs, whether
voluntary or involuntary, after payment of debts and other liabilities, holders
of Series A Preferred Stock are entitled to a liquidation preference equal to
$4.01 per share and are entitled to share ratably, with the holders of the
common stock, any assets distributed to holders of common stock. Each holder of
Series A Preferred Stock is entitled to vote, together as a single class with
all other shares entitled to vote, on all matters voted on by holders of common
stock. Holders of Series A Preferred Stock are entitled to cast the number of
votes they would be entitled to cast if they had converted their stock to
common stock on the applicable record date. As long as shares of Series A
Preferred Stock are outstanding the Company cannot, without the approval of 90%
of the shareholders of Series A Preferred Stock:

. amend its certificate of incorporation or bylaws in a manner materially
adverse to the holders of Series A Preferred Stock;

F-13
<PAGE>

NOVISTAR, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

. issue any equity security that has rights senior to or on parity with the
Series A Preferred Stock;

. repurchase any shares of capital stock other than from an employee upon
termination;

. consolidate, merge, sell all or substantially all of its assets or engage
in other transactions that result in a change of control; or

. dissolve.

Common stock

On January 1, 1999 Torch transferred all the assets and liabilities of Novistar
in exchange for Novistar declaring a stock dividend of 99 shares of common
stock for each share of common stock outstanding on the record date of January
1, 1999. On January 31, 2000, Torch contributed 9,233.25 shares and the
attached dividend rights to Novistar.

On February 18, 2000 Novistar increased the number of authorized shares of
common stock and issued 8,985,908 additional shares of common stock to Torch
representing payment of the stock dividend previously declared. Subsequent to
the dividend, Torch held 9,076,675 shares of Novistar common stock.

Acquisition of Oracle Energy Upstream Business

On February 18, 2000 the Company purchased from Oracle Corporation ("Oracle")
the Oracle Energy Upstream business. In connection with the acquisition, the
Company hired 85 employees of Oracle, primarily engaged in the development and
implementation of the acquired software programs. In addition, Novistar became
party to consulting and technical support contracts relating to the Oracle
Energy Upstream business. The purchase price for the assets was $10.0 million
in cash, subject to purchase price adjustments, a $10 million note issued by
the Company and 2,484,395 shares of the Series A Preferred Stock valued at
$9,950,000 based on the estimated fair value of the preferred stock. As part of
the acquisition the Company entered into an alliance agreement with Oracle that
will among other things, enable the Company to jointly market with Oracle
software products and services.

Initial public offering

The Company expects to file a registration statement on Form S-1 with the SEC
covering the proposed initial public offering of newly issued common stock (the
"IPO"). Upon effectiveness of the IPO, Torch will assign to Novistar the
business activity of the Torch Contracts in exchange for an amount to be paid
from the proceeds of the initial public offering and to be determined based on
a fairness opinion, but not to exceed $5.7 million. The amount paid will be
accounted for as a distribution.

In addition, upon effectiveness of the IPO the president and chief executive
officer of the Company will be granted and immediately vest in an additional
400,000 options at the initial public offering price.

Stock options

Subsequent to year end, under the terms of the 1999 Stock Option Plan the
Company issued 1,471,324 employee stock options with an exercise price ranging
between $0.01 and $4.00. Upon completion of the proposed initial public
offering, discussed above, the Company anticipates taking a significant charge
to income in relation to vested employee stock options, based on the price of
the stock at that date.

F-14
<PAGE>

NOVISTAR, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Sales incentives

Subsequent to year end, warrants for 161,066 shares were issued to one customer
as a sales incentive to enter into a long-term service contract. In addition,
the Company entered into an agreement to issue warrants for an additional
170,000 shares of common stock to another customer also as a sales incentive to
enter into a long-term service fee contract. As part of the sales incentive
agreement with the latter customer, the Company guaranteed the customer $3.5
million in cash or cost savings under the service fee contract, with minimum
annual payments of $500,000 . The $3.5 million sales incentive will be recorded
as a deferred charge and amortized over the life of the related service fee
contract. Given the terms of the warrants and the manner in which the sales
incentives were structured, the Company expects to recognize additional
deferred charges for the warrants issued based on the requirements of EITF No.
98-16. These deferred charges will be amortized over the lives of the related
service fee contracts.

Novistar has entered into a letter of intent with a customer pursuant to which
the customer will outsource certain business process services related to its
U.S. upstream oil and gas activities to Novistar. In connection with
negotiations of the outsourcing agreement Torch has also agreed to sell 750,000
shares of Novistar's common stock to the customer and the Company has agreed
to, among other things, issue the customer warrants to purchase 750,000 shares
of common stock at $10-15 per share. Upon completion of this transaction, the
Company will reflect the transaction in its financial statements in accordance
with EITF 98-16.

F-15
<PAGE>

NOVISTAR, INC. (Note 1)

UNAUDITED COMBINED STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except Per Share Data)

<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------
1999 2000
--------- ---------
<S> <C> <C>
Revenues:
Service fees........................................... $ 4,852 $ 12,022
Service fees--affiliates............................... 1,531 1,512
Marketing commissions.................................. 1,180 1,310
--------- ---------
Total revenues....................................... 7,563 14,844
Cost of revenues......................................... 8,107 9,656
--------- ---------
Gross profit (loss).................................. (544) 5,188
--------- ---------
Operating expenses:
General and administrative affiliates.................. 1,133 1,346
Selling, general and administrative.................... 271 1,383
Research and development expenses...................... -- 2,329
Depreciation and amortization.......................... 1,258 3,902
--------- ---------
Total operating expenses............................. 2,662 8,960
Operating loss........................................... (3,206) (3,772)
Interest expense....................................... -- 930
--------- ---------
Loss before income taxes................................. (3,206) (4,702)
Income tax benefit..................................... -- (1,592)
--------- ---------
Net loss................................................. $ (3,206) $ (3,110)
========= =========
Net loss per share:
Historical basic and diluted net loss per share.......... $ (0.35) $ (0.34)
========= =========
Weighted-average shares outstanding basic and diluted.... 9,076,675 9,076,675
========= =========
Pro forma statement of operations data (Note 2):
Loss before benefit for income taxes, as reported...... $ (3,206) $ (4,702)
Pro forma income tax benefit........................... -- (2,188)
--------- ---------
Pro forma net loss..................................... $ (3,206) $ (2,514)
========= =========
Pro forma net loss per share basic and diluted......... $ $
========= =========
Pro forma weighted-average shares outstanding basic and
diluted...............................................
========= =========
</TABLE>

See accompanying notes to financial statements.

F-16
<PAGE>

NOVISTAR, INC. (Note 1)

UNAUDITED COMBINED BALANCE SHEETS
(Amounts in Thousands, Except Share Data)

<TABLE>
<CAPTION>
Pro Forma
Stockholders
Deficit
June June 30,
December 31, 30, 2000
1999 2000 (Note 8)
------------ ------- ------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................. $ 61 $ 151
Accounts receivable....................... 1,560 4,476
Other current assets...................... 426 384
------- ------- -------
Total current assets.................... 2,047 5,011
Property and equipment, at cost:
Office furniture and equipment............ 7,842 8,693
Accumulated depreciation.................. (3,753) (4,955)
------- ------- -------
4,089 3,738
Intangible assets, net...................... 1,064 31,784
------- ------- -------
Total assets............................ $ 7,200 $40,533
======= ======= =======
Current liabilities:
Due to affiliates......................... $ 7,497 $11,114
Accounts payable and accrued liabilities.. 794 2,418
------- ------- -------
Total current liabilities............... 8,291 13,532
Note payable--preferred stockholder......... -- 10,000
Note payable--common stockholder............ -- 8,675
Deferred tax liabilities.................... -- 1,815
Deferred revenues and other................. 23 1,158
Stockholders' equity (deficit):
Common stock, par value $.01--authorized
100,000 and 20,000,000 shares; issued and
outstanding 100,000 and 9,076,675 shares
at December 31, 1999 and June 30, 2000,
respectively--treasury stock, at cost, $0
and 923,325 shares at June 30, 2000...... 1 91
Preferred stock, par value $.01; 3,000,000
shares authorized, 2,484,395 shares
issued and outstanding as of June 30,
2000 (liquidation preference
$9,950,000).............................. -- 25
Warrants.................................. -- 15
Additional paid-in capital................ 4,991 15,748
Accumulated deficit....................... (6,106) (10,526)
------- ------- -------
Total stockholders' equity (deficit).... (1,114) 5,353
------- ------- =======
Total liabilities and stockholders'
equity (deficit)....................... $ 7,200 $40,533
======= =======
</TABLE>

See accompanying notes to financial statements.

F-17
<PAGE>

NOVISTAR, INC. (Note 1)

UNAUDITED COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
(Amounts in Thousands)

<TABLE>
<CAPTION>
Preferred Treasury
Common Stock Stock Stock Additional
-------------- ------------- ------------- Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Shares Amount Warrants Capital Deficit Equity
------ ------ ------ ------ ------ ------ -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 31,
1999................... 100 $ 1 -- $-- -- $-- $-- $ 4,991 $ (6,106) $(1,114)
Treasury stock
contributed by parent.. (9) -- -- -- 9 -- -- -- -- --
Issuance of Series A
preferred stock........ -- -- 2,484 25 -- -- -- 9,925 -- 9,950
Issuance of common stock
upon stock dividend.... 8,986 90 -- -- 914 -- -- (90) -- --
Issuance of warrants to
customers.............. -- -- -- -- -- -- 15 -- -- 15
Contribution (Note 6)... -- -- -- -- -- -- -- 922 -- 922
Distributions (Note 6).. -- -- -- -- -- -- -- -- (1,310) (1,310)
Net loss................ -- -- -- -- -- -- -- -- (3,110) (3,110)
----- --- ----- --- --- --- --- ------- -------- -------
Balance June 30, 2000... 9,077 $91 2,484 $25 923 $-- $15 $15,748 $(10,526) $ 5,353
===== === ===== === === === === ======= ======== =======
</TABLE>

See accompanying notes to financial statements.

F-18
<PAGE>

NOVISTAR, INC. (Note 1)

UNAUDITED COMBINED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)

<TABLE>
<CAPTION>
Six Months
Ended June 30,
----------------
1999 2000
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................... $(3,206) $(3,110)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................ 1,258 3,902
Issuance of warrants..................................... -- 15
Changes in operating assets and liabilities, net of the
Oracle Energy Upstream acquisition effect:
Accounts receivable...................................... (95) (2,916)
Other current assets..................................... (374) 42
Accounts payable and accrued liabilities................. 1,155 1,624
Deferred tax liabilities................................. -- (1,598)
Deferred revenues and other.............................. -- 33
------- -------
Net cash flows used in operating activities.................. (1,262) (2,008)
Cash flows from investing activities:
Investment in property and equipment....................... (1,285) (797)
Acquisition of Oracle Energy Upstream business............. -- (9,009)
------- -------
Net cash flows used in investing activities.................. (1,285) (9,806)
Cash flows from financing activities:
Due to affiliates.......................................... 3,777 4,539
Distributions.............................................. (1,180) (1,310)
Proceeds from note payable--common stockholder............. -- 8,675
------- -------
Net cash flows provided by financing activities.............. 2,597 11,904
------- -------
Net increase in cash and cash equivalents.................... 50 90
Cash and cash equivalents, at beginning of year.............. 43 61
------- -------
Cash and cash equivalents, at end of year.................... $ 93 $ 151
======= =======
Supplemental disclosures:
Supplemental disclosures of cash flow information:
Interest paid.............................................. $ -- $ 221
======= =======
</TABLE>

See accompanying notes to financial statements.

F-19
<PAGE>

NOVISTAR, INC.

NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS

1. Organization of business and basis of presentation

Organization of business

Novistar, Inc. ("Novistar"), a Delaware corporation, was formed on April 24,
1998 by Torch Energy Advisors Incorporated ("Torch") and commenced operations
effective January 1, 1999, for the purpose of providing state-of-the-art
business process services including transaction processing, information
management, and process reengineering in three principal areas: oil and gas
property administration, information technology and procurement and inventory
management. Novistar's clients range from small private energy companies to
major integrated oil companies. On February 18, 2000, Novistar acquired from
Oracle Corporation the Oracle Energy Upstream business (see Note 4), which
specializes in licensing, support and implementation of application software,
including related consulting services. Novistar is headquartered in Houston,
Texas and its majority stockholder is Torch, which is wholly owned by Torch
Acquisition Company ("TAC").

Basis of presentation

In September 2000 Torch transferred to Novistar at book value the stock of
Petroleum Financial Inc. ("Petroleum Financial"). Upon effectiveness of the
public offering discussed in Note 8, Torch will assign to Novistar the crude
oil and natural gas marketing activity under contractual arrangements
administered by a division of Torch, the Torch Contracts. During the periods
covered by these combined financial statements, Novistar, Petroleum Financial
and the Torch Contracts (collectively the "Company" or "Novistar") were under
common control as an integral part of Torch's overall operations. These
combined financial statements have been prepared from Torch's historical
accounting records and present the combined financial position and results of
operations of the Company as of June 30, 2000 and for the six months ended June
30, 1999 and 2000 as if the Company had been a separate stand-alone entity.

The financial information included herein may not necessarily reflect the
Company's future or historical combined financial position, results of
operations, cash flows, or changes in stockholders' equity had the transactions
referred to above occurred as of the beginning of the year presented.

The combined financial statements included herein are unaudited; however, they
include all adjustments of a normal recurring nature which, in the opinion of
management, are necessary to present fairly the unaudited combined balance
sheets of Novistar as of June 30, 2000, the unaudited combined statements of
operations for the six months ended June 30, 1999 and 2000, the unaudited
statements of stockholders' equity for the six months ended June 30, 2000, and
the unaudited statements of cash flows for the six months ended June 30, 1999
and 2000. Although management believes that the disclosures in these financial
statements are adequate to make the interim information presented not
misleading, certain information relating to the Company's organization and
footnote disclosures normally included in annual audited financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. These financial statements should be read in conjunction
with the Company's audited combined financial statements for the year ended
December 31, 1999 and the notes thereto. The results of operations and cash
flows for the six-months ended June 30, 2000 are not necessarily indicative of
the results to be expected for the entire year.

2. Summary of significant accounting policies

Principles of combination

The accompanying financial statements include the accounts of Novistar,
Petroleum Financial and the Torch Contracts combined as of June 30, 2000 and
for the six months ended June 30, 1999 and 2000. All material intercompany
transactions between the combined entities have been eliminated.

F-20
<PAGE>

NOVISTAR, INC.

NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(Continued)

Equity instruments issued to customers

For equity instruments issued to customers, the Company follows the guidance
provided in Statement of Financial Accounting Standard ("SFAS") No. 123
"Accounting for Stock-Based Compensation" and in Emerging Issues Task Force
Issue No. 96-18 ("EITF 96-18") "Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services."

Income taxes

Until February 18, 2000, Novistar elected to be treated as a qualified
Subchapter S corporation under Section 1361(b)(3) of the Internal Revenue Code
of 1986. As a result of this election, Novistar was included in TAC's S
corporation tax return for the year ended December 31, 1999 that includes Torch
and subsidiaries. Each TAC stockholder is responsible for reporting his share
of taxable income or loss for 1999. In connection with the acquisition by
Novistar of certain assets of the Oracle Energy Upstream business as further
discussed in Note 4, Novistar was no longer eligible for Subchapter S
corporation status. Income taxes are calculated for Novistar beginning February
18, 2000 using the liability method in accordance with SFAS No. 109,
"Accounting for Income Taxes." Until its contribution to Novistar in September
2000, Petroleum Financial also elected to be treated as a qualified subchapter
S corporation and was included in TAC's S corporation tax return. As required
by Staff Accounting Bulletin No. 98 ("SAB 98"), the accompanying financial
statements reflect a pro forma income tax provision as if Novistar and
Petroleum Financial had been C corporations for tax purposes during the entire
period presented.

Revenue recognition

The Company principally derives its revenues from the sale of business process
services under long-term contractual arrangements. Service fees and marketing
commissions are recognized over the term of the service and marketing
agreements, as earned. In connection with the acquisition from Oracle
Corporation (see Note 4), the Company will expand its product offerings to
include consulting, licensing and support for the Oracle Energy Upstream
business. For purposes of revenue recognition for these expanded product
offerings, the Company will comply with the provisions of Statement of Position
("SOP") 97-2, "Software Revenue Recognition"; SOP 98-4, "Deferral of the
Effective Date of Certain Provisions of SOP 97-2"; and SOP 98-9, "Modification
of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions" including obtaining, as appropriate, vendor-specific objective
evidence of fair value.

Software development costs

All costs incurred in developing software products are expensed as research and
development expenses in the period incurred. Software development costs
incurred subsequent to the establishment of technological feasibility are not
material.

Use of estimates

Concentration of credit risk

Financial instruments which potentially expose the Company to credit risk
consist principally of trade receivables. Accounts receivable were
predominately with energy related companies.

F-21
<PAGE>

NOVISTAR, INC.

NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(Continued)

Stock-based compensation

SFAS No. 123 encourages, but does not require companies to record compensation
cost for stock-based compensation plans at fair value. The Company has chosen
to account for stock-based compensation awards to employees using the intrinsic
value method prescribed in Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation cost for stock options awarded to employees and
directors is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of grant over the amount an employee must pay to
acquire the stock.

Net loss per share

The Company's net loss per share data has been calculated under SFAS No. 128 as
if the number of common shares outstanding immediately prior to the offering
(see Note 8) had been outstanding for the entire period presented. The Company
had a net loss and, therefore, a separate calculation of diluted earnings per
share data was not required. However, had diluted earnings per share data been
required, stock options outstanding as of June 30, 2000 would not have been
included in the calculation because they were contingently issuable and the
conditions for exercisability had not been satisfied. Warrants and other common
stock equivalents would not have been included since they would have been anti-
dilutive.

As required by SAB 98, pro forma earnings per share information has been
presented as if Novistar had been a C corporation for tax purposes during the
periods presented and also to give effect to the number of shares whose
proceeds would be necessary to pay the distribution to Torch discussed in Note
8.

3. Related party transactions

The Company receives support services from Torch. Included in general and
administrative expenses--affiliates are support service charges for human
resources and office administration, risk management, corporate secretary--
legal services, corporate and litigation legal services, graphic services, tax
department services, financial reporting and general accounting, corporate
relations, financial planning and analysis, internal audit and joint interest
audit. These services are provided by Torch for a fixed or variable fee. In
addition, the Company may request Torch to perform services outside the scope
of the support services for additional compensation based on a time and
materials basis for hours worked and materials used by Torch personnel on such
special requests as well as out-of-pocket expenses. For the six months ended
June 30, 1999 and 2000, respectively, the Company paid $800,000 and $1.0
million for these services. In addition, the company paid $300,000 in both
periods to Torch as reimbursement for office rent on space occupied by
Novistar. The Company formalized its support services arrangement with Torch
through a Support Services Agreement effective January 1, 2000.

The Company provides information management and accounting services to Torch.
Included in service fees--affiliates are fees for revenue accounting,
operational cost accounting, property administration, production accounting,
treasury, information technology, and crude oil and natural gas marketing
strategy formulation provided to Torch. These services are provided by the
Company for a fixed or variable fee. In addition, Torch may request the Company
to perform services outside the scope of the support services for additional
compensation based on a time and materials basis for hours worked and materials
used by Company personnel on such special requests as well as out-of-pocket
expenses. For the six-month periods ended June 30, 1999 and 2000, respectively,
the Company received $1.5 million and $1.5 million for these services. The
Company formalized its management and accounting services arrangements with
Torch through an Information Management and Accounting Services Agreement
effective January 1, 2000.

F-22
<PAGE>

NOVISTAR, INC.

NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(Continued)

During the six months ended June 30, 2000, the Company performed business
process outsourcing for two customers under the terms of contractual
arrangements between the customers and Torch. Service fees in the accompanying
financial statements include approximately $500,000 billed to these customers
for the services provided.

4. Acquisition of Oracle Energy Upstream business

On February 18, 2000 the Company purchased from Oracle Corporation ("Oracle")
the Oracle Energy Upstream business. In connection with the acquisition, the
Company hired 85 employees of Oracle, primarily engaged in the development and
implementation of the acquired software programs. In addition, Novistar became
party to consulting and technical support contracts relating to Oracle's
Upstream software business. The purchase price for the assets was $10.0 million
in cash, subject to purchase price adjustments, a $10.0 million note issued by
the Company and 2,484,395 shares of Series A Preferred Stock valued at
$9,950,000 based on the estimated fair value of the preferred stock. As part of
the acquisition, the Company entered into an alliance agreement with Oracle
that will among other things, enable the Company to jointly market with Oracle
software products and services.

Senior subordinated note payable--common stockholder

Cash for the Oracle transaction was funded by a loan from Torch. The loan is
evidenced by a Senior Subordinated Note for $8.7 million dated February 18,
2000 with Torch. The note accrues interest at 9% from February 18, 2000 to
February 17, 2001, 10% from February 18, 2001 to February 17, 2002, 12% from
February 18, 2002 to February 17, 2003, 15% from February 18, 2003 to February
17, 2004, and 17% from February 18, 2004 to February 17, 2005. Interest is
payable quarterly in arrears beginning on May 17, 2000. The note is due upon
the earlier of: (a) February 18, 2005, or (b) upon a Major Event. A Major Event
constitutes: (a) an initial public offering of the Company, (b) a sale of all
or substantially all of the assets of the Company, or (c) any transaction or
series of related transactions, including, without limitation, any
reorganization, merger or consolidation, that results in the transfer of 50% or
more of the outstanding voting power of the Company.

Senior subordinated note payable--preferred stockholder

On February 18, 2000, the Company executed a $10.0 million Senior Subordinated
Note payable to Oracle. The note accrues interest at 9% from February 18, 2000
to February 17, 2001, 10% from February 18, 2001 to February 17, 2002, 12% from
February 18, 2002 to February 17, 2003, 15% from February 18, 2003 to February
17, 2004, and 17% from February 18, 2004 to February 17, 2005. Interest is
payable quarterly in arrears beginning on May 17, 2000. The note is due upon
the earlier of: (a) February 18, 2005, or (b) upon a Major Event. A Major Event
constitutes: (a) an initial public offering of the Company, (b) a sale of all
or substantially all of the assets of the Company, or (c) any transaction or
series of related transactions, including, without limitation, any
reorganization, merger or consolidation, that results in the transfer of 50% or
more of the outstanding voting power of the Company.

F-23
<PAGE>

NOVISTAR, INC.

NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(Continued)

The following is a preliminary allocation of the purchase price for the Oracle
Energy Upstream Business Acquisition reflected in the accompanying financial
statements. The purchase price allocation is based upon the estimated fair
value of the assets acquired and liabilities assumed in accordance with the
purchase method of accounting in No. 16, "Business Combinations," and reflects
net cash paid of $8.7 million after purchase adjustments and the capitalization
of $333,000 in acquisition costs. The final purchase price allocation may be
different from the preliminary one, and any differences may be material.

<TABLE>
<S> <C>
Tangible assets..................................................... $ 90
Intangible assets................................................... 12,890
Customer prepayments................................................ (1,102)
Deferred tax liability.............................................. (3,413)
Goodwill............................................................ 20,494
-------
Adjusted purchase price............................................. $28,959
=======
Promissory note..................................................... $10,000
Preferred stock..................................................... 9,950
Cash................................................................ 9,009
-------
Adjusted consideration.............................................. $28,959
=======
</TABLE>

The net assets and results of operations of the Oracle Energy Upstream business
have been included in the financial statements of the Company since February
18, 2000. Had the results of operations been reflected at the beginning of the
six-month period ended June 30, 2000, revenues and net loss for the six-month
period would have approximated $17.2 million and $2.5 million, respectively.

Intangible assets

The components of intangible assets are as follows:

<TABLE>
<CAPTION>
June 30,
2000
--------
<S> <C>
Goodwill........................................................... $20,494
Software technology................................................ 9,100
Assembled work force............................................... 2,690
Customer base...................................................... 1,100
Other.............................................................. 1,376
-------
34,760
Less--accumulated amortization..................................... (2,976)
-------
$31,784
=======
</TABLE>

Amortization expense for the six months ended June 30, 2000 was $2.7 million.

5. Income taxes

Prior to February 2000, Novistar was treated as an "S Corporation" for federal
income tax purposes, whereby taxable income or losses flow through to, and are
reported by, the shareholder of the Company. The S Corporation status was
terminated in February 2000, as a result of the issuance of preferred stock in
connection with the acquisition of certain assets from Oracle. Accordingly, a
provision has been made for federal income taxes in the accompanying financial
statements for Novistar beginning February 2000.

F-24
<PAGE>

NOVISTAR, INC.

NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(Continued)

Income tax benefit attributable to income (loss) from operations consists of:

<TABLE>
<CAPTION>
Six months ended June 30, 2000
-----------------------------------
Current Deferred Total
--------------------- -----------
<S> <C> <C> <C>
U.S. Federal................................ $ -- $ (1,370) $ (1,370)
State and Local............................. 6 (228) (222)
------- ----------- -----------
$ 6 $ (1,598) $ (1,592)
======= =========== ===========
</TABLE>

Income Tax Expense differed from the amounts computed by applying U.S. Federal
Income Tax Statutory rate of 35% to Pretax Income as a result of the following:

<TABLE>
<CAPTION>
June 30,
2000
--------
<S> <C>
Federal income tax (benefit) at statutory rate.................... $(1,646)
Increase (reduction) in income taxes resulting from:
Effect of non taxable earnings prior to termination of S
corporation status.............................................. 403
Permanent differences............................................ 96
State and local taxes, net of federal income tax benefit......... (111)
Effect of non taxable earnings of the Torch contracts and
Petroleum Financial............................................. (334)
-------
Total income tax benefit........................................ $(1,592)
=======
</TABLE>

The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at June 30, 2000 are
presented below:

<TABLE>
<CAPTION>
June 30,
2000
--------
<S> <C>
Deferred tax assets:
Allowance for doubtful accounts................................... $ 8
Miscellaneous accruals............................................ 89
Net operating loss carry forward.................................. 992
Other............................................................. 42
-------
Total deferred tax assets........................................ $ 1,131
Deferred tax liabilities:
Depreciation and amortization...................................... (2,946)
-------
Total deferred liabilities....................................... (2,946)
-------
Net deferred tax liabilities....................................... $(1,815)
=======
</TABLE>

At June 30, 2000, the Company has U.S. net operating loss carry forwards of
approximately $2.6 million which will begin to expire in 2019.

6. Stockholders' equity

The components of stockholders' equity are as follows:

<TABLE>
<CAPTION>
Additional
Common Preferred Paid In Accumulated
Stock Stock Warrants Capital Deficit Total
Company ------ --------- -------- ---------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Novistar................ $91 $25 $15 $13,576 $ (9,495) $4,212
Petroleum Financial..... -- -- -- 2,172 (1,031) 1,141
Torch Contracts......... -- -- -- -- -- --
--- --- --- ------- -------- ------
$91 $25 $15 $15,748 $(10,526) $5,353
=== === === ======= ======== ======
</TABLE>

F-25
<PAGE>

NOVISTAR, INC.

NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(Continued)

The statement of stockholders' equity reflects a deemed distribution of $1.3
million related to the cash flows from the Torch Contracts retained by Torch
(see note 8).

Effective January 1, 2000, Torch contributed intercompany balances of $922,000
representing amounts due by Petroleum Financial to Torch at that date.

7. Equity instruments

Preferred stock

On February 16, 2000 the Company authorized 3,000,000 shares of preferred
stock, $.01 par value. Of these shares, 2,484,395 are designated as convertible
preferred stock, Series A. The remaining shares of preferred stock are
undesignated and have not been issued.

The Series Preferred Stock may be converted by the holder into a share of
common stock at any time. The conversion ratio for the Series A Preferred Stock
is subject to adjustment for stock dividends and splits, reorganizations and
other distributions with respect to the common stock. In the event of an
initial public offering in which the Company receives not less than $10 per
share and $50 million in gross proceeds, each share of the Series A Preferred
Stock will automatically be converted into one share of common stock.

The holders of the Series A Preferred Stock are entitled to receive, on an as
converted basis, any dividends paid to holders of common stock. In the event of
any dissolution, liquidation, or winding up of the Company's affairs, whether
voluntary of involuntary, after payment of debts and other liabilities, holders
of Series A Preferred Stock are entitled to a liquidation preference equal to
$4.01 per share and are entitled to share ratably, with the holders of the
common stock, any assets distributed to holders of common stock. Each holder of
Series A Preferred Stock is entitled to vote, together as a single class with
all other shares entitled to vote, on all matters voted on by holders of common
stock. Holders of Series A Preferred Stock are entitled to cast the number of
votes they would be entitled to cast if they have converted their stock to
common stock on the applicable record date. As long as shares of Series A
Preferred Stock are outstanding the Company cannot, without the approval of 90%
of the shareholders of Series A Preferred Stock:

. amend its certification of incorporation or bylaws in a manner materially
adverse to the holders of Series A Preferred Stock;

. issue any equity security that has rights senior to or on parity with the
Series A Preferred Stock;

. repurchase any shares of capital stock other than from an employee upon
termination;

. consolidate, merge, sell all or substantially all of its assets or engage
in other transactions that result in a change of control; or

. dissolve.

Common stock

On January 1, 1999 Torch transferred all the assets and liabilities of Novistar
in exchange for Novistar declaring a stock dividend of 99 shares of common
stock for each share of common stock outstanding on the record dated of January
1, 1999. On January 31, 2000, Torch contributed 9,233.25 shares and the
attached dividend rights to Novistar.

F-26
<PAGE>

NOVISTAR, INC.

NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(Continued)

Stock options

During the six-month period ended June 30, 2000, the Company issued 1,471,324
employee stock options with an exercise price ranging between $0.01 and $4.00,
with vesting periods of up to three years under the terms of the 1999 Stock
Option Plan, bringing their total outstanding stock options to 2,138,824. Upon
completion of the Initial Public Offering ("IPO") discussed below, the majority
of these stock options become exercisable. The Company anticipates taking a
significant charge to income in relation to vested employee stock options at
that date based on the price of the stock upon effectiveness of the offering.

In addition, the president and chief executive officer will be granted and
immediately vest in an additional 400,000 options at the initial public
offering price.

Warrants

Warrants for 161,066 shares of common stock at a price of $4.00 per share were
issued to a customer in January 2000 as a sales incentive to enter into a long-
term service contract. The warrants vest over the life of the contracts absent
an IPO of common stock by the Company. Upon completion of an IPO by the
Company, the remaining unvested warrants vest and become fully exercisable. In
accordance with EITF 96-18 the Company has taken a charge as a sales incentive
related to the vested portion of the warrants for the period ended June 30,
2000. Upon completion of the IPO discussed below, the Company expects to
recognize a deferred charge related to these warrants which will be amortized
over the life of the related service contract.

In August 2000, the Company entered into an agreement to also issue warrants
for 170,000 shares of common stock to another customer as a sales incentive to
enter into a long-term service fee contract. As part of the sales incentive
agreement, the Company also guaranteed the customer $3.5 million in cash or
cost savings under the service fee contract, with minimum annual payments of
$500,000 million. The warrants will be fully vested and non-forfeitable at the
date of grant. However, at any time after an IPO, or one year from the date of
grant (whichever comes first), upon exercise of the warrant by the customer,
50% of the value created, defined to be the difference between the fair market
value of Novistar's common stock less the exercise price of the warrant, shall
be credited against the $3.5 million liability. Alternatively, the Company, at
its option, can offer to purchase the warrant at the fair market value of the
common stock less the exercise price of the warrant. While the customer does
not have to sell the warrant to the Company, upon an offer to purchase, 50% of
the value created would be credited against the $3.5 million liability. The
Company expects to recognize a deferred charge related to this sales incentive
arrangement in accordance with EITF 96-18 and to amortize this charge over the
life of the related service fee contract.

In August 2000, the Company also entered into a letter of intent with a
customer pursuant to which the customer will outsource their U.S. upstream oil
and gas activities to Novistar. In connection with negotiations of the
outsourcing agreement, Torch has agreed to sell 750,000 shares of Novistar's
common stock to the customer and the Company has agreed to, among other things,
issue the customer warrants to purchase 750,000 shares of common stock. Upon
completion of this transaction, the Company will reflect the transaction in its
financial statements in accordance with EITF 98-16.

8. Initial public offering

The Company expects to file a registration statement on Form S-1 with the
Securities and Exchange Commission covering the proposed initial public
offering of newly issued common stock (the "IPO"). Upon effectiveness of the
IPO, Torch will assign to Novistar the business activity related to the Torch
Contracts in exchange for an amount to be paid from the proceeds of the initial
public offering and to be determined based on a fairness opinion, but not to
exceed $5.7 million. The amount paid will be accounted for as a distribution as
reflected in the accompanying pro forma information.

F-27
<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Torch Energy Advisors Incorporated:

We have audited the accompanying statements of revenues and direct operating
expenses of the Service Fee Activities of Torch Energy Advisors Incorporated
for each of the three years in the period ended December 31, 1999. 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 in accordance with auditing standards generally
accepted in the United States. Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

The accompanying statements of revenues and direct operating expenses reflect
the revenues and direct operating expenses attributable to the Service Fee
Activities of Torch Energy Advisors Incorporated as described in Note 1 to the
financial statements and are not intended to be a complete presentation of the
revenues and expenses of the Service Fee Activities of Torch Energy Advisors
Incorporated.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the revenues and direct operating expenses of the
Service Fee Activities of Torch Energy Advisors Incorporated for each of the
three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.

ERNST & YOUNG LLP

Houston, Texas
August 15, 2000

F-28
<PAGE>

SERVICE FEE ACTIVITIES OF TORCH ENERGY ADVISORS INCORPORATED

STATEMENTS OF REVENUE AND DIRECT OPERATING EXPENSES

<TABLE>
<CAPTION>
For the year ended
December 31,
------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Revenues: ............................................ $23,710 $19,667 $21,215

Direct operating expenses:
Cost of revenues..................................... 20,885 20,040 23,794
------- ------- -------
Total direct operating expenses....................... 20,885 20,040 23,794
------- ------- -------
Excess (deficiency) of revenues over direct
operating expenses................................. $ 2,825 $ (373) $(2,579)
======= ======= =======
</TABLE>

See accompanying notes to financial statements.

F-29
<PAGE>

SERVICE FEE ACTIVITIES OF TORCH ENERGY ADVISORS INCORPORATED

NOTES TO STATEMENTS OF REVENUE AND DIRECT OPERATING EXPENSES

1. Organization and basis of presentation

Description of business

The Service Fee Activities of Torch Energy Advisors Incorporated ("Torch" or
the "Company") provide management services to energy companies. These services
include accounting outsourcing, hosting software applications, management
consulting services, services in connection with the acquisition and
divestiture of oil and gas properties, land administration services, human
resources and other administrative services. In addition to the Service Fee
Activities, Torch is engaged in energy trading and marketing, exploration and
production of crude oil and natural gas, contract operations of crude oil and
natural gas properties, and investment banking services. Torch is headquartered
in Houston, Texas and is solely owned by Torch Acquisition Company.

Basis of presentation

The statements of revenues and direct operating expenses of the Service Fee
Activities of Torch were derived from the historical accounting records of the
Company and are prepared on the accrual basis of accounting. The accompanying
statements of revenues and direct operating expenses reflect the operating
expenses of the departmental functions established to provide administrative
support to Torch's clients under its Service Fee Activities as well as to
Torch. The statements do not include depreciation and amortization, general and
administrative or interest expenses.

2. Summary of significant accounting policies

Revenue recognition

The Company principally derives its service fee revenues from the sale of
business process services. Service fees are recognized ratably over the term of
the service agreement. Marketing commissions are recognized as the commissions
are earned.

Use of estimates

Recently adopted accounting pronouncements

In December 1999, the staff of the SEC issued Staff Accounting Bulletin No. 101
("SAB 101"). SAB 101 summarizes certain areas of the SEC's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. The Company believes that its current revenue recognition
principles comply with SAB 101.

3. Major customers

Effective January 1, 1999 and October 1, 1999, the Company negotiated new
service agreements with its two major customers, Nuevo Energy Corporation
("Nuevo") and Bellwether Exploration Company ("Bellwether"), respectively.
Nuevo and Bellwether accounted for 61% and 23%, 60% and 28%, and 53% and 21%,
respectively, of the total revenues from the service fee activities of Torch
for the years ended December 31, 1997, 1998 and 1999, respectively. In
addition, Nuevo and Bellwether are entities that were either formed by Torch or
affiliated with Torch through common management or ownership.

F-30
<PAGE>

REPORT OF INDEPENDENT AUDITORS

To the Management
Oracle Energy Services

We have audited the accompanying statement of assets acquired and liabilities
assumed of Oracle Energy Services (the "Division") (a division of Oracle
Corporation) as of February 18, 2000 (date of acquisition by Novistar, Inc.)
and the related statements of revenues and direct operating expenses from
certain activities of Oracle Energy Services as described in Note 1 for the
years ended December 31, 1998 and 1999. These financial statements are the
responsibility of the Division's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
referred to above are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

The accompanying financial statements were prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission for inclusion in the registration statement on Form S-1 of Novistar,
Inc. as described in Note 1, and are not intended to be a complete presentation
of the financial position, results of operations and cash flows of Oracle
Energy Services.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the assets acquired and liabilities assumed of Oracle
Energy Services (a division of Oracle Corporation) as of February 18, 2000
(date of acquisition by Novistar, Inc.), and the related revenues and direct
operating expenses from certain activities of Oracle Energy Services as
described in Note 1 for the years ended December 31, 1998 and 1999, in
conformity with accounting principles generally accepted in the United States.

ERNST & YOUNG LLP
Houston, Texas
September 14, 2000

F-31
<PAGE>

ORACLE ENERGY SERVICES (a division of Oracle Corporation)

Statement of Assets Acquired and Liabilities Assumed

February 18, 2000

(Amounts in Thousands)

<TABLE>
<S> <C>
Assets acquired:
Prepaid royalties...................................................... $ 3,000
Accumulated amortization............................................... (2,466)
-------
534

Furniture, fixtures and equipment...................................... 602
Accumulated depreciation............................................... (462)
-------
140
-------
Total assets acquired................................................. $ 674
=======

Liabilities assumed:
Deferred revenue....................................................... $ 1,372
-------
Total liabilities assumed............................................. $ 1,372
=======
</TABLE>

See accompanying notes to financial statements.

F-32
<PAGE>

ORACLE ENERGY SERVICES (a division of Oracle Corporation)

Statements of Revenues and Direct Operating Expenses from Certain Activities
(Note 1)

(Amounts in Thousands)

<TABLE>
<CAPTION>
Period from
Year Ended January 1,
December 31, 2000 through
---------------- February 18,
1998 1999 2000
------- ------- ------------
(Unaudited)
<S> <C> <C> <C>
Revenues:
Consulting.................................... $22,095 $22,153 $2,044
License....................................... 6,684 403 --
Support....................................... 1,207 2,095 272
------- ------- ------
Total revenues............................... 29,986 24,651 2,316

Cost of revenues:
Consulting, including interdivisional
personnel expenses........................... 21,267 19,587 1,303
License, including royalty related expenses... 1,103 1,925 258
Support....................................... 845 1,258 129
------- ------- ------
Total cost of revenues....................... 23,215 22,770 1,690
------- ------- ------

Gross profit................................ 6,771 1,881 626
------- ------- ------

Operating expenses:
Research and development, including
interdivisional personnel expenses........... 9,517 8,609 1,081
------- ------- ------
Total operating expenses.................... 9,517 8,609 1,081

Deficiency of revenues over direct operating
expenses..................................... $(2,746) $(6,728) $ (455)
======= ======= ======
</TABLE>

See accompanying notes to financial statements.

F-33
<PAGE>

ORACLE ENERGY SERVICES (a division of Oracle Corporation)

Notes to Statement of Assets Acquired and Liabilities Assumed and Statements of
Revenues and Direct Operating Expenses from
Certain Activities

As of February 18, 2000, for the period from January 1, 2000 through February
18, 2000
and for the years ended December 31, 1998 and 1999

1. Description of business and basis of presentation

Description of business

Oracle Energy Services ("OES" or "Oracle Energy") was an operating division of
Oracle Corporation ("Oracle") that specialized in the licensing, support, and
implementation of application software, including related consulting services,
for the oil and gas industry. Oracle Energy's clients ranged from small private
energy companies to major integrated oil companies. OES products and services
are categorized into three primary areas:

1. Upstream software ("Upstream"), which is tailored to the petroleum
exploration and production market.

2. Downstream software ("Downstream"), which is tailored to petroleum
refining and processing activities.

3. Financials' software extensions ("Financials"), which provide interface
functionality between Oracle's core accounting and financial software
products and the Upstream and Downstream products.

Basis of presentation

On February 18, 2000, pursuant to an asset purchase agreement (the
"Agreement"), Oracle sold certain assets and transferred certain liabilities
related to its Oracle Energy Services division to Novistar, Inc. ("Novistar").
Assets sold related only to the Upstream products and services and included all
Upstream intellectual property and licensing rights, as well as certain
furniture, fixtures and equipment. According to the Agreement, liabilities
assumed by Novistar included certain of Oracle's obligations under existing
Upstream license and support agreements with U.S. and international customers.
Certain consulting contracts with U.S. customers were also assumed by Novistar.
Because Novistar has not assumed performance obligations under any
international consulting contracts, revenues and direct operating expenses from
international consulting contracts have been excluded from the accompanying
statements. In addition, Novistar has not assumed performance obligations under
two international license contracts; such revenues and direct operating
expenses have also been excluded. Except for consulting activity, amounts
reported for revenues and direct operating expenses reflect Upstream activity
only. Due to Oracle's historical record-keeping methodology for its consulting
practice, consulting for Upstream products cannot be separately identified and,
therefore, Oracle Energy consulting revenues and direct operating expenses
reflect Upstream, Downstream and Financials' activity. Accordingly, the
accompanying statements present: (i) the assets acquired and liabilities
assumed by Novistar as of February 18, 2000, (ii) the revenues and direct
operating expenses from Oracle Energy's U.S. consulting services, which include
Upstream, Downstream, and Financials' activity, and (iii) revenues and direct
operating expenses from Oracle Energy's Upstream licensing and support
activities conducted in the U.S. and internationally, with the exception of the
two international license contracts described above which were not part of the
acquisition.

Oracle Energy has, when needed, used non-OES employees on certain of its
consulting projects and development activities. Oracle Energy has also, under
certain circumstances, allowed its employees to work for other non-OES
divisions of Oracle. Interdivisional employee activity was billed to and from
the participating divisions at rates agreed-to by the divisions involved.
Interdivisional personnel expenses incurred by Oracle Energy are reflected in
consulting and research and development expenses. Amounts credited to Oracle
Energy resulting from work performed for other divisions, however, have been
excluded from the accompanying statements because they are considered to be
irrelevant to Novistar's proposed future operations; the excluded
interdivisional credits totaled $5.5 million in 1998, $3.2 million in 1999, and
$267,000 during the period from January 1, 2000 through February 18, 2000.

F-34
<PAGE>

ORACLE ENERGY SERVICES (a division of Oracle Corporation)

Notes to Statement of Assets Acquired and Liabilities Assumed and Statements of
Revenues and Direct Operating Expenses from
Certain Activities--(Continued)

The statement of assets acquired and liabilities assumed and statements of
revenues and direct operating expenses from certain activities have been
prepared to substantially comply with the rules and regulations of the
Securities and Exchange Commission ("SEC") for business combinations accounted
for as a purchase and are not intended to be a complete presentation of the
financial position, results of operations and cash flows of Oracle Energy.

2. Significant accounting policies

Revenue recognition

Oracle Energy followed the provisions of Statement of Position ("SOP") 97-2,
"Software Revenue Recognition"; SOP 98-4, "Deferral of the Effective Date of
Certain Provisions of SOP 97-2"; and SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions."

Consulting revenues

Customers often entered into arrangements for consulting services concurrent
with execution of license agreements. The services did not include significant
modification of the licensed products, were not essential to their
functionality and were available from other vendors. Payment obligations with
respect to the licensed products were not dependent upon the performance of
these services. Furthermore, in accordance with SOP 97-2, Oracle Energy
obtained vendor-specific objective evidence of fair value of these consulting
services. Accordingly, Oracle Energy recognized revenues for these services as
they were performed.

License revenues

Oracle Energy's standard end-user license agreement provided for an initial fee
to use the product in perpetuity up to a maximum number of users. License fees
were recognized as revenue when contract execution occurred, the software was
delivered, fees were fixed and determinable, and collection was probable. Fees
from licenses sold together with consulting and support services were generally
recognized upon contract execution using the "residual method" in accordance
with SOP 98-9, provided that the above criteria had been met, the consulting
and support services were not essential to the functionality of the software,
payment of the license fee was not dependent upon the performance of the
consulting and support services, and Oracle Energy had obtained vendor-specific
objective evidence of fair value for the consulting and support services.

Support revenues

Support revenues consist of fees for technical support and maintenance
services. Support revenues were recognized ratably over the term of the support
agreement. Support agreements were typically for one year, with renewal
provisions available.

Direct operating expenses

Direct operating expenses for consulting, support, and research and development
primarily include salaries and other personnel related costs, and unreimbursed
travel expenses. Direct operating expenses do not include allocated facilities
usage charges, allocated computer and communications' charges, depreciation,
general and administrative, or sales and marketing expenses as such costs could
not be separately identified.

F-35
<PAGE>

ORACLE ENERGY SERVICES (a division of Oracle Corporation)

Notes to Statement of Assets Acquired and Liabilities Assumed and Statements of
Revenues and Direct Operating Expenses from
Certain Activities--(Continued)

Furniture, fixtures, and equipment

The cost of furniture, fixtures, and equipment has been depreciated over the
estimated useful lives of the related assets on a straight-line basis.
Estimated useful lives typically ranged from two to five years.

Deferred revenue

Deferred revenue consists of support agreements for which amounts collected
from customers exceed the related revenue recognized to date.

Use of estimates

The preparation of the statement of assets acquired and liabilities assumed and
the statements of revenues and direct operating expenses from certain
activities in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect
the reported amounts included in the statements and accompanying notes. Actual
results could differ from those estimates.

3. Royalties

Royalty expenses have been incurred by Oracle Energy pursuant to two
agreements: (i) an asset purchase agreement, dated March 30, 1995, as amended,
between Apogee Open Systems Corporation ("Apogee") and Oracle (the "Apogee
Agreement"), and (ii) a software license and services agreement, dated March
30, 1995 between CNG Producing Company ("CNG") and Oracle (the "CNG
Agreement").

Pursuant to the Apogee Agreement, Oracle acquired certain software products,
including all source and object codes, which are significant components of
certain Oracle Energy products, and, accordingly, Oracle was required to pay,
quarterly, royalties to Apogee equal to 13.3 percent of license revenues
generated from the sale of Apogee products, as defined. In November, 1998,
Oracle paid $3 million to Apogee in full satisfaction of amounts due under the
Apogee Agreement. During 1998, Oracle Energy incurred and paid $600,000 in
royalties under the Apogee Agreement. The $3 million payment in November, 1998
was capitalized and amortized on a straight-line basis over the 19-month
remaining term of the Apogee Agreement. Royalty expense in 1998 and 1999
includes $315,000 and $1,895,000, respectively, of amortization expense.

The CNG Agreement required royalty payments to be made by Oracle to CNG equal
to 3.5 percent of license revenues generated from the sale of certain software
products, as defined, up to a cumulative maximum of $4 million. In June 1993,
CNG paid Apogee to develop certain software and, as a result, CNG was
eventually granted certain software licenses and rights to receive royalties
from Apogee based on future license revenues. Concurrent with the March 30,
1995 Apogee Agreement, Oracle entered into the CNG Agreement described above.
During 1998 and 1999, Oracle Energy incurred and paid $188,000 and $30,000,
respectively, in royalties under the CNG Agreement. In connection with Oracle's
sale of the Oracle Energy division on February 18, 2000, Novistar assumed the
obligations under the CNG Agreement.

F-36
<PAGE>

ORACLE ENERGY SERVICES (a division of Oracle Corporation)

Notes to Statement of Assets Acquired and Liabilities Assumed and Statements of
Revenues and Direct Operating Expenses from
Certain Activities--(Continued)

4. Related parties

Interdivisional Personnel Expenses

Consulting expenses include interdivisional personnel expenses, as described in
Note 1, of $8.5 million and $6.4 million in 1998 and 1999, respectively.
Research and development expenses include interdivisional personnel expenses of
$3.7 million and $1.5 million in 1998 and 1999, respectively.

Revenues from Novistar

Revenues recognized in 1998 and 1999 include approximately $900,000 and
$600,000, respectively, which were generated from products and services
provided to Novistar or its parent company, Torch Energy Advisors Incorporated.

5. Major customers

During 1998, revenues of $18 million were generated from four major customers.
During 1999, revenues of $12 million were generated from three major customers.

F-37
<PAGE>

Back Inside Cover

[Description of Artwork]
<PAGE>

[LOGO]

Novistar, Inc.

Common Stock

--------------

PROSPECTUS

--------------

, 2000

CIBC World Markets

Stephens Inc.

--------------------------------------------------------------------------------

You should rely only on the information contained in this prospectus. No
dealer, salesperson or other person is authorized to give information that is
not contained in this prospectus. This prospectus is not an offer to sell nor
is it seeking an offer to buy these securities in any jurisdiction where the
offer or sale it not permitted. The information contained in this prospectus is
correct only as of the date of this prospectus, regardless of the time of the
delivery of this prospectus or any sale of these securities.

Until , 2000, all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance And Distribution

The following table sets forth the costs and expenses, other than underwriting
discounts and commissions, payable by the Registrant in connection with the
sale of common stock being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fee and the Nasdaq National Market listing
fee.

<TABLE>
<CAPTION>
Amount
to be Paid
----------
<S> <C>
SEC registration fee.............................................. $26,400
NASD filing fee................................................... 10,500
Nasdaq National Market listing fee................................ *
Printing and engraving expenses................................... *
Legal fees and expenses........................................... *
Accounting fees and expenses...................................... *
Blue Sky qualification fees and expenses.......................... *
Transfer agent and registrar fees................................. *
Miscellaneous fees................................................ *
-------
Total........................................................... $ *
=======
</TABLE>
------------------
* To be supplied by amendment.

Item 14. Indemnification of Directors And Officers

Article eight of the Registrant's bylaws (Exhibit 3.5 hereto) provides for
mandatory indemnification of its directors and officers to the maximum extent
permitted by the Delaware General Corporation Law. In addition, the Registrant
will enter into Indemnification Agreements with its officers and directors.
Reference is also made to Section of the Underwriting Agreement contained in
Exhibit 1.1 hereto, which provides for the indemnification of officers and
directors of the Registrant against certain liabilities.

Item 15. Recent Sales of Unregistered Securities

Since the Registrant's inception, the Registrant issued and sold the following
securities:

On April 24, 1998, the Registrant issued 100,000 shares of common stock to
Torch Energy Advisors Incorporated in exchange for $1,000. This issuance was
made in reliance on Section 4(2) of the Securities Act of 1933 as a transaction
not involving a public offering.

On January 1, 1999, the Registrant declared a stock dividend of 99 shares of
common stock per outstanding share in exchange for the transfer by Torch Energy
Advisors Incorporated, the Registrant's sole shareholder at the time of the
transfer of the software, hardware and other equipment necessary to operate the
Registrant's business. On February 18, 2000, the Registrant issued 8,985,908.25
shares of common stock to Torch in payment of the dividend declared on January
1, 1999. The foregoing issuance was made in reliance on Section 4(2) of the
Securities Act of 1933 as a transaction not involving any public offering. All
of the securities were acquired by the recipient for investment and not with a
view toward the resale or distribution thereof. The Registrant was a wholly-
owned subsidiary of the recipient at the time of the investment. The recipient
is an accredited investor, the offer and sale was made without any public
solicitation and the stock certificate bears a restrictive legend. No
underwriter was involved in the transaction and no commissions were paid. The
recipient had adequate access, through its relationships with the Registrant,
to information about the Registrant.

II-1
<PAGE>

On February 18, 2000, the Registrant issued 2,484,395 shares of series A
preferred stock ("Preferred Stock") to Oracle Corporation. Each share of
Preferred Stock is convertible into one share of the Registrant's common stock.
In consideration for $10.0 million in cash, subject to purchase price
adjustments, the Preferred Stock and a $10 million subordinated promissory
note, the Registrant received a suite of software products which perform
transaction processing functions for companies in the upstream energy business.
The issuance of the Preferred Stock was made in reliance on Section 4(2) of the
Securities Act of 1933 as a transaction not involving any public offering. All
of the securities were acquired by the recipient for investment and not with a
view toward the resale or distribution thereof. The recipient is an accredited
investor, the offer and sale was made without any public solicitation and the
stock certificate bears a restrictive legend. No underwriter was involved in
the transaction and no commissions were paid. The recipient had adequate access
to information about the Registrant.

On the dates listed below, the Registrant granted the following options to
employees to purchase an aggregate of 2,138,824 shares.

<TABLE>
<CAPTION>
Number of
Grant Date Option Price Options
---------- ------------ ---------
<S> <C> <C>
May 1999........................................... $2.00 570,251
July 1999.......................................... $2.00 167,500
January 2000....................................... $0.01 853,073
February 2000...................................... $4.00 394,000
March 2000......................................... $4.00 1,000
April 2000......................................... $4.00 3,000
May 2000........................................... $2.00 100,000
June 2000.......................................... $4.00 50,000
</TABLE>

The options were issued in reliance on Section 4(2) of the Securities Act of
1933.

On January 24, 2000, the Registrant granted warrants to purchase an aggregate
of 161,066 shares of common stock to Newfield Exploration Company, a customer,
at an exercise price of $4.00 per share as an incentive to execute a long-term
service contract with the Registrant. The issuance of the warrants was made in
reliance on Section 4(2) of the Securities Act of 1933 as a transaction not
involving any public offering. All of the securities were acquired by the
recipients for investment and not with a view toward the resale or distribution
thereof. The recipients are accredited investors, the offer and sale was made
without any public solicitation and the warrants bear restrictive legends. No
underwriter was involved in the transaction and no commissions were paid. The
recipient had adequate access to information about the Registrant.

Item 16. Exhibits and Financial Statement Schedules

(a) Exhibits

<TABLE>
<CAPTION>
Exhibit
Number Description
------- --------------------------------------------------------------
<C> <C> <S>
(1) Underwriting Agreement
1.1 Form of Underwriting Agreement*
(3) Articles of Incorporation and By-laws
3.1 Certificate of Incorporation
3.2 Certificate of Amendment to Certificate of Incorporation dated
February 17, 2000
3.3 Certificate of Amendment to Certificate of Incorporation dated
September 7, 2000
</TABLE>

II-2
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------------------------------------------------------------
<C> <C> <S>
3.4 Certificate of Designation for Series A Preferred Stock dated
February 18, 2000
3.5 Amended and Restated Bylaws

(4) Instruments defining the rights of security holders, including
indentures
4.1 Form of Common Stock Certificate*
(5) Opinion regarding legality
5.1 Opinion of Haynes and Boone, LLP*

(10) Material Contracts
10.1 Asset Purchase Agreement between Oracle Corporation and Novistar,
Inc. dated February 16, 2000
10.2 Stockholders Agreement among Oracle Corporation, Torch Energy
Advisors Incorporated and Novistar, Inc. dated February 18, 2000
10.3 Oracle Alliance Agreement, including Amendment One, between
Oracle Corporation and Novistar, Inc. effective February 18, 2000
10.4 Full Use Sublicense Addendum, including Amendment One, between
Oracle Corporation and Novistar, Inc. effective February 18, 2000
10.5 Software License and Services Agreement, including Amendment One,
between Oracle Corporation and Novistar, Inc. effective February
18, 2000
10.6 Sales Addendum between Oracle Corporation and Novistar, Inc.
dated February 18, 2000
10.7 Amendment Two to the Order Form between Oracle Corporation and
Torch Energy Advisors Incorporated effective February 18, 2000
10.8 Master Services Agreement between Bellwether Exploration Company
and Torch Operating Company, Torch Energy Marketing, Inc., Torch
Energy Advisors Incorporated and Novistar, Inc. effective October
1, 1999*
10.9 Oil and Gas Administrative Services Agreement between Novistar,
Inc. and Bellwether Exploration Company effective October 1,
1999*
10.10 Master Services Agreement among Nuevo Energy Company and Torch
Energy Advisors Incorporated, Torch Operating Company, Torch
Energy Marketing, Inc. and Novistar, Inc. effective as of January
1, 1999*
10.11 Oil and Gas Administration Services Agreement between Nuevo
Energy Company and Novistar, Inc. effective as of January 1,
1999*
10.12 Support Services Agreement between Torch Energy Advisors
Incorporated and Novistar, Inc. dated January 1, 2000*
10.13 Information Management and Accounting Services Agreement between
Novistar, Inc. and Torch Energy Advisors Incorporated effective
January 1, 2000*
10.14 Natural Gas Marketing Services Agreement between Nuevo Energy
Company and Torch Energy Marketing, Inc. effective as of January
1, 1999*
10.15 Crude Oil Marketing Services Agreement between Nuevo Energy
Company and Torch Energy Marketing, Inc. effective as of January
1, 1999*
</TABLE>

II-3
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Description
------- ---------------------------------------------------------------
<C> <C> <S>
10.16 Crude Oil and Natural Gas Marketing Services Agreement between
Bellwether Exploration Company and Torch Energy Marketing, Inc.
effective as of October 1, 1999*
10.17 1999 Stock Option Plan dated May 1, 1999
10.18 Senior Subordinated Promissory Note to Oracle Corporation dated
February 18, 2000
10.19 Senior Subordinated Promissory Note to Torch Energy Advisors
dated February 18, 2000
10.20 Senior Subordinated Revolving Promissory Note to Torch Energy
Advisors Incorporated dated February 16, 2000

(21) Subsidiaries of the Registrant
21.1 Subsidiaries

(23) Consents of Experts and Counsel
23.1 Consent of Haynes and Boone, LLP (included in Exhibit 5.1)
23.2 Consent of Ernst & Young LLP

(24) Power of Attorney
24.1 Powers of Attorney (included on the signature page of the
Registration Statement)

(27) Financial Data Schedule
27.1 Financial Data Schedule
</TABLE>
------------------
*To be filed by amendment.

(b) Financial Statement Schedules

None.

Item 17. Undertakings

The undersigned Registrant hereby undertakes to provide to the underwriters at
the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has had been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.

II-4
<PAGE>

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-5
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement on Form S-1 to be signed on its behalf
by the undersigned, thereunto duly authorized, in Houston, Texas on September
20, 2000

NOVISTAR, INC.

By: /s/ Thomas M. Ray III
----------------------------------
Thomas M. Ray III, President,
Chief Executive Officer and
Chairman

II-6
<PAGE>

POWER OF ATTORNEY

Each person whose signature appears below constitutes and appoints Thomas M.
Ray III and John V. Sobchak, and each of them, as attorneys-in-fact, each with
the power of substitution, for him or her in any and all capacities, to sign
any amendment to this Registration Statement (including post-effective
amendments and registration statements filed pursuant to Rule 462 and
otherwise), and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting to
said attorneys-in-fact, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said attorneys-
in-fact or either of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has had been signed by the following persons in the capacities and on
the dates indicated:

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----

<S> <C> <C>
/s/ Thomas M. Ray President, Chief Executive September 20, 2000
______________________________________ Officer and Chairman
Thomas M. Ray (principal executive
officer)

/s/ John V. Sobchak Chief Financial Officer September 20, 2000
______________________________________ (principal financial and
John V. Sobchak accounting officer)

/s/ Michael B. Smith Director September 20, 2000
______________________________________
Michael B. Smith

/s/ J. P. Bryan Director September 20, 2000
______________________________________
J. P. Bryan

/s/ Frost Cochran Director September 20, 2000
______________________________________
Frost Cochran

/s/ Ian Thacker Director September 20, 2000
______________________________________
Ian Thacker
</TABLE>

II-7
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------------------------------------------------------------
<C> <C> <S>
(1) Underwriting Agreement
1.1 Form of Underwriting Agreement*
(3) Articles of Incorporation and By-laws
3.1 Certificate of Incorporation
3.2 Certificate of Amendment to Certificate of Incorporation dated
February 17, 2000
3.3 Certificate of Amendment to Certificate of Incorporation dated
September 7, 2000
3.4 Certificate of Designation for Series A Preferred Stock dated
February 18, 2000
3.5 Amended and Restated Bylaws

(4) Instruments defining the rights of security holders, including
indentures
4.1 Form of Common Stock Certificate*
(5) Opinion regarding legality
5.1 Opinion of Haynes and Boone, LLP*

<TABLE>
<CAPTION>
Exhibit
Number Description
------- ----------------------------------------------------------------
<C> <C> <S>
10.12 Support Services Agreement between Torch Energy Advisors
Incorporated and Novistar, Inc. dated January 1, 2000*
10.13 Information Management and Accounting Services Agreement between
Novistar, Inc. and Torch Energy Advisors Incorporated effective
January 1, 2000*
10.14 Natural Gas Marketing Services Agreement between Nuevo Energy
Company and Torch Energy Marketing, Inc. effective as of January
1, 1999*
10.15 Crude Oil Marketing Services Agreement between Nuevo Energy
Company and Torch Energy Marketing, Inc. effective as of January
1, 1999*
10.16 Crude Oil and Natural Gas Marketing Services Agreement between
Bellwether Exploration Company and Torch Energy Marketing, Inc.
effective as of October 1, 1999*
10.17 1999 Stock Option Plan dated May 1, 1999
10.18 Senior Subordinated Promissory Note to Oracle Corporation dated
February 18, 2000
10.19 Senior Subordinated Promissory Note to Torch Energy Advisors
dated February 18, 2000
10.20 Senior Subordinated Revolving Promissory Note to Torch Energy
Advisors Incorporated dated February 16, 2000

(21) Subsidiaries of the Registrant
21.1 Subsidiaries

(23) Consents of Experts and Counsel
23.1 Consent of Haynes and Boone, LLP (included in Exhibit 5.1)
23.2 Consent of Ernst & Young LLP

(24) Power of Attorney
24.1 Powers of Attorney (included on the signature page of the
Registration Statement)

(27) Financial Data Schedule
27.1 Financial Data Schedule
</TABLE>
------------------
*To be filed by amendment.